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Leases

12 Months Ended

Dec. 31, 2019

Obligations Under Operating Leases

We have recorded right of use assets and lease liabilities associated with the following operating leases.


•	Land we are leasing related to our Rothschild biomass plant through June 2051.


•	Rail cars we are leasing to transport coal to various generating facilities through February 2021.


•	Various office space leases.

The operating leases generally require us to pay property taxes, insurance premiums, and operating and maintenance costs associated with the leased property. Many of our leases contain options to renew past the initial term, as set forth in the lease agreement.

Obligations Under Finance Leases

We are the obligor under a power purchase contract with an unaffiliated third party and we lease power plants from We Power. Under finance lease accounting, we have recorded the leased plants and corresponding obligations as right of use assets and lease liabilities on our balance sheets. We treat these agreements as operating leases for rate-making purposes.

Prior to our adoption of Topic 842 on January 1, 2019, we accounted for these finance leases under Topic 980-840, Regulated Operations – Leases, as follows:


•	We recorded our minimum lease payments under the power purchase contract as purchased power expense in cost of sales on our income statements.


•	We recorded our minimum lease payments under our leases with We Power as rent expense in other operation and maintenance in our income statements.


•	We recorded the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under finance lease accounting rules as a deferred regulatory asset on our balance sheets.

In conjunction with our adoption of Topic 842, while the timing of expense recognition related to our finance leases did not change, the classification of the lease expense changed as follows:


•	Effective January 1, 2019, the minimum lease payments under the power purchase contract were no longer classified within cost of sales in our income statements, but were instead recorded as a component of depreciation and amortization and interest expense in accordance with Topic 980-842, Regulated Operations – Leases.


•	Similarly, the lease payments related to our leases with We Power were no longer classified within other operation and maintenance in our income statements, but were also divided between depreciation and amortization expense and interest expense in accordance with Topic 980-842.


•	In accordance with Topic 980-842, the timing of lease expense did not change for these finance leases upon adoption of Topic 842, and still resembled the expense recognition pattern of an operating lease, as the amortization of the right of use assets was modified from what would typically be recorded for a finance lease under Topic 842.


•	We continue to record the difference between the minimum lease payments and the sum of imputed interest and unadjusted amortization costs calculated under the finance lease accounting rules as a deferred regulatory asset on our balance sheets.

Power Purchase Commitment

In 1997, we entered into a 25-year power purchase contract with an unaffiliated independent power producer. The contract, for 236 MWs of firm capacity from a natural gas-fired cogeneration facility, includes zero minimum energy requirements. When the contract expires in 2022, we may, at our option and with proper notice, renew for another ten years, purchase the generating facility at fair market value, or allow the contract to expire. At lease inception we recorded this leased facility and corresponding obligation on our balance sheets at the estimated fair value of the plant's electric generating facilities.

As previously discussed, we treat the long-term power purchase contract as an operating lease for rate-making purposes. We record the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under finance lease accounting rules as a deferred regulatory asset on our balance sheets. Minimum lease payments are a function of the 236 MWs of firm capacity we receive from the plant and the fixed monthly capacity rate published in the lease. Due to the timing and the amounts of the minimum lease payments, the regulatory asset increased to $78.5 million in 2009, at which time the regulatory asset began to be reduced to zero over the remaining life of the contract. The total obligation under the finance lease was $18.4 million at December 31, 2019, and will decrease to zero over the remaining life of the contract.

Port Washington Generating Station

We are leasing PWGS 1 and PWGS 2, two 545 MW natural gas-fired generation units, which were placed in service in July 2005 and May 2008, respectively, from We Power under PSCW approved leases. We are amortizing the leased units on a straight-line basis

over the original 25-year term of the leases. The lease payments are expected to be recovered through our rates, as supported by Wisconsin's 2001 leased generation law. Due to the timing and the amounts of the minimum lease payments, we expect the regulatory asset to increase to approximately $129.4 million in the year 2021 for PWGS 1 and to approximately $126.3 million in the year 2023 for PWGS 2, at which time the regulatory assets will be reduced to zero over the remaining lives of the contracts. The total obligation under the finance leases for the units was $617.8 million as of December 31, 2019, and will decrease to zero over the remaining lives of the contracts.

The only variability associated with the PWGS lease payments relates to the potential for future changes in We Power's tax or interest rates, as the positive or negative impact of these changes is generally passed along to us, and subsequently to our customers. Because variability in the lease payments is dependent upon a rate (interest rate or tax rate), the lease payments are considered unavoidable under Topic 842, and are included in the measurement of the right of use asset and lease liability, consistent with how they were treated under Topic 840.

When the PWGS 1 and PWGS 2 contracts expire in 2030 and 2033, respectively, we may, at our option and with proper notice, choose to renew one or both contracts for up to three consecutive renewal terms (each renewal term would approximate 80% of the then remaining economic useful life of the respective generation unit), purchase one or both generating facilities at fair market value, or allow the contracts to expire.

Elm Road Generating Station

We are leasing ER 1, ER 2, and the common facilities, which are also utilized by our OC 5 through OC 8 generating units, from We Power under PSCW approved leases. We are amortizing the leased units on a straight-line basis over the 30-year term of the leases. ER 1 and ER 2 were placed in service in February 2010 and January 2011, respectively. The lease payments are expected to be recovered through our rates, as supported by Wisconsin's 2001 leased generation law. Due to the timing and the amounts of the minimum lease payments, we expect the regulatory asset to increase to approximately $525.4 million in the year 2028 for ER 1 and to approximately $431.9 million in the year 2029 for ER 2, at which time the regulatory assets will be reduced to zero over the remaining lives of the contracts. The total obligation under the finance leases was $2,204.7 million as of December 31, 2019, and will decrease to zero over the remaining lives of the contracts.

