RECENTLY ISSUED ACCOUNTING STANDARDS
Change in Accounting Policy
The new U.S. GAAP accounting policies that are applicable to and were adopted by TEC are described as follows:
Interest – Imputation of Interest
In April 2015, the FASB issued Accounting Standard Update (ASU) 2015-03, Interest – Imputation of Interest, which simplifies the presentation of debt issuance costs. The amendments require debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The recognition and
34
measurement guidance for debt issuance costs is not affected. TEC adopted this standard in the first quarter of 2016, and December 31, 2015 balances have been retrospectively restated. This change resulted in $18.1 million of debt issuance costs as of December 31, 2015, previously presented as “Deferred charges and other assets”, being reclassified as a deduction from the carrying amount of the related “Long-term debt, less amount due within one year” line item on its Consolidated Balance Sheet. In accordance with ASU 2015-15 Interest: Imputation of Interest, TEC continues to present debt issuance costs related to its letter of credit arrangements and related instruments in “Prepayments and other current assets” on its Consolidated Balance Sheets.
Derivatives and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The standard clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship provided that all other hedge accounting criteria continue to be met. TEC early adopted in 2016 as permitted.
Future Accounting Pronouncements
TEC considers the applicability and impact of all ASUs issued by FASB. The following updates have been issued by FASB but have not yet been adopted by TEC. Any ASUs not included below were assessed and determined to be either not applicable to TEC or to have minimal impact on the consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which creates a new principle-based revenue recognition framework, which has been codified as ASC Topic 606. The FASB issued amendments to ASC Topic 606 during 2016 to clarify certain implementation guidance and to reflect narrow scope improvements and practical expedients. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to. The guidance will require additional disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017 and will allow for either full retrospective adoption or modified retrospective adoption. TEC will adopt this guidance effective January 1, 2018. TEC has implemented a project plan and is in the process of evaluating the impact of adoption of this standard on its consolidated financial statements and disclosures. This includes evaluating the available adoption methods, accounting for contributions in aid of construction and contract acquisition costs, and disclosure requirements. TEC is also monitoring the assessment of ASC Topic 606 by the AICPA Power and Utilities Revenue Recognition Task Force. While TEC does not currently expect the impact to be significant, the ultimate impact of the adoption of ASC Topic 606, and the method of adoption, has not yet been finalized.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities. The standard provides guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. TEC does not have equity investments or available-for-sale debt securities and it does not record financial liabilities under the fair value option. However, it is currently evaluating the impact of the adoption of this guidance on its financial statement disclosures. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases. The standard, codified as ASC Topic 842, increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet for leases with terms of more than 12 months. Under the existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The effect of leases on the Consolidated Statements of Income and the Consolidated Statements of Cash Flows is largely unchanged. The guidance will require additional disclosures regarding key information about leasing arrangements. This guidance is effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2018. Early adoption is permitted, and is required to be applied using a modified retrospective approach. TEC is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The standard provides guidance regarding the measurement of credit losses for financial assets and certain other instruments that are not accounted for at fair value through net income, including trade and other receivables, debt securities, net investment in leases, and off-balance sheet credit
35
exposures. The new guidance requires companies to replace the current incurred loss impairment methodology with a methodology that measures all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance expands the disclosure requirements regarding credit losses, including the credit loss methodology and credit quality indicators. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted for annual reporting periods, including interim periods after December 15, 2018, and will be applied using a modified retrospective approach. TEC is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows. The standard provides guidance regarding the classification of certain cash receipts and cash payments on the statement of cash flows, where specific guidance is provided for issues not previously addressed. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017, with early adoption permitted, and is required to be applied on a retrospective approach. TEC is currently evaluating the impact of adoption of this standard on its consolidated statement of cash flows.
Restricted Cash on the Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, Restricted Cash on the Statement of Cash Flows. The standard will require TEC to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented in the statement of cash flows. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017, with early adoption permitted, and is required to be applied on a retrospective approach. To date, TEC does not have any restricted cash or restricted cash equivalents.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. The standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2017, with early adoption permitted, and is required to be applied prospectively.
ENVIRONMENTAL COMPLIANCE
Environmental Matters
TEC has significant environmental considerations. Tampa Electric operates stationary sources with air emissions regulated by the Clean Air Act. Its operations are also impacted by provisions in the Clean Water Act and federal and state legislative initiatives on environmental matters. TEC, through its Tampa Electric and PGS divisions, is a potentially responsible party (PRP) for certain superfund sites and, through its PGS division, for certain former manufactured gas plant sites.
