XML 46 R34.htm IDEA: XBRL DOCUMENT v3.8.0.1
FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (Tables)
 12 Months Ended
Dec. 31, 2017
Disclosure Text Block [Abstract]  
Financial Instruments Measured at Fair Value on a Recurring Basis
FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following tables present, by level within the fair value hierarchy, TEP’s assets and liabilities accounted for at fair value on a recurring basis classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
Level 1
 
Level 2
 
Level 3
 
Total
(in millions)
December 31, 2017
Assets
 
Cash Equivalents(1)
$
30

 
$
—

 
$
—

 
$
30

Restricted Cash(1)
12

 
—

 
—

 
12

Energy Derivative Contracts, Regulatory Recovery(2)
—

 
9

 
—

 
9

Energy Derivative Contracts, No Regulatory Recovery(2)
—

 
—

 
3

 
3

Total Assets
42

 
9

 
3

 
54

Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts, Regulatory Recovery(2)
—

 
(26
)
 
—

 
(26
)
Energy Derivative Contracts, No Regulatory Recovery(2)
—

 
—

 
(1
)
 
(1
)
Interest Rate Swap(3)
—

 
(1
)
 
—

 
(1
)
Total Liabilities
—

 
(27
)
 
(1
)
 
(28
)
Total Assets (Liabilities), Net
$
42

 
$
(18
)
 
$
2

 
$
26

(in millions)
December 31, 2016
Assets
 
Cash Equivalents(1)
$
23

 
$
—

 
$
—

 
$
23

Restricted Cash(1)
7

 
—

 
—

 
7

Energy Derivative Contracts, Regulatory Recovery(2)
—

 
3

 
—

 
3

Energy Derivative Contracts, No Regulatory Recovery(2)
—

 
—

 
2

 
2

Total Assets
30

 
3

 
2

 
35

Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts, Regulatory Recovery(2)
—

 
(2
)
 
(1
)
 
(3
)
Interest Rate Swap(3)
—

 
(2
)
 
—

 
(2
)
Total Liabilities
—

 
(4
)
 
(1
)
 
(5
)
Total Assets (Liabilities), Net
$
30

 
$
(1
)
 
$
1

 
$
30

(1) 
Cash Equivalents and Restricted Cash represent amounts held in money market funds and certificates of deposit valued at cost, including interest, which approximates fair market value. Cash Equivalents are included in Cash and Cash Equivalents on the Consolidated Balance Sheets. Restricted Cash is included in Investments and Other Property and in Current Assets—Other on the Consolidated Balance Sheets.
(2) 
Energy Derivative Contracts include gas swap agreements (Level 2) and forward purchased power and sales contracts (Level 3) entered into to reduce exposure to energy price risk. These contracts are included in Derivative Instruments on the Consolidated Balance Sheets. The valuation techniques are described below.
(3) 
The Interest Rate Swap is valued using an income valuation approach based on the 6-month LIBOR and is included in Derivative Instruments on the Consolidated Balance Sheets.
Potential Offset of Assets by Counterparty Netting and Cash Collateral
All energy derivative contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. TEP presents derivatives on a gross basis in the balance sheet. The tables below present the potential offset of counterparty netting and cash collateral.
 
Gross Amount Recognized in the Balance Sheets
 
Gross Amount Not Offset in the Balance Sheets
 
Net Amount
 
 
Counterparty Netting of Energy Contracts
 
Cash Collateral Received/Posted
 
(in millions)
December 31, 2017
Derivative Assets
 
 
 
 
 
 
 
Energy Derivative Contracts
$
12

 
$
10

 
$
—

 
$
2

Derivative Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts
(27
)
 
(10
)
 
—

 
(17
)
Interest Rate Swap
(1
)
 
—

 
—

 
(1
)
(in millions)
December 31, 2016
Derivative Assets
 
 
 
 
 
 
 
Energy Derivative Contracts
$
5

 
$
2

 
$
—

 
$
3

Derivative Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts
(3
)
 
(2
)
 
—

 
(1
)
Interest Rate Swap
(2
)
 
—

 
—

 
(2
)
Potential Offset of Liabilities by Counterparty Netting and Cash Collateral
All energy derivative contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. TEP presents derivatives on a gross basis in the balance sheet. The tables below present the potential offset of counterparty netting and cash collateral.
 
