58 59 • 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 P N M R E S O U R C E S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001 (b) Includes a Company contribution of $3.0 million, net of tax benefit of $2.0 million, to the PNM Foundation, a $7.9 million write-off, net of tax benefit of $5.1 million, of nonrecoverable coal mine decommissioning costs, the $7.8 million write-off, net of tax benefit of $5.2 million, of impaired Avistar investments, and the costs associated with the terminated acquisition of Western Resources of $10.9 million, net of tax benefit of $7.1 million, reduced consolidated net earnings. (a) Reflects EITF 02-3 impact, under which wholesale revenues and the associated cost of energy of $89.4 million are reclassified to a net margin basis in accordance with GAAP. (3) REGULATORY ASSETS AND LIABILITIES The Company is subject to the provisions of SFAS 71 with respect to operations regulated by the PRC and the FERC. Regulatory assets represent probable future recovery of previously incurred costs, which will be collected from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Consolidated Balance Sheets as of December 31, relate to the following (In thousands): The number of authorized shares of common stock of the Holding Company is 120 million shares with no par value. The number of shares issued and outstanding was 40,258,997 and 39,117,799 as of December 31, 2003 and 2002. In 2003, the Holding Company issued 19,703 common shares for the Employee Stock Purchase Plan for $0.5 million. On June 11, 2003, a contribution of 1,121,495 Holding Company common shares Common Stock Changes in common stock for PNM Resources, Inc. and Subsidiaries are as follows (Dollars in thousands): (4) CAPITALIZATION Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets are probable of future recovery. The forward starting interest rate swaps were terminated on May 13, 2003 for a cash settlement of $27.1 million. This amount has been capitalized by the Company as a financing cost and will be amortized over the life of the bonds.  PNM had $46.0 million of tax-exempt bonds outstanding that were callable at a premium beginning December 15, 2002, and an additional $136.0 million that became callable at a premium in August 2003. With the intention of refinancing these bonds, PNM had hedged the entire planned refinancing by entering into five forward starting interest rate swaps in the fourth quarter of 2001 and the first quarter of 2002. The Company received regulatory approval to refund the tax-exempt bonds on October 29, 2002. The refinancings were completed on May 23, 2003.  The Company accounts for its postretirement benefits other than pensions (“OPEB”) costs on an accrual basis. Therefore, the Company does not defer any OPEB costs as regulatory assets. The Company is permitted, under SFAS 71, to accrue the estimated cost of removal and salvage associated with certain of its assets through depreciation expense. Cost of removal, net of salvage, allowed under rate regulations was included in accumulated depreciation. The amounts accrued in depreciation are not associated with AROs recorded in accordance with SFAS 143. With the adoption of SFAS 143, the Company has reclassified $236.0 million and $227.9 million of removal costs from accumulated depreciation to regulatory liabilities as of December 31, 2003 and 2002, respectively. In August 2001, the Company signed an agreement with San Juan Coal Company (“SJCC”) and Tucson Electric Power Company (“Tucson”) to replace two surface mining operations with a single underground mine located adjacent to the SJGS. The Company recorded a regulatory asset of $113 million for the estimated costs anticipated to close the surface mining operation. In 2001, the Company wrote off $13.0 million for the portion of coal mine decommissioning costs associated with the Company’s FERC firm requirements customers and a portion of SJGS Unit 4. The Company will recover the remaining $100 million of costs associated with coal mine decommissioning that are attributed to New Mexico retail customers pursuant to its Global Electric Agreement which provides for a 17-year recovery of these costs beginning in September 2003. In 2003, the Company completed a comprehensive review of these costs and costs related to the decommissioning of the current underground mine and made adjustments to the liability and the related regulatory asset based on the resulting changes in estimate (see Note 12). In 2001, the Company wrote off $11.1 million of regulatory assets of which $8.1 million related to non-recoverable transition costs and $3.0 million for other non-recoverable regulatory assets. See Note 13 – “Commitments and Contingencies – Global Electric Agreement” regarding 2003 write-off of transition costs. Substantially all of the Company’s regulatory assets and regulatory liabilities are reflected in rates charged to customers or have been addressed in a regulatory proceeding. The Company receives or pays a rate of return on these regulatory assets and regulatory liabilities, except for mine reclamation costs, deferred income taxes, interest rate hedging costs, and unrealized loss on PVNGS decommissioning trust. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001 CORPORATE WHOLESALE AND OTHER CONSOLIDATED 2001: Operating revenues: External customers $ 1,411,500)% $ (87,813)(a) $ 2,254,178)% Intersegment revenues –)% –(a) –)% Depreciation and amortization 5,774)% 4,120(a) 96,936)% Interest income 5,234)% 9,137(a) 48,742)% Interest charges 17,063)% (440)(a) 64,840)% Total income tax expense (benefit) 79,404)% (29,407)(b) 81,063)% Operating income 136,237)% 6,031(a) 222,677)% Segment net income (loss) 121,161)% (18,717)(b) 149,847)% TOTAL ASSETS 377,585)% 264,902(a) 3,127,602)% GROSS PROPERTY ADDITIONS 23,631)% 14,945(a) 264,844)% 2003 2002 Assets: Current: PGAC $ 10,416)% $ $^{941}$)% Gas Take-or-Pay Costs 5,020)% $^{120}$)% SUBTOTAL 15,436)% $^{1,061}$)% Deferred: Mine Reclamation Costs 92,521)% $^{100,877}$)% Deferred Income Taxes 70,576)% $^{69,029}$)% Financing Costs 26,368)% $^{–}$)% Transition Costs –)% $^{16,720}$)% Loss on Reacquired Debt 20,936)% $^{7,345}$)% Other 5,015)% $^{2,312}$)% Total Deferred Assets 215,416)% $^{196,283}$)% TOTAL ASSETS 230,852)% $^{197,344}$)% Liabilities: Deferred: Asset retirement obligation (27,976)% $^{–}$)% Deferred Income Taxes (35,974)% $^{(38,941)}$% Cost of Removal (235,992)% $^{(227,933)}$% Unrealized loss on PVNGS decommissioning trust (6,479)% $^{(3,813)}$% Gain on Reacquired Debt (1,351)% $^{(1,503)}$% PVNGS Prudence Audit (4,306)% $^{(4,682)}$% Settlement due Customers (1,242)% $^{(1,325)}$% Other (3,064)% $^{(1,755)}$% TOTAL DEFERRED LIABILITIES (316,384)% $^{(279,952)}$% NET REGULATORY LIABILITIES $ (85,532)% $ $^{(82,608)}$% COMMON STOCK NUMBER AGGREGATE OF SHARES PAR VALUE Balance at December 31, 2001 39,117,799)% $ 625,632)% Exercise of stock options –)% (2,412)% Tax benefit from exercise of stock options –)% 899)% Balance at December 31, 2002 39,117,799)% 624,119)% Restricted stock rights –)% 31)% Exercise of stock options –)% (9,130)% Tax benefit from exercise of stock options –)% 3,637)% Pension contribution 1,121,495)% 28,609)% ESPP purchase 19,703)% 456)% Balance at December 31, 2003 40,258,997)% $ 647,722)%