• 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 The Holding Company is an investor-owned holding company of energy and energy related businesses. Its principal subsidiary, PNM, is an integrated public utility primarily engaged in the generation, transmission and distribution of electricity; transmission, distribution and sale of natural gas within the State of New Mexico; and the sale and marketing of electricity in the Western United States. In addition, the Holding Company provides energy and technology related services through its wholly owned subsidiary, Avistar. As it currently operates, the Company’s principal business segments, whose operating results are regularly reviewed by the Company’s management, are Utility Operations and Wholesale Operations (“Wholesale”). Utility Operations include Electric Services (“Electric”), Gas Services (“Gas”) and Transmission Services (“Transmission”). In 2003, the Company began allocating its business and results between the Electric and Wholesale segments for financial reporting purposes based on the assets allocations as mandated in the Global Electric Agreement (see Note 13 – Commitments and Contingencies – Global Electric Agreement). Certain prior period amounts have been reclassified to conform to the current year presentation. In addition, Transmission was reclassified from Electric and disclosed as its own business segment during the second quarter of 2003. The following segment presentation is based on the methodology that the Company’s management uses for making operating decisions and assessing performance of its various business activities. As such, the following presentation reports operating results without regard to the effect of accounting or regulatory changes and similar one-time items not related to normal operations. Reconciliation to the consolidated financial statements is provided. In addition, adjustments related to EITF Issue 02-03 “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities” and 03-11 “Reporting Realized Gains and Losses on Derivative Instruments that are subject to FASB statement No. 133 and Not Held for Trading Purposes” are excluded. These accounting pronouncements require a net presentation of trading gains and losses and realized gains and loss for certain non-trading derivatives. Management evaluates wholesale operations on a gross presentation basis due to its net asset-backed marketing strategy and the importance it places on the Company’s ability to repurchase and remarket previously sold capacity. The Company has publicly referred to this as “velocity”. Electric consists of the distribution and generation of electricity for retail electric customers in New Mexico. The Company provides retail electric service to a large area of north central New Mexico, including the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico. Customer rates for retail electric service are set by the PRC based on the provisions of the Global Electric Agreement.  Gas distributes natural gas to most of the major communities in New Mexico, including two of New Mexico’s three largest metropolitan areas, Albuquerque and Santa Fe. The Company’s customer base includes both sales-service customers and transportation-service customers. PNM purchases natural gas in the open market and resells it at cost to its distribution customers. As a result, increases or decreases in gas revenues resulting from wholesale gas price fluctuations do not impact the Company’s consolidated gross margin or earnings. The Company owns or leases transmission lines, interconnected with other utilities in New Mexico and south and east into Texas, west into Arizona, and north into Colorado and Utah. Transmission revenues consist of sales to third parties as well as to Electric and Wholesale. Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines that include long-term contracts, forward sales and short-term sales. The source of these sales is supply created by selling the unused capacity of jurisdictional assets as well as the capacity of the Company’s wholesale, plants excluded from retail rates. Both regulated and unregulated generation is jointly dispatched in order to improve reliability, provide the most economic power to retail customers and maximize profits on any wholesale transactions. Long-term contracts include sales to firm-requirements and other wholesale customers with multi-year arrangements. These contracts range from 2 to 17 years with an average of 7.5 years. Forward sales include third party purchases in the forward market that range from 1 month to 3 years. These transactions do not qualify as normal sales and purchases as defined in SFAS 133, and thus are generally marked to market. Short-term sales generally include spot market, hour ahead, day ahead and week ahead contracts with terms of 30 days or less. Also included in short-term sales are sales of any excess generation not required to fulfill PNM’s retail load and contractual commitments. Short-term sales also cover the revenue credit to retail customers as specified in the Global Electric Agreement. Wholesale Operations Utility Operations 55 ELECTRIC GAS TRANSMISSION Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) reports a measure for accumulated changes in equity of the Company that results from transactions and other economic events other than transactions with shareholders. The following table sets forth the changes in each component of accumulated other comprehensive income (loss) (In thousands): MARK-TO-MARKET ACCUMULATED UNREALIZED FOR CERTAIN  OTHER GAIN (LOSS)  MINIMUM PENSION DERIVATIVE COMPREHENSIVE  ON SECURITIES LIABILITY TRANSACTIONS INCOME (LOSS) BALANCE AT DECEMBER 31, 2000 $ (1,518)% $ 1,545)% $ –)% $ 27)% Period change in: Minimum pension liability adjustment –)% 28,858)% –)% 28,858)% Unrealized holding gains arising from the period (70)% –)% –)% (70)% Reclassification adjustment for losses included in net income 526)% –)% –)% 526)% Initial implementation of SFAS 133 designated cash flow hedges –)% –)% 6,148)% 6,148)% Change in fair market value of designated cash flow hedges –)% –)% (345)% (345)% Reclassification adjustment for losses included in net income –)% –)% (6,148)% (6,148)% BALANCE AT DECEMBER 31, 2001 (1,062)% 30,403)% (345)% 28,996)% Period change in: Minimum pension liability adjustment –)% 55,061)% –)% 55,061)% Unrealized holding gains arising from the period (1,303)% –)% –)% (1,303)% Reclassification adjustment for losses included in net income 919)% –)% –)% 919)% Change in fair market value of designated cash flow hedges –)% –)% 10,361)% 10,361)% Reclassification adjustment for losses included in net income –)% –)% 687)% 687)% BALANCE AT DECEMBER 31, 2002 (1,446)% 85,464)% 10,703)% 94,721)% Period change in: Minimum pension liability adjustment –)% (9,589)% –)% (9,589)% Unrealized holding gains arising from the period (1,916)% –)% –)% (1,916)% Reclassification adjustment for losses included in net income 672)% –)% –)% 672)% Change in fair market value of designated cash flow hedges –)% –)% (10,401)% (10,401)% BALANCE AT DECEMBER 31, 2003 $ (2,690)% $ 75,875)% $ 302)% $ 73,487)% The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which uses the asset and liability method for accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis. Current PRC approved rates include the tax effects of the majority of these differences. SFAS No. 109 requires that rate-regulated enterprises record deferred income taxes for temporary differences accorded flow-through treatment at the direction of a regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Because the PRC has consistently permitted the recovery of previously flowed-through tax effects, the Company has established regulatory liabilities and assets offsetting such deferred tax assets and liabilities. Items accorded flow-through treatment under PRC orders, deferred income taxes and the future ratemaking effects of such taxes, as well as corresponding regulatory assets and liabilities, are recorded in the financial statements. The Company evaluates its tangible long-lived assets in relation to their future undiscounted cash flows to assess recoverability in accordance with SFAS 144. Impairment testing of power generation assets is performed periodically in response to changes in market conditions. The Company considers its power generation assets used to supply jurisdictional and wholesale markets as a combined group due to its joint dispatch of these assets. Generation assets used primarily for reliability purposes are evaluated separately as a group. The Company did not recognize any impairment on its long-lived assets for the years 2001 through 2003. Certain prior year amounts have been reclassified to conform to the 2003 financial statement presentation. Income Taxes 54 Asset Impairment Change in Presentation  (2) SEGMENT INFORMATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002, 2001