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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-K



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FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended DECEMBER 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



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TEXAS-NEW MEXICO POWER COMPANY

(Exact name of registrant as specified in its charter)



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|                         |  |                                                                   |  |                                     
|------------------------ |  | ----------------------------------------------------------------- |  | ------------------------------------
|Texas                    |  | 4100 International Plaza, P. O. Box 2943, Fort Worth, Texas 76113 |  | Commission File Number: 2-97230     
|(State of incorporation) |  | (Address and zip code of principal executive offices)             | 
|                         |  |                                                                  
|                         |  | Telephone number, including area code: 817-731-0099               |  | 75-0204070                          
|                         |  |                                                                   |  | (I.R.S. employer identification no.)



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Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: None



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x



Indicate by check
mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



TNP Enterprises, Inc. holds all 10,705 outstanding common shares of Texas-New Mexico Power Company.



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter. $0.



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)

Annual Report on Form 10-K for the Fiscal Year Ended December
31, 2004



TABLE OF CONTENTS



|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|         |  | PART I                                                                                |  |   
|Item 1.  |  | BUSINESS                                                                              |  | 4 
|         |  | Introduction                                                                          |  | 4 
|         |  | Proposed PNM Resources, Inc., Acquisition of TNP Enterprises, Inc.                    |  | 5 
|         |  | TNMPs Service Areas                                                                  |  | 6 
|         |  | ERCOT                                                                                 |  | 6 
|         |  | Seasonality of Business                                                               |  | 7 
|         |  | Sources and Cost of Energy                                                            |  | 7 
|         |  | Government Regulation                                                                 |  | 7 
|         |  | Employees and Executive Officers                                                      |  | 8 
|         |  |                                                                                      
|Item 2.  |  | PROPERTIES                                                                            |  | 9 
|         |  | Transmission and Distribution Facilities                                              |  | 9 
|         |  | Administrative and Service Facilities                                                 |  | 9 
|         |  |                                                                                      
|Item 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 9 
|         |  |                                                                                      
|Item 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 10
|         |  |                                                                                      
|         |  | PART II                                                                               |  |   
|         |  |                                                                                      
|Item 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  | 10
|         |  |                                                                                      
|Item 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 11
|         |  |                                                                                      
|Item 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13
|         |  | Competitive Conditions                                                                |  | 13
|         |  | Critical Accounting Policies                                                          |  | 13
|         |  | Results of Operations                                                                 |  | 14
|         |  | Liquidity and Capital Resources                                                       |  | 18
|         |  | Aggregate Contractual Obligations                                                     |  | 20
|         |  | Off-Balance Sheet Arrangements                                                        |  | 20
|         |  |                                                                                      
|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                           |  | 21
|         |  |                                                                                      
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 22
|         |  | Note 1.   Summary of Significant Accounting Policies                                  |  | 28
|         |  | Note 2.   Proposed PNM Resources, Inc., Acquisition of TNP Enterprises, Inc.          |  | 30
|         |  | Note 3.   Regulatory Matters                                                          |  | 31
|         |  | Note 4.   Accounting Developments                                                     |  | 33
|         |  | Note 5.   Derivative Instruments, Hedging Activities, and Other Comprehensive Income  |  | 33
|         |  | Note 6.   Sale of TNP One                                                             |  | 34
|         |  | Note 7.   Employee Benefit Plans                                                      |  | 35
|         |  | Note 8.   Income Taxes                                                                |  | 39
|         |  | Note 9.   Long-Term Debt                                                              |  | 40
|         |  | Note 10. Related Party Transactions                                                   |  | 41
|         |  | Note 11. Commitments and Contingencies                                                |  | 41
|         |  | Note 12. Selected Quarterly Consolidated Financial Data (unaudited)                   |  | 42



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##### Table of Contents

|         |  |                                                                                        |  |   
|-------- |  | -------------------------------------------------------------------------------------- |  | --
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.  |  | 42
|         |  |                                                                                       
|Item 9A. |  | CONTROLS AND PROCEDURES.                                                               |  | 42
|         |  |                                                                                       
|         |  | PART III                                                                               |  |   
|         |  |                                                                                       
|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                     |  | 43
|         |  | Directors                                                                              |  | 43
|         |  | Committees and Meetings                                                                |  | 43
|         |  | Director Compensation                                                                  |  | 44
|         |  | Compensation Committee Interlocks and Insider Participation                            |  | 44
|         |  | Executive Officers                                                                     |  | 44
|         |  |                                                                                       
|Item 11. |  | EXECUTIVE COMPENSATION.                                                                |  | 45
|         |  | Pension Plan                                                                           |  | 45
|         |  | Employment Contracts and Termination, Severance and Change of Control and Arrangements |  | 46
|         |  | Report on Executive Compensation of TNMP Compensation Committee                        |  | 47
|         |  |                                                                                       
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.                        |  | 49
|         |  |                                                                                       
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                                        |  | 50
|         |  |                                                                                       
|Item 14. |  | PRINCIPAL ACCOUNTING FEES AND SERVICES.                                                |  | 50
|         |  |                                                                                       
|         |  | PART IV                                                                                |  |   
|         |  |                                                                                       
|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                        |  | 51
|         |  | SIGNATURES                                                                             |  | 52
|         |  | CERTIFICATIONS                                                                         |  | 54



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Statement Regarding Forward Looking Information



The discussions in this document that are not historical facts, including, but not limited to, future cash flows and the
potential recovery of stranded costs are based upon current expectations. Actual results may differ materially. Among the factors that could cause the results to differ materially from expectations are:



| |  | the outcome of any appeals of the Public Utility Commission of Texas (PUCT) order in the stranded cost true-up proceeding;
|- |  | --------------------------------------------------------------------------------------------------------------------------



| |  | the results of any future regulatory proceedings, including risks and uncertainties relating to the receipt of outstanding regulatory approvals of the proposed acquisition of TNP
Enterprises, Inc., (TNP) by PNM Resources, Inc. (the PNM Transaction);
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | collections experience;
|- |  | -----------------------



| |  | the risks that the businesses of TNP and PNM Resources will not be integrated successfully after the PNM Transaction;
|- |  | ---------------------------------------------------------------------------------------------------------------------



| |  | the risk that the benefits of the PNM Transaction will not be fully realized or will take longer to realize than expected;
|- |  | --------------------------------------------------------------------------------------------------------------------------



| |  | the risk that disruption from the PNM Transaction will make it more difficult to maintain relationships with customers, employees, suppliers or other third parties;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | conditions in the financial markets relevant to the PNM transaction;
|- |  | --------------------------------------------------------------------



| |  | interest rates;
|- |  | ---------------



| |  | weather;
|- |  | --------



| |  | changes in supply and demand in the market for electric power;
|- |  | --------------------------------------------------------------



| |  | market liquidity;
|- |  | -----------------



| |  | the competitive environment in the electric and natural gas industries;
|- |  | -----------------------------------------------------------------------



| |  | state and federal regulatory and legislative decisions and actions;
|- |  | -------------------------------------------------------------------



| |  | the effects of accounting pronouncements that may be issued periodically;
|- |  | -------------------------------------------------------------------------



| |  | insurance coverage available for claims made in litigation;
|- |  | -----------------------------------------------------------



| |  | general business and economic conditions;
|- |  | -----------------------------------------



| |  | the outcome of legal proceedings and the performance of state, regional and national economies. and;
|- |  | ----------------------------------------------------------------------------------------------------



| |  | other factors described from time to time in TNPs and Texas  New Mexico Power Companys (TNMPs) reports filed with the Securities and Exchange Commission
(SEC).
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



TNMP wishes to caution readers not to place undue
reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.



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##### Table of Contents

PART I



Item 1. BUSINESS



Introduction



Texas-New Mexico
Power Company (TNMP), is a regulated utility operating in Texas and New Mexico. In Texas, TNMP provides regulated transmission and distribution services under the provisions of the legislation that established retail competition in Texas (Senate
Bill 7). In New Mexico, TNMP provides integrated electricity services that include transmitting, distributing, purchasing and selling electricity to its New Mexico customers. TNMPs Texas and New Mexico operations are subject to traditional
cost-of-service regulation. Traditional cost-of-service regulation is a method of regulation that sets rates that TNMP can charge to its electricity customers based upon its cost of providing that service. The cost of providing that service includes
a return of and on the capital, which TNMP has invested and dedicated to providing electric service. TNMPs predecessor was organized in 1925.



TNMP has two subsidiaries, Texas Generating Company, LP (TGC), a Texas limited partnership, and Texas Generating Company II, LLC (TGC II), a Texas limited
liability company. TNMP formed TGC and TGC II as Texas corporations to finance construction of TNP One, formerly its sole generation facility. Until May 2001, TNMP owned TNP One together with TGC and TGC II. At that time, TNMP converted TGC and TGC
II to their present forms and consolidated the ownership of TNP One into TGC to comply with the Senate Bill 7. TNMP and TGC sold TNP One in October 2002.



Prior to January 2002, TNMP operated as an integrated electric utility in Texas, generating, transmitting and distributing electricity to customers in its
Texas service territory. As required by Senate Bill 7, and in accordance with a plan approved by the PUCT, TNMP separated its Texas utility operations into three components:



| |  |  | Retail Activities. First Choice Power, L.P., and First Choice Power Special Purpose, L.P. (collectively, First Choice) conduct the activities related to the sale of
electricity to retail customers in Texas.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Power Transmission and Distribution. TNMP continues to operate its regulated transmission and distribution business in Texas.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Power Generation.TGC became the unregulated entity performing TNMPs generation activities in Texas. However, in October 2002, TNMP and TGC sold TNP One to Sempra
Energy Resources. As a result of the sale, TGC and TGC II neither own property nor engage in any operating activities, and neither TNMP nor any of its affiliates are currently in the power generation business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Upon separation, TNMP provided First Choice equity capitalization of $23
million. No other payments or considerations were exchanged between TNMP, First Choice or TGC in connection with the separation.



First Choice and TNMP are wholly owned subsidiaries of TNP Enterprises, Inc. (TNP). As such, TNMP is subject to TNPs control. TNP controls decisions
regarding TNMPs business and has control over its management and affairs. As a member of the TNPs corporate group, TNMP operates within strategies and policies, including dividend strategies, that TNP may establish from time to time.
There are currently no formal dividend strategies or mandatory dividend requirements. TNMP has agreed with the New Mexico Public Regulation Commission (NMPRC) that TNMP will not pay excessive dividends to TNP, and are required to provide notice to
the NMPRC at least 15 days prior to the payment of any dividends. The NMPRC could prevent the payment of dividends that it deems excessive.



On April 7, 2000, pursuant to an Agreement and Plan of Merger among TNP, ST Acquisition Corp. (ST Corp) and SW Acquisition, LP (SW Acquisition), the
parent of ST Corp., ST Corp. merged with and into TNP (ST Corp. Merger). TNP is the surviving corporation in the ST Corp. Merger, and is wholly owned by SW Acquisition.



TNMP provides First Choice and TNP with corporate support services, including accounting, finance, information services,
legal and human resources, under a shared services agreement with First Choice dated March 1, 2001 and a similar agreement with TNP dated June 6, 1997. These services are billed at TNMPs cost and, in return, TNP and First Choice compensate
TNMP for the use of the services. These arrangements are discussed in Note 10.



TNMP is a Texas corporation. TGC is a Texas limited partnership and TGC II is a Texas limited liability company. The executive offices of TNMP, TGC and TGC II are located at 4100 International Plaza, P.O. Box 2943,
Fort Worth, Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis.



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Proposed PNM Resources, Inc., Acquisition of TNP Enterprises, Inc.



On July 24, 2004, SW Acquisition, L.P., the sole holder of TNP common stock, entered into an agreement (Stock Purchase Agreement) to sell all of
the outstanding common stock of TNP to PNM Resources, Inc. (PNM Resources) for approximately $189 million comprised of equal amounts of PNM Resources common stock and cash. PNM Resources will also assume approximately $835 million of TNPs net
debt and senior redeemable cumulative preferred stock (preferred securities).



Under the terms of the agreement, TNPs common shareholder will receive consideration, consisting of approximately 4.7 million newly issued PNM Resources shares and the remainder being paid in cash,
subject to closing adjustments. PNM Resources shares were valued at $20.20 on the date the agreement was entered into. The final sale price will be based on the share price on the day of closing. PNM Resources shares closed at $26.24 on February 28,
2005. The existing indebtedness and preferred securities at TNP will be retired. All debt at TNMP, TNPs wholly-owned electric utility subsidiary, will remain outstanding.



Based on the number of common shares outstanding on a fully diluted basis and taking into account additional equity
issuances, following the transaction, PNM Resources shareholders would own 94 percent of PNM Resources common equity, and TNPs shareholders would own approximately 6 percent.



