Company Quick10K Filing
Tallgrass Energy Partners
10-K 2020-12-31 Filed 2021-02-12
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
8-K 2020-08-10
8-K 2020-06-26
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 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Note 2. Regulatory Matters
Note 3. Utility Plant and Jointly - Owned Facilities
Note 4. Revenue
Note 5. Accounts Receivable
Note 6. Related Party Transactions
Note 7. Debt and Credit Agreements
Note 8. Leases
Note 9. Commitments and Contingencies
Note 10. Employee Benefits Plans
Note 11. Share - Based Compensation
Note 12. Supplemental Cash Flow Information
Note 13. Fair Value Measurements and Derivative Instruments
Note 14. Income Taxes
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-23 tepex2312312020.htm
EX-24 tepex2412312020.htm
EX-31.A tepex31a12312020.htm
EX-31.B tepex31b12312020.htm
EX-32 tepex3212312020.htm

Tallgrass Energy Partners Earnings 2020-12-31

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-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Arizona86-0062700
(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

Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, No Par Value (Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
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 x No o
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 o
Accelerated Filer o
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. o



Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates: None
As of February 11, 2021, Tucson Electric Power Company had 32,139,434 shares of common stock, no par value, outstanding, all of which were held by UNS Energy Corporation, an indirect wholly-owned subsidiary of Fortis Inc.
Documents incorporated by reference: None
Tucson Electric Power meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is, therefore, filing portions of this Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K.

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Table of Contents
PART I
PART II
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PART III
PART IV
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DEFINITIONS
The abbreviations and acronyms used in the 2020 Form 10-K are defined below:
INDUSTRY ACRONYMS AND CERTAIN DEFINITIONS
2015 Credit AgreementThe 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 AgreementThe 2019 Credit Agreement provided for $225 million in term loans. In April 2020, the term loans were repaid and the agreement was terminated
2019 FERC Rate CaseIn 2019, the FERC issued an order approving TEP's proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings
2020 IRPTEP's 2020 Integrated Resource Plan filed with the ACC in June 2020, which outlines TEP's energy portfolio over the next 15 years
2020 Rate OrderA rate order issued by the ACC resulting in a new rate structure for TEP, effective on January 1, 2021
ABRAlternate Base Rate
ACCArizona Corporation Commission
ACC Refund OrderAn order issued 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 a customer bill credit and a regulatory liability that reflects the deferral of the return of a portion of the savings, effective May 1, 2018
ADEQArizona Department of Environmental Quality
AFUDCAllowance for Funds Used During Construction
AMTAlternative Minimum Tax
AOCIAccumulated Other Comprehensive Income
AROAsset Retirement Obligation
BTABuild-Transfer Agreement
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
COVID-19Coronavirus Disease 2019
CCRCoal Combustion Residuals
DGDistributed Generation
DSMDemand Side Management
ECAEnvironmental Compliance Adjustor
EDITExcess Deferred Income Taxes
EE StandardsEnergy Efficiency Standards
EIMEnergy Imbalance Market
EPAEnvironmental Protection Agency
FASBFinancial Accounting Standards Board
FERCFederal Energy Regulatory Commission
FERC Refund OrderAn order issued by the FERC approving TEP's proposal of an overall transmission rate reduction reflecting the lower federal tax rate, effective March 21, 2018
GAAPGenerally Accepted Accounting Principles in the United States of America
LFCRLost Fixed Cost Recovery
LIBORLondon Interbank Offered Rate
LOCLetter(s) of Credit
NERCNorth American Electric Reliability Corporation
NOPRNotice of Proposed Rulemaking
OATTOpen Access Transmission Tariff
PBIPerformance Based Incentives
Phase 2Second phase of TEP's rate case proceedings originally filed April 2019
PPAPower Purchase Agreement
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PPFACPurchased Power and Fuel Adjustment Clause
PSUPerformance-Based Share Units
PTC
Production Tax Credit
PVPhotovoltaic
RCRAResource Conservation and Recovery Act
RECRenewable Energy Credit
Regional HazeRegional Haze Regulation promulgated by the EPA to improve visibility at national parks and wilderness areas
RESRenewable Energy Standard
Retail RatesRates designed to allow a regulated utility recovery of its costs of providing services and an opportunity to earn a reasonable return on its investment
RICEReciprocating Internal Combustion Engine
RMCRisk Management Committee
RSURestricted Share Units
SERPSupplemental Executive Retirement Plan
Summer MoratoriumEmergency 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
TCATransmission Cost Adjustor
TCJATax Cuts and Jobs Act
TEAMTax Expense Adjustor Mechanism
Tolling PPAA 20-year tolling PPA that TEP entered into in 2017 with SRP to purchase and receive all 550 MW of capacity, power, and ancillary services from Gila River Unit 2, which included a three-year option to purchase the unit
VEBAVoluntary Employee Beneficiary Association
ENTITIES AND GENERATING STATIONS
APSArizona Public Service Company
FortisFortis 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
FortisUSFortis intermediate holding company
Four CornersFour Corners Generating Station
Gila RiverGila River Generating Station
LunaLuna Generating Station
NavajoNavajo Generating Station
Oso GrandeA 250 MW nominal capacity wind-powered electric generation facility, which is under construction in southeastern New Mexico
PNMPublic Service Company of New Mexico
San JuanSan Juan Generating Station
SESSouthwest Energy Solutions, Inc.
SpringervilleSpringerville Generating Station
Springerville Common FacilitiesPortion of the facilities at Springerville used in common with Springerville Unit 1 and Unit 2
SRPSalt River Project Agricultural Improvement and Power District
SundtH. Wilson Sundt Generating Station
TEPTucson Electric Power Company, the principal subsidiary of UNS Energy Corporation
Tri-StateTri-State Generation and Transmission Association, Inc.
UASTPUniversity of Arizona Science and Technology Park
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UNS ElectricUNS Electric, Inc., an indirect wholly-owned subsidiary of UNS Energy Corporation
UNS EnergyUNS Energy Corporation, the parent company of TEP, whose principal executive offices are located at 88 East Broadway Boulevard, Tucson, Arizona 85701
UNS Energy AffiliatesAffiliated subsidiaries of UNS Energy Corporation including UniSource Energy Services, Inc., UNS Electric, Inc., UNS Gas, Inc., and Southwest Energy Solutions, Inc.
UNS GasUNS Gas, Inc., an indirect wholly-owned subsidiary of UNS Energy Corporation
UNITS OF MEASURE
ACAlternating Current
BBtuBillion British thermal unit(s)
GWhGigawatt-hour(s)
kWhKilowatt-hour(s)
MMBtuMillion Metric British thermal units
MWMegawatt(s)
MWhMegawatt-hour(s)
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FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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; Part II, Item 7. 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 or state legislature'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 final outcome of the FERC order effective August 2019, subject to refund, approving revisions to TEP's OATT; unfavorable rulings, penalties, or findings by the FERC; 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 EIM; 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 and government actions taken in response thereto; and the implementation of our 2020 IRP.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF BUSINESS
General
TEP and its predecessor companies have served the greater Tucson metropolitan area for 128 years. TEP was incorporated in the State of Arizona in 1963. TEP is a regulated electric utility company serving approximately 433,000 retail customers. TEP’s service territory covers 1,155 square miles and includes a population of over one million people in Pima County, as well as parts of Cochise County. TEP's principal business operations include generating, transmitting, and distributing electricity to its retail customers. In addition to retail sales, TEP sells electricity, transmission, and ancillary services to other utilities, municipalities, and energy marketing companies on a wholesale basis. TEP is subject to comprehensive state and federal regulation. The regulated electric utility operation is TEP's only segment.
TEP is a wholly-owned subsidiary of UNS Energy, a utility services holding company. UNS Energy is an indirect wholly-owned subsidiary of Fortis which is a leader in the North American electric and gas utility business.
Regulated Utility Operations
TEP delivers electricity to retail customers in southern Arizona. TEP owns or has contracts for coal, natural gas, wind, and solar generation resources to provide electricity. This electricity, together with electricity purchased in the wholesale market, is delivered over transmission lines which are part of the Western Interconnection, a regional grid in the United States. The electricity is then transformed to lower voltages and delivered to customers through TEP's distribution system.
FERC Regulation and Rates
The FERC regulates portions of utility accounting practices and rates of TEP, including rates and services for electric transmission and wholesale power sales in interstate commerce. The FERC establishes rates that allow a utility to recover transmission related costs.
FERC Rates
Prior to August 2019, TEP had stated transmission rates. In August 2019, the FERC approved TEP's proposed forward-looking OATT formula rate, which updates annually and allows for timely recovery of transmission related costs. TEP's OATT formula rate is currently subject to refund following hearing and settlement procedures.
ACC Regulation and Rates
TEP operates under a certificate of public convenience and necessity as regulated by the ACC, under which TEP is obligated to provide electricity service to customers within its service territory. The ACC establishes rates that are designed to allow a regulated utility recovery of its cost of providing services and an opportunity to earn a reasonable return on its investment (Retail Rates).
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.
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 until renewable retail sales represent at least 15% by 2025. The RES also requires that DG account for 30% of the renewable energy requirement. Arizona utilities are required to file an annual RES implementation plan for review and approval by the ACC. TEP currently plans to meet these requirements through a combination of utility-owned resources, PPAs, and customer-sited DG.
In 2020, the percentage of retail kWh sales attributable to the RES was approximately 16%, exceeding the 2020 requirement of 10%.
See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K and Rates and Regulations below for additional information regarding RES.
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Energy Efficiency Standard
Under the EE Standards, the ACC requires electric utilities to implement cost-effective programs to reduce customers' energy consumption. The EE Standards require increasing cumulative annual targeted retail kWh savings equal to 22% by 2020. As of December 31, 2020, TEP’s cumulative annual energy savings was approximately 22%.
