COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS

Unconditional Purchase Obligations

As of December 31, 2019, TEP had the following unconditional minimum purchase obligations:



(in millions)	2020		2021		2022		2023		2024		Thereafter		Total
Fuel, Including Transportation	$	94	$	61	$	40	$	33	$	33	$	194	$	455
Purchased Power	8		—		—		—		—		—		8
Transmission	21		16		14		3		3		6		63
Renewable Power Purchase Agreements	63		63		63		63		62		543		857
RES Performance-Based Incentives	8		7		7		7		7		33		69
Land Easements and Rights-of-Way ⁽¹⁾	1		2		1		1		3		79		87
Total Purchase Commitments	$	195	$	149	$	125	$	107	$	108	$	855	$	1,539


⁽¹⁾	Land easements and rights-of-way have varying terms and provisions and reflect expiration dates through 2054.

Costs for Purchased Power, Transmission, and Fuel, Including Transportation, are recoverable from customers through the PPFAC mechanism. A portion of the costs of PPAs are recoverable through the PPFAC, with the balance of costs recoverable through the RES tariff. PBI costs are recoverable through the RES tariff. See Note 2 for information on ACC approved cost recovery mechanisms.

Fuel, Including Transportation

TEP has long-term agreements for the purchase and delivery of coal with various expiration dates between 2020 and 2031. Amounts paid under these contracts depend on actual quantities purchased and delivered. Some of these agreements include price adjustment components that will affect future costs.

TEP has firm transportation agreements with capacity sufficient to meet its load requirements. These agreements expire in various years between 2022 and 2040.

Purchased Power

TEP has contracts with utilities and other energy suppliers for purchased power to: (i) meet system load and energy requirements; (ii) replace generation from company-owned units under maintenance and during outages; and (iii) meet operating reserve obligations. In general, these contracts provide for capacity and energy payments based on actual power taken under the contracts with various expiration dates through the second quarter of 2020. Certain of these contracts are at a fixed price per MW and others are indexed to natural gas prices. The commitment amounts included in the table above are based on projected market prices as of December 31, 2019.

Transmission

TEP has agreements with other utilities to purchase transmission services over lines that are part of the Western Interconnection, a regional grid in the United States. These agreements expire in various years between 2020 and 2030.

Renewable Power Purchase Agreements

TEP enters into long-term renewable PPAs which require TEP to purchase 100% of certain renewable energy generation facilities output once commercial operation status is achieved. While TEP is not required to make payments under the agreements if power is not delivered, estimated future payments are included in the table above. These agreements expire in various years between 2027 and 2036.

RES Performance-Based Incentives

TEP has entered into REC purchase agreements to purchase the environmental attributes from retail customers with solar installations. Payments for the RECs are termed PBIs and are paid in contractually agreed-upon intervals (usually quarterly) based on metered renewable energy production. These agreements expire in various years between 2020 and 2034.

Build-Transfer Agreement

In March 2019, TEP entered into a build-transfer agreement to develop a 250 MW nominal capacity wind-powered electric generation facility, which is under construction in southeastern New Mexico (Oso Grande) with estimated costs of approximately $384 million. In January 2020, TEP took ownership of Oso Grande. Construction commenced in the third quarter of 2019 and is expected to be completed for operation by December 2020. TEP made payments under the build-transfer agreement of $47 million in 2019 and $226 million in January 2020.

CONTINGENCIES

Legal Matters

TEP is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. TEP believes such normal and routine litigation will not have a material impact on its operations or consolidated financial results. TEP is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts on TEP and are disclosed below.

Claims Related to San Juan Generating Station

WildEarth Guardians

In 2013, WildEarth Guardians (WEG) filed a Petition for Review in the U.S. District Court for the District of Colorado against the Office of Surface Mining Reclamation and Enforcement (OSMRE) challenging several unrelated mining plan modification approvals, including two issued in 2008 related to Westmoreland San Juan Mining LLC's (as successor to SJCC) existing San Juan Mine. The petition alleges various National Environmental Policy Act (NEPA) violations against the OSMRE, including: (i) failure to provide requisite public notice and participation; and (ii) failure to analyze certain environmental impacts. WEG’s petition seeks various forms of relief, including voiding and remanding the various mining modification approvals, enjoining the federal defendants from re-issuing the approvals until they can demonstrate compliance with the NEPA, and enjoining operations at the affected mines. SJCC intervened in this matter and was granted its motion to sever its claims from the lawsuit and transfer venue to the U.S. District Court for the District of New Mexico, where this matter is now pending. In July 2016, the federal defendants filed a motion asking that the matter be voluntarily remanded to the OSMRE so the OSMRE may prepare a new Environmental Impact Statement (EIS) under the NEPA regarding the impacts of the San Juan Mine mining plan approval. In August 2016, the court issued an order granting the motion for remand to conduct further environmental analysis and complete an EIS by August 2019. The order provides that: (i) the OSMRE’s decision approving the mining plan will remain in effect during this process; or (ii) if the EIS is not completed by August 2019, then the approved mine plan will immediately be vacated, absent further court order. On April 30, 2019, the OSMRE issued a final Record of Decision (ROD) on the Final EIS released March 15, 2019. The Final EIS contemplates continued mining at the San Juan Mine in annual quantities similar to those currently being provided through 2033. The Assistant Secretary for Land and Minerals Management approved the mining plan outlined in the ROD in August 2019. TEP is not a party in this matter but does own 50% of Unit 1 at San Juan. San Juan is scheduled for early retirement in 2022. TEP does not anticipate any significant impact on the cost of coal at San Juan related to this matter.

