Company Quick10K Filing
Tucson Electric Power
10-Q 2020-06-30 Filed 2020-07-30
10-Q 2020-03-31 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-02-13
10-Q 2019-09-30 Filed 2019-11-01
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-01
10-K 2018-12-31 Filed 2019-02-15
10-Q 2018-09-30 Filed 2018-11-02
S-1 2018-09-14 Public Filing
10-Q 2018-06-30 Filed 2018-07-31
10-Q 2018-03-31 Filed 2018-05-01
10-K 2017-12-31 Filed 2018-02-15
10-Q 2017-09-30 Filed 2017-11-03
10-Q 2017-06-30 Filed 2017-07-28
10-Q 2017-03-31 Filed 2017-05-02
10-K 2016-12-31 Filed 2017-02-16
10-Q 2016-09-30 Filed 2016-11-04
10-Q 2016-06-30 Filed 2016-07-29
10-Q 2016-03-31 Filed 2016-05-03
10-K 2015-12-31 Filed 2016-02-18
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-07-31
10-Q 2015-03-31 Filed 2015-05-05
10-K 2014-12-31 Filed 2015-02-19
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-07-29
10-Q 2014-03-31 Filed 2014-04-28
10-K 2013-12-31 Filed 2014-02-25
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-07-30
10-Q 2013-03-31 Filed 2013-04-29
10-K 2012-12-31 Filed 2013-02-27
10-Q 2012-09-30 Filed 2012-11-02
10-Q 2012-06-30 Filed 2012-07-30
10-Q 2012-03-31 Filed 2012-04-30
10-K 2011-12-31 Filed 2012-02-28
10-Q 2011-09-30 Filed 2011-10-31
10-Q 2011-06-30 Filed 2011-08-08
10-Q 2011-03-31 Filed 2011-05-02
10-K 2010-12-31 Filed 2011-03-01
10-Q 2010-09-30 Filed 2010-10-27
10-Q 2010-06-30 Filed 2010-08-05
10-Q 2010-03-31 Filed 2010-05-04
10-K 2009-12-31 Filed 2010-02-26
8-K 2020-08-10 Other Events, Exhibits
8-K 2020-06-26 Other Events, Exhibits
8-K 2020-04-09
8-K 2020-02-13
8-K 2019-12-11
8-K 2019-12-04
8-K 2019-03-28
8-K 2018-11-06

TEP 10Q Quarterly Report

Part I
Item 1. Financial Statements
Note 1. Nature of Operations and Financial Statement Presentation
Note 2. Regulatory Matters
Note 3. Revenue
Note 4. Accounts Receivable
Note 5. Related Party Transactions
Note 6. Debt and Credit Agreements
Note 7. Commitments and Contingencies
Note 8. Employee Benefit Plans
Note 9. Fair Value Measurements and Derivative Instruments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.A tepex31a06302020.htm
EX-31.B tepex31b06302020.htm
EX-32 tepex3206302020.htm

Tucson Electric Power Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
10.08.06.04.02.00.02014201620182020
Assets, Equity
0.50.40.30.20.10.02014201620182020
Rev, G Profit, Net Income
0.30.20.1-0.1-0.2-0.32014201620182020
Ops, Inv, Fin

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     .
Commission File Number 1-5924
TUCSON ELECTRIC POWER COMPANY
(Exact name of registrant as specified in its charter)
Arizona
86-0062700
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

88 East Broadway Boulevard, Tucson, AZ 85701
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (520) 571-4000
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller Reporting Company Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
All shares of outstanding common stock of Tucson Electric Power Company are held by its parent company, UNS Energy Corporation, which is an indirect, wholly-owned subsidiary of Fortis Inc. There were 32,139,434 shares of common stock, no par value, outstanding as of July 29, 2020.

i




Table of Contents



ii




DEFINITIONS
The abbreviations and acronyms used in this Form 10-Q are defined below:
INDUSTRY ACRONYMS AND CERTAIN DEFINITIONS
2015 Credit Agreement
 
The 2015 Credit Agreement provides for a $250 million revolving credit and letter of credit facilities with a sublimit of $50 million; the credit agreement matures in October 2022
2019 Credit Agreement
 
The 2019 Credit Agreement provided for $225 million in term loans. In April 2020, the term loans were repaid and the agreement terminated
2019 ACC Rate Case
 
In April 2019, TEP filed a general rate case with the ACC based on a test year ended December 31, 2018
2019 FERC Rate Case
 
In 2019, the FERC issued an order approving TEP's proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings
2020 IRP
 
TEP's 2020 Integrated Resource Plan filed with the ACC in June 2020, which outlines TEP's energy portfolio over the next 15 years
ABR
 
Alternate Base Rate
ACC
 
Arizona Corporation Commission
ACC Refund Order
 
An order issued in 2018 by the ACC approving TEP’s proposal to return savings from the Company’s federal corporate income tax rate under the TCJA to its customers through a combination of customer bill credits and a regulatory liability deferral that reflects the return of a portion of the savings, effective May 1, 2018
ADEQ
 