RES requirements and Energy Efficiency Standards may be impacted by changes to Arizona's energy policy. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting Results of Operations and Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.
ACC Rates
The ACC establishes rates that are designed to allow a regulated utility recovery of its cost of providing services and an opportunity to earn a reasonable return on its investment. Retail Rates are generally established in rate case proceedings. TEP's last rate case proceeding was finalized in 2020.
As a result of past regulatory decisions, TEP has cost recovery mechanisms that allow for more timely recovery of certain costs between rate case proceedings. These mechanisms are generally reset annually through separate filings with the ACC. TEP's cost recovery mechanisms include:
PPFAC — a usage-based charge or credit that reflects changes in energy costs that are not recovered through base rates established in a rate case.
REST — a usage-based charge that recovers the cost of complying with the RES.
DSM — a usage-based charge that recovers the cost of energy efficiency programs that are designed to help TEP comply with the EE Standards.
LFCR — a usage-based charge that partially offsets the revenue TEP loses when customers reduce their bills as a result of energy efficiency programs and DG system installations.
ECA — a usage-based charge that recovers certain costs incurred at TEP's generation stations to comply with environmental regulations.
TEAM — a usage-based charge or credit that allows TEP to pass-through the regulatory deferral balance related to the TCJA, the change in EDIT, and any material income tax effects of post-test year tax legislation.
TCA — a usage-based charge or credit that allows TEP to recover the cost or return the benefit of investments and expenses resulting from annual updates to TEP's FERC OATT formula rate.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting Results of Operations and Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on TEP's 2020 Rate Order and cost recovery mechanisms.
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Customers
Electricity sold to retail and wholesale customers by class of customer and the average number of retail customers over the last five years were as follows:
(sales in GWh)20202019201820172016
Electric Sales
Residential4,17028 %3,698 22 %3,766 24 %3,786 29 %3,724 29 %
Commercial2,00513 %2,077 13 %2,136 14 %2,192 17 %2,139 17 %
Industrial, non-Mining1,83412 %1,896 11 %1,949 12 %1,939 15 %2,006 16 %
Industrial, Mining1,086%1,057 %1,033 %991 %997 %
Other16— %16 — %16 — %18 — %30 — %
Total Retail Sales by Customer Class9,11161 %8,74453 %8,90057 %8,92668 %8,89670 %
Wholesale Sales, Long-Term 508%490 %424 %587 %463 %
Wholesale Sales, Short-Term (1)
5,27935 %7,257 44 %6,279 40 %3,630 28 %3,308 26 %
Total Electric Sales14,898100 %16,491 100 %15,603 100 %13,143 100 %12,667 100 %
Average Number of Retail Customers
Residential391,95390 %387,40990 %384,02190 %381,39990 %378,99190 %
Commercial39,096%38,838%38,642%38,564%38,403%
Industrial, non-Mining491— %503— %504— %520— %580— %
Industrial, Mining4— %4— %4— %4— %4— %
Other1,877%1,872%1,873%1,879%1,866%
Total Retail Customers433,421100 %428,626100 %425,044100 %422,366100 %419,844100 %
(1)Sales increased in 2019 and 2018 due to an increase in generation capacity related to Gila River Unit 2. In 2020, sales decreased due to the retirement of Navajo in 2019 and Gila River Unit 2 replacing the generation to serve retail load.
Retail Customers
TEP provides electric utility service to a diverse group of residential, commercial, industrial, and public sector customers. Major industries served include copper mining, cement manufacturing, defense, healthcare, education, military bases, and governmental entities. TEP’s retail sales are influenced by several factors including economic conditions, seasonal weather patterns, DSM initiatives and the increasing use of energy-efficient products, and customer-sited DG.
Local, regional, and national economic factors impact the growth in the number of customers in TEP’s service territory. In each of the past five years, TEP’s average number of retail customers increased by approximately 1%. TEP expects the number of retail customers to increase at a rate of approximately 1% in 2021 based on the estimated population growth in its service territory.
TEP’s retail sales volume in 2020 was 9,111 GWh, which is an increase of 2% from 2016 levels. During the past five years, increased sales volumes due to warmer weather and customer growth have been tempered by state requirements to promote energy efficiency and DG.
In 2020, due to changes in consumer and business behavior in response to the COVID-19 pandemic, there was a decrease in energy usage by commercial and industrial customers. However, due to stay at home orders and the adoption of work from home practices, there was an offsetting increase in energy usage by residential customers.
See Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting Results of Operations of this Form 10-K for additional information regarding COVID-19 pandemic impacts.
Wholesale Customers
TEP’s utility operations include the wholesale marketing of electricity to other utilities and power marketers. Wholesale sales transactions are made on both a firm and interruptible basis. A firm contract requires TEP to supply power on demand (except
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under limited emergency circumstances), while an interruptible contract allows TEP to stop supplying power under defined conditions.
Generally, TEP commits to future sales based on expected generation capability, forward prices, and generation costs using a diversified portfolio approach to provide a balance between long-term, mid-term, and spot power sales.
Long-Term Wholesale Sales
Contracts for long-term wholesale sales cover periods of one year or greater. TEP typically uses its own generation to serve the requirements of its long-term wholesale customers.
TEP's primary long-term wholesale sale contracts are presented in the table below:
CounterpartyContracts Expire December 31,
Navajo Tribal Utility Authority2022
TRICO Electric Cooperative2024
Navopache Electric Cooperative2041
Short-Term Wholesale Sales
Certain contracts for short-term wholesale sales cover periods of less than one year and obligate TEP to sell capacity or power at a fixed price. TEP also engages in short-term sales by selling power in the daily or hourly markets at fluctuating spot market prices and making other non-firm power sales. The majority of our revenues from short-term wholesale sales are passed through to TEP’s retail customers offsetting fuel and purchased power costs. TEP uses short-term wholesale sales as part of its hedging strategy to reduce customer exposure to fluctuating power prices.
Energy Imbalance Market
In 2019, TEP signed an agreement with the California Independent System Operator indicating its intent to begin participating in the EIM by spring of 2022. Participation in the EIM is voluntary and available to all balancing authorities in the western United States. In order to participate in the EIM, TEP must demonstrate resource adequacy through a combination of owned or contracted resources. TEP's participation in the EIM is expected to: (i) reduce the costs to serve customers through more efficient dispatch of a larger and more diverse pool of resources; (ii) allow for more effective integration of renewables; and (iii) enhance reliability through improved system utilization and responsiveness.
Competition
Retail Customers
TEP is the primary electric service provider to retail customers within its service territory and operates under a certificate of public convenience and necessity as regulated by the ACC.
In 2018, the ACC opened a docket to evaluate several energy policies including retail competition for generation services. In 2019, the ACC staff prepared a draft of retail electric competition rules and workshops have been held on the subject. Such rules have not been officially proposed and no changes have been made. The adoption of new rules would be subject to rulemaking proceedings at the ACC. TEP cannot predict what additional steps, if any, the ACC may take to further evaluate retail competition in this docket.
Wholesale Customers
TEP engages in long-term wholesale sales to optimize its generation resources. As a result of its wholesale power activity, TEP competes with other utilities, power marketers, and independent power producers in wholesale markets.
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Generation Facilities
As of December 31, 2020, TEP had 2,932 MW of nominal generation capacity, as set forth in the following table. Nominal rating is based on current unit design basis net output, measured in AC:
UnitDateCapacityOperatingTEP’s Share
Generation SourceNo.LocationIn Service(MW)Agent%(MW)
Natural Gas
Gila River2Gila Bend, AZ2003550SRP100550 
Gila River3Gila Bend, AZ2003550SRP75.0413 
Luna 1Deming, NM2006555PNM33.3185 
Sundt3Tucson, AZ1962104TEP100104 
Sundt4Tucson, AZ1967156TEP100156 
Sundt Reciprocating Internal Combustion Engine (1)
1-10Tucson, AZ2019-2020188TEP100188 
Sundt Internal Combustion TurbinesTucson, AZ1972-197350TEP10050 
DeMoss PetrieTucson, AZ200175TEP10075 
North LoopTucson, AZ200196TEP10096 
Coal
Springerville1Springerville, AZ1985387TEP100387 
Springerville (2)
2Springerville, AZ1990406TEP100406 
San Juan1Farmington, NM1976340PNM50.0170 
Four Corners4Farmington, NM1969785APS7.055 
Four Corners5Farmington, NM1970785APS7.055 
Renewables
Utility-Scale Renewables (3)
Various2002-201742TEP10042 
Total Capacity2,932 
(1)TEP placed in service five natural gas RICE units in December 2019 and an additional five units in March 2020. See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on the RICE units.
(2)Springerville Unit 2 is owned by San Carlos Resources, Inc., a wholly-owned subsidiary of TEP.
(3)In September 2020, Sundt Areva Solar Thermal was retired. Sundt Areva Solar Thermal had a nominal capacity of 5 MW.
Springerville
Springerville Units 3 and 4 are each approximately 400 MW coal-fired generation facilities that are operated, but not owned, by TEP. These facilities are located at the same site as Springerville Units 1 and 2. Tri-State, the lessee of Springerville Unit 3, compensates TEP for operating the facilities and pays an allocated portion of the fixed costs related to the Springerville Common Facilities and Springerville Coal Handling Facilities. SRP, the owner of Springerville Unit 4, owns 17.05% of the Springerville Coal Handling Facilities and 14% of the Springerville Common Facilities.
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Utility-Scale Renewables
As of December 31, 2020, TEP owned 42 MW of PV solar generation capacity, measured in AC. The following table presents TEP's owned utility-scale renewable generation resources:
Generation SourceLocationDate/Projected Date
in Service
In Service
Capacity (MW)
Under Development
Capacity (MW)
Solar
Fort Huachuca Phase I & II (1)
Sierra Vista, AZ2014-201718 
Springerville SolarSpringerville, AZ2004-201414 
UASTP Phase I & II (2)
Tucson, AZ2010-2011
Solon Prairie Fire (2)
Tucson, AZ2012
Raptor RidgeTucson, AZ202110 
Wind
Oso Grande (3)
Chaves County, NM2021250 
Total Capacity42 260 
(1)TEP has a 30-year easement agreement to facilitate operations on behalf of the Department of the Army.
