Company Update

8-K 1 f8k_092605restate.htm FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) September 26, 2005 (September 26, 2005) Commission Name of Registrants, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 333-32170 PNM Resources, Inc. 85-0468296 (A New Mexico Corporation) Alvarado Square Albuquerque, New Mexico 87158 (505) 241-2700 1-6986 Public Service Company of New Mexico 85-0019030 (A New Mexico Corporation) Alvarado Square Albuquerque, New Mexico 87158 (505) 241-2700 ______________________________ (Former name, former address and former fiscal year, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b) [] Pre-commencement communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR 240.13e-4(c) Item 8.01 Other Events. PNM Resources, Inc. ("PNMR") and Public Service Company of New Mexico ("PNM") (collectively the "Company") conform their presentation of segment information contained in the 2004 Annual Report on Form 10-K to reflect the segment presentation previously disclosed in the Company's Form 10-Q for the quarterly period ended June 30, 2005. In conjunction with the acquisition of TNP Enterprises, Inc. and Subsidiaries ("TNP") on June 6, 2005, Company management changed its business segment reporting. TNP's primary subsidiaries are Texas-New Mexico Power Company ("TNMP") and First Choice Power, L.P. ("First Choice"). Upon review and in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), and as disclosed in the Company's Form 10-Q for the quarterly period ended June 30, 2005, the Company determined that two segments previously reported separately, Transmission and Electric, should be combined to form one reportable segment, PNM Electric, as this combined segment represents an integral part of serving utility customers. This also makes the PNM Electric segment comparable with the TNMP Electric segment post-acquisition. All prior periods have been reclassified to conform to the current presentation and include certain estimates and allocations where necessary. The Company's principal businesses include regulated operations and unregulated operations. Regulated Operations, as presented in the 2004 Annual Report on Form 10-K, include the segments PNM Electric and PNM Gas and were previously referred to as Utility Operations. Unregulated Operations include the segment PNM Wholesale and were previously referred to as Wholesale Operations. Subsequent to the acquisition of TNP, Regulated Operations also include the TNMP Electric segment and Unregulated Operations include the First Choice segment. This Current Report on Form 8-K conforms the information contained in the Company's 2004 Annual Report on Form 10-K to the presentation reported in its Form 10-Q for the quarterly period ending June 30, 2005. Accordingly, this Form 8-K revises information previously reported in the Company's 2004 Annual Report on Form 10-K to reflect the effects of the change in segment reporting. This report is limited to reclassifications to reflect the change in business segment reporting, including the change in principal business names, as discussed above. Sections of the 2004 Annual Report on Form 10-K that are included in their entirety in this Form 8-K are: Item 6. Selected Financial Data Item 8. Financial Statements and Supplementary Data Sections of the 2004 Annual Report on Form 10-K that are not included in their entirety, but rather include only sections that require update due to the change in segment reporting, are: Item 1. Business Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Other sections of the 2004 Annual Report on Form 10-K are not included in whole or in part, as they are not impacted by the change in segment reporting. 2 NO ATTEMPT HAS BEEN MADE IN THIS FORM 8-K TO MODIFY OR UPDATE OTHER DISCLOSURES AS PRESENTED IN THE ORIGINAL FORM 10-K. THIS FORM 8-K DOES NOT INCLUDE DISCLOSURES FOR SEGMENTS, RESULTS OF OPERATIONS OR FINANCIAL POSITION OF TNP, SINCE THE ACQUISITON OF TNP OCCURRED AFTER THE PERIODS PRESENTED IN THE ORIGINAL FORM 10-K. THIS FORM 8-K IS LIMITED TO THE RECLASSIFICATIONS NECESSARY TO REFLECT A CHANGE IN BUSINESS SEGMENT REPORTING AS REPORTED PRIOR TO PNMR'S ACQUISITION OF TNP. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements made in this report and other documents the Company files with the SEC that relate to future events or the Company's expectations, projections, estimates, intentions, goals, targets and strategies are made pursuant to the Private Securities Litigation Reform Act of 1995. You are cautioned that all forward-looking statements are based upon current expectations and estimates and the Company assumes no obligation to update this information. Because actual results may differ materially from those expressed or implied by the forward-looking statements, the Company cautions you not to place undue reliance on these statements. Many factors could cause actual results to differ, and will affect the Company's future financial condition, cash flow and operating results. These factors include the availability of cash from TNP Enterprises, Inc. and its subsidiaries, the risks that the businesses will not be integrated successfully, the risk that the benefits of the acquisition will not be fully realized or will take longer to realize than expected, disruption from the acquisition making it more difficult to maintain relationships with customers, employees, suppliers or other third parties, conditions in the financial markets relevant to the acquisition, the outcome of litigation with SW Acquisition, L.P. relating to the TNP Enterprises, Inc. acquisition and of any appeals of the Public Utility Commission of Texas order in the stranded cost true-up proceeding or the acquisition proceeding, the ability of First Choice Power to attract and retain customers, changes in Electric Reliability Council of Texas protocols, changes in the cost of power acquired by First Choice Power, collections experience, insurance coverage available for claims made in litigation, interest rates, weather (including impacts on the Company of the hurricanes in the Gulf Coast region), water supply, fuel costs, availability of fuel supplies, risk management and commodity risk transactions, seasonality and other changes in supply and demand in the market for electric power, wholesale power prices, market liquidity, the competitive environment in the electric and natural gas industries, the performance of generating units and transmission system, the ability of the Company to secure long-term power sales, the risks associated with completion of the construction of Luna Energy Facility, including construction delays and unanticipated cost overruns, state and federal regulatory and legislative decisions and actions, the outcome of legal proceedings, changes in applicable accounting principles and the performance of state, regional and national economies. For a detailed discussion of the important factors that affect the Company and that could cause actual results to differ from those expressed or implied by the Company's forward-looking statements, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's current and future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and the Company's current and future Current Reports on Form 8-K, filed with the SEC. 3 TABLE OF CONTENTS Page GLOSSARY 5 THE COMPANY 8 REGULATED OPERATIONS 9 UNREGULATED OPERATIONS 11 EMPLOYEES 12 SELECTED FINANCIAL DATA 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 OVERVIEW 17 OVERALL OUTLOOK 18 RESULTS OF OPERATIONS 20 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38 FINANCIAL STATEMENTS AND EXHIBITS 143 SIGNATURE 144 4 GLOSSARY Afton..................................... Afton Generating Station AFUDC................................. Allowance For Funds Used During Construction Albuquerque......................... City of Albuquerque, New Mexico ALJ........................................ Administrative Law Judge Anaheim............................... City of Anaheim, California APS....................................... Arizona Public Service Company ARO...................................... Asset Retirement Obligation AR Securitization................. Accounts Receivable Securitization BNCC.................................... BHP Navajo Coal Company Board..................................... Board of Directors BTU....................................... British Thermal Unit Cal ISO.................................. California System Operator Cal PX................................... California Power Exchange Cascade................................. Cascade Investment, LLC Clean Air Act....................... The Clean Air Act Amendments of 1990 Congress............................... United States Congress Decatherm............................ 1,000,000 BTUs Delta...................................... Delta-Person Limited Partnership, a New Mexico limited partnership DOE...................................... United States Department of Energy DOJ....................................... United States Department of Justice DOL...................................... United States Department of Labor DRP....................................... Director Retainer Plan EIP......................................... Eastern Interconnection Project EPE........................................ El Paso Electric Company EPA....................................... United States Environmental Protection Agency ERCOT.................................. Electric Reliability Council of Texas ERISA.................................... Employee Retirement Income Security Act FASB..................................... Financial Accounting Standards Board Farmington........................... City of Farmington, New Mexico FERC..................................... Federal Energy Regulatory Commission Four Corners......................... Four Corners Power Plant FPL........................................ FPL Energy New Mexico Wind, LLC GAAP.................................... Generally Accepted Accounting Principles in the United States of America Gathering Company............ Sunterra Gas Gathering Company, a wholly‑owned subsidiary of PNM Resources, Inc. GCT....................................... Grand Canyon Trust Great Southwestern............. Great Southwestern Construction, Inc. Holding Company................ PNM Resources, Inc. IRS......................................... United States Internal Revenue Service ISO........................................ Independent System Operator KW........................................ Kilowatt KWh...................................... Kilowatt Hour LIBOR................................... London Interbank Offered Rate Lordsburg............................. Lordsburg Generating Station 5 Los Alamos........................... The County of Los Alamos, New Mexico Luna...................................... Luna Energy Facility Merchant Plant..................... Wholesale power plant that sells energy on the open market Moody's................................. Moody's Investor Services, Inc. MW....................................... Megawatt MWh..................................... Megawatt Hour Navajo Acts.......................... Navajo Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act Ninth Circuit........................ United States Court of Appeals for the Ninth Circuit NMED................................... New Mexico Environment Department NMPRC................................. New Mexico Public Regulation Commission, successor to the NMPUC NMPUC................................ New Mexico Public Utility Commission NNHPD................................ Navajo Nation Historic Preservation Department NOPR.................................... Notice of Proposed Rulemaking NRC...................................... United States Nuclear Regulatory Commission NSPS..................................... New Source Performance Standards NSR....................................... New Source Review Nuclear Waste Act............... Nuclear Waste Policy Act of 1982, as amended in 1987 OPEB..................................... Postemployment Benefits Other than Pension Plans O&M..................................... Operations and Maintenance Expense PCBs...................................... Pollution Control Bonds PEP........................................ Omnibus Performance Equity Plan PGAC.................................... PNM's Purchased Gas Adjustment Clause PG&E.................................... Pacific Gas and Electric Co. PNM...................................... Public Service Company of New Mexico PPA....................................... Power Purchase Agreement PSD....................................... Prevention of Significant Deterioration PSP........................................ Performance Stock Plan Processing Company............ Sunterra Gas Processing Company, a wholly‑owned subsidiary of PNM Resources, Inc. PUCT.................................... Public Utility Commission of Texas PUHCA................................. The Public Utility Holding Company Act of 1935 PVNGS.................................. Palo Verde Nuclear Generating Station RCRA.................................... Resource Conservation and Recovery Act REA....................................... Renewable Energy Act RMRR.................................... Routine Maintenance, Repair or Replacement RTO....................................... Regional Transmission Organization Reeves Station....................... Reeves Generating Station Restructuring Act................. New Mexico Electric Utility Industry Restructuring Act of 1999, as amended RMC...................................... Risk Management Committee Salt River Project.................. Salt River Project Agricultural Improvement and Power District SCE........................................ Southern California Edison Company SCPPA.................................. Southern California Public Power Authority SDG&E.................................. San Diego Gas and Electric Company 6 SEC........................................ United States Securities and Exchange Commission SESCO................................... San Angelo Electric Service Company SFAS...................................... Statement of Financial Accounting Standards SJCC...................................... San Juan Coal Company SJGS....................................... San Juan Generating Station SMA...................................... Supply Margin Assessment SPS........................................ Southwestern Public Service Company SUNs..................................... Senior Unsecured Notes S&P....................................... Standard and Poor's Ratings Services TCEQ.................................... Texas Commission on Environmental Quality TNMP.................................... Texas‑New Mexico Power Company TNP....................................... TNP Enterprises, Inc. Therm.................................... Natural gas component of gas revenues Throughput.......................... Volumes of gas delivered, whether or not owned by the Company Tri-State................................ Tri-State Generation and Transmission Association, Inc. Tucson................................... Tucson Electric Power Company UAMPS................................. Utah Associated Municipal Power Systems USBR..................................... United States Bureau of Reclamation USEC..................................... United States Enrichment Corporation USFS...................................... United States Forest Service VAR...................................... Value at Risk WestConnect........................ WestConnect RTO, LLC WSPP.................................... Western Systems Power Pool 7 THE COMPANY PNM Resources, Inc., the Holding Company, was incorporated in the State of New Mexico on March 3, 2000. The Holding Company's principal subsidiary, PNM, was incorporated in the State of New Mexico on May 9, 1917. Upon the completion on December 31, 2001 of a one-for-one share exchange between PNM and the Holding Company, the Holding Company became the parent company of PNM. Prior to the share exchange, the Holding Company had existed as a subsidiary of PNM. The new parent company began trading on the New York Stock Exchange under the same PNM symbol beginning on December 31, 2001. This filing for PNM Resources, Inc. and Subsidiaries and PNM is presented on a combined basis. The Holding Company and PNM and Subsidiaries have their principal offices at Alvarado Square, Albuquerque , New Mexico 87158 (telephone number 505‑241‑2700). The Holding Company is an investor-owned holding company of energy and energy-related companies. PNM is a public utility primarily engaged in the generation, transmission, distribution, sale and marketing of electricity, and in the transmission, distribution and sale of natural gas within the State of New Mexico. For the periods included in this report, the business of PNM constituted substantially all of the business of the Holding Company and its subsidiaries. Therefore, the historical financial results and results of operations of PNM are virtually identical to the consolidated results of the Holding Company and all its subsidiaries for the periods presented. For ease of discussion, this report may use the term "Company" when referring to PNM or when discussing matters of common applicability to the Holding Company and PNM. Effective December 30, 2004, the Holding Company became a registered holding company under PUHCA. The Holding Company also created a subsidiary called PNMR Services Company, which began operating on January 1, 2005, subject to final approval by the SEC. A registered holding company typically provides shared services to itself and its subsidiaries through a services company. The Holding Company's status as a registered holding company will not change the utility operations of the Company. The Company's principal businesses, whose operating results are regularly reviewed by the Company's management, are Regulated Operations and Unregulated Operations. Regulated Operations include the PNM Electric and PNM Gas segments. Unregulated Operations include the PNM Wholesale segment. The Company allocates its business and results between the PNM Electric and PNM Wholesale segments for financial reporting purposes based on the asset allocations mandated in the Global Electric Agreement (see Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements). PNM Electric consists of the generation, transmission and distribution of electricity for retail electric customers in New Mexico and the sale of transmission to third parties as well as to PNM Wholesale. PNM Gas consists of the transportation and distribution of natural gas to end-users. PNM Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines: long-term contracts, forward sales and short-term sales. The Company has sources of power from property it owns or leases and power purchased by the Company through various long-term PPAs. For the year ended December 31, 2004, the Company had a 2,529 MW generation capacity from these sources. The plants owned by the Company are available through joint dispatch to support service to the retail customers of PNM. 8 Financial information relating to amounts of sales, revenue, net income and total assets of the Company's reportable segments is contained in "Part II, Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 - "Segment Information" in the Notes to Consolidated Financial Statements. On July 25, 2004, the Company announced the proposed $1.024 billion acquisition of TNP, including its principal subsidiaries, TNMP and First Choice Power. The Company expects the proposed TNP acquisition to be accretive to its earnings and free cash flow in the first full year after closing, which is expected in the second quarter of 2005. (See "Acquisitions - Proposed TNP Acquisition" in "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations" and Note 20 - "Proposed TNP Acquisition" in the Notes to Consolidated Financial Statements.) REGULATED OPERATIONS PNM Electric The Company provides jurisdictional 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. The largest retail electric customer served by the Company accounted for approximately 8.6% of the Company's total retail electric revenues for the year ended December 31, 2004. The Company also sells transmission to third parties as well as to PNM Wholesale. Weather-normalized retail electric load growth was 3.3% in 2004. The Company's system peak demands for its retail customers and firm requirements customers in the summer and the winter for the last three years are shown in the following table: SYSTEM PEAK DEMANDS (Megawatts) 2004 2003 2002 Summer 1,655 1,661 1,478 Winter 1,481 1,434 1,309 PNM Electric holds long-term, non-exclusive franchise agreements for its electric retail operations, with varying expiration dates. These franchise agreements allow the Company to access public rights-of-way for placement of the Company's electric facilities. Franchise agreements have expired in Albuquerque, Santa Fe, Bernalillo County, Sandoval County, San Miguel County, Village of Bosque Farms, Pueblo de Cochiti, Village of Tijeras, McKinley County and the City of Las Vegas. The Company remains obligated under New Mexico state law to provide service to customers in these franchise areas despite the absence of an effective franchise agreement. The Albuquerque metropolitan area accounted for approximately 53% of the Company's 2004 total electric utility operating revenues, and no other franchise area represents more than approximately 9%. The Company continues to collect and pay franchise fees to Albuquerque and Santa Fe, Village of Bosque Farms, Village of Tijeras and the City of Las Vegas. The Company currently does not pay franchise fees to Bernalillo County, Luna County, Sandoval County, McKinley County, Pueblo de Cochiti or San Miguel County. 9 The Company owns or leases 2,856 circuit miles of electric transmission lines, interconnected with other utilities in New Mexico, east and south into Texas, west into Arizona, and north into Colorado and Utah. Due to rapid load growth in the Company's service territory in recent years and the lack of transmission development, most of the capacity on this transmission system is fully committed and there is very little or no additional access available on a firm commitment basis. These factors result in physical constraints on the system and limit the ability to wheel power into the Company's service area from outside of New Mexico. PNM Gas PNM Gas distributes natural gas to most of the major communities in New Mexico, including Albuquerque and Santa Fe. The Albuquerque metropolitan area accounted for approximately 50% of the total gas revenues in 2004. No single sales-service customer accounted for more than 0.8% of the Company's therm sales in 2004. PNM Gas holds long-term non-exclusive franchises with varying expiration dates in all incorporated communities requiring franchise agreements except for municipalities of Aztec, Bosque Farms, Clayton, Eunice, Gallup, Grants, Hurley, Milan, Santa Clara, Santa Fe County, and Tatum. The Company remains obligated to serve these franchise areas pursuant to state law despite the absence of an effective franchise agreement. The Company's customer base includes both sales-service customers and transportation-service customers. Sales-service customers purchase natural gas and receive transportation and delivery services from the Company for which the Company receives both cost-of-gas and cost-of-service revenues. Cost-of-gas revenues collected from sales-service customers are recovered in accordance with NMPRC regulations through the Company's PGAC and represent a pass-through of the Company's cost of natural gas to the customer. Therefore, the Company's operating results are not affected by an increase or decrease in natural gas prices. An order was issued by the NMPRC in 2001 that approved an agreement regarding PNM's hedging strategy and the implementation of a price management fund program which includes a continuous monthly balancing