572/24, 658 PM 2.3 Evaluating other contracts for leases = pwe Viewpoint 2.3 Evaluating other contracts for leases Publication date: 31 Mar 2028 Us tities guide Uniti and powor companies enter other arangements inching lan easoments, storage contracts, and transportation contracts, that may lea be leases, Wrile the evalustion of hese contract snouls ganeraly folow the same process desorbed In UP 2.2, certain nuances these contracts ean make the lease assessment mate challenging, 2.3.1 Land easements Land easements (or ights of way) represent tho right to use, access, or cross anothor entity's and for an identified purpose. Easements are typically acquired by repartng enti to construct assets auch a8 tansssion or dstbution lines, pipelines, or col phone towers. Easemonts may involve righ to construct assets an the surface ofthe garth Yard or surace rights) or below the earth underground or subs.tace rights). Eagoments may also involve the ably to use space above the land (righ). n dition, easements often permit the grantor to contin to access and use the land forts awn purposes. [An easement may grant citferent igh to diferent aspects of a property (e.g, surface, subsurface, a. n some instances, reporting ently may obtain the right to access a parcel a anc ac have atonal rights toa potion ofthat land (6. may have exclusive access to part ofthe property whee thas the ight ta construct certain assets). Because of tis, determining whether an easement arrangement contains a lease requtes judgment. Section UP 2.3.1.1 through UP 2.8.1.8 duane the key stops in determining whether en easement arrengemert contains a lease, Tis analyse flows the lase ‘valuation ramework discussed in UP 2.2. See also (G 23 for urtherelecussion onthe lease evaluation framework ‘Question UP 2-10 Does a land wasoment that provides for perpetual uso rights moot tho dofiiton ofa leas? PwC response Ik depends. land easement arangement may provide for perpetual use rights. To qualify as @ ease, an arrangement rust convey aight to use an denied asset fora period of time. Therefore, a contract that does nol contain a dete term would be outsce the scope of ASC 842. A reporting entity must consider the substance of the easement in determining wrether ts tly porptual For example, the perpetual provision ina “pay-as-you-go” easement that provides the right fo use land indefinitely may not be substantive Ifthe easemert holder can terminate the arrangement at fy time by merely stopping the payments In this instance, the catract ssi to a contrac with perpetual renewal periods. I tho easement is or contains a lease, an entity must Gotermine how mary ofthe ranewal periods are reasonably arta of exercise by thelesaee when assessing the lease term. 2.3.1.1 Land easements: Is the arrangement explicitly scoped out of ASC 842? ‘Areporing entity should consider whether the right to use the assets scoped out of ASC 842. For example, an easement may be an intangible asset an equred to be accounted for in accordance wth ASC: 850, tangible Assets ‘ASC 350-10-20 detines intangible assets as “asses rot inclucng francil assets) that lack physical substance." ASC '805-20-55-87 provides examples of contract-based itargible assets, Inclucing use rghts, such as dln, water, a, timber cutting, and route authorities. As such an arrangement that provides for ar us rights isan intangible asset. ln sccordsnce with ASC 842-10-15-1,tangibe assets are outside the scope of ASC: 82 Many atrangements that provide for underground or subsurface rigs (gnts to space below the earth's surface) are ‘similar toa use rights Wo believe rights to ary spaces that cannot be inhabited or accused by human bolngs, such as ir rights or rights to construct some underground pipelines, could be eccourted fr as intangible assets Figure UP 2-4 Examples of tangle ad intangible rghis Property, plant, or equipment Perangoment relate to: ‘Arrangement lates to © ‘Surface land rights © Air rights © Underground or subsurface rights. © Underground or subsurface rights and the space may be accessed and the space cannot be or inhabited (e.g., basement levels accessed or inhabited (e.g., rights of a building, subway tunnels) htips:lviewpoint pwe.comidtluslenfpwelaccounting_quidestutities_and_power /utlites_and_power_USichapter_2 leases US/2 4 evaluatin... 