Mine Reclamation at Generation Facilities Not Operated by TEP

TEP pays ongoing mine reclamation costs related to coal mines that supply generation facilities in which TEP has an ownership interest but does not operate. Amounts recorded for final mine reclamation are subject to various assumptions, such as estimations of reclamation costs, timing when final reclamation will occur, and the expected inflation rate. As these assumptions change, TEP will prospectively adjust the expense amounts for final reclamation over the remaining coal supply agreements’ terms. TEP’s PPFAC allows the Company to pass through final mine reclamation costs, as a component of fuel costs, to retail customers. Therefore, TEP defers these expenses until recovered from rate payers by increasing the regulatory asset and the reclamation liability over the remaining life of the coal supply agreements and recovers the regulatory asset through the PPFAC as final mine reclamation costs are paid out.

San Juan and Four Corners

TEP is liable for a portion of final mine reclamation costs upon closure of the mines servicing San Juan and Four Corners. TEP’s estimated share of mine reclamation costs at both mines is $57 million upon expiration of the related coal supply agreements, which expire in 2022 and 2031, respectively. An aggregate liability balance related to San Juan and Four Corners final mine reclamation of $36 million and $31 million as of December 31, 2019 and 2018, respectively, was recorded in Other on the Consolidated Balance Sheets. See Note 2 for additional information related to final mine reclamation costs.

Navajo

In December 2019, TEP entered into an agreement with the owner and operator of the Kayenta Mine and the third-party owners of Navajo for the settlement and release of asserted claims associated with the early retirement of Navajo. During 2019, TEP paid $17 million related to the retirement of Navajo which includes $8 million paid for final mine reclamation costs as a result of the settlement. As of December 31, 2019, TEP had no liability balance related to Navajo final mine reclamation. A liability balance related to Navajo final mine reclamation of $5 million as of December 31, 2018, was recorded in Current Liabilities—Other on the Consolidated Balance Sheets.

Performance Guarantees

TEP has joint participation agreements with participants at Navajo, San Juan, Four Corners, and Luna. The participants in each of the generation facilities, including TEP, have guaranteed certain performance obligations. Specifically, in the event of payment default, each non-defaulting participant has agreed to bear its proportionate share of expenses otherwise payable by the defaulting participant. In exchange, the non-defaulting participants are entitled to receive their proportionate share of the generation capacity of the defaulting participant. With the exception of Four Corners, there is no maximum potential amount of future payments TEP could be required to make under the guarantees. The maximum potential amount of future payments is $250 million at Four Corners. As of December 31, 2019, there have been no such payment defaults under any of the participation agreements. The Navajo participation agreement expired in 2019, but certain performance obligations continue through the decommissioning of the generating station. The San Juan participation agreement expires in 2022, Four Corners in 2041, and Luna in 2046.

Environmental Matters

TEP is subject to federal, state, and local environmental laws and regulations regarding air and water quality, renewable portfolio standards, emissions performance standards, climate change, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species, and other environmental matters that have the potential to impact TEP's current and future operations. Environmental laws and regulations are subject to a range of interpretations, which may ultimately be resolved by the courts. Because these laws and regulations continue to evolve, TEP is unable to predict the impact of the changing laws and regulations on its operations and consolidated financial results. TEP expects to recover the cost of environmental compliance from its ratepayers. TEP believes it is in compliance with applicable environmental laws and regulations in all material respects.

Broadway-Pantano Site

The Water Quality Assurance Revolving Fund (WQARF) imposes liability on parties responsible for, in whole or in part, the presence of hazardous substances at a site. Those who released, generated, or disposed of hazardous substances at a contaminated site, or transported to or owned such contaminated site, are among the Potentially Responsible Parties (PRP). PRPs may be strictly liable for clean-up. The ADEQ is administering a remediation plan to delineate and then apportion costs among anticipated adverse parties in the Broadway-Pantano WQARF site, a hazardous waste site in Tucson, Arizona, which includes the Broadway North and South Landfills. Collectively, these landfills were in operation from 1953 and 1973. TEP's Eastloop substation and a portion of a related transmission line are located on two parcel adjacent to these landfills. On November 8, 2019, the ADEQ notified TEP that it considers TEP to be a PRP with respect to the Broadway-Pantano WQARF site. TEP does not expect this matter to have a material impact on its financial statements, however, the overall investigation and remediation plan have not been finalized.