Arizona Department of Environmental Quality
AFUDC
 
Allowance for Funds Used During Construction
ALJ
 
Administrative Law Judge
AMT
 
Alternative Minimum Tax
COVID-19
 
Coronavirus Disease 2019
DG
 
Distributed Generation
DSM
 
Demand Side Management
EDIT
 
Excess Deferred Income Taxes
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
GAAP
 
Generally Accepted Accounting Principles in the United States of America
LFCR
 
Lost Fixed Cost Recovery
LIBOR
 
London Interbank Offered Rate
LOC
 
Letter(s) of Credit
OATT
 
Open Access Transmission Tariff
PPA
 
Power Purchase Agreement
PPFAC
 
Purchased Power and Fuel Adjustment Clause
Retail Rates
 
Rates designed to allow a regulated utility recovery of its costs of providing services and an opportunity to earn a reasonable return on its investment
RICE
 
Reciprocating Internal Combustion Engine
Summer Moratorium
 
Emergency rules first enacted by the ACC in 2019 that suspend service disconnections and late fees for electric residential customers who otherwise would be eligible for service disconnection during the period from June 1 through October 15
TCA
 
Transmission Cost Adjustor
TCJA
 
Tax Cuts and Jobs Act
TEAM
 
Tax Expense Adjustor Mechanism

iii




ENTITIES AND GENERATING STATIONS
Fortis
 
Fortis Inc., a corporation incorporated under the Corporations Act of Newfoundland and Labrador, Canada, whose principal executive offices are located at Fortis Place, Suite 1100, 5 Springdale Street, St. John's, NL A1E 0E4
Four Corners
 
Four Corners Generating Station
Gila River
 
Gila River Generating Station
Luna
 
Luna Generating Station
Navajo
 
Navajo Generating Station
Oso Grande
 
A 250 MW nominal capacity wind-powered electric generation facility, which is under construction in southeastern New Mexico
San Juan
 
San Juan Generating Station
SES
 
Southwest Energy Solutions, Inc.
Springerville
 
Springerville Generating Station
SRP
 
Salt River Project Agricultural Improvement and Power District
Sundt
 
H. Wilson Sundt Generating Station
TEP
 
Tucson Electric Power Company, the principal subsidiary of UNS Energy Corporation
UNS Electric
 
UNS Electric, Inc., an indirect wholly-owned subsidiary of UNS Energy Corporation
UNS Energy
 
UNS Energy Corporation, the parent company of TEP, whose principal executive offices are located at 88 East Broadway Boulevard, Tucson, Arizona 85701
UNS Energy Affiliates
 
Affiliated subsidiaries of UNS Energy Corporation including UniSource Energy Services, Inc., UNS Electric, Inc., UNS Gas, Inc., and Southwest Energy Solutions, Inc.
UNS Gas
 
UNS Gas, Inc., an indirect wholly-owned subsidiary of UNS Energy Corporation
UNITS OF MEASURE
BBtu
 
Billion British thermal unit(s), a measure of the quantity of heat required to raise the temperature of one pound of liquid water by one degree Fahrenheit at the temperature at which water has its greatest density, in billions
GWh
 
Gigawatt-hour(s), a measure of electricity that represents one billion watts of power expended over one hour
kWh
 
Kilowatt-hour(s), a measure of electricity that represents one thousand watts of power expended over one hour
MW
 
Megawatt(s), a measure of electricity that represents one million watts of power


iv



FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. TEP, or the Company, is including the following cautionary statements to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by TEP in this Quarterly Report on Form 10-Q. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future economic conditions, future operational or financial performance and underlying assumptions, and other statements that are not statements of historical facts. Forward-looking statements may be identified by the use of words such as anticipates, believes, estimates, expects, intends, may, plans, predicts, potential, projects, would, and similar expressions. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by or on behalf of TEP, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, TEP disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.
Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed therein. We express our estimates, expectations, beliefs, and projections in good faith and believe them to have a reasonable basis. However, we make no assurances that management’s estimates, expectations, beliefs, or projections will be achieved or accomplished. We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. These may be in addition to other factors and matters discussed in: Part I, Item 1A. Risk Factors of our 2019 Annual Report on Form 10-K; Part II, Item 1A. Risk Factors; Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other parts of this report. These factors include: voter initiatives and state and federal regulatory and legislative decisions and actions, including changes in tax and energy policies and any change in the structure of utility service in Arizona resulting from the ACC's examination of the state's energy policies; changes in, and compliance with, environmental laws and regulatory decisions and policies that could increase operating and capital costs, reduce generation facility output, or accelerate generation facility retirements; the outcome of the general rate case filed with the ACC in April 2019; the final outcome of the FERC order effective August 2019, subject to refund, approving revisions to TEP's OATT; regional economic and market conditions that could affect customer growth and energy usage; changes in energy consumption by retail customers; weather variations affecting energy usage; our forecasts of peak demand and whether existing generation capacity and PPAs are sufficient to meet the expected demand plus reserve margin requirements; the cost of debt and equity capital and access to capital markets and bank markets, which may affect our ability to raise additional capital and use the proceeds from any capital that we do raise as originally intended; the performance of the stock market and a changing interest rate environment, which affect the value of our pension and other postretirement benefit plan assets and the related contribution requirements and expenses; the potential inability to make additions to our existing high voltage transmission system; unexpected increases in operations and maintenance expense; resolution of pending litigation matters; changes in accounting standards; changes in our critical accounting policies and estimates; the ongoing impact of mandated energy efficiency and DG initiatives; changes to long-term contracts; the cost of fuel and power supplies; the ability to obtain coal from our suppliers; cyber-attacks, data breaches, or other challenges to our information security, including our operations and technology systems; the performance of TEP's generation facilities; the development of our wind-powered electric generation facility in southeastern New Mexico; participation in the Energy Imbalance Market; the extent of the impact of the COVID-19 pandemic on our business and operations, and the economic and societal disruptions resulting from the COVID-19 pandemic; the impact of the TCJA on our financial condition and results of operations, including the assumptions we make relating thereto; and the implementation of our 2020 IRP.


