LEASES

6 Months Ended

Jun. 30, 2024

Leases [Abstract]

LEASES

LEASES

Leasing Arrangements as Lessee

We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize a right-of-use asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Right-of-use assets are included in other deferred charges, the current portion of lease liabilities is included in accrued expenses and the long-term portion of lease liabilities is included in other deferred credits and other liabilities on our consolidated statements of financial position.

We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize a right-of-use asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense.

Operating Leases

We have lease agreements as lessee for the right to use various facilities and operational assets. Rent expense for all short-term and long-term operating leases was $0.7 million for the three months ended June 30, 2024 and $0.6 million for the comparable period in 2023. Rent expense for all short-term and long-term operating leases was $1.3 million for the six months

ended June 30, 2024 and $1.2 million for the comparable period in 2023. Rent expense is included in various categories of operating expenses on our consolidated statements of operations based on the type and purpose of the lease.

In May 2024, we entered into several land leases in connection with our acquisition of the Dolores Canyon Solar project being developed in southwestern Colorado and commencing construction on such project. The term of those leases is 30 years with two five-year renewal option periods which we are reasonably assured to exercise.

Our consolidated statements of financial position include the following lease components (dollars in thousands):

	June 30, 2024			December 31, 2023
Operating leases:
Operating lease right-of-use assets	$	13,238		$	9,072
Less: Accumulated amortization	(2,919)			(2,595)
Net operating lease right-of-use assets	$	10,319		$	6,477
Operating lease liabilities - current	$	(471)		$	(371)
Operating lease liabilities - noncurrent	(5,461)			(1,396)
Total operating lease liabilities	$	(5,932)		$	(1,767)
Finance leases:
Finance lease right-of-use assets	$	95		$	—
Less: Accumulated amortization	(7)			—
Net finance lease right-of-use assets	$	88		$	—
Finance lease liabilities - current	$	(46)		$	—
Finance lease liabilities - noncurrent	(37)			—
Total finance lease liabilities	$	(83)		$	—
Lease Term and Discount Rate:
Weighted-average remaining lease term (in years)
Operating leases	32.1			7.0
Finance leases	1.9			0.0
Weighted-average discount rate
Operating leases	6.91		%	4.68		%
Finance leases	6.99%			—%

Future expected minimum lease commitments under operating leases are as follows (dollars in thousands):

	Operating Leases		Finance Leases		Total
Year 1	$	703	$	51	$	754
Year 2	517		38		555
Year 3	531		—		531
Year 4	838		—		838
Year 5	432		—		432
Thereafter	12,401		—		12,401
Total lease payments	$	15,422	$	89	$	15,511
Less imputed interest	(9,490)		(6)		(9,496)
Total	$	5,932	$	83	$	6,015

Leasing Arrangements as Lessor

We have lease agreements as lessor for certain operational assets. The revenue from these lease agreements of $4.7 million and $1.7 million for the three months ended June 30, 2024 and 2023 and $6.4 million and $3.4 million for the six months ended June 30, 2024 and 2023, respectively, are included in other operating revenue on our consolidated statements of operations.

In May 2024, the conditions for the effectiveness of a tolling agreement with a third party were satisfied for our two 70 MW units at our Knutson Generating Station for all capacity and energy through the operation of both units. In substance, this agreement was determined to be a lease in accordance with the accounting standards for leases as the third party has the right to the economic benefits of the asset and controls the use of the asset by its contractual rights, including the ability to direct the timing of dispatch of energy.

The lease arrangement with the Springerville Partnership is not reflected in our lease right right-of-use asset or liability balances as the associated revenues and expenses are eliminated in consolidation. See Note 17 - Variable Interest Entities. However, as the non-controlling interest associated with this lease arrangement generates book-tax differences, a deferred tax asset and liability have been recorded.