The only variability associated with the ERGS lease payments relates to the potential for future changes in We Power's tax or interest rates, as the positive or negative impact of these changes are generally passed along to us, and subsequently to our customers. Because variability in the lease payments is dependent upon a rate (interest rate or tax rate), the lease payments are considered unavoidable under Topic 842, and are included in the measurement of the right of use asset and lease liability, consistent with how they were treated under Topic 840.

When the ER 1 and ER 2 contracts expire in 2040 and 2041, respectively, we may, at our option and with proper notice, choose to renew one or both contracts for up to three consecutive renewal terms (each renewal term would approximate 80% of the then remaining economic useful life of the respective generation unit), purchase one or both generating facilities at fair market value, or allow the contracts to expire.

Amounts Recognized in the Financial Statements

The components of lease expense and supplemental cash flow information related to our leases for the year ended December 31 are as follows:



(in millions)	2019			2018		2017
Long-term power purchase commitment	$	8.2		$	7.7	$	7.2
We Power leases	363.3			363.3		363.3
Total finance/capital lease expense ⁽¹⁾	$	371.5		$	371.0	$	370.5

Operating lease expense ⁽²⁾	2.6			2.7		3.7
Total lease expense	$	374.1		$	373.7	$	374.2

Other information

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for finance/capital leases ⁽³⁾	$	350.9		$	381.4	$	427.7
Operating cash flows for operating leases	$	2.6		$	2.7	$	3.5
Financing cash flows for finance leases ⁽³⁾	$	50.5

Non-cash activity – right of use assets obtained in exchange for operating lease liabilities	$	13.0

Weighted-average remaining lease term – finance leases	18.6 years
Weighted-average remaining lease term – operating leases	25.0 years

Weighted-average discount rate – finance leases ⁽⁴⁾	13.9		%
Weighted average discount rate – operating leases ⁽⁴⁾	4.5		%

⁽¹⁾

For the year ended December 31, 2019, total finance lease expense included amortization of right of use assets in the amount of $20.6 million (included in depreciation and amortization expense), and interest on lease liabilities of $350.9 million (included in interest expense). For the years ended December 31, 2018, and 2017, total capital lease cost related to the long-term power purchase agreement was included in cost of sales and total capital lease cost related to the PWGS and ERGS units was included in other operation and maintenance.


⁽²⁾	Operating lease expense was included as a component of operation and maintenance for the years ended December 31, 2019, 2018, and 2017.


⁽³⁾	Prior to our adoption of Topic 842 on January 1, 2019, all cash flows related to capital leases were recorded as a component of operating cash flows.


⁽⁴⁾	Because our operating leases do not provide an implicit rate of return, we used the fully collateralized incremental borrowing rates based upon information available for similarly rated companies in determining the present value of lease payments for our operating leases. For our finance leases, the rate implicit in each lease was readily determinable.

The following table summarizes our finance lease right of use assets, which were included in property, plant and equipment on our balance sheets:



(in millions)	December 31, 2019			December 31, 2018
Long-term power purchase commitment
Under finance/capital lease	$	140.3		$	140.3
Accumulated amortization	(126.6		)	(120.9		)
Total long-term power purchase commitment	$	13.7		$	19.4

PWGS
Under finance/capital lease	$	742.7		$	736.9
Accumulated amortization	(367.6		)	(335.9		)
Total PWGS	$	375.1		$	401.0

ERGS
Under finance/capital lease	$	2,194.4		$	2,166.3
Accumulated amortization	(672.8		)	(598.8		)
Total ERGS	$	1,521.6		$	1,567.5

Total finance lease right of use assets/capital lease assets	$	1,910.4		$	1,987.9

Right of use assets related to operating leases were $10.6 million at December 31, 2019, and were included in other long-term assets on our balance sheets.

Future minimum lease payments under our finance and operating leases and the present value of our net minimum lease payments as of December 31, 2019, were as follows:



(in millions)	Total Operating Leases			Power Purchase Commitment			PWGS			ERGS			Total Finance Leases
2020	$	2.6		$	8.8		$	98.5		$	294.4		$	401.7
2021	0.7			9.4			98.5			294.4			402.3
2022	0.5			4.2			98.5			294.2			396.9
2023	0.5			—			98.5			294.1			392.6
2024	0.5			—			98.4			294.0			392.4
Thereafter	13.2			—			681.7			4,558.1			5,239.8
Total minimum lease payments	18.0			22.4			1,174.1			6,029.2			7,225.7
Less: Interest	(7.4		)	(4.0		)	(556.3		)	(3,824.5		)	(4,384.8		)
Present value of minimum lease payments	10.6			18.4			617.8			2,204.7			2,840.9
Less: Short-term lease liabilities	(2.2		)	(6.3		)	(25.4		)	(26.1		)	(57.8		)
Long-term lease liabilities	$	8.4		$	12.1		$	592.4		$	2,178.6		$	2,783.1

Short-term and long-term lease liabilities related to operating leases were included in other current liabilities and other long-term liabilities on the balance sheets, respectively.