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Leases

9 Months Ended

Sep. 30, 2020

Leases. As a lessee, we have a relatively small portfolio of leases with the most significant being our 60% undivided interest in Scherer Unit No. 2 and railcar leases for the transportation of coal. We also have various other leases of minimal value.

We classify our four Scherer Unit No. 2 leases as finance leases and our railcar leases as operating leases. We have made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from short-term leases, leases having an initial term of 12 months or less, for any class of underlying asset. We recognize lease expense for short-term leases on a straight-line basis over the lease term. Lease expense recognized for our short-term leases during the nine months ended September 30, 2020 and September 30, 2019 was insignificant.

Finance Leases

Three of our Scherer Unit No. 2 finance leases have lease terms through December 31, 2027, and one lease extends through June 30, 2031. At the end of the leases, we can elect at our sole discretion to:

•Renew the leases for a period of not less than one year and not more than five years at fair market value,

•Purchase the undivided interest at fair market value, or

•Redeliver the undivided interest to the lessors.

For rate-making purposes, we include the actual lease payments for our finance leases in our cost of service. The difference between lease payments and the aggregate of the amortization on the right-of-use asset and the interest on the finance lease obligation is recognized as a regulatory asset. Finance lease amortization is recorded in depreciation and amortization expense.

Operating Leases

Our railcar operating leases have terms that extend through March 16, 2024. At the end of the railcar operating leases, we can renew at terms mutually agreeable by us and the lessors, purchase the assets or return the assets to the lessors. We have an additional operating lease that has a term that extends through February 2042 with one renewal option for a 20 year term.

The exercise of renewal options for our finance and operating leases is at our sole discretion.

As all of our operating leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the time new lease agreements are entered into or reassessed to determine the present value of lease payments.

For lease agreements entered into or reassessed after the adoption of the new leases standard, we combine lease and nonlease components.


Classification	September 30, 2020		December 31, 2019
	(dollars in thousands)
Right-of-Use Assets—Finance leases
Right-of-use assets	$	302,732	$	302,732
Less: Accumulated provision for depreciation	(261,457)		(257,504)
Total finance lease assets	$	41,275	$	45,228
Lease liabilities—Finance leases
Obligations under finance leases	$	72,354	$	75,649
Long-term debt and finance leases due within one year	6,418		6,081
Total finance lease liabilities	$	78,772	$	81,730


Classification	September 30, 2020		December 31, 2019
	(dollars in thousands)
Right-of-Use Assets—Operating leases
Electric plant in service	$	3,550	$	3,237
Total operating lease assets	$	3,550	$	3,237
Lease liabilities—Operating leases
Capitalization—Other	$	2,553	$	2,293
Other current liabilities	1,010		1,252
Total operating lease liabilities	$	3,563	$	3,545


		Three months ended				Nine months ended
Lease Cost	Classification	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
		(dollars in thousands)
Finance lease cost:
Amortization of leased assets	Depreciation and amortization	$	1,344	$	1,189	$	4,032	$	3,567
Interest on lease liabilities	Interest expense	2,217		2,372		6,651		7,116
Operating lease cost:	Inventory(1) & production expense	286		542		1,081		2,308
Total leased cost		$	3,847	$	4,103	$	11,764	$	12,991

(1) The majority of our operating lease costs relates to our railcar leases and such costs are added to the cost of our fossil-fuel inventories and are recognized in fuel expense as the inventories are consumed.


	September 30, 2020		December 31, 2019
Lease Term and Discount Rate:
Weighted-average remaining lease term (in years)
Finance leases	8.10		8.84
Operating leases	7.39		7.39
Weighted-average discount rate:
Finance leases	11.05	%	11.05	%
Operating leases	4.66	%	5.12	%


	Nine months ended
	September 30, 2020		September 30, 2019
	(dollars in thousands)
Other Information:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	4,516	$	4,817
Operating cash flows from operating leases	$	1,301	$	2,602
Financing cash flows from finance leases	$	2,959	$	2,658
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	6,983

Maturity analysis of our finance and operating lease liabilities as of September 30, 2020 is as follows:


	(dollars in thousands)
Year Ending December 31,	Finance Leases		Operating Leases		Total
2020	$	7,475	$	261	$	7,736
2021	14,949		1,119		16,068
2022	14,949		929		15,878
2023	14,949		708		15,657
2024	14,949		234		15,183
Thereafter	55,532		1,085		56,617
Total lease payments	$	122,803	$	4,336	$	127,139
Less: imputed interest	(44,031)		(773)		(44,804)
Present value of lease liabilities	$	78,772	$	3,563	$	82,335

As a lessor, we primarily lease office space to several tenants within our headquarters building. Several of these tenants are related parties. We account for all of these lease agreements as operating leases.

Lease income recognized during the three and nine months ended September 30, 2020 and September 30, 2019 was as follows:


	Three Months Ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Lease income	$	1,543	$	1,514	$	4,633	$	4,554

Leases