(2)The UASTP I & II and Solon Prairie Fire are located on properties held under land easements and leases.
(3)Oso Grande is expected to be placed in service in the first half of 2021.
Renewable Power Purchase Agreements
As of December 31, 2020, TEP had renewable PPAs for 156 MW from solar resources and 80 MW from wind resources as presented in the table below. The solar PPAs contain options that allow TEP to purchase all or part of the related project at a future date. The following table's capacity is measured in AC.
Generation SourceLocationDate/Projected Date
in Service
In Service
Capacity (MW)
Under Development
Capacity (MW)
Solar
Red HorseWillcox, AZ201541 
Avalon ISahuarita, AZ201429 
Avra ValleyMarana, AZ201225 
Picture RocksMarana, AZ201220 
Avalon IISahuarita, AZ201616 
ValenciaTucson, AZ201310 
E.On Tech ParkTucson, AZ2012
Gato MontesTucson, AZ2012
Small PPAs (<5MW)VariousVarious
Wilmot Solar (1)
Sahuarita, AZ2021100 
Wind
Macho SpringsDeming, NM201150 
Red Horse WindWillcox, AZ201530 
Borderlands WindCatron County, NM202199 
Total Capacity236 199 
(1)Wilmot Solar will be accompanied by 30 MW of battery storage.
Public Utility Regulatory Policies Act Ruling
On December 17, 2019, the ACC issued a decision related to contract terms for qualifying facilities under Public Utility Regulatory Policies Act (PURPA). Congress enacted PURPA in 1978 in response to a national energy crisis. The FERC prescribes rules for the implementation of PURPA and state regulatory agencies implement PURPA. PURPA requires, among other things, that electric utilities enter into contracts to purchase power from facilities that qualify under PURPA at a price
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equivalent to the utility's avoided cost. The ACC's 2019 decision requires, among other things, that TEP's contracts to purchase power from qualifying facilities with renewable nameplate capacity over 100 kW include certain terms and conditions, including a minimum 18-year contract length and pricing based on TEP's long-term avoided cost.
PURPA and the FERC's regulations limit qualifying facilities to a power production capacity of 80 MW. In September 2020, the FERC issued a ruling that identified energy storage facilities as separate production facilities that are not to be identified as limiting elements on qualifying facilities' output in order to keep the net production capacity below the qualifying threshold.
The rulings did not have a material impact on TEP's operations or financial results.
Purchased Power
TEP purchases power from other utilities and power marketers. TEP may enter into contracts to purchase: (i) power under long-term contracts to serve retail load and long-term wholesale contracts; (ii) capacity or power during periods of planned outages or for peak summer load conditions; and (iii) power for resale to certain wholesale customers under load and resource management agreements. See Note 9 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K related to purchased power commitments.
TEP typically uses its generation, supplemented by purchased power, to meet the summer peak demands of its retail customers. TEP hedges a portion of its total energy price exposure with forward priced contracts. Certain of these contracts are at a fixed price per MWh and others are indexed to natural gas prices. TEP also purchases power in the daily and hourly markets: (i) to meet higher than anticipated demands; (ii) during periods of generation outages; or (iii) when doing so is more economical than generating its own power.
TEP is a member of a regional reserve-sharing organization and has reliability and power-sharing relationships with other utilities. These relationships allow TEP to call upon other utilities during emergencies, such as generation facility outages and system disturbances, which reduces the amount of reserves TEP is required to carry.
Peak Demand and Future Resources
Peak Demand
(in MW)20202019201820172016
Retail Customers2,467 2,367 2,413 2,415 2,278 
In 2020, TEP's generation and purchased resources were sufficient to meet total retail and long-term wholesale peak demand, while maintaining a reserve margin in compliance with reliability criteria set forth by the Western Electricity Coordinating Council, a regional entity with delegated authority from NERC.
Peak demand occurs during the summer months due to the cooling requirements of retail customers in TEP’s service territory. Retail peak demand varies from year-to-year due to weather, energy conservation, DG, economic conditions, and other factors. Retail peak demand in years 2017 to 2020 was higher than in 2016 primarily due to warmer than normal summer temperatures.
Forecasted retail peak demand for 2021 is 2,295 MW compared with actual peak demand of 2,467 MW in 2020. TEP’s 2021 estimated retail peak demand is based on weather patterns observed over a 10-year period and other factors, including estimates of customer usage. TEP believes that existing generation capacity and PPAs are sufficient to meet the expected demand and reserve margin requirements in 2021.
Future Resources
TEP's strategy on future resources is to continue its transition from carbon-intensive sources to a more sustainable energy portfolio, while maintaining reliability and ensuring rate affordability for its customers.
In June 2020, TEP filed its 2020 IRP, which outlines its plan over the next 15 years to meet its electric demand while transitioning to a more sustainable energy portfolio. The plan includes a goal to reduce carbon emissions by 80% compared to 2005 by 2035. The IRP proposes to achieve this goal by reducing our dependency on coal-fired generation over the next 12 years while developing new renewable energy projects like Oso Grande, Raptor Ridge, and energy storage projects to meet electric demand. Over the past five years, TEP's generation capacity from coal-fired generation has decreased by 24%.
In December 2020, ACC staff issued a NOPR based on energy rules it had proposed in November 2020. If adopted, the new rules would require affected utilities to, among other things, reduce carbon emissions by 50% below a baseline level by 2032 and 100% by 2050. The new rules are not expected to have a material impact on TEP's 2020 IRP.
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See Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting Results of Operations of this Form 10-K for additional information regarding TEP's 2020 IRP and the NOPR.
Fuel Supply
A summary of Fuel and Purchased Power resource information is provided below:
Average Cost (cents per kWh)Percentage of Total kWh Resources
202020192018202020192018
Coal2.51 2.46 2.44 38 %41 %44 %
Natural Gas2.03 2.33 2.54 49 %45 %42 %
Purchased Power, Non-Renewable6.26 4.09 4.32 %10 %10 %
Purchased Power, Renewable 9.42 9.43 9.41 %%%
100 %100 %100 %
Coal Supply
The coal used for generation is low-sulfur, bituminous or sub-bituminous coal sourced from mines in Arizona and New Mexico. The table below provides information on the existing coal contracts that supply our generation stations. The average cost of coal per MMBtu, including transportation, was $2.37 in 2020 and 2019, and $2.33 in 2018.
StationCoal Supplier2020 Coal Consumption (tons in 000s)Contract Expiration DateAverage Sulfur ContentCoal Obtained From
SpringervillePeabody CoalSales2,42020221.0%Lee Ranch Mine/El Segundo Mine
Four Corners NTEC29720310.7%Navajo Mine
San JuanSan Juan Coal Co.63120220.8%San Juan Mine
Coal-Fired Generation Facilities Operated by TEP
The coal supplies for Springerville Units 1 and 2 are transported approximately 200 miles by railroad from northwestern New Mexico. TEP expects to have access to coal supplies to fulfill the estimated requirements for each of the Springerville units' estimated remaining life.
Coal-Fired Generation Facilities Operated by Others
TEP also participates in jointly-owned coal-fired generation facilities at Four Corners and San Juan. Four Corners, which is operated by APS, and San Juan, which is operated by PNM, are mine-mouth generation facilities located adjacent to the coal reserves. TEP expects coal reserves available to these two jointly-owned generation facilities to be sufficient for the remaining lives of the stations.
Natural Gas Supply
The table below provides information on the natural gas transportation agreements that deliver our natural gas to the generation stations. The average cost of natural gas per MMBtu, including transportation, was $2.19 in 2020, $2.20 in 2019, and $2.92 in 2018.
StationNatural Gas Transportation CounterpartyContract Expiration Date(s)
GilaTranswestern Pipeline Co./El Paso Natural Gas Company, LLC2022-2040
LunaEl Paso Natural Gas Company, LLC2022
Sundt (1)
El Paso Natural Gas Company, LLC2023-2040
DeMoss PetrieSouthwest Gas CorporationRetail Tariff
North LoopSouthwest Gas CorporationRetail Tariff
(1)TEP placed in service five natural gas RICE units at Sundt in December 2019 and an additional five units in March 2020. See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on the RICE units.
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Transmission and Distribution
TEP's distribution and transmission facilities are located in Arizona and New Mexico. These facilities are located on property owned by: (i) TEP; (ii) public entities; (iii) private entities; and (iv) Indian Nations. TEP's transmission and distribution systems included approximately 2,197 miles of transmission lines and 7,797 miles of distribution lines as of December 31, 2020.
TEP's transmission facilities transmit the output from TEP’s electric generation facilities to the Tucson area and power markets. The transmission system is part of the Western Interconnection, which includes the interconnected transmission systems of 14 western states, two Canadian provinces, and parts of Mexico. TEP's transmission system, together with contractual rights on other systems, enables TEP to integrate and access generation resources to meet its energy load requirements.
ENVIRONMENTAL MATTERS
The EPA regulates the amount of sulfur dioxide (SO2), nitrogen oxide (NOx), carbon dioxide (CO2), particulate matter, mercury, and other by-products produced by generation facilities. TEP may incur added costs to comply with future changes in federal and state environmental laws, regulations, and permit requirements at its generation facilities. Environmental laws and regulations are subject to a range of interpretations, which may ultimately be resolved by the courts. Because these laws and regulations continue to evolve, TEP is unable to predict the impact of the changing laws and regulations on its operations and consolidated financial results. TEP expects the recovery of the cost of environmental compliance through Retail Rates.
Refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources of this Form 10-K for additional information related to environmental laws and regulations as well as environmental compliance capital expenditures. See Note 9 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on the Broadway-Pantano site.