account with a carrying charge. This carrying charge has the effect of keeping PNM whole on purchases of gas since it is compensated for the time value of money that exists due to any delay in collecting. Additionally, the Company makes occasional gas sales to off-system sales customers. Off-system sales deliveries generally occur at pipeline interconnects with the Company's system and profits are shared between the Company and its customers on a 30%/70% basis. The Company had 23 transportation-service customers in 2004, which procure gas for their end users independently of the Company's end users. Transportation-service customers are gas marketers and producers contracting with the Company for transportation services to their end users and for other related services that provide the Company with cost-of-service revenues only. Transportation services are provided to transportation-service customers at locations throughout the Company's distribution systems, as well as points on and off the Company's transmission pipelines. The Company provided gas transportation deliveries to 1,474 transportation end users during 2004. In 2004, 48% of the Company's total gas throughput was related to transportation gas deliveries. The Company's transportation rates are unbundled, and transportation customers only pay for the service they receive. In 2004, revenues from transportation customers accounted for 4% of the Company's total gas revenue. Revenues from sales-service customers accounted for the remaining 96%. Of this percentage, 67% was related to the cost of gas on 10 which the Company makes no margin. Because a major portion of the Company's load is related to heating, sales levels are affected by the weather. In 2004, 63% of the Company's total gas sales occurred in the months of January, February, March and December. The Company obtains its supply of natural gas primarily from sources within New Mexico by contracting with third party producers and marketers. These contracts are generally sufficient to meet the Company's peak-day demand. The Company serves certain cities, which depend on El Paso Natural Gas Company or Transwestern Pipeline Company, for transportation of gas supplies. Because these cities are not directly connected to the Company's transmission facilities, gas transported by these companies is the sole supply source for those cities. Such transportation is regulated by the FERC. As a result of FERC Order 636, the Company's options for transporting gas to these cities and other portions of its distribution system have increased. UNREGULATED OPERATIONS PNM Wholesale PNM Wholesale consists of the generation and sale of electricity into the wholesale market based on three product lines, which are long-term contracts, forward sales and short-term sales. Long-term contracts include sales to firm-requirements and other wholesale customers with multi-year arrangements. At December 31, 2004, these contracts ranged from 1 to 16 year terms with an average term of 7.1 years. Forward sales include sales in the forward market that range from 1 month to 3 years that are supplied by third-party purchases. These transactions do not qualify as normal sales and purchases as defined in SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and, as a result, are 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 are sales of any excess generation not required to fulfill PNM Electric's retail load and contractual commitments. Short-term sales also cover the revenue credit to retail customers as specified in the Global Electric Agreement (see Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements). The PNM Wholesale strategy calls for increased net asset-backed energy sales supported by long-term contracts in the wholesale market, where the Company's aggregate net open forward electric sales position, including short term sales and long-term contracts, is covered by its forecasted excess generation capacity. Management actively monitors the net asset-backed sales 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. The 75% threshold is in compliance with 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. The Company continues to operate in the wholesale market and seek appropriately 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. 11 EMPLOYEES As of December 31, 2004, the Company had 2,623 full-time employees. The following table sets forth the number of employees by business segment as of December 31, 2004: Number Corporate (1) 551 PNM Electric 1,078 PNM Gas 475 PNM Wholesale 502 Other 17 Total 2,623 (1) These employees resided at the Holding Company at December 31, 2004 and effective January 1, 2005, reside at the Services Company. The number of employees of the Company who are represented by unions or other collective bargaining groups include (i) PNM Electric, 241; (ii) PNM Gas, 57; and (iii) PNM Wholesale, 330. 12 SELECTED FINANCIAL DATA 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. All references to numbers of shares outstanding and per share amounts have been restated to reflect the 3-for-2 stock split that occurred on June 11, 2004. PNM RESOURCES, INC. AND SUBSIDIARIES 2004 2003 2002 2001 2000 (In thousands except per share amounts and ratios) Total Operating Revenues $1,604,792 $1,455,653 $1,118,694 $2,254,178 $1,526,835 Earnings from Continuing Operations $ 87,686 $ 58,552 $ 63,686 $ 149,847 $ 100,360 Net Earnings $ 87,686 $ 95,173 $ 63,686 $ 149,847 $ 100,360 Earnings per Common Share: Continuing Operations $ 1.45 $ 0.98 $ 1.09 $ 2.55 $ 1.69 Basic $ 1.45 $ 1.60 $ 1.09 $ 2.55 $ 1.69 Diluted $ 1.43 $ 1.58 $ 1.07 $ 2.51 $ 1.69 Cash Flow Data: Net cash flows provided from operating activities $ 235,755 $ 228,692 $ 97,359 $ 327,346 $ 239,515 Net cash flows used in investing activities $ (144,451) $ (101,567) $ (200,427) $ (407,014) $ (157,500) Net cash flows generated (used) by financing activities $ (86,803) $ (118,133) $ 78,362 $ 385 $ (94,723) Total Assets $3,487,635 $3,378,629 $3,247,227 $3,127,602 $3,092,494 Long-Term Debt, including current maturities $ 987,823 $ 987,210 $ 980,092 $ 953,884 $ 953,823 Common Stock Data: Market price per common share at year end $ 25.290 $ 18.733 $ 15.880 $ 18.633 $ 17.875 Book value per common share at year end $ 18.20 $ 18.07 $ 16.60 $ 17.25 $ 15.61 Average number of common shares outstanding 60,414 59,621 58,677 58,677 59,231 Cash dividend declared per common share $ 0.67 $ 0.60 $ 0.57 $ 0.53 $ 0.53 Return on Average Common Equity 8.1 % 9.3 % 6.4 % 15.5 % 11.1 % Capitalization: Common stock equity 52.4 % 51.9 % 49.5 % 50.8 % 48.6 % Preferred stock without mandatory redemption Requirements 0.6 0.6 0.7 0.6 0.7 Long-term debt, less current maturities 47.0 47.5 49.8 48.6 50.7 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 13 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES 2004 2003 2002 2001 2000 (In thousands except per share amounts and ratios) Total Operating Revenues $1,603,967 $1,455,342 $1,117,290 $2,254,178 $1,526,835 Earnings from Continuing Operations $ 92,438 $ 59,978 $ 62,216 $ 150,433 $ 100,360 Net Earnings Available for Common Stock $ 91,866 $ 96,013 $ 61,630 $ 149,847 $ 100,360 Total Assets $3,393,730 $3,299,304 $3,074,768 $3,127,602 $3,092,494 Long-Term Debt, including current maturities $ 987,676 $ 987,210 $ 953,940 $ 953,884 $ 953,823 14 PNM RESOURCES, INC. AND SUBSIDIARIES AND PUBLIC SERVICE COMPANY OF NEW MEXICO COMPARATIVE OPERATING STATISTICS 2004 2003 2002 2001 2000 Regulated Operations - Sales: Energy Sales-KWh (in thousands): Residential 2,509,449 2,405,488 2,298,542 2,197,889 2,171,945 Commercial 3,450,503 3,379,147 3,254,576 3,213,208 3,133,996 Industrial 1,283,769 1,292,711 1,612,723 1,603,266 1,544,367 Other ultimate customers 227,770 (a) 221,137 (a) 240,665 (a) 240,934 238,635 Total KWh Sales 7,471,491 7,298,483 7,406,506 7,255,297 7,088,943 Gas Throughput-Decatherms (in thousands): Residential 30,618 27,416 29,627 27,848 28,810 Commercial 11,639 10,810 12,009 10,421 9,859 Industrial 413 485 749 3,920 5,038 Other 13,871 5,510 4,807 4,355 6,426 Total gas sales 56,541 44,221 47,192 46,544 50,133 Transportation throughput 43,208 50,756 44,889 51,395 44,871 Total Gas Throughput 99,749 94,977 92,081 97,939 95,004 Revenues (in thousands): PNM Electric Revenues: Residential $ 206,950 $ 203,710 $ 197,174 $ 187,600 $ 186,133 Commercial 251,092 252,876 247,800 242,372 238,243 Industrial 61,905 64,549 82,009 82,752 79,671 Other ultimate customers 13,638 14,069 14,942 14,795 14,618 Total revenues to ultimate customers 533,585 (b) 535,204 (b) 541,925 (c) 527,519 518,665 Transmission revenues 18,327 19,453 23,857 26,553 16,855 Miscellaneous electric revenues 6,500 5,807 5,014 5,154 3,163 Total PNM Electric Revenues $ 558,412 $ 560,464 $ 570,796 $ 559,226 $ 538,683 PNM Gas Revenues: Residential $ 292,163 $ 226,799 $ 176,284 $ 221,409 $ 203,208 Commercial 92,128 72,269 53,734 65,654 56,283 Industrial 2,889 2,820 2,872 27,519 24,206 Other 88,467 37,473 26,781 36,495 37,360 Revenues from gas sales 475,647 339,361 259,671 351,077 321,057 Transportation 15,274 18,906 17,735 20,188 14,163 Total PNM Gas Revenues $ 490,921 $ 358,267 $ 277,406 $ 371,265 $ 335,220 Total Regulated Operations Revenues $1,049,333 $ 918,731 $ 848,202 $ 930,491 $ 873,903 (a) Does not include Company use amounts of 25,623 for 2004, 26,117 for 2003, and 26,405 for 2002. (b) Includes EITF 03-11 adjustments of $33,609 for 2004 and $15,015 for 2003. (c) Includes EITF 02-3 adjustment of $73,987. 15 PNM RESOURCES, INC. AND SUBSIDIARIES AND PUBLIC SERVICE COMPANY OF NEW MEXICO COMPARATIVE OPERATING STATISTICS 2004 2003 2002 2001 2000 Regulated Operations - Customers at Year End: PNM Electric: Residential 367,491 358,099 345,588 340,656 332,332 Commercial 43,425 42,391 41,092 40,065 39,525 Industrial 290 296 311 377 371 Other ultimate customers 818 822 796 924 625 Total ultimate customers 412,024 401,608 387,787 382,022 372,853 Sales for Resale 68 72 76 79 81 Total PNM Electric Customers 412,092 401,680 387,863 382,101 372,934 PNM Gas: Residential 430,578 421,104 411,642 404,753 398,623 Commercial 34,993 34,645 35,194 32,894 32,626 Industrial 47 46 58 50 50 Other 2,931 2,983 3,664 3,528 3,612 Transportation 23 40 27 34 32 Total PNM Gas Customers 468,572 458,818 450,585 441,259 434,943 Nonregulated Operations - Sales: Energy Sales-MWh: Long-term contracts 2,943,372 2,469,707 844,168 1,463,031 330,003 Forward sales 2,366,766 (a) 3,237,525 (a) - (c) - - Short-term sales 6,057,946 5,834,972 7,269,242 10,596,004 10,213,725 Total sales to ultimate customers 11,368,084 11,542,204 8,113,410 12,059,035 10,543,728 Revenues (in thousands): Long-term contracts $ 158,085 $ 135,674 $ 58,546 $ 77,250 $ 87,731 Forward sales 125,378 (b) 151,483 (b) 3,575 (d) (2,572) (14,768) Short-term sales 271,171 249,454 207,674 1,247,471 577,811 Total PNM Wholesale Revenues $ 554,634 $ 536,611 $ 269,795 $ 1,322,149 $ 650,774 Customers at Year End: PNM Wholesale 68 72 76 79 81 Generation Statistics: Reliable Net Capability-KW 1,729,000 1,742,000 1,734,000 1,521,000 1,521,000 Coincidental Peak Demand-KW 1,655,000 1,661,000 1,478,000 1,431,000 1,368,000 Average Fuel Cost per Million BTU $ 1.3751 $ 1.4120 $ 1.3910 $ 1.6007 $ 1.3827 BTU per KWh of Net Generation 10,442 10,854 10,568 10,549 10,547 (a) Includes EITF 03-11 adjustments of 632,460 MWh for 2004 and 359,800 MWh for 2003. (b) Includes EITF 03-11 adjustments of $33,609 for 2004 and $15,015 for 2003. (c) Includes EITF 02-3 adjustment of 1,336,745 MWh. (d) Includes EITF 02-3 of $73,987. