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⁾	2018		2017
Plant in Service
Generation Plant	3.19%	24	$	2,667	$	2,548
Transmission Plant	1.48%	31	1,010		1,001
Distribution Plant	1.56%	35	1,692		1,632
General Plant	5.89%	11	409		389
Intangible Plant, Software Costs, and Other ⁽¹⁾	Various	Various	239		207
Plant Held for Future Use	—	—	3		4
Total Plant in Service ⁽²⁾			$	6,020	$	5,781

Utility Plant Under Capital Leases ⁽³⁾			$	249	$	85

⁽¹⁾

Primarily represents computer software. Unamortized computer software costs were $73 million and $59 million as of December 31, 2018 and 2017, respectively. The amortization of computer software costs was $24 million in 2018, $19 million in 2017, and $17 million in 2016. 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 as of December 31, 2018 and 2017.


⁽³⁾	In May 2018, TEP recorded capital lease obligations related to the Tolling PPA. See Note 7 for additional information regarding the Tolling PPA and 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)	2018		2017		2016
Lease Expense
Interest Expense included in:
Interest Expense, Capital Leases	$	2	$	3	$	3
Operating Expenses, Fuel	8		—		—
Amortization of Capital Lease Assets included in:
Operating Expenses, Amortization	6		6		5
Total Lease Expense	$	16	$	9	$	8

Springerville Acquisition

In December 2017, TEP purchased an undivided interest in the Springerville Common Facilities. As of December 31, 2018, Utility Plant Under Capital Leases represented 32.2% undivided interests in certain Springerville Common Facilities. See Note 7 for additional information regarding the Springerville capital lease purchases.

JOINTLY-OWNED FACILITIES

As of December 31, 2018, TEP was a participant in the following jointly-owned generation facilities and transmission systems:



(in millions)	Ownership Percentage ⁽¹⁾	Plant in Service		Construction Work in Progress		Accumulated Depreciation		Net Book Value
San Juan Unit 1	50.0%	$	290	$	1	$	134	$	157
Four Corners Units 4 and 5	7.0%	173		2		76		99
Luna	33.3%	58		—		4		54
Gila River Unit 3	75.0%	204		4		67		141
Gila River Common Facilities	18.8%	25		—		9		16
Springerville Coal Handling Facilities	83.0%	208		—		86		122
Transmission Facilities	Various	532		13		290		255
Total		$	1,490	$	20	$	666	$	844


⁽¹⁾	TEP also has a 7.5% ownership interest in Navajo. Navajo's NBV is classified as a regulatory asset. See Note 2 for additional information related to Navajo's NBV.

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

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. See Note 2 for additional information related to the planned early retirement of Navajo.

Sundt Generating Station

In 2018, TEP's PDEQ Application was approved. Under the project outlined in the PDEQ Application, TEP will place in service 10 natural gas RICE units with a total nominal generation capacity of 190 MW. The RICE units are scheduled for commercial operation by the end of the first quarter of 2020.

Consistent with the approved PDEQ Application, TEP plans to early retire Sundt Units 1 and 2 prior to start-up of the first RICE unit. 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.

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)	2018		2017
Beginning of Period	$	46	$	33
Liabilities Incurred ⁽¹⁾	10		3
Liabilities Settled	—		(1		)
Regulatory Deferral/Accretion Expense	3		2
Revisions to the Present Value of Estimated Cash Flows ⁽²⁾	13		9
End of Period	$	72	$	46


⁽¹⁾	Primarily related to closure of the ash landfill at Springerville.


⁽²⁾	Primarily related to changes in expected cost estimates for certain generation facilities.