Air Quality Control
Emission Reductions
Tampa Electric has undertaken major steps to dramatically reduce its air emissions through a series of voluntary actions, including technology selection (e.g., IGCC) and conversion of coal-fired units to natural-gas fired combined cycle; implementation of a responsible fuel mix taking into account price and reliability impacts to its customers; a substantial capital expenditure program to add BACT emissions controls; implementation of additional controls to accomplish early reductions of certain emissions; and enhanced controls and monitoring systems for certain pollutants.
Tampa Electric, through voluntary negotiations in 1999 with the EPA, the U.S. Department of Justice and the FDEP, signed a Consent Decree and Consent Final Judgment, as settlement of federal and state litigation, to dramatically decrease emissions from its power plants. Tampa Electric has fulfilled the obligations of the Consent Decree, and the court terminated the Consent Decree on November 22, 2013. Termination of the Consent Final Judgment was completed on May 6, 2015.
The emission-reduction requirements of these agreements resulted in the repowering of the coal-fired Gannon Power Station to natural gas, which was renamed as the H. L. Culbreath Bayside Power Station (Bayside Power Station), enhanced availability of flue-gas desulfurization systems (scrubbers) at Big Bend Station to help reduce SO2, and installation of SCR systems for NOx reduction on Big Bend Units 1 through 4. Cost recovery for the SCRs began for each unit in the year that the unit entered service through the ECRC (see the Business-Tampa Electric-Regulation section). Cost recovery for the repowering of the Bayside Power Station was accomplished in Tampa Electric’s 2008 rate case.
36
Reductions in mercury emissions also have occurred due to the repowering of the Gannon Power Station to the Bayside Power Station. At the Bayside Power Station, where mercury levels have decreased 99% from 1998 levels, there are virtually zero mercury emissions. Additional mercury reductions have been achieved from the installation of the SCRs at Big Bend Power Station, which have led to a system-wide reduction of mercury emissions of more than 90% from 1998 levels.
CAIR/CSAPR
As a result of all its completed emission reduction actions, Tampa Electric has achieved the emission-reduction levels called for in Phase I and Phase II of CAIR. On July 7, 2011, EPA released its final CAIR-replacement rule, called Cross-State Air Pollution Rule (CSAPR). An update to CSAPR was finalized on October 26, 2016 and will be implemented in 2017. Based on updated EPA modeling, Florida is no longer subject to CSAPR requirements. However, Florida (including TEC power plants) could be subject to a future version of CSAPR as a result of an expected update triggered by compliance with the more stringent 2015 ozone standard (which is described below) or ongoing litigation relating to current rule applicability.
Hazardous Air Pollutants (HAPS) Maximum Achievable Control Technology (MACT) Mercury Air Toxics Standards (MATS)
The EPA published proposed rules under National Emission Standards for HAPS on May 3, 2011, pursuant to a court order. These rules are expected to reduce mercury, acid gases, organics, and certain non-mercury metals emissions and require MACT. The final Utility MACT rules, now called Mercury Air Toxics Standards (MATS), were published in December 2011 with implementation called for in early 2015.
On June 29, 2015, the U.S. Supreme Court remanded the EPA’s MATS to the U.S. District of Columbia Circuit Court (the D.C. Circuit Court) for failing to properly consider the cost of compliance. MATS remains in effect until the D.C. Circuit Court acts.
All of Tampa Electric’s conventional coal-fired units are already equipped with electrostatic precipitators, scrubbers and SCRs, and the Polk Unit 1 IGCC unit emissions are minimized in the gasification process. Tampa Electric is uniquely positioned to be able to meet the MATS standards without considerable impacts, compared to others who have not taken similar early actions. Therefore, Tampa Electric has minimized the impact of this rule and has demonstrated compliance on all applicable units with the most stringent “Low Emitting Electric Generating Unit” classification for MATS with nominal additional capital investment.
Carbon Reductions and GHG
Tampa Electric has historically supported voluntary efforts to reduce carbon emissions and has taken significant steps to reduce overall emissions at Tampa Electric’s facilities. Since 1998, Tampa Electric has reduced its system wide emissions of CO2 by approximately 20%, bringing emissions to near 1990 levels. Tampa Electric expects emissions of CO2 to remain near 1990 levels until the addition of the next base load unit, which was placed in service in January 2017 (see the Tampa Electric and Capital Investments sections). Tampa Electric estimates that the repowering to natural gas and the shut-down of the Gannon Station coal-fired units resulted in an annual decrease in CO2 emissions of approximately 4.8 million tons below 1998 levels. During this same time frame, the numbers of retail customers and retail energy sales have risen by approximately 32% and 18%, respectively.