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Management's Discussion and Analysis of Financial Condition and Results of Operations for the Holding Company and Subsidiaries and PNM and Subsidiaries is presented on a combined basis. For the periods included in this report, the business of PNM constituted substantially all of the business of the Holding Company. Therefore, the historical results of operations of PNM are virtually identical to the consolidated results of the Holding Company and all its subsidiaries for the periods presented. For discussion purposes, this report will use the term "Company" when discussing matters of common applicability to the Holding Company and Subsidiaries and PNM. Readers of Management's Discussion and Analysis of Financial Condition and Results of Operations should assume that the information presented applies to consolidated results of operations of both the Holding Company and its subsidiaries, including PNM, except where the context or references clearly indicate otherwise. Discussions regarding specific contractual obligations generally reference the company that is legally obligated. In the case of contractual obligations of PNM, these obligations are consolidated with the Holding Company and its subsidiaries under GAAP. Broader operational discussions refer to the Company. The Holding Company was established as the holding company in 2001 and was exempt from regulation under PUHCA. In April 2004, however, the SEC staff informed PNM Resources Inc. that, because of an SEC ruling in 2003, the level of interstate power sales by PNM did not allow the Holding Company to continue to claim exemption from registration. On December 30, 2004, the Holding Company became a registered holding company under PUHCA. The Holding Company also created a new subsidiary called PNMR Services Company, which began operating on January 1, 2005, subject to final approval by the SEC. The Holding Company performed substantially all of the corporate activities of PNM from 2001 to 2004. These activities were billed to PNM on a cost basis to the extent they were for the corporate management of PNM and are allocated to the operating segments. The services functions previously performed by the Holding Company have been assumed by PNMR Services Company effective January 1, 2005. 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, within the State of New Mexico, in the generation, transmission and distribution of electricity; transmission, distribution and sale of natural gas; and the sale and marketing of electricity in the Western United States. The Company's vision is to "Build America's Best Merchant Utility." The Company views a merchant utility as the balanced combination of a strong regulated utility with growth-oriented electric sales in competitive markets. 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 wholesale energy marketplace. As a utility, PNM has an obligation to serve its customers under the jurisdiction of the NMPRC. As a wholesale electricity provider, PNM markets excess production from the utility, as well as unregulated generation, into a 17 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. The Company's principal businesses, whose operating results are regularly reviewed by the Company's management, are Regulated Operations and Unregulated Operations. Regulated Operations include PNM Electric and PNM Gas. These segments model the resource allocations as mandated in the Global Electric Agreement (see Note 14 - "Commitments and Contingencies - Global Electric Agreement" in the Notes to Consolidated Financial Statements). PNM Electric consists of the distribution, transmission and generation of electricity for retail electric customers in New Mexico and the sale of transmission to third parties as well as to PNM Wholesale. PNM Gas includes the transportation and distribution of natural gas to end-users. Unregulated Operations includes the PNM Wholesale segment. PNM 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 Regulated 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 Unregulated Operations strategy calls for increased net asset-backed energy sales supported by long-term contracts into 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. Management actively monitors the net asset-backed sales 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. 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. 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. Refer to "Disclosure Regarding Forward Looking Statements" and "Risk Factors." OVERALL OUTLOOK Earnings growth in 2004 was primarily due to strong growth in the Company's electric and gas utility, coupled with reduced interest costs from debt refinancing and the positive effect of the gas rate increase, which went into full effect in April 2004. Other factors that 18 contributed to the increase in earnings during 2004 included lower coal costs, improved coal quality, strong fourth-quarter gas revenues, improved availability of SJGS and continued cost-control measures throughout the Company. These positive factors more than offset the impact of the retail electric rate reduction that went into effect in September 2003. PNM Wholesale operating revenues increased $35.1 million, or 6.3%, in 2004 over the prior year period primarily due to additional long-term contract sales and wholesale electric price improvements. These new contracts support the Company's long-term growth plans and net asset-backed strategy. In addition, the Company's 2004 short-term sales increased over the prior year period, partially due to an increase in average short-term prices. Additionally, short-term sales volume increased as more favorable day-ahead market spreads shifted volume from forward sales due to less favorable market spreads between PVNGS and the Mead market hub. However, PNM Wholesale gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $8.7 million, or 8.3%. The decrease reflected higher purchase power prices, the effect of less available excess energy resulting from increased electric retail load growth and unplanned outages on certain of the Company's generation facilities. Operating revenues for PNM Electric decreased $2.1 million, or 0.4%, in 2004 from the prior year. The decrease in revenues was due to an electric rate reduction, which decreased 2004 revenues by $16.7 million. The Company reduced its retail rates based on an electric rate agreement that took effect in September 2003; under the agreement, rates will decrease again by 2.5% in September 2005 and remain at that level through 2007. PNM Electric sales grew 2.4%, to 7.5 million MWh in 2004 compared to 7.3 million MWh in 2003. Weather-normalized retail electric load growth was 3.3% in 2004. This volume increase was due to customer growth, which increased revenues by $21.2 million. Operating revenues for PNM Gas increased $132.7 million, or 37.0%, over the prior year primarily because of higher natural gas prices in 2004 as compared to 2003. The Company purchases natural gas in the open market and resells it at the same price to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the Company's consolidated gross margin or earnings. In 2004, the Company began using gas swaps to lock in prices for off-system sales. The gross margin, or operating revenues minus cost of energy sold, increased $17.8 million, or 13.7%, over the prior year. This increase was due mainly to customer growth, a normal winter heating season during 2004 compared to the first quarter of 2003, and the NMPRC-approved rate increase, partially offset by the decrease in off-system transportation sales described above. 19 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Consolidated The Company's net earnings for the year ended December 31, 2004 were $87.8 million, or $1.43 per diluted share of common stock, a 7.8% decrease in net earnings compared to $95.2 million, or $1.58 per diluted share of common stock, in 2003. This decrease primarily resulted from items that occurred in 2003 that did not recur in 2004. In 2003, the Company recognized $36.6 million, net of income taxes, as an addition to net income for the cumulative effect of changes in accounting principles for the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") and the change in the pension actuarial valuation measurement date ($0.61 per diluted share of common stock). This increase to 2003 income was partially offset by the write-off of transition costs of $9.5 million, net of income taxes, or $0.16 per diluted share of common stock, that resulted from the repeal of electric deregulation in New Mexico in 2003, and a charge of $10.0 million, net of income taxes, or $0.17 per diluted share of common stock, for costs related to long-term debt refinancing. The following discussion 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, these statements report operating results without regard to the effect of accounting or regulatory changes, and similar one-time items not related to normal operations. See Note 2 - "Segment Information", in the Notes to Consolidated Financial Statements for additional information regarding these results and the consolidated financial statements. 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 included in Corporate and Other. 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. Corporate costs, income taxes and non-operating items are discussed only on a consolidated basis and are in conformity with the presentation in the consolidated financial statements. 20 Regulated Operations PNM Electric The table below sets forth the operating results for PNM Electric. Year Ended December 31, 2004 2003 Variance (In thousands) Operating revenues : $ 558,412 $ 560,464 $ (2,052) Less: Cost of energy 186,517 177,767 8,750 Intersegment energy transfer (42,769) (34,760) (8,009) Gross margin 414,664 417,457 (2,793) Energy production costs 113,848 108,734 5,114 Transmission and distribution O&M 31,360 31,596 (236) Customer related expense 18,190 15,543 2,647 Administrative and general 4,640 6,972 (2,332) Total non-fuel O&M 168,038 162,845 5,193 Corporate allocation 69,820 69,374 446 Depreciation and amortization 63,050 73,532 (10,482) Taxes other than income taxes 20,324 20,520 (196) Income taxes 23,141 23,708 (567) Total non-fuel operating expenses 344,373 349,979 (5 , 606) Operating income $ 70,291 $ 67,478 $ 2,813 The following table shows electric revenues by customer class and average customers: PNM Electric Revenues Year Ended December 31, 2004 2003 Variance (In thousands) Residential $206,950 $203,710 $ 3,240 Commercial 251,092 252,876 (1,784) Industrial 61,905 64,549 (2,644) Transmission 18,327 19,453 (1,126) Other 20,138 19,876 262 $558,412 $560,464 $(2,052) Average customers 406,968 396,303 10,665 21 The following table shows electric sales by customer class: PNM Electric Sales Year Ended December 31, 2004 2003 Variance (Megawatt hours) Residential 2,509,449 2,405,488 103,961 Commercial 3,450,503 3,379,147 71,356 Industrial 1,283,769 1,292,711 (8,942) Other 253,393 247,255 6,138 7,497,114 7,324,601 172,513 Operating revenues decreased $2.1 million, or 0.4%, from the prior year. The decrease in revenues was primarily due to an electric rate reduction under the Global Electric Agreement. The rate reduction decreased 2004 revenues by $16.7 million. Under the agreement, rates will decrease again by 2.5% in September 2005 and remain at that level through 2007. PNM Electric sales grew 2.4%, to 7.5 million MWh in 2004 compared to 7.3 million MWh in 2003. Weather-normalized retail electric load growth was 3.3% in 2004. This volume increase was due to customer growth, which increased revenues by $21.2 million. This volume increase was offset slightly by warmer summer weather in 2003 compared to 2004. Cooling Degree Days for Albuquerque declined 22% to 1,304 during the year ended December 31, 2004 compared to 1,671 during the year ended December 31, 2003. The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $2.8 million, or 0.7%, from the prior year. Generation costs decreased by $3.5 million driven by lower fuel costs at SJGS, while purchased power costs increased $5.4 million due to higher prices. In addition, costs of $5.9 million related to the amortization of certain coal mine reclamation costs as agreed to in the current electric rate agreement were incurred during 2004, an increase of $4.0 million compared to 2003. These costs are amortized over 17 years. Total non-fuel O&M expenses increased $5.2 million, or 3.2%, over the prior year. Energy production costs increased $5.1 million, or 4.7%, primarily due to increased plant maintenance costs of $4.3 million for planned and unplanned outages in 