v



PART I
ITEM 1. FINANCIAL STATEMENTS
TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Operating Revenues
$
339,705

 
$
326,091

 
$
618,261

 
$
659,094

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Fuel
62,697

 
75,441

 
125,996

 
164,859

Purchased Power
28,833

 
27,345

 
47,151

 
60,195

Transmission and Other PPFAC Recoverable Costs
12,005

 
12,094

 
22,600

 
24,019

Increase (Decrease) to Reflect PPFAC Recovery Treatment
6,378

 
(10,918
)
 
5,196

 
(4,713
)
Total Fuel and Purchased Power
109,913

 
103,962

 
200,943

 
244,360

Operations and Maintenance
84,032

 
92,045

 
171,487

 
178,633

Depreciation
47,123

 
41,427

 
93,622

 
82,744

Amortization
7,042

 
7,397

 
13,998

 
15,014

Taxes Other Than Income Taxes
14,643

 
14,120

 
29,552

 
28,321

Total Operating Expenses
262,753

 
258,951

 
509,602

 
549,072

 
 
 
 
 
 
 
 
Operating Income
76,952

 
67,140

 
108,659

 
110,022

 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
Interest Expense
(22,572
)
 
(22,144
)
 
(43,053
)
 
(44,275
)
Allowance For Borrowed Funds
2,013

 
1,303

 
4,895

 
2,577

Allowance For Equity Funds
7,189

 
3,398

 
10,223

 
6,721

Unrealized Gains (Losses) on Investments
3,276

 
934

 
(3,151
)
 
4,014

Other, Net
1,339

 
(92
)
 
2,192

 
116

Total Other Income (Expense)
(8,755
)
 
(16,601
)
 
(28,894
)
 
(30,847
)
 
 
 
 
 
 
 
 
Income Before Income Tax Expense
68,197

 
50,539

 
79,765

 
79,175

Income Tax Expense
10,707

 
8,476

 
14,357

 
10,917

Net Income
$
57,490

 
$
42,063

 
$
65,408

 
$
68,258

The accompanying notes are an integral part of these financial statements.


1



TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Amounts in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Comprehensive Income
 
 
 
 
 
 
 
Net Income
$
57,490

 
$
42,063

 
$
65,408

 
$
68,258

Other Comprehensive Income
 
 
 
 
 
 
 
Net Changes in Fair Value of Cash Flow Hedges:
 
 
 
 
 
 
 
Net of Income Tax Expense of $0 and $8

 
24

 
 
 
 
Net of Income Tax Expense of $0 and $17
 
 
 
 

 
52

Supplemental Executive Retirement Plan Adjustments:
 
 
 
 
 
 
 
Net of Income Tax Expense of $45 and $22
135

 
66

 
 
 
 
Net of Income Tax Expense of $90 and $44
 
 
 
 
270

 
132

Total Other Comprehensive Income, Net of Tax
135

 
90

 
270

 
184

Total Comprehensive Income
$
57,625

 
$
42,153

 
$
65,678

 
$
68,442

The accompanying notes are an integral part of these financial statements.


2



TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
 
Six Months Ended June 30,
 
2020
 
2019
Cash Flows from Operating Activities
 
 
 
Net Income
$
65,408

 
$
68,258

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
Depreciation Expense
93,622

 
82,744

Amortization Expense
13,998

 
15,014

Amortization of Debt Issuance Costs
1,280

 
1,153

Use of Renewable Energy Credits for Compliance
21,664

 
18,624

Deferred Income Taxes
19,866

 
14,244

Pension and Other Postretirement Benefits Expense
7,442

 
8,881

Pension and Other Postretirement Benefits Funding
(4,955
)
 
(6,431
)
Allowance for Equity Funds Used During Construction
(10,223
)
 
(6,721
)
Regulatory Deferral, ACC Refund Order
8,817

 
3,156

Changes in Current Assets and Current Liabilities:
 
 
 
Accounts Receivable
(11,386
)
 
5,910

Materials, Supplies, and Fuel Inventory
3,847

 
(4,689
)
Regulatory Assets
(1,500
)
 
(151
)
Other Current Assets
2,121

 
1,766

Accounts Payable and Accrued Charges
(20,317
)
 
(32,061
)
Income Taxes Receivable, Net
(7,154
)
 
(3,326
)
Regulatory Liabilities
3,213

 
(4,507
)
Other, Net
2,661

 
969

Net Cash Flows—Operating Activities
188,404

 
162,833

Cash Flows from Investing Activities
 
 
 
Capital Expenditures
(473,881
)
 
