COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2023

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

COMMITMENTS

There have been no significant changes to TEP's long-term commitments from those reported in its 2022 Annual Report on Form 10-K, except as noted below.

Fuel, Including Transportation

TEP has firm natural gas transportation agreements with capacity sufficient to meet its load requirements. In the first quarter of 2023, TEP amended and extended an agreement for gas transportation to Sundt through 2048. TEP's minimum purchase commitment is $5 million in each of 2023 through 2027 and $92 million thereafter.

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.

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 costs are subject to various assumptions, such as: (i) estimations of reclamation costs; (ii) timing of when final reclamation will occur; and (iii) the expected inflation rate. As these assumptions change, TEP prospectively adjusts the expense amounts for final reclamation over the remaining term of the respective coal supply agreement. TEP’s PPFAC allows the pass-through of final mine reclamation costs to retail customers as a component of fuel costs. Therefore, TEP defers these expenses until recovered from customers by recording a regulatory asset and the reclamation liability over the remaining life of the respective coal supply agreements. TEP recovers the regulatory asset through the PPFAC as final mine reclamation costs are funded. After expiration of the related coal supply agreement, TEP will record its share of any change in the estimate of its final mine reclamation liability to its regulatory asset and reclamation liability.

TEP is liable for a portion of final mine reclamation costs upon closure of the mines servicing San Juan and Four Corners. TEP’s share of final mine reclamation costs at Four Corners is $7 million upon the expiration of the Four Corners coal supply agreement in 2031. TEP ceased operations at San Juan upon expiration of the coal supply agreement in June 2022. As of June

30, 2023, TEP’s remaining final mine reclamation liability at San Juan was $29 million. TEP established a trust to fund its share of estimated final mine reclamation costs at San Juan, which will remain in effect through the completion of final mine reclamation activities currently projected to occur by 2039. See Note 1 for additional information on restricted cash.

TEP's aggregate liability balance related to San Juan and Four Corners final mine reclamation totaled $34 million and $37 million as of June 30, 2023, and December 31, 2022, respectively, and was recorded in Other on the Condensed Consolidated Balance Sheets.

Performance Guarantees

TEP has joint generation participation agreements with participants at Four Corners and Luna Generating Station (Luna), which expire in 2041 and 2046, respectively. The participants at Four Corners and Luna, 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. There is no cap on the potential amount of future payments TEP could be required to make under the Luna guarantee. The aggregate maximum potential amount of future payments to the non-defaulting parties is $250 million at Four Corners. As of June 30, 2023, there have been no such payment defaults under either of the participation agreements.

The Navajo Generating Station (Navajo) and San Juan participation agreements expired in 2019 and 2022, respectively, but certain performance obligations continue through the decommissioning of both generation facilities. In the case of a default under either participation agreement, the non-defaulting participants would seek financial recovery directly from the defaulting party.

Environmental Matters

TEP is subject to federal, state, and local environmental laws and regulations regarding air and water quality, water use, 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 customers. TEP believes it is in compliance with applicable environmental laws and regulations in all material respects.