Leases

12 Months Ended

Dec. 31, 2018

We lease certain vehicles, land, buildings, equipment and miscellaneous other items through operating rental agreements with varying terms, provisions and expiration dates.

Lease expense recognized in the Consolidated Statements of Income was $18 million in 2018, $18 million in 2017, and $16 million in 2016. APS’s lease expense was $17 million in 2018, $17 million in 2017, and $15 million in 2016. These amounts do not include purchased power lease contracts, discussed below.

Estimated future minimum lease payments for Pinnacle West’s and APS’s operating leases, excluding purchased power agreements, are approximately as follows (dollars in thousands):



Year	Pinnacle West Consolidated		APS
2019	$	13,747	$	13,411
2020	12,428		12,143
2021	9,478		9,282
2022	6,513		6,321
2023	5,359		5,171
Thereafter	42,236		40,656
Total future lease commitments	$	89,761	$	86,984

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.

Purchased Power Lease Contracts

A purchased power contract may contain a lease for accounting purposes. This generally occurs when a purchased power contract designates a specific power plant from which the buyer purchases substantially all of the output and also meets other required lease accounting criteria. APS has certain purchased power contracts that contain lease arrangements. The future minimum lease payments due under these contracts are $54 million, all of which relate to 2019. Due to the inherent uncertainty associated with the reliability of the fuel source, payments under most renewable purchased power lease contracts are considered contingent rents and are excluded from future minimum lease payments. See Note 10 for additional information on our purchased power contract estimated commitments.

Operating lease cost for purchased power lease contracts was $47 million in 2018, $60 million in 2017 and $82 million in 2016. In addition, contingent rents for purchased power lease contracts was $109 million in 2018, $100 million in 2017, and $88 million in 2016. These 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 3.

See Note 2 for a discussion of the new lease accounting standard we adopted on January 1, 2019.