Tucson Electric Power Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

tep-20200930

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 September 30, 2020

☐ 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 October 29, 2020.

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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
RES						Renewable Energy Standard
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

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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, including renewable generation resources; 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.

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PART I

ITEM 1. FINANCIAL STATEMENTS

TUCSON ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Amounts in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Operating Revenues	$	471,672	$	441,171	$	1,089,933	$	1,100,265

Operating Expenses
Fuel	90,900		112,961		216,896		277,820
Purchased Power	71,562		37,049		118,713		97,244
Transmission and Other PPFAC Recoverable Costs	16,966		14,976		39,566		38,995
Increase (Decrease) to Reflect PPFAC Recovery Treatment	(83)		(15,532)		5,113		(20,244)
Total Fuel and Purchased Power	179,345		149,454		380,288		393,815
Operations and Maintenance	88,504		94,154		259,991		272,787
Depreciation	47,462		42,187		141,084		124,931
Amortization	7,330		7,039		21,328		22,053
Taxes Other Than Income Taxes	14,571		14,054		44,123		42,375
Total Operating Expenses	337,212		306,888		846,814		855,961

Operating Income	134,460		134,283		243,119		244,304

Other Income (Expense)
Interest Expense	(23,159)		(22,132)		(66,212)		(66,407)
Allowance For Borrowed Funds	2,246		1,521		7,141		4,098
Allowance For Equity Funds	5,823		4,034		16,046		10,755
Unrealized Gains (Losses) on Investments	842		456		(2,309)		4,470
Other, Net	1,278		(551)		3,470		(434)
Total Other Income (Expense)	(12,970)		(16,672)		(41,864)		(47,518)

Income Before Income Tax Expense	121,490		117,611		201,255		196,786
Income Tax Expense	21,029		19,441		35,386		30,358
Net Income	$	100,461	$	98,170	$	165,869	$	166,428

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

TUCSON ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Amounts in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Comprehensive Income
Net Income	$	100,461	$	98,170	$	165,869	$	166,428
Other Comprehensive Income
Net Changes in Fair Value of Cash Flow Hedges:
Net of Income Tax Expense of $0 and $13	—		40
Net of Income Tax Expense of $0 and $30					—		92
Supplemental Executive Retirement Plan Adjustments:
Net of Income Tax Expense of $45 and $22	135		66
Net of Income Tax Expense of $134 and $66					405		198
Total Other Comprehensive Income, Net of Tax	135		106		405		290
Total Comprehensive Income	$	100,596	$	98,276	$	166,274	$	166,718

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

TUCSON ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash Flows from Operating Activities
Net Income	$	165,869	$	166,428
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Depreciation Expense	141,084		124,931
Amortization Expense	21,328		22,053

Amortization of Debt Issuance Costs	2,010		1,735
Use of Renewable Energy Credits for Compliance	32,672		28,083
Deferred Income Taxes	38,809		37,168

Pension and Other Postretirement Benefits Expense	11,162		13,321
Pension and Other Postretirement Benefits Funding	(14,503)		(15,038)

Allowance for Equity Funds Used During Construction	(16,046)		(10,755)
Regulatory Deferral, ACC Refund Order	16,364		5,946



Changes in Current Assets and Current Liabilities:
Accounts Receivable	(57,208)		(28,547)
Materials, Supplies, and Fuel Inventory	(8,392)		(6,724)
Regulatory Assets	4,948		4,426

Other Current Assets	(5,100)		(961)
Accounts Payable and Accrued Charges	(939)		(13,832)

Income Taxes Receivable, Net	6,865		(6,987)
Regulatory Liabilities	8,944		(5,335)
Other, Net	7,260		715
Net Cash Flows—Operating Activities	355,127		316,627
Cash Flows from Investing Activities
Capital Expenditures	(597,375)		(322,142)



Purchase Intangibles, Renewable Energy Credits	(41,117)		(39,419)

Purchase, Other Investments	(8,500)		—
Contributions in Aid of Construction	2,816		4,520
Note Receivable	—		(1,000)
Net Cash Flows—Investing Activities	(644,176)		(358,041)
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 Debt—Net of Discount	645,768		—
Repayments of Long-Term Debt	(180,410)		—

Dividend Paid to Parent	(37,500)		(37,500)
Payments of Finance Lease Obligations	(17,086)		(10,889)

Contribution from Parent	200,000		—
Other, Net	(4,731)		67
Net Cash Flows—Financing Activities	441,041		(48,322)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	151,992		(89,736)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period	28,472		152,747
Cash, Cash Equivalents, and Restricted Cash, End of Period	$	180,464	$	63,011

