Leases

6 Months Ended

Jun. 30, 2019

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 2019 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 January 1, 2019 we adopted new lease accounting guidance (see Note 13). We elected the transition method that allows us to apply the new lease guidance on the date of adoption, January 1, 2019, and will not retrospectively adjust prior periods. We also elected certain transition practical expedients that allow us to not reassess (a) whether any expired or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases and (c) initial direct costs for any existing leases. These practical expedients apply to leases that commenced prior to January 1, 2019. Furthermore, we elected the practical expedient transition provisions relating to the treatment of existing land easements.

On January 1, 2019 the adoption of this new accounting standard resulted in the recognition on our Condensed Consolidated Balance Sheets of approximately $194 million of right-of-use lease assets and $119 million of lease liabilities relating to our operating lease arrangements. The right-of-use lease assets include $85 million of prepaid lease costs that have been reclassified from other deferred debits, and $10 million of deferred lease costs that have been reclassified from other current liabilities. In addition to these balance sheet impacts, the adoption of the guidance resulted in expanded lease disclosures, which are included below.

The following tables provide information related to our lease costs for the three and six months ended June 30, 2019 (dollars in thousands):



	Three Months Ended June 30, 2019
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	14,063	$	4,414	$	18,477
Variable lease cost	41,529		360		41,889
Short-term lease cost	—		1,812		1,812
Total lease cost	$	55,592	$	6,586	$	62,178



	Six Months Ended June 30, 2019
	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
Operating lease cost	$	14,063	$	8,762	$	22,825
Variable lease cost	58,820		360		59,180
Short-term lease cost	—		2,665		2,665
Total lease cost	$	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 at June 30, 2019 (dollars in thousands):



	June 30, 2019
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2019 (remaining six months of 2019)	$	49,051	$	7,335	$	56,386
2020	—		12,868		12,868
2021	—		10,029		10,029
2022	—		6,988		6,988
2023	—		5,838		5,838
2024	—		3,691		3,691
Thereafter	—		38,506		38,506
Total lease commitments	49,051		85,255		134,306
Less imputed interest	294		20,411		20,705
Total lease liabilities	$	48,757	$	64,844	$	113,601

We recognize lease assets and liabilities upon lease commencement. At June 30, 2019, we have additional lease arrangements that have been executed, but have not yet commenced. These arrangements primarily relate to purchased power lease contracts. These leases have commencement dates beginning in June 2020 with terms ending through October 2027. We expect the total fixed consideration paid for these arrangements, which includes both lease and nonlease payments, will approximate $705 million over the term of the arrangements.

The following table provides information related to estimated future minimum operating lease payments at December 31, 2018 (dollars in thousands):



	December 31, 2018
Year	Purchased Power Lease Contracts		Land, Property & Equipment Leases		Total
2019	$	54,499	$	13,747	$	68,246
2020	—		12,428		12,428
2021	—		9,478		9,478
2022	—		6,513		6,513
2023	—		5,359		5,359
Thereafter	—		42,236		42,236
Total future lease commitments	$	54,499	$	89,761	$	144,260

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



	June 30, 2019
Weighted average remaining lease term	8 years
Weighted average discount rate (a)	3.84	%

(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, 2019
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows (dollars in thousands):	$	11,987