1/105124, 6:58 Mt 28 Evaluating other contract for eases to construct an underground pipeline) It a contract conveys both surface ane subsurface land righ, reporting entitles should evaluat the rights separately, Such arrangements may include lease and norlease component 2.3.1.2 Land easements: Is there an identified asset? Irthe arangement is within the scope of ASC 842, the reporting entity will peed to evalat I the anangement involves fn identified aset, Land easements generally mest th identifies asset criterion on the basis ratte ransacton invoNs an expe portion ofan idertfed asset. Reporting etties may sso need to consider whether a ight of way rangement contins more than one ientiied asset, For example, some land easements for an isentifed parcel of and sllow the grantee to use potion ofthe parcel ora specie ar imted purpose. This type of arrangement may cartin, two identified asses, Reporting entes should roview tho rights provided by the easoment arrangement. H mor than one ientiied asset tot, each should be evahated to determine it fs subject toa fase Figure UP 2-4 inchades examples of identified assets within atypical easement arrangement. Figure UP 2-5 Examples of identi asset in a easement rangement Identified asset Examples (One identified asset ‘Surface lad rahi fra single parcel Muto identifed assets ‘Surface land rghts for multiple, cstint parcels of a ‘Surface land rights fora land parcel. 100 acres) and diferent rights fora potion of he parcel (2g, 10 acres ata loestion entific nthe contrac [As discussed in UP 2.2.2.2, a parton of an asset may be an identified asset itis physically istnct Therefore, a cation ofthe portion of rd woul wale ah dented asst. n some eats pation within the parcel may net intally be identified. A contract that contains the right to iso an asat to bo identi in the futuro would meat he defition of a ease only wh tho locaton of ho pation ofthe parcels ideted Substtution rights ofthe grantor also need tobe considered. I the grartor can require ssets constructed by the grantee to be reloctted a the grantos’s expense, the grantor may have substantve substitution dghts and thers would not be an ienifee asset (288 UP 22.1 for cecussion of eubetttion ght), The greement does not involve an identified asset andl would rot meet the definton ofa lease under ASC B42 His considered lke, based onthe facts and crcumstances present al the inception othe contact, that the grantor wil requ the grantoe's assets tobe relocated 2.3.1.3 Land easements: Does the purchaser have the right to control the use of the identified asset? In detorining whether an easement conveys the right to contro the use ofan identified asst, a reporting entity shou consider wether the grantee has exclusive or shared use ofan set an arrangement conveys the right to control the exclusive use ofan identified asset, contains a lease in accordance with ASC 642, Figure UP 2-5 outlines ineators of exclusive and shared use arrangements Figure UP 2-6 Determination of whether an easement corveys exclusive or shared use Type ofuse Indicators Example wording Exclusive Exchave use oxo stated in the contract © Company shall have exclusive use of the site during term . Purpose is to grant the grantee an exclusive use easement nitps:iviewpoint pwe.com/dtluslenipwelaccounting_ quidesiutiltes_and_power_jutiities_and_power_USichapter_2 leases_USI2_3 evaluatin.. 2/10572/24, 658 PM 2.3 Evaluating other contracts for leases Exclusive us is imgliod in tho sontract, ® Grantor shall not access the easement area or otherwise conduct any activities within the easement area without the consent of grantee. © itis understood that the easement area shall be fenced, and all access thereto shall be restricted. Shared he contract provides grantor with he abilty to access and © Grantor reserves the rights for (1) Use land for other purposes estan for ome oro underground water pipelines, (2) fas ong a8 doesnot interere farm, grazing, or pasture fences, ith he operation of ranoe's and (8) roads, provided the assets) exercise of such rights does not interfere with the exercise of any of the rights herein granted to grantee, © In addition to said reserved rights, grantor shall have only the additional right to cultivate land within the rights of way for any and all field crops which may be ‘grown thereon provided such uses shall not interfere with the rights herein granted to grantee, Grantor retains the tight of access to the lands included within the right-of-way at any time and may enter any facilities on the right-of- way. ‘Any requirements for grantee to prove permission before the grantor can use the dantfiad space should be assessed based on specific ets and ceumstances to determine whathr the arrangement provdes exclusive uso, Ia Contract provides for exclusive use fo the customer, the corract contains a less Ifthe contract instead provi for shared use, a reporting nity will ned to evaluat whether the rghts ofeach party are substantive. I maiong this determination, a reporting entity should e tors Such as which party makes relevant decisions about how the assets used and the types of economic benefits ach party derives from tho uso ofthe asso Even in situations when Use is sharee between two or more partes, the grantee may have a lease ithe grants rights are non-substantve. Examples of crcustances in which contractual shared vse arrangements may bein substance exclusive use| snargements Include (out are not Imted 0 © Easements involving land in a geographic location with no or insignificant alternative use © Easements involving land underlying a solar farm, in which the solar panels comprise the majority of the total land surface, and the landowner has the right to use the small portions of land in between individual solar panels, In each of these sesnaros, there is no or Fit atamatve use forthe identified eseat covered by the contact. Thus, the grant has io substance exclusive uso and doomed to recoive suostrtaly all af tho economie Benet, Example UP 2-4 an Example UP 2-5 ilustst the application ofthe evaluation ramework in determining whather a easoment arangemectis or contains a lease. EXAMPLE UP 2-7 Easement agreement with mutiple unit of account htips:lviewpoint pwe.comidtluslenfpwelaccounting_quidesiutties_and_power /utlites_and_power_USichapler_2 leases US/2_4 evaluatin... 