(199,791
)
Purchase Intangibles, Renewable Energy Credits
(25,746
)
 
(24,793
)
Purchase, Other Investments
(8,556
)
 

Contributions in Aid of Construction
2,329

 
3,932

Net Cash Flows—Investing Activities
(505,854
)
 
(220,652
)
Cash Flows from Financing Activities
 
 
 
Proceeds from Borrowings, Revolving Credit Facility
105,000

 

Repayments of Borrowings, Revolving Credit Facility
(105,000
)
 

Proceeds from Borrowings, Term Loan
60,000

 

Repayments of Borrowings, Term Loan
(225,000
)
 

Proceeds from Issuance, Long-Term DebtNet of Discount
346,983

 

Payments of Finance Lease Obligations
(11,535
)
 
(10,889
)
Contribution from Parent
200,000

 

Other, Net
(2,632
)
 
(166
)
Net Cash Flows—Financing Activities
367,816

 
(11,055
)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
50,366

 
(68,874
)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period
28,472

 
152,747

Cash, Cash Equivalents, and Restricted Cash, End of Period
$
78,838

 
$
83,873

The accompanying notes are an integral part of these financial statements.

3



TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands, except share data)
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Utility Plant
 
 
 
Plant in Service
$
6,902,038

 
$
6,663,912

Utility Plant Under Finance Leases
151,467

 
151,467

Construction Work in Progress
483,450

 
303,488

Total Utility Plant
7,536,955

 
7,118,867

Accumulated Depreciation and Amortization
(2,559,434
)
 
(2,506,686
)
Accumulated Amortization of Finance Lease Assets
(82,160
)
 
(77,285
)
Total Utility Plant, Net
4,895,361

 
4,534,896

 
 
 
 
Investments and Other Property
67,049

 
62,136

 
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents
60,895

 
9,762

Accounts Receivable (Net of Allowance for Credit Losses of $6,679 and $5,716)
166,855

 
154,847

Fuel Inventory
24,672

 
23,731

Materials and Supplies
116,755

 
121,542

Regulatory Assets
123,848

 
138,412

Derivative Instruments
8,771

 
3,596

Other
26,839

 
21,416

Total Current Assets
528,635

 
473,306

Regulatory and Other Assets
 
 
 
Regulatory Assets
322,072

 
326,860

Derivative Instruments
3,872

 
2,763

Other
92,347

 
89,196

Total Regulatory and Other Assets
418,291

 
418,819

Total Assets
$
5,909,336

 
$
5,489,157

The accompanying notes are an integral part of these financial statements.

(Continued)

4



TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands, except share data)
 
June 30, 2020
 
December 31, 2019
CAPITALIZATION AND OTHER LIABILITIES
 
 
 
Capitalization
 
 
 
Common Stock Equity:
 
 
 
Common Stock (No Par Value, 75,000,000 Shares Authorized, 32,139,434 Shares Outstanding as of June 30, 2020 and December 31, 2019)
$
1,596,539

 
$
1,396,539

Capital Stock Expense
(6,357
)
 
(6,357
)
Retained Earnings
661,200

 
595,792

Accumulated Other Comprehensive Loss
(7,501
)
 
(7,771
)
Total Common Stock Equity
2,243,881

 
1,978,203

Preferred Stock (No Par Value, 1,000,000 Shares Authorized, None Outstanding as of June 30, 2020 and December 31, 2019)

 

Finance Lease Obligations

 
67,316

Long-Term Debt, Net
1,865,995

 
1,522,087

Total Capitalization
4,109,876

 
3,567,606

Current Liabilities
 
 
 
Current Maturities of Long-Term Debt, Net
80,383

 
80,330

Borrowings Under Credit Agreements, Net

 
165,000

Finance Lease Obligations
72,868

 
17,086

Accounts Payable
108,376

 
136,465

Accrued Taxes Other than Income Taxes
48,220

 
42,741

Accrued Employee Expenses
28,520

 
32,567

Accrued Interest
17,470

 
16,700

Regulatory Liabilities
100,190

 
96,017

Customer Deposits
20,871

 
24,568

Derivative Instruments
14,059

 
27,615

Other
26,420

 
23,678

Total Current Liabilities
517,377

 
662,767

Regulatory and Other Liabilities
 
 
 
Deferred Income Taxes, Net
459,920

 
432,484

Regulatory Liabilities
466,261

 
477,495

Pension and Other Postretirement Benefits
132,086

 
133,452

Derivative Instruments
52,099

 
48,697

Other
171,717

 
166,656

Total Regulatory and Other Liabilities
1,282,083

 
1,258,784

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Total Capitalization and Other Liabilities
$
5,909,336

 
$
5,489,157

The accompanying notes are an integral part of these financial statements.

