Leases

6 Months Ended

Jun. 30, 2021

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 6 for a discussion of VIEs.

On May 1, 2021, APS had a new purchased power lease contract that commenced. The lease term ends on October 31, 2027. This lease allows APS the right to the generation capacity from a natural-gas fueled generator during the months of May through October over the contract term. APS does not operate or maintain the leased asset. APS controls the dispatch of the leased asset during the months of May through October 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. This purchased power lease contract is accounted for as an operating lease. The contract does not contain a purchase option or a term extension option. 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 tables provide information related to our lease costs (dollars in thousands):


	Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	29,514	$	4,598	$	34,112	$	17,221	$	4,651	$	21,872
Variable lease cost	40,539		256		40,795		40,821		255		41,076
Short-term lease cost	—		1,260		1,260		—		996		996
Total lease cost	$	70,053	$	6,114	$	76,167	$	58,042	$	5,902	$	63,944


	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	29,514	$	9,239	$	38,753	$	17,221	$	9,304	$	26,525
Variable lease cost	62,027		510		62,537		61,394		498		61,892
Short-term lease cost	—		2,249		2,249		—		1,786		1,786
Total lease cost	$	91,541	$	11,998	$	103,539	$	78,615	$	11,588	$	90,203

Lease costs are primarily included as a component of operating expenses on our Condensed Consolidated Statements of Income. Lease costs relating to purchased power lease contracts are recorded in fuel and purchased power on the Condensed 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.

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


	June 30, 2021
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2021 (remaining six months of 2021)	$	95,596	$	7,762	$	103,358
2022	103,744		11,872		115,616
2023	106,161		9,544		115,705
2024	108,634		6,955		115,589
2025	111,166		5,181		116,347
2026	75,099		3,989		79,088
Thereafter	39,106		34,444		73,550
Total lease commitments	639,506		79,747		719,253
Less imputed interest	25,803		17,613		43,416
Total lease liabilities	$	613,703	$	62,134	$	675,837

We recognize lease assets and liabilities upon lease commencement. At June 30, 2021, we have lease arrangements that have been executed, but have not yet commenced. These arrangements primarily relate to energy storage agreements, with lease commencement dates expected to begin in June 2022 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 $392 million over the term of the arrangements.

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


	Six Months Ended June 30, 2021		Six Months Ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	13,068	$	7,624
Right-of-use operating lease assets obtained in exchange for operating lease liabilities	248,694		434,997


	June 30, 2021		December 31, 2020
Weighted average remaining lease term	6 years		6 years
Weighted average discount rate (a)	1.72	%	1.69	%

(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.