3/10572/24, 658 PM 2.3 Evaluating other contracts for leases Rosemary Electic & Gas Company (REG) enters into an arargement to obtain the right to access land avmed by 8 farmor (he Grantor) for 0 years, The ln is located in lowa and used by the Grantor to grow various erops. The contract provides the righ for REG to access a spec plot of land measuring 10 acres. The contract also provides FREG wih th right o construct and operate ansmission towers on an identied ection of to 10-acr pot In accordance withthe contract, he Grantor has the abit to use the space not eccupled by REG's vansmission assets {or ts own purposes, ae long asthe Granta’ activities do not interfere with the operation of REG's tanamission assets ‘The Grantor does not have the ally to access the ented subsection ofthe plot of land where the vansmission eset wil be Bll. Doos te arangemont contain alease? Analysis Yes. The contract provides for surlace lane gh and conveys siferet rights betwoen the specied 10-acre pot of land and te identi subsection. REG has exclusive use ofthe parcel where the tower wil be constructed and shared sceess to the remairing propery. Therefore, the agreement contains two comparents that are within the scope of ASC 1542, In addition, because the contract species the location of both parcels of land, each is considered an identified REG has exclusive use ofthe dented parcel of lend where the tower wl be bul ard thus has the ability to Both (1) rect how tis piece of land is used and (2) obtain substantial allo the economic bereft trom, AS such, REG has ‘he right to contol ne use ofthe loentned parcel of lard, and tne agreement contare a leese for his portion af the lnc parc Use ofthe remaining portion ofthe 10-acre lan parcels shared between REG and the Grantor. The Grantor Is able to use the land for is farming actives. Therefore, REG dose not have the right to bain substantially all ofthe economic bene rom use ofthe asset Based on these factors, REG's right to use ofthe unoccupied portion of the lard parcel doesnot meet the defistion af lease under ASC 2 Based an the above assessment, the agrerent contains one lase component and one non-oase component, REG ‘Would need to allocate the paymanita made unde the contact between the two components urls elects the practical expeciont fo combine the ran-tease component withthe las component), Soo Figure UP 28 for deta on the practical expects related to combining lease and nor-lease components EXAMPLE UP 2-8 Easomont agreomont with shared use of identi land Rosemary Elsctc & Gas Company (REG) enter nto an arrangement to obtain the right to seceas a specifi plot of ane ‘owned by th stato of Calfornia the Grantor} for 35 years. Tho contract also provides RE th right to construct. aperate, use, and maintain electric nes and other structures necessary to varsmit and astibute electric eneray across ‘the ido lad parcol. In accordance with the agreement, the Grantor retains tho right to accoss al land included in ‘the agroament ané may access any faclty constructed by REG. The land is curt used asa stato park. Does the easement arargement contain a lease? Analysis No. The contract provides surface land rghts that alow EEG access tothe land to construct and operate transmission ‘tower at parioae interval. in aditon, both ents are alowed access oa parts ofthe lnd, Including te space beneath the transmission towers. As such, Both entities have non-exclusive use ofthe fll property. Even ator REG constructs the transmission towers, nether party has exclusive use of any par ofthe land. Therefor, REG wil need to consider whether the Grant's rights to direct the use ofthe land ar benefits receved from the use of tho lard are substantive. The lands curently being used as a puble park. which although the exact value cannot be calculated, the Grantor's rght to continue to use th lad as a puble park are assumed tobe substantive. Therefore REG does not have the right to obtain substataly all ofthe economic benefts from use of the asset, Based on these facts, the right to use the parcel af land doss not meet the definition of alease under ASC 842, ‘Akerratively, if REG constructed a bulding or another structure beneath one of the transmission towers, such that the structure occuped substatialy a ofthe space beneath