Gross Amount Recognized in the Balance Sheets
 
Gross Amount Not Offset in the Balance Sheets
 
Net Amount
 
 
Counterparty Netting of Energy Contracts
 
Cash Collateral Received/Posted
 
(in millions)
December 31, 2017
Derivative Assets
 
 
 
 
 
 
 
Energy Derivative Contracts
$
12

 
$
10

 
$
—

 
$
2

Derivative Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts
(27
)
 
(10
)
 
—

 
(17
)
Interest Rate Swap
(1
)
 
—

 
—

 
(1
)
(in millions)
December 31, 2016
Derivative Assets
 
 
 
 
 
 
 
Energy Derivative Contracts
$
5

 
$
2

 
$
—

 
$
3

Derivative Liabilities
 
 
 
 
 
 
 
Energy Derivative Contracts
(3
)
 
(2
)
 
—

 
(1
)
Interest Rate Swap
(2
)
 
—

 
—

 
(2
)
Realized Losses from Cash Flow Hedges
Realized losses from cash flow hedges are shown in the following table:
 
Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Capital Lease Interest Expense
$
1

 
$
1

 
$
2

Purchased Power
—

 
—

 
1
Financial Impact of Energy Contracts
Energy Derivative Contracts, Regulatory Recovery
TEP records unrealized gains and losses on energy purchase contracts that are recoverable through the PPFAC mechanism on the balance sheet as a regulatory asset or a regulatory liability rather than reporting the transaction in the income statement or in the statement of other comprehensive income, as shown in the following table:
 
Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Unrealized Net Gain (Loss) Recorded to Regulatory (Assets) Liabilities
$
(18
)
 
$
12

 
$
6
Derivative Volumes
Derivative Volumes
As of December 31, 2017, TEP has energy contracts that will settle on various expiration dates through 2029. The volumes associated with the energy contracts were as follows:
 
December 31,
 
2017
 
2016
Power Contracts GWh
2,589

 
2,610

Gas Contracts BBtu (1)
137,952

 
12,355


(1) 
Increase in volume of gas contracts is a result of the planned early retirement of certain coal-fired generation. To reduce exposure to energy price risk associated with natural gas, the Company entered into longer term gas contracts increasing its overall volume outstanding in 2017. See Note 3 for additional information related to the planned early retirement of coal-fired generation.
Fair Value Inputs, Assets, Quantitative Information Regarding Significant Unobservable Inputs
Level 3 Fair Value Measurements
The following tables provide quantitative information regarding significant unobservable inputs in TEP’s Level 3 fair value measurements:
 
Valuation
 
Fair Value of
 
 
 
Range of
 
Approach
 
Assets
 
Liabilities
 
Unobservable Inputs
 
Unobservable Input
(in millions)
December 31, 2017
Forward Power Contracts
Market approach
 
$
3

 
$
(1
)
 
Market price per MWh
 
$
17.65

 
$
34.60

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
December 31, 2016
Forward Power Contracts
Market approach
 
$
2

 
$
(1
)
 
Market price per MWh
 
$
20.90

 
$
40.00
Fair Value Inputs, Liabilities, Quantitative Information Regarding Significant Unobservable Inputs
Level 3 Fair Value Measurements
The following tables provide quantitative information regarding significant unobservable inputs in TEP’s Level 3 fair value measurements:
 
Valuation
 
Fair Value of
 
 
 
Range of
 
Approach
 
Assets
 
Liabilities
 
Unobservable Inputs
 
Unobservable Input
(in millions)
December 31, 2017
Forward Power Contracts
Market approach
 
$
3

 
$
(1
)
 
Market price per MWh
 
$
17.65

 
$
34.60

 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
December 31, 2016
Forward Power Contracts
Market approach
 
$
2

 
$
(1
)
 
Market price per MWh
 
$
20.90

 
$
40.00
Level 3 Fair Value Reconciliation of Changes
The following table presents a reconciliation of changes in the fair value of net assets and liabilities classified as Level 3 in the fair value hierarchy and the gains (losses) attributable to the change in unrealized gains (losses) relating to assets (liabilities) still held at the end of the period:
 
Years Ended December 31,
(in millions)
2017
 
2016
Beginning of Period
$
1

 
$
(2
)
Gains (Losses) Recorded
 
 
 
Regulatory Assets or Liabilities, Derivative Instruments
1

 
2

Wholesale Revenues
4

 
4

Settlements
(4
)
 
(3
)
End of Period
$
2

 
$
1

 
 
 
 
Gains (Losses), Assets (Liabilities) still held
$
2

 
$
1
Face Value and Estimated Fair Value of Long-Term Debt
The following table includes the face value and estimated fair value of TEP's long-term debt:
 
Fair Value
Hierarchy
 
Face Value
 
Fair Value
 
 
 
December 31,
(in millions)
 
 
2017
 
2016
 
2017
 
2016
Liabilities
 
 
 
 
 
 
 
 
 
Long-Term Debt, including Current Maturities
Level 2
 
$
1,466

 
$
1,466

 
$
1,547

 
$
1,472