National Ambient Air Quality Standards
In December 2020, the EPA published a final rule retaining the current primary and secondary U.S. National Ambient Air Quality Standards (NAAQS) for ozone (O3), which was set at 70 parts per billion (ppb) by the EPA in 2015. If an area does not meet the standard, the area is designated as a “non-attainment” area and the state must develop a plan to bring the air-shed into compliance. A “non-attainment” designation under the ozone NAAQS may slow economic growth in the region, increase restrictions on ozone precursor emissions of volatile organic compounds and nitrogen oxides from existing sources and impact TEP's ability to site new local fossil fuel generation. Under the 70 ppb standard, Arizona submitted recommendations for area designations (attainment, non-attainment, or unclassifiable) to the EPA in September 2016. The EPA completed all area designations as of July 2018. Maricopa County, the location of Gila River, was designated as "non-attainment." There is no significant impact on Gila River from this designation at this time. Pima County, the location of the Sundt, DeMoss Petrie and North Loop generation stations, and Apache County, the location of Springerville, are currently in attainment with the 70 ppb standard.
HUMAN CAPITAL
As of December 31, 2020, TEP had 1,575 employees, of which approximately 648 were represented by the International Brotherhood of Electrical Workers Local No. 1116 (IBEW). The current collective bargaining agreements between the IBEW and TEP expire in July 2022 with wages in effect through December 2022.
TEP values its employees and recognizes that the framework for success within the company is dependent on a strong workforce who feels safe, supported, and empowered. TEP strives to create a positive environment for its employees through the values and initiatives outlined below.
Governance and Culture
TEP believes that the foundation for a healthy work environment starts with the tone at the top. The Executive Officers and Board of Directors are actively involved in tracking the Company's goals and objectives. TEP's business strategy is intended to help employees thrive through a commitment to building adaptability to change, investing in continuous learning, and promoting collaboration, inclusion, and diversity, while deepening the Company's safety culture.
TEP's compliance team and Board of Directors review the Company's Code of Ethics and Business Conduct (Code) annually and make updates based on direct feedback from employees. The Code serves as TEP's ethical compass, and expressly states that the Company will not tolerate certain behaviors including retaliation, discrimination, harassment, or abusing positions of trust for personal gain. The Code is intended to help TEP create a safe and respectful workplace where employees feel valued and secure.
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Diversity, Equity, and Inclusion
Diversity, equity, and inclusion are an integral part of TEP’s vision and values. TEP values an inclusive culture and the unique contributions, perspectives, and experiences of its employees. Based on its commitment to diversity, equity, and inclusion, TEP implemented unconscious bias training for all employees, and conducted workshops to encourage employees to think inclusively. TEP continues to identify and focus on behaviors that build strong and positive relationships at work to support an environment of thriving employees.
Business Resource Groups
The Company supports employee participation in Business Resource Groups (BRG), which are voluntary, employee-led groups that have established missions, goals, and practices that support career development and employee engagement and align with TEP's business priorities. Participants share ideas and issues to help promote an inclusive, equitable, and respectful workplace. Examples of BRGs that provide professional networking opportunities at TEP include:
Veterans in Energy — dedicated to: (i) building relationships between its members; (ii) providing support and mentorship for military veterans and families; and (iii) promoting engagement and retention.
Women in Energy — dedicated to: (i) inspiring women in their professional growth; (ii) developing leadership qualities; and (iii) promoting engagement in diverse thought.
Workforce Development Pipeline Planning
TEP's workforce pipeline initiatives center on attracting, engaging, and developing a diverse workforce. Many of these efforts are specifically geared towards investing in: (i) underserved and minority students, from elementary schools through post-graduate studies; (ii) individuals with disabilities; and (iii) military veterans.
TEP is a Troops to Energy Jobs employer that works with the Center for Energy Workforce Development to match military skills with open positions in a variety of fields within the Company. TEP has sponsored numerous military internships for separating or retiring service members in partnership with Davis-Monthan Air Force Base, among other military bases. As of December 31, 2020, 12% of TEP's employees were military veterans.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Executive Officers, who are elected annually by TEP’s Board of Directors, acting at the direction of the Board of Directors of UNS Energy, as of January 1, 2021, are as follows:
NameAgePosition(s) HeldExecutive Officer Since
Susan M. Gray (1)
48
President and Chief Executive Officer (2)
2015
Frank P. Marino (1)
56Senior Vice President and Chief Financial Officer2013
Todd C. Hixon (1)
54Senior Vice President, General Counsel and Corporate Secretary2011
Erik B. Bakken48Vice President, System Operations and Energy Resources2018
Dallas J. Dukes53Vice President, Energy Programs and Pricing2019
Cynthia A. Garcia53Vice President, Energy Delivery2020
Mark C. Mansfield65Vice President, Special Projects2012
Catherine E. Ries61Vice President, Customer and Human Resources2007
Michael E. Sheehan53Vice President, Resource Planning, Fuels, and Wholesale Marketing2020
Mary Jo Smith63Vice President and Policy Advisor2015
Morgan C. Stoll50Vice President and Chief Information Officer2016
Martha B. Pritz59Treasurer2017
(1)Member of the TEP Board of Directors. The directors of TEP are elected annually by TEP's sole shareholder, UNS Energy, acting at the direction of the Board of Directors of UNS Energy.
(2)Susan M. Gray was appointed Chief Executive Officer, effective January 1, 2021, succeeding David G. Hutchens.
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SEC REPORTS AVAILABLE
TEP makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practical after it electronically files or furnishes them to the SEC. The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically. TEP's reports are also available free of charge through TEP’s website at https://www.tep.com/investor-information/.
TEP is providing the address of its website solely for the information of investors and does not intend for the address to be an active link. The information contained on TEP’s website is not a part of, or incorporated by reference into, any report or other filing by TEP filed with the SEC.

ITEM 1A. RISK FACTORS
The business and financial results of TEP are subject to a number of risks and uncertainties, including those set forth below. These risks and uncertainties fall primarily into five major categories: revenues, regulatory, environmental, financial, and operational. Additional risks and uncertainties that are not currently known to TEP or that are not currently believed by TEP to be material may also negatively impact TEP’s business and financial results.
REVENUES
A significant decrease in the demand for electricity in TEP's service area would negatively impact retail sales and adversely affect results of operations, net income, and cash flows at TEP.
National and local economic conditions have a significant impact on customer growth and overall retail sales in TEP’s service area. TEP anticipates an annual customer growth rate of 1% for the next five years.
Research and development activities are ongoing for new technologies that produce power and reduce power consumption. These technologies include renewable energy, customer-sited DG, appliances, equipment, energy storage, and control systems. Continued development and use of these technologies and compliance with the ACC's EE Standards and RES continue to have a negative impact on TEP’s use per customer and overall retail sales. TEP's use per customer declined by an average of 1% per year from 2016 through 2020.
The revenues, results of operations, and cash flows of TEP are seasonal and are subject to weather conditions and customer usage patterns, which are beyond the Company’s control.
Retail Sales
TEP typically earns the majority of its operating revenue and net income in the third quarter because retail customers increase their air conditioning usage during the summer. Conversely, first quarter net income is typically limited by relatively mild winter weather in TEP's retail service territory. Cool summers or warm winters may reduce customer usage, negatively affecting operating revenues, cash flows, and net income by reducing sales.
Production Tax Credits
Electricity generated from TEP's wind-powered facility will depend heavily on wind conditions. If such conditions are unfavorable, the facility’s electricity generation and associated PTCs may be reduced, negatively affecting cash tax payments and net income.
TEP is dependent on a small number of customers for a significant portion of future revenues. A reduction in the electricity sales to these customers would negatively affect results of operations, net income, and cash flows at TEP.
TEP’s ten largest customers represented 11% of total revenues in 2020. TEP sells electricity to mines, military installations, and other large commercial and industrial customers. Retail sales volumes and revenues from these customers could decline as a result of, among other things: global, national, and local economic conditions; curtailments of customer operations due to unfavorable market conditions; military base reorganization or closure decisions by the federal government; the effects of energy efficiency; or the decision by customers to self-generate all or a portion of their energy needs. A reduction in retail kWh sales by any one of TEP’s ten largest customers would negatively affect the Company's results of operations, net income, and cash flows.
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REGULATORY
TEP's business is significantly impacted by government legislation, regulation and oversight. TEP's inability to recover its costs, earn a reasonable return on its investments, or comply with current regulations would negatively affect its results of operations, net income, and cash flows.
TEP's financial condition is influenced by how regulatory authorities, including the ACC and FERC, establish the rates TEP can charge customers and authorize rates of return, common equity levels, and the amount of costs that may be recovered from customers. The Company's ability to timely obtain rate adjustments that provide TEP with the opportunity to earn authorized rates of return depends upon timely regulatory action under applicable statutes and regulations, and cannot be guaranteed.
ACC—The ACC is a constitutionally created body composed of five elected commissioners that has jurisdiction over rates for retail customers. Commissioners are elected state-wide for staggered four-year terms and are limited to serving two consecutive terms. As a result, the composition of the ACC, and therefore its policies, are subject to change every two years.
FERC—The FERC has jurisdiction over rates for electric transmission in interstate commerce and rates for wholesale sales of electric power, including terms and prices of transmission services and sales of electricity at wholesale.
Owners and operators of bulk power systems, including TEP, are subject to mandatory reliability standards developed and enforced by NERC and subject to the oversight of the FERC. Compliance with modified or new reliability standards may subject TEP to higher operating costs and increased capital costs. Failure to comply with the mandatory reliability standards could subject TEP to sanctions, including substantial monetary penalties.
Changes made to legislation, regulation, or regulatory structure could negatively affect TEP's results of operations, net income, and cash flows.