the tower and prechided ary alteative use ofthat area, REG ‘would have in substance exclusive use of the space beneath the tower. In that scenario, the partion ofthe proparty cupid by the structure beneath the tower would be a separate lease component. Because the Grantor would not have the ability to use the space occupied by the structure, REG would have the right fo obtain subetatally al ofthe seonamie boris rom that pat ofthe lard. As areul, the ght to use the part of lara occupied bythe structure Undementh the tower would moe the definition ofa lease under ASC 642 inthis scenario, Use ofthe unoecuied partion ofthe lard inthe alteaive scenario continues to be shared between REG ard the Grantor, and the Grantor's Fights to tat portion are substantive, As such the right to use the unoccupied portion ofthe land would not met the defrition of alease, 2.3.2 Energy storage htips:lviewpoint pwe.comidtluslenfpwelaccounting_quidestutities_and_power /utlites_and_power_USichapler_2 leases US/2 4 evaluatin... 4/10572/24, 658 PM 2.3 Evaluating other contracts for leases [As the demand for renewable energy grows, reporting entties continue ta look for ways to furher integrate renewable resources while maintaining th rlabyof th ect gi, Shifing away trom fossfuel energy suply wil require investments in new technology to balance the intermittent nature of wind ard solar facilis, Uilties and developers are increasingly foeusad on energy storage systems to adarassitormstency to better align renewable power generation with demand, The Inflation Reducton Act provdes financial Incertives to Suppor investments in energy storage provece, Figure UP 2-6 summarizes the main types of energy storage systems curently avallable in the market. Figure uP 2-7 Types of eneay storage systems Type Deserij Pumped rysroslecre © Uses hydroelectric reservoirs that store energy by pumping water into an upper reservoir. When energy is required, water is channeled down into a turbine to generate electricity Battery e ‘Stores power as chemical energy that can later be converted back into electrical energy. Types of batteries include lithium- ion batteries, flow batteries, and capacitators. ‘Compressed ar . Electricity is used to compress air at a high pressure. The compressed air is stored underground and, when needed, is heated in an expansion turbine generator to produce energy. Flywheel © Uses kinetic energy to store power by rotating a mechanical device at high speeds. To use the stored energy, the force from the rotating flywheel is released to power a generator. Hyerosen © Electricity is converted into hydrogen using a process called electrolysis and stored in a pressurized tank for future use. Thermal . Solar energy is temporarily stored in the form of heat or cold and can be converted to steam to generate electricity Pumped hyckosectc facts aro curonty the most prevalent type of energy storage aystom inthe US. The use of batories and hyerogen, however, cotinues to inrease as technology an elency improves and costs dectne. These factties may be corsicted as part ofa power generation asset or as standalone facies, In addon, a storage faciy may be sod with ay typeof generation however the most common arangement ft include it a part fa renewable fac Figure UP 2-8 ilutrates a storage projec thats connected to both & power generation asset and tothe power gid, such that the system can be charged tom ether source, and discharged erergy can either be released back tothe gid or toa specie delivery pit for eorsumption by te of tker, Figure UP 2-8 Sample structure fora hybed storage project with a grid connection Legend > ouscrmtedto chasing stra I sem ee > pour digarhed fom sanase Delivery a! “a toralponer |_20 Ste seneraon/ anion View Typical structures for storage of take agroomens iclude the follow nitpsiviewpoint pwe.com/dtluslenipwelaccounting_ guidesiutites_and_power_jutlities_and_power__USichapter_2 leases_USI2_3 evaluatin.. 5/105124, 6.58 PM 28 Evaluating other contract for eases Energy storage capacity contract This type of agreement provides the off-taker with use of the storage project's capacity. Utilities typically enter into this type of contract to ensure the reliability of the grid and to meet resource adequacy needs required by the state or other regulators’ requirements. In some markets, these agreements may also be called resource adequacy contracts. Energy storage tolling agreement Energy storage tolling agreements provide the off-taker with capacity, energy, and/or other products (e.g., ancillary services including demand response or congestion relief) generated by a storage system that is connected to the grid. In this type of structure, the off-taker will purchase and deliver power to the storage project to charge the battery for dispatch at a later time. In this type of arrangement, the off-taker typically has the authority to decide when the storage system is charged and discharged. Hybrid power purchase and storage agreement