The Company’s available-for-sale securities include assets held in trust for its share of decommissioning costs of PVNGS and its executive retirement program. The trusts hold equity and fixed income securities. These amounts are included in other investments on the balance sheet. The carrying value, gross unrealized gains and losses and estimated fair value of investments in available-for-sale securities are as follows (In thousands): The carrying amounts reflected on the consolidated balance sheets approximate fair value for cash, temporary instruments, receivables, and payables due to the short period of maturity. The carrying amount and fair value of the Company’s financial instruments (including current maturities) at December 31 are (In thousands): GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current transaction. Fair value is based on market quotes provided by the Company’s investment bankers and trust advisors. The market prices used to value PNM’s mark-to-market energy portfolio are based on closing exchange prices and over-the-counter quotations. Operating lease expense, inclusive of the net PVNGS lease payment, was approximately $33.4 million in 2003, $34.9 million in 2002 and $32.7 million in 2001. Aggregate minimum payments to be received in future periods under non-cancelable subleases are approximately $3.6 million. 62 P N M R E S O U R C E S • 2 0 0 3 A n n u a l R e p o r t t o S h a r e h o l d e r s 63 DECEMBER 31, 2003, 2002, 2001 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum operating lease payments (in thousands) at December 31, 2003 are: 6) FAIR VALUE OF FINANCIAL INSTRUMENTS 2004 $ 29,068 2005 30,724 2006 31,542 2007 32,426 2008 33,370 Later years 268,410 TOTAL MINIMUM LEASE PAYMENTS $ 425,540 2003 2002 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE Long-Term Debt $ 987,210)% $ 1,029,349)% $ 980,092)% $ 1,027,435)% Investment in PVNGS Lessors' Notes $ 347,870)% $ 424,731)% $ 368,010)% $ 436,345)% Available for sale investments $ 86,456)% $ 86,456)% $ 152,352)% $ 152,352)% CARRYING VALUE UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE Available-for-sale: Equity securities 42,269)% 13,893)% (344)% 55,818)% U.S. Government securities 4,858)% 361)% (31)% 5,188)% Corporate bonds 11)% –)% –)% 11)% Municipal bonds 19,250)% 1,316)% (13)% 20,553)% Other investments 4,895)% –)% (9)% 4,886)% 71,283)% 15,570)% (397)% 86,456)% 2003 The Company uses derivative financial instruments to manage risk as it relates to changes in natural gas and electricity prices, interest rates of future debt issuances and adverse market changes for investments held by the Company’s various trusts. The Company also uses certain derivative instruments for wholesale electricity sales in order to take advantage of favorable price movements and market timing activities in the wholesale power markets. Pursuant to a 1997 order issued by the New Mexico Public Utility Commission, the predecessor to the PRC, the Company is allowed to hedge certain portions of natural gas supply contracts to protect the Company’s natural gas customers from the risk of adverse price fluctuations in the natural gas market. All hedge gains and losses from these hedges are recoverable through the Company’s purchased gas adjustment clause (“PGAC”) if deemed prudently incurred by the PRC. As a result, earnings are not affected by gains or losses generated by these instruments.  PNM purchased gas options to protect its natural gas customers from the risk of price fluctuations during the 2003-2004 heating season. PNM expended $9.5 million to purchase gas options that limit the maximum amount the Company would pay for gas during the winter heating season. The Company recovered its actual hedging expenditures as a component of the PGAC during the months of October 2003 through February 2004 in equal monthly allotments of $1.9 million. In 2002, PNM purchased gas options to protect its natural gas customers from the risk of price fluctuation during the 2002-2003 heating season. PNM expended $6.0 million to purchase options that limit the maximum amount the Company would pay for gas during the winter heating season. The Company recovered its actual hedging expenditures as a component of the PGAC during the months of October 2002 through February 2003 in equal allotments of $1.2 million. Natural Gas Contracts The proceeds and gross realized gains and losses on the disposition of available-for-sale investments are shown in the following table. Realized gains and losses are determined by specific identification of costs of securities sold. The short-term investment balance was fully redeemed in the year ended December 31, 2003 and included in proceeds from sales (In thousands). 2003 2002 2001 Proceeds from sales $ 123,030)% $ 219,880)% $ 80,943)% Gross realized gains 7,685)% 2,537)% 3,077)% Gross realized losses (5,694)% (7,624)% (7,476)% CARRYING VALUE FAIR VALUE Within 1 year $ 1,513)% $ 1,482)% After 1 year through 5 years 2,857)% 2,889)% After 5 years through 10 years 2,997)% 3,126)% Over 10 years 17,024)% 18,518)% Equity securities 42,269)% 55,818)% Other investments 4,623)% 4,623)% $ 71,283)% $ 86,456)% CARRYING VALUE UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE Available-for-sale: Mortgage-backed securities $ 32,643)% $ 4,134)% $ (1,514)% $ 35,263)% Equity securities 33,145)% 410)% (93)% 33,462)% U.S. Government securities 32,466)% 438)% (19)% 32,885)% Corporate bonds 21,229)% 1,394)% (24)% 22,599)% Municipal bonds 12,725)% 702)% –)% 13,427)% Other investments 14,716)% –)% –)% 14,716)% $ 146,924)% $ 7,078)% $ (1,650)% $ 152,352)% 2002 At December 31, 2003, the available-for-sale securities held by the Company had the following maturities (in thousands): NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001