(Concluded)


5



TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (Unaudited)
(Amounts in thousands)
 
Three Months Ended
 
Common Stock
 
Capital Stock Expense
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholder's Equity
Balances as of March 31, 2019
$
1,346,539

 
$
(6,357
)
 
$
510,472

 
$
(4,620
)
 
$
1,846,034

Net Income
 
 
 
 
42,063

 
 
 
42,063

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
90

 
90

Balances as of June 30, 2019
$
1,346,539

 
$
(6,357
)
 
$
552,535

 
$
(4,530
)
 
$
1,888,187

Balances as of March 31, 2020
$
1,546,539

 
$
(6,357
)
 
$
603,710

 
$
(7,636
)
 
$
2,136,256

Net Income
 
 
 
 
57,490

 
 
 
57,490

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
135

 
135

Contribution from Parent
50,000

 
 
 
 
 
 
 
50,000

Balances as of June 30, 2020
$
1,596,539

 
$
(6,357
)
 
$
661,200

 
$
(7,501
)
 
$
2,243,881

 
Six Months Ended
 
Common Stock
 
Capital Stock Expense
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholder's Equity
Balances as of December 31, 2018
$
1,346,539

 
$
(6,357
)
 
$
484,277

 
$
(4,714
)
 
$
1,819,745

Net Income
 
 
 
 
68,258

 
 
 
68,258

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
184

 
184

Balances as of June 30, 2019
$
1,346,539

 
$
(6,357
)
 
$
552,535

 
$
(4,530
)
 
$
1,888,187

Balances as of December 31, 2019
$
1,396,539

 
$
(6,357
)
 
$
595,792

 
$
(7,771
)
 
$
1,978,203

Net Income
 
 
 
 
65,408

 
 
 
65,408

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
270

 
270

Contribution from Parent
200,000

 
 
 
 
 
 
 
200,000

Balances as of June 30, 2020
$
1,596,539

 
$
(6,357
)
 
$
661,200

 
$
(7,501
)
 
$
2,243,881

The accompanying notes are an integral part of these financial statements.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. NATURE OF OPERATIONS AND FINANCIAL STATEMENT PRESENTATION
TEP is a regulated utility that generates, transmits, and distributes electricity to approximately 432,000 retail customers in a 1,155 square mile area in southeastern Arizona. TEP also sells electricity to other utilities and power marketing entities, located primarily in the western United States. TEP is a wholly-owned subsidiary of UNS Energy, a utility services holding company. UNS Energy is an indirect wholly-owned subsidiary of Fortis.
BASIS OF PRESENTATION
TEP's Condensed Consolidated Financial Statements and disclosures are presented in accordance with GAAP, including specific accounting guidance for regulated operations and the Securities and Exchange Commission's (SEC) interim reporting requirements.
The Condensed Consolidated Financial Statements include the accounts of TEP and its subsidiaries. In the consolidation process, accounts of the parent and subsidiaries are combined and intercompany balances and transactions are eliminated. TEP jointly owns several generation and transmission facilities with both affiliated and non-affiliated entities. TEP records its proportionate share of: (i) jointly-owned facilities in Utility Plant on the Condensed Consolidated Balance Sheets; and (ii) operating costs associated with these facilities in the Condensed Consolidated Statements of Income. These Condensed Consolidated Financial Statements exclude some information and footnotes required by GAAP and the SEC for annual financial statement reporting and should be read in conjunction with the Consolidated Financial Statements and footnotes in TEP's 2019 Annual Report on Form 10-K.
The Condensed Consolidated Financial Statements are unaudited, but, in management's opinion, include all normal, recurring adjustments necessary for a fair statement of the results for the interim periods presented. Because weather and other factors cause seasonal fluctuations in sales, TEP's quarterly operating results are not indicative of annual operating results.
Certain amounts from prior periods have been reclassified to conform to the current period presentation. Most notably, TEP bifurcated Other, Net on the Condensed Consolidated Statements of Income as follows:
 
As Filed
 
Amount Reclassified
 
As Reclassified
 
As Filed
 
Amount Reclassified
 
As Reclassified
(in thousands)
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
Other, Net
$
842

 
$
(934
)
 
$
(92
)
 
$
4,130

 
$
(4,014
)
 
$
116

Unrealized Gains (Losses) on Investments

 
934

 
934

 

 
4,014

 
4,014


Variable Interest Entities
TEP regularly reviews contracts to determine if it has a variable interest in an entity, if that entity is a Variable Interest Entity (VIE), and if TEP is the primary beneficiary of the VIE. The primary beneficiary is required to consolidate the VIE when it has: (i) the power to direct activities that most significantly impact the economic performance of the VIE; and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
TEP has entered into long-term renewable PPAs with various entities. Some of these entities are VIEs due to the long-term fixed price component in the agreements. These PPAs effectively transfer commodity price risk to TEP, the buyer of the power, creating a variable interest. TEP has determined it is not a primary beneficiary of these VIEs as it lacks the power to direct the activities that most significantly impact the economic performance of the VIEs. TEP reconsiders whether it is a primary beneficiary of the VIEs on a quarterly basis.
As of June 30, 2020, the carrying amounts of assets and liabilities on the balance sheet that relate to variable interests under long-term PPAs are predominantly related to working capital accounts and generally represent the amounts owed by TEP for the deliveries associated with the current billing cycle. TEP's maximum exposure to loss is limited to the cost of replacing the power if the providers do not meet the production guarantee. However, the exposure to loss is mitigated as TEP would likely recover these costs through cost recovery mechanisms. See Note 2 for additional information related to cost recovery mechanisms.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