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

TUCSON ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in thousands, except share data)


	September 30, 2020		December 31, 2019
ASSETS
Utility Plant
Plant in Service	$	6,944,251	$	6,663,912
Utility Plant Under Finance Leases	151,467		151,467
Construction Work in Progress	546,497		303,488
Total Utility Plant	7,642,215		7,118,867
Accumulated Depreciation and Amortization	(2,592,399)		(2,506,686)
Accumulated Amortization of Finance Lease Assets	(84,675)		(77,285)
Total Utility Plant, Net	4,965,141		4,534,896

Investments and Other Property	67,769		62,136

Current Assets
Cash and Cash Equivalents	163,009		9,762
Accounts Receivable (Net of Allowance for Credit Losses of $9,572 and $5,716)	211,488		154,847
Fuel Inventory	31,163		23,731
Materials and Supplies	122,502		121,542
Regulatory Assets	118,734		138,412
Derivative Instruments	13,763		3,596

Other	20,564		21,416
Total Current Assets	681,223		473,306
Regulatory and Other Assets
Regulatory Assets	308,973		326,860
Derivative Instruments	2,567		2,763
Other	92,046		89,196
Total Regulatory and Other Assets	403,586		418,819
Total Assets	$	6,117,719	$	5,489,157

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

(Continued)

TUCSON ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in thousands, except share data)


	September 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 September 30, 2020 and December 31, 2019)	$	1,596,539	$	1,396,539
Capital Stock Expense	(6,357)		(6,357)
Retained Earnings	724,161		595,792
Accumulated Other Comprehensive Loss	(7,366)		(7,771)
Total Common Stock Equity	2,306,977		1,978,203
Preferred Stock (No Par Value, 1,000,000 Shares Authorized, None Outstanding as of September 30, 2020 and December 31, 2019)	—		—
Finance Lease Obligations	—		67,316
Long-Term Debt, Net	2,063,352		1,522,087
Total Capitalization	4,370,329		3,567,606
Current Liabilities
Current Maturities of Long-Term Debt, Net	—		80,330
Borrowings Under Credit Agreements, Net	—		165,000
Finance Lease Obligations	67,316		17,086
Accounts Payable	115,633		136,465
Accrued Taxes Other than Income Taxes	68,170		42,741
Accrued Employee Expenses	29,717		32,567
Accrued Interest	17,503		16,700
Regulatory Liabilities	107,458		96,017
Customer Deposits	18,303		24,568
Derivative Instruments	18,379		27,615
Other	19,287		23,678
Total Current Liabilities	461,766		662,767
Regulatory and Other Liabilities
Deferred Income Taxes, Net	489,409		432,484
Regulatory Liabilities	453,393		477,495
Pension and Other Postretirement Benefits	124,333		133,452
Derivative Instruments	39,589		48,697
Other	178,900		166,656
Total Regulatory and Other Liabilities	1,285,624		1,258,784

Commitments and Contingencies

Total Capitalization and Other Liabilities	$	6,117,719	$	5,489,157

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

(Concluded)

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 June 30, 2019	$	1,346,539	$	(6,357)	$	552,535	$	(4,530)	$	1,888,187
Net Income					98,170				98,170
Other Comprehensive Income, Net of Tax							106		106
Dividend Declared to Parent					(37,500)				(37,500)


Balances as of September 30, 2019	$	1,346,539	$	(6,357)	$	613,205	$	(4,424)	$	1,948,963


Balances as of June 30, 2020	$	1,596,539	$	(6,357)	$	661,200	$	(7,501)	$	2,243,881
Net Income					100,461				100,461
Other Comprehensive Income, Net of Tax							135		135
Dividend Declared to Parent					(37,500)				(37,500)


Balances as of September 30, 2020	$	1,596,539	$	(6,357)	$	724,161	$	(7,366)	$	2,306,977


	Nine 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					166,428				166,428
Other Comprehensive Income, Net of Tax							290		290
Dividend Declared to Parent					(37,500)				(37,500)


Balances as of September 30, 2019	$	1,346,539	$	(6,357)	$	613,205	$	(4,424)	$	1,948,963


Balances as of December 31, 2019	$	1,396,539	$	(6,357)	$	595,792	$	(7,771)	$	1,978,203
Net Income					165,869				165,869
Other Comprehensive Income, Net of Tax							405		405
Dividend Declared to Parent					(37,500)				(37,500)
Contribution from Parent	200,000								200,000

Balances as of September 30, 2020	$	1,596,539	$	(6,357)	$	724,161	$	(7,366)	$	2,306,977

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

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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 433,000 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 September 30, 2019						Nine Months Ended September 30, 2019
Other Income (Expense)
Other, Net	$	(95)	$	(456)	$	(551)	$	4,036	$	(4,470)	$	(434)
Unrealized Gains (Losses) on Investments	—		456		456		—		4,470		4,470

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 September 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.

