Leases

6 Months Ended

Jun. 30, 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 2020 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 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 tables provide information related to our lease costs (dollars in thousands):



	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	17,221	$	4,651	$	21,872	$	14,063	$	4,414	$	18,477
Variable lease cost	40,821		255		41,076		41,529		360		41,889
Short-term lease cost	—		996		996		—		1,812		1,812
Total lease cost	$	58,042	$	5,902	$	63,944	$	55,592	$	6,586	$	62,178



	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total		Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	17,221	$	9,304	$	26,525	$	14,063	$	8,762	$	22,825
Variable lease cost	61,394		498		61,892		58,820		360		59,180
Short-term lease cost	—		1,786		1,786		—		2,665		2,665
Total lease cost	$	78,615	$	11,588	$	90,203	$	72,883	$	11,787	$	84,670

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, 2020
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2020 (remaining six months of 2020)	$	59,555	$	7,817	$	67,372
2021	66,658		13,123		79,781
2022	68,325		9,495		77,820
2023	70,033		7,191		77,224
2024	71,784		4,945		76,729
2025	73,578		3,245		76,823
Thereafter	36,759		36,615		73,374
Total lease commitments	446,692		82,431		529,123
Less imputed interest	16,844		18,807		35,651
Total lease liabilities	$	429,848	$	63,624	$	493,472

We recognize lease assets and liabilities upon lease commencement. At June 30, 2020, we have additional lease arrangements that have been executed, but have not yet commenced. These arrangements primarily relate to purchased power lease contracts with lease commencement dates beginning in May 2021 with terms ending in October 2027. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $258 million over the term of the arrangements.

The following tables provide other additional information related to operating lease liabilities:



	June 30, 2020		December 31, 2019
Weighted average remaining lease term	7 years		13 years
Weighted average discount rate (a)	1.66	%	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.



	Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows (dollars in thousands):	$	7,624	$	11,987