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LEASES | 9 Months Ended
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Sep. 30, 2019
Leases [Abstract] |
LEASES | LEASES In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revised the previous guidance (Topic 840) regarding accounting for leases. Revisions include requiring a lessee to recognize a lease asset and a lease liability on its balance sheet for each lease, including operating leases with an initial term greater than 12 months. In addition, required quantitative and qualitative disclosures related to lease agreements were expanded. As required, we adopted Topic 842 effective January 1, 2019. We utilized the following practical expedients, which were available under ASU 2016-02, in our adoption of the new lease guidance.
• | We did not reassess whether any expired or existing contracts were leases or contained leases.
• | We did not reassess the lease classification for any expired or existing leases (that is, all leases that were classified as operating leases in accordance with Topic 840 continue to be classified as operating leases, and all leases that were classified as capital leases in accordance with Topic 840 are classified as finance leases).
• | We did not reassess the accounting for initial direct costs for any existing leases.
We did not elect the practical expedient allowing entities to account for the nonlease components in lease contracts as part of the single lease component to which they were related. Instead, in accordance with Accounting Standards Codification 842-10-15-31, our policy is to account for each lease component separately from the nonlease components of the contract. We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of our right of use assets. No impairment losses were included in the measurement of our right of use assets upon our adoption of Topic 842. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which is an amendment to ASU 2016-02. Land easements (also commonly referred to as rights of way) represent the right to use, access or cross another entity's land for a specified purpose. This new guidance permits an entity to elect a transitional practical expedient, to be applied consistently, to not evaluate under Topic 842 land easements that were already in existence or had expired at the time of the entity's adoption of Topic 842. Once Topic 842 is adopted, an entity is required to apply Topic 842 prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. We elected this practical expedient, resulting in none of our land easements being treated as leases upon our adoption of Topic 842. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if required. We used the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented. We did not require a cumulative-effect adjustment upon adoption of Topic 842. Right of use assets and related lease liabilities related to our operating leases that were recorded upon adoption of Topic 842 were $49.0 million and $48.8 million, respectively. Regarding our power purchase agreement that meets the criteria of a finance lease, while the adoption of Topic 842 changed the classification of expense related to this lease on a prospective basis, it had no impact on the total amount of lease expense recorded, and did not impact the lease asset and related liability amounts recorded on our balance sheets. 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, through April 2029.
• | Land we are leasing related to our Rothschild biomass plant through June 2051, and also a land lease related to a non-utility solar facility through December 2034.
• | 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 Leases 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 statements.
• | 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 $19.7 million at September 30, 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 will be amortized over the 50-year extended term of the leases. The lease payments are expected to 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 Two Creeks was $7.7 million as of September 30, 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 1,500 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 will be amortized over the extended term of the leases. The lease payments are expected to 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 $21.0 million as of September 30, 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 three and nine months ended September 30 are as follows:
|  | Three Months Ended September 30 |  | Nine Months Ended September 30
(in millions) |  | 2019 |  | 2018 |  | 2019 |  | 2018
Finance/capital lease expense (1) |  | $ | 2.1 |  |  | $ | 2.0 |  |  | $ | 6.2 |  |  | $ | 5.8 |
Operating lease expense (2) |  | 1.3 |  |  | 1.4 |  |  | 4.1 |  |  | 4.2 |
Short-term lease expense (2) |  | 0.1 |  |  | 0.1 |  |  | 0.2 |  |  | 0.8 |
Total lease expense |  | $ | 3.5 |  |  | $ | 3.5 |  |  | $ | 10.5 |  |  | $ | 10.8 |
Other information |  |  |  |  |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |  |
Operating cash flows for finance/capital leases (3) |  |  |  |  |  | $ | 2.6 |  |  | $ | 5.8 |
Operating cash flows for operating leases |  |  |  |  |  | $ | 4.9 |  |  | $ | 4.9 |
Financing cash flows for finance leases (3) |  |  |  |  |  | $ | 3.6 |  |  | $ | — |
Non-cash activities: |  |  |  |  |  |  |  |
Right of use assets obtained in exchange for finance lease liabilities |  |  |  |  |  | $ | 28.7 |  |  |
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 |  |  |  |  |  | 13.0 years |  |  |
Weighted average discount rate – finance leases (4) |  |  |  |  |  | 6.8 | % |  |
Weighted average discount rate – operating leases (4) |  |  |  |  |  | 4.4 | % |  |
(1) | For the three and nine months ended September 30, 2019, finance lease expense included amortization of right of use assets in the amount of $1.3 million and $3.6 million (included in depreciation and amortization expense), respectively, and interest on lease liabilities of $0.8 million and $2.6 million (included in interest expense), respectively. For each of the three and nine months ended September 30, 2018, total capital lease cost 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 three and nine months ended September 30, 2019 and 2018.