2004. Transmission and distribution O&M expense decreased $0.2 million, or 0.8%, primarily due to a decrease in operating lease costs of $1.1 million for a transmission line, a portion of which was purchased in April 2003 and decreased maintenance costs of $0.3 million in 2004, which were mostly offset by increased labor and outside services costs. Customer-related expense increased $2.6 million, or 17.0%, as a result of favorable collection outcomes in 2003. Administrative and general expense decreased $2.3 million, or 33.5%, due to lower expenses for paid-time-off and insurance, regulatory commission expense and outside service costs. Depreciation and amortization decreased $10.5 million, or 14.3%. This reduction was primarily attributable to a decrease in depreciation rates to align depreciation expenses with NMPRC approved rates based on a new five-year depreciation study, which decreased 22 depreciation expense by $8.2 million year over year. Additionally, depreciation decreased $3.0 million due to the Company's billing system being fully depreciated at the end of 2003. The Company expects to see depreciation rise going forward as a result of increased investment in new information technology platforms. PNM Gas The table below sets forth the operating results for PNM Gas. Year Ended December 31, 2004 2003 Variance (In thousands) Operating revenues $ 490,921 $ 358,267 $ 132,654 Less: Cost of energy 343,219 228,345 114,874 Gross margin 147,702 129,922 17,780 Energy production costs 2,338 1,930 408 Transmission and distribution O&M 28,006 29,515 (1,509) Customer related expense 19,283 16,832 2,451 Administrative and general 1,648 2,040 (392) Total non-fuel O&M 51,275 50,317 958 Corporate allocation 38,725 39,930 (1,205) Depreciation and amortization 18,894 22,186 (3,292) Taxes other than income taxes 7,412 6,886 526 Income taxes 8,063 (1,110) 9,173 Total non-fuel operating expenses 124,369 118,209 6,160 Operating income $ 23,333 $ 11,713 $ 11,620 The following table shows gas revenues by customer and average customers: PNM Gas Revenues Year Ended December 31, 2004 2003 Variance (In thousands) Residential $292,163 $226,799 $65,364 Commercial 92,128 72,269 19,859 Industrial 2,889 2,820 69 Transportation* 15,274 18,906 (3,632) Other 88,467 37,473 50,994 $490,921 $358,267 $132,654 Average customers 461,399 452,328 9,071 *Customer-owned gas. 23 The following table shows gas throughput by customer class: PNM Gas Throughput Year Ended December 31, 2004 2003 Variance (Thousands of decatherms) Residential 30,618 27,416 3,202 Commercial 11,639 10,810 829 Industrial 413 485 (72) Transportation* 43,208 50,756 (7,548) Other 13,871 5,510 8,361 99,749 94,977 4,772 *Customer-owned gas. Operating revenues increased $132.7 million, or 37.0%, over the prior year primarily because of higher natural gas prices in 2004 as compared to 2003 and the rate increase discussed below. The Company purchases natural gas in the open market and resells it at the same price to its sales-service customers. As a result, increases or decreases in gas revenues driven by gas costs do not impact the Company's consolidated gross margin or earnings. In 2004, off-system sales revenues increased $47.7 million due to the revision of an interstate transportation contract and improved conditions in the gas market. Total gas sales volumes increased 5.0%, resulting from off-system sales and customer growth of 2.0%; customer growth increased revenues $2.7 million over the prior year. A normal early winter season compared to a warmer 2003 increased revenues $3.0 million. In addition, revenues grew $11.4 million due to a cost of service rate increase granted by the NMPRC in January 2004. The rate increase is expected to increase gas revenues by approximately $22.0 million annually; however, implementation of the residential increase was delayed until April 2004. The increase in operating revenues was partially offset by a decrease in off-system transportation of $5.4 million due to lower price differences between the San Juan and Permian basins. The gross margin, or operating revenues minus cost of energy sold, increased $17.8 million, or 13.7%, over the prior year. This increase was due mainly to customer growth, a normal winter heating season during the first quarter 2004 compared to the first quarter of 2003, and the NMPRC-approved rate increase, partially offset by the decrease in off-system transportation sales described above. Total non-fuel O&M expenses increased $1.0 million, or 1.9%, over the prior year. Customer-related expense increased $2.5 million, or 14.6%, primarily due to an improvement in collection rates in 2003 that was maintained in 2004. Transmission and distribution O&M expense decreased $1.5 million primarily due to a reduction in payroll costs from a Company reorganization. Administrative and general expense decreased $0.4 million due primarily to a $1.3 million decrease in paid-time-off expense, offset in part by increased insurance expense of $0.5 million and increased capital activity in 2004. 24 Depreciation and amortization decreased $3.3 million, or 14.8%, primarily due to the Company's customer billing system being fully depreciated at the end of 2003. The Company expects to see depreciation rise going forward as a result of increased investment in new information technology platforms and other capital spending. Unregulated Operations PNM Wholesale The table below sets forth the operating results for PNM Wholesale. Year Ended December 31, 2004 2003 Variance (In thousands) Operating revenues : External sales $ 588,243 $ 551,625 $ 36,618 Intersegment sales - 1,535 (1,535) Total revenues 588,243 553,160 35,083 Less: Cost of energy 449,059 413,089 35,970 Intersegment energy transfer 42,769 34,760 8,009 Gross margin 96,415 105,311 (8,896) Energy production costs 29,967 29,919 48 Transmission and distribution O&M 81 59 22 Customer related expense 1,049 711 338 Administrative and general 7,255 8,390 (1,135) Total non-fuel O&M 38,352 39,079 (727) Corporate allocation 4,557 5,590 (1,033) Depreciation and amortization 14,809 14,230 579 Taxes other than income taxes 3,533 3,263 270 Income taxes 8,537 10,922 (2,385) Total non-fuel operating expenses 69,788 73,084 (3,296) Operating income $ 26,627 $ 32,227 $ (5,600) 25 The following table shows revenues by customer class: PNM Wholesale Revenues Year Ended December 31, 2004 2003 Variance (In thousands) Long-term contracts $ 158,085 $135,674 $ 22,411 Forward sales* 158,987 166,498 (7,511) Short-term sales 271,171 249,453 21,718 Intersegment sales - 1,535 (1,535) $ 588,243 $553,160 $ 35,083 *Includes mark-to-market gains/(losses). The following table shows sales by customer class: PNM Wholesale Sales Year Ended December 31, 2004 2003 Variance (Megawatt hours) Long-term contracts 2,943,372 2,469,707 473,665 Forward sales 2,999,226 3,597,325 (598,099) Short-term sales 6,057,946 5,834,972 222,974 12,000,544 11,902,004 98,540 Operating revenues increased $35.1 million or 6.3% over the prior year. This increase in wholesale electric sales primarily reflects additional long-term contract sales and wholesale electric price improvements in forward and short-term prices. New long-term contracts added 437,446 MWhs, or $21.0 million in revenues, slightly offset by a decrease in certain existing contract sales prices of $3.3 million due largely to a price reduction for sales to Kirtland Air Force Base. These contracts support the Company's long-term growth plans and net asset-backed strategy. In addition, the Company's short-term sales increased $21.7 million, or 8.7%, compared to the prior year period, partially due to an increase in average short-term prices of 4.4%. Additionally, short-term sales volume increased 3.8% as more favorable day-ahead market spreads shifted volume from forward sales, which decreased 16.6%. Forward sales decreased $7.5 million or 4.5% due to less favorable energy purchase-to-sale market spreads between PVNGS and the Mead market hub. The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $8.9 million, or 8.4%, from the prior year. Forward sales margin decreased $1.9 million reflecting higher purchase prices, partially offset by higher sale prices. Short-term sales margin decreased $13.7 million primarily due to the effect of higher purchase costs and less available excess energy resulting from increased electric retail load growth and unplanned outages on certain of the Company's generation facilities, partially offset by higher 26 sales volumes and higher market prices. Average forward and short-term market purchase prices increased 10.7% over the prior year while average forward and short-term market sale prices increased 4.4% over the prior year. The Company had an unfavorable change in the unrealized mark-to-market position of $1.7 million from the prior year ($1.8 million gain in 2004 versus $3.5 million gain in 2003), reflecting depressed pricing caused by cooler weather. Long-term contracts margin increased $6.8 million due to additional long-term sales under new and existing contracts. In addition, the long-term margin increase included $6.1 million from sales of pollution credits. Total non-fuel O&M decreased $0.7 million, or 1.8%, from the prior year. Administrative and general decreased $1.1 million, or 13.4%, due to transportation costs of $1.0 million recognized in 2003 for turbines that were placed in storage, which did not recur in 2004. Corporate and Other Corporate administrative and general expenses, which represent costs that are driven primarily by corporate-level activities, is allocated to the business segments and is presented in the corporate allocation line item in the segment statements. These costs decreased $1.8 million, or 1.6%, from the prior year to $113.7 million. The decrease in these costs was due to a net decrease in pension and benefit costs of $1.6 million due to decreased pension and benefit expenses of $11.5 million, resulting from higher returns on pension plan assets and lower retiree medical cost projections. The decrease was partially offset by increased 401(k) and benefit costs of $9.9 million. Taxes other than income increased $2.7 million due to the 2003 favorable resolution of tax issues of $2.4 million and increased social security taxes due to overall higher payroll costs. Consolidated Other Income and Deductions Other income decreased $4.6 million, or 8.8%, from the prior year due to decreased tax credits of $2.4 million, and a decrease in the equity component of AFUDC of $1.3 million. Additionally, other income decreased due to favorable 2003 customer settlements of $0.8 million, which did not recur in 2004. Other deductions decreased $38.0 million from the prior year primarily due to a charge of $16.7 million in 2003 for the write-off of transition costs due to the repeal of deregulation in New Mexico and a charge of $16.6 million in 2003 for costs related to long-term debt refinancing. Interest Expense Interest expense decreased $14.8 million, or 22.4%, over the prior year due to debt refinancing, including SUNs and PCBs, and lower short-term debt balances, which decreased interest costs $10.1 million. Additionally, the Company had lower borrowing levels in 2004, which reduced interest expense by $2.6 million, and a favorable interest rate swap which further reduced interest expense by $2.1 million. 