UTILITY PLANT AND JOINTLY-OWNED FACILITIES

UTILITY PLANT

The following table shows Plant in Service on the Consolidated Balance Sheets by major class:



	Annual Depreciation Rate ⁽⁴⁾	Average Remaining Life in Years ⁽⁴⁾	December 31,
(dollars in millions)	Annual Depreciation Rate ⁽⁴⁾	Average Remaining Life in Years ⁽⁴⁾	2016		2015
Plant in Service
Generation Plant	3.31%	22	$	2,866	$	2,612
Transmission Plant	1.48%	32	1,024		1,008
Distribution Plant	2.08%	35	1,512		1,456
General Plant	5.48%	11	381		358
Intangible Plant, Software Costs and Other ⁽¹⁾	Various	Various	185		179
Plant Held for Future Use	—	—	7		5
Total Plant in Service ⁽²⁾			$	5,975	$	5,618

Utility Plant under Capital Leases ⁽³⁾			$	167	$	132

⁽¹⁾

Unamortized computer software costs were $52 million and $45 million as of December 31, 2016 and 2015, respectively. The amortization of computer software costs were $17 million in 2016, $14 million in 2015, and $17 million in 2014. Intangible Plant, Software Costs and Other primarily represents computer software. Computer software is being amortized over its expected useful life ranging from three to five years for smaller application software and its average remaining life of three years for large enterprise software.


⁽²⁾	Included in Plant in Service are plant acquisition adjustments of $(139) million and $(97) million as of December 31, 2016 and 2015, respectively.


⁽³⁾	In 2016, TEP committed to purchase an undivided ownership interest in the Springerville Common Facilities upon the expiration of the first lease term in December 2017. As a result of this commitment, Utility Plant Under Capital Leases increased by the present value of the purchase commitment. See Note 6 for additional information regarding the Springerville leases.


⁽⁴⁾	The depreciation rates represent a composite of the depreciation rates of assets within each major class of utility plant. Annual Depreciation Rate and Average Remaining Life in Years are based on the 2012 depreciation study available for the major classes of Plant in Service. TEP will implement new depreciation rates effective March 1, 2017, as approved in the 2017 Rate Order.

Utility Plant Under Capital Leases

All assets included in Utility Plant Under Capital Leases are used in generation operations and amortized over the primary lease term. As of December 31, 2016, Utility Plant Under Capital Leases represent an undivided one-half interest in certain Springerville Common Facilities. See Note 6 for additional information regarding Springerville leases. The following table shows the amount of lease expense incurred for capital leases:



	Years Ended December 31,
(in millions)	2016		2015		2014
Lease Expense
Interest Expense Included in:
Interest Expense, Capital Leases	$	3	$	4	$	10
Operating Expenses, Fuel	—		—		1
Amortization of Capital Lease Assets Included in:
Operating Expenses, Fuel	—		2		6
Operating Expenses, Amortization	5		6		16
Total Lease Expense	$	8	$	12	$	33

SPRINGERVILLE ACQUISITION

In February 2016, TEP entered into an agreement for the settlement and release of asserted claims and the purchase and sale of beneficial interests in Springerville Unit 1 (Agreement). In September 2016, TEP received FERC authorization to complete the transactions contemplated in the Agreement. In accordance with the Agreement, TEP purchased the undivided interest in Springerville Unit 1 for $85 million. The purchase increased TEP's total ownership interest to 100%. See Note 7 for additional information regarding the settlement.

JOINTLY-OWNED FACILITIES

As of December 31, 2016, TEP was a participant in the following jointly-owned generation facilities and transmission systems:



(in millions)	Ownership Percentage	Plant in Service		Construction Work in Progress		Accumulated Depreciation		Net Book Value
San Juan Units 1 and 2	50.0%	$	496	$	3	$	262	$	237
Navajo Units 1, 2, and 3	7.5%	149		4		114		39
Four Corners Units 4 and 5	7.0%	110		27		76		61
Luna Energy Facility	33.3%	55		—		2		53
Gila River Unit 3	75.0%	202		3		59		146
Gila River Common Facilities	18.8%	25		—		8		17
Springerville Coal Handling Facility ⁽¹⁾	83.0%	201		—		80		121
Transmission Facilities	Various	383		3		175		211
Total		$	1,621	$	40	$	776	$	885

⁽¹⁾

As of December 31, 2015, an undivided interest in Springerville Coal Handling Facilities was classified as Assets Held for Sale, Net. In 2016, TEP reclassified the undivided interest in the Springerville Coal Handling Facilities from Assets Held for Sale, Net to Utility Plant on the Consolidated Balance Sheets. See Note 6 for additional information regarding the Springerville Coal Handling Facilities lease interests.

As participants in these jointly-owned facilities, TEP is responsible for its share of operating and capital costs for the above facilities. The Company accounts for its share of operating expenses and utility plant costs related to these facilities using proportionate consolidation.

RETIREMENTS

San Juan

In October 2014, the EPA published a final rule approving a SIP covering BART requirements for San Juan, which includes the closure of Units 2 and 3 by December 2017. TEP is a participant in San Juan Unit 2. Given the closure of two units and the desire of certain participants to exit their ownership in San Juan, PNM and the other participants, including TEP, negotiated restructured ownership agreements which became effective upon the sale of SJCC stock in January 2016. As a condition of the New Mexico Public Regulatory Commission’s (NMPRC) approval of the early retirement of San Juan Units 2 and 3, PNM is required to make a filing with the NMPRC in 2018 to demonstrate the ongoing economic viability of San Juan beyond 2022. Under the new restructured ownership agreements, TEP and the other remaining participants have the option to exit their remaining ownership interest in San Juan as of June 30, 2022.

As of December 31, 2016, the NBV of TEP's share in San Juan Unit 2, including construction work in progress, was $98 million. TEP will apply excess depreciation reserves against the unrecovered NBV as approved in the 2017 Rate Order. See Note 2 for additional information regarding the 2017 Rate Order.

Sundt

In June 2014, the EPA issued a final rule that required TEP to either: (i) install, by mid-2017, SNCR and dry sorbent injection if Sundt Unit 4 continued to use coal as a fuel source; or (ii) permanently eliminate coal as a fuel source as a better-than-BART alternative by the end of 2017. In March 2016, TEP notified the EPA of its decision to permanently eliminate coal as a fuel source, and transferred the NBV of the coal handling facilities at Sundt to a regulatory asset.

As of December 31, 2016, the NBV of the coal handling facilities at Sundt was $16 million. TEP will apply excess depreciation reserves against the unrecovered NBV as approved in the 2017 Rate Order. See Note 2 for additional information regarding the 2017 Rate Order.

ASSET RETIREMENT OBLIGATIONS

The accrual of AROs is primarily related to generation and PV assets and is included in Regulatory and Other Liabilities—Other on the Consolidated Balance Sheets. The following table reconciles the beginning and ending aggregate carrying amounts of ARO accruals in the Consolidated Balance Sheets:



	December 31,
(in millions)	2016			2015
Beginning of Period	$	32		$	28
Liabilities Incurred	—			4
Accretion Expense or Regulatory Deferral	2			1
Revisions to the Present Value of Estimated Cash Flows ⁽¹⁾	(1		)	(1		)
End of Period	$	33		$	32


⁽¹⁾	Primarily related to changes in expected cost estimates, in conjunction with changes of asset retirement dates of generation facilities.