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,
($ in millions)	Annual Depreciation Rate ⁽⁴⁾	Average Remaining Life in Years ⁽⁴⁾	2017		2016
Plant in Service
Generation Plant	3.19%	25	$	2,548	$	2,866
Transmission Plant	1.48%	32	1,001		1,024
Distribution Plant	1.56%	36	1,632		1,512
General Plant	5.89%	12	389		381
Intangible Plant, Software Costs, and Other ⁽¹⁾	Various	Various	207		185
Plant Held for Future Use	—	—	4		7
Total Plant in Service ⁽²⁾			$	5,781	$	5,975

Utility Plant Under Capital Leases ⁽³⁾			$	85	$	167

⁽¹⁾

Primarily represents computer software. Unamortized computer software costs were $59 million and $52 million as of December 31, 2017 and 2016, respectively. The amortization of computer software costs was $19 million in 2017, $17 million in 2016, and $14 million in 2015. Computer software is being amortized over its expected useful life ranging from three to five years for smaller application software and average remaining life of three years for large enterprise software.


⁽²⁾	Includes plant acquisition adjustments of $(134) million and $(139) million as of December 31, 2017 and 2016, respectively.


⁽³⁾	In December 2017, TEP completed the purchase of an undivided ownership interest in the Springerville Common Facilities. See Note 6 for additional information regarding the Springerville leases.


⁽⁴⁾	Represents a composite of the depreciation rates of assets within each major class of utility plant and is based on the 2015 depreciation study available for the major classes of Plant in Service. TEP implemented 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. The following table shows the amount of lease expense incurred for capital leases:



	Years Ended December 31,
(in millions)	2017		2016		2015
Lease Expense
Interest Expense included in:
Interest Expense, Capital Leases	$	3	$	3	$	4
Amortization of Capital Lease Assets included in:
Operating Expenses, Fuel	—		—		2
Operating Expenses, Amortization	6		5		6
Total Lease Expense	$	9	$	8	$	12

Springerville Acquisitions

In September 2016, TEP purchased an undivided interest in Springerville Unit 1. The purchase increased TEP's total ownership interest to 100%. In December 2017, TEP purchased an undivided interest in the Springerville Common Facilities. As of December 31, 2017, Utility Plant Under Capital Leases represented a 32.2% undivided interest in certain Springerville Common Facilities. See Note 6 for additional information regarding the Springerville capital lease purchases.

JOINTLY-OWNED FACILITIES

As of December 31, 2017, 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 Unit 1	50.0%	$	274	$	6	$	83	$	197
Four Corners Units 4 and 5	7.0%	113		54		79		88
Luna	33.3%	55		—		3		52
Gila River Unit 3	75.0%	203		3		60		146
Gila River Common Facilities	18.8%	25		—		8		17
Springerville Coal Handling Facilities	83.0%	202		—		81		121
Transmission Facilities	Various	483		5		247		241
Total		$	1,355	$	68	$	561	$	862

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 Generating Station

In October 2014, the EPA published a final rule approving a SIP covering BART requirements for San Juan, which included the closure of Units 2 and 3 by December 2017. TEP is a participant in San Juan Units 1 and 2. Given the closure of Units 2 and 3 and the desire of certain participants to exit their ownership in San Juan, PNM, TEP, and the other participants negotiated restructured ownership agreements which became effective upon the sale of San Juan Coal Company (SJCC) stock in January 2016. Under the new restructured ownership agreements, TEP and the other remaining participants have the option to exit their remaining ownership interests in San Juan as of June 30, 2022.

In 2017, TEP recorded the early retirement San Juan Unit 2 and applied excess depreciation reserves against the unrecovered NBV as approved in the 2017 Rate Order. The Consolidated Balance Sheets reflect a $224 million decrease in Plant in Service and Accumulated Depreciation and Amortization related to San Juan Unit 2. On December 20, 2017, San Juan Unit 2 was removed from service. See Note 2 for additional information regarding the 2017 Rate Order.

Navajo Generating Station

In 2017, the Navajo Nation approved a land lease extension which allows TEP and the co-owners of Navajo to continue operations through December 2019 and begin decommissioning activities thereafter. TEP is currently recovering Navajo's capital and operating costs in base rates using a useful life of 2030. As a result of the planned early retirement of Navajo, $52 million of the facility's NBV and other related costs were reclassified from Utility Plant, Net to Regulatory Assets on the Consolidated Balance Sheets as of December 31, 2017. See Note 2 for additional information related to the planned early retirement of Navajo.

Sundt Generating Station

In March 2016, TEP notified the EPA of its decision to permanently eliminate coal as a fuel source to comply with the EPA rules and transferred the NBV of the coal handling facilities at Sundt to a regulatory asset. As approved in the 2017 Rate Order, TEP applied excess depreciation reserves against the regulatory asset as of December 31, 2017. See Note 2 for additional information regarding the 2017 Rate Order.

In 2017, TEP submitted an Air Quality Permit Application (Application) to the Pima County Department of Environmental Quality (PDEQ) related to a generation modernization project at Sundt that will add generation capacity in the form of RICE generators in 2019 and 2020. As part of the Application, TEP plans to early retire Sundt Units 1 and 2 by the end of 2020. TEP is currently recovering capital and operating costs for Sundt Units 1 and 2 in base rates using useful lives of 2028 and 2030, respectively. As a result of the planned early retirement, $31 million of the facilities' NBV was reclassified from Utility Plant, Net to Regulatory Assets on the Consolidated Balance Sheets as of December 31, 2017. See Note 2 for additional information related to the planned early retirement of Sundt Units 1 and 2.

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 on the Consolidated Balance Sheets:



	December 31,
(in millions)	2017			2016
Beginning of Period	$	33		$	32
Liabilities Incurred	3			—
Liabilities Settled	(1		)	—
Regulatory Deferral/Accretion Expense	2			2
Revisions to the Present Value of Estimated Cash Flows ⁽¹⁾	9			(1		)
End of Period	$	46		$	33


⁽¹⁾	Primarily related to changes in expected cost estimates and the acceleration of asset retirement dates of certain generation facilities.