27 Income Taxes The Company's consolidated income tax expense was $49.2 million for the year ended December 31, 2004, compared to $27.9 million for the prior year before the cumulative effect of a change in accounting principles. The increase was due to the impact of higher pre-tax earnings. The Company's effective income tax rates for the years ended December 31, 2004 and 2003 were 35.81% and 32.05%, respectively. The increase in the effective tax rate, year-over-year, was due to a decrease in permanent tax differences, resulting from AFUDC and certain tax credits in 2003. Cumulative Effect of a Change in Accounting Principle Effective January 1, 2003, the Company adopted SFAS 143. The effect of the initial application of the new standard is reported as a cumulative effect of a change in accounting principle. As a result, the Company recorded income, net of income taxes, of approximately $37.4 million, or $0.62 per diluted common share, representing amounts expensed in prior years for its asset retirement obligations in excess of the actual legal obligations as established under the new accounting standard. In 2003, the Company changed its valuation date for its pension and post retirement benefits plans from September 30 to December 31 to better reflect the actual plan balances as of the Company's year end balance sheet date. The effect of the change in the pension plans' valuation date is reported as a cumulative effect of a change in accounting principle. The Company recorded additional expense, net of income taxes, of approximately $0.8 million, or $0.01 per diluted common share reflecting the effect of changing the valuation date. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Consolidated The Company's net earnings for the year ended December 31, 2003 were $95.2 million or $1.58 per diluted share of common stock, a 49.5% increase in net earnings compared to $63.7 million or $1.07 per diluted share of common stock in 2002. This increase primarily reflects the cumulative effect of a change in accounting principle for the adoption of SFAS 143 of $37.4 million, net of income taxes, and improved operating performance. This increase was partially offset by the write-off of transition costs of $9.5 million, net of income taxes, that resulted from the repeal of electric deregulation in New Mexico in the first quarter of 2003 and a charge of $10.0 million, net of income taxes, for costs related to long-term debt refinancing. The following discussion 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, these statements report operating results without regard to the effect of accounting or regulatory changes, and similar one-time items not related to normal operations. See Note 2 - "Segment Information", in the Notes to Consolidated Financial Statements for additional information regarding these results and the consolidated financial statements. 28 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 included in Corporate and Other. 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. Corporate costs, income taxes and non-operating items are discussed only on a consolidated basis and are in conformity with the presentation in the consolidated financial statements. 29 PNM Electric The table below sets forth the operating results for PNM Electric. Year Ended December 31, 2003 2002 Variance (In thousands) Operating revenues : $ 560,464 $ 570,796 $(10,332) Less: Cost of energy 177,767 166,783 10,984 Intersegment energy transfer (34,760) (29,155) (5,605) Gross margin 417,457 433,168 (15,711) Energy production costs 108,734 113,947 (5,213) Distribution O&M 31,596 34,518 (2,922) Customer related expense 15,543 17,381 (1,838) Administrative and general 6,972 7,624 (652) Total non-fuel O&M 162,845 173,470 (10,625) Corporate allocation 69,374 57,581 11,793 Depreciation and amortization 73,532 68,395 5,137 Taxes other than income taxes 20,520 20,715 (195) Income taxes 23,708 31,478 (7,770) Total non-fuel operating expenses 349,979 351,639 (1,660) Operating income $ 67,478 $ 81,529 $(14,051) The following table shows electric revenues by customer class and average customers: PNM Electric Revenues Year Ended December 31, 2003 2002 Variance (In thousands) Residential $ 203,710 $ 197,174 $ 6,536 Commercial 252,876 247,800 5,076 Industrial 64,549 82,009 (17,460) Transmission 19,453 23,857 (4,404) Other 19,876 19,956 (80) $ 560,464 $ 570,796 $ (10,332) Average customers 396,303 384,478 11,825 30 The following table shows electric sales by customer class: PNM Electric Sales Year Ended December 31, 2003 2002 Variance (Megawatt hours) Residential 2,405,488 2,298,542 106,946 Commercial 3,379,147 3,254,576 124,571 Industrial 1,292,711 1,612,723 (320,012) Other 247,255 267,070 (19,815) 7,324,601 7,432,911 (108,310) Operating revenues decreased $10.3 million, or 1.8%, over the prior year primarily due to the transfer of a significant customer from retail to wholesale electric rates in the first quarter of 2003 and a 4% retail electric rate reduction, which became effective in September 2003. Rates will decrease again by 2.5% in September 2005 and remain at that level through 2007. The customer transfer reduced PNM Electric revenues $17.1 million. The rate reduction resulted in a decrease in revenues of approximately $6.9 million. In addition, revenues decreased due to lower demand for wheeling of $7.4 million to California from Arizona as a result of lower demand in the California Market. These decreases were partially offset by average customer growth of approximately 3.1% and increased demand for wheeling in New Mexico of $1.7 million and $2.3 million in new contract revenue. The contract with such customer was not renewed for 2004. After adjusting 2002 MWh sales for the transfer of the significant customer from retail to wholesale for comparative purposes, retail electric MWh sales increased due to customer growth. The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, decreased $15.7 million, or 3.6%, over the prior year. This decrease was due primarily to the rate decrease, an increase in cost of energy due to outages at PVNGS Unit 2 during the fourth quarter of 2003 for a steam-generator replacement project, and the customer transfer described above. These decreases were partially offset by customer growth and lower cost of generation. Total non-fuel O&M expenses decreased $10.6 million, or 6.1%, over the prior year. Energy production costs decreased $5.2 million, or 4.6%, primarily due to 2002 outages at Four Corners and Reeves Station, which did not recur in 2003, for $1.3 million and $1.0 million, respectively and reduced PVNGS plant maintenance costs of $0.5 million due to increased capitalized expenditures related to the steam-generator replacement project. Transmission and distribution O&M decreased $2.9 million, or 8.5%, due to a decrease in lease costs of $3.3 million for the EIP transmission line, a portion of which was purchased in April 2003, offset by increased maintenance costs incurred for reliability purposes. Customer-related expense decreased $1.8 million, or 10.6%, due to decreased bad debt expense as a result of continued collection efforts and the favorable outcome of a customer bankruptcy proceeding. Depreciation and amortization increased $5.1 million, or 7.5%, due to a higher depreciable plant base for new service delivery. In addition, lower energy production costs related to decreased 31 decommissioning expenses of $2.7 million were mostly offset by an increase in depreciation expense of $2.2 million for the change in accounting for costs related to asset retirement obligations as required by SFAS 143 and the purchase of additional transmission lines. PNM Gas The table below sets forth the operating results for PNM Gas. Year Ended December 31, 2003 2002 Variance (In thousands) Operating revenues $ 358,267 $ 277,406 $ 80,861 Less: Cost of energy 228,345 144,333 84,012 Gross margin 129,922 133,073 (3,151) Energy production costs 1,930 1,937 (7) Transmission and distribution O&M 29,515 29,306 209 Customer related expense 16,832 16,607 225 Administrative and general 2,040 2,943 (903) Total non-fuel O&M 50,317 50,793 (476) Corporate allocation 39,930 33,516 6,414 Depreciation and amortization 22,186 20,673 1,513 Taxes other than income taxes 6,886 7,716 (830) Income taxes (1,110) 2,703 (3,813) Total non-fuel operating expenses 118,209 115,401 2,808 Operating income $ 11,713 $ 17,672 $ (5,959) The following table shows gas revenues by customer and average customers: PNM Gas Revenues Year Ended December 31, 2003 2002 Variance (In thousands) Residential $226,799 $176,284 $ 50,515 Commercial 72,269 53,734 18,535 Industrial 2,820 2,872 (52) Transportation* 18,906 17,735 1,171 Other 37,473 26,781 10,692 $358,267 $277,406 $ 80,861 Average customers 452,328 443,396 8,932 *Customer-owned gas. 32 The following table shows gas throughput by customer class: PNM Gas Throughput Year Ended December 31, 2003 2002 Variance (Thousands of decatherms) Residential 27,416 29,627 (2,211) Commercial 10,810 12,009 (1,199) Industrial 485 749 (264) Transportation* 50,756 44,889 5,867 Other 5,510 4,807 703 94,977 92,081 2,896 *Customer-owned gas. Operating revenues increased $80.9 million, or 29.2%, over the prior year to $358.3 million, primarily because of higher natural gas prices in 2003 as compared to 2002. The gross margin, or operating revenues minus cost of energy sold, decreased $3.2 million, or 2.4%, over the prior year. This decrease is due mainly to the expiration in January 2003 of a rate rider for the recovery of certain costs of $4.1 million. The rate rider decrease was offset by an increase in volume. Transportation throughput increased by 5.9 million decatherms, or 13.1% driven by gas pipe line extensions, increasing off-system sales. Despite customer growth of 2.0%, volume from other customers decreased 3.0 million decatherms, or 6.3%, caused by warmer weather in 2003. Total non-fuel O&M expenses decreased $0.5 million, or 0.9%, over the prior year. Administrative and general costs decreased $0.9 million, or 30.7%, primarily due to lower consulting costs of $1.0 million. Depreciation and amortization increased $1.5 million or 7.3% due to a higher depreciable plant base for new service delivery and transportation gas line extensions. Taxes other than income taxes decreased $0.8 million or 10.8% due to a decrease in property tax of $0.2 million as a result of a change in assessed values and a decrease in NMPRC supervision and lower inspection fees of $0.6 million. 33 PNM Wholesale The table below sets forth the operating results for PNM Wholesale. Year Ended December 31, 2003 2002 Variance (In thousands) Operating revenues : External sales $ 551,625 $ 343,780 $ 207,845 Intersegment sales 1,535 - 1,535 Total revenues 553,160 343,780 209,380 Less: Cost of energy 413,089 262,517 150,572 Intersegment energy transfer 34,760 29,155 5,605 Gross margin 105,311 52,108 53,203 Energy production costs 29,919 32,507 (2,588) Transmission and distribution O&M 59 45 14 Customer related expense 711 754 (43) Administrative and general 8,390 3,199 5,191 Total non-fuel O&M 39,079 36,505 2,574 Corporate allocation 5,590 4,023 1,567 Depreciation and amortization 14,230 8,808 5,422 Taxes other than income taxes 3,263 2,619 644 Income taxes 10,922 (3,245) 14,167 Total non-fuel operating expenses 73,084 48,710 24,374 Operating income $ 32,227 $ 3,398 $ 28,829 The following table shows revenues by customer class: PNM Wholesale Revenues Year Ended December 31, 2003 2002 Variance (In thousands) Long-term contracts $135,674 $ 58,546 $ 77,128 Forward sales* 166,498 77,560 88,938 Short-term sales 249,453 207,674 41,779 Intersegment sales 1,535 - 1,535 $553,160 $343,780 $209,380 *Includes mark-to-market gains/(losses). 