The transaction is subject to certain conditions, including, to the
extent they are required, receipt of necessary orders or other actions by the PUCT, the NMPRC, the Federal Energy Regulatory Commission (FERC), the SEC and clearance under applicable federal anti-trust statutes. Information regarding the approval
status in each jurisdiction is as follows:



Texas. On
September 9, 2004, TNMP and PNM Resources filed a joint application with the PUCT seeking a finding that the acquisition is consistent with the public interest. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources
filed a stipulation settling all issues in the acquisition docket and providing for rate reductions by TNMP, timing of the 60-day rate review and effective dates for the resulting rates, extension or renewal of certain service quality and
reliability commitments, a synergy savings rate credit to be effective after closing, and a finding that the acquisition is consistent with the public interest. Various parties, including the staff of the PUCT executed the stipulation and all
parties agreed not to oppose its approval. Management expects the PUCT to find the acquisition to be consistent with the public interest and implement the stipulation no later than April 2005. See Note 3  Regulatory Matters - Texas for
additional information associated with the settlement.



New
Mexico. On September 9, 2004, TNMP and PNM Resources filed a joint application with the NMPRC seeking approval of the acquisition. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources filed a stipulation
settling all issues in the acquisition docket including rate reductions by TNMP over five years, the sharing of synergy savings with customers of TNMP and various PNM Resources subsidiaries, and the agreement of the parties that the acquisition
should be approved. Management expects that the NMPRC will approve the acquisition settlement in the second quarter of 2005. See Note 3  Regulatory Matters  New Mexico for additional information associated with the settlement.



FERC. On December 23, 2004, TNMP and PNM Resources
filed a joint application requesting approval of the acquisition. On January 28, 2005, El Paso Electric Company (EPE) filed a protest to the acquisition stating that EPE needed more information on competitive issues before the application could be
approved. Xcel Energy also filed a motion to intervene in the matter but did not protest approval of the transaction. The application requested FERC to issue all necessary approvals by March 2, 2005.



SEC. During the first quarter of 2005, PNM Resources filed for all
required actions needed for approval of the acquisition by the SEC.



Federal Trade Commission. On February 2, 2005, PNM Resources received anti-trust clearance under the Hart-Scott-Rodino Act from the Federal Trade Commission.



The transaction is also subject to certain rights of termination by each party, including rights of termination in
the event that required regulatory action is denied or not received. The Stock Purchase Agreement may also be terminated if the closing has not occurred on or prior to December 31, 2005.



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TNMPs Service Areas



TNMP
serves a market niche of smaller- to medium-sized communities. TNMP provides electric service, either directly or through retail electric providers, to more than 255,000 customers in 85 Texas and New Mexico municipalities and adjacent rural areas.
Only three of the 85 communities in TNMPs service territory have populations exceeding 50,000. TNMPs service territory is organized into two operating areas: Texas and New Mexico. In most areas that TNMP serves, it is the exclusive
provider of transmission and distribution services.



Texas



TNMPs Texas territory consists of three
non-contiguous areas. One portion of this territory extends from Lewisville, which is approximately 10 miles north of DFW International Airport, eastward to municipalities near the Red River, and to communities north, west and south of Fort Worth. A
second portion of its territory includes the area along the Texas Gulf Coast between Houston and Galveston, and a third includes areas of far west Texas between Midland and El Paso. In Texas, TNMP provides transmission and distribution service,
through retail electric providers, to a variety of entities, including customers engaged in the agricultural, food processing, oil and gas, petrochemical, and tourism industries.



TNMPs Texas operations lie entirely within the Electric Reliability Council of Texas (ERCOT) region. ERCOT is the
independent system operator that is responsible for maintaining reliable operations of the bulk electric power supply system in the ERCOT region, which is located entirely within Texas and serves about 85 percent of the electrical load in Texas.



New Mexico



TNMPs non-contiguous New Mexico service territories include areas in
southwest and south central New Mexico. TNMP engages in the transmission, distribution, purchase and sale of electricity to residential customers and a variety of commercial and industrial entities, including customers engaged in mining and
agriculture, with copper mines as the major industrial customer.



Franchises and Certificates of Public Convenience and Necessity



Texas and New Mexico laws do not require an electric utility to execute a franchise agreement with a municipality to be entitled to provide or continue to provide electrical service within the municipality. A
franchise agreement does, however, document the mutually agreeable terms under which the service will be provided within a municipality. TNMP holds 79 franchises with terms ranging from 15 to 50 years, three franchises with five year terms, one
franchise with a ten year term, and two franchises with indefinite terms from the 85 municipalities to which TNMP provides electric service. These franchises will expire on various dates from 2005 to 2039. Three Texas franchises, Sweeny, Lewisville,
and Texas City, and one New Mexico franchise, Silver City, are scheduled to expire in 2005. These franchises account for approximately 21 percent of total company revenues. The Texas City franchise is currently renewed on a month-to-month basis.
TNMP intends to negotiate and execute new or amended franchise agreements with these municipalities to be effective before the existing franchises expire. The sales within the 85 franchises currently contribute approximately 64 percent of
TNMPs total revenues. The remainder of TNMPs revenues are earned from service provided to facilities in TNMPs service area that lie outside the territorial jurisdiction of the municipalities with which TNMP has franchise
agreements.



TNMP also holds PUCT certificates of public
convenience and necessity covering all Texas areas that it serves. These certificates include terms that are customary in the public utility industry. TNMP generally has not been required to have certificates of public convenience and necessity to
provide electric service in New Mexico. In both Texas and New Mexico, TNMP is the exclusive transmission and distribution provider in nearly all of the areas it serves.



ERCOT



TNMP is a member of ERCOT.
The ERCOT independent system operator, or ISO, is responsible for maintaining reliable operations of the bulk electric power supply system in the electric market served in Texas by ERCOT. Its responsibilities include ensuring that information
relating to a customers choice of retail electric provider is conveyed in a timely manner to anyone needing the information. It is also responsible for ensuring that electricity production and delivery are accurately accounted for among the
generation resources and wholesale buyers and sellers in the ERCOT region. The ERCOT ISO does not operate a centrally dispatched pool and does not procure energy on behalf of its members other than to maintain the reliable operation of the
transmission system. The ERCOT ISO also serves as agent for procuring ancillary services for those who elect not to secure their own ancillary services requirements.



Members of ERCOT include retail customers, investor and municipal owned electric utilities, rural electric cooperatives,
river authorities, independent generators, power markets and retail electric providers. The electric market served by ERCOT



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operates under the reliability standards set by the North American Electric Reliability Council. The PUCT has primary
jurisdictional authority over the electric market served by ERCOT and the reliability of electricity across Texas main interconnected power grid.



Seasonality of Business



TNMPs sales and operating revenues remain relatively constant throughout the year. A significant portion of TNMPs revenues are based on customer peak loads which are set annually and do not fluctuate with monthly kilowatt 
hour (Kwh) consumption. TNMPs quarterly revenues were 23 percent, 24 percent, 28 percent and 25 percent of total revenues for the 1st, 2nd, 3rd and 4th quarters of 2004, respectively.



Customer Concentration



TNMP provides transmission and distribution services at regulated rates to various retail electric providers that, in turn,
provide retail electric service within TNMPs Texas service area. As of December 31, 2004, 37 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice, TNMPs affiliated retail
electric provider, is TNMPs largest customer. For the year ended December 31, 2004, First Choice provided $92.8 million of revenue to TNMP. That amount represents approximately 65 percent of TNMPs total revenue for the year ended
December 31, 2004.



Sources and Cost of Energy



TNMP
purchases all electricity for its New Mexico customers needs and energy-scheduling services under a long-term wholesale power contract with Public Service Company of New Mexico (PNM). TNMPs electricity purchases under this contract,
which extends through December 2006, are at fixed rates to provide price stability to its New Mexico customers. PNM is a wholly-owned subsidiary of PNM Resources. For the year ended December 31, 2004, TNMPs cost of purchased power was 7.1
cents per Kwh, which reflects the cost of its New Mexico power supply. As discussed previously, First Choice assumed the energy supply activities of TNMP on January 1, 2002.



To maintain a reliable power supply for its New Mexico customers and to coordinate interconnected operations, TNMP is a
member of the Western Electricity Coordinating Council.



Government Regulation



TNMP is
subject to various federal, state and local regulations. TNMP possesses all necessary franchises, licenses and certificates to enable it to conduct its business. Within Texas, TNMP is a rate-regulated electric transmission and distribution utility
and is subject to the jurisdiction of the PUCT and certain municipalities with respect to rates and service. Within New Mexico, TNMP is subject to the jurisdiction of the NMPRC. TNMP is subject in some of its activities, including the issuance of
securities and the acquisition or disposition of properties in New Mexico, to the jurisdiction of the FERC. TNMPs transmission and distribution activities in Texas are not subject to FERC regulation, because those activities occur solely
within the ERCOT system of Texas.



In addition to regulation as
a utility, TNMPs facilities are regulated by the Environmental Protection Agency and Texas and New Mexico environmental agencies. During 2002, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash
removal) of approximately $3.1 million. Substantially all of TNMPs environmental expenses were incurred at TNP One, which TNMP sold in October 2002.



In October, 2003, the Texas Commission on Environmental Quality (TCEQ) notified approximately 50 companies, including TNMP, that releases of hazardous
substances had been documented from a site owned and operated by a vendor with whom those companies did business. TNMP purchased transformers from the vendor and also sent some transformers to the vendor for repair and/or disposal. The owner and
operator of the site has filed for bankruptcy and the site is under the control of the bankruptcy trustee. In August 2004, 15 of the companies identified by TCEQ as potentially responsible parties (PRPs), including TNMP, formed an initial working
group to manage the remediation efforts and determine the allocation of responsibility among the PRPs. As a result of the initial allocation of responsibility, in 2004, TNMP recorded a liability of $0.6 million for its share of the clean up of this
site.



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##### Table of Contents

Employees and Executive Officers



At December 31, 2004, TNMP had 604 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are good.



Executive officers of TNMP, who are elected annually by and serve at the
discretion of the board of directors, are as follows:



|                          |  |     |  |                                                 
|------------------------- |  | --- |  | ------------------------------------------------
|Name                      |  | Age |  | Position with TNMP                              
|Jack V. Chambers          |  | 55  |  | Chairman, President, & Chief Executive Officer  
|W. Douglas Hobbs          |  | 61  |  | Senior Vice President & Chief Operations Officer
|Scott Forbes              |  | 47  |  | Senior Vice President & Chief Financial Officer 
|Melissa D. Davis          |  | 47  |  | Vice President - Human Resources                
|Michael D. Blanchard      |  | 54  |  | Vice President & General Counsel                
|C. Adam Carte             |  | 35  |  | Vice President & Treasurer                      
|Joseph B. Hegwood         |  | 48  |  | Vice President & Controller                     
|Joel K. Ivy               |  | 45  |  | Vice President - Technical Services             
|Neal Walker               |  | 38  |  | Vice President - Market Operations              
|Michael H. Kennemer       |  | 46  |  | Vice President  Audit Services                 
|Georgia (Cookie) Chambers |  | 47  |  | Chief Information Officer                       
|Paul W. Talbot            |  | 48  |  | Secretary                                       
|B. Jan Adkins             |  | 61  |  | Assistant Secretary                             



Jack V.
Chambers was named Chairman, President & Chief Executive Officer of TNMP in April 2001. Prior to that time, Mr. Chambers had served as Senior Vice President & Chief Operations Officer of TNMP since October 2000. Mr. Chambers was
Senior Vice President and Chief Customer Officer of TNMP from 1994 until October 2000, and Senior Vice President of TNP from April 1996 until the closing of the ST Corp. Merger.



W. Douglas Hobbs became Senior Vice President & Chief Operations Officer in August 2002. He had served as
TNMPs Vice President  T&D Operations since June 2002. Prior to that, he had served as TNMPs Vice President  Texas Transmission and Distribution Operations since October 2000. He was Vice President and Regional Customer
Officer of TNMP from March 1999 to October 2000.



Scott
Forbes became Chief Financial Officer of First Choice in October 2003, and Senior Vice President & Chief Financial Officer of TNMP, in August 2002. Previously, he had served as Vice President  Chief Accounting & Information
Officer of TNMP since January 2001. Prior to that, he had served as Chief Accounting & Information Officer of TNMP since April 2000 and as Chief Information Officer of TNMP since June 1998.



Melissa D. Davis has served as Vice President  Human
Resources of TNMP since March 1999. She served as TNMP Vice President and Regional Customer Officer from February 1997 until March 1999.



Michael D. Blanchard became Vice President & General Counsel of TNMP in February 1998. He also served as Vice President & General
Counsel of TNP from February 1998 until the closing of the ST Corp. Merger. He was Corporate Secretary and General Counsel of TNMP and TNP from 1987 to February 1998.



C. Adam Carte became Vice President & Treasurer of TNMP in August 2003. Prior to joining TNMP, Mr. Carte
served in several treasury and finance positions with NRG Energy, Inc., of Minneapolis, Minnesota. He was NRGs Vice President and Treasurer in 2002, its Assistant Treasurer from 2000 to 2002, Director of Treasury Operations and Corporate
Finance from 1999 to 2000, and Senior Treasury Analyst/Treasury Analyst, Treasury Assistant from 1995 to 1999.



Joseph B. Hegwood was elected Vice President and Controller of TNMP in August 2003. He was also named TNMPs Chief Accounting Officer
at that time. He was TNMPs Assistant Controller from August 2002 until August 2003. From July 2002 to August 2002, he served as Director of Accounting of TNMP. He served as Director of Finance of TNMP from July 2000 to July 2002. He was
TNMPs Manager of Budgets, Projects & Property Accounting from July 1998 to July 2000.



