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EMPLOYEE BENEFITS PLANS
 12 Months Ended
Dec. 31, 2023
Retirement Benefits [Abstract]  
EMPLOYEE BENEFITS PLANS EMPLOYEE BENEFITS PLANS
PENSION BENEFIT PLANS
TEP has three noncontributory, defined benefit pension plans. Benefits are based on years of service and average compensation. Two of the plans cover the majority of TEP's employees. The Company funds those plans by contributing at least the minimum amount required under IRS regulations. TEP also maintains a SERP for executive management.
OTHER POSTRETIREMENT BENEFITS PLAN
TEP provides limited healthcare and life insurance benefits for retirees. Active TEP employees may become eligible for these benefits if they reach retirement age while working for TEP or an affiliate.
TEP funds its other postretirement benefits for classified employees through a VEBA. TEP contributed $2 million in each of 2023 and 2022 and $3 million in 2021. Other postretirement benefits for unclassified employees are self-funded.
REGULATORY RECOVERY
TEP records changes in non-SERP pension and other postretirement defined benefit plans, not yet reflected in net periodic benefit cost, as a regulatory asset or liability, as such amounts are probable of future recovery or refund in rates charged to retail customers. Changes in the SERP obligation, not yet reflected in net periodic benefit cost, are recorded in AOCL since SERP expense is not currently recoverable in rates.
The following table presents pension and other postretirement benefit amounts (excluding tax balances) included in the balance sheet:
Pension BenefitsOther Postretirement Benefits
December 31,
(in millions)2023202220232022
Regulatory Assets$107 $90 $— $— 
Regulatory Liabilities— — (4)(8)
Regulatory and Other Assets—Other— 8 — — 
Accrued Employee Expenses(1)(1)(3)(2)
Pension and Other Postretirement Benefits(28)(20)(53)(49)
Accumulated Other Comprehensive Loss5 4 — — 
Net Amount Recognized$83 $81 $(60)$(59)
OBLIGATIONS AND FUNDED STATUS
The Company measured the actuarial present values of all defined benefit pension and other postretirement benefit obligations as of December 31, 2023 and 2022. The table below presents the status of all TEP pension and other postretirement benefit plans.
Pension BenefitsOther Postretirement Benefits
Years Ended December 31,
(in millions)2023202220232022
Change in Benefit Obligation
Beginning of Period$411 $600 $74 $90 
Actuarial Loss (Gain)39 (176)6 (17)
Interest Cost22 16 4 2 
Service Cost12 21 4 5 
Benefits Paid(23)(35)(5)(6)
Plan Amendments (1)
— 1 — — 
Settlements (2)
— (16)— — 
End of Period (3)
461 411 83 74 
Change in Fair Value of Plan Assets
Beginning of Period398 538 23 28 
Actual Return on Plan Assets44 (101)4 (4)
Benefits Paid(22)(34)(2)(3)
Employer Contributions (4)
12 11 2 2 
Settlements (2)
— (16)— — 
End of Period (5)
432 398 27 23 
Funded Status at End of Period$(29)$(13)$(56)$(51)
(1)Employees promoted to officer become eligible for SERP benefits based in part on their service prior to officer promotion. These prior service costs are accounted for in this table as a plan amendment.
(2)Represents the aggregate lump-sum benefit payments for plans that exceeded the threshold of service plus interest costs. The change is due to a decrease in retiring employees opting to receive their benefits as a lump-sum.
(3)The increase in pension and other postretirement benefit obligations was primarily due to a decrease in the discount rate.
(4)TEP expects to contribute $11 million to the pension plans and $2 million to the VEBA trust in 2024.
(5)The increase in pension and other postretirement benefit plan assets was primarily due to positive equity and fixed income returns.
All three pension plans had a projected benefit obligation in excess of plan assets as of December 31, 2023, compared to one as of December 31, 2022. This was primarily due to a decrease in discount rates partially offset by positive equity and fixed income returns. For plans with projected benefit obligations in excess of plan assets, total projected benefit obligations and plan assets were $461 million and $432 million, respectively, as of December 31, 2023, and $21 million and none, respectively, as of December 31, 2022.
The other postretirement benefits plan had an accumulated postretirement benefit obligation in excess of the fair value of plan assets as of December 31, 2023 and 2022.