Restricted Cash
Restricted cash includes cash balances restricted with respect to withdrawal or usage based on contractual or regulatory considerations. The following table presents the line items and amounts of cash, cash equivalents, and restricted cash reported on the balance sheet and reconciles their sum to the cash flow statement:
 
June 30,
(in millions)
2020
 
2019
Cash and Cash Equivalents
$
61

 
$
70

Restricted Cash included in:
 
 
 
Investments and Other Property
16

 
13

Current Assets—Other
2

 
1

Total Cash, Cash Equivalents, and Restricted Cash
$
79

 
$
84


Restricted cash included in Investments and Other Property on the Condensed Consolidated Balance Sheets represents cash contractually required to be set aside to pay TEP's share of mine reclamation costs at San Juan and various contractual agreements. Restricted cash included in Current Assets—Other represents the current portion of TEP's share of San Juan's mine reclamation costs.
NEW ACCOUNTING STANDARDS ISSUED AND ADOPTED
The following new authoritative accounting guidance issued by the FASB has been adopted as of January 1, 2020. Unless otherwise indicated, adoption of the new guidance in each instance had an insignificant impact on TEP’s financial position, results of operations, cash flows, and disclosures.
Credit Losses
TEP adopted accounting guidance that requires entities to incorporate reasonable and supportable forecasts in an entity's estimates of credit losses and recognition of expected losses upon the initial recognition of a financial instrument, in addition to using past events and current conditions. The new guidance also requires quantitative and qualitative disclosures regarding the activity in the allowance for credit losses for financial assets within the scope of the guidance. See Note 4 for additional disclosure about TEP's allowance for credit losses.
NEW ACCOUNTING STANDARDS ISSUED AND NOT YET ADOPTED
New authoritative accounting guidance issued by the FASB was assessed and either determined to not be applicable or is expected to have an insignificant impact on TEP’s financial position, results of operations, cash flows, and disclosures.

NOTE 2. REGULATORY MATTERS
The ACC and the FERC each regulate portions of the utility accounting practices and rates of TEP. The ACC regulates rates charged to retail customers, the siting of generation and transmission facilities, the issuance of securities, transactions with affiliated parties, and other utility matters. The ACC also enacts other regulations and policies that can affect TEP's business decisions and accounting practices. The FERC regulates rates and services for electric transmission and wholesale power sales in interstate commerce.
2019 ACC RATE CASE
In April 2019, TEP filed a general rate case with the ACC based on a test year ended December 31, 2018.
TEP's key proposals of the rate case, adjusted for rebuttal testimony filed in November 2019, include:
a non-fuel retail revenue increase of $99 million, partially offset by a reduction in base fuel revenue of approximately $39 million for a net increase of $60 million over test year retail revenues;
a 7.49% return on original cost rate base of $2.7 billion, which includes a cost of equity of 10.00% and an average cost of debt of 4.65%;

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



a request to recover costs of changes in generation resources, including: (i) the retirement of Navajo and Sundt Units 1 and 2; and (ii) the replacement generation capacity associated with the purchase of Gila River Unit 2 and the installation of the Sundt RICE Units;
a TEAM that would be updated for income tax changes that materially affect TEP’s authorized revenue requirement; and
a TCA mechanism, updated annually, allowing TEP to recover any changes in transmission costs approved by the FERC.
Hearings before an ALJ were held during the first six months of 2020. Parties to the rate case will file post-hearing briefs in July and August 2020. As a result of work schedule disruptions arising from the COVID-19 pandemic, the timing of when new rates will go into effect is uncertain.
TEP cannot predict the outcome of the proceeding.
2019 FERC RATE CASE
In 2019, the FERC issued an order approving TEP's proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings.
Provisions of the order include, but are not limited to:
replacing TEP's stated transmission rates with a forward-looking formula rate;
a 10.4% return on equity; and
elimination of transmission rates that are bifurcated between high-voltage and lower-voltage facilities, as well as elimination of the bifurcated loss factor rate.
The requested forward-looking formula rate is intended to allow for a more timely recovery of transmission related costs. As part of the order, the FERC established hearing and settlement procedures. All revisions to the OATT in the FERC order are subject to refund. Settlement discussions in the proceeding are ongoing. TEP had reserved $9 million as of June 30, 2020, and $4 million as of December 31, 2019, of wholesale revenues in Current Liabilities—Regulatory Liabilities on the Condensed Consolidated Balance Sheets. TEP cannot predict the outcome of the proceeding.
FEDERAL TAX LEGISLATION
Arizona Corporation Commission
In December 2017, the ACC opened a docket requesting that all regulated utilities submit proposals to address passing the benefits of the TCJA through to customers. In 2018, the ACC approved TEP’s proposal to return savings from the Company’s federal corporate income tax rate under the TCJA to its customers through a combination of customer bill credits and a regulatory liability deferral that reflects the return of a portion of the savings, effective May 1, 2018 (ACC Refund Order). The ACC Refund Order represents the reduction in the federal corporate income tax rate and an estimate of EDIT amortization that will be trued up annually for actuals. The bill credit was designed to return the refund amount to customers based on forecasted kWh sales for the calendar year. Any over or under collected amounts are deferred to a regulatory liability or asset and will be used to adjust the following year's bill credit amounts.
The table below summarizes the regulatory asset (liability) over or under collected balance related to the ACC Refund Order:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020
 