Joel K. Ivy was elected Vice President - Technical Services of TNMP in February 2004. Mr. Ivy has served in several engineering and
technical capacities with TNMP since July 1983. He was Director of Technical Services of TNMP from August 2001 until February 2004. He was a Business Unit Manager in TNMPs Bay Area Business Unit from July 2000 until August 2001 and Regional
Engineering Coordinator in TNMPs Gulf Coast Region from October 1996 until July 2000.





8



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##### Table of Contents

Neal Walker was elected Vice President - Market Operations of TNMP in February 2004. Mr.
Walker has served in several customer operations and management positions with TNMP since April 1990. He was Business Unit Manager of TNMPs North Texas region from October 2001 until February 2004. He was director of Customer Operations of the
North Texas Region from May 2000 until October 2001, and a Business Unit Manager of two different business units in TNMPs North Texas region from October 1996 until May 2000.



Michael H. Kennemer was elected Vice President - Audit Services of TNMP in February 2004. Mr. Kennemer was
Director of Audit Services for TNMP from August 2001 until February 2004. He was an internal auditor of Hunt Corporation, Dallas, Texas from April 1993 until August 2001.



Georgia (Cookie) Chambers has served as Chief Information Officer of TNMP since September 2002. From 1999
through 2001, she served as Vice President of Information Technology for Paging Network, Inc. and from 1997 through 1998, she served as Director of Application Development. Ms. Chambers is unrelated to Jack V. Chambers.



Paul W. Talbot was elected Corporate Secretary of TNMP in
February 1998. He was elected Corporate Secretary of First Choice in August 2001. He served as Corporate Secretary of TNP from February 1998 until the closing of the ST Corp. Merger. He has been Senior Counsel of TNMP since August 1996.



B. Jan Adkins became Assistant Corporate Secretary of TNMP
in August 1987. She also served as Assistant Corporate Secretary of TNP from August 1987 until the closing of the ST Corp. Merger.



Item 2. PROPERTIES



Transmission and Distribution Facilities



TNMPs facilities are located within its Texas and New Mexico service areas. TNMPs Texas transmission and distribution facilities are located in three non-contiguous areas. One area extends from Lewisville, which is approximately
10 miles north of DFW International Airport, eastward to municipalities near the Red River, and to communities north, west and south of Fort Worth. A second area includes portions of Galveston and Brazoria counties, located along the Texas Gulf
Coast between Houston and Galveston, and a third includes areas of far west Texas between Midland and El Paso, extending from the cities of Kermit and Pecos south to Fort Stockton and Sanderson. TNMPs New Mexico transmission and distribution
facilities are located in southwest and south central New Mexico, including the cities of Alamogordo, Ruidoso, Silver City, Lordsburg and surrounding communities.



Management believes that TNMPs transmission and distribution facilities have sufficient capacity to serve existing
customers adequately and that those facilities can be extended and expanded to serve customer growth for the foreseeable future. These facilities primarily consist of overhead and underground lines, substations, transformers, and meters. TNMP
generally constructs its transmission and distribution facilities on easements or public rights of way and not on real property held in fee simple.



Administrative and Service Facilities



TNMPs corporate headquarters are located in Fort Worth, Texas. Office space is leased through December 31, 2008. The mailing address for TNMPs principal executive offices is 4100 International Plaza, P.O. Box 2943, Fort Worth,
Texas 76113. TNMPs telephone number is (817) 731-0099.



TNMP owns or leases 26 construction centers or other office facilities in Texas and New Mexico. In addition to these facilities, TNMP owns or leases offices in 12 Texas communities that are shared with First Choice.



Item 3. LEGAL PROCEEDINGS



Since
1998, TNMP has been engaged in litigation in the state and federal courts with Power Resource Group, Inc. (PRG) involving the effectiveness of certain PUCT rules that implement Public Utility Regulatory Policy Act (PURPA) regulations. PRG claims
that if the FERC regulations had been properly implemented in Texas, TNMP would have been required to make a long-term purchase of electricity from PRG. Currently, PRG is appealing to the United States District Court of Appeals for the Fifth
Circuit, the ruling in favor of TNMP and the PUCT by the United States District Court for the Western District of Texas. The District Court denied PRGs claims that: (1) the PUCTs rules inappropriately implemented the PURPA statute



9



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and FERC implementing rules; (2) the District Court should direct the PUCT to promulgate new rules implementing PURPA to
PRGs satisfaction; and (3) the District Court should direct that the new rules, as required to be adopted, be applied to PRGs claim against TNMP as if such rules existed from the beginning of the dispute. The District Court determined
that PRGs claim was an as applied claim over which the Court had no jurisdiction. TNMP is defending the appeal to the Fifth Circuit and continues to believe that it will be successful in defending against PRGs claims.



Information regarding additional regulatory and legal matters
is provided in Notes 3 and 11.



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders in the fourth quarter of 2004.



PART II



Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



TNP holds all 10,705 outstanding common shares of TNMP. During 2004 and 2003, TNMP declared common dividends to TNP as follows (in thousands):



|        |  |      |       |      |   |       
|------- |  | ---- | ----- | ---- | - | ------
|Quarter |  | 2004 |       | 2003
|First   |  | $    |      |      | $ | 18,400
|Second  |  |      | 6,000 |      |   |      
|Third   |  |      |      |      |   | 11,000
|Fourth  |  |      |      |      |   |      
|        |  |      |       |      |   |       
|Total   |  | $    | 6,000 |      | $ | 29,400
|        |  |      |       |      |   |       



10



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Item 6. SELECTED FINANCIAL DATA



The
following table sets forth selected financial data of TNMP for 2000 through 2004.



|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | --------- | -
|                                                                                      |  | 2004                   |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                                                      |  | (Dollars in thousands) |        
|TEXAS-NEW MEXICO POWER COMPANY                                                        |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|For the years ended December 31,                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Consolidated results                                                                  |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Operating revenues(1)                                                                 |  | $                      | 269,665 |   |      | $ | 249,488 |      |  | $ | 303,907 |   |  | $    | 651,532 |   |  | $ | 644,035   |  
|Income before extraordinary item and the cumulative effect of change in accounting(2) |  | $                      | 46,643  |   |      | $ | 25,282  |      |  | $ | 36,131  |   |  | $    | 52,134  |   |  | $ | 41,957    |  
|Net income (loss)(3)                                                                  |  | $                      | (51,193 | ) |      | $ | 25,282  |      |  | $ | 36,131  |   |  | $    | 50,964  |   |  | $ | 41,957    |  
|At December 31,                                                                       |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Total assets                                                                          |  | $                      | 872,506 |   |      | $ | 981,348 |      |  | $ | 898,616 |   |  | $    | 974,564 |   |  | $ | 1,030,082 |  
|Capitalization                                                                        |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Long-term debt, including current maturities                                          |  | $                      | 415,569 |   |      | $ | 423,626 |      |  | $ | 345,495 |   |  | $    | 342,411 |   |  | $ | 426,327   |  
|Common shareholders equity                                                           |  |                        | 189,302 |   |      |   | 245,979 |      |  |   | 250,994 |   |  |      | 337,411 |   |  |   | 322,977   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Total capitalization                                                                  |  | $                      | 604,871 |   |      | $ | 669,605 |      |  | $ | 596,489 |   |  | $    | 679,822 |   |  | $ | 749,304   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Capitalization ratios                                                                 |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Long-term debt, including current maturities                                          |  |                        | 68.7    | % |      |   | 63.3    | %    |  |   | 57.9    | % |  |      | 50.4    | % |  |   | 56.9      | %
|Common shareholders equity                                                           |  |                        | 31.3    |   |      |   | 36.7    |      |  |   | 42.1    |   |  |      | 49.6    |   |  |   | 43.1      |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  
|Total capitalization                                                                  |  |                        | 100.0   | % |      |   | 100.0   | %    |  |   | 100.0   | % |  |      | 100.0   | % |  |   | 100.0     | %
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |           |  

---

|(1) | In early 2002, Texas operations became unbundled in accordance with Senate Bill 7. Texas statistics therefore are primarily associated with the transmission and
distribution of electricity to retail customers and the generation and sale of electricity from TNP One generating plant (sold on October 31, 2002). New Mexico operations remain unchanged from prior years.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects a change in the method of accounting for major maintenance costs in 2001.
|--- | ----------------------------------------------------------------------------------

|(3) | Reflects an extraordinary item of $97.8 million (net of tax) related to the disallowance of stranded costs in Texas in 2004 as described in Note 3.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



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TEXAS-NEW MEXICO POWER COMPANY

SELECTED OPERATING STATISTICS



|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|---------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- |  | ---- | --------- | - |  | - | ---------
|                                                                 |  | 2004 |           | 2003 |   | 2002(1)   |  | 2001 |           |  | 2000
|Operating revenues (in thousands):                               |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Residential                                                      |  | $    | 92,434    |      | $ | 92,026    |  | $    | 102,464   |  | $    | 264,704   |   |  | $ | 231,953  
|Commercial                                                       |  |      | 91,662    |      |   | 92,083    |  |      | 94,052    |  |      | 210,378   |   |  |   | 176,635  
|Industrial                                                       |  |      | 50,779    |      |   | 44,145    |  |      | 42,089    |  |      | 173,885   |   |  |   | 172,908  
|Sales for resale(2)                                              |  |      |          |      |   |          |  |      | 53,806    |  |      | 12,499    |   |  |   | 12,350   
|Other                                                            |  |      | 34,790    |      |   | 21,234    |  |      | 11,496    |  |      | (9,934    | ) |  |   | 50,189   
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Total                                                            |  | $    | 269,665   |      | $ | 249,488   |  | $    | 303,907   |  | $    | 651,532   |   |  | $ | 644,035  
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Sales (MWH):                                                     |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Residential                                                      |  |      | 2,682,425 |      |   | 2,688,719 |  |      | 2,622,978 |  |      | 2,555,472 |   |  |   | 2,582,081
|Commercial                                                       |  |      | 2,205,300 |      |   | 2,159,359 |  |      | 2,095,666 |  |      | 2,089,978 |   |  |   | 2,069,046
|Industrial                                                       |  |      | 2,174,261 |      |   | 2,220,335 |  |      | 1,958,920 |  |      | 4,166,178 |   |  |   | 4,610,059
|Sales for resale(2)                                              |  |      |          |      |   |          |  |      | 1,978,194 |  |      | 291,958   |   |  |   | 281,017  
|Other                                                            |  |      | 112,994   |      |   | 113,574   |  |      | 110,592   |  |      | 99,884    |   |  |   | 101,563  
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Total                                                            |  |      | 7,174,980 |      |   | 7,181,987 |  |      | 8,766,350 |  |      | 9,203,470 |   |  |   | 9,643,766
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Number of customers (at year-end):                               |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Residential                                                      |  |      | 219,006   |      |   | 215,589   |  |      | 210,936   |  |      | 205,712   |   |  |   | 202,759  
|Commercial                                                       |  |      | 35,932    |      |   | 35,729    |  |      | 34,979    |  |      | 33,654    |   |  |   | 34,345   
|Industrial                                                       |  |      | 107       |      |   | 109       |  |      | 114       |  |      | 117       |   |  |   | 116      
|Sales for resale(2)                                              |  |      |          |      |   |          |  |      |          |  |      |          |   |  |   | 16       
|Other                                                            |  |      | 867       |      |   | 828       |  |      | 835       |  |      | 802       |   |  |   | 788      
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Total                                                            |  |      | 255,912   |      |   | 252,255   |  |      | 246,864   |  |      | 240,285   |   |  |   | 238,024  
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Revenue statistics:                                              |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Average annual use per residential customer (Kwh)                |  |      | 12,354    |      |   | 12,606    |  |      | 12,554    |  |      | 12,451    |   |  |   | 12,805   
|Average annual revenue per residential customer (dollars)(1)     |  |      | 426       |      |   | 431       |  |      | 490       |  |      | 1,290     |   |  |   | 1,150    
|Average revenue per Kwh sold per residential customer (cents)(1) |  |      | 3.45      |      |   | 3.42      |  |      | 3.91      |  |      | 10.36     |   |  |   | 8.98     
|Average revenue per Kwh sold total sales (cents)(1)              |  |      | 3.76      |      |   | 3.47      |  |      | 3.47      |  |      | 7.08      |   |  |   | 6.68     
|                                                                 |  |      |           |      |  
|Net generation and purchases (MWH):                              |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Generated                                                        |  |      |          |      |   |          |  |      | 2,010,606 |  |      | 2,349,380 |   |  |   | 2,215,236
|Purchased                                                        |  |      | 1,139,070 |      |   | 993,441   |  |      | 1,106,924 |  |      | 7,145,034 |   |  |   | 7,686,302
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Total                                                            |  |      | 1,139,070 |      |   | 993,441   |  |      | 3,117,530 |  |      | 9,494,414 |   |  |   | 9,901,538
|                                                                 |  |      |           |      |   |           |  |      |           |  |      |           |   |  |   |          
|Average cost per Kwh purchased (cents)(3)                        |  |      | 6.67      |      |   | 6.83      |  |      | 5.85      |  |      | 4.58      |   |  |   | 4.01     
|                                                                 |  |      |           |      |  
|Employees (year-end)                                             |  |      | 604       |      |   | 584       |  |      | 578       |  |      | 748       |   |  |   | 830      

---

|(1) | In early 2002, Texas operations became unbundled in accordance with Senate Bill 7. Texas statistics therefore are primarily associated with the transmission and
distribution of electricity to retail customers and the generation and sale of electricity from TNP One generating plant (sold on October 31, 2002). New Mexico operations remain unchanged from prior years.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Sales for resale in 2002, include the sale of output from TNP One until it was sold on October 31, 2002.
|--- | --------------------------------------------------------------------------------------------------------

|(3) | After the unbundling of Texas operations in early 2002, average cost per Kwh purchased reflects the cost of New Mexico power supply only.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNMP



Competitive Conditions



TNMP
provides transmission and distribution services within TNMPs Texas service area at regulated rates to various retail electric providers that, in turn, provide retail electric service. As of December 31, 2004, 36 retail electric providers
served customers that receive transmission and distribution services from TNMP. First Choice provided electric service to customers that accounted for approximately 49 percent of the energy delivered by TNMP for the year ended December 31, 2004.
TNMPs next largest customer was a non-affiliated retail electric provider that served customers that accounted for approximately 24 percent of the energy delivered by TNMP during the year ended December 31, 2004.