Related to utility sources, the EPA rule that addresses the GHG emission threshold triggers that would require permitting review of new and/or major modifications to existing stationary sources of GHG emissions, became effective January 2, 2011. A recent U. S. Supreme Court ruling narrowed the EPA’s authority to implement this rule but the key provisions remain applicable to Tampa Electric. While this rule does not have an immediate impact on Tampa Electric’s ongoing operations, GHG permitting was completed for Tampa Electric’s most recent base load unit, the Polk Unit 2 – 5 conversion to combined cycle.
In June 2013, President Obama announced his Climate Action Plan, a broad package of mostly administrative initiatives aimed at reducing GHG emissions by approximately 17% below 2005 levels by 2020. On June 2, 2014, the EPA released a comprehensive proposed rule to limit GHG emissions from existing power plants. The EPA’s final rule, the Clean Power Plan, was signed by the Administrator of the EPA on August 3, 2015 and sets emission performance goals that will cut GHG emissions from existing power plants by an average across all states of 32% from their 2012 levels by 2030, with an interim goal for the period from 2022 through 2029.
In January 2016, the U.S. Court of Appeals for the District of Columbia Circuit denied requests by 27 states and numerous trade groups that would have barred the EPA from implementing the carbon regulations for the electricity sector. However, in February 2016, the U.S. Supreme Court issued a stay against enforcement of the Clean Power Plan for the electricity sector pending resolution of the legal challenges before the U.S. Court of Appeals for the District of Columbia Circuit. The timing of the resolution of the legal challenges and the removal of the stay by the U.S. Supreme Court is uncertain, but it is likely to delay further actions by the states until 2018 or later. Prior to the U.S. Supreme Court ruling, Florida had not begun its rulemaking process, and is currently awaiting final resolution of the legal challenges before proceeding with rulemaking. Tampa Electric is evaluating a number of potential compliance scenarios, but there is no Florida initiative to develop a final compliance plan. The outcome of this litigation and the rule-
37
making process and its impact on TEC’s businesses is therefore uncertain at this time; however, it could result in increased operating costs, and/or decreased operations at Tampa Electric’s coal-fired plants. Depending on how the state plan is developed and implemented, the Clean Power Plan could cause an increase in costs or rates charged to customers, which could curtail sales. See Item 1A - Risk Factors.
Tampa Electric expects that the costs to comply with new environmental regulations would be eligible for recovery through the ECRC. If approved as prudent, the costs required to comply with CO2 emissions reductions would be reflected in customers’ bills. If the regulation allowing cost recovery is changed and the cost of compliance is not recovered through the ECRC, Tampa Electric could seek to recover those costs through a base-rate proceeding.
Ozone
On September 30, 2015 in response to a court order, the EPA published a final rule revising the ground level ozone standard to 70 parts per billion from the previous level of 75 parts per billion. Compliance with the new standard will be the responsibility of individual states, which will provide flexibility in meeting the standards depending on the severity of each states’ ozone levels. States will be required to be in compliance between 2020 and 2037. On September 30, 2016, the Florida Department of Environmental Protection submitted its recommendation that the entire State of Florida be designated as “attainment” for the 2015 standard. EPA is expected to promulgate final ozone attainment designations by October 2017. Litigation regarding the stringency of the rule is ongoing. Therefore, it is not possible to estimate the impact of this new standard on the operations of Tampa Electric or to estimate the potential cost of compliance.
Water Supply and Quality
The EPA’s final rule under 316(b) of the Clean Water Act became effective in October 2014. This rule was initially proposed by EPA in response to citizens’ lawsuits over perceived impacts to aquatic life resulting from operation of cooling water systems in the U.S. from either impingement (on intake screens) or entrainment (through condensers). Tampa Electric uses water from Tampa Bay as cooling water for its Bayside and Big Bend facilities. Both plants use mesh screens to reduce the adverse impacts to aquatic organisms, and Big Bend units 3 and 4 use proprietary fine-mesh screens, BACT, to further reduce impacts to aquatic organisms. Neither station has historically demonstrated any significant adverse environmental impacts. Polk Power Station is not covered by this rule since it does not operate an intake on Waters of the U.S. Tampa Electric has two ongoing projects (one for Bayside and one for Big Bend) to negotiate scheduling with the regulating authority and to complete the biological, technical, and financial study elements necessary to comply with the rule. These study elements will ultimately be used by the regulating authority to determine the necessity of cooling water system retrofits for Big Bend and Bayside Power Stations. The full impact of the new regulations on Tampa Electric will depend on the outcome of subsequent legal proceedings challenging the rule, the results of the study elements performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies.