2019
 
2020
 
2019
Beginning of Period
$

 
$
3

 
$

 
$
4

ACC Refund (Reduction in Operating Revenues)
(9
)
 
(9
)
 
(16
)
 
(16
)
Amount Returned to Customers through Bill Credits
5

 
6

 
8

 
10

Regulatory Deferral
5

 
1

 
9

 
3

End of Period
$
1

 
$
1

 
$
1

 
$
1


Customer bill credits are trued-up annually to reflect actuals for both kWh sales and EDIT amortization. TEP filed an informational filing with the ACC to establish a 2020 customer refund of $35 million. The refund will be returned to customers

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



through a combination of a customer bill credit and a regulatory liability in 2020. The customer bill credit will account for 50% of the returned savings in 2020 and through the completion of our rate case. A regulatory liability balance related to the deferred TCJA customer refunds of $17 million as of June 30, 2020, and $8 million as of December 31, 2019, was recorded in Regulatory and Other Liabilities—Regulatory Liabilities on the Condensed Consolidated Balance Sheets.
COST RECOVERY MECHANISMS
TEP has received regulatory decisions that allow for more timely recovery of certain costs through the recovery mechanisms described below.
Purchased Power and Fuel Adjustment Clause
TEP's PPFAC rate is typically adjusted annually on April 1st and goes into effect for the subsequent 12-month period unless the schedule is modified by the ACC. The PPFAC rate includes: (i) a forward component which is calculated by taking the difference between forecasted fuel and purchased power costs and the amount of those costs established in Retail Rates; and (ii) a true-up component that reconciles the difference between actual costs and those recovered in the preceding 12-month period.
The table below summarizes the PPFAC regulatory asset (liability) balance:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020
 
2019
 
2020
 
2019
Beginning of Period
$
36

 
$
(22
)
 
$
36

 
$
(17
)
Deferred Fuel and Purchased Power Costs (1)
67

 
75

 
115

 
128

PPFAC and Base Power Recoveries (2)
(75
)
 
(62
)
 
(123
)
 
(120
)
End of Period
$
28

 
$
(9
)
 
$
28

 
$
(9
)
(1) 
Includes costs eligible for recovery through the PPFAC and base power rates.
(2) 
In March 2019, the ACC approved a PPFAC credit as part of TEP's annual rate adjustment request. In March 2020, the ACC approved a PPFAC surcharge as part of TEP's annual rate adjustment request, which went into effect on June 1, 2020.
Renewable Energy Standard
The ACC’s Renewable Energy Standard (RES) requires Arizona-regulated utilities to supply an increasing percentage of their retail sales from renewable generation sources each year. The renewable energy requirement in 2020 is 10% of retail electric sales, which will increase annually until renewable retail sales represent at least 15% by 2025. DG will account for 30% of the annual renewable energy requirement. Arizona utilities are required to file an annual RES implementation plan for review and approval by the ACC.
In 2019, the ACC approved TEP's 2019 RES implementation plan with a budget amount of $55 million. The recovery funds: (i) above market cost of renewable power purchases; (ii) previously awarded incentives for customer-installed DG; and (iii) various other program costs.
Energy Efficiency Standards
TEP is required to implement cost-effective DSM programs to comply with the ACC’s Energy Efficiency Standards (EE Standards). The EE Standards provide regulated utilities a DSM surcharge to recover from retail customers the costs to implement DSM programs, as well as an annual performance incentive. TEP records its annual DSM performance incentive for the prior calendar year in the first quarter of each year. TEP recorded $2 million in 2020 and 2019 related to performance in Operating Revenues on the Condensed Consolidated Statements of Income.
In 2019, the ACC approved TEP’s 2018 energy efficiency implementation plan with a budget of approximately $23 million, which is collected through the DSM surcharge, and approved a waiver of the 2018 EE Standard. In addition, the ACC ordered that TEP's 2018 energy efficiency implementation plan be considered as its 2019 and 2020 energy efficiency implementation plans. In June 2020, TEP filed its 2021 energy efficiency implementation plan with a budget of approximately $23 million. TEP cannot predict the outcome of the proceeding.
TEP filed a request with the ACC in April 2020 to refund to customers approximately $8 million of over-collected DSM funds as a result of the COVID-19 pandemic. In May 2020, the ACC approved the request and TEP returned the funds in the form of customer bill credits over the June 2020 billing cycle.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



Lost Fixed Cost Recovery Mechanism
The LFCR mechanism provides for recovery of certain non-fuel costs that would go unrecovered due to reduced retail kWh sales as a result of implementing ACC-approved energy efficiency programs and customer-installed DG. TEP records a regulatory asset and recognizes LFCR revenues when amounts are verifiable regardless of when the lost retail kWh sales occurred. TEP is required to make an annual filing with the ACC requesting recovery of LFCR revenues recognized in the prior year. The recovery is subject to a year-over-year increase cap of 2% of TEP's applicable retail revenues.
The table below summarizes the LFCR revenues recognized in Operating Revenues on the Condensed Consolidated Statements of Income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020
 
2019
 
2020
 
2019
LFCR Revenues
$
10

 
$
6

 
$
22

 
$
16

REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities recorded in the balance sheet are summarized in the table below:
($ in millions)
Remaining Recovery Period
(years)
 
