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LEASES

12 Months Ended

Dec. 31, 2019

TEP leases an interest in Springerville Common Facilities, land, rail cars, and communication tower space with remaining terms of one to 22 years. Most leases include one or more options to renew, with renewal terms that may extend a lease term for up to 15 years. Certain lease agreements include rental payments adjusted periodically for inflation or require TEP to pay real estate taxes, insurance, maintenance, or other operating expenses associated with the lease premises.

TEP’s leases are included in the balance sheet as follows:



(in millions)	Lease Type	December 31, 2019
Lease Assets
Utility Plant Under Finance Leases	Finance	$	151
Accumulated Amortization of Finance Lease Assets	Finance	(77		)
Regulatory and Other Assets, Other	Operating	8
Lease Liabilities
Current Liabilities, Finance Lease Obligations	Finance	17
Finance Lease Obligations	Finance	67
Current Liabilities, Other	Operating	1
Regulatory and Other Liabilities, Other	Operating	6

Springerville Common Facilities Leases

TEP finances a portion of the Springerville Common Facilities with finance leases. In December 2019, TEP elected to purchase a 32.2% undivided interest in the Springerville Common Facilities by January 2021 for $68 million. The lease assets are amortized over the estimated life of the underlying plant because ownership of the plant transfers at the end of the lease term. In addition, TEP has agreements with Tri-State, the lessee of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, that contain the following conditions should TEP complete the purchase of the Springerville Common Facilities: (i) SRP will be obligated to buy a 14% undivided interest in the facilities; and (ii) Tri-State will be obligated to either: (a) buy a 14% undivided interest in the facilities; or (b) continue to make payments to TEP for the use of these facilities.

Gila River Unit 2

In May 2018, TEP recorded an increase to finance lease assets and obligations related to a 20-year Tolling PPA with SRP, entered into in 2017, to purchase and receive all 550 MW of capacity, power, and ancillary services from Gila River Unit 2. The

Tolling PPA included a three-year option to purchase the unit. TEP exercised its option and subsequently purchased Gila River Unit 2 in December 2019 at which time the lease asset and obligation were removed.

The following table presents the components of TEP’s lease cost:



	Year Ended
(in millions)	December 31, 2019
Finance
Amortization of Leased Assets ⁽¹⁾	$	13
Interest on Lease Liabilities ⁽²⁾	13
Operating	1
Variable	16
Short Term	1
Total Lease Cost	$	44


⁽¹⁾	TEP deferred $6 million in amortization related to Gila River Unit 2 in Regulatory and Other Assets—Regulatory Assets based on PPFAC recovery of TEP's fixed capacity payment.

⁽²⁾

Finance lease interest expense is recorded in Interest Expense on the Consolidated Statements of Income. In 2018, lease interest expense related to Gila River Unit 2 was recorded in Purchased Power on the Consolidated Statements of Income. Finance lease interest expense related to Gila River Unit 2 was $12 million for the year ended December 31, 2019. TEP purchased Gila River Unit 2 in December 2019.

TEP has a 20-year lease for energy storage with variable payments contingent on performance, which is expected to commence by the fourth quarter of 2020.

As of December 31, 2019, TEP had the following future minimum lease payments, excluding payments to lessors for variable costs:



(in millions)	Finance Leases		Operating Leases		Total
2020	$	18	$	1	$	19
2021	68		1		69
2022	—		1		1
2023	—		1		1
2024	—		1		1
Thereafter	—		4		4
Total Lease Payments	86		9		95
Less Imputed Interest	2		2		4
Total Lease Obligations	84		7		91
Less Current Portion	17		1		18
Total Non-Current Lease Obligations	$	67	$	6	$	73

The following table presents TEP's lease terms and discount rate related to its leases:



	December 31, 2019
Weighted-Average Remaining Lease Term (years)
Finance Leases	1
Operating Leases	12
Weighted-Average Discount Rate
Finance Leases	2.2	%
Operating Leases	4.1	%

The following table presents TEP's cash flow information related to its leases:



	Year Ended
(in millions)	December 31, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flows used for Finance Leases	$	13
Operating Cash Flows used for Operating Leases	1
Financing Cash Flows used for Finance Leases	11
Investing Cash Flows used for Finance Leases	164

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.

In addition, TEP leases limited office facilities and utility property to others with remaining terms of four to thirteen years. Most leases include one or more options to renew, with renewal terms that may extend a lease term for up to three years.

Operating lease income for the year ended December 31, 2019, was $1 million. TEP's expected operating lease payments to be received as of December 31, 2019, are $1 million in each of 2020 through 2024 and thereafter.

DISCLOSURES RELATED TO PERIODS PRIOR TO ADOPTION OF THE NEW LEASE STANDARD

As of December 31, 2018, future minimum lease payments were as follows:



(in millions)	Capital Leases		Operating Leases
2019	$	187	$	1
2020	20		1
2021	—		1
2022	—		1
2023	—		1
Thereafter	—		5
Total Lease Payments	207		$	10
Less: Imputed Interest	14
Total Lease Obligations	193
Less: Current Portion	173
Total Non-Current Lease Obligations	$	20

TEP's operating lease cost was $1 million for the year ended December 31, 2018.

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.

