content_image/93756.jpg content_image/93757.jpg content_image/93758.jpg content_image/93759.jpg
## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

## DECEMBER 31, 2003, 2002, 2001 

The following table summarizes weighted-average fair value of options granted during the year: 

<img src='content_image/93756.jpg'>

The fair value of each option grant is determined on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions: 

<img src='content_image/93757.jpg'>

## (11) CONSTRUCTION PROGRAM AND JOINTLY-OWNED PLANTS 

The Company’s construction expenditures for 2003 were approximately $177.2 million, including expenditures on jointly-owned projects. The Company’s proportionate share of operating and maintenance expenses for the jointly-owned plants is included in operating expenses in the consolidated statements of earnings. 

At December 31, 2003, the Company’s interests and investments in jointly-owned generating facilities are (In thousands): 

<img src='content_image/93758.jpg'>

* Includes the Company’s interest in PVNGS Unit 3, the Company’s interest in common facilities for all PVNGS units and the Company’s owned interests in PVNGS Units 1 and 2. 

## San Juan Generating Station (“SJGS”) 

The Company operates and jointly owns SJGS. At December 31, 2003, SJGS Units 1 and 2 are owned on a 50% shared basis with Tucson Electric Power Company, Unit 3 is owned 50% by the Company, 41.8% by Southern California Public Power Authority (“SCPPA”) and 8.2% by Tri-State Generation and Transmission Association, Inc. Unit 4 is owned 38.457% by the Company, 28.8% by M-S-R Public Power Agency, (“M-S-R”), 10.04% by the City of Anaheim, California, 8.475% by the City of Farmington, 7.2% by the County of Los Alamos, and 7.028% by Utah Associated Municipal Power Systems. 

## Palo Verde Nuclear Generating Station (“PVNGS”) 

The Company is a participant in the three 1,270 MW units of PVNGS, also known as the Arizona Nuclear Power Project, with Arizona Public Service Company (“APS”) (the operating agent), Salt River Project, El Paso Electric Company (“El Paso”), Southern California Edison Company, SCPPA and The Department of Water and Power of the City of Los Angeles. The Company has a 10.2% undivided interest in PVNGS, with portions of its interests in Units 1 and 2 held under leases. (See Note 12 for additional discussion.) 

## Four Corners Power Plant (“Four Corners”) 

The Company is a participant in two 755 MW units of Four Corners with APS (the operating agent), El Paso, Salt River Project, Southern California Edison Company, and Tucson Electric Power Company. The Company has a 13% undivided interest in Units 4 and 5 of Four Corners. 

## (12) ASSET RETIREMENT OBLIGATIONS 

The Company identified the asset retirement obligation (“ARO”) liability on the decommissioning of the Company’s nuclear generation facilities and fossil fuel generation plants. The Company’s transmission and distribution facilities are also subject to SFAS 143. The majority of these assets, however, have an indeterminable useful life and settlement date. As such, an ARO liability for transmission and distribution assets would not be recognized until a reasonable estimate of the fair value of these assets can be made and a settlement date becomes known. In 2003, the Company did not identify any material AROs associated with the transmission and distribution assets. 

Previously, the Company had recognized decommissioning costs for its fossil fuel and nuclear generation facilities ratably over approved cost recovery periods. Upon implementation of SFAS 143 the net difference between the amounts determined to represent legal AROs under SFAS 143 and the Company’s previous method of accounting for decommissioning costs, has been recognized as a cumulative effect of a change in accounting principle, net of related income taxes (see Note 17). Additionally, certain amounts accrued for nuclear decommissioning costs over the Company’s legal AROs for its nuclear generation facilities have been reclassified as regulatory liabilities. 

The effects of adoption of SFAS 143 standard are based on the Company’s interpretation of the standard and determination of underlying assumptions, such as the Company’s discount rate, estimates of the future costs for decommissioning and the timing of the removal activities to be performed. Any changes in these assumptions underlying the required calculations may require revisions to the estimated ARO when identified. 

A reconciliation of the Company’s asset retirement obligations is as follows (In thousands): 

<img src='content_image/93759.jpg'>

## (13) COMMITMENTS AND CONTINGENCIES 

## Long-Term Power Contracts 

PNM has a power purchase contract with Southwestern Public Service Company (“SPS”), which originally provided for the purchase of up to 200 MW, expiring in May 2011. PNM may reduce its purchases from SPS by 25 MW annually upon three years’ notice. PNM provided such notice to reduce the purchase by 25 MW in 1999 and by an additional 25 MW in 2000. PNM also is party to a master power purchase and sale agreement with SPS, dated August 2, 1999, pursuant to which PNM has agreed to purchase 72 MW of firm power from SPS from 2002 through 2005. Beginning May 2004, PNM will purchase an additional 45 MW of firm energy through 2005, increasing to 67 MW in 2006. PNM has 70 MW of contingent capacity obtained from El Paso under a transmission capacity for generation capacity trade arrangement through September 2004. Beginning October 2004 and continuing through June 2005, the capacity amount is 39 MW. PNM holds a purchased power agreement (“PPA”) with Tri-State for 50 MW through June 30, 2010. In addition, PNM is interconnected with various utilities for economy interchanges and mutual assistance in emergencies. 

In 1996, PNM entered into an operating lease for the rights to all the output of a new gas-fired generating plant for 20 years. The operating lease’s maximum dependable capacity is 132 MW. In July 2000, the plant went into operation. The gas turbine generating unit is operated by Delta-Person Limited Partnership (“Delta”) and is located on PNM 's retired Person Generating Station site in Albuquerque, New Mexico. Primary fuel for the gas turbine generating unit is natural gas, which is procured by Wholesale on the open market and delivered by Gas through its transportation services. In addition, the unit has the capability to utilize low sulfur fuel oil in the event natural gas is not available or cost effective. 

In July 2001, PNM entered into a long-term wholesale power contract with Texas-New Mexico Power (“TNP”) to provide power to serve a portion of TNP‘s New Mexico retail load. The contract, which commenced July 1, 2001, expires December 31, 2006. PNM provided varying amounts of firm power on demand to complement existing contracts for the first two years of the agreement. As those contracts expired at the end of 2002, PNM became TNP’s sole supplier for its load in New Mexico. In the last year of the contract, it is estimated that TNP will need 114 MW of firm power. 

In December 2002, PNM entered into a 27 month contract to supply 80 MW of power to U.S. Navy facilities in San Diego, California. PNM began delivering power under the contract January 1, 2003. The contract runs through March 2005. 

In 2002, PNM entered into an agreement with FPL Energy LLC (“FPL”), a subsidiary of FPL Group, Inc., to develop a 200 MW wind generation facility in New Mexico. PNM began receiving commercial power from the project in June 2003. FPL Energy owns and operates the New Mexico Wind Energy Center (“NMWE”), which consists of 136 wind-powered turbines on a site in eastern New Mexico. PNM has a contract to purchase all the power generated by the NMWE for 25 years. In 2003, PNM received approval from the PRC for a voluntary tariff that allows PNM retail customers to buy wind-generated electricity for a small monthly premium. Power from the facility not subscribed by PNM retail customers under the voluntary program is sold on the wholesale market, either within New Mexico or outside the state. 

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

## DECEMBER 31, 2003, 2002, 2001 

