PNM Resources 2006 Annual Report

2 0 0 6 A n n uA l Re p oR t P O W E R I N P a R t N E R s h I P s P a R t N E R s h I P s I N P O W E R In business and life, amazing things happen when people or organizations with unique ideas and skills unite with a common focus. As partners, we can achieve much more together than we ever could individually. In the energy business, great partners not only help us realize new opportunities, they also help define who we are and who we will be. Partnerships make us stronger, smarter and more competitive. The results are astounding. It’s the Power in Partnerships. ChaIRmaN’s LEttER tO shareholders For the past three years, PNM Resources’ management has been moving forward with our plans for disciplined, purposeful growth – and we have seen substantial results. Looking forward, our future resides in the strength of strategic alliances and partnerships we’ve created with other r e s o u r c e s businesses, employees, our customers and the communities we serve. We deeply value these partnerships. In turn, they create value for you, our shareholders. 2006 resulted in many accomplishments and new opportunities for our company. The acquisition of the coal-fired Twin Oaks Power plant and the commissioning of Luna Energy Facility are just two examples. Luna went online earlier than expected and $11 million under budget. During the year we also renewed our focus on safety P n M 1 as a key value for our employees, and the results immediately paid off. Our OSHA recordable injury rate decreased 30 percent and our workers’ compensation costs dropped 21 percent. Jeff Sterba c h air M an , President and ceo P nM r esources, inc . P a r t n e r s h i P s Challenges in 2006 included the Palo Verde Nuclear Generating Station, which operated below expected levels for the first half of the year. Many of Palo Verde’s issues are being addressed, although more work remains to be done to ensure the plant can return to its historic levels of reliability. High natural gas prices in the winter of 2006 created a hardship for many of our gas customers and drove our cost of producing electricity upward. Our employees did a superb job of not only increasing efficiencies in order to keep costs under control, but also reaching out to customers in new ways to provide assistance during the heating season. Through programs such as the Low-Income Home Energy Assistance Program and an aggressive marketing campaign to encourage conservation, customers had more options for managing high natural gas prices. When 2006 came to an end, we had exceeded our earnings-per-share growth annual target of 5 percent to 6 percent for the fourth year in a row. Ongoing diluted earnings per share, excluding non-recurring charges, grew more than 15 percent to $1.80 in 2006, compared with 2005. GAAP diluted earnings per share were $1.73, compared with $1.00 in 2005. Recognizing our strong earnings growth, the board of directors increased the company’s common stock dividend in 2006 by 10 percent for an annual indicated rate of $0.88. Since February 2004, when I first began talking about our measured growth approach, the board has voted to increase the dividend 38 percent. P o w e r i n pnM Resources’ 3,300 employees demonstrate the genuine power of partnerships every day in their commitment to achieving a continued high level of service in Herman Duran Master ser Vice te ch P nM G as oP e rations the industry. C R E a t E OPPORtuNItIEs Partners in Growth Uniting to achieve mutual benefits. That’s what partners do. Our new joint venture with a wholly owned subsidiary of Cascade Investment, L.L.C., enables us to accelerate our unregulated growth strategy with less risk.  Our investors also saw significant stock price appreciation in 2006. From market open on Jan. 3 to the year’s closing bell on Dec. 29, PNM Resources’ common share stock price appreciated nearly 27 percent to $31.10. Combined with our dividend payment, PNM Resources provided a total shareholder return of about 31 percent in 2006. P n M The solid growth of our earnings, dividend and stock price are strong achievements for investors. They are the direct results of immediate contributions by First Choice Power, our competitive retail electric provider in Texas, and Twin Oaks Power plant. Both acquisitions demonstrated the near-term benefits of our longer-term planned growth strategy. 