The accumulated benefit obligation aggregated for all pension plans was $409 million and $373 million as of December 31, 2023 and 2022, respectively. One pension plan had an accumulated benefit obligation in excess of plan assets as of December 31, 2023 and 2022. The following table includes information for the pension plan with an accumulated benefit obligation in excess of pension plan assets:
December 31,
(in millions)20232022
Accumulated Benefit Obligation $20 $19 
Fair Value of Plan Assets — — 
The following table provides the components of TEP’s regulatory assets, regulatory liabilities, and AOCL that have not been recognized as components of net periodic benefit cost as of the dates presented:
Pension BenefitsOther Postretirement Benefits
December 31,
(in millions)2023202220232022
Net Loss (Gain)$111 $93 $(3)$(7)
Prior Service Cost (Benefit)1 1 (1)(1)
The Company measures service and interest costs by applying the specific spot rates along the yield curve to the plans' liability cash flows. Net periodic benefit plan cost includes the following components:
Pension BenefitsOther Postretirement Benefits
Years Ended December 31,
(in millions)202320222021202320222021
Service Cost$12 $21 $20 $4 $5 $6 
Non-Service Cost
Interest Cost22 16 14 4 2 2 
Expected Return on Plan Assets(29)(37)(34)(2)(1)(2)
Prior Service Benefit Amortization— — — — (1)— 
Amortization of Net Loss 5 7 9 — — 1 
Effect of Settlement— 3 — — — — 
Net Periodic Benefit Cost$10 $10 $9 $6 $5 $7 
The non-service components of net periodic benefit cost are primarily included in Other, Net on the Consolidated Statements of Income. In 2022, $3 million of the effect of settlement was deferred as a regulatory asset and recorded in Regulatory and Other Assets—Regulatory Assets on the Consolidated Balance Sheets. TEP capitalized 21% of service cost as a cost of construction in each of 2023 and 2022, and 22% in 2021.
The changes in plan assets and benefit obligations recognized as regulatory assets, regulatory liabilities, or in AOCL were as follows:
Pension BenefitsOther Postretirement Benefits
Regulatory AssetAOCLRegulatory Asset/Liability
(in millions)202320222021202320222021202320222021
Current Year Actuarial Loss (Gain)$22 $(27)$(16)$1 $(9)$— $4 $(11)$(13)
Prior Service Benefit Amortization— — — — — — — 1 — 
Amortization of Net Loss(5)(6)(8)— (1)(1)— — (1)
Prior Service Cost— — — — 1 — — — — 
Effect of Settlement— (3)— — — — — — — 
Total Recognized Loss (Gain)$17 $(36)$(24)$1 $(9)$(1)$4 $(10)$(14)
For all pension plans, TEP amortizes prior service costs and benefits on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans.
Net periodic benefit cost is subject to various assumptions and determinations, such as the discount rate, the rate of compensation increase, and the expected return on plan assets. Changes that may arise over time regarding these assumptions and determinations will change amounts recorded in the future as net periodic benefit cost.
TEP uses a combination of sources in selecting the expected long-term rate-of-return-on-assets assumption, including an investment return model. The model used provides a “best-estimate” range over 20 years from the 25th percentile to the 75th percentile. The model, used as a guideline for selecting the overall rate-of-return-on-assets assumption, is based on forward-looking return expectations only. The above method is used for all asset classes.
The following table includes the weighted average assumptions used to determine benefit obligations:
Pension BenefitsOther Postretirement Benefits
2023202220232022
Discount Rate5.4%5.7%5.2%5.6%
Rate of Compensation Increase3.2%2.9%N/AN/A
The following table includes the weighted average assumptions used to determine net periodic benefit costs:
Pension BenefitsOther Postretirement Benefits
202320222021202320222021
Discount Rate, Service Cost5.9%3.4%3.3%5.7%3.2%2.9%
Discount Rate, Interest Cost5.6%2.7%2.3%5.5%2.5%1.9%
Rate of Compensation Increase2.9%2.8%2.8%N/AN/AN/A
Expected Return on Plan Assets7.5%7.0%6.8%7.5%7.0%7.0%
Healthcare cost trend rates are assumed to decrease gradually from next year to the year the ultimate rate is reached:
December 31,
20232022
Next Year (Pre-65)7.3%7.0%
Next Year (Post-65)5.8%6.0%
Ultimate Rate Assumed (Pre-65 and Post-65)4.5%4.5%
Year Ultimate Rate is Reached (Pre-65)20342032
Year Ultimate Rate is Reached (Post-65)20282028
PENSION PLAN AND OTHER POSTRETIREMENT BENEFIT ASSETS
TEP calculates the fair value of plan assets on December 31, the measurement date. Asset allocations, by asset category, on the measurement date were as follows:
PensionOther Postretirement Benefits
2023202220232022
Asset Category
Equity Securities53 %53 %60 %61 %
Fixed Income Securities40 %39 %38 %38 %
Real Estate6 %7 %— %— %
Other1 %1 %2 %1 %
Total100 %100 %100 %100 %
As of December 31, 2023, the fair value of VEBA trust assets was $27 million, of which $10 million were fixed income investments and $17 million were equities. As of December 31, 2022, the fair value of VEBA trust assets was $23 million, of which $9 million were fixed income investments and $14 million were equities. The VEBA trust assets are primarily Level 1 assets within the fair value hierarchy described below. There are no Level 3 assets in the VEBA trust.