A hybrid project will include a generation facility connected to a storage system. A hybrid purchase power agreement will include the purchase and sale of the power, renewable energy credits (if applicable), storage, and any other attributes from the hybrid project (e.g., ancillary services). The off-taker may use a hybrid power purchase agreement to manage the reliability of the grid (discharging renewable energy when needed) or to arbitrage power prices (storing energy when power prices are lower and discharging when prices increase). Like otner power purchase agreements, hybric power purchase agreements can be structured in many ways to meet the reeds and economic incentives ofthe counterparties. The contact typically outines which paty has the ight to determine ‘when ane haw the storage systam willbe used during the contract tom. These rights may remain withthe developer or be conveyed tothe of taker Commercial arrangements for energy storage projects continue to evolve along wth technological advancement of storage “ystems and contined investment in renewable enecgy resources. Al energy storage contracts — whether standalone or hye — shoul be evaluated using the commacity contract accountng framework dscussed in UP, neuding consideration of lease, davatve, and consoldation accounting. Seo UP S and UP 10 for discussion of derivative and consolidation considerations, respectively. The flowing dacussion focus on less consierstons, 2.3.2.1 Energy storage: Is the arrangement explicitly scoped out of ASC 842? Gonerally, we would not expecta storage agreamont to meat any ofthe scope excapiorsoutind in ASC B42-10-15-1 Further alscussion of scope exceptions fs included in LG 2.2 2.3.2.2 Energy storage: Does the contract include an identified asset? ‘An agreement involving storage generally specifies the slorage system to be used to fll the contract. he contract des not exalt identity the asset, a reporting entity should consicer whether the contract terms imality spect the Storage system tobe used. Factors to consider in evaluting whether & corract involves Identified plantar ciscussed inup223, [Atybrid power purchase ard storage agreement may convoy the right to use a single or multiple asst). As discusses in UP 2.22, the assesemert of dentiieg assets should be based on the structure of the physical facily without consideration of contract pricing (Le, whether the price of generation and storage s bundled or discrete should not Impact the evaluation of whether the cortract contains one or twa unite of accaur). This determination may ba complex ‘when the generation facility and energy storage function as an inegrated system that produces, stores, and dispatches In adkition, a reporting entity should determine whether one or muticle customers will have contractual ghts to the autputs fom te dented system. For example, a portion of the capacty of a Weritfed battery aystem sccounted for 235 a soparate asso! may not be physically distinct. As discussed in UP 22.22. a potion of an asset that's nat Physically estinct snot an denied asset unless it represents substantial all ofthe asset's eapacty and thereby htips:lviewpoint pwe.comidtluslenfpwelaccounting_quidestutities_and_power /utlites_and_power_USichapler_2 leases US/2 4 evaluatin... 6110572/24, 658 PM 2.3 Evaluating other contracts for leases provides the customer with the right to obtain substantial al ofthe economic benefits from the use ofthe asset. The valuation is sia to that of a pipline capacity contract discussed in UP 2.3. ‘Atybrid power purchase agreement would contan a single deified asst Ifthe generatonfacity and storage system fre bul and configured to function asa single unt anc are not physically cistnet and separable assets Tis would be ‘the case, for example, i the batery and the generation facity were constructed st te same time ad are interdaperdent such thatthe battery cannot operat independently ofthe generation resource and can orly be charged bythe renewable facty In contrast, the generation facity anc the battery are physical stint an can be operated independent of one another, they would be evaluat as two separate identifi assets. This is typical the case whan the system is configured auch that the battery storage can operate separately from the renewable tacit and ean be charged and dispatched from either the renewable act or from the rc Ina hybrie power purchase agreement thal contains two kentifed asset, a reporting entity must separately evaluate (1) the gareraton ‘city ard 2 the storage system. The evaluation of wnethar ne cortractcontars a lease ofthe generation facity wil follow the guidance discussed in UP 2.2 This section focuses on the evaluation of whether Contract fora storage system contains aleass. This guidance would apply fo both standalone storage cortracts ard a storage aangement that is a separate identifies assot in a hybrid purchase power arrangement. 