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Lease Commitments

3 Months Ended

Mar. 31, 2024

The Company leases office buildings, vehicles, battery storage facilities, and other equipment. In addition certain rights-of-way agreements are classified as leases. All of the Company’s leases with terms in excess of one year are recorded on the balance sheet 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 Condensed Consolidated Statements of Earnings. See additional discussion of the Company’s leasing activities in Note 8 of the Notes to Consolidated Financial Statements in the 2023 Annual Reports on Form 10-K.

PVNGS

In 1985 and 1986, PNM entered into leases for its interest in PVNGS Unit 1 and 2. The leases initially were scheduled to expire in January 2015 for four Unit 1 leases and January 2016 for 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 expired in January 2023 and the one Unit 2 lease expired in January 2024. PNM has no further lease payments related to PVNGS Unit 1 or 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. In January 2023, the Unit 1 leases expired, and PNM closed on the associated sale to SRP, receiving payments of $33.7 million, of which $28.4 million was recorded as a reduction to Net utility plant on the Condensed Consolidated Balance Sheets and is presented as cash flows from investing activities on the Condensed Consolidated Statement of Cash Flows. In addition, $5.3 million was recorded as a reduction to materials, supplies, and fuel stock on the Condensed Consolidated Balance Sheets and is presented as cash flows from operating activities on the Condensed Consolidated Statement of Cash Flows. In January 2024, the Unit 2 leases expired, and PNM closed on the associated sale to SRP, receiving payments of $3.4 million, of which $2.8 million was recorded as a reduction to Net utility plant on the Condensed Consolidated Balance Sheets and is presented as cash flows from investing activities on the Condensed Consolidated Statement of Cash Flows. In addition, $0.6 million was recorded as a reduction to Materials, supplies and fuel stock on the Condensed Consolidated Balance Sheets and is presented as cash flows from operating activities on the Condensed Consolidated Statement of Cash Flows.

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 2023 payment for the amount due under the Navajo Nation right-of-way lease was $8.3 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 Condensed

Consolidated Balance Sheets and recognizes amortization expense associated with these agreements in the Condensed Consolidated Statement of Earnings over their term. As of March 31, 2024 and December 31, 2023, the unamortized balance of these rights-of-ways was $71.3 million and $56.2 million. PNM recognized amortization expense associated with these agreements of $1.1 million and $0.9 million in the three months ended March 31, 2024 and 2023.

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 March 31, 2024, residual value guarantees on fleet vehicle and equipment leases are $0.8 million, $1.0 million, and $1.8 million for PNM, TNMP, and PNMR Consolidated.

Battery Storage Agreements

The Company has entered into various battery storage agreements for 20-year terms and have fixed payments over the life of the agreements. The Company accounts for these agreements as operating leases and records the initial lease liabilities with corresponding right-of-use assets. In addition, the Company has elected to separate lease components from non-lease components for battery storage agreements and accordingly, does not include non-lease components in the measurement of the lease liability or right-of-use asset. The non-lease components, currently not included in the measurement of the lease liability or the corresponding right-of-use asset, comprise of 25.5% of the value of the agreements.

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


	March 31, 2024						December 31, 2023
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating leases:
Operating lease assets, net of amortization	$	177,865	$	1,615	$	179,480	$	180,370	$	1,814	$	182,201
Current portion of operating lease liabilities	10,925		887		11,811		11,371		895		12,267
Long-term portion of operating lease liabilities	165,199		643		165,842		166,191		809		167,000

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 Condensed Consolidated Balance Sheets is presented below:


	March 31, 2024						December 31, 2023
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Financing leases:
Non-utility property	$	23,262	$	25,400	$	48,826	$	25,425	$	24,487	$	49,981
Accumulated depreciation	(10,975)		(13,058)		(24,095)		(11,984)		(11,869)		(23,905)
Non-utility property, net	12,287		12,342		24,731		13,441		12,618		26,076

Other current liabilities	$	3,836	$	4,604	$	8,473	$	4,146	$	4,616	$	8,776
Other deferred credits	8,469		7,760		16,299		9,300		8,023		17,326