TEP incurs costs to comply with legislative and regulatory requirements and initiatives, such as those relating to clean energy requirements, the deployment of distributed energy resources, and implementation of programs for demand response, customer energy efficiency, and electric vehicles. New initiatives or changes to existing requirements could arise in the future through legislative, regulatory, or other initiatives (including ballot initiatives) on either a federal or state level.
In 2018, the ACC opened rulemaking dockets to evaluate possible modifications to various state energy policies, including renewable energy goals and retail competition for generation services. In December 2020, ACC staff issued a NOPR based on energy rules it had proposed in November 2020. If adopted, the new rules would require Arizona regulated utilities to, among other things: (i) reduce their CO2 emissions by 50% by 2032, 75% by 2040, and by 100% by 2050, measured from a baseline emissions period of 2016 through 2018; (ii) reach certain levels of distributed energy storage and demand-side energy resources; and (iii) follow updated integrated resource planning rules. These draft rules, if adopted during a formal rule-making proceeding, may accelerate the Company's long-term resource diversification strategy and increase capital expenditures and operating expenses. TEP's ability to recover costs, including its investments, associated with these and other legislative and regulatory initiatives will, in large part, depend on the final form of legislative or regulatory requirements. Further increases to rates could negatively affect the affordability of the rates charged to customers, which may negatively affect TEP’s results of operations, net income, and cash flows. In 2019 and 2020, the ACC staff discussed draft rules for retail competition for generation services. These rules have not been officially proposed, but if such rules were adopted, retail competition could have a negative impact on the Company's retail sales. TEP cannot predict the final outcome of these proposals. The adoption of any new policies or rules would be subject to rulemaking proceedings at the ACC.
ENVIRONMENTAL
TEP is subject to numerous environmental laws and regulations that may increase its cost of operations or expose it to environmental-related litigation and liabilities.
Numerous federal, state, and local environmental laws and regulations affect present and future operations. Those laws and regulations include rules regarding air emissions of conventional pollutants and greenhouse gases, water use, wastewater discharges, solid waste, hazardous waste, and management of CCR.
These laws and regulations can contribute to higher capital, operating, and other costs, particularly with regard to enforcement efforts focused on existing generation facilities and compliance standards related to new and existing generation facilities. These laws and regulations generally require TEP to obtain and comply with a wide variety of environmental licenses, permits, authorizations, and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. Failure to comply with applicable laws and regulations may result in litigation, the imposition of fines, penalties, and a requirement by regulatory authorities for costly equipment upgrades.
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Existing environmental laws and regulations may be revised and new environmental laws and regulations may be adopted or become applicable to the Company's facilities. Increased compliance costs or additional operating restrictions from revised or additional regulation could have a negative effect on TEP's results of operations, particularly if those costs are not timely and fully recoverable from TEP customers. TEP’s obligation to comply with these laws and regulations as a participant or owner in regulated facilities like Springerville, San Juan, and Four Corners, coupled with the financial impact of future climate change legislation, other environmental regulations, and other business considerations, could jeopardize the economic viability of these generation facilities. Additionally, these regulations may jeopardize continued generation facility operations or the ability of individual participants to meet their obligations and willingness to continue their participation in these facilities potentially resulting in an increased operational cost for the remaining participants.
TEP also is contractually obligated to pay a portion of the environmental reclamation costs incurred at generation facilities in which it has a minority interest and is obligated to pay similar costs at the mines that supply these generation facilities. While TEP has recorded the portion of its costs that can be determined at this time, the total costs for final reclamation at these sites are unknown and could be substantial.
FINANCIAL
Early closure of TEP's coal-fired generation facilities could result in TEP recognizing regulatory impairments or increased cost of operations if recovery of TEP's remaining investments in such facilities and the costs associated with early closures are not permitted through rates charged to customers.
TEP's remaining coal-fired generation facilities may be closed before the end of their useful lives in response to economic conditions and/or changes in regulation, including the ACC's draft energy rules and future changes in environmental regulations. If any of the coal-fired generation facilities from which TEP obtains power are closed prior to the end of their useful lives, TEP may need to seek regulatory recovery of the remaining net book value and could incur added expenses relating to accelerated depreciation and amortization, decommissioning, reclamation, and cancellation of long-term coal contracts of such generation facilities. As of December 31, 2020, the net book value of TEP's in service coal-fired generation facilities was $1,169 million.
Volatility or disruptions in the financial markets, rising interest rates, or unanticipated financing needs, could increase TEP's financing costs, limit access to the credit or bank markets, affect the Company's ability to comply with financial covenants in debt agreements, and increase TEP's pension funding obligations. Such outcomes may negatively affect liquidity and TEP's ability to carry out the Company's financial strategy.
We rely on access to bank markets and capital markets as a significant source of liquidity and for capital requirements not satisfied by the cash flows from TEP's operations. Market disruptions such as those experienced in 2008, 2009, and 2020 in the United States and abroad may increase the Company's cost of borrowing or negatively affect TEP's ability to access sources of liquidity needed to finance the Company's operations and satisfy its obligations as they become due. These disruptions may include turmoil in the financial services industry, including substantial uncertainty surrounding particular lending institutions and counterparties we do business with, unprecedented volatility in the markets, and general economic downturns in TEP's utility service territories. If TEP is unable to access credit at reasonable rates, or if the Company's borrowing costs dramatically increase, TEP's ability to finance its operations, meet debt obligations, and execute its financial strategy could be negatively affected.
Increases in short-term interest rates would increase the cost of borrowings under TEP's credit facilities. In addition, changing market conditions could negatively affect the market value of assets held in its pension and other postretirement defined benefit plans and may increase the amount and accelerate the timing of required future funding contributions.
Generation facility closings or changes in power flows into TEP's service territory could require us to redeem or defease some or all of the tax-exempt bonds issued for the Company's benefit, which could result in increased financing costs.
TEP has financed a portion of utility plant assets with the proceeds of pollution control revenue bonds and industrial development revenue bonds issued by governmental authorities. Interest on these bonds is, subject to certain exceptions, excluded from gross income for federal tax purposes. This tax-exempt status is based, in part, on continued use of the assets for pollution control purposes or the local furnishing of power within TEP’s two-county retail service area.
As of December 31, 2020, there were outstanding approximately $177 million aggregate principal amount of tax-exempt bonds that financed pollution control expenditures at Springerville. The bonds may be redeemed at par commencing in the first quarter of 2022. The bonds would be subject to early redemption should Springerville be retired and dismantled prior to maturity or the first redemption date.
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In addition, as of December 31, 2020, there were outstanding approximately $107 million aggregate principal amount of tax-exempt bonds that financed local furnishing facilities. Depending on changes that may occur to the regional generation mix in the desert southwest, to the regional bulk transmission network, or to the demand for retail power in TEP’s local service area, it is possible that TEP would no longer qualify as a local furnisher of power within the meaning of the Internal Revenue Code. If TEP could no longer qualify as a local furnisher of power, all of TEP’s tax-exempt local furnishing bonds could be subject to mandatory early redemption by TEP or defeasance to the earliest redemption date, and TEP could be required to pay additional amounts if interest on such bonds were no longer tax-exempt. The bonds may be redeemed at par commencing on dates ranging from the second quarter of 2022 to the first quarter of 2023.
OPERATIONAL
The operation of generation facilities and transmission and distribution systems involves risks and uncertainties that could result in reduced generation capability or unplanned outages that could negatively affect TEP’s results of operations, net income, and cash flows.
The operation of generation facilities and transmission and distribution systems involves certain risks and uncertainties, including equipment breakdown or failures, fires, weather, and other hazards, interruption of fuel supply, and lower than expected levels of efficiency or operational performance. Unplanned outages, including extensions of planned outages due to equipment failures or other complications, occur from time to time. They are an inherent risk of the Company's business and can cause damage to its reputation. If TEP’s generation facilities or transmission and distribution systems operate below expectations, TEP’s operating results could be negatively affected or TEP's capital spending could be increased.
In addition, as coal-fired generation facilities are closed, the economic viability of coal mines and coal suppliers may be jeopardized. To date, several coal suppliers have declared bankruptcy and coal mines have been closed. As additional coal-fired generation facilities are closed, the availability of sufficient coal supplies could decrease and prices may increase, which could, in turn, negatively affect the viability of our remaining coal-fired generation facilities.
The operation of generation facilities and transmission systems on Indian lands may create operational and financial risks for TEP that, if realized, could negatively affect TEP’s results of operations, net income, and cash flows.
Certain jointly-owned facilities and portions of TEP's transmission lines are located on Indian lands pursuant to leases, land easements, or other rights-of-way that are effective for specified periods. TEP is unable to predict the final outcomes of pending and future approvals by the applicable sovereign governing bodies with respect to the cost of renewals and continued access to these leases, land easements, and rights-of-way. If pending and future approvals are not obtained and if continued access to the facilities is not granted, it could negatively affect TEP's results of operations, net income, and cash flows.
TEP receives power from certain generation facilities that are jointly-owned with, or operated by, third parties. Therefore, TEP may not have the ability to affect the management or operations at such facilities which could negatively affect TEP’s results of operations, net income, and cash flows.
Certain of the generation facilities from which TEP receives power are jointly-owned with, or operated by, third parties. TEP does not have the sole discretion to affect the management or operations at such facilities. As a result of this reliance on other operators, TEP may not be able to ensure the proper management of the operations and maintenance of such generation facilities. Further, TEP may have limited ability to determine how best to manage the changing economic conditions or environmental requirements that may affect such facilities. A divergence in the interests of TEP and the co-owners or operators, as applicable, of such facilities could negatively impact the business and operations of TEP.
The effects of climate change may create operational and financial risks for TEP that, if realized, could negatively affect TEP's results of operations, net income, and cash flows.