June 30, 2020
 
December 31, 2019
Regulatory Assets
 
 
 
 
 
Pension and Other Postretirement Benefits
Various
 
$
131

 
$
135

Early Generation Retirement Costs
Various
 
64

 
68

Derivatives (Note 9)
10
 
59

 
72

Lost Fixed Cost Recovery
2
 
57

 
46

Income Taxes Recoverable through Future Rates (1)
Various
 
33

 
38

Under Recovered Purchased Energy Costs
1
 
28

 
36

Property Tax Deferrals (2)
1
 
25

 
24

Final Mine Reclamation and Retiree Healthcare Costs (3)
9
 
22

 
19

Springerville Unit 1 Leasehold Improvements (4)
3
 
8

 
9

Other Regulatory Assets
Various
 
19

 
18

Total Regulatory Assets
 
 
446

 
465

Less Current Portion
1
 
124

 
138

Total Non-Current Regulatory Assets
 
 
$
322

 
$
327

Regulatory Liabilities
 
 
 
 
 
Income Taxes Payable through Future Rates (1)
Various
 
$
315

 
$
327

Net Cost of Removal (5)
Various
 
156

 
164

Renewable Energy Standard
Various
 
60

 
59

Deferred Investment Tax Credits (6)
Various
 
2

 
3

Other Regulatory Liabilities
Various
 
33

 
20

Total Regulatory Liabilities
 
 
566

 
573

Less Current Portion
1
 
100

 
96

Total Non-Current Regulatory Liabilities
 
 
$
466

 
$
477

(1) 
Amortized over the lives of the assets.
(2) 
Recorded as a regulatory asset based on historical ratemaking treatment allowing regulated utilities recovery of property taxes on a pay-as-you-go or cash basis. TEP records a liability to reflect the accrual for financial reporting purposes and an offsetting regulatory asset to reflect recovery for regulatory purposes. This asset is fully recovered in rates with a recovery period of approximately six months.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



(3) 
Represents costs associated with TEP’s jointly-owned facilities at San Juan and Four Corners. TEP recognizes these costs at future value and is permitted to fully recover these costs on a pay-as-you-go basis through the PPFAC mechanism. The majority of final mine reclamation costs are expected to be funded by TEP through 2028.
(4) 
Represents investments TEP made, which were previously recorded in Plant in Service on the Condensed Consolidated Balance Sheets, to ensure that the facilities continued to provide safe and reliable service to TEP's customers. TEP received ACC authorization to recover leasehold improvement costs at Springerville Unit 1 over a 10-year period.
(5) 
Represents an estimate of the future cost of retirement, net of salvage value. These are amounts collected through revenue for transmission, distribution, generation plant, and general and intangible plant which are not yet expended.
(6) 
Represents federal energy credits generated after 2011 that are amortized over the tax life of the underlying asset.
Regulatory assets are either being collected or are expected to be collected through Retail Rates. With the exception of Early Generation Retirement Costs and Springerville Unit 1 Leasehold Improvements, TEP does not earn a return on regulatory assets. Regulatory liabilities represent items that TEP either expects to pay to customers through billing reductions in future periods or plans to use for the purpose for which they were collected from customers. With the exception of over-recovered PPFAC costs and Income Taxes Payable through Future Rates, TEP does not pay a return on regulatory liabilities.
PLANT IN SERVICE
Under an air permit approved by the Pima County Department of Environmental Quality, TEP placed in service five natural gas RICE units at Sundt in December 2019 and an additional five units in March 2020. There was $183 million as of June 30, 2020, and $82 million, as of December 31, 2019, related to the Sundt RICE Units recorded in Plant in Service on the Condensed Consolidated Balance Sheets. The 10 units have a total nominal generation capacity of 188 MW.

NOTE 3. REVENUE
DISAGGREGATION OF REVENUES
TEP earns the majority of its revenues from the sale of power to retail and wholesale customers based on regulator-approved tariff rates. The following table presents the disaggregation of TEP’s Operating Revenues on the Condensed Consolidated Statements of Income by type of service:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2020
 
2019
 
2020
 
2019
Retail
$
265

 
$
236

 
$
457

 
$
438

Wholesale (1)
30

 
43

 
66

 
127

Other Services
23

 
30

 
47

 
54

Revenues from Contracts with Customers
318

 
309

 
570

 
619

Alternative Revenues
10

 
6

 
24

 
18

Other
12

 
11

 
24

 
22

Total Operating Revenues (2)
$
340

 
$
326

 
$
618

 
$
659


(1) 
In 2019, the FERC issued an order approving TEP's proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings. TEP began to recognize a provision for revenues subject to refund for the estimate of revenues that are probable for refund. See Note 2 for more information regarding the 2019 FERC Rate Case.
(2) 
Calculated on rounded data and may not correspond exactly to TEP's Operating Revenues reported on the Condensed Consolidated Statements of Income.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)    



NOTE 4. ACCOUNTS RECEIVABLE
The following table presents the components of Accounts Receivable on the Condensed Consolidated Balance Sheets:
(in millions)
June 30, 2020
 
December 31, 2019
Retail
$
76

 
$