APS 2015 Annual Report Download - page 52

Table of Contents
Cholla
On September 11, 2014, APS announced that it would close its 260 MW Unit 2 at Cholla and cease burning coal at Units 1 and
3 by the mid-2020s if EPA approves a compromise proposal offered by APS to meet required environmental and emissions standards
and rules. On April 14, 2015, the ACC approved APS's plan to retire Unit 2, without expressing any view on the future recoverability of
APS's remaining investment in the Unit. (See Note 3 for details related to the resulting regulatory asset and Note 10 for details of the
proposal.) APS believes that the environmental benefits of this proposal are greater in the long term than the benefits that would have
resulted from adding emissions control equipment. APS closed Unit 2 on October 1, 2015.
Four Corners
Asset Purchase Agreement and Coal Supply Matters. On December 30, 2013, APS purchased SCE’s 48% interest in each of
Units 4 and 5 of Four Corners. The final purchase price for the interest was approximately $182 million. In connection with APS’s most
recent retail rate case with the ACC, the ACC reserved the right to review the prudence of the Four Corners transaction for cost recovery
purposes upon the closing of the transaction. On December 23, 2014, the ACC approved rate adjustments related to APS’s acquisition
of SCE’s interest in Four Corners resulting in a revenue increase of $57.1 million on an annual basis. On February 23, 2015, the ACC
decision approving the rate adjustments was appealed. APS has intervened and is actively participating in the proceeding. The Arizona
Court of Appeals has suspended the appeal pending the Arizona Supreme Court's decision in the SIB matter discussed below, which
could have an effect on the outcome of this Four Corners proceeding. We cannot predict when or how this matter will be resolved.
Concurrently with the closing of the SCE transaction, BHP Billiton, the parent company of BNCC, the coal supplier and
operator of the mine that serves Four Corners, transferred its ownership of BNCC to NTEC, a company formed by the Navajo Nation to
own the mine and develop other energy projects. BHP Billiton will be retained by NTEC under contract as the mine manager and
operator until July 2016. Also occurring concurrently with the closing, the Four Corners’ co-owners executed the 2016 Coal Supply
Agreement for the supply of coal to Four Corners from July 2016, when the current coal supply agreement expires, through 2031. El
Paso, a 7% owner in Units 4 and 5 of Four Corners, did not sign the 2016 Coal Supply Agreement. Under the 2016 Coal Supply
Agreement, APS has agreed to assume the 7% shortfall obligation. On February 17, 2015, APS and El Paso entered into an asset
purchase agreement providing for the purchase by APS, or an affiliate of APS, of El Paso’s 7% interest in each of Units 4 and 5 of Four
Corners. The cash purchase price, which will be subject to certain adjustments at closing, is immaterial in amount, and the purchaser
will assume El Paso's reclamation and decommissioning obligations associated with the 7% interest. Completion of the purchase is
subject to the receipt of certain regulatory approvals and is expected to occur in July 2016.
When APS, or an affiliate of APS, ultimately acquires El Paso's interest in Four Corners, NTEC has the option to purchase the
interest within a certain timeframe pursuant to an option granted by APS to NTEC. On December 29, 2015, NTEC notified APS of its
intent to exercise the option. APS is negotiating a definitive purchase agreement with NTEC for the purchase of the 7% interest. The
2016 Coal Supply Agreement contains alternate pricing terms for the 7% shortfall obligations in the event NTEC does not purchase the
interest.
Lease Extension. APS, on behalf of the Four Corners participants, negotiated amendments to an existing facility lease with the
Navajo Nation, which extends the Four Corners leasehold interest from 2016 to 2041. The Navajo Nation approved these amendments
in March 2011. The effectiveness of the amendments also required the approval of the DOI, as did a related federal rights-of-way
grant. A federal environmental review was undertaken as part of the DOI review process, and culminated in the issuance by DOI of a
record
49