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Lease Commitments

12 Months Ended

Dec. 31, 2019

The Company enters into various lease agreements to meet its business needs and to satisfy the needs of its customers. Historically, the Company’s leases were classified as operating leases and included leases for generating capacity from PVNGS Units 1 and 2, certain rights-of-way agreements for transmission lines and facilities, vehicles and equipment necessary to construct and maintain the Company’s assets, and building and office equipment. In February 2016, the FASB issued ASU 2016-02 – Leases (Topic 842) to provide guidance on the recognition, measurement, presentation, and disclosure of leases. Among other things, ASU 2016-02 requires that all leases be recorded on the balance sheets by recognizing a present value liability for future cash

flows of the lease agreement and a corresponding right-of-use asset. The Company adopted Topic 842 on January 1, 2019, its required effective date. The Company elected to use many of the practical expedients available upon adoption of the standard. As a result, the Company will continue to classify its leases existing as of December 31, 2018 as operating leases until they expire or are modified. In addition, the Company elected the practical expedient to not reevaluate the accounting for land easements and rights-of-way agreements existing at December 31, 2018. The Company also elected the use of the practical expedient to apply the requirements of the new standard on its effective date and has not restated prior periods to conform to the new guidance. Adoption of the lease standard has a material impact on the Company’s Consolidated Balance Sheets but does not have a material impact on the Consolidated Statements of Earnings or the Consolidated Statements of Cash Flows.

Effective January 1, 2019, the Company accounts for contracts that convey the use and control of identified assets for a period of time as leases. The Company classifies leases as operating or financing by evaluating the terms of the lease agreement. Agreements under which the Company is likely to utilize substantially all of the economic value or life of the asset or that the Company is likely to own at the end of the lease term, either through purchase or transfer of ownership, are classified as financing leases. Leases not meeting these criteria are accounted for as operating leases. Agreements under which the Company is a lessor are insignificant. Leases with terms that are expected to exceed one year are recognized on the Company’s Consolidated Balance Sheets by recording a lease liability and corresponding right-of-use asset. PNMR, PNM, and TNMP determine present value for their leases using their incremental borrowing rates at the commencement date of the lease or, when readily available, the rate implicit in the agreement. In most cases the implicit interest rate is not available in the Company’s lease agreements. Operating lease expense is recognized within operating expenses according to the use of the asset on a straight-line basis. Financing lease costs are recognized by amortizing the right-of-use asset on a straight-line basis and by recording interest expense on the lease liability. Financing lease right-of-use assets amortization is reflected in depreciation and amortization and interest on financing lease liabilities is reflected as interest charges on the Company’s Consolidated Statements of Earnings.

PVNGS

PNM leases interests in Units 1 and 2 of PVNGS. The PVNGS leases were entered into in 1985 and 1986 and initially were scheduled to expire on January 15, 2015 for the four Unit 1 leases and January 15, 2016 for the four Unit 2 leases. Following procedures set forth in the PVNGS leases, PNM notified four of the lessors under the Unit 1 leases and one lessor under the Unit 2 lease that it would elect to renew those leases on the expiration date of the original leases. The four Unit 1 leases now expire on January 15, 2023 and the one Unit 2 lease now expires on January 15, 2024. The annual lease payments during the renewal periods aggregate $16.5 million for PVNGS Unit 1 and $1.6 million for Unit 2.

The terms of each of the extended leases do not provide for additional renewal options beyond their currently scheduled expiration dates. PNM has the option to purchase the assets underlying each of the extended leases at their fair market value or to return the lease interests to the lessors on the expiration dates. Under the terms of the extended leases, PNM had until January 15, 2020 for the Unit 1 leases and has until January 15, 2021 for the Unit 2 lease to provide notices to the lessors of PNM’s intent to exercise the purchase options or to return the leased assets to the lessors. On January 3, 2020, PNM executed 60-day waivers of the deadline to provide notice of its intent to purchase or return the assets underlying the PVNGS Unit 1 leases. Under the waivers, PNM is required to provide notice by March 16, 2020. The waivers did not impact the PVNGS Unit 1 leases’ current January 15, 2023 expiration dates. PNM’s elections are independent for each lease and are irrevocable. In the proceeding addressing PNM’s 2017 IRP (Note 17), PNM agreed to promptly notify the NMPRC of a decision to extend the Unit 1 or 2 leases, or to exercise its option to purchase the leased assets at fair market value upon the expiration of leases. If PNM elects to exercise its purchase option under any of the leases, the leases provide an appraisal process to determine fair market value. If PNM elects to return the assets underlying the extended leases, PNM will retain certain obligations related to PVNGS, including costs to decommission the facility. PNM is depreciating its capital improvements related to the extended leases using NMPRC approved rates through the end of the NRC license period for each unit, which expire in June 2045 for Unit 1 and in June 2046 for Unit 2. Whether PNM retains or returns the assets underlying the extended leases, PNM will seek to recover its undepreciated investments, and any amounts paid to purchase the assets, as well as any other obligations related to PVNGS from NM retail customers. Any transfer of the assets underlying the leases will be required to comply with NRC licensing requirements.

