ASC 842, which outlines a model for entities to use in accounting for leases and supersedes previous lease accounting guidance, became effective on January 1, 2019. The core principle of the model is that an entity should recognize the ROU assets and liabilities that arise from leases on the balance sheet and depreciate or amortize the asset and liability over the term of the lease, as well as provide disclosure to enable users of the consolidated financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company determines if an arrangement is a lease, as well as its classification, at its inception.

ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and lease liabilities are recognized at the commencement date of the agreement based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The implicit

rate is used when it is readily determinable. The operating and finance lease ROU assets also include any lease payments made and exclude lease incentives, if any, that accrue to the benefit of the lessee.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Any difference between lease expense and cash paid for leased assets is recognized as a regulatory asset or regulatory liability.

The Company's most significant operating lease is with the State of Montana associated with submerged land around the Company's hydroelectric facilities in the Clark Fork River basin, which expires in 2046. The terms of this lease are subject to renegotiation, depending on the outcome of ongoing litigation between Montana and NorthWestern Energy. In addition, the State of Montana and Avista Corp. are engaged in litigation regarding lease terms, including how much money, if any, the State of Montana will return to Avista Corp. The Company is currently paying all lease payments to the State of Montana into an escrow account until the litigation is resolved. As such, amounts recorded for this lease are uncertain and amounts may change in the future depending on the outcome of the ongoing litigation. Any reduction in future lease payments or the return of previously paid amounts to Avista Corp. will be included in the future ratemaking process.

In addition to the lease with the State of Montana, the Company also has other operating leases for land associated with its utility operations, as well as communication sites which support network and radio communications within its service territory. The Company's leases have remaining terms of 1 to 73 years. Most of the Company's leases include options to extend the lease term for periods of 5 to 50 years. Options are exercised at the Company's discretion.

Certain of the Company's lease agreements include rental payments which are periodically adjusted over the term of the agreement based on the consumer price index. The Company's lease agreements do not include any material residual value guarantees or material restrictive covenants.

Avista Corp. does not record leases with a term of 12 months or less in the Consolidated Balance Sheets. Total short-term lease costs for the year ended December 31, 2020 are immaterial.

AEL&P has a PPA which is treated as a finance lease for accounting purposes related to the Snettisham Hydroelectric Project, which expires in 2034. For ratemaking purposes, this lease is treated as an operating lease with a constant level of annual rental expense (straight line rent expense). Because of this regulatory treatment, any difference between the operating lease expense for ratemaking purposes and the expenses recognized under GAAP (interest expense and amortization of the finance lease ROU asset) is recorded as a regulatory asset and amortized during the later years of the lease when the finance lease expense is less than the operating lease expense included in base rates. In 2018 and prior years, the total cost associated with the Snettisham PPA was included in resource costs. Due to the adoption of the new lease standard, the amortization of the ROU asset is now included in depreciation and amortization and the interest associated with the lease liability is now included in interest expense on the Consolidated Statements of Income.

The components of lease expense were as follows for the year ended December 31 (dollars in thousands):

	2020		2019
Operating lease cost:
Fixed lease cost (Other operating expenses)	$	4,746	$	4,425
Variable lease cost (Other operating expenses)		1,099		988
Total operating lease cost	$	5,845	$	5,413

Finance lease cost:
Amortization of ROU asset (Depreciation and amortization)	$	3,641	$	3,641
Interest on lease liabilities (Interest expense)		2,662		2,795
Total finance lease cost	$	6,303	$	6,436

Supplemental cash flow information related to leases was as follows for the year ended December 31 (dollars in thousands):

	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows:
Operating lease payments	$	4,612	$	4,375
Interest on finance lease		2,662		2,795
Total operating cash outflows	$	7,274	$	7,170

Finance cash outflows:
Principal payments on finance lease	$	2,800	$	2,660

Supplemental balance sheet information related to leases was as follows for December 31 (dollars in thousands):

	December 31,			December 31,
	2020			2019
Operating Leases
Operating lease ROU assets (Other property and investments-net and other non-current assets)	$	71,891		$	69,746

Other current liabilities	$	4,249		$	4,128
Other non-current liabilities and deferred credits		67,716			65,565
Total operating lease liabilities	$	71,965		$	69,693

Finance Leases
Finance lease ROU assets (Other property and investments-net and other non-current assets)	$	47,338		$	50,980

Other current liabilities	$	2,935		$	2,800
Other non-current liabilities and deferred credits		48,815			51,750
Total finance lease liabilities	$	51,750		$	54,550

Weighted Average Remaining Lease Term
Operating leases	25.20 years			26.60 years
Finance leases	7.22 years			8.27 years

Weighted Average Discount Rate
Operating leases		4.28	%		3.82	%
Finance leases		4.62	%		4.88	%

Maturities of lease liabilities (including principal and interest) were as follows as of December 31, 2020 (dollars in thousands):

	Operating Leases			Finance Leases
2021	$	4,779		$	5,457
2022		4,799			5,460
2023		4,827			5,456
2024		4,852			5,459
2025		4,865			5,454
Thereafter		96,734			43,661
Total lease payments	$	120,856		$	70,947
Less: imputed interest		(48,891	)		(19,197	)
Total	$	71,965		$	51,750

Maturities of lease liabilities (including principal and interest) were as follows as of December 31, 2019 (dollars in thousands):

	Operating Leases			Finance Leases
2020	$	4,372		$	5,462
2021		4,375			5,457
2022		4,383			5,460
2023		4,399			5,456
2024		4,411			5,459
Thereafter		91,654			49,115
Total lease payments	$	113,594		$	76,409
Less: imputed interest		(43,901	)		(21,859	)
Total	$	69,693		$	54,550