Senate Bill 7 provides for recovery of stranded costs, which is the
difference between the regulatory value of TNMPs investment in generation assets and the market price for energy in a competitive market. On January 22, 2004, TNMP filed its true-up proceeding with the PUCT. On July 22, 2004, the PUCT issued
its decision in TNMPs stranded cost true-up proceeding in Docket No. 29206. . The PUCT decision allows TNMP to recover a true-up balance of $87.3 million of the $266.5 million that TNMP requested. The $87.3 million is composed of stranded
costs of $128.1 million reduced by an over-recovered fuel balance of $40.8 million



In the third quarter of 2004, TNMP began accruing carrying charges on stranded costs for the period subsequent to the July 22, 2004 stranded cost order. In accordance with PUCT rules in effect at the time that TNMP
filed its true-up proceeding, TNMP is allowed to accrue and recover carrying charges on the stranded cost balance from the date of the final order.



On August 11, 2004, TNMP filed a motion for rehearing of the PUCT decision. On October 7, 2004, the PUCT denied all of TNMPs motions for rehearing
except for an issue related to a June 2004 Texas Supreme Court ruling that addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the date that competition began in Texas. In accordance with the June 2004 Texas
Supreme Court ruling, and consistent with the application in the true-up case of another utility, TNMP expects to recover $41.7 million of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. Accordingly, TNMP
recorded $27.2 million of carrying charges for the period January 1, 2002 through July 21, 2004, in the fourth quarter of 2004. In accordance with provisions within SFAS 92  Regulated Enterprises  Accounting for Phase-In Plans, TNMP was
limited in its recognition for income statement purposes to only the debt related portion of the carrying charges, TNMP was prohibited from income statement recognition of $14.5 million associated with the equity portion of the carrying charges
until the receipt of those amounts from customers. A final order in the true-up proceeding is expected to be issued in the second quarter of 2005.



Critical Accounting Policies



Accounting policies that TNMP and its subsidiaries employed in the preparation of the consolidated financial statements are discussed in Note 1. TNMP is required to use estimates in order to prepare the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America. Those estimates include accruals for estimated revenues for electricity delivered from the latest billing date to the end of the accounting period and
estimated purchased power expenses incurred but not billed at the end of the accounting period. The use of these estimates is customary in the electric utility industry. Estimated revenues and purchased power expenses are adjusted to the actual
amounts billed or incurred in the following month. TNMP also employs certain critical accounting policies that require use of judgments and assumptions that are subject to uncertainty. The amounts reported in the consolidated financial statements
that are related to those critical accounting policies could be different if either different judgments were made or different assumptions were used. Those critical accounting policies are discussed below.



Carrying Charges on Stranded Costs. As discussed above, TNMP expects
to recover an estimated $41.7 million of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. TNMP recorded $27.2 million of carrying charges for the period January 1, 2002 through July 21, 2004, in the fourth
quarter of 2004. TNMPs estimate of allowable carrying charges is based on the Supreme Court ruling, and the PUCTs application of that ruling in a previous true up case of another utility. A final order in TNMPs true-up proceeding
is expected to be issued in the second quarter of 2005. Action taken by the PUCT could affect the ultimate recovery of accrued carrying costs.



Accounting for Derivatives  Normal Purchases and Sales. In the normal course of business TNMP enters into commodity contracts, which include
swing components for additional purchases of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). However, the Financial Accounting Standards Board (FASB) has defined criteria by which option-type and forward contracts for electricity could qualify for the
normal purchase and sales exception provided by SFAS 133, as amended by SFAS 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. Based on the FASBs guidance, TNMP has determined that its contracts for
electricity qualify for the normal purchases and sales exception. Accordingly, TNMP does not account for its electricity contracts as derivatives.



13



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##### Table of Contents

If TNMP were required to account for its electricity contracts as derivatives, the fair values of the
contracts would be recorded on the balance sheet as assets or liabilities. Changes in the fair values of the contracts would be recognized in earnings.



Results of Operations



2004 Compared to 2003



Overall Results



For the year ended December 31, 2004, TNMP had a loss applicable to common
stock of $51.2 million compared with income applicable to common stock of $25.3 million for the twelve months ended December 31, 2003. The changes in TNMPs earnings for 2004 compared with 2003 are attributable to the factors listed below (in
millions):



|                                                            |  |                            |       |  
|----------------------------------------------------------- |  | -------------------------- | ----- | -
|                                                            |  | EarningsIncrease(Decrease) |      
|                                                            |  | 2004 v. 2003               |      
|Changes in gross profit                                     |  | $                          | 8.5   |  
|Other operating and maintenance                             |  |                            | (3.1  | )
|Taxes other than income taxes                               |  |                            | (1.7  | )
|Carrying charges - regulatory assets                        |  |                            | 32.0  |  
|Extraordinary item (net of taxes)                           |  |                            | (97.8 | )
|All other (including income tax effects on the items above) |  |                            | (14.4 | )
|                                                            |  |                            |       |  
|Change in TNMP net income(loss)                             |  | $                          | (76.5 | )
|                                                            |  |                            |       |  



Gross Profit



The following table summarizes the components of TNMPs gross profit
(in thousands).



|                      |  |      |         |      |   |                    |  |   |       
|--------------------- |  | ---- | ------- | ---- | - | ------------------ |  | - | ------
|                      |  | 2004 |         | 2003 |   | Increase(Decrease)
|Operating revenues    |  | $    | 269,665 |      | $ | 249,488            |  | $ | 20,177
|Purchased power       |  |      | 76,017  |      |   | 67,825             |  |   | 8,192 
|Transmission expenses |  |      | 25,339  |      |   | 21,858             |  |   | 3,481 
|                      |  |      |         |      |   |                    |  |   |       
|Gross Profit          |  | $    | 168,309 |      | $ | 159,805            |  | $ | 8,504 
|                      |  |      |         |      |   |                    |  |   |       



Transmission expense
is included in the Other operating and maintenance line of TNMPs consolidated income statement.



The following table summarizes the components of the change in TNMPs gross profit for the year ended December 31, 2004, compared with the same period in 2003 (in
thousands).



|                                             |  |                                 |        |  
|-------------------------------------------- |  | ------------------------------- | ------ | -
|                                             |  | Increase (Decrease)2004 v. 2003 |       
|Texas final fuel reconciliation disallowance |  | $                               | 15,698 |  
|Customer growth                              |  |                                 | 2,447  |  
|Weather related                              |  |                                 | (3,690 | )
|Transmission revenue, net                    |  |                                 | (2,878 | )
|Electric service revenues                    |  |                                 | (1,278 | )
|New Mexico purchased power cost recovery     |  |                                 | (878   | )
|Price/sales mix and other                    |  |                                 | (917   | )
|                                             |  |                                 |        |  
|Gross profit increase                        |  | $                               | 8,504  |  
|                                             |  |                                 |        |  



Gross profit for the
year ended December 31, 2004, increased $8.5 million, or 5.3 percent compared with the corresponding 2003 period. The increase is driven by a $15.7 million disallowance of fuel and energy-related purchased power costs that occurred in the final fuel
reconciliation in Texas in 2003. The final fuel reconciliation balance was included in the stranded costs true-up balance discussed in Note 3. Additionally, gross profit increased by $2.4 million due to revenues associated with a growth in
customers.



14



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##### Table of Contents

Partially offsetting the increases in gross profit were lower revenues of $3.7 million related to milder
than normal weather in 2004 compared to 2003. Transmission revenues, net of transmission costs, decreased by $2.9 million in 2004 compared with 2003 driven primarily by higher costs from TXU Electric Delivery Company and Lower Colorado River
Authority. Additionally, electric service revenues decreased by $1.3 million primarily due to fewer customer disconnects in 2004.



Purchased power expenses, associated with TNMP New Mexico operations, increased by $8.2 million in 2004, compared with the amounts incurred in 2003.
Throughout 2003, TNMP recovered all purchased power costs through the fuel and purchased power cost adjustment clause (FPPCAC) authorized by the NMPRC. The FPPCAC clause temporarily expired in February 2004 and was reinstated in October 2004,
resulting in unrecovered purchased power costs of $0.9 million in 2004.



The following table summarizes TNMPs sales for the years ended December 31, 2004 and 2003 (amounts in GWH).



|                |  |       |  |       |  |          |   |  |      |   
|--------------- |  | ----- |  | ----- |  | -------- | - |  | ---- | --
|                |  | 2004  |  | 2003  |  | Variance |   |  | %    |   
|Residential     |  | 2,682 |  | 2,689 |  | (7       | ) |  | (0.3 | )%
|Commercial      |  | 2,205 |  | 2,159 |  | 46       |   |  | 2.1  | % 
|Industrial      |  | 2,174 |  | 2,220 |  | (46      | ) |  | (2.1 | )%
|Other           |  | 113   |  | 114   |  | (1       | ) |  | (0.9 | )%
|                |  |       |  |       |  |          |   |  |      |   
|Total GWH sales |  | 7,174 |  | 7,182 |  | (8       | ) |  | (1.2 | )%
|                |  |       |  |       |  |          |   |  |      |   



Residential sales
decreased slightly in 2004 compared with 2003 due to milder than normal weather in 2004 compared to 2003. Commercial sales increased in 2004, primarily due to an increase in the number of commercial customers. The number of commercial customers
increased to approximately 35,932 in 2004 from approximately 35,729 in 2003. Industrial sales decreased 2.1 percent in 2004 compared with 2003, but did not significantly impact revenues. Industrial revenues are generated from industrial
customers capacity requirements rather than the amount of GWH sales. Capacity requirements of industrial customers did not change significantly in 2004 compared with 2003.



Operating Expenses



For the year ended December 31, 2004, TNMP incurred operating expenses of $201.2 million, an increase of $17.5 million from the amount incurred during the
corresponding period of 2003.



Increases in purchased power and
transmission expenses of $11.7 million are discussed above in Gross Profit. The remaining components of the changes in operating expenses are discussed below.



Other Operating and Maintenance



Other operating and maintenance expenses increased $3.1 million for the year ended December 31, 2004, compared with the same
period in 2003. The increase is primarily attributable to a $3.1 million reduction to operating expenses in August 2003 related to the transfer of previously expensed System Benefit Fund costs from expense to a regulatory asset based on a PUCT
ruling.



Taxes Other Than Income Taxes



Taxes other than income taxes increased $1.7 million for the year ended
December 31, 2004, compared with the corresponding 2003 period. The increase is primarily related to higher ad valorem taxes.



Carrying Charges on Regulatory Assets



During 2004, TNMP recorded $31.0 million of carrying charges associated with its stranded costs in Texas. Of that amount,
$27.2 million of carrying charges related to the period January 1, 2002 through July 21, 2004. These charges resulted from a June 2004 Texas Supreme Court ruling that addressed recovery of carrying charges on recoverable stranded costs back to
January 1, 2002, the date that competition began in Texas. Additionally, TNMP recorded carrying charges of $1.0 million related to other regulatory assets in Texas and New Mexico. In accordance with provisions within SFAS 92  Regulated
Enterprises  Accounting for Phase-In Plans, TNMP was limited in its recognition for income statement purposes to only the debt related portion of the carrying charges, TNMP is prohibited from income statement recognition of $17.1 million
associated with the equity portion of the carrying charges until the actual receipt of those amounts from customers.



Extraordinary Item (net of taxes)



In the second quarter of 2004, TNMP recorded a loss of $97.8 million related to the PUCT true-up proceeding regarding TNMPs stranded costs. The PUCT
allowed TNMP to recover $87.3 million of the $266.5 million that TNMP requested as



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stranded cost. This decision resulted in a loss of $155.2 million before tax ($97.8 million after tax). TNMP recorded the
$97.8 million after tax loss as an extraordinary item in accordance with the requirements of SFAS 101  Regulated Enterprises  accounting for the discontinuance of the application of FASB Statement No.71.