Climate change may impact regional and global weather conditions and result in extreme weather events, including high temperatures, severe thunderstorms, drought, and wildfires. Changes in weather conditions or extreme weather events in TEP’s service territory or affecting TEP's remote generation facilities or transmission system may lead to service outages and business interruptions, which could result in an increase in capital expenditures and operating expenses. Any increases in severity and frequency of weather-related system outages could affect TEP's operations and system reliability. Although physical utility assets have been constructed and are operated and maintained to withstand severe weather, there can be no assurance that they will successfully do so in all circumstances. In addition, changes in weather conditions or extreme weather events outside of TEP's service territory could result in higher wholesale energy prices, insurance premiums, and other costs, which could negatively impact TEP's business and operations. Any of these situations could have a negative impact on TEP's results of operations, net income, and cash flows.
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TEP is subject to physical attacks which could have a negative impact on the Company's business and results of operations.
TEP’s generation, transmission, and distribution facilities are critical to the provision of electric service to our customers and provide the framework for our service infrastructure. TEP is facing a heightened risk of physical attacks on the Company's electric systems. The Company's electric generation, transmission, and distribution assets are geographically dispersed and are often in rural or unpopulated areas which makes it especially difficult to adequately detect, defend from, and respond to such attacks. The Company relies on the continued operation of its network infrastructure, which is part of an interconnected regional grid. Any significant interruption of these assets could prevent the Company from fulfilling its critical business functions including delivering energy to customers. Security threats continue to evolve and adapt. TEP and our third-party vendors have been subject to, and will likely continue to be subject to, attempts to disrupt operations. Despite implementation of security measures, there can be no assurance that the Company will be able to prevent the disruption of our operations.
If, despite TEP's security measures, a significant physical attack occurred, the Company could: (i) have operations disrupted and/or property damaged; (ii) experience loss of revenues, response costs, and other financial loss; and (iii) be subject to increased regulation, litigation, and damage to the Company's reputation. Any of these outcomes could have a negative impact on TEP's business and results of operations.
TEP is subject to cyber-attacks which could have a negative impact on the Company's business and results of operations.
Cybercrime, which includes the use of malware, computer viruses, and other means for disruption or unauthorized access has increased in frequency, scope, and potential impact in recent years. The Company relies on the continued operation of sophisticated digital information technology systems and network infrastructure, which are part of an interconnected regional grid. TEP's operations technology systems face a heightened risk of cyber-attack due to the critical nature of the infrastructure, the Company's connectivity to the Internet, and inherent vulnerability to disability or failures due to hacking, viruses, acts of war or terrorism, and other types of data security breaches.
TEP's information technology systems and network infrastructure have been subject, and will likely continue to be subject, to cyber-attacks from foreign or domestic sources attempting to gain unauthorized access to information and/or information systems or to disrupt utility operations through computer viruses and phishing attempts either directly or indirectly through its material vendors or related third parties. Furthermore, the Company's utility business requires access to sensitive customer data, including personal and credit information, in the ordinary course of business.
If, despite TEP's security measures, a significant cyber or data breach occurred, the Company could: (i) have operations disrupted, customer information stolen, and general business system and process interruption or compromise, including preventing TEP from servicing customers, collecting revenues or the recording, processing and/or reporting financial information correctly; (ii) experience loss of revenues, response costs, and other financial loss; and (iii) be subject to increased regulation, litigation, and damage to the Company's reputation. Any of these outcomes could have a negative impact on TEP's business and results of operations. To date we have not experienced any material breaches or disruptions to our network, information systems, or our service operations.
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, including the COVID-19 pandemic, could adversely affect our business, results of operations and financial condition.
TEP could be negatively impacted by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. The COVID-19 pandemic has negatively impacted the economy on a global, national, and local level, disrupted global supply chains, and created significant volatility and disruption of financial markets. Responses from governmental authorities and companies to reduce the spread of the COVID-19 pandemic have significantly reduced economic activity through various containment measures including, among others, business closures, work stoppages or work-from-home orders, shuttering of public spaces and events, and/or severe restrictions of global and regional travel.
The extent of the impact of the COVID-19 pandemic on TEP’s operational and financial performance, including the ability to execute business strategies and initiatives in the expected time frame, the ability to obtain external financing, and the timing of regulatory actions, will depend on factors beyond our control, including the duration, spread, and severity of the pandemic, and how quickly and to what extent normal economic and operating conditions resume, all of which are uncertain and cannot be predicted at this time. An extended period of global supply chain and economic disruption could materially affect TEP’s business, results of operations, access to sources of liquidity, and financial condition.
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GENERAL RISK FACTORS
Changes in tax regulation may negatively affect the results of operations, net income, and cash flows of TEP.
The Company is subject to taxation by the various taxing authorities at the federal, state and local levels where it does business. Legislation or regulation could be enacted by any of these governmental authorities, which could affect the Company’s tax positions.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
TEP's corporate headquarters is owned by TEP and located in Tucson, Arizona. Operational support facilities for Tucson operations are owned by TEP and located in Tucson, Arizona.
TEP has land easements for transmission facilities related to San Juan, Four Corners, and Navajo located on tribal lands of the Zuni, Navajo, and Tohono O’odham Nations. Four Corners and Navajo are located on properties held under land easements from the United States and under leases from the Navajo Nation. TEP, individually and in conjunction with PNM, acquired land rights, land easements, and leases for San Juan's generation facilities, transmission lines, and water diversion facility located on land owned by the Navajo Nation. TEP, in conjunction with PNM and Samchully Power & Utilities 1 LLC, holds an undivided ownership interest in the property on which Luna is located.
TEP’s rights under various land easements and leases may be subject to defects such as:
possible conflicting grants or encumbrances due to the absence of, or inadequacies in, the recording laws or record systems of the Bureau of Indian Affairs and the Indian Nations;
possible inability of TEP to legally enforce its rights against adverse claims and the Indian Nations without Congressional consent; or
failure or inability of the Indian Nations to protect TEP’s interests in the land easements and leases from disruption by the U.S. Congress, Secretary of the Interior, or other adverse claims.
These possible defects have not interfered, and are not expected to materially interfere, with TEP’s interest in and operation of its facilities.
TEP's rights under land easements expire at various times in the future and renewal action by the applicable tribal or federal agencies will be required. The ultimate cost of renewal for certain of the rights-of-way for the Company's transmission lines is uncertain. The principal owned and leased generation, distribution, and transmission facilities of TEP are described in Part I, Item 1. Business, Overview of Business and such descriptions are incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS
TEP is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company believes such normal and routine litigation will not have a material impact on its operations or financial results. TEP is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts on TEP.
See Note 9 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
TEP’s common stock is wholly-owned by UNS Energy and is not listed for trading on any stock exchange.

ITEM 6. SELECTED FINANCIAL DATA
The Company is not providing information responsive to this Item as it is choosing to voluntary comply with the revisions to Item 6 of Form 10-K contained in SEC Release No. 33-10890, which eliminated the disclosure requirements contained in Item 301 of Regulation S-K.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis explains the results of operations, the financial condition, and the outlook for TEP. It includes the following:
outlook and strategies;
factors affecting results of operations;
results of operations;
liquidity and capital resources, including: (i) capital expenditures; and (ii) environmental matters;
critical accounting policies and estimates; and
new accounting standards issued and not yet adopted.
Management’s Discussion and Analysis includes financial information prepared in accordance with GAAP.
This section of this Form 10-K primarily discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 activity and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in Part II, Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Annual Report on Form 10-K.
Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes in Part II, Item 8 of this Form 10-K. For information on factors that may cause our actual future results to differ from those we currently anticipate, see Forward-Looking Information at the front of this report and Part I, Item 1A. Risk Factors for additional information.
References in this discussion and analysis to "we" and "our" are to TEP.
OUTLOOK AND STRATEGIES
TEP's financial performance and outlook are affected by many factors, including: (i) global, national, regional, and local economic conditions; (ii) volatility in the financial markets; (iii) environmental laws and regulations; and (iv) other regulatory and legislative actions. Our plans and strategies include:
Achieving constructive outcomes in our regulatory proceedings that will provide us: (i) recovery of our full cost of service and an opportunity to earn an appropriate return on our rate base investments; (ii) updated rates that provide more accurate price signals and a more equitable allocation of costs to our customers; and (iii) the ability to continue providing safe, affordable, and reliable service.
Continuing our transition from carbon-intensive sources to a more sustainable energy portfolio, while providing reliability and rate stability for our customers, mitigating environmental impacts, complying with regulatory requirements, leveraging and improving our existing utility infrastructure, and maintaining financial strength. In 2020, we announced our long-term goal to reduce carbon emissions by exiting coal-fired generation over the next 12 years and increasing renewable energy resources and energy storage. These goals may be impacted by various federal and state energy policies, including policies currently under consideration.
Focusing on our core utility business through operational excellence, promoting economic development in our service territory, investing in infrastructure to ensure reliable service, and maintaining a strong community presence.
CURRENT ECONOMIC CONDITIONS—COVID-19
In March 2020, the World Health Organization declared COVID-19 a pandemic. In response to the COVID-19 pandemic, Arizona's governor and many local governments issued various requirements and recommendations, and further actions may continue to be taken. This pandemic has caused changes in consumer and business behavior and disrupted economic activity in TEP’s service territory. These disruptions could continue for a prolonged period of time or become more severe. We activated our business continuity plans and continue to reevaluate and reassess protocols and plans as the pandemic conditions evolve. These actions are intended to aid in the prevention of the spread of COVID-19 among our employees and customers, and to support the continued delivery of safe and reliable service to our customers and the communities we serve. Actions we have taken include: (i) implemented work from home practices for a portion of our workforce; (ii) increased precautions with regard
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to employee and facility hygiene for field crews and others who must continue working on premises, including elimination of in-person meetings and separation of field crews; (iii) imposed travel limitations on employees; (iv) implemented screening procedures conducted prior to entering our facilities; (v) distributed face masks to our workforce; and (vi) restricted access to critical facilities. Additional safety protocols have been implemented for work required within customers' premises that are intended to aid in the protection of our employees, our customers, and the community.