EPA determined that numeric water quality standards are required in Florida to implement the Clean Water Act. On January 26, 2010, EPA published proposed “Water Quality Standards for the State of Florida’s Lakes and Flowing Waters.” There was a long, litigious path in which EPA and FDEP both proposed criteria. Ultimately, the courts upheld the ruling that the Florida regulations meet the requirements of the Clean Water Act. Both Big Bend and Bayside Power Stations already have allocations allotted by the Nitrogen Management Consortium of the Tampa Bay Estuary Program for total nitrogen, which is the limiting nutrient for Tampa Bay. Other criteria related to streams may still directly affect Polk Power Station’s cooling reservoir discharge to surface water, and may require the station to reduce the amount of nutrients in the cooling reservoir water before discharge.
After the completion of a study into wastewater discharges by the electric utility industry in 2009, the EPA announced its intent to revise the existing steam electric effluent limit guidelines (ELGs) that place technology-based limits on wastewater discharges. The final EPA rule was published in the U.S. Federal Register November 3, 2015 and became effective January 4, 2016. The ELGs establish limits for wastewater discharges from flue gas desulfurization (FGD) processes, fly ash and bottom ash transport water, leachate from ponds and landfills containing coal combustion residuals (CCRs), gasification processes, and flue gas mercury controls. For FGD wastewater, the rule imposed limits for arsenic, mercury, selenium, and nitrate/nitrite which will require the addition of biological treatment at Big Bend Station. Both fly ash and bottom ash transport water have been designated as zero discharge wastewaters, with the exception of use as make-up water in FGD scrubber. Transport water used as make-up will be subject to FGD wastewater limits at the point of discharge. New limits for gasification processes will likely require additional treatment at Polk Power Station. Cost estimates are being developed based on an evaluation of treatment technologies required to meet the pollutant limits. The new guidelines are expected to be incorporated into NPDES permit renewals to achieve compliance as soon as possible after November 1, 2018, but no later than December 31, 2023.
38
EPA Waters of the US
In June 2015, the U.S. Army Corps of Engineers (Corps) and the EPA issued a rule defining “Waters of the United States” (WOTUS) for purposes of federal Clean Water Act (CWA) jurisdiction. The final rule took effect on August 28, 2015. The rule has the effect of defining the scope of agency jurisdiction under the CWA very broadly. In August 2015, a federal judge in North Dakota issued an injunction against the implementation of the rule in certain states. In October 2015, the Sixth Circuit Court of Appeals issued a nationwide stay of WOTUS, effectively ending the implementation of the rule in the 37 states that were not subject to the prior injunction. This stay is temporary, pending the outcome of litigation.
Superfund and Former Manufactured Gas Plant Sites
TEC, through its Tampa Electric and PGS divisions, is a PRP for certain superfund sites and, through its PGS division, for certain former manufactured gas plant sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of December 31, 2016, TEC has estimated its ultimate financial liability to be $31.6 million, primarily at PGS. This amount has been accrued and is primarily reflected in the long-term liability section under “Other” on the Consolidated Condensed Balance Sheets. The environmental remediation costs associated with these sites are expected to be paid over many years.
The estimated amounts represent only the portion of the cleanup costs attributable to TEC. The estimates to perform the work are based on TEC’s experience with similar work, adjusted for site-specific conditions and agreements with the respective governmental agencies. The estimates are made in current dollars, are not discounted and do not assume any insurance recoveries.
In instances where other PRPs are involved, most of those PRPs are creditworthy and are likely to continue to be creditworthy for the duration of the remediation work. However, in those instances that they are not, TEC could be liable for more than TEC’s actual percentage of the remediation costs.
Factors that could impact these estimates include the ability of other PRPs to pay their pro-rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. Under current regulations, these costs are recoverable through customer rates established in subsequent base rate proceedings. See Note 3 to the 2016 Annual TEC Consolidated Financial Statements for information regarding an agreement approved by the FPSC to accelerate the amortization of the regulated asset associated with this reserve.
Coal Combustion Residuals Recycling and Disposal
Tampa Electric produces ash and other by-products, collectively known as CCRs, at its Big Bend and Polk power stations. The CCRs produced at Big Bend include fly ash, FGD gypsum, boiler slag, bottom ash and economizer ash. The CCRs produced at the Polk Power Station include gasifier slag and sulfuric acid. Overall, an annual average of 95% of all CCRs produced at these facilities is marketed to customers for beneficial use in commercial and industrial products. The remaining 5% are either disposed of onsite or shipped offsite to nearby industrial waste landfills in Central Florida.