2006, though, may best be remembered as the year we created a new foundation to sustain and build upon that growth. In November, we announced plans to work with Cascade Investment, L.L.C., to create an energy company joint venture. As the private investment vehicle for Microsoft founder Bill Gates, Cascade has been one of our largest shareholders for more than five years. The joint venture – temporarily called EnergyCo – is a natural partnership of two very different companies with similar visions of long-term success. EnergyCo combines PNM Resources’ proven operating expertise and market experience with Cascade’s financial resources and energy investment acumen. Cascade has demonstrated its increasing confidence in our company by investing $100 million in equity-linked securities to help fund the 2005 acquisition of First Choice Power and Texas-New Mexico Power Co. The EnergyCo announcement was well received by Wall Street and sparked interest among new investors. Investor confidence in our company was demonstrated during an oversubscribed one-day public offering of common stock one month after the EnergyCo announcement when we issued 5.75 million shares near our all-time high stock price. Among the investors were 26 new institutional firms and 8 investors with an international base. r e s o u r c e s 4 P a r t n e r s h i P s i n P o w e r EnergyCo is a 50-50 joint venture that will serve expanding U.S. energy markets, primarily in the Southwest, Texas and the West. EnergyCo PNM Resources Cascade Investment subsidiary POWER IN Partnerships The EnergyCo joint venture will provide a vehicle to execute our growth strategy in our unregulated, or competitive, lines of business. It also will drive shareholder value faster than we could have otherwise. Through EnergyCo, we will develop or acquire power generating facilities and offer r e s o u r c e s energy and energy-related services initially in the areas we know best: the Southwest, Texas and the West. While this joint venture is new, some of its strategies will be familiar to those who have followed PNM Resources in recent years. EnergyCo will benefit from the expertise PNM Resources has developed in improving plant efficiency and reliability and offering competitive products and services in the wholesale energy market. EnergyCo is designed to capitalize on smart growth opportunities while preserving PNM Resources’ financial strength. The joint venture also provides a vehicle to better separate our unregulated merchant assets from our regulated jurisdictional assets, which is required to occur by 2010. “PNM Resources continues to grow. It is careful and methodical. It is not growth for growth’s P n M 5 P a r t n e r s h i P s sake, but the result of executing our strategy and vision to Build America’s Best Merchant Utility.” Those are words I wrote in my 2004 Letter to Shareholders. Our EnergyCo joint venture further delivers on that promise. We are right on course for measured growth, and we continue to stay true to the balanced, sustainable business model that achieves diversified earnings from solid regulated utility businesses and earnings growth from competitive electricity markets. To sustain and enhance this model, we sought and found Power in Partnerships. P o w e r i n 2006 2005 2004 2003 $1.43 $1.30 $1.56 $1.80 2006 2005 2004 2003 $.63 $.61 $.77 $.86 Ongoing Earnings (per diluted common share) Dividends Paid (per common share) “ Growth must be responsible. energyCo provides a unique opportunity for pnM Resources to execute our strategy in a way that reduces risk and provides value for our shareholders. C h a r l e s E l d r e d ” sr. Vice President and cFo PnM resources Wendy Carlson V i c e P r e s i d e n t & t r e a s u r e r • Charles Eldred s r . V i c e P r e s i d e n t & c h i e F F i n a n c i a l o F F i c e r Hugh Smith s r . V i c e P r e s i d e n t , e n e r G y r e s o u r c e s • Alice Cobb s r . V i c e P r e s i d e n t & c h i e F a d M i n i s t r a t i V e o F F i c e r P n M r e s o u r c e s 7 P a R t N E R I N G P o w e r i n P a r t n e r s h i P s Generation for Generations The challenge of climate change is it requires action now on a problem that will affect our grandchildren far more than it will affect us. With the right framework, we can address this problem and even create opportunities within our society. PaRtNERshIPs IN Power P n M As exciting as the Cascade news is, it should not overshadow other 2006 success stories, including several that reflect our continued commitment to sustainability and environmental performance. In the span of three months, we launched two initiatives designed to elevate public interest in solar photovoltaic, or PV, technology. The first was a customer-owned solar PV program in which our New Mexico utility, PNM, purchases renewable energy certificates, or RECs, from participating customers every time their interconnected solar PV systems generate one kilowatt-hour of electricity, whether customers use the power or provide it to the grid. The second was a newly constructed 25-kilowatt solar array located alongside Interstate 25 between Albuquerque and Santa Fe. This facility has sparked curiosity among the thousands of motorists who drive by each day. We also started a massive environmental construction project at the PNM San Juan Generating Station that will help us reduce emissions of mercury, particulates, nitrogen oxide and sulfur dioxide. The San Juan project will significantly improve the plant’s environmental performance while enhancing the local economy with millions of dollars. The nearly $300 million undertaking by the plant’s owners is expected to be completed in 2009 and generate about $17 million in construction-related wages for the Four Corners area. But perhaps the most significant environmental partnership in which we are involved is the task of