Recognizing the potential effect that the COVID-19 pandemic could have on many customers’ ability to pay their bills and the need for continued utility service, we voluntarily suspended service disconnections and late fees for non-payment of bills until December 31, 2020. In addition, the ACC approved our request to refund customers approximately $8 million of over-collected DSM funds in excess of program expenditures. Funds were returned to customers in the form of bill credits over the June 2020 billing cycle. In December 2020, the ACC enacted a bill credit and payment program for residential electric customers who are behind on their electric bills as a result of the COVID-19 pandemic. We are also working with our suppliers, vendors, and contractors to assess and mitigate potential impacts to the procurement of goods and services.
The COVID-19 pandemic remains a continuously evolving situation. We cannot predict the duration of the pandemic or the ultimate effects of it on the global, national, or local economy. We will continue to monitor developments affecting our workforce, customers, suppliers, and operations and take additional measures as we believe are warranted. We have not experienced a material impact to our results of operations as a result of the COVID-19 pandemic.
Performance - 2020 Compared with 2019
TEP reported net income of $191 million in 2020 compared with $187 million in 2019. The increase of $4 million, or 2%, was primarily due to:
$21 million in higher retail revenue primarily due to an increase in usage related to favorable weather;
$11 million in higher LFCR revenues; and
$9 million in higher AFUDC due to an increase in construction projects and a FERC Order that provided for an adjustment in the AFUDC calculation.
The increase was partially offset by:
$18 million in higher depreciation and amortization expense due to an increase in asset base;
$9 million in higher interest expense primarily related to long-term debt issuances in 2020; partially offset by lower interest expense related to the Springerville Common Facilities finance leases;
$4 million in higher income tax expense primarily due to AMT credits recognized in 2019 not recurring in 2020; and
$4 million decrease in value of investments used to support certain post-employment benefits as a result of less favorable market conditions.
FACTORS AFFECTING RESULTS OF OPERATIONS
Several factors affect our current and future results of operations. The most significant factors are related to the potential economic impacts of the COVID-19 pandemic, regulatory matters, generation resource shift, and weather patterns.
COVID-19 Pandemic Impacts
The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including: (i) the duration of the declared health emergencies; (ii) actions by governmental authorities and regulators; (iii) impacts on our customers, employees, and vendors; and (iv) actions by us to assist our customers through this crisis. These developments are continuously evolving and are challenging to predict. Areas currently impacted, and areas we expect to continue to be impacted, may have an effect on our results of operations, cash flows, and earnings are noted below.
Retail Sales
As a result of various Executive Orders issued in 2020 by Arizona's governor and changes in consumer and business behavior in response to the COVID-19 pandemic, energy usage by our commercial and industrial customers has decreased below average levels experienced in prior periods. This decrease is expected to last for the duration of the pandemic response and may continue beyond as a result of sustained economic impacts in our service territory. However, energy usage by our residential customers has increased due to stay at home orders and widespread adoption of work from home practices. We expect the
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increase to last for the duration of the pandemic response and possibly beyond as companies rethink their work from home practices. In 2020, we did not experience a significant impact to total retail sales as a result of the COVID-19 pandemic.
Retail Customer Assistance
We suspended service disconnections and late fees for all customers who would have otherwise been eligible for service disconnection to help customers affected by the COVID-19 pandemic beginning March 2020 through December 31, 2020. During 2020, we experienced an increase in accounts receivable balances greater than 90 days as a result of the suspension of service disconnections and higher summer bills due to warmer weather.
In December 2020, the ACC enacted a bill credit and payment program for residential customers who are behind on their electric bills as a result of the COVID-19 pandemic. For qualifying customers, the program included: (i) an upfront bill credit applied to their December 2020 bill; and (ii) automatic enrollment into an eight-month payment plan. We also voluntarily created payment arrangements for commercial customers.
As a result of the moratoriums, we increased our credit loss reserve by $7 million as of December 31, 2020, compared to December 31, 2019. We are continuing to monitor collection activity and will adjust our allowance for credit losses as needed.
Reduction to DSM Surcharge
In April 2020, we filed a request with the ACC to refund to customers approximately $8 million of over-collected DSM funds. In May 2020, the ACC approved the request and we returned the funds in the form of customer bill credits over the June 2020 billing cycle.
Regulatory Matters
We are subject to comprehensive regulation. The discussion below contains material developments to those matters.
2020 Rate Order
In December 2020, the ACC issued a rate order for new rates that took effect January 1, 2021.
Provisions of the 2020 Rate Order include, but are not limited to:
a non-fuel retail revenue increase of $58 million over test year retail revenues;
a 7.04% return on original cost rate base of $2.7 billion, which includes a cost of equity of 9.15% and an average cost of debt of 4.65%;
a capital structure for rate making purposes of approximately 53% common equity and 47% long-term debt;
approval 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 RICE units at Sundt;
a TEAM that will be updated for income tax changes that materially affect our authorized revenue requirement; and
a TCA mechanism, updated annually, allowing us to recover changes in transmission costs approved by the FERC.
In addition, the 2020 Rate Order established a second phase of TEP’s rate case to address the impact on certain communities due to the closures of fossil-based generation facilities (Phase 2). In January 2021, the ACC staff opened a generic docket related to this matter and will consider additional evidence or recommendations in Phase 2. TEP cannot predict the timing or outcome of these proceedings.
2019 FERC Rate Case
In 2019, the FERC issued an order approving our proposed OATT revisions effective August 1, 2019, subject to refund and further proceedings.
Provisions of the order include, but are not limited to:
replacing our stated transmission rates with a forward-looking formula rate;
a 10.4% return on equity; and
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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. If this request is approved, transmission revenues would increase by approximately $7 million annually. As part of the order, the FERC established hearing and settlement procedures. On February 8, 2021, the Settlement Judge determined that the parties in the rate case proceeding were at an impasse and recommended ending the settlement process and appointing a Presiding Judge to continue the formula rate case proceeding. All rates charged under the revised OATT pursuant to the FERC order are subject to refund until the proceeding concludes. We reserved $15 million as of December 31, 2020, and $4 million as of December 31, 2019, of wholesale revenues in Current Liabilities—Regulatory Liabilities on the Consolidated Balance Sheets. We cannot predict the outcome of the proceedings.
Other FERC Matters
On January 29, 2021, the FERC notified TEP that it is commencing an audit that is intended to evaluate our compliance with: (i) the accounting requirements of the Uniform System of Accounts; and (ii) the reporting requirements of the FERC Form 1 Annual Report and Supplemental Form 3-Q Quarterly Financial Reports. The audit will cover the period of January 1, 2018 to the present. We cannot predict the outcome or findings, if any, of the FERC audit at this time.
Federal Income 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 issued the ACC Refund Order, which was based on the reduction in the federal corporate income tax rate and an estimate of EDIT amortization that would be trued-up annually for actual results. 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 were deferred to a regulatory liability or asset and were used to adjust the following year's bill credit amounts.
Customer bill credits are trued-up annually to reflect actuals for both kWh sales and EDIT amortization. The refund amounts totaled $35 million in 2020 and $33 million in both 2019 and 2018. The refunds were returned to customers through a combination of a customer bill credit and a regulatory liability. In 2020, the customer bill credit accounted for 50% of the returned savings.
In December 2020, the ACC approved the TEAM as part of the 2020 Rate Order. In 2021, through the initial TEAM rate, TEP will return the amounts previously deferred to a regulatory liability.
See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 and Liquidity and Capital Resources, Income Tax Position of this Form 10-K for additional information regarding the ACC Refund Order.
Federal Energy Regulatory Commission
In 2018, the FERC issued the FERC Refund Order. In May 2018, we responded to the order and the FERC approved our proposal of an overall transmission rate reduction of approximately 5.3%, reflecting the lower federal tax rate, to be effective March 21, 2018. As a result, we recognized a reduction in Operating Revenues on the Consolidated Statements of Income of $1 million in 2018.
Also in 2018, the FERC issued a NOPR regarding the effect of the TCJA and related EDIT amortization. In November 2019, the FERC issued a final rule on the NOPR, which required us to address the effect of the TCJA and related EDIT amortization in our next FERC rate case. As required by the final rule, our 2019 FERC Rate Case addressed the effects of the TCJA and related EDIT amortization.
See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for additional information regarding the FERC Refund Order.
Generation Resource Shift
Our long-term strategy is to continue our shift from carbon-intensive sources to a more sustainable energy portfolio including expanding renewable energy resources while reducing reliance on coal-fired generation resources. In June 2020, we filed our 2020 IRP with the ACC, which provides details on our long-term strategy.
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2020 IRP
Our 2020 IRP proposal includes a goal of reducing our carbon dioxide emissions 80% compared to levels in 2005 by 2035. To achieve this goal, we plan to continue the retirement of older fossil-fuel resources and replace these assets with a combination of renewable resources, battery storage, and energy efficiency programs. The existing coal-fired generation fleet faces a number of uncertainties impacting the viability of continued operations, including changing state and federal law and energy policies, competition from other resources, fuel supply and land lease contract extensions, environmental regulations, and, for jointly owned facilities, the willingness of other owners to continue their participation. Given this uncertainty, we plan exiting all ownership interests in coal generation facilities over the next 12 years. We will seek regulatory recovery for amounts that would not otherwise be recovered, if any, as a result of these actions. The execution of our IRP proposal is dependent on obtaining regulatory recovery approval.
We are planning to provide more than 70% of our power from wind and solar resources as part of a cleaner energy portfolio. The Oso Grande project is expected to provide a significant shift towards renewable generation and further decrease TEP's dependency on coal-fired generation. Our generation capacity from coal-fired generation has decreased by 24% in the past five years.