2,3,2.3 Energy storage: Does the customer have the right to control the use of the identified asset? ‘As clacusaed in UP 2.2.3, the right ta contra the use ofan identified asset is convayed ifthe customer) haa the right ‘wo obtain substantial ll the economic Benes rom use ofthe denied asset and 2) has the right to dese the use of the iri asset ‘The economic benefits produced by a renewable generation facility (Le, energy, RECS) ter ftom those produced by a storage asset (Le, storage capacity). Silay, the vlavant decisions that impact the use ofa geveration fect ae diferent fom the significant decisiors impacting an energy storage ascot. As Such, propor identification of tho units) of sccountiseticalin determining whether a storage aangement corals a lease. Aight to obtain substantially all he economic benefits ‘The reparing entity should consider whether thas aight o substantially al of the economic benefits from the storage system. The of-aker’s ably to use the storage ad ralaled dgpatched energy sa strong indlealr tha thas aight Yo substantially all ofits economic benefits from the storage syst. the customer has the option to consume alo the output ofthe beter Defoe ‘tis cespatened to the gr or can prevent others from consuming the output (ight of fst refusal, the arrangement Ekaly meets this criterion, Aight to irect the use ofthe identified assot Dotormining whether tho of-akor has the right to use the identified asset requires an evaluation of tho decisionmaking fights within the arrangement that rectly impact the timing, occurence, and quantty of economic benefits from using the storage system, Relevant decisions decuring during the term ofa contract fora storage Syston gonaraly nese the flowing © Source of charging the system (e.., is a battery charged from the generation facility or the power grid) When the storage system is charged © When and to where stored energy is dispatched from the system © Where the storage system is located (and if it can be easily moved) Evahistng whether a contact convey the right to drect th use of an dented asset focuses anly on decision that can be made during the period of usa of th asset, In some casos, some o all the decisions about how and for what purpose the storage system is used may be pracstanminec. For example, a betery ystems conrected toa sla acity Isautomatical tly charged before generated power is dspatched tothe grt, some of the decisions around charging may De predetermined, However, aher devsion euch ae whether power rom the rc willbe stored by th of-taker or ‘whon stored power is cispatehed aro stil relevant ar should bo evaltad 19 dotermine who holes those rights In adlton tothe rlevant dec's:ons noted above, a hybri storage proect wl yplaly requ that some operations! activites (e.g, maintenance, scheduling, metering, commurications management) o occur throughout the corract ter. Operation ofthe system does nat generally constitu a “eleva decision” under ASC B42 as typically implementing rather than crecting) decsins thal impact the asses economic productivity. ‘Question UP 2-11 Do automated charging ard dispatching processes preclude a customer fram having the righ to contro tho use of storage systom? Not necessarily. Software can be used to automate charging and dispatch fora storage system. For example a storage system may be contgured o automatcally charge using power rom a renewable ganeratlonfacty during porods htips:lviewpoint pwe.comidtluslenfpwelaccounting_quideslutities_and_power /utlites_and_power_USichapler_2 leases US/2_4 evaluatin... 7/10572/24, 658 PM 2.3 Evaluating other contracts fo leases ‘when demands below a certain threshold and to cispatch power to a spected delivery point during peak hours. This configuration may be contemplated in the desig ofthe hybrid storage and ound in the agreements In these tuations, reporting entities must determina whether there are other elavart decisions impacting how an for what purpose the storage systom is used o1, whether te automated orders can be overden and/or ehanged during the period of use) then evaluate who holds those rights. Ifthe customer can averrde or change any predstermined or Automated settings, wil generally have the ably to contol the use ofthe storage sytem, Furthermore, the suppl is contractualy required to dispatch the enoray from the storage systom atthe customer's direction ain respons to ‘the eustomer’s demane, the customer would typically have te right ta crac the use ofthe storage system even ihe spatch process is automated [Example UP 2-9 hstrats the evaluation of whether a hybrid power purchase and storage agroement contains a ease EXAMPLE UP 2-9 Batty storage system linked o tenawabla genartion facil Sunflower Pawer Company (SPC) owns ard operates a 100 MW tybri renewable Battery storage project, SunGan, Rosemary Elsete & Gas Company (REG) enter into & cortesct with SPS to purchase ll ofthe eapaeiy, leery, and fonvironmertalatbutes produced by the solar facility as wel as al ofthe storage capacity ofthe attached battery system for use