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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.


•	Leases of office space, primarily related to several floors we are leasing in the Aon Center office building in Chicago, Illinois, though April 2029.


•	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.

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 Lease

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. 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.

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


•	We recorded our minimum lease payments as purchased power expense in cost of sales on our income statement.


•	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 this finance lease did not change, 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.


•	In accordance with Topic 980-842, the timing of lease expense did not change for this finance lease 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.

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.

Two Creeks Solar Project

Related to its investment in Two Creeks, WPS, along with an unaffiliated utility, entered into several land leases in Manitowoc County, Wisconsin that commenced in the third quarter of 2019. The leases with unaffiliated parties are for a total of approximately 600 acres of land. Each lease has an initial term of 30 years with two optional 10-year extensions. We expect the two optional extensions to be exercised, and, as a result, the land leases are being amortized over the 50-year extended term of the leases. The lease payments are being recovered through rates.

We treat these land lease contracts as operating leases for rate-making purposes. Our total obligation under the finance leases for Two Creeks was $7.7 million as of December 31, 2019, and will decrease to zero over the remaining lives of the leases.

Badger Hollow Solar Farm I

Related to its investment in Badger Hollow I, WPS, along with an unaffiliated utility, entered into several land leases in Iowa County, Wisconsin that commenced in the third quarter of 2019. The leases are for a total of approximately 1,400 acres of land. Each lease has an initial construction term that ends upon achieving commercial operation, then automatically extends for 25 years with an option for an additional 25-year extension. We expect the optional extension to be exercised, and, as a result, the land leases are being amortized over the extended term of the leases. The lease payments will be recovered through rates.

We treat these land lease contracts as operating leases for rate-making purposes. Our total obligation under the finance leases for Badger Hollow I was $19.8 million as of December 31, 2019, and will decrease to zero over the remaining lives of the leases.

Amounts Recognized in the Financial Statements

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



(in millions)	2019			2018		2017
Finance/capital lease expense ⁽¹⁾	$	8.2		$	7.7	$	7.2
Operating lease expense ⁽²⁾	5.5			5.6		6.4
Short-term lease expense ⁽²⁾	0.6			1.5		0.8
Total lease expense	$	14.3		$	14.8	$	14.4

Other information

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance/capital leases ⁽³⁾	$	3.3		$	7.7	$	7.2
Operating cash flows from operating leases	$	6.0		$	6.5	$	7.1
Financing cash flows from finance leases ⁽³⁾	$	4.9

Non-cash activities:
Right of use assets obtained in exchange for finance lease liabilities	$	27.2
Right of use assets obtained in exchange for operating lease liabilities	$	49.0

Weighted-average remaining lease term – finance leases	31.5 years
Weighted-average remaining lease term – operating leases	12.9 years

Weighted-average discount rate – finance lease ⁽⁴⁾	6.7		%
Weighted average discount rate – operating leases ⁽⁴⁾	4.4		%

⁽¹⁾

For the year ended December 31, 2019, finance lease expense included amortization of right of use assets in the amount of $4.9 million (included in depreciation and amortization expense) and interest on lease liabilities of $3.3 million (included in interest expense). For the years ended December 31, 2018 and 2017, total capital lease expense related to the long-term power purchase agreement was included in cost of sales.


⁽²⁾	Operating and short-term lease expense were 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 the finance lease 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 power purchase agreement that meets the definition of a finance lease, the rate implicit in the lease was readily determinable. For our solar land leases that are finance leases, we used the fully collateralized incremental borrowing rates based upon information available for similarly rated companies in determining the present value of lease payments.

The following table summarizes our finance lease right of use assets, which were included in property, plant and equipment on our balance sheets at December 31:



(in millions)	2019			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

Two Creeks land leases
Under finance leases	$	7.7		$	—
Accumulated amortization	(0.1		)	—
Total Two Creeks land leases	$	7.6		$	—

Badger Hollow I land leases
Under finance leases	$	19.5		$	—
Accumulated amortization	(0.2		)	—
Total Badger Hollow I land leases	$	19.3		$	—

Total finance lease right of use assets/capital lease asset	$	40.6		$	19.4

Right of use assets related to operating leases were $41.4 million at December 31, 2019, and were included in other long-term assets on our balance sheets.

Future minimum lease payments under our operating leases and our finance 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			Two Creeks			Badger Hollow I			Total Finance Leases
2020	$	6.8		$	8.8		$	0.2		$	0.3		$	9.3
2021	4.8			9.4			0.2			0.7			10.3
2022	4.8			4.2			0.2			0.7			5.1
2023	4.9			—			0.2			0.7			0.9
2024	4.8			—			0.2			0.7			0.9
Thereafter	30.1			—			22.8			53.4			76.2
Total minimum lease payments	56.2			22.4			23.8			56.5			102.7
Less: Interest	(14.8		)	(4.0		)	(16.1		)	(36.7		)	(56.8		)
Present value of minimum lease payments	41.4			18.4			7.7			19.8			45.9
Less: Short-term lease liabilities	(4.4		)	(6.3		)	—			—			(6.3		)
Long-term lease liabilities	$	37.0		$	12.1		$	7.7		$	19.8		$	39.6

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.

At December 31, 2018, short-term and long-term liabilities under our capital lease were $4.9 million and $18.4 million, respectively. Short-term and long-term lease liabilities related to our finance/capital leases were included in current portion of long-term debt and long-term debt on the balance sheets, respectively.