Leases

12 Months Ended

Dec. 31, 2022

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 2023 through 2052. 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 17 for a discussion of VIEs.

APS has purchased power lease agreements that allow APS the right to the generation capacity from certain natural-gas fueled generators during certain months of each year throughout the term of the arrangements. As APS only has rights to use the assets during certain periods of each year, the leases have

non-consecutive periods of use. APS does not operate or maintain these leased assets. APS controls the dispatch of these leased assets and is required to pay fixed monthly capacity payments during the 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):


	For the Year Ended December 31,
	2022		2021		2020
Operating Lease Cost - Purchased Power Lease Contracts	$	104,001	$	105,762	68,883
Operating Lease Cost - Land, Property, and Other Equipment	18,061		18,498		18,493
Total Operating Lease Cost	122,062		124,260		87,376
Variable lease cost (a)	122,040		118,969		122,331
Short-term lease cost	9,928		3,872		3,804
Total lease cost	$	254,030	$	247,101	$	213,511

(a) Primarily relates to purchased power lease contracts.

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 3. 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 generation 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):


	December 31, 2022
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2023	$	106,151	$	14,254	$	120,405
2024	104,315		11,330		115,645
2025	106,582		8,655		115,237
2026	120,016		7,207		127,223
2027	89,108		5,292		94,400
Thereafter	210,486		37,873		248,359
Total lease commitments	736,658		84,611		821,269
Less imputed interest	57,682		19,130		76,812
Total lease liabilities	$	678,976	$	65,481	$	744,457

We recognize lease assets and liabilities upon lease commencement. At December 31, 2022, we have various lease arrangements that have been executed but have not yet commenced. These arrangements primarily relate to energy storage assets. The lease commencement dates for these arrangements have experienced delays. APS continues to work with the lessors to determine revised commencement dates. We expected lease commencement dates ranging from June 2023 through June 2025, with lease terms expiring through May 2045. We expect the total fixed consideration paid for these arrangements, which includes both lease and non-lease payments, will approximate $2.7 billion over the 20-year terms of the agreements.

In January 2023, APS modified two existing purchase power operating lease agreements. Among other changes, the modifications extend the expiration dates of these contracts from October 2027 to October 2032 for one of the leases, and from September 2026 to October 2034 for the other lease. These lease agreements previously commenced in 2020 and 2021. In January 2023, as a result of these modifications, APS recorded an additional $537 million of operating lease liabilities and right-of-use operating lease assets. These obligations relate to payments that will occur during the periods 2023 through 2034.

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


	Year Ended December 31, 2022		Year Ended December 31, 2021		Year Ended December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	118,463	$	116,661	$	75,097
Right-of-use operating lease assets obtained in exchange for operating lease liabilities	16,990		500,582		441,653


	December 31, 2022		December 31, 2021
Weighted average remaining lease term	7 years		8 years
Weighted average discount rate (a)	2.21	%	2.13	%

(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.