Leases

12 Months Ended

Dec. 31, 2020

We lease certain land, buildings, vehicles, equipment and other property through operating rental agreements with varying terms, provisions, and expiration dates. APS also has certain purchased power agreements that qualify as lease arrangements. Our leases have remaining terms that expire in 2021 through 2050. Substantially all of our leasing activities relate to APS.

In 1986, APS entered into agreements with three separate lessor trust entities in order to sell and lease back interests in Palo Verde Unit 2 and related common facilities. These lessor trust entities have been deemed VIEs for which APS is the primary beneficiary. As the primary beneficiary, APS consolidated these lessor trust entities. The impacts of these sale leaseback transactions are excluded from our lease disclosures as lease accounting is eliminated upon consolidation. (See Note 18 for a discussion of VIEs.)

On June 1, 2020 APS had two separate purchased power lease contracts that commenced. The lease terms end on September 30, 2025 and September 30, 2026, respectively. Both of these leases allow APS the right to the generation capacity from certain natural-gas fueled generators during the months of June through September over the contract term. APS does not operate or maintain these leased assets. APS controls the dispatch of the leased assets during the months of June through September and is required to pay a fixed monthly capacity payment during these periods of use. For these types of leased assets APS has elected to combine both the lease and non-lease payment components and accounts for the entire fixed payment as a lease obligation. These purchased power lease contracts are accounted for as operating leases. The contracts do not contain purchase options or term extension options. In addition to the fixed monthly capacity payment, APS must also pay variable charges based on the actual production volume of the asset. The variable consideration is not included in the measurement of our lease obligation.

The following table provides information related to our lease costs (dollars in thousands):


	Year Ended December 31, 2020						Year Ended December 31, 2019
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	68,883	$	18,493	$	87,376	$	42,190	$	18,038	$	60,228
Variable lease cost	121,359		972		122,331		113,233		782		114,015
Short-term lease cost	—		3,804		3,804		—		4,385		4,385
Total lease cost	$	190,242	$	23,269	$	213,511	$	155,423	$	23,205	$	178,628

Lease costs are primarily included as a component of operating expenses on our Consolidated Statements of Income. Lease costs relating to purchased power lease contracts are recorded in fuel and purchased power on the Consolidated Statements of Income, and are subject to recovery under the PSA or RES (see Note 4). The tables above reflect the lease cost amounts before the effect of regulatory deferral under the PSA and RES. Variable lease costs are recognized in the period the costs are incurred, and primarily relate to renewable purchased power lease contracts. Payments under most renewable purchased power lease contracts are dependent upon environmental factors, and due to the inherent uncertainty associated with the reliability of the fuel source, the payments are considered variable and are excluded from the measurement of lease liabilities and right-of-use lease assets. Certain of our lease agreements

have lease terms with non-consecutive periods of use. For these agreements we recognize lease costs during the periods of use. Leases with initial terms of 12 months or less are considered short-term leases and are not recorded on the balance sheet.

Lease expense recognized in the Consolidated Statements of Income was $18 million in 2018, this amount does not include purchased power lease contracts. Operating lease cost for purchased power lease contracts was $47 million in 2018. In addition, contingent rents for purchased power lease contracts was $109 million in 2018. These purchased power lease costs are recorded in fuel and purchased power on the Consolidated Statements of Income, and are subject to recovery under the PSA or RES (see Note 4).

The following table provides information related to the maturity of our operating lease liabilities (dollars in thousands):


	December 31, 2020
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2021	$	66,658	$	14,455	$	81,113
2022	68,325		10,849		79,174
2023	70,033		8,503		78,536
2024	71,784		6,104		77,888
2025	73,578		4,400		77,978
Thereafter	36,760		37,314		74,074
Total lease commitments	387,138		81,625		468,763
Less imputed interest	14,375		18,267		32,642
Total lease liabilities	$	372,763	$	63,358	$	436,121

We recognize lease assets and liabilities upon lease commencement. At December 31, 2020, we have certain purchased power lease contracts, that have been executed but have not yet commenced. In January 2021, we also executed additional purchased power lease contracts relating to energy storage. These arrangements have commencement dates beginning in May 2021 with terms ending through December 2042. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $650 million over the term of the arrangements.

The following tables provide other additional information related to operating lease liabilities (dollars in thousands):


	Year Ended December 31, 2020		Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	75,097	$	69,075
Right-of-use operating lease assets obtained in exchange for operating lease liabilities	441,653		11,262


	December 31, 2020		December 31, 2019
Weighted average remaining lease term	6 years		13 years
Weighted average discount rate (a)	1.69	%	3.71	%

(a)Most of our lease agreements do not contain an implicit rate that is readily determinable. For these agreements we use our incremental borrowing rate to measure the present value of lease liabilities. We determine our incremental borrowing rate at lease commencement based on the rate of interest that we would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. We use the implicit rate when it is readily determinable.