Information concerning the weighted average remaining lease terms and the weighted average discount rates used to determine the Company’s lease liabilities as of March 31, 2024 is presented below:



	PNM		TNMP		PNMR Consolidated
Weighted average remaining lease term (years):
Operating leases	16.59		1.57		16.46
Financing leases	3.67		3.02		3.35

Weighted average discount rate:
Operating leases	5.61	%	4.22	%	5.60	%
Financing leases	4.65	%	4.80	%	4.72	%

Information for the components of lease expense is as follows:


	Three Months Ended March 31, 2024
		PNM		TNMP		PNMR Consolidated
		(In thousands)
Operating lease cost:
Battery storage leases		$	2,947	$	—	$	2,947
Other operating leases		2,059		270		2,329
Amounts capitalized		(35)		(232)		(267)
Total operating lease expense		4,971		38		5,009
Financing lease cost:
Amortization of right-of-use assets		1,218		1,316		2,542
Interest on lease liabilities		144		152		297
Amounts capitalized		(841)		(1,182)		(2,023)
Total financing lease expense		521		286		816

Variable lease expense		360		—		360
Short-term lease expense		204		6		216
Total lease expense for the period		$	6,056	$	330	$	6,401


	Three Months Ended March 31, 2023
		PNM		TNMP		PNMR Consolidated
		(In thousands)
Operating lease cost:		$	3,908	$	429	$	4,337
Amounts capitalized		(160)		(353)		(513)
Total operating lease expense		3,748		76		3,824
Financing lease cost:
Amortization of right-of-use assets		1,008		1,064		2,093
Interest on lease liabilities		122		111		234
Amounts capitalized		(690)		(1,000)		(1,690)
Total financing lease expense		440		175		637

Variable lease expense		262		—		262
Short-term lease expense		147		—		151
Total lease expense for the period		$	4,597	$	251	$	4,874

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


	Three Months Ended						Three Months Ended
	March 31, 2024						March 31, 2023
	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	$	3,826	$	14	$	3,840	$	9,193	$	126	$	9,319
Operating cash flows from financing leases	44		29		74		42		14		55
Finance cash flows from financing leases	464		256		728		377		161		560

Non-cash information related to right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	27	$	63	$	90	$	—	$	—	$	—
Financing leases	263		1,040		1,398		2,730		1,347		4,077

Capitalized lease costs are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023.

Future expected lease payments are shown below:


	As of March 31, 2024
	PNM						TNMP				PNMR Consolidated
			Operating										Operating
	Financing		Battery Storage		Other		Financing		Operating		Financing		Battery Storage		Other
	(In thousands)
Remainder of 2024	$	3,333	$	8,840	$	7,117	$	3,909	$	708	$	7,271	$	8,840	$	7,825
2025	3,636		11,786		7,082		4,262		785		7,926		11,786		7,867
2026	3,117		11,786		7,031		3,038		90		6,181		11,786		7,121
2027	1,885		11,786		7,035		1,615		14		3,526		11,786		7,049
2028	856		11,786		7,038		383		11		1,241		11,786		7,049
Later years	614		172,254		10,587		93		—		707		172,254		10,587
Total minimum lease payments	13,441		228,238		45,890		13,300		1,608		26,852		228,238		47,498
Less: Imputed interest	1,136		92,547		5,457		936		78		2,080		92,547		5,536
Lease liabilities	$	12,305	$	135,691	$	40,433	$	12,364	$	1,530	$	24,772	$	135,691	$	41,962

The above table includes $11.9 million, $12.0 million, and $23.8 million for PNM, TNMP, and PNMR at March 31, 2024 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.

At March 31, 2024, the Company has various lease arrangements that have been executed but have not yet commenced, which are primarily related to battery storage agreements. The Company currently expects lease commencement dates in 2024, with lease terms expiring in 2045, and will recognize lease assets and liabilities upon lease commencement. The expected total fixed consideration to be paid for these arrangements, which includes non-lease payments, is approximately $1.1 billion over the 20-year terms of the agreements.

Lease Commitments