34 The following table shows sales by customer class: PNM Wholesale Sales Year Ended December 31, 2003 2002 Variance (Megawatt hours) Long-term contracts 2,469,707 844,169 1,625,538 Forward sales 3,597,325 1,336,745 2,260,580 Short-term sales 5,834,972 7,269,240 (1,434,268) 11,902,004 9,450,154 2,451,850 Operating revenues increased $209.4 million, or 60.9%, over the prior year to $553.2 million. This increase in wholesale electric sales primarily reflects additional long-term contract sales and more stable wholesale market conditions. The Company sold wholesale (bulk) power of 11.9 million MWh of electricity for the year ended December 31, 2003, compared to 9.5 million MWh for 2002. The gross margin, or operating revenues minus cost of energy sold and intersegment energy transfer, increased $53.2 million, over the prior year. A higher gross margin was achieved primarily by additional long-term sales under new and existing contracts, a return to more stable market prices and improved market liquidity. The addition of 273 MW of long-term contracts added $37.4 million, or 72.9%, of the total gross margin increase for the year. In December 2003 and January 2004, the Company added an additional 57 MW of long-term contracts. In addition, long-term contract margin increased due to the transfer of a significant customer from retail to wholesale. Forward sales margin increased $14.3 million, or 27.9%, of the total gross margin increase reflecting higher prices. The average price realized by the Company on its forward sales was $46 per MWh in 2003, compared to $37 per MWh in 2002. Liquidity returning to the market helped drive improvement of forward sales, as the Company had velocity of 1.9 vs. 1.6 a year ago. Short-term sales margin decreased $0.4 million, or 0.8%, of total gross margin due to lower volume from retail growth, increased long-term sales contracts and fewer available resources caused by a significant outage schedule in 2003, mostly offset by higher prices. The average price realized by the Company on its short-term sales was $42 per MWh in 2003, compared to $29 per MWh in 2002. Overall open market sales (forward and short-term sales) averaged $44 per MWh in 2003 versus $33 per MWh in 2002. This increase was partially offset by increased purchased power costs resulting from the 2003 outage schedule, which reduced availability of generation for wholesale sales. In addition, the Company had to buy power in the open market at higher prices to cover its contractual obligations, which resulted in increased purchased power costs of $20.5 million. The Company had a favorable change in the unrealized mark-to-market position of the forward sales portfolio of $1.0 million period-over-period ($3.5 million gain in 2003 versus $2.5 million gain in 2002). Total non-fuel O&M expenses increased $2.6 million, or 7.1%, over the prior year. Energy production costs decreased $2.6 million, or 8.0%, primarily due to decreased decommissioning costs of $3.1 million and prior period, non-recurring engineering costs of $4.0 million related to the start-up of the Afton plant. These cost decreases were offset by increases of $2.3 million for 35 the operation of the new Afton and Lordsburg gas fired facilities and $1.8 million due to increased PVNGS Unit 3 outages. Administrative and general costs increased $5.2 million or 162.3% primarily due to transportation and storage costs of $1.2 million turbines that will be utilized in future construction for merchant plant growth and increased pension and benefits costs of $4.0 million at SJGS and PVNGS. Depreciation and amortization increased $5.4 million or 61.6% primarily due to the addition of Lordsburg and Afton, which added $3.6 million of depreciation expense and an increase of $1.6 million for the change in accounting for asset retirement obligations as required by SFAS 143. Taxes other than income taxes increased $0.6 million or 24.6% primarily due to increased property taxes from the addition of Afton and Lordsburg. Corporate and Other Corporate administrative and general expenses, which represent costs that are driven primarily by corporate-level activities, is allocated to the business segments and is presented in the corporate allocation line item in the segment statements. These costs increased $19.7 million over the prior year to $115.5 million. This increase was due to increased pension and benefits expense of $17.9 million, resulting from lower prior-year returns on pension investments and increasing healthcare costs. Consulting expenses increased $1.5 million primarily for Sarbanes-Oxley Act compliance and other strategic corporate initiatives. Taxes other than income decreased $2.5 million, or 79.6%, over the prior year due to the favorable resolution of certain outstanding tax issues and a decrease in social security taxes from lower payroll costs. Consolidated Other Income and Deductions Other income increased $4.3 million, or 9.0%, over the prior year reflecting higher year-over-year returns on investments of $6.3 million, and an increase in the equity component of AFUDC of $2.6 million. These increases were offset by decreased interest income of $4.5 million due to the redemption of short-term investments early in 2003. Cash from the redemption of these investments was primarily used for the Company's retirement of the EIP long-term debt, debt refinancing, repayment of short-term debt and pension funding. Other deductions increased $33.8 million over the prior year primarily due to a charge of $16.7 million in 2003 for the write-off of transition costs due to the repeal of deregulation in New Mexico and a charge of $16.6 million for costs related to long-term debt refinancing. Interest Expense Interest expense increased $4.8 million, or 7.8%, over the prior year primarily due to decreased capitalized interest of $3.9 million from the completion of the Afton and Lordsburg gas-fired plants in southern New Mexico. Higher average short term borrowing levels also contributed to the increase. 36 Income Taxes The Company's consolidated income tax expense before the cumulative effect of a change in accounting principle was $27.9 million for the year ended December 31, 2003, compared to $33.0 million for the prior year. The decrease was due to the impact of lower pre-tax earnings. The Company's effective income tax rates for the years ended December 31, 2003 and 2002 were 32.05% and 33.95%, respectively. The decrease in the effective tax rate, year-over-year, was due to an increase in permanent tax differences, resulting from AFUDC and research and development credits in 2003. 37 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Page Management's Annual Report on Internal Control Over Financial Reporting 39 Report of Independent Registered Public Accounting Firm 41 Financial Statements: PNM Resources, Inc. and Subsidiaries Consolidated Statements of Earnings 47 Consolidated Statements of Retained Earnings 48 Consolidated Balance Sheets 49 Consolidated Statements of Cash Flows 51 Consolidated Statements of Capitalization 53 Consolidated Statements of Comprehensive Income (Loss) 54 Public Service Company of New Mexico and Subsidiaries Consolidated Statements of Earnings 55 Consolidated Statements of Retained Earnings 56 Consolidated Balance Sheets 57 Consolidated Statements of Cash Flows 59 Consolidated Statements of Capitalization 61 Consolidated Statements of Comprehensive Income (Loss) 62 Notes to Consolidated Financial Statements 63 Supplementary Data: Quarterly Operating Results 137 Report of Independent Registered Public Accounting Firm on Schedules 138 Schedule I Condensed Financial Information of Parent Company 139 Schedule II Valuation and Qualifying Accounts 142 38 Management's Annual Report on Internal Control Over Financial Reporting Management of PNM Resources, Inc. and subsidiaries ("the Company") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a - 15(f) under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal control over financial reporting based on the Internal Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment performed, management concludes that the Company's internal control over financial reporting was effective as of December 31, 2004. Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on management's assessment of internal control over financial reporting, which is included herein. /s/ Jeffry E. Sterba Jeffry E. Sterba, Chairman, President and Chief Executive Officer /s/ John R. Loyack John R. Loyack, Senior Vice President and Chief Financial Officer Note: This "Management's Annual Report on Internal Control Over Financial Reporting" is repeated verbatim and unchanged from the 2004 Annual Report on Form 10-K. 39 Management's Annual Report on Internal Control Over Financial Reporting Management of Public Service Company of New Mexico and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a - 15(f) under the Securities Exchange Act of 1934, as amended. Management assessed the effectiveness of the Company's internal control over financial reporting based on the Internal Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment performed, management concludes that the Company's internal control over financial reporting was effective as of December 31, 2004. Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on management's assessment of internal control over financial reporting, which is included herein. /s/ Jeffry E. Sterba Jeffry E. Sterba, Chairman, President and Chief Executive Officer /s/ John R. Loyack John R. Loyack, Senior Vice President and Chief Financial Officer Note: This "Management's Annual Report on Internal Control Over Financial Reporting" is repeated verbatim and unchanged from the 2004 Annual Report on Form 10-K. 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PNM Resources, Inc. We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that PNM Resources, Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, 41 the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated February 25, 2005 (September 26, 2005 as to Note 2) expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 25, 2005 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Public Service Company of New Mexico We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Public Service Company of New Mexico and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the 43 Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated February 25, 2005 (September 26, 2005 as to Note 2) expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 25, 2005 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PNM Resources, Inc. We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of PNM Resources, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of earnings, retained earnings, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PNM Resources, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations , effective January 1, 2003. As discussed in Note 10 to the consolidated financial statements, during 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 25, 2005 (September 26, 2005, as to Note 2) 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Public Service Company of New Mexico We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Public Service Company of New Mexico and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of earnings, retained earnings, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PNM Resources, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations , effective January 1, 2003. As discussed in Note 10 to the consolidated financial statements, during 2003, the Company changed the actuarial valuation measurement date for the pension plan and other post-retirement benefit plans from September 30 to December 31. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 25, 2005 (September 26, 2005, as to Note 2) 46 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year Ended December 31, 2004 2003 2002 (In thousands, except per share amounts) Operating Revenues: Electric $1,113,046 $ 1,097,075 $ 839,884 Gas 490,921 358,267 277,406 Other 825 311 1,404 Total operating revenues 1,604,792 1,455,653 1,118,694 Operating Expenses: Cost of energy sold 945,309 802,670 499,751 Administrative and general 168,095 158,706 146,231 Energy production costs 146,153 140,584 149,528 Depreciation and amortization 102,221 115,649 102,409 Transmission and distribution costs 59,447 60,070 63,870 Taxes, other than income taxes 34,607 31,310 34,244 Income taxes 36,062 28,072 20,887 Total operating expenses 1,491,894 1,337,061 1,016,920 Operating income 112,898 118,592 101,774 Other Income and Deductions: Other income 48,070 52,705 48,360 Other deductions (8,150) (46,153) (12,306) Income tax (expense) benefit (13,185) 183 (12,144) Net other income and deductions 26,735 6,735 23,910 Earnings before interest charges 139,633 125,327 125,684 Interest Charges: Interest on long-term debt, net 46,702 59,429 56,409 Other interest charges 4,673 6,760 5,003 Net interest charges 51,375 66,189 61,412 Preferred Stock Dividend Requirements of Subsidiary 572 586 586 Net Earnings Before Cumulative Effect of Changes in Accounting Principles 87,686 58,552 63,686 Cumulative Effect of Changes in Accounting Principles Net of Tax of $23,999 - 36,621 - Net Earnings $ 87,686 $ 95,173 $ 63,686 Net Earnings per Common Share: Basic $ 1.45 $ 1.60 $ 1.09 Diluted $ 1.43 $ 1.58 $ 1.07 Dividends Paid per Share of Common Stock $ 0.63 $ 0.61 $ 0.57 The accompanying notes are an integral part of these financial statements. 