helping to address climate change as an industry and as a nation. As CEO of an energy holding company, I personally have been engaged on Capitol Hill, with industry colleagues and at international conferences to make the case that the time for debate is over and the time to act is now. No single answer exists to address climate change and reduce atmospheric concentrations of carbon. Similarly, no single industry can bear the entire responsibility. We all need to know the rules of the road. For our industry, uncertainty regarding future carbon limitations makes it very difficult to plan future generation resources. And regardless of how carbon emissions are limited, it is clear to me that our country will need to make significant investments in the development and deployment of technology, particularly in the areas of advanced coal and carbon capture and storage. Reducing carbon emissions will require all tools available to us, including coal, energy efficiency, renewable energy and nuclear power, as well as technology we have yet to imagine. P a r t n e r s h i P s i n P o w e r r e s o u r c e s 8 2007 and Beyond One of our key goals is to provide our electric and natural gas retail customers the best possible service, reliability and value. We have done an excellent job in recent years of increasing r e s o u r c e s the efficiency of our operations in order to keep prices affordable for customers. Indeed, our electric rates are among the lowest in the region and nation. However, rising electric demand and a growing number of customers require us to make significant investments in infrastructure during the coming years to maintain the reliability customers need and expect. Unfortunately, the cost of building new infrastructure has increased dramatically. In addition, the emerging climate debate requires that we make decisions and investments that are compatible with potential national climate change regulation. To effectively manage the challenges that are ahead, adjustments to our rate P n M 9 structure are necessary. When our 2006 gas rate case is concluded, we expect our 490,000 gas customers in New Mexico P a r t n e r s h i P s to see a modest increase in gas delivery fees. This would be only the second rate increase in 13 years. Early in 2007, we applied for an electric rate increase for PNM’s 436,000 customers. This increase, if approved, would be effective Jan. 1, 2008, and would mark the first PNM electric rate increase in more than 20 years. Even with increases, we anticipate our new gas and electric rates still will remain very competitive with other utilities in the region and nation. P o w e r i n 2008 2007 2006 2005 2004 1,655 1,779 1,855 1,962 1,915 10 9 8 7 6 2000 2001 2002 2003 2004 2005 2006 actual and Projected Peak Demand (mW) Competitive Electric Rates (cents per kWh) Total Retail Electric Comparison PNM electric rates are 28 percent lower than regional rates and 21 percent lower than national rates. PNM SW Region USA photovoltaic panels convert sunlight into electricity, and our solar pV program converts customers into electricity generation partners. Beginning in 2006, pnM electric customers were paid for the environmental benefits created by their rooftop solar pV systems. P nM’ s P hoto Voltaic arra y ne a r a lbuque rque , n.M. P n M r e s o u r c e s 11 G E N E R a t I O N P o w e r i n P a r t n e r s h i P s sustainability for the Future Ensuring environmental sustainability as we meet growth and demand is at the heart of the energy challenge and provides the opportunity to find solutions. That is why PNM Resources is among the 14 major American businesses and leading environmental organizations that have joined together in a call for strong national legislation to achieve significant reductions of greenhouse gas emissions.  Clearly, a new energy era is being shaped. It’s being influenced by an expanding customer base, rising demand, the need for new power generation sources and the commitment to environmental sustainability. These challenges present some risks for PNM Resources but also immense opportunities for collaboration, innovation and leadership. I believe we will rise to the occasion. We’ll meet these challenges by continuing to rely on our vision and our values, both of which have served our shareholders, employees and customers well over the years. As we look ahead, our measured approach should bring opportunities for expanded earnings and a larger base of satisfied customers. We will continue to pursue and form alliances that will grow the company and increase shareholder value. We seek Partnerships in Power, because we have seen the Power in Partnerships. Sincerely, J e f f S t e r b a chairMan, President and ceo PnM resources Jeffry E. Sterba Chairman, President and CEO of PNM Resources, Age 52 Director since 2000 P n M r e s o u r c e s B O a R D 13 D I R E C t O R s Adelmo E. Archuleta President and CEO of Molzen-Corbin & Assoc., Age 56 Director since 2003 Human Resources and Compensation Committee Audit and Ethics Committee O F P o w e r i n P a r t n e r s h i P s Bonnie S. Reitz Owner/Founder, InsideOut… Culture