Leases

12 Months Ended

Dec. 31, 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 2022 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 May 1, 2021, APS had a new purchased power lease contract that commenced, with a lease term expiring on October 31, 2027. On December 31, 2021, APS modified an existing purchased power lease contract that had commenced in June 2020. The lease modification extends the expiration of this

lease from September 30, 2025, to October 31, 2031, among other changes. These purchased power lease agreements 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,
	2021		2020		2019
Operating Lease Cost - Purchased Power Lease Contracts	$	105,762	$	68,883	42,190
Operating Lease Cost - Land, Property, and Other Equipment	18,498		18,493		18,038
Total Operating Lease Cost	124,260		87,376		60,228
Variable lease cost (a)	118,969		122,331		114,015
Short-term lease cost	3,872		3,804		4,385
Total lease cost	$	247,101	$	213,511	$	178,628

(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 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 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, 2021
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2022	$	103,752	$	13,051	$	116,803
2023	106,151		10,758		116,909
2024	104,315		8,073		112,388
2025	106,582		6,034		112,616
2026	120,016		4,803		124,819
Thereafter	299,594		35,289		334,883
Total lease commitments	840,410		78,008		918,418
Less imputed interest	72,249		17,325		89,574
Total lease liabilities	$	768,161	$	60,683	$	828,844

We recognize lease assets and liabilities upon lease commencement. At December 31, 2021, we have various lease arrangements that have been executed but have not yet commenced. These arrangements primarily relate to energy storage assets, with expected lease commencement dates ranging from June 2022 through June 2024, with lease terms expiring through May 2044. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $1.3 billion 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, 2021		Year Ended December 31, 2020		Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	116,661	$	75,097	$	69,075
Right-of-use operating lease assets obtained in exchange for operating lease liabilities	500,582		441,653		11,262


	December 31, 2021		December 31, 2020
Weighted average remaining lease term	8 years		6 years
Weighted average discount rate (a)	2.13	%	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.