during a 10-year term. The contract species thatthe SunGen asses a solar generation fcity and an attached battery syster) wl be used to fll the contract. SPC does not have substantive substan rights anc cannot use the project for any other purpose or eusiomer during the contract term. REG was not involved in designing the project before I was constructed. SPC i responsible for operating and maistaning the projects solar generation and battery system to saisty minimum technical requirements. There are no decisions to be made about whether, when, or how much electricity willbe pracuced ftom the solar generation fecity <4 to the natre ofthe Fact, he battery system can be charged using power generated by the attached sok falty or ftom te gr The contract authorizes REG to determine when the bettors charged, whether itis charged using gr power or by he SunGen solar ‘aelles, ana when any stores powers dpsed, subject to any aperatona limitations and dispatch parameters REG pays SPC an energy charge forthe power, RECS, anc capacity ftom the solar acy, as well asa fixed capacity payment fr use ofthe attached battery system, Because the battery system and sola fact may be operated independently, the parties conclude thatthe use ofthe ‘solar faity and tho battery system are two iseniied ascts, Does the hyoid power purchase agreement contain one Analysis ‘As the hybrid power purchase agreement cartins two idntfied assets, REG would separately evaluate whether the hybrid power purchase agreement contains an embeded lease of ether (or bath) the solar generation fact and the battorysystom, ‘SunGen, solar generation facity FREG's agreement to purchase the capacity, electri, and environmental atibutes trom SPC does not meet tho defrition of alease. The contract volves an identi asset (because the SunGen solar facilis exactly specified in the contract and SPC has no substitution rants, and REG has the right to oblan substartialy all of tho economic benefits rom use ofthe identified asset aver the 10-year perad of use. REG does not, however, have tne ight ta corto ‘the use ofthe fact because t does not have the ight to ret Reuse because (1) the decisions about how and for ‘what puraose the plant wil be used curing the period of use are predtermined, (2) REG was not involved in the design (@4, didnot have input nto thelocation and specifeatons of the fality that determine ts ouput) an, 8) REG does. not operat the faci. ‘SunGin, battery system FREG's agreement to use the battery system dovs moet the defition of a lease. The contact volves an identi assot (because the SunGen batary syst is explcly spec‘ed In the contract and SPC has no substitution rigs). Further REG has the right to corral the use ofthe batery system throughout the 10.year term © Economic benefits — REG has exclusive use of the battery through its contractual right to all the battery system's storage capacity and thus has the right to obtain all of the economic benefits from the use of the battery system cover the 10-year term of the agreement. © Right to direct the use of the battery system — The relevant decisions about how and for what purpose the battery system is used include (1) the determination of when the battery is charged; (2) the determination of how the battery is charged (whether from the grid or the solar facility); and (3) when power is dispatched from the system. REG has the contractual right to make all of these decisions. Although SPC operates and maintains the battery storage system, these decisions are not relevant as they are following REG's direction. htips:lviewpoint pwe.comidtluslenfpwelaccounting_quides/utties_and_power /utlites_and_power_USichapler_2 leases US/2 4 evaluatin... 8/10572/24, 658 PM 2.3 Evaluating other contracts for leases Because SPC is prevented from using the battery system for another purpose, REG’s decision making ability, in effect, determines when and whether the storage capacity is used. ‘Asa eau, REG would conclude that thas purchase agreement fo th of the storage tacty ergy eeceive fom the fact and a EXAMPLE UP 2-10 Fight to control ~ energy storage fling arangoment Rosemary Electe & Gas Company (REG) enters a cotract to purchase all ofthe storage capacity from one of SunFlower Power's standalo battry projects over a fve-yea trm. SPC owns and operas five standalone battoy systems in ow with gd connections. The contract apace the batary system tobe used to ful the contract with REG, inclucsng its unique specications and location. Perth terms of the coiract with SPC, REG can purchase power ‘tom the gid ta charge the batary systom currig tho trm ofthe agreement. SPC is responsible far operating ana ‘maintaining the battery system to satay minimum technial requirements ‘The contract authorizes REG to determine when the baer is charged and when any stored power is dspatcheo, subject o operational mations and dispatch paramsters, REG pays SPC a fixed monthly eapacty charge and 2 variable payment associated with charging and dispatcher power from the baltey. [Which party has the right to conto the use a he denied assat dung the period of use? Analysis REG has the righ to corral the use of the identified battery system curing he period of use. Athough SPC operetes and mainain the batter storage system, these are no eghts to erect how and for what purpose the storage system I sed, aa discussed in ASC BA2-10-15-28, EG docides when the battery system willbe charged and dscharged, thus determining how and for what purzose the battery system wil be used, AEG also has the rlght to obtaln substantially allo the economic Benes rom the Batery system identified in the contract. 