to Customer, Age 54 Director since 2002 Human Resources and Compensation Committee Governance and Public Policy Committee Julie A. Dobson Chairman of TeleBright Corporation, Age 50 Director since 2002 Audit and Ethics Committee Finance Committee Charles E. McMahen Retired Officer of Compass Bank, Age 67 Director since 2005 Human Resources and Compensation Committee Audit and Ethics Committee 14 P n M r e s o u r c e s P a r t n e r s h i P s Joan B. Woodard, Ph.D. Exec. Vice President and Deputy Director of Nuclear Weapons Program for Sandia National Laboratories, Age 54 Director since 2003 Finance Committee Governance and Public Policy Committee Woody L. Hunt CEO of Hunt Building Co.Ltd. and Affiliated Companies, Age 61 Director since 2005 Audit and Ethics Committee Finance Committee Manuel T. Pacheco, Ph.D. President Emeritus University of Missouri System, Age 65 Director since 2001 Human Resources and Compensation Committee Governance and Public Policy Committee Robert M. Price President of PSV Inc. Age 76 Director since 1992 Human Resources and Compensation Committee Finance Committee Governance and Public Policy Committee i n P o w e r ENvIRONmENtaL Performance 2006 2005 2004 Net Generation Net Energy Generated (MWh)(1) r e s o u r c e s 12,507,265 10,556,668 10,725,719 Air Emissions Nitrogen Oxide (NOx) Intensity (pounds per MWh) Absolute emissions (tons) Sulfur Dioxide (SO2) Intensity (pounds per MWh) Absolute emissions (tons) Particulate Matter (PM) Intensity (pounds per MWh) Absolute emissions (tons) Carbon Dioxide (CO2) Intensity (pounds per MWh) Absolute emissions (tons) Water Freshwater Withdrawals Freshwater intensity (gallons per MWh) Withdrawals (acre feet) 2.6 17,907 1.9 11,724 0.091 567 1,572 9,828,960 3.0 16,004 1.7 8,815 0.083 438 1,458 7,696,763 2.9 15,760 1.8 9,495 0.093 497 1,403 7,524,827 15 P n M 469 18,019 408 13,210 414 13,638 P a r t n e r s h i P s Waste Hazardous Waste(2) Percentage diverted from waste stream Generated (tons) Recycled (tons) Disposed (tons) 53% 5 3 2 23% 3,214,324 750,920 2,463,404 11% 4 0.4 3 17% 1,400,000 231,272 1,168,728 0% 3 0 3 10% 1,400,000 142,884 1,257,116 Fly Ash Percentage diverted from waste stream Generated (tons) Recycled (tons) Disposed (tons) P o w e r i n Renewables Renewable Energy Generation Total renewable generation (MWh) Wind energy total generation (MWh) Solar PV total generation (kWh) Wind Energy: PNM Sky BlueTM Total generated for customers (MWh) PNM Sky BlueTM customers Solar Energy(3) Total installed (kW AC) Total measured (kWh) Participating Solar PV customers 528,632 528,598 34,326 65,565 13,795 159 137,619 76 507,800 507,800 504,793 504,793 45,328 8,510 – – – 31,209 6,978 – – – (1) Includes Twin Oaks Power plant generation for May-Dec. 2006 and New Mexico Wind Energy Center generation for customer and wholesale markets. (2) All hazardous waste is disposed in compliance with local, state and federal regulations. (3) Customer-owned Photovoltaic Renewable Energy Certificate Purchase Program. For more details, please refer to the PNM Resources Environmental Sustainability report to be published later this year. F I N a N C I a L I N F O R m a t I O N t he ne w Me xico w ind e ne r Gy c e nte r ne a r ho use , n.M. INvEstOR highlights 2006 2005 PERCENTAGE CHANGE ANNuALizED GRoWTH RATE SiNCE 2002 (In thousands except per share amounts and ratios) Financial Data r e s o u r c e s Operating Revenues Operating Expenses Net Earnings Available for Common Stock Retained Earnings $2,471,669 $2,238,162 $122,114 $623,936 $1.73 $1.80 $21.86 $0.860 $32.07 $22.49 $31.10 69,829 1.42 17.77 8.20% 2.77% $2,076,810 $1,939,441 $67,227 $564,623 $1.00 $1.56 $18.39 $0.770 $30.45 $23.83 $24.49 65,928 1.33 24.01 5.64% 3.14% 19.0% 15.4% 81.6% 10.5% 73.0% 15.4% 18.9% 11.7% 5.3% (5.6%) 27.0% 5.9% 6.8% (26.0%) 45.4% (12.0%) 21.9% 21.8% 17.7% 8.8% 12.8% 10.4% 7.4% 10.8% 11.8% 18.3% 18.3% 4.4% 10.2% 5.1% 6.4% (6.3%) Common Share Data 17 P a r t n e r s h i P s Earnings (Diluted) per Share as Reported Earnings (Diluted) per Share Ongoing(1) Book Value per Share Dividends Paid per Share Market Price per Share High Low Close at Year-End Average Shares Outstanding (Basic) Financial Ratios P n M Market-to-Book Ratio at Year-End Price Earnings Ratio at Year-End Return on Average Common Equity Dividend Yield on Market Price at Year-End (1) P o w e r Reconciliation of GAAP to ongoing earnings per share: 2 006 diluted ongoing earnings of $1.80 were reduced by adjustments for acquisition integration costs of $0.04 and joint venture formation costs of $0.03 resulting in 2006 GAAP diluted EPS of $1.73. 2 005 diluted ongoing earnings of $1.56 were reduced by adjustments for acquisition integration costs of $0.15, turbine write-down of $0.13, equity-linked units of $0.11, refinancing of $0.10, software write-off of $0.04, regulatory costs associated with the NMPRC’s approval of the TNP acquisition of $0.02, and cumulative effect of a change in accounting principle of $0.01 resulting in a 2005 GAAP diluted EPS of $1.00. There were no non-recurring charges in 2004. 