2003 Compared to 2002



Overall Results



TNMP had income applicable to common stock of $25.3 million for the year ended December 31, 2003, compared with income applicable to common stock of $36.1
million for the year ended December 31, 2002. The changes in TNMPs earnings for 2003 compared to 2002 are attributable to the factors listed below (in millions):



|                                                            |  |                             |       |  
|----------------------------------------------------------- |  | --------------------------- | ----- | -
|                                                            |  | EarningsIncrease (Decrease) |      
|                                                            |  | 2003 v. 2002                |      
|Changes in gross profit                                     |  | $                           | (23.7 | )
|Other operating and maintenance                             |  |                             | 11.4  |  
|Taxes other than income taxes                               |  |                             | 3.3   |  
|Interest charges                                            |  |                             | (7.1  | )
|All other (including income tax effects on the items above) |  |                             | 5.3   |  
|                                                            |  |                             |       |  
|TNMP consolidated earnings decrease                         |  | $                           | (10.8 | )
|                                                            |  |                             |       |  



Gross Profit



The following table summarizes the components of
TNMPs gross profit (in thousands).



|                                           |  |      |         |      |   |                    |  |   |         |  
|------------------------------------------ |  | ---- | ------- | ---- | - | ------------------ |  | - | ------- | -
|                                           |  |      |         |      |   | Increase(Decrease) | 
|                                           |  | 2003 |         | 2002 |   | 2003 v. 2002       | 
|Operating revenues, excluding transmission |  | $    | 231,036 |      | $ | 287,576            |  | $ | (56,540 | )
|                                           |  |      |        
|Purchased power and fuel                   |  |      | 67,825  |      |   | 100,679            |  |   | (32,854 | )
|Transmission expenses, net of revenues     |  |      | 3,406   |      |   | 3,360              |  |   | 46      |  
|                                           |  |      |         |      |   |                    |  |   |         |  
|Gross profit                               |  | $    | 159,805 |      | $ | 183,537            |  | $ | (23,732 | )
|                                           |  |      |         |      |   |                    |  |   |         |  



Transmission expense
is included in the Other operating and maintenance line of TNMPs consolidated income statement.



The following table summarizes the components of the change in TNMPs gross profit for the year ended December 31, 2003, compared with the same
period in 2002 (in thousands).



|                                             |  |                                 |         |  
|-------------------------------------------- |  | ------------------------------- | ------- | -
|                                             |  | Increase (Decrease)2003 v. 2002 |        
|Sales of TNP One output - 2002               |  | $                               | (18,244 | )
|Texas final fuel reconciliation disallowance |  |                                 | (15,698 | )
|January 2002 bundled rates                   |  |                                 | (4,606  | )
|Customer growth                              |  |                                 | 2,600   |  
|Weather related                              |  |                                 | 5,963   |  
|Electric service revenues                    |  |                                 | 3,084   |  
|Price/sales mix and other                    |  |                                 | 3,169   |  
|                                             |  |                                 |         |  
|Gross profit decrease                        |  | $                               | (23,732 | )
|                                             |  |                                 |         |  



Gross profit for the
year ended December 31, 2003, decreased $23.7 million compared with the corresponding 2002 period. The decrease is attributable to the loss of revenue from the sale of TNP One output, which TNMP sold in October 2002, and a disallowance of fuel and
energy-related purchased power costs that occurred in the final fuel reconciliation in Texas. The final fuel reconciliation is further discussed in Note 3. In addition, 2002 gross profit included revenues from the billing of bundled rates in January
2002 that were not present in 2003.



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##### Table of Contents

Although retail competition began on January 1, 2002, TNMPs former customers were transferred to
First Choice following their January 2002 meter reading. As a result, TNMPs January 2002 revenues include charges for service rendered through January 2002 meter reading dates at prices that reflect its integrated operations prior to
competition. Beginning in February 2002, TNMPs revenues reflected rates designed to recover its cost of providing transmission and distribution service under the provisions of Senate Bill 7. Those rates are lower than the rates TNMP charged
prior to the beginning of competition, and resulted in decreased gross profit in the twelve months ended December 31, 2003. The table above quantifies the impact of changing TNMPs rates to recover its cost of providing only transmission and
distribution service.



In the first quarter of 2002, TNMP sold
the output of TNP One to First Choice at cost, which was 2.5 cents (Kwh). First Choice used the power to serve its customers load. Beginning in April 2002, TNMP sold the output of TNP One to third parties at prices that averaged 2.8 cents per
Kwh, until the sale of TNP One in October 2002. TNMP realized pre-tax income of $4.3 million related to third party sales for the year ended December 31, 2002.



Electric service revenues increased because TNMP provided a greater number of fee-based services to retail electric providers in the year ended
December 31, 2003, compared with the same period in 2002. The fee-based services included account initiation charges, service call charges, disconnect/reconnect charges and various metering charges, among others. Some of the charges for fee-based
services that TNMP provided to retail electric providers were included in the bundled rates TNMP charged its customers prior to competition.



The $3.2 million gross profit increase described as price/sales mix and other for the year ended December 31, 2003, compared to the
corresponding 2002 period, is primarily attributable to increased revenues from commercial and industrial customers in Texas. A significant portion of those customers revenues are calculated based upon those customers highest peak demand
for electricity in the twelve month period ending in the month that the customers are billed. Customers bills during 2003 were based upon a full twelve months of demand data, but customers bills during 2002 were based upon less than
twelve months of demand data due to the beginning of retail competition in January 2002. As a result, some 2002 bills were lower than they normally would be, because the demand data for the summer months of 2001, during which these customers
typically have their highest demand, could not be included in the calculation of the customers bills.



Purchased power and fuel expenses decreased $32.9 million for the year ended December 31, 2003, compared with the amount incurred in the same period in
2002. Expenses in 2002 included fuel costs of $35.5 million at TNP One, which was sold in October 2002.



The following table summarizes TNMPs sales for the years ended December 31, 2003 and 2002 (amounts in GWH).



|                 |  |       |  |       |  |          |   |  |        |  
|---------------- |  | ----- |  | ----- |  | -------- | - |  | ------ | -
|                 |  | 2003  |  | 2002  |  | Variance |   |  | %      |  
|Residential      |  | 2,689 |  | 2,623 |  | 66       |   |  | 2.5    |  
|Commercial       |  | 2,159 |  | 2,096 |  | 63       |   |  | 3.0    |  
|Industrial       |  | 2,220 |  | 1,959 |  | 261      |   |  | 13.3   |  
|Sales for resale |  |      |  | 1,978 |  | (1,978   | ) |  | (100.0 | )
|Other            |  | 114   |  | 110   |  | 4        |   |  | 3.6    |  
|                 |  |       |  |       |  |          |   |  |        |  
|Total GWH sales  |  | 7,182 |  | 8,766 |  | (1,584   | ) |  | (18.1  | )
|                 |  |       |  |       |  |          |   |  |        |  



Residential and
commercial sales increased in 2003 compared with 2002, primarily due to increases in the number of residential and commercial customers. The number of residential customers increased to approximately 216,000 in 2003 from approximately 211,000 in
2002. The number of commercial customers grew to approximately 36,000 in 2003 from approximately 35,000 in 2002. The increases in residential customers reflect economic growth in TNMPs service territory, particularly in the suburbs of Houston
and Dallas-Fort Worth. Average use per customer, which is affected by weather, grew less than one percent for residential customers and 1.4 percent for commercial customers. Industrial sales increased 13.3 percent in 2003 compared with 2002, but did
not significantly impact revenues. Industrial revenues are generated from industrial customers capacity requirements rather than the amount of GWH sales. Capacity requirements of industrial customers did not change significantly in 2003
compared with 2002. Sales for resale in 2002 included the sale of the output from TNP One until October 2002, when TNP One was sold.



Operating Expenses



For the year ended December 31, 2003, TNMP incurred operating expenses of $183.7 million, a decrease of $43.6 million from the amount incurred during the
corresponding period of 2002. The primary reason for the decrease was the absence of the operating expenses related to TNP One in 2003 resulting from the sale of TNP One in October 2002. TNMP does not expect similar decreases in operating expenses
in the future.



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##### Table of Contents

Operating expenses include purchased power and fuel, and transmission expense. Those expenses decreased
$30.7 million for the year ended December 31, 2003, compared with the same period in 2002.



The details in the changes of purchased power and fuel, and transmission expense, are discussed above in Gross Profit. The remaining components of the changes in operating expenses are discussed
below.



Other Operating and Maintenance



Other operating and maintenance expenses decreased $11.4 million for the
year ended December 31, 2003, compared with the same period in 2002. The decrease is related to operating expenses of TNP One, which was sold in October 2002 and to TNMPs establishment of a regulatory asset related to unrecovered System
Benefit Fund payments.



Taxes Other Than Income Taxes



Taxes other than income taxes decreased $3.3 million for
the year ended December 31, 2003, compared with the corresponding 2002 period. The decrease is primarily related to ad valorem taxes on TNP One, which was sold in October 2002.



Interest Expenses



Interest expenses increased $7.1 million for the year ended December 31, 2003, compared to the same period in 2002. The increase reflects interest on
TNMPs issuance of $250 million of 6.125 percent Senior Notes in June 2008 and $3.1 million of charges associated with the termination of its interest rate swaps upon the issuance of the Senior Notes in June 2003.



Liquidity and Capital Resources



Liquidity



The main sources of liquidity for TNMP are
cash flow from its operations and cash on hand. TNMPs cash balance as of December 31, 2004, was approximately $65.8 million.



TNMPs cash flow from operations for the year ended December 31, 2004 was $0.1 million lower than in the year ended December 31, 2003. The factors
causing the decrease in cash flow from operations are summarized in the following table (in millions).



|                                                                |  |                                         |      |  
|--------------------------------------------------------------- |  | --------------------------------------- | ---- | -
|                                                                |  | Cash FlowIncrease(Decrease)2004 v. 2003 |     
|Decreased cash flow from sales, net of purchased power payments |  | $                                       | (8.9 | )
|Decreased cash paid to suppliers                                |  |                                         | 4.2  |  
|Decreased payments for income taxes                             |  |                                         | 5.6  |  
|All other                                                       |  |                                         | (1.0 | )
|                                                                |  |                                         |      |  
|TNMP consolidated cash flow from operations decrease            |  | $                                       | (0.1 | )
|                                                                |  |                                         |      |  



Cash flow from sales,
net of purchased power costs, for 2004 was $8.9 million lower than 2003 due to lower sales from milder than normal weather, lower net transmission revenues and lower electric service revenues as discussed in Gross Profit. Cash paid by
suppliers was lower in 2004 due to reduced payroll and benefits and lower outside service costs than in 2003. TNMP also paid less income tax in 2004 because of lower taxable income than in 2003.



Affiliate Guarantee. In October 2003, the NMPRC granted TNMPs
request for the authority to extend a portion of the guarantees that TNMP provided for certain power supply obligations of First Choice. On June 1, 2004, TNMP terminated this authority to guarantee the power supply obligations of First Choice upon
First Choices establishment of First Choice Power Special Purpose, L.P. (FCPSP) under authorization granted by the PUCT in Docket No. 29081. FCPSP was established in connection with First Choices power supply agreement with Constellation
Energy Commodities Group, Inc. (Constellation).



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##### Table of Contents

Stranded Cost Disallowance. As discussed in Note 3, in the second quarter of 2004, TNMP recorded
an extraordinary loss of $97.8 million related to the PUCT true-up proceeding regarding TNMPs stranded costs. The loss did not trigger any covenant violations at TNMP.



Debt Repurchases. During the first six months of 2004, TNMP repurchased $7.3 million of its 6.25 percent Senior Notes
due in 2009 and $1.1 million of its 6.125 percent Senior Notes due in 2008. There were no additional debt repurchases in 2004.



Rating Actions.In June 2004, as a result of the PUCT true-up order, Moodys downgraded TNMP to Ba2 from Baa3, and identified the ratings
outlook as negative. Also in June, Standard & Poors placed TNMPs ratings on credit watch negative, primarily as a result of the PUCT true-up order. TNMP has no financial covenants or regulatory restrictions that are affected by the
recent rating actions.



Following the announcement that PNM
Resources had agreed to acquire TNP Enterprises, Moodys revised its ratings outlook on TNMP to positive from negative, and Standard & Poors revised its rating outlook on TNMP to developing from negative. On March 2, 2005, Standard
& Poors revised its rating outlook on TNMP to positive from developing, citing the strong likelihood that the PNM Resources acquisition will receive all required approvals.



Cash Flow.Management believes that TNMPs cash flow from operations and cash on hand should be sufficient to
meet TNMPs working capital and credit needs through the end of 2005.



Dividend Payments. TNMP is required to provide notice to the NMPRC prior to paying dividends to TNP. For the years ended December 31, 2004, 2003 and 2002, TNMP paid dividends of $6.0 million, $29.4 million and
$102.3 million, respectively, to TNP. Dividends paid in 2002 include $84.3 million of the proceeds from the sale of TNP One.



Tax Sharing Payments. TNMP is a party to a tax sharing agreement with TNP. Under the provisions of the tax sharing agreement, TNMP made payments of
$9.1 million and $15.7 million to TNP for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2002, TNMP received $3.4 million in tax sharing from TNP.



