16 17 • 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 SELECTED FINANCIAL DATA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The selected financial data and comparative operating statistics should be read in conjunction with the consolidated financial statements, the notes to consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. PNM Resources Inc. and Subsidiaries  (In thousands except per share amounts and ratios) 2003 2002 2001 2000 1999 Total Operating Revenues $ 1,455,714)% $ 1,118,694)% $ 2,254,178)% $ 1,526,835)% $ 1,121,362)% Earnings from Continuing Operations $ 58,552)% $ 63,686)% $ 149,847)% $ 100,360)% $ 79,028)% Net Earnings $ 95,173)% $ 63,686)% $ 149,847)% $ 100,360)% $ 82,569)% Earnings per Common Share Continuing Operations $ 1.47)% $ 1.63)% $ 3.83)% $ 2.54)% $ 1.93)% Basic $ 2.39)% $ 1.63)% $ 3.83)% $ 2.54)% $ 2.01)% Diluted $ 2.37)% $ 1.61)% $ 3.77)% $ 2.53)% $ 2.01)% Cash Flow Data Net cash flows provided from operating activities $ 228,692)% $ 97,359)% $ 327,346)% $ 239,515)% $ 213,045)% Net cash flows used in investing activities $ (101,567)% $ (200,427)% $ (407,014)% $ (157,500)% $ (55,886)% Net cash flows generated (used) by financing activities $ (118,133)% $ 78,362)% $ 385)% $ (94,723)% $ (98,040)% Total Assets $ 3,378,629)% $ 3,247,227)% $ 3,127,602)% $ 3,092,494)% $ 2,911,731)% Long-Term Debt, including current maturities $ 987,210)% $ 980,092)% $ 953,884)% $ 953,823)% $ 988,489)% Common Stock Data Market price per common share at year end $ 28.10)% $ 23.82)% $ 27.95)% $ 26.81)% $ 16.25)% Book value per common share at year end $ 27.09)% $ 24.90)% $ 25.87)% $ 23.42)% $ 21.79)% Average number of common shares outstanding 39,747)% 39,118)% 39,118)% 39,487)% 41,038)% Cash dividend declared per common share $ 0.92)% $ 0.88)% $ 0.80)% $ 0.80)% $ 1.00)% Return on Average Common Equity 9.3%) 6.4%) 15.5%) 11.1%) 9.4%) Capitalization Common stock equity 51.9%) 49.5%) 50.8%) 48.6%) 46.7%) Preferred stock without mandatory  redemption Requirements 0.6)% 0.7)% 0.6)% 0.7)% 0.7)% Long-term debt, less current maturities 47.5)% 49.8)% 48.6)% 50.7)% 52.6)% 100.00%) 100.00%) 100.00%) 100.00%) 100.00%) The following is management’s assessment of the Company’s financial condition and the significant factors affecting the results of operations. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes. Trends and contingencies of a material nature are discussed to the extent known. The Holding Company is an investor-owned holding company of energy and energy related companies. 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. Overview Competitive Strategy The Company is positioned as a “merchant utility,” primarily operating as a regulated energy service provider. The Company is also engaged in the sale and marketing of electricity in the competitive energy marketplace. As a utility, PNM has an obligation to serve its customers under the jurisdiction of the PRC. As a wholesale electricity provider, PNM markets excess production from the utility, as well as unregulated generation, into a competitive marketplace. As part of its electric wholesale power operation, it purchases wholesale electricity in the open market for future resale or to provide energy to retail customers in New Mexico when the Company’s generation assets cannot satisfy demand. The wholesale operations utilize a net asset-backed strategy, whereby the Company’s aggregate net open position for the sale of electricity is covered by the Company’s forecasted excess generation capabilities.  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”). These segments model the resource allocations as mandated in the Global Electric Agreement (see Note 13 – “Commitments and Contingencies – Global Electric Agreement” in the Notes to Consolidated Financial Statements). Electric consists of the distribution and generation of electricity for retail electric customers in New Mexico. Gas includes the transportation and distribution of natural gas to end-users. Transmission consists of the transmission of electricity 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 Utility Operations strategy is directed at supplying reasonably priced and reliable energy to retail customers through customer-driven  operational excellence, high quality customer service, cost efficient processes, and improved overall organizational performance. The Wholesale Operations strategy calls for increased net asset-backed energy sales supported by long-term contracts and the wholesale market, whereby the Company's aggregate net open forward electric sales position, including short term sales, forward sales and long-term contracts, is covered by its forecasted excess generation capacity. The net asset-backed sales are actively monitored by management by the use of stringent risk management policies. The Company’s future growth plans call for approximately 75% of its new generation portfolio to be committed through long-term contracts as required by the Global Electric Agreement. Growth will be dependent on market development and on the Company’s ability to generate funds for the Company’s future expansion. Although the current economic environment has led the Company to scale back its expansion plans, the Company will continue to operate in the wholesale market and seek reasonably priced asset additions. Expansion of the Company’s generating portfolio will depend on the Company’s ability to acquire favorably priced assets at strategic locations and to secure long-term commitments for the purchase of power from the acquired plants. Earnings growth in 2003 was primarily due to the addition of new long-term power contracts, coupled with customer growth in the Company’s Utility Operations and the Company’s ongoing cost control efforts. The gains made in the Company’s Wholesale Operations more than offset a retail electric rate reduction that took effect in September and a reduction in gas utility revenues due to warmer weather in 2003. Wholesale Operations was the biggest contributor to the Company’s earnings growth in 2003, aided by a more stable price environment. The Company continued to grow its wholesale sales by adding long-term contracts to ensure a reliable and sustainable revenue source to support its Wholesale Operations. In 2003, the Company added more than 330 MW’s of new long-term contracts, of which contracts for 57 MW’s were added in late 2003 or do not commence until 2004. In addition, the Company added 200 MW of generating capacity in 2003 to support retail and enhance wholesale operations. These developments allowed the Company to improve its velocity, the Company’s ability to repurchase and remarket previously sold capacity. The Company’s velocity ratio, which is defined as total electric wholesale and retail sales divided by total output of its generation plants, increased to 1.9 in 2003 from 1.6 in 2002. These gains were partially offset by extended scheduled outages and unplanned outages at SJGS and PVNGS and the associated increases in purchase power costs. Overall Outlook