See Note 17 for information concerning the NMPRC’s treatment of PNM’s purchase of assets underlying 64.1 MW and extension of 114.6 MW of leased capacity in PVNGS Unit 2, the NM Supreme Court’s decision regarding PNM’s appeal of certain matters in the NM 2015 Rate Case, as well as information concerning a joint petition to investigate PNM’s option to purchase additional assets underlying the extended leased capacity in PVNGS.

Covenants in PNM’s PVNGS Units 1 and 2 lease agreements limit PNM’s ability, without consent of the owner participants in the lease transactions, (i) to enter into any merger or consolidation, or (ii) except in connection with normal dividend policy, to convey, transfer, lease or dividend more than 5% of its assets in any single transaction or series of related transactions. PNM is exposed to losses under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to PVNGS or the occurrence of specified nuclear events), PNM would be required to make specified payments to the lessors and take title to the leased interests. If such an event had occurred as of December 31, 2019, amounts due to the lessors under the

circumstances described above would be up to $157.6 million, payable on January 15, 2020 in addition to the scheduled lease payments due on January 15, 2020. In such event, PNM would record the acquired assets at the lower of their fair value or the amount paid. Furthermore, the NRC places restrictions on the ownership of nuclear generating facilities. These restrictions could limit the transfer of ownership should PNM decide to return the assets underlying all or a portion of its current leased interests in PVNGS. In the event PNM decides to return these interests to the lessors, and a qualified buyer cannot be identified, PNM may be required to retain all of a portion of its existing leased capacity in PVNGS or be exposed to other claims for damages by the lessors.

Land Easements and Rights-of-Ways

Many of PNM’s electric transmission and distribution facilities are located on lands that require the grant of rights-of-way from governmental entities, Native American tribes, or private parties. PNM has completed several renewals of rights-of-way, the largest of which is a renewal with the Navajo Nation. PNM is obligated to pay the Navajo Nation annual payments of $6.0 million, subject to adjustment each year based on the Consumer Price Index, through 2029. PNM’s April 2018 payment for the amount due under the Navajo Nation right-of-way lease was $6.9 million, which included amounts due under the Consumer Price Index adjustment, and was used to determine PNM’s operating lease liability as of January 1, 2019. Changes in the Consumer Price Index subsequent to January 1, 2019 are considered variable lease payments.

PNM has other prepaid rights-of-way agreements that are not accounted for as leases or recognized as a component of plant in service. PNM reflects the unamortized balance of these prepayments in other deferred charges on the Consolidated Balance Sheets and recognizes amortization expense associated with these agreements in the Consolidated Statement of Earnings over their term. As of December 31, 2019 and 2018, the unamortized balance of these rights-of-ways was $60.2 million and $63.0 million. During the years ended December 31, 2019, 2018, and 2017, PNM recognized amortization expense associated with these agreements of $3.7 million, $3.8 million, and $3.5 million.

Fleet Vehicles and Equipment

As of December 31, 2018, all of the Company’s leases of fleet vehicles and equipment were classified as operating leases. Historically, the Company has utilized substantially all of the economic value of its fleet and equipment leases by the end of the lease term. The Company generally has the contractual ability to return its fleet vehicle and equipment leases to the lessor after one year provided the lessor can recover remaining amounts owed under the agreement from third-parties or through make-whole provisions in the contract but does not typically exercise this right. As a result, fleet vehicle and equipment leases commencing on or after January 1, 2019 are classified as financing leases. The Company’s fleet vehicle and equipment lease agreements include non-lease components for insignificant administrative and other costs that are billed over the life of the agreement. The Company has elected to combine these fees with the lease components of the agreement. Certain of the Company’s fleet vehicle and equipment leases contain residual value guarantees. At December 31, 2019, residual value guarantees on fleet vehicle and equipment leases are $0.7 million, $1.2 million, and $1.9 million for PNM, TNMP, and PNMR.

Other

The Company holds a number of office space and office equipment leases. The Company’s current office space leases, all of which existed as of December 31, 2018, are classified as operating leases. These agreements include non-lease components for costs such as common area maintenance fees, which the Company has elected to combine with the lease component of the agreements. Certain of the Company’s office space leases are held between the Company’s consolidated subsidiaries and have been eliminated on consolidation. See Note 20. The Company’s office equipment leases are primarily for copiers and other graphics equipment. The Company classifies its office equipment leases existing as of December 31, 2018 as operating leases. Office equipment leases commencing on or after January 1, 2019 are classified as financing leases.

Information related to the Company’s operating leases recorded on the Consolidated Balance Sheets, including amounts recognized upon adoption of ASU 2016-02, is presented below:



	December 31, 2019						January 1, 2019
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating leases:
Operating lease assets, net of amortization	$	120,585	$	9,954	$	131,212	$	143,816	$	12,942	$	157,440
Current portion of operating lease liabilities	25,927		2,753		29,068		21,589		3,132		25,189
Long-term portion of operating lease liabilities	97,992		7,039		105,512		124,891		9,787		135,174

As discussed above, the Company classifies its fleet vehicle and equipment leases and its office equipment leases commencing on or after January 1, 2019 as financing leases. Information related to the Company’s financing leases recorded on the Consolidated Balance Sheets is presented below:



	December 31, 2019
	PNM			TNMP			PNMR Consolidated
	(In thousands)
Financing leases:
Non-utility property	$	4,857		$	4,910		$	10,028
Accumulated depreciation	(482		)	(466		)	(973		)
Non-utility property, net	$	4,375		$	4,444		$	9,055

Other current liabilities	$	722		$	850		$	1,637
Other deferred credits	3,333			3,597			7,102

Information concerning the weighted average remaining lease terms and the weighted average discount rates used to determine the Company’s lease liabilities is presented below:



	December 31, 2019
	PNM		TNMP		PNMR Consolidated
Weighted average remaining lease term (years):
Operating leases	6.70		4.10		6.49
Financing leases	5.64		5.54		5.54

Weighted average discount rate:
Operating leases	3.89	%	3.95	%	3.90	%
Financing leases	3.68	%	3.65	%	3.64	%

Information for the components of lease expense is as follows:



	Year Ended December 31, 2019
	PNM			TNMP			PNMR Consolidated
	(In thousands)
Operating lease cost	$	28,254		$	3,341		$	31,963
Less: amounts capitalized	(1,319		)	(2,594		)	(3,913		)
Total operating lease expense	26,935			747			28,050
Financing lease cost:
Amortization of right-of-use assets	481			466			973
Interest on lease liabilities	92			100			194
Less: amounts capitalized	(280		)	(423		)	(704		)
Total financing lease expense	293			143			463

Variable lease expense	96			—			96
Short-term lease expense	346			26			414
Total lease expense for the period	$	27,670		$	916		$	29,023

Supplemental cash flow information related to the Company’s leases is as follows:



	Year Ended December 31, 2019
	PNM		TNMP		PNMR Consolidated
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	26,392	$	935	$	27,849
Operating cash flows from financing leases	44		25		71
Finance cash flows from financing leases	183		109		313

Non-cash information related to right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	143,816	$	12,942	$	157,816
Financing leases	4,473		4,910		9,645

Excluded from the operating and financing cash paid for leases above are $1.3 million and $0.3 million at PNM, $2.6 million and $0.4 million at TNMP, and $3.9 million and $0.7 million at PNMR. These capitalized costs are reflected as investing activities on the Company’s Consolidated Statements of Cash Flows for the twelve months ended December 31, 2019.

Future expected lease payments as of December 31, 2019 and December 31, 2018 are shown below:



	As of December 31, 2019
	PNM				TNMP				PNMR Consolidated
	Financing		Operating		Financing		Operating		Financing		Operating
	(In thousands)
2020	$	857	$	27,028	$	998	$	3,078	$	1,925	$	30,660
2021	830		26,576		966		2,448		1,866		29,316
2022	803		26,266		934		1,996		1,807		28,473
2023	767		17,735		819		1,508		1,624		19,423
2024	505		7,908		648		877		1,153		8,833
Later years	723		34,466		526		765		1,249		35,489
Total minimum lease payments	4,485		139,979		4,891		10,672		9,624		152,194
Less: Imputed interest	430		16,060		444		880		885		17,614
Lease liabilities as of December 31, 2019	$	4,055	$	123,919	$	4,447	$	9,792	$	8,739	$	134,580



	Operating leases
	As of December 31, 2018
	PNM		TNMP		PNMR Consolidated
	(In thousands)
2019	$	27,691	$	3,664	$	31,772
2020	27,000		3,102		30,404
2021	26,462		2,324		29,012
2022	26,217		1,795		28,175
2023	17,447		1,279		18,868
Later years	42,329		1,150		43,489
Total minimum lease payments	$	167,146	$	13,314	$	181,720

The above tables include $8.7 million, $13.1 million, and $21.8 million for PNM, TNMP, and PNMR at December 31, 2019 for expected future payments on fleet vehicle and equipment leases that could be avoided if the leased assets were returned and the lessor is able to recover estimated market value for the equipment from third parties. The Company’s contractual commitments for leases that have not yet commenced are insignificant.

Lease Commitments