LEASES

PGE determines if an arrangement is a lease at inception and whether the arrangement is classified as an operating or finance lease. At commencement of the lease, PGE records a right-of-use (ROU) asset and lease liability in the condensed consolidated balance sheets based on the present value of lease payments over the term of the arrangement. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent PGE's obligation to make lease payments arising from the lease. If the implicit rate is not readily determinable in the contract, PGE uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Contract terms may include options to extend or terminate the lease, and when the Company deems it is reasonably certain that PGE will exercise that option it is included in the ROU asset and lease liability. Operating leases will reflect lease expense on a straight-line basis, while finance leases will result in the separate presentation of interest expense on the lease liability and amortization expense of the right-of-use asset. Any material differences between expense recognition and timing of payments will be deferred as a regulatory asset or liability in order to match what is being recovered in customer prices.

PGE does not record leases with a term of 12-months or less in the condensed consolidated balance sheet. Total short-term lease cost for the three months ended March 31, 2019 is immaterial. PGE has lease agreements with lease and non-lease components, which are accounted for separately.

The Company’s leases relate primarily to the use of land, support facilities, and power purchase agreements that rely on identified plant. Variable payments are generally related to power purchase agreements for components dependent upon energy production, and are not included in the determination of the present value of lease payments.

The components of lease cost were as follows (in millions):



	Three Months Ended March 31, 2019

Operating lease cost	$	1

Variable lease cost	$	9

Supplemental information related to amounts and presentation of leases in the condensed consolidated balance sheets is presented below (in millions):



	Balance Sheet Classification	March 31, 2019
Operating Leases:
Operating lease right-of-use assets	Other noncurrent assets	$	41

Current operating lease liabilities	Accrued expenses and other current liabilities	5
Noncurrent operating lease liabilities	Other noncurrent liabilities	36
Total operating lease liabilities		$	41

Finance Leases:
Finance lease right-of-use assets	Electric utility plant, net	$	2

Current finance lease liabilities	Accrued expenses and other current liabilities	—
Noncurrent finance lease liabilities	Other noncurrent liabilities	2
Total finance lease liabilities		$	2

Lease term and discount rates were as follows:



	March 31, 2019
Weighted Average Remaining Lease Term
Operating leases	30 years
Finance leases	4 years

Weighted Average Discount Rate
Operating leases	3.8	%
Finance leases	3.4	%

As of March 31, 2019, maturities of lease liabilities were as follows (in millions):



	Operating Leases			Finance Leases

2019	$	4		$	—
2020	5			—
2021	5			1
2022	5			1
2023	5			—
Thereafter	53			—
Total lease payments	$	77		$	2
Less imputed interest	(36		)	—
Total	$	41		$	2

Supplemental cash flow information related to leases was as follows (in millions):



	Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1

As of March 31, 2019, PGE has an additional operating lease for a power purchase agreement and a finance lease for a gas storage agreement, neither of which have commenced, with an estimated present value of future lease payments of $15 million and $130 million, respectively. These operating and finance leases are expected to commence in 2019 with lease terms of five and 30 years, respectively.

2018 Lease Obligations

As of December 31, 2018, and pursuant to historical lease accounting under Topic 840, PGE’s estimated future minimum lease payments pursuant to capital, build-to-suit, and operating leases for the following five years and thereafter are as follows (in millions):



	Future Minimum Lease Payments
	Capital Leases			Build-to-Suit		Operating Leases
2019	$	6		$	11	$	4
2020	6			14		5
2021	6			13		5
2022	6			13		6
2023	5			13		7
Thereafter	67			225		97
Total minimum lease payments	96			$	289	$	124
Less imputed interest	(47		)
Present value of net minimum lease payments	49
Less current portion	(2		)
Noncurrent portion	$	47

Capital Leases—PGE entered into agreements to purchase natural gas transportation capacity via a 24-mile natural gas pipeline, Carty Lateral, that was constructed to serve the Carty facility. The Company has entered into a 30-year agreement to purchase the entire capacity of Carty Lateral, which is approximately 175,000 decatherms per day. At the end of the initial contract term, the Company has the option to renew the agreement in continuous three-year increments with at least 24 months prior written notice.

As of December 31, 2018, a capital lease asset of $57 million and accumulated amortization of such assets of $8 million was reflected within Electric utility plant, net in the condensed consolidated balance sheets. The present value of the future minimum lease payments due under the agreement included $2 million within Accrued expenses and other current liabilities and $47 million in Other noncurrent liabilities on the condensed consolidated balance sheets. For ratemaking purposes capital leases are treated as operating leases; therefore, in accordance with the accounting rules for regulated operations, the amortization of the leased asset is based on the rental payments recovered from customers. Amortization of the leased asset of $3 million and interest expense of $4 million was recorded to Purchased power and fuel expense in the consolidated statements of income through December 31, 2018 and 2017. Pursuant to the adoption of the new lease accounting standard, Topic 842, PGE derecognized the capital lease obligation and related capital lease asset as it no longer met the definition of a lease.

Build-to-suit—PGE entered into a 30-year lease agreement with a local natural gas company, NW Natural, to expand their current natural gas storage facilities, including the development of an underground storage reservoir and construction of a new compressor station and 13-miles of pipeline, which are collectively designed to provide no-notice storage and transportation services to PGE’s PW1, PW2, and Beaver natural gas-fired generating plants. Pursuant to the agreement, in September 2016, PGE issued NW Natural a Notice To Proceed with construction of the expansion project, which the gas company estimates construction will be completed during the second quarter of 2019, at a cost of approximately $149 million. Due to the level of PGE’s involvement during the construction period, the Company is deemed to be the owner of the assets for accounting purposes during the construction period. As a result, PGE recorded $131 million to Construction work-in-progress within Electric utility plant, net and a corresponding liability for the same amount to Other noncurrent liabilities in the condensed consolidated balance sheets as of December 31, 2018. Pursuant to the adoption of the new lease accounting standard, Topic 842, PGE derecognized the build-to-suit assets and liabilities as they are no longer considered to meet the build-to-suit criteria under the new standard.

The table above reflects PGE’s estimated future minimum lease payments pursuant to the agreement based on estimated costs.

Operating leases—PGE has various operating leases associated with leases of land, support facilities, and power purchase agreements that rely on identified plant that expire in various years, extending through 2096. Rent expense was $7 million in 2018 and $9 million in 2017. Contingent rents related to power purchase agreements was $14 million in 2018.

Sublease income was $4 million in 2018 and 2017.