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Lease Commitments

9 Months Ended

Sep. 30, 2020

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 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 2019 Annual Reports on Form 10-K.

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. Under the terms of the extended leases, PNM had until January 15, 2020 for the Unit 1 leases and 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 filed notice with the NMPRC of 60-day waivers of the deadline to provide notice to purchase or return the assets underlying the PVNGS Unit 1 leases. On March 3, 2020, and April 10, 2020, PNM filed additional notices of waivers of the deadlines. 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, 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. See Note 12. On June 11, 2020, PNM provided notice to the lessors and the NMPRC of its intent to return the assets underlying 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. Any transfer of the assets underlying the leases will be required to comply with NRC licensing requirements. For example, the NRC could limit the transfer of ownership of the assets underlying all or a portion of PNM's currently leased interests in PVNGS. If a qualified buyer cannot be identified, PNM may be required to retain all or a portion of its currently leased capacity in PVNGS or be exposed to other claims for damages by the lessors. PNM will seek to recover its undepreciated investments, as well as any other obligations related to PVNGS from NM retail customers.

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 September 30, 2020, amounts due to the lessors under the circumstances described above would be up to $154.5 million, payable on January 15, 2021 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 2020 payment for the amount due under the Navajo Nation right-of-way lease was $7.1 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 September 30, 2020 and December 31, 2019, the unamortized balance of these rights-of-ways was $58.0 million and $60.2 million. PNM recognized amortization expense associated with these agreements of $0.9 million and $2.8 million in the three and nine months ended September 30, 2020, and $0.9 million and $2.8 million in the three and nine months ended September 30, 2019.

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 September 30, 2020, residual value guarantees on fleet vehicle and equipment leases are $0.8 million, $1.3 million, and $2.1 million for PNM, TNMP, and PNMR Consolidated.

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


	September 30, 2020						December 31, 2019
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating leases:
Operating lease assets, net of amortization	$	103,251	$	7,876	$	111,638	$	120,585	$	9,954	$	131,212
Current portion of operating lease liabilities	24,282		2,341		26,826		25,927		2,753		29,068
Long-term portion of operating lease liabilities	76,252		5,311		81,933		97,992		7,039		105,512

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:


	September 30, 2020						December 31, 2019
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Financing leases:
Non-utility property	$	10,491	$	11,047	$	21,841	$	4,857	$	4,910	$	10,028
Accumulated depreciation	(1,503)		(1,576)		(3,159)		(482)		(466)		(973)
Non-utility property, net	8,988		9,471		18,682		4,375		4,444		9,055

Other current liabilities	1,804		1,946		3,829		722		850		1,637
Other deferred credits	6,924		7,532		14,603		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 as of September 30, 2020 is presented below:



	PNM		TNMP		PNMR Consolidated
Weighted average remaining lease term (years):
Operating leases	6.17		3.69		5.99
Financing leases	5.07		5.12		5.07

Weighted average discount rate:
Operating leases	3.93	%	4.03	%	3.93	%
Financing leases	2.85	%	3.05	%	2.95	%

Information for the components of lease expense is as follows:


	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating lease cost:	$	6,798	$	685	$	7,545	$	20,538	$	2,205	$	22,938
Amounts capitalized	(248)		(577)		(825)		(786)		(1,812)		(2,599)
Total operating lease expense	$	6,550	$	108	$	6,720	$	19,752	$	393	$	20,339
Financing lease cost:
Amortization of right-of-use assets	435		439		893		1,022		1,110		2,187
Interest on lease liabilities	58		74		134		156		198		358
Amounts capitalized	(281)		(452)		(733)		(682)		(1,105)		(1,787)
Total financing lease expense	212		61		294		496		203		758

Variable lease expense	63		—		63		158		—		158
Short-term lease expense	16		4		22		176		5		183
Total lease expense for the period	$	6,841	$	173	$	7,099	$	20,582	$	601	$	21,438


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	PNM		TNMP		PNMR Consolidated		PNM		TNMP		PNMR Consolidated
	(In thousands)
Operating lease cost:	$	6,873	$	726	$	7,725	$	21,260	$	2,439	$	24,051
Amounts capitalized	(319)		(630)		(949)		(1,015)		(1,949)		(2,964)
Total operating lease expense	$	6,554	$	96	$	6,776	$	20,245	$	490	$	21,087
Financing lease cost:
Amortization of right-of-use assets	143		125		274		286		264		556
Interest on lease liabilities	26		27		54		56		61		117
Amounts capitalized	(81)		(114)		(195)		(158)		(233)		(391)
Total financing lease expense	88		38		133		184		92		282

Variable lease expense	32		—		32		64		—		64
Short-term lease expense	63		5		68		212		10		263
Total lease expense for the period	$	6,737	$	139	$	7,009	$	20,705	$	592	$	21,696

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


	Nine Months Ended						Nine Months Ended
	September 30, 2020						September 30, 2019
	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	$	25,804	$	483	$	26,708	$	26,092	$	757	$	27,225
Operating cash flows from financing leases	58		32		94		28		17		45
Finance cash flows from financing leases	378		215		646		113		72		189

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	5,635		6,309		11,985		3,645		3,678		7,402

Capitalized costs excluded from the operating and financing cash paid for leases above for the nine months ended September 30, 2020, are $0.8 million and $0.7 million at PNM, $1.8 million and $1.1 million at TNMP, and $2.6 million and $1.8 million at PNMR. For the nine months ended September 30, 2019, capitalized costs excluded are $1.0 million and $0.2 million at PNM, $1.9 million and $0.2 million at TNMP, and $3.0 million and $0.4 million at PNMR. These capitalized costs are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019.

Future expected lease payments are shown below:


	As of September 30, 2020
	PNM				TNMP				PNMR Consolidated
	Financing		Operating		Financing		Operating		Financing		Operating
	(In thousands)
Remainder of 2020	$	511	$	438	$	565	$	682	$	1,097	$	1,253
2021	2,011		26,576		2,210		2,426		4,304		29,294
2022	1,959		26,266		2,115		1,975		4,155		28,452
2023	1,899		17,735		1,926		1,481		3,869		19,395
2024	1,277		7,908		1,583		877		2,863		8,833
Later years	1,739		34,467		1,977		765		3,717		35,489
Total minimum lease payments	9,396		113,390		10,376		8,206		20,005		122,716
Less: Imputed interest	668		12,856		898		554		1,573		13,957
Lease liabilities as of September 30, 2020	$	8,728	$	100,534	$	9,478	$	7,652	$	18,432	$	108,759

The above table includes $11.3 million, $16.0 million, and $27.3 million for PNM, TNMP, and PNMR at September 30, 2020 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