The following tables present the fair value measurements of pension plan assets by level within the fair value hierarchy:
Level 1Level 2Level 3Total
(in millions)December 31, 2023
Asset Category
Cash Equivalents$3 $— $— $3 
Equity Securities:
United States Large Cap— 68 — 68 
United States Small Cap— 26 — 26 
Non-United States— 68 — 68 
Global— 67 — 67 
Fixed Income— 171 — 171 
Real Estate— — 27 27 
Private Equity— — 2 2 
Total$3 $400 $29 $432 
(in millions)December 31, 2022
Asset Category
Equity Securities:
United States Large Cap$— $61 $— $61 
United States Small Cap— 23 — 23 
Non-United States— 66 — 66 
Global— 61 — 61 
Fixed Income— 154 — 154 
Real Estate— — 30 30 
Private Equity— — 3 3 
Total$— $365 $33 $398 
•Level 1 cash equivalents are based on observable market prices and are comprised of the fair value of commercial paper, money market funds, and certificates of deposit.
•Level 2 investments comprise amounts held in commingled equity funds, United States bond funds, and real estate funds. Valuations are based on active market quoted prices for assets held by each respective fund.
•Level 3 real estate investments values are generally determined by appraisals conducted in accordance with accepted appraisal guidelines, including consideration of projected income and expenses of the property as well as recent sales of comparable properties.
•Level 3 private equity funds are classified as funds-of-funds. They are valued based on individual fund manager valuation models.
The following table presents a reconciliation of changes in the fair value of pension plan assets classified as Level 3 in the fair value hierarchy. There were no transfers in or out of Level 3.
(in millions)Private EquityReal EstateTotal
Balance as of December 31, 2021$4 $26 $30 
Actual Return on Plan Assets:
Assets Held at Reporting Date— 4 4 
Purchases, Sales, and Settlements(1)— (1)
Balance as of December 31, 20223 30 33 
Actual Return on Plan Assets:
Assets Held at Reporting Date(1)(3)(4)
Purchases, Sales, and Settlements— — — 
Balance as of December 31, 2023$2 $27 $29 
Pension Plan Investments
Investment Goals
Asset allocation is the principal method for achieving each pension plan’s investment objectives while maintaining appropriate levels of risk. TEP considers the projected impact on benefit security of any proposed changes to the current asset allocation policy. The expected long-term returns and implications for pension plan sponsor funding are reviewed in selecting policies to ensure that current asset pools are projected to be adequate to meet the expected liabilities of the pension plans. TEP expects to use asset allocation policies weighted most heavily to equity and fixed income funds, while maintaining some exposure to real estate and opportunistic funds. Within the fixed income allocation, long-duration funds may be used to partially hedge interest rate risk.
Risk Management
TEP recognizes the difficulty of achieving investment objectives considering the uncertainties and complexities of the investment markets. The Company recognizes some risk must be assumed to achieve a pension plan’s long-term investment objectives. In establishing risk tolerances, the following factors affecting risk tolerance and risk objectives will be considered: (i) plan status; (ii) plan sponsor financial status and profitability; (iii) plan features; and (iv) workforce characteristics. TEP determined that the pension plans can tolerate some interim fluctuations in market value and rates of return to achieve long-term objectives. TEP tracks each pension plan’s portfolio relative to the benchmark through quarterly investment reviews. The reviews consist of a performance and risk assessment of all investment categories and on the portfolio. Investment managers for the pension plan may use derivative financial instruments for risk management purposes or as part of their investment strategy. Currency hedges may also be used for defensive purposes.
Relationship between Plan Assets and Benefit Obligations
The overall health of each plan will be monitored by comparing the value of plan obligations (both Accumulated Benefit Obligation and Projected Benefit Obligation) against the fair value of assets and tracking the changes in each. The frequency of this monitoring will depend on the availability of plan data but will be no less frequent than annually via actuarial valuation.
Target Allocation Percentages
The current target allocation percentages for the major asset categories of the plan follow. Each plan allows a variance of +/- 2% from targets before funds are automatically rebalanced:
PensionOther Postretirement Benefits
December 31, 2023
Cash/Treasury Bills2%1%
Equity Securities:
United States Large Cap16%25%
United States Mid Cap—%8%
United States Small Cap6%4%
Non-United States Developed—%15%
Non-United States Emerging—%8%
Global Equity28%—%
Global Infrastructure3%—%
Fixed Income38%39%
Real Estate6%—%
Private Equity1%—%
Total100%100%
Pension Fund Descriptions
For each type of asset category selected by the Pension Committee, TEP's investment consultant assembles a group of third-party fund managers and allocates a portion of the total investment to each fund manager. In the case of the private equity fund, TEP's investment consultant directs investments to a private equity manager that invests in third-party funds.
ESTIMATED FUTURE BENEFIT PAYMENTS
TEP expects the following benefit payments to be made by the plans, which reflect future service, as appropriate:
(in millions)202420252026202720282029-2033
Pension Benefits$26 $27 $27 $28 $29 $159 
Other Postretirement Benefits6 6 6 6 6 31 
DEFINED CONTRIBUTION PLAN
TEP offers a defined contribution savings plan to all eligible employees. The plan meets the IRS required standards for 401(k) qualified plans. Participants direct the investment of contributions to certain funds in their account. The Company matches part of a participant’s contributions to the plan. TEP made matching contributions to the plan of $8 million in 2023 and $7 million in each of 2022 and 2021.