2 003 diluted ongoing earnings of $1.30 were reduced by adjustments for refinancing of $0.16, transition costs write-off of $0.17 and increased by cumulative effect of changes in accounting principles of $0.61 resulting in a 2003 GAAP diluted EPS of $1.58. 2 002 diluted ongoing earnings of $1.21 were reduced by adjustments for reorganization costs of $0.09, transmission line project write-off of $0.05, and severance costs of $0.02 and increased by Western Resources acquisition and legal costs of $0.02 resulting in a 2002 GAAP diluted EPS of $1.07 i n sELECtED Financial Data 2006 2005 PERCENTAGE CHANGE ANNuALizED GRoWTH RATE SiNCE 2002 (In thousands except generation statistics and number of employees) Electric Regulated operations Statistics PNM and TNMP electric MWh Sales PNM and TNMP electric Revenues PNM and TNMP electric Customers 15,578,276 $849,139 701,027 15,749,327 $1,290,414 245,674 84,198 $508,829 489,629 1,855 $1.7143 12,287,285 $728,326 684,225 13,086,813 $944,358 210,451 85,835 $511,442 478,482 1,779 $1.4711 26.8% 16.6% 2.5% 20.3% 36.6% 16.7% (1.9%) (0.5%) 2.3% 4.3% 16.5% 20.3% 10.4% 16.0% 13.6% 39.2% 0.0% (2.2%) 16.4% 2.1% 5.8% 5.4% P n M Electric unregulated operations Statistics Wholesale and First Choice Power MWh Sales Wholesale and First Choice Power Revenues First Choice Power Customers r e s o u r c e s Gas Regulated operating Statistics PNM Gas Throughput (Decatherms in thousands) PNM Gas Revenues PNM Gas Customers PNM Generation Statistics Coincidental Peak Demand - MW Average Fuel Cost per Million BTU 18 Number of Employees 3,294 3,382 (2.6%) 5.5% P a r t n e r s h i P s Notes: For year ended 2006 Wholesale includes Twin Oaks Power plant from the date of acquisition, April 18, 2006. For year ended 2005 TNMP and First Choice Power are reported from the date of acquisition, June 6, 2005. T he customers reported above for TNMP and First Choice Power include 139,337 customers for 2006 and 150,787 customers for 2005, respectively, who are customers of TNMP who have chosen First Choice Power as their Retail Electric Provider, REP. These TNMP customers are also included in the First Choice Power segment. U nder the Texas Electric Choice Act, customers of TNMP in Texas can choose First Choice Power or any other REP to provide energy. However, TNMP delivers energy to customers within its service area regardless of the REP chosen. Therefore, TNMP earns revenue for energy delivery and First Choice Power earns revenue from the usage of that energy by its customers. The MWh reported above for TNMP and First Choice Power include 2,332,098 MWh for 2006 and 1,644,675 MWh for 2005, respectively, used by customers of TNMP who have chosen First Choice Power as their REP. T he condensed financial statements in this summary annual report were derived from the consolidated financial statements that appear in PNM Resources’ 2006 Form 10-K filed with the Securities and Exchange Commission on March 1, 2007. Copies of the Form 10-K may be obtained by calling PNM Resources’ Shareholder Services Department at (800) 545-4425 or visiting PNMResources.com. i n P o w e r CORPORatE Information Report of independent Registered Public Accounting Firm To the Board of Directors and Stockholders of PNM Resources, Inc. Albuquerque, New Mexico We have audited the consolidated balance sheets and consolidated statements of capitalization of PNM Resources, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, 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, 2006. We also have audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. Such consolidated financial statements, management’s assessment of the effectiveness of the Company’s internal control over financial reporting and our reports thereon dated February 28, 2007, expressing unqualified opinions and including an explanatory paragraph regarding the adoption of Financial Accounting Standards Board Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations in 2005, and Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment and Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132R in 2006, and PNM Resources, Inc.’s acquisition of TNP Enterprises, Inc. in 2005 (which are not included herein) are included in the Company’s 2006 Form 10-K. The accompanying condensed consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on such condensed consolidated financial statements in relation to the complete consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31, 2006 and 2005, and the related condensed consolidated statements of earnings and of cash flows for each of the three years in the period ended December 31, 2006, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Dallas, Texas February 28, 2007 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, 2006. Management has excluded Twin Oaks from their report on internal control over financial reporting. The financial statements of Twin Oaks reflect total assets and revenues constituting 12 and 5 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006. The Company has disclosed the material change in the Company’s internal control over financial reporting due to the acquisition, which occurred April 18, 2006. 