Pension Plans. TNMP maintains a qualified defined benefit pension
plan, retiree medical plan, and retiree life insurance plan that cover its subsidiaries eligible employees. TNMP also maintains an excess benefit plan, which provides pension benefits in excess of amounts permitted for qualified plans under
U.S. tax law to affected participants of the qualified pension plan.



TNMPs retirement plan expense for the qualified pension plan, retiree medical plan, retiree life insurance plan and excess benefit plan was approximately $1.9 million, $1.8 million, and $1.0 million for 2004, 2003 and 2002,
respectively.



Retirement plan expense has been calculated
based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets of 7.8 percent for 2004 and 8.5 percent for 2003.



In developing the expected long-term rate of return assumption, TNMP evaluated input from its actuary, including a review of
asset class return expectations as well as long-term inflation assumptions developed by independent consultants and economists. Projected investment returns are based on equity and fixed income indices, which represent broad market expectations.
Based on this input, TNMP believes it is reasonable to assume that its pension plan investment strategy will generate long-term returns of at least 7.8 percent in 2005 and beyond.



The expected long-term rate of return on pension plan assets is based on an investment strategy that allocates pension plan
assets among equity, Treasury Inflation Protected Securities (TIPS), and money market assets based on a formula dependent upon the composite price/earnings ratio of the S&P 500 index and the current yield on TIPS. As of December 31, 2004, the
plans target allocation was 20 percent equity index fund, 0 percent TIPS, and 80 percent money market fund. TNMP believes that 7.8 percent is a reasonable long-term rate of return for its pension plan assets based on simulated returns of the
investment strategy over the last 5, 15 and 20 years. The plans return on average plan assets during 2004 was approximately 5.7 percent. TNMP will continue to evaluate its actuarial assumptions, including the expected rate of return, at least
annually, and will make adjustments as necessary.



TNMP bases
its determination of retirement plan expense on a market-related valuation of assets, which reduces year-to-year volatility. The market-related valuation recognizes realized and unrealized gains or losses over a five-year period. Therefore, future
asset values will be impacted as previously deferred realized and unrealized gains and losses are recognized. Recent investment gains and losses will be recognized in the market-related value of assets over the next five years.



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The discount rate that TNMP utilizes for determining its benefit obligations and retirement plan expense
is based on a review of long-term corporate bonds. The Moodys Aa index as of December 31 has been used to establish the discount rate. The discount rate determined on this basis decreased from 6.0 percent at December 31, 2003 to 5.75 percent
at December 31, 2004.



The value of qualified pension plan
assets has decreased from $85.1 million at December 31, 2003 to $82.4 million at December 31, 2004, primarily due to payments to beneficiaries. The decline in value and declining discount rates have reduced the funded status (the difference between
plan assets and projected benefit obligation) for the qualified pension plan and excess benefit plan from ($0.2) million at December 31, 2003 to ($2.5) million at December 31, 2004.



TNMP Capital Resources



As of December 31, 2004, TNMPs common equity and long-term debt ratios were 31.3 percent and 68.7 percent, respectively, compared to common equity
and long-term debt ratios of 36.7 percent and 63.3 percent as of December 31, 2003, respectively. The changes in capital ratios reflect the extraordinary loss discussed in Note 3 regarding the PUCTs decision in TNMPs stranded cost
true-up proceeding in Docket No. 29206.



TNMPs capital
requirements through 2009 are projected to be as follows (amounts in millions):



|                                                      |  |      |      |      |   |      |  |      |      |      |   |       |  |   |      
|----------------------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | ---- | ---- | ---- | - | ----- |  | - | -----
|                                                      |  | 2005 |      | 2006 |   | 2007 |  | 2008 |      | 2009
|TNMP 6.125 percent Senior Notes due 2008 (see Note 9) |  | $    |     |      | $ |     |  | $    |     |      | $ | 248.9 |  | $ |     
|TNMP 6.25 percent Senior Notes due 2009 (see Note 9)  |  |      |     |      |   |     |  |      |     |      |   |      |  |   | 167.7
|TNMP capital expenditures                             |  |      | 37.8 |      |   | 33.9 |  |      | 34.4 |      |   | 34.8  |  |   | 35.3 
|                                                      |  |      |      |      |   |      |  |      |      |      |   |       |  |   |      
|Total capital requirements                            |  | $    | 37.8 |      | $ | 33.9 |  | $    | 34.4 |      | $ | 283.7 |  | $ | 203.0
|                                                      |  |      |      |      |   |      |  |      |      |      |   |       |  |   |      



Aggregate Contractual Obligations



The table below presents TNMPs aggregate contractual obligations as of December 31, 2004, adjusted for the issuance of the existing notes (amounts in millions):



|                                                           |  |       |       |                 |   |          |  |          |      |                  |   |       |  |   |  
|---------------------------------------------------------- |  | ----- | ----- | --------------- | - | -------- |  | -------- | ---- | ---------------- | - | ----- |  | - | -
|                                                           |  |       |       | Payments due in |   |         
|                                                           |  | Total |       | Less than1 Year |   | 1-3Years |  | 3-5Years |      | More than5 years
|Long-term debt (See Note 9)                                |  | $     | 416.6 |                 | $ |         |  | $        |     |                  | $ | 416.6 |  | $ | 
|Obligations under purchased power agreements (See Note 11) |  |       | 28.3  |                 |   | 14.6     |  |          | 13.7 |                  |   |      |  |   | 
|                                                           |  |       |       |                 |   |          |  |          |      |                  |   |       |  |   |  
|Total                                                      |  | $     | 444.9 |                 | $ | 14.6     |  | $        | 13.7 |                  | $ | 416.6 |  | $ | 
|                                                           |  |       |       |                 |   |          |  |          |      |                  |   |       |  |   |  



Off-Balance Sheet Arrangements



TNMP guaranteed First Choices borrowings and issuances of letters of credit under the TNMP/First Choice Credit Facility until its expiration in October 2003. In October 2003, the NMPRC granted TNMPs request for the authority to
extend a portion of the guarantees that TNMP provided for certain power supply obligations of First Choice. On June 1, 2004, TNMP terminated this authority to guarantee the power supply obligations of First Choice upon First Choices
establishment of FCPSP as a part of First Choices power supply agreement with Constellation.



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##### Table of Contents

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



TNMPs use of market risk sensitive instruments for trading purposes is minimal and does not have a material impact on its financial condition or
results of operations.



Commodity Prices



Under terms of a long-term wholesale power contract with PNM signed
in 2001, PNM became the sole supplier of power to serve TNMPs New Mexico load beginning January 1, 2003. The contract extends through December 2006 and provides energy supply at fixed prices.



Interest Rates



TNMP manages its exposure to interest rate risk through the issuance of
fixed rate debt or through the issuance of financial instruments to convert variable rate debt to fixed rates.



TNMPs ratio of fixed rate debt to total debt was 100 percent at both December 31, 2004 and 2003. During 2002, TNMP had two open swap transactions
designed to manage interest rate risk associated with the TNMP/First Choice Credit Facility. The swaps effectively converted TNMPs variable rate borrowings in 2002 to fixed rates. The swaps were terminated on June 10, 2003, when TNMP issued
the 6.125 percent Senior Notes due in 2008 and terminated the TNMP/First Choice Credit Facility. While TNMP is exposed to additional interest rate risk due to the expiration of swaps, it has an offsetting position due to cash on hand as a result of
the 6.125 percent Senior Notes financing in 2003. As of December 31, 2004, TNMPs cash balance was approximately $65.8 million, a significant portion of which was invested in variable rate, short-term securities.



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##### Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM



To
the Shareholder and Board of Directors of Texas-New Mexico Power Company:



We
have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Texas-New Mexico Power Company and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of
income (loss), cash flows and common shareholders equity 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 these 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 audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
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, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Texas-New Mexico Power Company and subsidiaries at 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.



DELOITTE & TOUCHE LLP



Dallas, Texas

March 8, 2005



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

(a wholly owned subsidiary of TNP Enterprises, Inc.)

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the Years Ended December 31,



|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                           |  | 2004           |         |   | 2003 |   |         | 2002 | 
|                                                                           |  | (In thousands) |        
|OPERATING REVENUES                                                         |  | $              | 269,665 |   |      | $ | 249,488 |      |  | $ | 303,907 |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|OPERATING EXPENSES:                                                        |  |                |         |   |      |   |         |      |  |   |         |  
|Purchased power and fuel                                                   |  |                | 76,017  |   |      |   | 67,825  |      |  |   | 100,679 |  
|Other operating and maintenance                                            |  |                | 72,621  |   |      |   | 65,997  |      |  |   | 75,240  |  
|Depreciation of utility plant                                              |  |                | 29,691  |   |      |   | 28,631  |      |  |   | 27,567  |  
|Credit for recovery of stranded plant                                      |  |                |        |   |      |   |        |      |  |   | (733    | )
|Taxes other than income taxes                                              |  |                | 22,884  |   |      |   | 21,227  |      |  |   | 24,507  |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                   |  |                | 201,213 |   |      |   | 183,680 |      |  |   | 227,260 |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|OPERATING INCOME                                                           |  |                | 68,452  |   |      |   | 65,808  |      |  |   | 76,647  |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|INTEREST CHARGES AND OTHER INCOME AND DEDUCTIONS                           |  |                |         |   |      |   |         |      |  |   |         |  
|Interest on long-term debt                                                 |  |                | 25,855  |   |      |   | 25,279  |      |  |   | 18,300  |  
|Other interest and amortization of debt-related costs                      |  |                | 2,836   |   |      |   | 3,621   |      |  |   | 3,514   |  
|Carrying charges on regulatory assets (Note 3)                             |  |                | (32,006 | ) |      |   |        |      |  |   |        |  
|Other income and deductions, net                                           |  |                | (1,267  | ) |      |   | (2,079  | )    |  |   | (464    | )
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|Total                                                                      |  |                | (4,582  | ) |      |   | 26,821  |      |  |   | 21,350  |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|INCOME BEFORE INCOME TAXES                                                 |  |                | 73,034  |   |      |   | 38,987  |      |  |   | 55,297  |  
|Income taxes                                                               |  |                | 26,391  |   |      |   | 13,705  |      |  |   | 19,166  |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|INCOME BEFORE EXTRAORDINARY ITEM                                           |  |                | 46,643  |   |      |   | 25,282  |      |  |   | 36,131  |  
|Extraordinary item - disallowance of stranded costs, net of taxes (Note 3) |  |                | (97,836 | ) |      |   |        |      |  |   |        |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  
|NET INCOME (LOSS)                                                          |  | $              | (51,193 | ) |      | $ | 25,282  |      |  | $ | 36,131  |  
|                                                                           |  |                |         |   |      |   |         |      |  |   |         |  



The
accompanying notes are an integral part of these consolidated financial statements.



23



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

(a wholly owned subsidiary of TNP Enterprises, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,