2.3.3 Other contract considerations Powor and uty companies may enter into other types of contracts, such as pipeline capactly, natural gas storage, pole sttachments, at snould lao be evaluates in accordance wih the contract accounting framework ciscussed in UP ‘These convacts typically would not contan dervatves or requ variable interest eniy accountings however, reporting ents wil need to assess whether they afeor contain a lease. ‘This evaluation should follow the general model outned In UP 22 an further discussed in LG 2.3. n considering many of these contracts, one of he key areas of adgment ss whalher the ered asset i physically stint — a reqaromeont for secountng (680 UP 2.2.22) Question uP 2-12 (Can pipeline capacty or transmission be the subject ofa lease? we response Yes. A pipaline and transmiss.on ines are ntiiable astats tha can be used to transport a resource from one lation to nother A contract forthe ful capscty of a pipeline or tranamiasion Ine involves an explo identified arse, “The anawer may change, however, an ent contact for only a parton ofthe canacty of a ppaline or transmission Ine. A portion o pipeline uch sea lateral pipeline) or transmission Ine could be physealy dati (and therfore would be an identified asset it an entty can separate and use the portion ofthe asset independently. “Last mile” assets (the fend ofa single, contiguous asset) would be evaluated inthe sme way the lst mil is mecharvealy separable om the remazer of the asset. ther sa swien that permis an entity to shutoff the aw of lectrcy or signal tom power Tne, he asset would be considered physical distirct and would bean dertitied asst. [As noted in ASO 842-10-15-16, a contact that provides the use ofa portion ofthe capac a an asset tat i nat physically cstinct snot an dented asset unless it represents substantial all ofthe capacity ofthe asset and thereby Provides the customer withthe right to obtain substantial all ofthe economic benefts from use ofthe asset. See LG 2.5.2" for he factors to conser when evaluating whether a conraet provides subetantaly al ofthe economic Bona ‘tom use of an ase Question UP 2-13 Does a pale attachment arrangement involve a physically ctinet asset? htips:lviewpoint pwe.comidtluslenfpweaccounting_quidesiutities_and_power /utlites_and_power_USichapler_2 leases US/2_4 evaluatin... 9/10572/24, 658 PM 2.8 Evaluating other contracts for leases Generally, no. When thinking about whether an asst is physical clstinct,enties may need to consider the nature ofthe assol and evaluat how tho asset was designed to be used. This evalaion coud include th type of functionally the ‘asset wll provide anc to what partis it wil be provided tities oten obtain or grant the right to attach cables, wires, and associated appurtenances to tity pols. The sinargements provide forthe use ofa speesfe spat on an electri uty pole toa third party (eg, ace phone carer, ‘Goneraly, the asses ee place onthe pol) in these arrangements would net be considered physically stint and ‘thus would not be Weited assets. The portion ofa utty pole to be used by athe party generally eanrot be physleally ‘ormecharically separated rom the remainder ofthe pole. Further, the primary use of aust polis to suppor electrical ‘tes and transport elotrety (Le, permit the uthty company to provide ts care sevice). A the primary purposes not to serve as ahosting device for tire-party aats, itis not designed to be apportioned to individual users ard it may ‘therefore be reasonable to conclide thatthe utlty pole attachments Would hat be considered physically dtinet. tr contrast, the primary use ofa ol phone towers tose or ran spsos onthe tower to phon earls, Ae result, the ‘specie hosting locations ona cel phon tower would be considered physical distinct. Soe LG 2.3.1. for further ‘discussion on assessing whether an asset physically strc. PwC. Alrights reserved PuC refers fo the US member frm or one of is subsidaties or afiiates, and may sometimes refer to the Pu network Each memoer fms a separstelogalenily Please see www.pwe.com/structwe for futher detals. This contents for geveral information purposes only, ad should not be used asa subst for consultation with profesional htps:lviewpoint pwe.comidtluslenfpwelaccounting_quides/utities_and_power /utlites_and_power_USichapter_2 leases US/2_4 evaluat... 10/10