(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:
(in millions) |  | September 30, 2019 |  | December 31, 2018
Long-term power purchase commitment |  |  |  |
Under finance/capital lease |  | $ | 140.3 |  |  | $ | 140.3 |
Accumulated amortization |  | (125.2 | ) |  | (120.9 | )
Total long-term power purchase commitment |  | $ | 15.1 |  |  | $ | 19.4 |
Two Creeks land leases |  |  |  |
Under finance leases |  | $ | 7.7 |  |  | $ | — |
Accumulated amortization |  | — |  |  | — |
Total Two Creeks land leases |  | $ | 7.7 |  |  | $ | — |
Badger Hollow I land leases |  |  |  |
Under finance leases |  | $ | 21.0 |  |  | $ | — |
Accumulated amortization |  | — |  |  | — |
Total Badger Hollow I land leases |  | $ | 21.0 |  |  | $ | — |
Total finance lease right of use assets/capital lease asset |  | $ | 43.8 |  |  | $ | 19.4 |
Right of use assets related to operating leases were $43.8 million at September 30, 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 September 30, 2019, were as follows:
(in millions) |  | Total Operating Leases |  | Power Purchase Commitment |  | Two Creeks |  | Badger Hollow I |  | Total Finance Leases
Three months ending December 31, 2019 |  | $ | 1.1 |  |  | $ | 2.0 |  |  | $ | 0.1 |  |  | $ | 0.1 |  |  | $ | 2.2 |
2020 |  | 6.9 |  |  | 8.8 |  |  | 0.2 |  |  | 0.4 |  |  | 9.4 |
2021 |  | 4.9 |  |  | 9.4 |  |  | 0.2 |  |  | 0.7 |  |  | 10.3 |
2022 |  | 4.9 |  |  | 4.2 |  |  | 0.2 |  |  | 0.7 |  |  | 5.1 |
2023 |  | 5.0 |  |  | — |  |  | 0.2 |  |  | 0.7 |  |  | 0.9 |
2024 |  | 4.8 |  |  | — |  |  | 0.2 |  |  | 0.8 |  |  | 1.0 |
Thereafter |  | 30.5 |  |  | — |  |  | 22.8 |  |  | 57.7 |  |  | 80.5 |
Total minimum lease payments |  | 58.1 |  |  | 24.4 |  |  | 23.9 |  |  | 61.1 |  |  | 109.4 |
Less: Interest |  | (14.9 | ) |  | (4.7 | ) |  | (16.2 | ) |  | (40.1 | ) |  | (61.0 | )
Present value of minimum lease payments |  | 43.2 |  |  | 19.7 |  |  | 7.7 |  |  | 21.0 |  |  | 48.4 |
Less: Short-term lease liabilities |  | (4.4 | ) |  | (5.9 | ) |  | — |  |  | — |  |  | (5.9 | )
Long-term lease liabilities |  | $ | 38.8 |  |  | $ | 13.8 |  |  | $ | 7.7 |  |  | $ | 21.0 |  |  | $ | 42.5 |
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. Significant Judgments and Other Information We are currently party to several easement agreements that allow us access to land we do not own for the purpose of constructing and maintaining certain electric power and natural gas equipment. The majority of payments we make related to easements relate to our wind generating facilities. We have not classified our easements as leases because we view the entire parcel of land specified in our easement agreements to be the identified asset, not just that portion of the parcel that contains our easement. As such, we have concluded that we do not control the use of an identified asset related to our easement agreements, nor do we obtain substantially all of the economic benefits associated with these shared-use assets. As of November 7, 2019, we have not entered into any material leases that have not yet commenced.

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- Definition The entire disclosure for finance and operating leases of a lessee. Includes, but is not limited to, a description of the lessee's finance and operating leases and a maturity analysis of the lessee's finance and operating lease liabilities. + References No definition available. + Details
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