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 in the Company’s 2006 Form 10-K. 19 P o w e r i n P a r t n e r s h i P s P n M r e s o u r c e s Jeffry E. Sterba c h a i rMa n , P r e s ident and c h i eF e x e c u t iV e o FFicer Charles Eldred s e n i o r V i c e P r e sident and c h i e F Fi n a n c i a l oFFicer CONDENsED CONsOLIDatED statements of Earnings 2006 2005 2004 (In thousands except per share amounts) operating Revenues Electric Gas Other Total operating revenues operating Expenses Cost of energy sold Other operations and maintenance expense Depreciation and amortization Taxes, other than income taxes Income taxes Total operating expenses Operating income other income and Deductions Other income and deductions Other income taxes (expense) benefit Net other income and deductions Net earnings before interest charges interest Charges Net interest charges Preferred Stock Dividend Requirements Net Earnings Before Cumulative Effect of Changes in Accounting Principles Cumulative Effect of Changes in Accounting Principles Net of Tax (Expense) Benefit of $0, $592, and $0 Net Earnings Net Earnings per Common Share Basic Diluted Dividends Declared per Share of Common Stock Average Shares Outstanding (Basic) Average Shares Outstanding (Diluted) $ 1,962,073 508,410 1,186 2,471,669 1,445,790 522,001 152,271 71,902 46,198 2,238,162 233,507 52,429 (17,772) 34,657 268,164 145,522 528 122,114 – $ 122,114 $ 1.75 $ 1.73 $ 0.880 69,829 70,636 $ 1,564,077 510,801 1,932 2,076,810 1,274,647 454,028 138,722 52,594 19,450 1,939,441 137,369 40,740 (13,411) 27,329 164,698 93,677 2,868 68,153 (926) $ 67,227 $ 1.02 $ 1.00 $ 0.785 65,928 67,080 $ 1,113,046 490,921 825 1,604,792 945,309 373,695 102,221 34,607 36,062 1,491,894 112,898 39,920 (13,185) 26,735 139,633 51,375 572 87,686 – $ 87,686 $ 1.45 $ 1.43 $ 0.665 60,414 61,340 20 P n M r e s o u r c e s P a r t n e r s h i P s i n P o w e r The condensed financial statements in this summary annual report were derived from the consolidated financial statements that appear in PNM Resources’ 2006 Form 10-K filed with the Securities and Exchange Commission on March 1, 2007. Copies of the Form 10-K may be obtained by calling PNM Resources’ Shareholder Services Department at (800) 545-4425 or visiting PNMResources.com. CONDENsED CONsOLIDatED Balance sheets 2006 2005 (In thousands) Assets Utility Plant Utility plant Less accumulated depreciation and amortization Subtotal Construction work in progress Nuclear fuel, net Net utility plant Other Property and Investments Investment in lessor notes Other property and investments Total other property and investments Current Assets Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets Deferred Charges Regulatory assets Other deferred charges Total deferred charges Total Assets Capitalization and Liabilities Capitalization Common stockholders’ equity Cumulative preferred stock of subsidiary Long-term debt Total capitalization Current Liabilities Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term Liabilities Accumulated deferred income taxes and investment tax credits Regulatory liabilities Asset retirement obligations Other deferred credits Total long-term liabilities Total Capitalization and Liabilities $ 1,693,296 11,529 1,765,907 3,470,732 764,345 214,229 332,277 1,310,851 607,679 398,170 61,338 316,854 1,384,041 $ 6,165,624 $ 1,286,459 11,529 1,746,395 3,044,383 332,200 206,648 184,648 723,496 485,069 402,253 55,646 413,862 1,356,830 $ 5,124,709 $ 5,141,300 1,639,156 3,502,144 230,871 28,844 3,761,859 257,659 177,285 434,944 123,419 358,748 63,329 145,379 690,875 553,564 724,382 1,277,946 $ 6,165,624 $ 4,307,085 1,518,370 2,788,715 168,195 27,182 2,984,092 286,678 184,227 470,905 68,199 344,892 52,037 131,169 596,297 347,279 726,136 1,073,415 $ 5,124,709 21 P n M r e s o u r c e s Balance sheet P o w e r i n P a r t n e r s h i P s The condensed financial statements in this summary annual report were derived from the consolidated financial statements that appear in PNM Resources’ 2006 Form 10-K filed with the Securities and Exchange Commission on March 1, 2007. Copies of the Form 10-K may be obtained by calling PNM Resources’ Shareholder Services Department at (800) 545-4425 or visiting PNMResources.com. CONDENsED CONsOLIDatED statements of Cash Flows 2006 2005 2004 (In thousands) Cash Flows From operating Activities Net earnings Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization Accumulated deferred income tax Cumulative effect of changes in accounting principles Net unrealized (gains) losses on trading and investment securities Realized (gains) on investment securities Equity-linked units charge Turbine impairment Amortization of fair value of acquired Twin Oaks sales contract Other, net Change in certain assets and liabilities, net of amounts acquired Net cash flows from operating activities Cash Flows From investing Activities Capital additions Return of principal PVNGS lessor notes Cash acquired from purchase of TNP, net of cash paid Twin Oaks business acquisition Other, net Net cash flows from investing activities Cash Flows From Financing Activities