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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:


	September 30,
(in millions)	2020		2019
Cash and Cash Equivalents	$	163	$	49
Restricted Cash included in:
Investments and Other Property	15		13
Current Assets—Other	2		1
Total Cash, Cash Equivalents, and Restricted Cash	$	180	$	63

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%;

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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 concluded in June 2020. Parties to the rate case filed 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 remains 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 $11 million as of September 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 September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
Beginning of Period	$	1	$	1	$	—	$	4
ACC Refund (Reduction in Operating Revenues)	(15)		(11)		(31)		(27)

Amount Returned to Customers through Bill Credits	6		7		14		17
Regulatory Deferral	7		3		16		6
End of Period	$	(1)	$	—	$	(1)	$	—

Customer bill credits are trued-up annually to reflect actuals for both kWh sales and EDIT amortization. In October 2019, TEP filed an informational filing with the ACC to establish a 2020 customer refund of $35 million. The refund is being returned to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

customers 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 $24 million as of September 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. On October 1, 2020, TEP filed an informational filing with the ACC to establish a 2021 customer refund of $38 million.

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 September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
Beginning of Period	$	28	$	(9)	$	36	$	(17)
Deferred Fuel and Purchased Power Costs (1)	109		104		224		232
PPFAC and Base Power Recoveries (2)	(110)		(91)		(233)		(211)
End of Period	$	27	$	4	$	27	$	4

(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, which went into effect on April 1, 2019. 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 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 both 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.

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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 September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
LFCR Revenues	$	12	$	9	$	34	$	25

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)	September 30, 2020		December 31, 2019
Regulatory Assets
Pension and Other Postretirement Benefits	Various	$	129	$	135
Early Generation Retirement Costs	Various	63		68
Lost Fixed Cost Recovery	2	57		46
Derivatives (Note 9)	9	48		72
Income Taxes Recoverable through Future Rates (1)	Various	28		38
Under Recovered Purchased Energy Costs	1	27		36
Property Tax Deferrals (2)	1	26		24
Final Mine Reclamation and Retiree Healthcare Costs (3)	8	23		19
Springerville Unit 1 Leasehold Improvements (4)	3	7		9
Other Regulatory Assets	Various	20		18
Total Regulatory Assets		428		465
Less Current Portion	1	119		138
Total Non-Current Regulatory Assets		$	309	$	327


Regulatory Liabilities
Income Taxes Payable through Future Rates (1)	Various	$	300	$	327
Net Cost of Removal (5)	Various	151		164
Renewable Energy Standard	Various	63		59
Deferred Investment Tax Credits (6)	Various	2		3

Other Regulatory Liabilities	Various	44		20
Total Regulatory Liabilities		560		573
Less Current Portion	1	107		96
Total Non-Current Regulatory Liabilities		$	453	$	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.

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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, Income Taxes Recoverable through Future Rates, 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 $186 million as of September 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 September 30,				Nine Months Ended September 30,
(in millions)	2020		2019		2020		2019
Retail	$	361	$	333	$	818	$	771
Wholesale (1)	61		60		127		187
Other Services	24		30		71		84
Revenues from Contracts with Customers	446		423		1,016		1,042
Alternative Revenues	12		9		36		27
Other	14		9

10-Q	2020-09-30	Filed 2020-10-30
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	2020-09-22	Other Events, Exhibits
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

EX-31.A	tepex31a09302020.htm
EX-31.B	tepex31b09302020.htm
EX-32	tepex3209302020.htm


Definitions			iii
Forward-Looking Information			v
PART I

Item 1. Financial Statements
Condensed Consolidated Statements of Income			1
Condensed Consolidated Statements of Comprehensive Income			2
Condensed Consolidated Statements of Cash Flows			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Changes in Stockholder's Equity			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Critical Accounting Policies and Estimates			37
New Accounting Standards Issued and Not Yet Adopted			37
Item 3. Quantitative and Qualitative Disclosures about Market Risk			37
Item 4. Controls and Procedures			37

PART II

Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38

Item 6. Exhibits			39
Signatures			40

TEP 10Q Quarterly Report

Tucson Electric Power Earnings 2020-09-30