Leases

3 Months Ended

Mar. 31, 2025

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 and energy storage agreements that qualify as lease arrangements. Our leases have remaining terms that expire in 2025 through 2073. 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 8 for a discussion of VIEs.

APS has purchased power lease agreements that 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 the leased assets. APS controls the dispatch of the leased assets during the months of use 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. In addition to the fixed monthly capacity payments, APS must also pay variable charges based on the actual production volume of the assets. The variable consideration is not included in the measurement of our lease obligation.

APS has executed various energy storage purchased power lease agreements that allow APS the right to charge and discharge energy storage facilities. APS pays a fixed monthly capacity price for rights to use the lease assets. The agreements generally have 20-year lease terms and provide APS with the exclusive use of the energy storage assets through the lease term. APS does not operate or maintain the energy storage facilities and has no purchase options or residual value guarantees relating to these lease assets. For this class of energy storage lease assets, APS has elected to separate the lease and non-lease components. These leases are accounted for as operating leases, with lease terms that commenced between September 2023 and March 2025.

The following table provides information related to our lease costs (dollars in thousands):


	Three Months Ended March 31,
	2025		2024
Operating Lease Cost - Purchased Power and Energy Storage Lease Contracts	$	12,547	$	937
Operating Lease Cost - Land, Property, and Other Equipment	5,337		4,773
Total Operating Lease Cost	17,884		5,710
Variable Lease Cost (a)	21,370		21,564
Short-term Lease Cost	592		2,800
Total Lease Cost	$	39,846	$	30,074

(a) Primarily relates to purchased power lease contracts.

Lease costs are primarily included as a component of operating expenses on our Condensed Consolidated Statements of Income. Lease costs relating to purchased power and energy storage 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 6. 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 sheets.

The following table provides information related to the maturity of our operating lease liabilities (dollars in thousands):


	March 31, 2025
Year	Purchased Power and Energy Storage Lease Contracts		Land, Property and Equipment Leases		Total
2025 (remaining nine months of 2025)	$	197,622	$	12,933	$	210,555
2026	236,859		14,891		251,750
2027	262,780		12,310		275,090
2028	266,577		9,641		276,218
2029	270,514		7,516		278,030
2030	274,492		4,392		278,884
Thereafter	1,850,659		57,475		1,908,134
Total lease commitments	3,359,503		119,158		3,478,661
Less imputed interest	1,036,548		40,691		1,077,239
Total lease liabilities	$	2,322,955	$	78,467	$	2,401,422

We recognize lease assets and liabilities upon lease commencement. As of March 31, 2025, we have various lease arrangements that have been executed, but have not yet commenced. We expect the total fixed consideration paid for these arrangements, which includes both lease and non-lease payments, will approximate $14.8 billion over the terms of the agreements. These arrangements primarily relate to energy storage assets. We expect lease commencement dates ranging from April 2025 through June 2028, with lease terms expiring through June 2048. The lease commencement dates for certain arrangements have experienced delays. As a result of these delays and other events, APS has received cash proceeds from certain lessors prior to lease commencement. Proceeds received from lessors relating to energy storage Power Purchase Agreement (“PPA”) leases are accounted for as lease incentives on our Condensed Consolidated Balance Sheets, and upon lease commencement are amortized over the associated lease term. For regulatory purposes, the proceeds received by APS relating to these PPA leases are treated as a reduction to fuel and purchased power costs through the PSA in the period proceeds are received. See Note 6.

The following tables provide other additional information related to operating lease liabilities (dollars in thousands):


	Three Months Ended March 31,
	2025			2024
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows:	$	17,207		$	3,544
Right-of-use operating lease assets obtained in exchange for operating lease liabilities:	$	763,437	(a)	$	6,747


	March 31, 2025		December 31, 2024
Weighted average remaining lease term	14 years		11 years
Weighted average discount rate (b)	5.17	%	4.90	%

(a)Primarily relates to the three new energy storage operating lease agreements that commenced in 2025.

(b)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.