TEC determines whether a contract contains a lease at inception by evaluating if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Operating lease ROU assets and operating lease liabilities are recognized on the Consolidated Condensed Balance Sheets based on the present value of the future minimum lease payments over the lease term at commencement date. As most of TEC’s leases do not provide an implicit rate, the incremental borrowing rate at commencement of the lease is used in determining the present value of future lease payments. Lease expense is recognized on a straight-line basis over the lease term and is recorded as “Operations and maintenance expenses” on the Consolidated Condensed Statements of Income.

Where TEC is the lessor, a lease is a sales-type lease if certain criteria are met and the arrangement transfers control of the underlying asset to the lessee. For arrangements where the criteria are met due to the presence of a third-party residual value guarantee, the lease is a direct financing lease.

For direct finance leases, a net investment in the lease is recorded that consists of the sum of the minimum lease payments and residual value (net of estimated executory costs and unearned income). The difference between the gross investment and the cost of the leased item is recorded as unearned income at the inception of the lease. Unearned income is recognized in income over the life of the lease using a constant rate of interest equal to the internal rate of return on the lease.

TEC has certain contractual agreements that include lease and non-lease components, which management has elected to account for as a single lease component for all leases.

TEC has operating leases for buildings, land, telecommunication services and rail cars. TEC’s leases have remaining lease terms of 2 years to 67 years, some of which include options to extend the leases for up to an additional 65 years. These options are included as part of the lease term when it is considered reasonably certain that they will be exercised.

(millions)	Classification	September 30, 2019
Right-of-use asset	Other deferred debits	$	28
Lease liabilities
Current	Other current liabilities	$	1
Long-term	Deferred credits and other liabilities		28
Total lease liabilities		$	29

TEC has recorded operating lease expense for the three and nine months ended September 30, 2019 of $1 million and $3 million, respectively.

Future minimum lease payments under non-cancellable operating leases for each of the next five years and in aggregate thereafter consisted of the following at September 30, 2019:


(millions)	2019		2020		2021		2022		2023		Thereafter		Total
Minimum lease payments	$	1	$	2	$	3	$	3	$	3	$	53	$	65
Less imputed interest														(36	)
Total future minimum payments													$	29

Nine months ended September 30,	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases (millions)	$	3
Right-of-use assets obtained in exchange for lease obligations:
Operating leases (millions)	$	11
Weighted average remaining lease term (years)		43
Weighted average discount rate - operating leases		4.3	%

TEC leases CNG stations to other companies, which are classified as direct finance leases. The net investment in direct finance leases consists of the following:

(millions)	September 30, 2019
Total minimum lease payments to be received	$	34
Less amounts representing estimated executory costs		(13	)
Minimum lease payments receivable	$	21
Less unearned finance lease income		(11	)
Net investment in direct finance leases	$	10
Principal due within one year (included in "Receivables")		(2	)
Net investment in direct finance leases - long-term (included in "Other deferred debits")	$	8

The unearned income related to these direct finance leases is recognized in income over the life of the lease using a constant rate of interest equal to the internal rate of return on the lease and is recorded as “Gas revenues” on the Consolidated Condensed Statements of Income. Customers have the option to purchase the assets related to the CNG stations at any time after year five of the agreement, which is in 2021, by paying a make-whole payment at the date of the purchase based on a targeted internal rate of return. Alternatively, the customer may take possession of the CNG station asset at the end of the lease term for no cost.

As of September 30, 2019, future minimum direct finance lease payments to be received for each of the next five years and in aggregate thereafter consisted of the following:


(millions)	2019		2020		2021		2022		2023		Thereafter		Total
Minimum lease payments to be received	$	1	$	2	$	2	$	2	$	2	$	25	$	34
Less executory costs														(13	)
Total minimum lease payments receivable													$	21