ACCOUNTING FOR RATE REGULATION

6 Months Ended

Jun. 30, 2024

Regulatory Assets and Liabilities Disclosure [Abstract]

In accordance with the accounting requirements related to regulated operations, some revenues and expenses have been deferred at the discretion of our Board, subject to FERC approval, if based on regulatory orders or other available evidence, it is probable that these amounts will be refunded or recovered through future rates. Regulatory assets are costs that we expect to recover from our Utility Members based on rates approved by the applicable authority. Regulatory liabilities represent probable future reductions in rates associated with amounts that are expected to be refunded to our Utility Members based on rates approved by the applicable authority. Expected recovery of deferred costs and returning deferred credits are based on specific ratemaking decisions by FERC or precedent for each item. We recognize regulatory assets as expenses and regulatory liabilities as operating revenue, other income, or a reduction in expense concurrent with their recovery through rates.

Regulatory assets and liabilities are as follows (dollars in thousands):


	June 30, 2024		December 31, 2023
Regulatory assets
Deferred income tax expense (1)	$	15,223	$	15,223
Deferred prepaid lease expense – Springerville Unit 3 Lease (2)	73,406		74,551
Acquisition costs – J.M. Shafer (3)	36,325		37,749
Acquisition costs – Colowyo Coal (4)	32,545		33,062
Deferred debt prepayment transaction costs (5)	102,103		106,417
Deferred Holcomb expansion impairment loss (6)	72,458		74,795
New Horizon Mine environmental obligation (7)	44,869		44,869
Unrecovered plant (8)	526,425		532,817
Total regulatory assets	903,354		919,483

Regulatory liabilities
Interest rate swap - realized gain (9) and other	1,625		1,854

Membership withdrawal (10)	513,699		463
Withdrawal related transmission credit (11)	178,511		—
Total regulatory liabilities	693,835		2,317
Net regulatory asset	$	209,519	$	917,166

(1)A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be received or settled through future rate revenues.

(2)Represents deferral of the loss on acquisition related to the Springerville Generating Station Unit 3 (“Springerville Unit 3”) prepaid lease expense upon acquiring a controlling interest in the Springerville Unit 3 Partnership LP (“Springerville Partnership”) in 2009. The regulatory asset for the deferred prepaid lease expense is being amortized to depreciation, amortization and depletion expense in the amount of $2.3 million annually through the 47-year period ending in 2056 and recovered from our Utility Members through rates.

(3)Represents acquisition costs related to our acquisition of an entity that owned J.M. Shafer Generating Station in December 2011. Acquisition costs are being amortized to depreciation, amortization and depletion expense in the amount of $2.8 million annually through the 25-year period ending in 2036 and recovered from our Utility Members through rates.

(4)Represents acquisition costs related to our acquisition of Colowyo Coal in December 2011. Acquisition costs are being amortized to depreciation, amortization and depletion expense in the amount of $1.0 million annually through the 44-year period ending in 2056 and recovered from our Utility Members through rates.

(5)Represents transaction costs that we incurred related to the prepayment of our long-term debt in 2014. These costs are being amortized to depreciation, amortization and depletion expense in the amount of $8.6 million annually over the 21.4-year period ending in 2036 and recovered from our Utility Members through rates.

(6)Represents deferral of the impairment loss related to development costs, including costs for the option to purchase development rights for the expansion of the Holcomb Generating Station. The regulatory asset for the deferred impairment loss is being amortized to depreciation, amortization and depletion expense in the amount of $4.7 million annually over the 20-year period ending in 2039 and recovered from our Utility Members through rates.

(7)Represents $44.9 million of New Horizon Mine environmental obligation expense that was recognized as a regulatory item in 2023. The regulatory asset for the deferred environmental obligation expense will be amortized to expense in the amount of $1.8 million annually over 25 years.

(8)Represents deferral of the impairment losses and other closure costs related to the early retirement of the Escalante, Rifle and Craig Generating Station Units 2 and 3. The deferred impairment loss for Escalante Generating Station is being amortized to depreciation, amortization and depletion expense in the amount of $12.2 million annually over the 25-year period ending in December 2045, which was the depreciable life of the Escalante Generating Station, and recovered from our Utility Members through rates. The deferred impairment loss for Rifle Generating Station is being amortized to depreciation, amortization and depletion expense in the amount of $0.6 million annually through December 2028, which was the depreciable life of the Rifle Generating Station, and recovered from our Utility Members in rates. We recognized the early retirement of Craig Generating Station Units 2 and 3 and concluded the impairment of incurred costs is probable of recovery through future rates. We recognized an impairment loss of $261.6 million and deferred the loss in accordance with accounting for rate regulation. The deferred impairment loss will be amortized to depreciation, amortization and depletion expense beginning in October 2028 through 2039 for Craig Generating Station Unit 2 and January 2030 through

2043 for Craig Generating Station Unit 3. These amortization periods are the depreciable lives of Craig Generating Station Unit 2 and 3. The annual amortization is expected to approximate the former annual Craig Generation Station Unit 2 and 3 depreciation for the remaining life of the asset.

(9)Represents deferral of a realized gain of $4.6 million related to the October 2017 settlement of a forward starting interest rate swap. This realized gain was deferred as a regulatory liability and is being amortized to interest expense over the 12–year term of the First Mortgage Obligations, Series 2017A and refunded to Utility Members through reduced rates when recognized in future periods.

(10) Represents the remaining balance of the deferred recognition of other operating revenues related to the withdrawal of former Utility Members from membership in us. On May 1, 2024, United Power withdrew from membership in us and terminated its wholesale electric service contract with us pursuant to Rate Schedule 281 on-file with FERC and a Membership Withdrawal Agreement. United Power's contract termination payment amount was $709.4 million, of which $530.1 million was membership withdrawal that was deferred by our Board as a regulatory liability. The deferred membership withdrawal will be refunded to Utility Members through reduced rates when recognized in operating revenues in future periods with the oldest vintage year used first.

(11) Represents the remaining $179.3 million of United Power's transmission credit related to taking transmission service from us. A portion of a withdrawing member's contract termination payment is allocated to transmission debt that is deferred as required by FERC's order on Rate Schedule 281. The transmission credit, plus interest at FERC's prescribed interest rate, is refunded to the withdrawing member on a monthly basis if the withdrawing member takes transmission service from us and amortized on a straight-line basis over the remaining term. If the withdrawing member's transmission bill for a given month is lower than the credit amount that would be due, the difference is forfeited by the withdrawing member.