|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                         |  | 2004           |         |   | 2003 |   |          | 2002 | 
|                                                                                         |  | (In thousands) |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                |         |   |      |   |          |      |  |   |          |  
|Cash received from sales to customers                                                    |  | $              | 242,441 |   |      | $ | 246,372  |      |  | $ | 262,323  |  
|Purchased power and fuel costs paid                                                      |  |                | (70,830 | ) |      |   | (65,856  | )    |  |   | (125,065 | )
|Cash paid for payroll and to other suppliers                                             |  |                | (47,783 | ) |      |   | (51,993  | )    |  |   | (56,714  | )
|Interest paid, net of amounts capitalized                                                |  |                | (26,145 | ) |      |   | (27,424  | )    |  |   | (19,066  | )
|Income taxes received (paid)                                                             |  |                | (8,434  | ) |      |   | (14,000  | )    |  |   | 760      |  
|Other taxes paid                                                                         |  |                | (21,885 | ) |      |   | (19,782  | )    |  |   | (32,770  | )
|Other operating cash receipts and payments, net                                          |  |                | 960     |   |      |   | 1,128    |      |  |   | 29       |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                | 68,324  |   |      |   | 68,445   |      |  |   | 29,497   |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                |         |   |      |   |          |      |  |   |          |  
|Additions to utility plant                                                               |  |                | (43,524 | ) |      |   | (41,669  | )    |  |   | (39,076  | )
|Other investing activities                                                               |  |                | (566    | ) |      |   | (2,519   | )    |  |   |         |  
|Sale of TNP One                                                                          |  |                |        |   |      |   |         |      |  |   | 117,545  |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES                                    |  |                | (44,090 | ) |      |   | (44,188  | )    |  |   | 78,469   |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                |         |   |      |   |          |      |  |   |          |  
|Dividends paid on common stock                                                           |  |                | (6,000  | ) |      |   | (29,400  | )    |  |   | (102,300 | )
|Issuance of senior notes, net of discount                                                |  |                |        |   |      |   | 248,923  |      |  |   |         |  
|Redemption of senior notes                                                               |  |                | (8,375  | ) |      |   |         |      |  |   |         |  
|Financing and redemption costs                                                           |  |                | (1,007  | ) |      |   | (1,600   | )    |  |   | 266      |  
|Borrowings from (repayments to) affiliate                                                |  |                |        |   |      |   | (14,557  | )    |  |   | 14,557   |  
|Borrowings from (repayments to) credit facility - net                                    |  |                |        |   |      |   | (171,000 | )    |  |   | 3,000    |  
|Capitalization of First Choice Power                                                     |  |                |        |   |      |   |         |      |  |   | (23,000  | )
|Other                                                                                    |  |                |        |   |      |   |         |      |  |   | (5,839   | )
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                      |  |                | (15,382 | ) |      |   | 32,366   |      |  |   | (113,316 | )
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                  |  |                | 8,852   |   |      |   | 56,623   |      |  |   | (5,350   | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                         |  |                | 56,907  |   |      |   | 284      |      |  |   | 5,634    |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |  | $              | 65,759  |   |      | $ | 56,907   |      |  | $ | 284      |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BYOPERATING ACTIVITIES:         |  |                |         |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                                        |  | $              | (51,193 | ) |      | $ | 25,282   |      |  | $ | 36,131   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                |         |   |      |   |          |      |  |   |          |  
|Extraordinary item - disallowance of stranded costs, net of taxes                        |  |                | 97,836  |   |      |   |         |      |  |   |         |  
|Depreciation of utility plant                                                            |  |                | 29,691  |   |      |   | 28,631   |      |  |   | 27,567   |  
|Credit for Texas system benefit fund regulatory asset                                    |  |                |        |   |      |   | (3,716   | )    |  |   |         |  
|Credit for recovery of stranded plant                                                    |  |                |        |   |      |   |         |      |  |   | (733     | )
|Amortization of debt-related costs and other deferred charges                            |  |                | 2,588   |   |      |   | 2,841    |      |  |   | 2,293    |  
|Carrying charges on regulatory assets                                                    |  |                | (32,006 | ) |      |   |         |      |  |   |         |  
|Allowance for funds used during construction                                             |  |                | (754    | ) |      |   | (938     | )    |  |   | (519     | )
|Deferred income taxes                                                                    |  |                | 43,857  |   |      |   | 3,053    |      |  |   | 25,323   |  
|Investment tax credits                                                                   |  |                | (722    | ) |      |   | (874     | )    |  |   | (1,459   | )
|Deferred purchased power and fuel costs                                                  |  |                | (511    | ) |      |   | 18,373   |      |  |   | 13,523   |  
|                                                                                         |  |                |        
|Cash flows impacted by changes in current assets and liabilities:                        |  |                |         |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                                      |  |                | 2,045   |   |      |   | 1,235    |      |  |   | (25,654  | )
|Accounts payable                                                                         |  |                | 3,424   |   |      |   | 1,233    |      |  |   | (22,409  | )
|Accrued interest                                                                         |  |                | (220    | ) |      |   | 2,220    |      |  |   | (181     | )
|Accrued taxes                                                                            |  |                | (16,401 | ) |      |   | (1,132   | )    |  |   | (12,290  | )
|Changes in other current assets and liabilities                                          |  |                | (9,429  | ) |      |   | (641     | )    |  |   | (9,623   | )
|Interest rate lock on issuance of senior notes                                           |  |                |        |   |      |   | (4,162   | )    |  |   |         |  
|Other, net                                                                               |  |                | 119     |   |      |   | (2,960   | )    |  |   | (2,472   | )
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  | $              | 68,324  |   |      | $ | 68,445   |      |  | $ | 29,497   |  
|                                                                                         |  |                |         |   |      |   |          |      |  |   |          |  



The
accompanying notes are an integral part of these consolidated financial statements.



24



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

(a wholly owned subsidiary of TNP Enterprises, Inc.)

CONSOLIDATED BALANCE SHEETS

December 31,



|                                                                                        |  |                |         |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                        |  | 2004           |         |   | 2003 |  
|                                                                                        |  | (In thousands) |        
|ASSETS                                                                                  |  |                |         |   |      |   |         |  
|                                                                                        |  |               
|CURRENT ASSETS:                                                                         |  |                |         |   |      |   |         |  
|Cash and cash equivalents                                                               |  | $              | 65,759  |   |      | $ | 56,907  |  
|Special deposits                                                                        |  |                | 3,086   |   |      |   | 2,520   |  
|Accounts receivable, net                                                                |  |                | 30,398  |   |      |   | 32,443  |  
|Federal income tax refund                                                               |  |                | 22,912  |   |      |   |        |  
|Materials and supplies, at lower of cost or market                                      |  |                | 1,505   |   |      |   | 1,082   |  
|Other current assets                                                                    |  |                | 7,526   |   |      |   | 662     |  
|                                                                                        |  |                |         |   |      |   |         |  
|Total current assets                                                                    |  |                | 131,186 |   |      |   | 93,614  |  
|                                                                                        |  |                |         |   |      |   |         |  
|UTILITY PLANT:                                                                          |  |                |         |   |      |   |         |  
|Electric plant                                                                          |  |                | 846,489 |   |      |   | 804,622 |  
|Construction work in progress                                                           |  |                | 4,261   |   |      |   | 13,666  |  
|                                                                                        |  |                |         |   |      |   |         |  
|Total                                                                                   |  |                | 850,750 |   |      |   | 818,288 |  
|Less accumulated depreciation                                                           |  |                | 276,081 |   |      |   | 259,670 |  
|                                                                                        |  |                |         |   |      |   |         |  
|Net utility plant                                                                       |  |                | 574,669 |   |      |   | 558,618 |  
|                                                                                        |  |                |         |   |      |   |         |  
|LONG-TERM AND OTHER ASSETS:                                                             |  |                |         |   |      |   |         |  
|Other property and investments, at cost                                                 |  |                | 343     |   |      |   | 343     |  
|Recoverable stranded costs                                                              |  |                | 135,446 |   |      |   | 298,651 |  
|Regulatory tax assets                                                                   |  |                | 2,484   |   |      |   | 1,685   |  
|Deferred charges                                                                        |  |                | 28,378  |   |      |   | 28,437  |  
|                                                                                        |  |                |         |   |      |   |         |  
|Total long-term and other assets                                                        |  |                | 166,651 |   |      |   | 329,116 |  
|                                                                                        |  |                |         |   |      |   |         |  
|                                                                                        |  | $              | 872,506 |   |      | $ | 981,348 |  
|                                                                                        |  |                |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                    |  |                |         |   |      |   |         |  
|                                                                                        |  |               
|CURRENT LIABILITIES:                                                                    |  |                |         |   |      |   |         |  
|Accounts payable                                                                        |  | $              | 15,649  |   |      | $ | 13,302  |  
|Accrued interest                                                                        |  |                | 7,345   |   |      |   | 7,565   |  
|Accrued taxes                                                                           |  |                | 15,302  |   |      |   | 8,791   |  
|Accrued payroll and benefits                                                            |  |                | 1,583   |   |      |   | 5,048   |  
|Customers deposits                                                                     |  |                | 912     |   |      |   | 702     |  
|Other current liabilities                                                               |  |                | 4,243   |   |      |   | 3,808   |  
|                                                                                        |  |                |         |   |      |   |         |  
|Total current liabilities                                                               |  |                | 45,034  |   |      |   | 39,216  |  
|                                                                                        |  |                |         |   |      |   |         |  
|LONG-TERM AND OTHER LIABILITIES:                                                        |  |                |         |   |      |   |         |  
|Deferred purchased power and fuel costs                                                 |  |                |        |   |      |   | 40,844  |  
|Accumulated deferred income taxes                                                       |  |                | 138,249 |   |      |   | 152,167 |  
|Accumulated deferred investment tax credits                                             |  |                | 2,326   |   |      |   | 18,459  |  
|Regulatory liability-accrued cost of removal                                            |  |                | 40,729  |   |      |   | 38,218  |  
|Deferred credits and other liabilities                                                  |  |                | 41,297  |   |      |   | 22,839  |  
|                                                                                        |  |                |         |   |      |   |         |  
|Total long-term and other liabilities                                                   |  |                | 222,601 |   |      |   | 272,527 |  
|                                                                                        |  |                |         |   |      |   |         |  
|LONG-TERM DEBT, LESS CURRENT MATURITIES                                                 |  |                | 415,569 |   |      |   | 423,626 |  
|                                                                                        |  |                |         |   |      |   |         |  
|COMMON SHAREHOLDERS EQUITY:                                                            |  |                |         |   |      |   |         |  
|Common shareholders equity:                                                            |  |                |         |   |      |   |         |  
|Common stock, $10 par value per shareAuthorized 12,000,000 shares; issued 10,705 shares |  |                | 107     |   |      |   | 107     |  
|Capital in excess of par value                                                          |  |                | 197,751 |   |      |   | 197,751 |  
|Retained earnings (deficit)                                                             |  |                | (6,795  | ) |      |   | 50,398  |  
|Accumulated other comprehensive loss                                                    |  |                | (1,761  | ) |      |   | (2,277  | )
|                                                                                        |  |                |         |   |      |   |         |  
|Total common shareholders equity (deficit)                                             |  |                | 189,302 |   |      |   | 245,979 |  
|                                                                                        |  |                |         |   |      |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 11)                                                 |  |                |         |   |      |   |         |  
|                                                                                        |  | $              | 872,506 |   |      | $ | 981,348 |  
|                                                                                        |  |                |         |   |      |   |         |  



The
accompanying notes are an integral part of these consolidated financial statements.



25



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

(a wholly owned subsidiary of TNP Enterprises, Inc.)

CONSOLIDATED STATEMENTS OF CAPITALIZATION

December 31,



|                                                                                               |  |                |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | 2004           |         |   | 2003 |  
|                                                                                               |  | (In thousands) |        
|LONG-TERM DEBT                                                                                 |  |                |         |   |      |   |         |  
|SENIOR NOTES                                                                                   |  |                |         |   |      |   |         |  
|6.125% due 2008                                                                                |  | $              | 248,935 |   |      | $ | 250,000 |  
|6.25% due 2009                                                                                 |  |                | 167,690 |   |      |   | 175,000 |  
|Unamortized discount                                                                           |  |                | (1,056  | ) |      |   | (1,374  | )
|                                                                                               |  |                |         |   |      |   |         |  
|Total long-term debt                                                                           |  |                | 415,569 |   |      |   | 423,626 |  
|                                                                                               |  |                |         |   |      |   |         |  
|COMMON SHAREHOLDERS EQUITY                                                                    |  |                |         |   |      |   |         |  
|Common stock, $10 par value per shareAuthorized shares - 12,000,000Outstanding shares - 10,705 |  |                | 107     |   |      |   | 107     |  
|Capital in excess of par value                                                                 |  |                | 197,751 |   |      |   | 197,751 |  
|Retained earnings (deficit)                                                                    |  |                | (6,795  | ) |      |   | 50,398  |  
|Accumulated other comprehensive loss                                                           |  |                | (1,761  | ) |      |   | (2,277  | )
|                                                                                               |  |                |         |   |      |   |         |  
|Total common shareholders equity (deficit)                                                    |  |                | 189,302 |   |      |   | 245,979 |  
|                                                                                               |  |                |         |   |      |   |         |  
|TOTAL CAPITALIZATION                                                                           |  | $              | 604,871 |   |      | $ | 669,605 |  
|                                                                                               |  |                |         |   |      |   |         |  



The accompanying notes are an integral
part of these consolidated financial statements.



26



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

(a wholly owned subsidiary of TNP Enterprises, Inc.)

