• 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 67 The components of the net accumulated deferred income tax liability were (In thousands):  The Company’s provision for income taxes, before cumulative effect of changes in accounting principles, differed from the Federal income tax computed at the statutory rate for each of the years shown. The differences are attributable to the following factors (In thousands):  2003 2002 2001 Federal income tax at statutory rates $ 30,459)% $ $^{34,056}$)% $ $^{81,024}$)% Investment tax credits  (3,121)% $^{(3,131)}$% $^{(3,139)}$% Depreciation of flow-through items 2,033)% $^{2,112}$)% $^{2,249}$)% Gains on the sale and leaseback of PVNGS Units 1 and 2 (527)% $^{(527)}$% $^{(527)}$% Equity income from passive investments –)% $^{–}$)% $^{(1,180)}$% Annual reversal of deferred income taxes accrued at prior tax rates (1,963)% $^{(1,963)}$% $^{(1,963)}$% Valuation reserve –)% $^{–}$)% $^{(6,552)}$% Research and development credit (966)% $^{(551)}$% $^{–}$)% Affordable housing credit (969)% $^{(947)}$% $^{–}$)% Allowance for funds used during construction (906)% $^{–}$)% $^{–}$)% State income tax 4,161)% $^{4,715}$)% $^{10,706}$)% Other  (312)% $^{(733)}$% $^{445}$)% TOTAL INCOME TAXES $ 27,889)% $ $^{33,031}$)% $ $^{81,063}$)% EFFECTIVE TAX RATE 32.05%) $^{33.95%}$) $^{35.02%}$) 2003 2002 Deferred Tax Assets: Nuclear decommissioning costs $ 32,181)% $ $^{32,192}$)% Regulatory liabilities related to income taxes  34,725)% $^{37,656}$)% Minimum pension liability 49,692)% $^{56,008}$)% Other  44,225)% $^{57,373}$)% TOTAL DEFERRED TAX ASSETS  160,823)% $^{183,229}$)% Deferred Tax Liabilities: Depreciation  (245,145))% $^{(216,425)}$% Investment tax credit  (38,462)% $^{(41,583)}$% Regulatory assets related to income taxes (69,327))% $^{(67,744)}$% Asset retirement obligations (24,524)% $^{–}$)% Other  (71,925))% $^{(38,792)}$% TOTAL DEFERRED TAX LIABILITIES  (449,383)% $^{(364,544)}$% NET ACCUMULATED DEFERRED INCOME TAX LIABILITIES $ (288,560)% $ $^{(181,315)}$% The following table reconciles the change in the net accumulated deferred income tax liability to the deferred income tax expense included in the consolidated statement of earnings for the period: Net change in deferred income tax liability per above table $ 107,245)% Change in tax effects of income tax related regulatory assets and liabilities (4,514)% Tax effect of mark-to-market on investments available for sale (10,863)% Tax effect of excess pension liability (6,316)% Tax effect of cumulative effect of changes in accounting principles (23,999)% Other 126)% DEFERRED INCOME TAX EXPENSE FOR THE PERIOD $ 61,679)% Management is responsible for the determination of the asset target mix and the rate of return. The Company’s current target asset mix was applied to an investment consultant’s asset model to determine the assumption of a 9% rate of return. The investment consultant’s asset model assumption set consists of forward looking mean returns, standard deviations, and a correlation matrix for asset classes of interest to institutional clients. The investment consultant’s asset model evaluates asset assumptions on an annual basis and more frequently when substantial changes in market conditions indicate. The pension plan and other post-retirement benefits have in place a policy that defines the investment objectives; establishes performance goals of the asset managers, and provides procedures for the manner in which investments are to be reviewed. The Plan implements its investments strategies to achieve the following objectives: contributed $9.0, $9.5 and $9.0 million in the years ended December 31, 2003, 2002 and 2001, respectively. In January 2002, the Company made an aggregate contribution of $23.5 million to fund pension and other post-retirement benefit plans. An additional aggregate contribution of $1.1 million was made in September 2002 and $1.5 million in December 2002. On May 13, 2003, the board of directors approved the use of Holding Company common stock in the funding of the Company’s pension plan as well as its retiree medical trust. Corporate plan sponsors may make contributions of common stock to their defined benefit plans of up to 10% of the value of the portfolio without the approval of the United States Department of Labor (“DOL”) provided that the contribution does not otherwise constitute a prohibited transaction under the Employee Retirement Income Security Act (“ERISA”). On June 11, 2003, a contribution of 1,121,495 Holding Company common shares (approximately $28.9 million in market value) was made to the Company’s pension plan. The Company does not plan to make any contributions in 2004 to the pension plan. In December 1996, the Board of Directors approved changes to the Company’s pension plan and the implementation of a 401(k) defined contribution plan effective January 1, 1998. Salaries used in pension plan benefit calculations were frozen as of December 31, 1997. Additional credited service can be accrued under the pension plan up to a limit determined by age and years of service. The Company contributions to the 401(k) plan consist of a discretionary contribution equal to 3% of eligible compensation, and a discretionary matching contribution equal to 75% of the first 6% of eligible compensation contributed by the employee on a before-tax basis. Beginning January 1, 2004, the Company will make a non-matching contribution ranging from 3% to 10% of eligible compensation based on the eligible employee’s age. The Company The Company and its subsidiaries maintain a qualified defined benefit pension plan which covers eligible union and non-union employees, including officers. The pension plan was frozen at the end of 1997 with regard to new participants. The pension plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and the average of their highest annual base salary for three consecutive years. The Company’s policy is to fund actuarially-determined contributions. Contributions to the plan reflect benefits attributed to employees’ years of service to date and also for services expected to be provided in the future. Pension plan assets primarily consist of common stock, fixed income securities, cash equivalents and real estate. In 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefits from September 30 to December 31 to better reflect the actual pension balances as of the Company’s balance sheet dates and recognized a cumulative effect of a change in accounting principle of $0.8 million, net of taxes at $0.5 million (see Note 17). The Company has no net operating loss carryforwards as of December 31, 2003. The Company defers investment tax credits related to rate regulated assets and amortizes them over the estimated useful lives of those assets.  All federal income tax years prior to 2000 are closed. Tax years 2000 and 2001 are currently under examination by the IRS. Although the Company does not expect any significant adjustments to the tax provision as a result of the IRS examination, management is unable to determine the final outcome of the IRS examination at this time. There are no material differences between the provision for income taxes and deferred income taxes between the Company and PNM. • Maximize the return on assets, commensurate with the risk that the Corporate Investment Committee deem appropriate to: meet the obligations of the pension plan and other post-retirement benefits; minimize the volatility of the pension expense; and account for contingencies; and • Generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumption. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001 Pension Plan (9) PENSION AND OTHER POST-RETIREMENT BENEFITS