Short-term borrowings (repayments), net Short-term interim financing for Twin Oaks acquisition Repayments of interim financing for Twin Oaks acquisition Long-term debt borrowings (2005 incl Cascade) Long-term debt repayments (2005 incl Cascade) Issuance of common stock Redemption of TNP Preferred Stock Exercise of employee stock options Dividends paid Other, net Net cash flows from financing activities Increase in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of Year Cash and Cash Equivalents at the End of Year Supplemental Cash Flow Disclosures Interest paid, net of capitalized interest Income taxes paid (refunded), net Supplemental schedule of noncash investing and financing activities During 2005, PNMR purchased all of the outstanding common shares of TNP for $74.6 million in cash and $87.4 million in PNMR common stock. In conjunction with the acquisitions, liabilities were assumed as follows: $ 122,114 173,650 47,331 – 1,062 (5,871) – – (70,851) (12,489) (10,522) 244,424 (321,118) 23,279 – (481,058) (20,678) (799,575) 182,650 480,000 (230,505) 15,000 – 226,098 – (20,243) (59,708) 17,079 610,371 55,220 68,199 $ 123,419 $ 140,459 $ 16,158 $ 67,227 $ 87,686 P n M 162,391 28,318 1,518 (2,455) (8,562) 11,348 14,958 – (11,578) (53,057) 210,108 (221,814) 21,432 45,965 – 117 (154,300) 237,500 – – 339,832 (399,626) 101,231 (224,564) (9,735) (51,128) 1,686 (4,804) 51,004 17,195 $ 68,199 $ 77,066 $ (4,174) 132,454 39,966 – (1,640) (2,584) – – – (5,986) (14,754) 235,142 (145,710) 20,292 – – (18,420) (143,838) (31,218) – – – – – – (16,430) (38,848) (307) (86,803) 4,501 12,694 $ 17,195 $ 46,469 $ 14,459 22 r e s o u r c e s P a r t n e r s h i P s i n P o w e r Fair value of assets acquired Cash paid for transaction costs Cash paid for TNP common shares PNMR common stock exchanged for TNP common stock Liabilities assumed $ 1,501,114 (21,520) (74,648) (87,392) $ 1,317,554 The condensed financial statements in this summary annual report were derived from the consolidated financial statements that appear in PNM Resources’ 2006 Form 10-K filed with the Securities and Exchange Commission on Mar. 1, 2007. Copies of the Form 10-K may be obtained by calling PNM Resources’ Shareholder Services Department at (800) 545-4425 or visiting PNMResources.com. thE Company PNM Resources inc. and Subsidiaries We are an investor-owned holding company of regulated and unregulated energy and energy-related companies and were incorporated in the State of New Mexico on March 3, 2000. Company management regularly reviews operating results of our primary subsidiaries, which are Public Service Company of New Mexico, Texas-New Mexico Power Co., First Choice Power, L.P. and Altura Energy, LLC. PNM is an integrated public utility with regulated operations primarily engaged in the generation, transmission and distribution of electricity, and the transmission, distribution and sale of natural gas within New Mexico. PNM’s unregulated operations primarily focus on the sale and marketing of electricity in the western United States. TNMP is a regulated utility in Texas that provides regulated transmission and distribution services. First Choice Power is a competitive retail electric provider operating in the competitive, unregulated electricity market in Texas. Altura is an unregulated subsidiary that owns Twin Oaks Power, a 305-megawatt coal-fired power plant in Texas. In addition, we provide energy and technology-related services through our unregulated, wholly owned subsidiary, Avistar, Inc. The company also owns a 50-percent share of EnergyCo, LLC, an energy joint venture with a subsidiary of Cascade Investment, L.L.C. EnergyCo will provide energy and energy services to expanding markets throughout the Southwest, Texas and the West. Stock Performance P n M r e s o u r c e s 23 The following graph assumes that $100 was invested on Dec. 31, 2001, in PNM Resources Common Stock, the S&P 500 Stock Index and the S&P Midcap 400 Utilities Index, and that all dividends were reinvested. $ 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 P a r t n e r s h i P s PNM Resources S&P 500 Index S&P Midcap 400 Utilities Index Comparison of 5-Year Cumulative total Return PNM Resources S&P 500 Index S&P Midcap 400 Utilities Index $100 $100 $100 88 78 92 108 100 116 151 111 138 150 117 152 197 135 185 P o w e r i n Fiscal Year Ended December 31 (Data Source: Bloomberg) 2001 2002 2003 2004 2005 2006 Historical performance does not necessarily predict future results. PNM Resources’ common stock is traded on the NYSE. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements made in this report 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 these forward-looking statements, the Company cautions you not to place undue reliance on these statements. The Company’s business, financial condition, cash flow and operating results are influenced by many factors, which are often beyond its control, that can cause actual results to differ from those expressed or implied by the forward looking statements. These factors include the risk that the new limited liability company in which the Company has a 50% interest, and which temporarily is named “EnergyCo”, is unable to identify and implement profitable acquisitions, the potential unavailability of cash from the Company’s subsidiaries due to regulatory, statutory and contractual restrictions, the outcome of any appeals of the Public Utility Commission of Texas order in the stranded cost true-up 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, fluctuations in interest rates, conditions in the financial markets affecting the Company’s permanent financing for the Twin Oaks power plant acquisition, weather, water supply, changes in fuel costs, availability of fuel supplies, the effectiveness of risk management and commodity risk transactions, seasonality and other changes in supply and demand in the market for electric power, variability of wholesale power prices and natural gas prices, volatility and liquidity in the wholesale power markets and the natural gas markets, changes in the competitive environment in the electric and natural gas industries, the performance of generating units, including PVNGS, and transmission systems, the market for electrical generating equipment, the ability to secure long-term power sales, the risks associated with completion of the construction of generation, including pollution control equipment at the San Juan Generating Station and the expansion of the Afton Generating Station, transmission, distribution and other projects, including construction delays and unanticipated cost overruns, state and federal regulatory and legislative decisions and actions, the risk that the Company and its subsidiaries may have to commit to substantial capital investments and additional operating costs to comply with new environmental control requirements including possible future requirements to address concerns about global climate change, 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. shaREhOLDER Information Securities information NYSE Listed Stock Symbol: PNM Common shareholders of record: 14,121 (as of Jan. 31, 2006) Newspaper listing: PNM Res Reports and Publications Copies of the Company’s Form 10-K (annual report) and Form 10-Q (quarterly report) to the Securities and Exchange Commission (SEC), proxy statement, all news releases, a 5-year Financial and Statistical Report, up-to-date stock quotes, quarterly earnings results and other corporate literature are available free upon request by calling (505) 241-2868, by accessing the information on the Internet at PNMResources.com or by writing to Investor Relations. Contact information Corporate Headquarters: PNM Resources, Inc. Alvarado Square Albuquerque, N.M. 87158 Web site: PNMResources.com Investor Relations: Phone: (505) 241-2868 Fax: (505) 241-2367 Shareholder Services: Phone: (800) 545-4425 2007 Annual Meeting The 2007 Annual Meeting of Stockholders will be at 9 a.m. (MDT) on May 22, 2007, at the South Broadway Cultural Center, 1025 Broadway SE, Albuquerque, N.M. Proxies will be requested from stockholders when the notice of meeting and proxy statement are mailed on or about April 12, 2007. Transfer Agent and Registrar Corporate Headquarters: Mellon Investor Services PO Box 3338 South Hackensack, N.J. 07606-1938 Overnight, Registered or Certified Mail: Mellon Investor Services 480 Washington Blvd Jersey City, N.J. 07310 Phone: (877) 663-7775 Web site: vault.melloninvestor.com/isd/ Dividend Reinvestment and Direct Stock Purchase Plan PNM Resources offers a dividend reinvestment and direct stock purchase plan as a service to both new investors and current shareholders. In addition to full or partial reinvestment of dividends, the PNM Direct Plan gives shareholders the opportunity to make direct cash investments. More information about the plan and enrollment forms are available through Mellon Investor Services. Dividends Declared and Common Stock Prices: (in Dollars) Photography: Michael barley 2006 QtR 1 2 3 4 Dividend - Stock Price High Low Dividend - $0.40 2005 Stock Price High Low $0.22 $0.44 $0.22 $25.50 $22.49 $0.185 $28.20 $23.83 $26.60 $23.92 $28.94 $25.41 $30.38 $26.12 $30.45 $27.62 $29.22 $24.03 On May 26, 2006, the Company submitted the required annual written certification to the NYSE to comply with Section 303A.12(a) of the NYSE Listed Company Manual. There were no qualifications to the certification. In addition, the Company has filed with the SEC, as exhibits to its Form 10-K filed on March 1, 2007, the Sarbanes-Oxley Act Section 302 certifications regarding the quality of the Company’s public disclosure. Design: KilMer & KilMer Brand Consultants $32.07 $27.47 $0.20 Dividends declared during the quarter ended Sept. 30, 2006 include a $0.22 per share dividend declared on July 18, 2006 and a $0.22 per share dividend declared on Sept. 26, 2006. Dividends declared during the quarter ended Sept. 30, 2005 include a $0.20 per share dividend declared on July 19, 2005 and a $0.20 per share dividend declared on Sept. 27, 2005. For further information regarding dividends, please see the discussion on page A-30 in the Company’s Form 10-K. Alvarado Square • A l b u q u e r q u e , nM 8 7 1 5 8 p nM R e s o u r c e s . c o m