LEASES

LEASES

Leasing Arrangements as Lessee

We determine if an arrangement is a lease upon commencement of the contract. If an arrangement is determined to be a long-term lease (greater than 12 months), we recognize a right-of-use asset and lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may also include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Right-of-use assets are included in other deferred charges, the current portion of lease liabilities is included in accrued expenses and the long-term portion of lease liabilities is included in other deferred credits and other liabilities on our consolidated statements of financial position.

We have elected to apply the short-term lease exception for contracts that have a lease term of twelve months or less and do not include an option to purchase the underlying asset. Therefore, we do not recognize a right-of-use asset or lease liability for such contracts. We recognize short-term lease payments as expense on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are recognized as expense.

Operating Leases

We have lease agreements as lessee for the right to use various facilities and operational assets. Rent expense for all short-term and long-term operating leases was $0.7 million for the three months ended June 30, 2024 and $0.6 million for the comparable period in 2023. Rent expense for all short-term and long-term operating leases was $1.3 million for the six months

ended June 30, 2024 and $1.2 million for the comparable period in 2023. Rent expense is included in various categories of operating expenses on our consolidated statements of operations based on the type and purpose of the lease.

In May 2024, we entered into several land leases in connection with our acquisition of the Dolores Canyon Solar project being developed in southwestern Colorado and commencing construction on such project. The term of those leases is 30 years with two five-year renewal option periods which we are reasonably assured to exercise.

Our consolidated statements of financial position include the following lease components (dollars in thousands):

	June 30, 2024			December 31, 2023
Operating leases:
Operating lease right-of-use assets	$	13,238		$	9,072
Less: Accumulated amortization	(2,919)			(2,595)
Net operating lease right-of-use assets	$	10,319		$	6,477
Operating lease liabilities - current	$	(471)		$	(371)
Operating lease liabilities - noncurrent	(5,461)			(1,396)
Total operating lease liabilities	$	(5,932)		$	(1,767)
Finance leases:
Finance lease right-of-use assets	$	95		$	—
Less: Accumulated amortization	(7)			—
Net finance lease right-of-use assets	$	88		$	—
Finance lease liabilities - current	$	(46)		$	—
Finance lease liabilities - noncurrent	(37)			—
Total finance lease liabilities	$	(83)		$	—
Lease Term and Discount Rate:
Weighted-average remaining lease term (in years)
Operating leases	32.1			7.0
Finance leases	1.9			0.0
Weighted-average discount rate
Operating leases	6.91		%	4.68		%
Finance leases	6.99%			—%

Future expected minimum lease commitments under operating leases are as follows (dollars in thousands):

	Operating Leases		Finance Leases		Total
Year 1	$	703	$	51	$	754
Year 2	517		38		555
Year 3	531		—		531
Year 4	838		—		838
Year 5	432		—		432
Thereafter	12,401		—		12,401
Total lease payments	$	15,422	$	89	$	15,511
Less imputed interest	(9,490)		(6)		(9,496)
Total	$	5,932	$	83	$	6,015

Leasing Arrangements as Lessor

We have lease agreements as lessor for certain operational assets. The revenue from these lease agreements of $4.7 million and $1.7 million for the three months ended June 30, 2024 and 2023 and $6.4 million and $3.4 million for the six months ended June 30, 2024 and 2023, respectively, are included in other operating revenue on our consolidated statements of operations.

In May 2024, the conditions for the effectiveness of a tolling agreement with a third party were satisfied for our two 70 MW units at our Knutson Generating Station for all capacity and energy through the operation of both units. In substance, this agreement was determined to be a lease in accordance with the accounting standards for leases as the third party has the right to the economic benefits of the asset and controls the use of the asset by its contractual rights, including the ability to direct the timing of dispatch of energy.

The lease arrangement with the Springerville Partnership is not reflected in our lease right right-of-use asset or liability balances as the associated revenues and expenses are eliminated in consolidation. See Note 17 - Variable Interest Entities. However, as the non-controlling interest associated with this lease arrangement generates book-tax differences, a deferred tax asset and liability have been recorded.