Stability in our core business Integrity in all our business dealings Goals for 2004 Innovation to meet changing needs Our personal commitment to reliability Solid growth in our wholesale business JEFFRY E. STERBA Chairman, President and Chief Executive Officer of PNM Resources, Inc. Sincerely, PNM RESOURCES • 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 Over the past decade, PNM has worked hard to build a strong financial foundation that supports sustained growth in shareholder value. Retained earnings, the fundamental measure of a company’s net worth, grew from $445 million at the end of 2002 to $503 million at the end of 2003. By taking advantage of lower interest rates, we were able to cut interest expense by nearly $12 million by  refinancing existing debt. We also expanded our line of credit to $300 million to ensure we have the liquidity we need to run and grow our business. Because about 75 to 85 percent of PNM Resources earnings flow from our  electric and gas utility in New Mexico, one of our primary goals over the past  several years has been to gain predictability and stability in the revenues we  generate from this core business. We made significant progress toward that goal in 2003. At the beginning of the year the state legislature officially dropped plans to introduce electric competition in New Mexico. The legislation recognizes the need for a reasonable transition away from the originally proposed restructured markets back to a  vertically integrated industry in New Mexico by allowing us to expand our  wholesale marketing presence and maintain joint dispatch of both regulated and non-regulated generation. In January 2003, the state Public Regulation Commission accepted a negotiated agreement setting PNM electric rates through 2007. The agreement lowered  customer electric rates by $21 million in September 2003, with a second  $14 million reduction planned for September 2005, while still offering the  opportunity to earn a fair return on investment in our electric utility. To improve the return on our gas utility, PNM next negotiated a $22 million increase in gas service rates and fees. Together, the two new rate agreements serve as a solid base for earnings growth over the next several years. Over the past several years, I’ve seen a fundamental change in our corporate  culture as we grapple with the tough questions about how we measure ourselves, what our standards are, and how we hold ourselves accountable. As a result, we have been able to defy the myth that quality costs more. We have been able to improve the quality of service to our customers at the same time we reduced costs, so that PNM customers today are paying lower rates than they were almost  20 years ago. Our PNM slogan, “A Personal Commitment to New Mexico,” has been embraced by employees throughout the company. It’s this commitment our folks make every day to their jobs, to you as shareholders and to the communities they serve that makes the difference. Providing value to shareholders, support for the communities we serve, and  a challenging, rewarding environment for our employees are the bedrock  principles that define the PNM corporate culture. “Do the Right Thing,” the code of corporate ethics adopted by PNM nearly  10 years ago, has provided us with a solid foundation for ethical business  behavior and positioned the company well to comply with the requirements of the Sarbanes-Oxley Act. We take seriously our responsibility to give you the information you need to form your own opinion on your company’s progress. By providing revenue and margin numbers on each business segment, we  are trying to make it easier for our owners to trace the source of earnings and understand the factors that drive financial results. While we take a conservative approach both to financial management and in our growth strategy, we are always seeking out new and better ways to serve  customers, cut costs, and improve your company’s environmental performance. One of the 2003 PNM initiatives I’m most proud of is our participation in the New Mexico Wind Energy Center, a 200-Megawatt “wind farm” that taps an inex- haustible energy source to help produce the power the West needs, without any use of scarce water or any air pollution. In the first months of our voluntary “Sky Blue” program, more than 4,000  customers agreed to pay a small monthly premium to buy a portion of their  energy from renewable generation resources. We also see a market for renewable energy among PNM wholesale customers. In 2003 we made our first major sale, of 50 megawatts of wind energy credits, to an Arizona utility. We look forward to a growing trade that will allow New Mexico’s renewable resources  to supplement or replace fossil fuel power. Our wholesale strategy aims to build long-term relationships based on mutual advantage and confidence. With a vital commodity like electricity, customers want to deal with a supplier they can trust to provide solid value for a fair price. That is the PNM commitment to our customers, both retail and wholesale. The PNM reputation for reliability and fair dealing helped us add several  new clients to our customer base in 2003. Over the course of the year, we signed new long-term contracts to provide 330 megawatts of power to customers in Arizona, Nevada and California. These new power sales contracts balance the more than 550 megawatts in generating capacity PNM has added to our  portfolio over the past four years. Including our obligation to serve our  New Mexico customers, nearly three-quarters of our generation capacity is  now committed under long-term arrangements. In last year’s annual report, I listed five objectives we intended to accomplish in 2003: to continue to improve operational performance, expand our wholesale business, improve the return in our gas utility, add a renewable energy component to the PNM generation mix, and pursue new growth opportunities. We achieved all five of those goals. We have already achieved one of the major goals that we set for 2004 when  we made a commitment to improve our credit rating. In early 2004, both Moody's Investors Services and Standard & Poor's raised PNM's credit rating one notch. The improved credit ratings position the company for continued growth. Pursuing new growth opportunities remains on our to do list in 2004. In 2003, adding several important new long-term contracts helped improve earnings by nearly 8 percent for the year. To continue that upward trend, we need to acquire more power in the near future to serve our expanding wholesale business and meet the growing demand in our home service territory. We are going to be very cautious about how we add those new resources. We are going to do it at the right price and in the right location. Another 2004 goal is to work with New Mexico regulators to find ways to  better manage the impact of high natural gas costs both for PNM gas customers and for our own gas-fired power plants.  With retail electric and gas rates set, earnings growth in 2004 will depend on  continued growth in our home service territory, the continued expansion of our wholesale power business, and our continued success in controlling expenses and improving productivity through our company-wide efforts at process improvement. Our aim is to grow earnings by between 5 and 6 percent a year over the long term. We exceeded that target in 2003 with nearly 8 percent earnings growth. We raised the dividend for the fourth consecutive year in February 2004  bringing the PNM Resources common stock dividend up to $0.96 per year. Strategically, our target is to pay out 50 to 60 percent of earnings from the  regulated utility side of our business as dividends. Since the dividend payout now is a bit under our 60 percent limit, we still have room to grow the dividend as we go forward. As long as our earnings streams hold up, we see dividend growth as an important component of shareholder value. Thank you for your continued confidence in PNM, 3