Arizona Energy Policy
In 2018, the ACC opened rulemaking dockets to evaluate possible modifications to various energy policies including existing renewable energy and energy efficiency goals, integrated resource planning, and retail competition for generation services. In 2019 and 2020, the ACC discussed draft rules related to retail electric competition. The ACC discussed those draft rules during workshops, but such rules have not been officially proposed and no changes have been made.
In December 2020, ACC staff issued a NOPR based on energy rules it had proposed in November 2020. If adopted, the new rules would require TEP to: (i) reduce carbon emissions below a baseline level by 50% by 2032 and 100% by 2050; (ii) include a demand-side resource capacity of at least 35% of our 2020 peak demand by 2030; (iii) achieve on average 1.3% annual energy efficiency savings starting in 2021; and (iv) install energy storage systems with an aggregate capacity equal to at least 5% of TEP's 2020 peak demand. The new rules would repeal the existing RES and EE Standards. We would seek the ACC's approval to recover any costs related to new energy policies or requirements. We cannot predict the outcome of these matters or their impact on our financial position or results of operations.
Navajo Generating Station
TEP and the co-owners of Navajo retired the generation station in November 2019 and began decommissioning activities. We expect the majority of decommissioning activities to be completed by 2024 with monitoring activities continuing through 2054. We have historically recovered the capital and operating costs in base rates using a useful life of 2030 for Navajo. Due to the early retirement, we received approval to recover final retirement costs over a 10-year period in the 2020 Rate Order.
See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for additional information regarding the early retirement of Navajo.
Sundt Generating Station
In 2018, the Pima County Department of Environmental Quality approved our air permit which allowed us to place in service 10 natural gas RICE units at Sundt and required the retirement of Sundt Units 1 and 2 in November 2019. We have historically recovered the capital and operating costs in base rates using useful lives of 2028 and 2030 of Sundt Units 1 and 2, respectively. Due to the early retirement, we received approval to recover final retirement costs over a 10-year period as part of the 2020 Rate Order.
We placed in service five of the RICE units in December 2019, and the remaining five were placed in service in March 2020. The Sundt RICE units balance the variability of intermittent renewable energy resources. The units replaced 162 MW of nominal net generation capacity from Sundt Units 1 and 2, which were less efficient and lacked the quick start, fast ramp capabilities of the Sundt RICE units. We received approval to recover the 10 Sundt RICE units over the useful lives of the assets as part of the 2020 Rate Order. The total cost of the Sundt RICE units project was $187 million.
See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for additional information regarding the early retirement of Sundt Units 1 and 2.
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Gila River Generating Station
In 2017, we entered into a 20-year tolling PPA with SRP to purchase and receive all 550 MW of capacity, power, and ancillary services from Gila River Unit 2, which included a three-year option to purchase the unit. We completed the purchase of Gila River Unit 2 in December 2019 for $165 million. The 550 MW of capacity, power, and ancillary services replaced coal-fired generation lost due to early retirements. The ACC approved recovery of the Gila River Unit 2 purchase as part of the 2020 Rate Order.
Executive Orders
On May 1, 2020, the President of the United States of America signed an Executive Order, Securing the United States Bulk-Power System. The Department of Energy issued a request for information seeking to understand current industry practices surrounding supply chain components of the bulk-power system. In August 2020, we participated in the preparation of industry comments facilitated by the Edison Electric Institute. On January 20, 2021, the President signed an Executive Order suspending the prior Executive Order for 90 days, during which time the Secretary of Energy and the Director of the Office of Management and Budget have been directed to consider whether a replacement order should be issued. We are continuing to monitor the status and potential impacts of these Executive Orders.
Production Tax Credits
Federal renewable electricity PTCs are earned as energy from qualifying wind-powered facilities is generated based on a per kilowatt rate as prescribed pursuant to the applicable federal income tax law. Qualifying generating facilities are eligible for the credit for 10 years from the date the facilities are placed in service. The PTC rate is published annually by the IRS and was $0.025 per kWh generated for 2020. The Company will begin earning PTCs once Oso Grande begins generating power to serve our customers. If placed in service in the first half of 2021, Oso Grande is expected to generate approximately $20 million in PTCs in 2021. The PTCs are anticipated to offset most of the operating and interest expenses of Oso Grande, which are currently not in base rates.
Electricity generated from Oso Grande depends heavily on wind conditions. If such conditions are unfavorable or below our estimates, the project’s electricity generation and associated PTCs may be substantially different than forecasted.
Weather Patterns
Changing weather patterns and other factors cause seasonal fluctuations in sales of power. Our summer peaking load occurs during the third quarter of the year when cooling demand is higher, which results in higher revenue during such period. By contrast, lower sales of power occur during the first quarter of the year due to mild winter weather in our retail service territory. Seasonal fluctuations affect the comparability of our results of operations.
Interest Rates
See Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk of this Form 10-K for information regarding interest rate risks and its impact on earnings.
RESULTS OF OPERATIONS
Significant drivers of TEP's results of operations that do not have a significant impact on net income include:
Cost Recovery Mechanisms — TEP records operating revenue related to cost recovery mechanisms that allow for more timely recovery of fuel and purchase power costs and certain operations and maintenance costs between rate case proceedings. These mechanisms, which include PPFAC, Renewable Energy Standard Tariff, and DSM, are generally reset annually through separate filings with the ACC. See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on cost recovery mechanisms.
Short-Term Wholesale Sales — Revenues related to short-term wholesale sales are primarily related to ACC jurisdictional generation assets and are returned to retail customers by offsetting revenues against fuel and purchased power costs eligible for recovery through the PPFAC cost recovery mechanism.
Springerville Units 3 and 4 — Operations and maintenance expenses related to Springerville Units 3 and 4 are reimbursed by Tri-State, the lessee of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, through participant billings recorded in Operating Revenues on the Consolidated Statements of Income.
The following discussion provides the significant items that affected TEP's results of operations for the year ended 2020 compared to 2019 presented on a pre-tax basis.
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Operating Revenues
The following table provides a disaggregation of Operating Revenues:
Years Ended December 31,Increase (Decrease)Year Ended
December 31,
Increase (Decrease)
(in millions)20202019Percent2018Percent
Operating Revenues
Retail$1,039 $972 6.9 %$1,022 (4.9)%
Wholesale, Long-Term34 34 — %32 6.3 %
Wholesale, Short-Term (1)
151 200 (24.5)%197 1.5 %
Transmission30 32 (6.3)%29 10.3 %
Springerville Units 3 and 4 Participant Billings78 108 (27.8)%84 28.6 %
Other93 72 29.2 %69 4.3 %
Total Operating Revenues$1,425 $1,418 0.5 %$1,433 (1.0)%
(1)Revenues associated with derivatives are primarily returned to retail customers by offsetting the fuel and purchase power costs eligible for recovery through the PPFAC mechanism similar to short-term wholesale sales. As a result, revenues associated with derivatives are included in Wholesale, Short-Term in the table above.
TEP reported Operating Revenues of $1,425 million in 2020 compared with $1,418 million in 2019. The increase of $7 million, or less than 1%, was primarily due to:
$34 million in higher retail revenue primarily due to higher fuel and purchase power recoveries due to higher rates and increased volumes;
$24 million in higher retail revenue primarily due to favorable weather;
$13 million in higher other revenue due to an increase in LFCR revenue;
$8 million in higher retail revenue due to higher RES cost recoveries as a result of higher program expenses; and
$7 million in higher retail revenue due to a natural gas transportation asset management agreement contract entered into in 2020.
The increase was partially offset by:
$48 million in lower wholesale short-term sales primarily due to a decrease in volumes driven by the expiration of a capacity sale contract in December 2019; and
$29 million in lower participant billings related to Springerville Units 3 and 4.
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The following table provides key statistics impacting Operating Revenues:
Years Ended December 31,Increase (Decrease)Year Ended
December 31,
Increase (Decrease)
(kWh in millions)20202019Percent2018Percent
Electric Sales (kWh) (1)
Retail Sales9,111 8,744 4.2 %8,900 (1.8)%
Wholesale, Long-Term508 490 3.7 %424 15.6 %
Wholesale, Short-Term5,279 7,257 (27.3)%6,279 15.6 %
Total Electric Sales14,898 16,491 (9.7)%15,603 5.7 %
Average Revenue per kWh (2)
Retail11.40 11.12 2.5 %11.48 (3.1)%
Wholesale, Long Term6.76 6.94 (2.6)%7.52 (7.7)%
Wholesale, Short-Term2.84 2.87 (1.0)%3.19 (10.0)%
Total Retail Customers (3)
433,421 428,626 1.1 %425,044 0.8 %
(1)These numbers represent the kWh sold to retail, long-term wholesale, and short-term wholesale customers. Management uses kWh sold to retail and wholesale customers to monitor electricity usage.
(2)This metric represents the cents earned per kWh for retail and wholesale revenue. This number is calculated as revenue divided by Electric Sales (kWh) for each respective revenue class. Management uses this metric to monitor retail and wholesale rates.
(3)This number represents the total retail customer count across all customer classes including residential, commercial, industrial (mining), industrial (non-mining), and other. The customer count is based on the number of active service agreements at the end of each period. Management uses this count to monitor the growth of retail customers.
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Operating Expenses
Fuel and Purchased Power Expense
TEP reported Fuel and Purchased Power expense of $515 million in 2020 compared with $506 million in 2019. The increase of $9 million, or 2%, was primarily due to:
$55 million in higher PPFAC recoveries primarily due to: (i) an increase in the PPFAC rate; and (ii) a decrease in PPFAC eligible costs; and
$9 million in higher purchased power primarily due to an increase in: (i) price; and (ii) the retirement of RECs; partially offset by a decrease in volume due to the purchase of Gila River Unit 2.
The increase was partially offset by $56 million in lower fuel costs primarily due to decreases in: (i) Coal-Fired Generation volumes; (ii) losses on natural gas swap agreements; and (iii) natural gas prices.
The following table provides key statistics impacting Fuel and Purchased Power: