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Lease Commitments

12 Months Ended

Dec. 31, 2021

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 Consolidated 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. 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. The Company leases office buildings, vehicles, and other equipment. In addition, PNM leases interests in PVNGS Units 1 and 2 and certain rights-of-way agreements that are classified as leases. All of the Company’s leases with terms in excess of one year are recorded on the Consolidated Balance Sheets by recording a present value lease liability and a corresponding right-of-use asset. Operating lease expense is recognized within operating expenses according to the use of the asset on a straight-line basis. Financing lease costs, which are comprised primarily of fleet and office equipment leases commencing after January 1, 2019, 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 had 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. On June 11, 2020, PNM provided notice to the lessors and the NMPRC of its intent to return the assets underlying in both the PVNGS Unit 1 and Unit 2 leases upon their expiration in January 2023 and 2024. Although PNM elected to return the assets underlying the extended leases, PNM retains 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.

On April 5, 2021, PNM and SRP entered into an Asset Purchase and Sale Agreement, pursuant to which PNM agreed to sell to SRP certain PNM-owned assets and nuclear fuel necessary to the ongoing operation and maintenance of leased capacity in PVNGS Unit 1 and Unit 2, which SRP has agreed to acquire from the lessors upon termination of the existing leases. The proposed transaction between PNM and SRP received all necessary approvals, including NRC approval for the transfer of the associated possessory licenses to SRP at the end of the term of each of the respective leases. See Notes 16 and 17 for

information on other PVNGS matters including the PVNGS Leased Interest Abandonment Application which included PNM's request to create regulatory assets for the associated remaining undepreciated investments.

PNM is exposed to loss under the PVNGS lease arrangements upon the occurrence of certain events that PNM does not consider 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, 2021, amounts due to the lessors under the circumstances described above would be up to $148.4 million, payable on January 15, 2022 in addition to the scheduled lease payments due on that date.

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 2021 payment for the amount due under the Navajo Nation right-of-way lease was $7.3 million, which included amounts due under the Consumer Price Index adjustment. 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, 2021 and 2020, the unamortized balance of these rights-of-ways was $53.4 million and $55.8 million. During the years ended December 31, 2021, 2020, and 2019, PNM recognized amortization expense associated with these agreements of $3.7 million, $4.4 million, and $3.7 million.

Fleet Vehicles and Equipment

Fleet vehicle and equipment leases commencing on or after January 1, 2019 are classified as financing leases. Fleet vehicle and equipment leases existing as of December 31, 2018 are classified as operating 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. At December 31, 2021, residual value guarantees on fleet vehicle and equipment leases are $0.9 million, $1.4 million, and $2.3 million for PNM, TNMP, and PNMR.

Information related to the Company’s operating leases recorded on the Consolidated Balance Sheets is presented below:


	December 31, 2021						December 31, 2020
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating leases:
Operating lease assets, net of amortization	$	73,903	$	5,264	$	79,511	$	97,461	$	7,206	$	105,133
Current portion of operating lease liabilities	25,278		1,882		27,218		25,130		2,193		27,460
Long-term portion of operating lease liabilities	52,552		3,155		55,993		75,941		4,779		81,065

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, 2021						December 31, 2020
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)						(In thousands)
Financing leases:
Non-utility property	$	15,171	$	16,181	$	31,695	$	11,453	$	13,299	$	25,055
Accumulated depreciation	(4,550)		(4,923)		(9,660)		(2,044)		(2,241)		(4,383)
Non-utility property, net	$	10,621	$	11,258	$	22,035	$	9,409	$	11,058	$	20,672

Other current liabilities	$	2,731	$	2,994	$	5,813	$	1,993	$	2,397	$	4,470
Other deferred credits	7,732		8,273		16,075		7,176		8,669		15,972

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, 2021						December 31, 2020
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
Weighted average remaining lease term (years):
Operating leases	5.60		2.90		5.44		6.23		3.46		6.04
Financing leases	4.30		4.14		4.20		4.78		4.84		4.79

Weighted average discount rate:
Operating leases	3.99	%	3.98	%	3.99	%	3.93	%	4.06	%	3.94	%
Financing leases	2.60	%	2.71	%	2.65	%	2.76	%	2.84	%	2.80	%

Information for the components of lease expense is as follows:


	Year Ended December 31, 2021
	PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating lease cost	$	26,690	$	2,445	$	29,270
Amounts capitalized	(836)		(2,115)		(2,951)
Total operating lease expense	25,854		330		26,319
Financing lease cost:
Amortization of right-of-use assets	2,507		2,682		5,277
Interest on lease liabilities	263		307		574
Amounts capitalized	(1,726)		(2,678)		(4,404)
Total financing lease expense	1,044		311		1,447
Variable lease expense	380		—		380
Short-term lease expense (1)	2,972		6		3,035
Total lease expense for the period	$	30,250	$	647	$	31,181

(1) Includes expense of $2.5 million for the twelve months ended December 31, 2021 for rental of temporary cooling towers associated with the SJGS Unit 1 outage. These amounts are partially offset with insurance reimbursements of $1.8 million for the twelve months ended December 31, 2021. For additional information on the SJGS Unit 1 outage see Note 17.


	Year Ended December 31, 2020
	PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating lease cost	$	27,302	$	2,870	$	30,418
Amounts capitalized	(1,020)		(2,375)		(3,395)
Total operating lease expense	26,282		495		27,023
Financing lease cost:
Amortization of right-of-use assets	1,563		1,775		3,412
Interest on lease liabilities	221		285		511
Amounts capitalized	(1,056)		(1,754)		(2,810)
Total financing lease expense	728		306		1,113
Variable lease expense	221		—		221
Short-term lease expense	288		5		295
Total lease expense for the period	$	27,519	$	806	$	28,652

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


	Year Ended December 31, 2021						Year Ended December 31, 2020
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	25,655	$	323	$	26,129	$	26,007	$	596	$	27,121
Operating cash flows from financing leases	90		34		128		82		48		136
Financing cash flows from financing leases	870		339		1,296		557		307		936

Non-cash information related to right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	—	$	317	$	317	$	—	$	—	$	—
Financing leases	3,792		3,126		6,958		6,588		8,985		15,614

Capitalized lease costs are reflected as investing activities on the Company’s Consolidated Statements of Cash Flows for the twelve months ended December 31, 2021 and 2020.

Future expected lease payments are shown below:


	As of December 31, 2021
	PNM				TNMP				PNMR Consolidated
	Financing		Operating		Financing		Operating		Financing		Operating
	(In thousands)
2022	$	2,962	$	26,266	$	3,253	$	1,888	$	6,307	$	28,365
2023	2,841		17,735		3,017		1,480		5,912		19,395
2024	2,159		7,908		2,546		1,030		4,719		8,987
2025	1,345		6,946		1,638		525		2,985		7,509
2026	1,022		6,880		834		449		1,857		7,367
Later years	724		20,640		613		—		1,336		20,823
Total minimum lease payments	11,053		86,375		11,901		5,372		23,116		92,446
Less: Imputed interest	590		8,545		634		335		1,228		9,235
Lease liabilities as of December 31, 2021	$	10,463	$	77,830	$	11,267	$	5,037	$	21,888	$	83,211

The above table includes $11.3 million, $14.5 million, and $25.8 million for PNM, TNMP, and PNMR at December 31, 2021 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