LEASES

TEP’s leases are included in the balance sheet as follows:



(in millions)	Lease Type	December 31, 2019
Lease Assets
Utility Plant Under Finance Leases	Finance	$	151
Accumulated Amortization of Finance Lease Assets	Finance	(77		)
Regulatory and Other Assets, Other	Operating	8
Lease Liabilities
Current Liabilities, Finance Lease Obligations	Finance	17
Finance Lease Obligations	Finance	67
Current Liabilities, Other	Operating	1
Regulatory and Other Liabilities, Other	Operating	6

Springerville Common Facilities Leases

Gila River Unit 2

The following table presents the components of TEP’s lease cost:



	Year Ended
(in millions)	December 31, 2019
Finance
Amortization of Leased Assets ⁽¹⁾	$	13
Interest on Lease Liabilities ⁽²⁾	13
Operating	1
Variable	16
Short Term	1
Total Lease Cost	$	44


⁽¹⁾	TEP deferred $6 million in amortization related to Gila River Unit 2 in Regulatory and Other Assets—Regulatory Assets based on PPFAC recovery of TEP's fixed capacity payment.

⁽²⁾

TEP has a 20-year lease for energy storage with variable payments contingent on performance, which is expected to commence by the fourth quarter of 2020.

As of December 31, 2019, TEP had the following future minimum lease payments, excluding payments to lessors for variable costs:



(in millions)	Finance Leases		Operating Leases		Total
2020	$	18	$	1	$	19
2021	68		1		69
2022	—		1		1
2023	—		1		1
2024	—		1		1
Thereafter	—		4		4
Total Lease Payments	86		9		95
Less Imputed Interest	2		2		4
Total Lease Obligations	84		7		91
Less Current Portion	17		1		18
Total Non-Current Lease Obligations	$	67	$	6	$	73

The following table presents TEP's lease terms and discount rate related to its leases:



	December 31, 2019
Weighted-Average Remaining Lease Term (years)
Finance Leases	1
Operating Leases	12
Weighted-Average Discount Rate
Finance Leases	2.2	%
Operating Leases	4.1	%

The following table presents TEP's cash flow information related to its leases:



	Year Ended
(in millions)	December 31, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flows used for Finance Leases	$	13
Operating Cash Flows used for Operating Leases	1
Financing Cash Flows used for Finance Leases	11
Investing Cash Flows used for Finance Leases	164

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.

DISCLOSURES RELATED TO PERIODS PRIOR TO ADOPTION OF THE NEW LEASE STANDARD

As of December 31, 2018, future minimum lease payments were as follows:



(in millions)	Capital Leases		Operating Leases
2019	$	187	$	1
2020	20		1
2021	—		1
2022	—		1
2023	—		1
Thereafter	—		5
Total Lease Payments	207		$	10
Less: Imputed Interest	14
Total Lease Obligations	193
Less: Current Portion	173
Total Non-Current Lease Obligations	$	20

TEP's operating lease cost was $1 million for the year ended December 31, 2018.

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.

LEASES

TEP’s leases are included in the balance sheet as follows:



(in millions)	Lease Type	December 31, 2019
Lease Assets
Utility Plant Under Finance Leases	Finance	$	151
Accumulated Amortization of Finance Lease Assets	Finance	(77		)
Regulatory and Other Assets, Other	Operating	8
Lease Liabilities
Current Liabilities, Finance Lease Obligations	Finance	17
Finance Lease Obligations	Finance	67
Current Liabilities, Other	Operating	1
Regulatory and Other Liabilities, Other	Operating	6

Springerville Common Facilities Leases

Gila River Unit 2

The following table presents the components of TEP’s lease cost:



	Year Ended
(in millions)	December 31, 2019
Finance
Amortization of Leased Assets ⁽¹⁾	$	13
Interest on Lease Liabilities ⁽²⁾	13
Operating	1
Variable	16
Short Term	1
Total Lease Cost	$	44


⁽¹⁾	TEP deferred $6 million in amortization related to Gila River Unit 2 in Regulatory and Other Assets—Regulatory Assets based on PPFAC recovery of TEP's fixed capacity payment.

⁽²⁾

TEP has a 20-year lease for energy storage with variable payments contingent on performance, which is expected to commence by the fourth quarter of 2020.

As of December 31, 2019, TEP had the following future minimum lease payments, excluding payments to lessors for variable costs:



(in millions)	Finance Leases		Operating Leases		Total
2020	$	18	$	1	$	19
2021	68		1		69
2022	—		1		1
2023	—		1		1
2024	—		1		1
Thereafter	—		4		4
Total Lease Payments	86		9		95
Less Imputed Interest	2		2		4
Total Lease Obligations	84		7		91
Less Current Portion	17		1		18
Total Non-Current Lease Obligations	$	67	$	6	$	73

The following table presents TEP's lease terms and discount rate related to its leases:



	December 31, 2019
Weighted-Average Remaining Lease Term (years)
Finance Leases	1
Operating Leases	12
Weighted-Average Discount Rate
Finance Leases	2.2	%
Operating Leases	4.1	%

The following table presents TEP's cash flow information related to its leases:



	Year Ended
(in millions)	December 31, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flows used for Finance Leases	$	13
Operating Cash Flows used for Operating Leases	1
Financing Cash Flows used for Finance Leases	11
Investing Cash Flows used for Finance Leases	164

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.

DISCLOSURES RELATED TO PERIODS PRIOR TO ADOPTION OF THE NEW LEASE STANDARD

As of December 31, 2018, future minimum lease payments were as follows:



(in millions)	Capital Leases		Operating Leases
2019	$	187	$	1
2020	20		1
2021	—		1
2022	—		1
2023	—		1
Thereafter	—		5
Total Lease Payments	207		$	10
Less: Imputed Interest	14
Total Lease Obligations	193
Less: Current Portion	173
Total Non-Current Lease Obligations	$	20

TEP's operating lease cost was $1 million for the year ended December 31, 2018.

See Note 12 for non-cash transactions that resulted in recognition of right-of-use assets in exchange for lease liabilities.