47 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Year Ended December 31, 2004 2003 2002 (In thousands) Balance at Beginning of Year $ 503,069 $ 444,651 $ 415,388 Net earnings 87,686 95,173 63,686 Dividends: Common stock (40,189) (36,755) (34,423) Balance at End of Year $ 550,566 $ 503,069 $ 444,651 The accompanying notes are an integral part of these financial statements. 48 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2004 2003 (In thousands) ASSETS Utility Plant: Electric plant in service $2,488,961 $2,419,162 Gas plant in service 680,487 630,949 Common plant in service and plant held for future use 140,818 130,547 3,310,266 3,180,658 Less accumulated depreciation and amortization 1,135,510 1,063,645 2,174,756 2,117,013 Construction work in progress 124,381 133,317 Nuclear fuel, net of accumulated amortization of $16,448 and $15,995 25,449 25,917 Net utility plant 2,324,586 2,276,247 Other Property and Investments: Investment in lessor notes 308,680 330,339 Other investments 139,848 114,273 Non-utility property, net of accumulated depreciation of $1,773 and $1,755 1,437 1,455 Total other property and investments 449,965 446,067 Current Assets: Cash and cash equivalents 17,195 12,694 Accounts receivables, net of allowance for uncollectible accounts of $1,329 and $9,284 96,600 68,258 Unbilled revenues 104,708 82,899 Other receivables 48,393 47,042 Inventories 41,352 40,799 Regulatory assets 3,339 15,436 Other current assets 51,967 38,835 Total current assets 363,554 305,963 Deferred charges: Regulatory assets 217,196 215,416 Prepaid pension cost 87,336 85,782 Other deferred charges 44,998 49,154 Total deferred charges 349,530 350,352 $3,487,635 $3,378,629 The accompanying notes are an integral part of these financial statements. 49 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2004 2003 (In thousands) CAPITALIZATION AND LIABILITIES Capitalization: Common stockholders' equity: Common stock outstanding (no par value, 120,000,000 shares authorized: issued 60,464,595 and 60,388,496 at December 31, 2004 and 2003, respectively) $ 638,826 $ 647,722 Accumulated other comprehensive loss, net of tax (89,813) (73,487) Retained earnings 550,566 503,069 Total common stockholders' equity 1,099,579 1,077,304 Cumulative preferred stock of subsidiary without mandatory redemption ($100 par value, 10,000,000 shares authorized: issued 115,293 and 128,000 at December 31, 2004 and 2003, respectively) 11,529 12,800 Long-term debt 987,823 987,210 Total capitalization 2,098,931 2,077,314 Current Liabilities: Short-term debt 94,700 125,918 Accounts payable 117,645 86,155 Accrued interest and taxes 15,796 23,477 Other current liabilities 128,476 110,031 Total current liabilities 356,617 345,581 Deferred Credits: Accumulated deferred income taxes 284,528 250,098 Accumulated deferred investment tax credits 35,360 38,462 Regulatory liabilities 327,419 316,384 Asset retirement obligations 50,361 46,416 Additional minimum pension liability 164,801 128,825 Accrued postretirement benefit cost 16,102 20,638 Other deferred credits 153,516 154,911 Total deferred credits 1,032,087 955,734 Commitments and Contingencies (see Note 14) - - $3,487,635 $3,378,629 The accompanying notes are an integral part of these financial statements. 50 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2004 2003 2002 (In thousands) Cash Flows From Operating Activities: Net earnings $ 87,686 $ 95,173 $ 63,686 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 131,625 144,854 115,415 Allowance for equity funds used during construction (1,294) (2,589) - Accumulated deferred income tax 39,966 90,175 44,138 Transition costs write-off - 16,720 - Loss on reacquired debt - 16,576 - Cumulative effect of a change in accounting principle - (60,620) - Net unrealized losses on trading and investment contracts (1,640) (1,360) (29,513) Wholesale credit reserve - (2,433) - Other, net - - 4,464 Changes in certain assets and liabilities: Accounts receivables (28,342) (21,344) 2,830 Unbilled revenues (21,809) 5,539 3,936 Accrued postretirement benefit costs (6,089) (14,962) (18,986) Other assets (2,085) (5,972) (41,152) Accounts payable 30,429 (7,317) 34,597 Accrued interest and taxes (7,680) (22,712) (25,833) Other liabilities 14,988 (1,036) (56,223) Net cash flows from operating activities 235,755 228,692 97,359 Cash Flows From Investing Activities: Utility plant additions (135,795) (167,701) (229,629) Nuclear fuel additions (9,915) (9,503) (10,596) Redemption of available-for-sale investments - 80,291 76,633 Combustion turbine payments - (11,136) (29,975) Bond purchase - (6,675) (5,572) Return of principal PVNGS lessor notes 20,292 18,360 17,531 Luna Energy investment (13,379) - - Other (5,654) (5,203) (18,819) Net cash flows from investing activities (144,451) (101,567) (200,427) The accompanying notes are an integral part of these financial statements. 51 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2004 2003 2002 (In thousands) Cash Flows From Financing Activities: Short-term borrowings (repayments), net (31,218) (24,082) 115,000 Long-term debt borrowings - 483,882 - Long-term debt repayments - (476,572) - Premium on long-term debt refinancing - (23,905) - Refund costs of pollution control bonds - (31,427) - Retirement of preferred stock (1,118) - - Exercise of employee stock options (16,430) (9,639) (2,412) Dividends paid (38,848) (36,702) (34,226) Other 811 312 - Net cash flows from financing activities (86,803) (118,133) 78,362 Increase (Decrease) in Cash and Cash Equivalents 4,501 8,992 (24,706) Beginning of Year 12,694 3,702 28,408 End of Year $ 17,195 $ 12,694 $ 3,702 Supplemental Cash Flow Disclosures: Interest paid, net of capitalized interest $ 46,469 $ 69,046 $ 53,041 Income taxes paid (refunded), net $ 14,459 $ (23,154) $ 13,541 Non Cash Transactions: Long-term debt assumed for transmission line $ - $ - $ 26,152 Pension contribution of PNM Resources, Inc. common shares $ - $ 28,950 $ - The accompanying notes are an integral part of these financial statements. 52 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION As of December 31, 2004 2003 (In thousands) Common Stock Equity: Common Stock, no par value $ 638,826 $ 647,722 Accumulated other comprehensive income, net of tax (89,813) (73,487) Retained earnings 550,566 503,069 Total common stock equity 1,099,579 1,077,304 Cumulative Preferred Stock: Without mandatory redemption requirements: 1965 Series, 4.58% with a stated value of $100.00 and a current redemption price of $102.00. Outstanding shares at December 31, 2004 and 2003 were 115,293 and 128,000, respectively 11,529 12,800 Long-Term Debt: Issue and Final Maturity First Mortgage Bonds, Pollution Control Revenue Bonds: 5.7% due 2016 65,000 65,000 Senior Unsecured Notes, Pollution Control Revenue Bonds: 6.30% due 2016 77,045 77,045 5.75% due 2022 37,300 37,300 5.80% due 2022 100,000 100,000 6.375% due 2022 90,000 90,000 6.30% due 2026 23,000 23,000 6.60% due 2029 11,500 11,500 2.10% due 2033 46,000 46,000 2.10% due 2033 100,000 100,000 4.00% due 2038 36,000 36,000 Total Senior Unsecured Notes, Pollution Control Revenue Bonds 520,845 520,845 Senior Unsecured Notes: 4.40% due 2008 300,000 300,000 7.50% due 2018 100,025 100,025 Other, including unamortized discounts 1,953 1,340 Total long-term debt 987,823 987,210 Total Capitalization $2,098,931 $2,077,314 The accompanying notes are an integral part of these financial statements. 53 PNM RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS ) Year Ended December 31, 2004 2003 2002 (In thousands) Net Earnings $87,686 $95,173 $ 63,686 Other Comprehensive Income (Loss): Unrealized gain (loss) on securities : Unrealized holding gains arising during the period, net of tax (expense) benefit of $(1,212), $(1,256) and $(853) 1,849 1,916 1,303 Reclassification adjustment for losses included in net income, net of tax (expense) benefit of $745, $440 and $602 (1,137) (672) (919) Additional Minimum pension liability adjustment, net of tax (expense) benefit of $14,415, $(6,284) and $36,085 (21,996) 9,589 (55,061) Mark-to-market adjustment for certain derivative transactions: Change in fair market value of designated cash flow hedges, net of tax (expense) benefit of $(3,567), $(6,816) and $(6,790) 5,443 10,401 (10,361) Reclassification adjustment for losses included in net income, net of tax (expense) benefit of $318, $0 and $450 (485) - (687) Total Other Comprehensive Income (Loss) (16,326) 21,234 (65,725) Total Comprehensive Income (Loss) $71,360 $116,407 $ (2,039) The accompanying notes are an integral part of these financial statements. 54 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year Ended December 31, 2004 2003 2002 (In thousands) Operating Revenues: Electric $ 1,113,046 $ 1,097,075 $ 839,884 Gas 490,921 358,267 277,406 Total operating revenues 1,603,967 1,455,342 1,117,290 Operating Expenses: Cost of energy sold 945,186 802,650 498,941 Administrative and general 165,942 160,200 140,500 Energy production costs 146,153 140,584 149,528 Depreciation and amortization 99,633 113,921 101,689 Transmission and distribution costs 59,447 61,169 63,870 Taxes, other than income taxes 31,270 29,670 31,333 Income taxes 37,964 28,262 22,774 Total operating expenses 1,485,595 1,336,456 1,008,635 Operating income 118,372 118,886 108,655 Other Income and Deductions: Other income 47,727 48,755 40,446 Other deductions (5,497) (39,625) (15,059) Income tax expense (14,733) (2,328) (10,096) Net other income and deductions 27,497 6,802 15,291 Earnings before interest charges 145,869 125,688 123,946 Interest Charges: Interest on long-term debt, net 49,015 59,013 56,409 Other interest charges 4,416 6,697 5,321 Net interest charges 53,431 65,710 61,730 Net Earnings Before Cumulative Effect of Changes in Accounting Principles 92,438 59,978 62,216 - - - Cumulative Effect of Changes in Accounting Principles, Net of tax of $23,999 - 36,621 - Net Earnings 92,438 96,599 62,216 Preferred Stock Dividend Requirements 572 586 586 Net Earnings Available for Common Stock $ 91,866 $ 96,013 $ 61,630 The accompanying notes are an integral part of these financial statements. 55 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Year Ended December 31, 2004 2003 2002 (In thousands) Balance at Beginning of Year $ 302,589 $ 256,157 $ 288,388 Net earnings 92,438 96,599 62,216 Dividends: Cumulative preferred stock (572) (586) (586) Dividends to Parent: Assets - - (34,880) Cash (23,000) (49,581) (58,981) Balance at End of Year $ 371,455 $ 302,589 $ 256,157 The accompanying notes are an integral part of these financial statements. 56 PUBLIC SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2004 2003 (In thousands) ASSETS Utility Plant: Electric plant in service $ 2,488,961 $ 2,419,162 Gas plant in service 680,487 630,949 Common plant in service and plant held for future use 97,369 92,809 3,266,817 3,142,920 Less accumulated depreciation and amortization 1,125,444 1,055,251 2,141,373 2,087,669 Construction work in progress 110,406 120,340 Nuclear fuel, net of accumulated amortization of $16,448 and $15,995 25,449 25,917 Net utility plant 2,277,228 2,233,926 Other Property and Investments: Investment in lessor notes 308,680 330,339 Other investments 116,134 91,273 Non-utility property 966 966 Total other property and investments 425,780 422,578 Current Assets: Cash and cash equivalents 16,448 11,607 Accounts receivables, net of allowance for uncollectible accounts of $1,329 and $9,284 96,600 68,258 Unbilled revenue 104,708 82,899 Other receivables 45,717 45,814 Inventories 41,246 40,791 Regulatory assets 3,339 15,436 Other current assets 39,933 28,089 Total current assets 347,991 292,894 Deferred charges: Regulatory assets 217,196 215,416 Prepaid pension cost 87,336 85,782 Other deferred charges 38,199 48,708 Total deferred charges 342,731 349,906 $ 3,393,7