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS EQUITY



|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|-------------------------------------- |  | --------------------------- |  | ---------------------------- | --- |  | ------------------ | ------- | - | --------------------------------- | - | ------- | ----- |  | - | ------ | - |  | - | ------- | -
|                                       |  | Common Shareholders Equity | 
|                                       |  | Common Stock                |  | Capital inExcess ofPar Value |     |  | AccumulatedDeficit |         |   | AccumulatedOtherComprehensiveLoss |   |         | Total | 
|                                       |  | Shares                      |  | Amount                       |     |  |                    |        
|                                       |  | (Dollars in thousands)      | 
|YEAR ENDED DECEMBER 31, 2002           |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Balance at January 1, 2002             |  | 10,705                      |  | $                            | 107 |  | $                  | 222,149 |   |                                   | $ | 115,685 |       |  | $ | (530   | ) |  | $ | 337,411 |  
|Net income                             |  |                            |  |                              |    |  |                    |        |   |                                   |   | 36,131  |       |  |   |       |   |  |   | 36,131  |  
|Other comprehensive income, net of tax |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Interest rate hedge                    |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | (1,164 | ) |  |   | (1,164  | )
|Minimum pension liability              |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | 314    |   |  |   | 314     |  
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Comprehensive income                   |  |                            |  |                              |    |  |                    |        |   |                                   |   | 36,131  |       |  |   | (850   | ) |  |   | 35,281  |  
|Dividends on common stock              |  |                            |  |                              |    |  |                    |        |   |                                   |   | (97,300 | )     |  |   |       |   |  |   | (97,300 | )
|Capitalization of First Choice Power   |  |                            |  |                              |    |  |                    | (24,398 | ) |                                   |   |        |       |  |   |       |   |  |   | (24,398 | )
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Balance at December 31, 2002           |  | 10,705                      |  |                              | 107 |  |                    | 197,751 |   |                                   |   | 54,516  |       |  |   | (1,380 | ) |  |   | 250,994 |  
|                                       |  |                             |  |                              |     | 
|YEAR ENDED DECEMBER 31, 2003           |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Comprehensive income                   |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Net income                             |  |                            |  |                              |    |  |                    |        |   |                                   |   | 25,282  |       |  |   |       |   |  |   | 25,282  |  
|Other comprehensive income, net of tax |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Interest rate hedge                    |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | (1,111 | ) |  |   | (1,111  | )
|Minimum pension liability              |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | 214    |   |  |   | 214     |  
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Comprehensive income (loss)            |  |                            |  |                              |    |  |                    |        |   |                                   |   | 25,282  |       |  |   | (897   | ) |  |   | 24,385  |  
|Dividends on common stock              |  |                            |  |                              |    |  |                    |        |   |                                   |   | (29,400 | )     |  |   |       |   |  |   | (29,400 | )
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Balance at December 31, 2003           |  | 10,705                      |  |                              | 107 |  |                    | 197,751 |   |                                   |   | 50,398  |       |  |   | (2,277 | ) |  |   | 245,979 |  
|                                       |  |                             |  |                              |     | 
|YEAR ENDED DECEMBER 31, 2004           |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Comprehensive income                   |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Net loss                               |  |                            |  |                              |    |  |                    |        |   |                                   |   | (51,193 | )     |  |   |       |   |  |   | (51,193 | )
|Other comprehensive income, net of tax |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Interest rate hedge                    |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | 515    |   |  |   | 515     |  
|Minimum pension liability              |  |                            |  |                              |    |  |                    |        |   |                                   |   |        |       |  |   | 1      |   |  |   | 1       |  
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Comprehensive income (loss)            |  |                            |  |                              |    |  |                    |        |   |                                   |   | (51,193 | )     |  |   | 516    |   |  |   | (50,677 | )
|Dividends on common stock              |  |                            |  |                              |    |  |                    |        |   |                                   |   | (6,000  | )     |  |   |       |   |  |   | (6,000  | )
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  
|Balance at December 31, 2004           |  | 10,705                      |  | $                            | 107 |  | $                  | 197,751 |   |                                   | $ | (6,795  | )     |  | $ | (1,761 | ) |  | $ | 189,302 |  
|                                       |  |                             |  |                              |     |  |                    |         |   |                                   |   |         |       |  |   |        |   |  |   |         |  



The accompanying notes are an integral
part of these consolidated financial statements.



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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Note 1. Summary of Significant Accounting Policies



General Information. The consolidated financial statements of TNMP and subsidiaries include the accounts of TNMP and its wholly owned subsidiary, TGC. All intercompany transactions and balances have been
eliminated in consolidation.



TNMP is a regulated utility
operating in Texas and New Mexico. In Texas, TNMP is engaged solely in the transmission and distribution of electricity. In New Mexico, TNMP provides integrated electricity services under traditional cost-of-service regulation. Those services
include transmitting, distributing, and selling electricity to New Mexico customers. Traditional cost-of-service regulation is a method of regulation that sets rates that TNMP can charge to its electricity customers based upon TNMPs cost of
providing that service. The cost of providing that service includes a return on the capital TNMP has invested and dedicated to providing electric service.



TNMP is subject to PUCT and NMPRC regulation. Some of TNMPs activities, including the issuance of securities, are subject to FERC regulation, and
its accounting records are maintained in accordance with FERCs Uniform System of Accounts.



Effective January 1, 2002, retail competition began in Texas under the provisions of Senate Bill 7. Prior to January 1, 2002, TNMP operated as an
integrated electric utility in Texas. In accordance with Senate Bill 7 and in compliance with a plan approved by the PUCT, TNMP separated its Texas utility operations into three components:



| |  |  | Retail Sales Activities. First Choice assumed the activities related to the sale of electricity to retail customers in Texas. On January 1, 2002, TNMPs customers
automatically became customers of First Choice, unless they chose a different retail electric provider. The rates that First Choice charges for its services are not regulated, with the exception of the price-to-beat, a regulated price that First
Choice must offer to certain former customers of TNMP.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Power Transmission and Distribution. TNMP continues to operate its regulated transmission and distribution business in Texas.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Power Generation. TGC became the unregulated entity performing TNMPs generation activities in Texas. In October 2002, TNMP and TGC sold TNP One to Sempra Energy
Resources. As a result of the sale, TGC neither owns property nor engages in any operating activities. Neither TNMP nor any of its affiliates are currently in the power generation business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The use of estimates is required to prepare TNMPs consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America. Management believes that estimates are essential and will not materially differ from actual results. However, adjustments may be
necessary in the future to the extent that future estimates or actual results are different from the estimates used in the 2004 financial statements.



Accounting for the Effects of Regulation. TNMP applies the provisions of SFAS 71, Accounting for the Effects of Certain Types of
Regulation, to its transmission and distribution operations in Texas and New Mexico. TNMP discontinued the application of SFAS 71 to the generation/power supply portions of its operations in Texas as a result of the passage of Senate Bill 7.



Utility Plant. TNMPs utility plant is stated at
the historical cost of construction, which includes labor, materials, indirect charges for such items as engineering and administrative costs, and Allowance for Funds Used During Construction (AFUDC) or capitalized interest. Property repairs and
replacement of minor items are charged to operating expenses, while replacements of units of property are capitalized to utility plant.



AFUDC is a non-cash item designed to enable a utility to capitalize financing costs during periods of construction of property subject to rate regulation.
Established regulatory practices enable TNMP to recover these costs from customers. The composite rate used for AFUDC was 8.0 percent in 2004, 7.3 percent in 2003, and 7.9 percent in 2002. AFUDC is applied to construction expenditures for the
portion of its business that is accounted for under SFAS 71.



The costs of depreciable units of plant retired or disposed of in the normal course of business are eliminated from utility plant accounts and such costs plus removal expenses less salvage are charged to accumulated depreciation. When
complete operating units are disposed of, appropriate adjustments are made to accumulated depreciation, and the resulting gains or losses, if any, are recognized.



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Depreciation is provided on a straight-line method based on the estimated lives of the properties as
indicated by periodic depreciation studies. A portion of depreciation of transportation equipment used in construction is charged to utility plant accounts in accordance with the equipments use. Depreciation as a percentage of average
depreciable cost was 3.6 percent, 3.7 percent, and 3.7 percent in 2004, 2003, and 2002, respectively.



Cash Equivalents. Investments in highly liquid debt instruments with maturities of three months or less when purchased are considered cash
equivalents.



Customer Receivables and Operating
Revenues. TNMP accrues estimated revenues for electricity delivered from the latest billing date to the end of the accounting period. Prior to February 2002, TNMP, under a factoring arrangement with an unaffiliated company, sold its customer
receivables on a nonrecourse basis. Amounts estimated to have been delivered, but remaining unbilled, were also sold in connection with this agreement. The factoring arrangement was terminated in February 2002.



Purchased Power and Fuel Costs. Effective January 1, 2002, First
Choice assumed the energy supply activities related to the sale of electricity to retail customers in Texas.



In New Mexico, TNMP is allowed to recover all purchased power costs through the FPPCAC authorized by the NMPRC. The FPPCAC changes monthly to reflect
over-collections or under-collections of purchased power costs. As discussed in Note 3, the FPPCAC temporarily expired in February 2004 but was reinstated in October 2004.



Deferred Charges. Costs incurred in issuing long-term debt are deferred and amortized on a straight-line basis over
the lives of the respective issues. Included in deferred charges are other assets that are expected to benefit future periods and certain costs that are deferred for ratemaking purposes and amortized over periods allowed by regulatory authorities.



Income Taxes. TNP files a consolidated federal income
tax return that includes the consolidated operations of its subsidiaries, First Choice, and TNMP. The amounts of income taxes recognized in TNMPs accompanying consolidated financial statements were computed as if TNMP and its subsidiaries
filed a separate consolidated federal income tax return. Investment Tax Credit (ITC) amounts utilized in the federal income tax return are generally deferred and amortized to earnings ratably over the estimated service lives of the related assets.



Other Comprehensive Income. Other Comprehensive Income
includes unrealized gains and losses related to derivative transactions designated as cash flow hedges and minimum pension liabilities recorded under the provisions of SFAS No. 87, Employers Accounting for Pensions.



Details regarding the components of Other Comprehensive Income (Loss) are
discussed in Note 5.



Derivative Instruments. TNMP may
enter into derivative instruments, including options and swaps, to manage risks related to changes in interest rates and commodity prices. TNMP records derivatives on the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded in earnings or other comprehensive income depending upon the use of the derivative and whether the derivative qualifies for hedge accounting.



Fair Values of Financial Instruments. Fair values of cash equivalents and customer receivables approximated the carrying amounts because of the
short maturities of those instruments.



The estimated fair
value of long-term debt was based on quoted market prices of the same or similar issues. The estimated fair value of TNMPs financial instruments are as follows:



|                               |  |                   |         |                   |   |                |  |            |         |  |   |        
|------------------------------ |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                               |  | December 31, 2004 |         | December 31, 2003
|                               |  | CarryingAmount    |         | Fair Value        |   | CarryingAmount |  | Fair Value
|                               |  | (In thousands)   
|Capitalization and Liabilities |  |                   |         |                   |   |                |  |            |         |  |   |        
|Long-term debt                 |  | $                 | 416,625 |                   | $ | 434,773        |  | $          | 425,000 |  | $ | 433,100



Reclassification. Certain items
in 2002 and 2003 were reclassified to conform to the 2004 presentation.



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Note 2. Proposed PNM Resources, Inc., Acquisition of TNP Enterprises, Inc.



On July 24, 2004, SW Acquisition, L.P., the sole holder of TNP common stock, entered into a Stock Purchase Agreement to sell all of the outstanding
common stock of TNP to PNM Resources for approximately $189 million comprised of equal amounts of PNM Resources common stock and cash. PNM Resources will also assume approximately $835 million of TNPs net debt and senior redeemable cumulative
preferred stock (preferred securities).



Under the terms
of the agreement, TNPs common shareholders will receive consideration, consisting of approximately 4.7 million newly issued PNM Resources shares and the remainder being paid in cash, subject to closing adjustments. PNM Resources shares were
valued at $20.20 on the date the agreement was entered into. The final sale price will be based on the share price on the day of closing. PNM Resources closed at $26.24 on February 28, 2005. The existing indebtedness and preferred securities at TNP
will be retired. All debt at TNMP, TNPs wholly-owned electric utility subsidiary, will remain outstanding.



Based on the number of common shares outstanding on a fully diluted basis and taking into account additional equity issuances, following the
transaction, PNM Resources shareholders would own 94 percent of PNM Resources common equity, and TNPs shareholders would own approximately 6 percent.



The transaction is subject to certain conditions, including, to the extent they are required, receipt of necessary
orders or other actions by the PUCT, the NMPRC, the FERC, the SEC and clearance under applicable federal anti-trust statutes. Information regarding the approval status in each jurisdiction is as follows:



Texas. On September 9, 2004, TNMP and PNM Resources filed a joint
application with the PUCT seeking a finding that the acquisition is consistent with the public interest. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources filed a stipulation settling all issues in the
acquisition docket and providing for rate reductions by TNMP, timing of the 60-day rate review and effective dates for the resulting rates, extension or renewal of certain service quality and reliability commitments, a synergy savings rate credit to
be effective after closing, and a finding that the acquisition is consistent with the public interest. Various parties, including the staff of the PUCT executed the stipulation and all parties agreed not to oppose its approval. Management expects
the PUCT to find the acquisition to be consistent with the public interest and implement the stipulation no later than April 2005. See Note 3  Regulatory Matters - Texas for additional information associated with the settlement.



New Mexico. On September 9, 2004, TNMP and PNM Resources filed a joint
application with the NMPRC seeking approval of the acquisition. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources filed a stipulation settling all issues in the acquisition docket including rate reductions by
TNMP over five years, the sharing of synergy savings with customers of TNMP and various PNM Resources subsidiaries, and the agreement of the parties that the acquisition should be approved. Management expects that the NMPRC will approve the
acquisition settlement in the second quarter of 2005. See Note 3  Regulatory Matters  New Mexico for additional information associated with the settlement.



FERC. On December 23, 2004, TNMP and PNM Resources filed a joint application requesting approval of the acquisition.
On January 28, 2005, EPE filed a protest to the acquisition stating that EPE needed more information on competitive issues before the application could be approved. Xcel Energy also filed a motion to intervene in the matter but did not protest
approval of the transaction. On March 2, 2005, FERC issued an order, rejecting EPEs protest and approving the acquisition.



SEC. During the first quarter of 2005, PNM Resources filed for all required action needed for approval of the acquisition by the SEC.



Federal Trade Commission. On February 2, 2005, PNM Resources
received anti-trust clearance under the Hart-Scott-Rodino Act from the Federal Trade Commission.



The transaction is also subject to certain rights of termination by each party, including rights of termination in the event that required
regulatory action is denied or not received. The Stock Purchase Agreement may also be terminated if the closing has not occurred on or prior to December 31, 2005.



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Note 3. Regulatory Matters



Texas



Retail Competition. As discussed in Note 1,
the Texas electricity market has been open to retail competition since January 1, 2002. In accordance with Senate Bill 7, TNMP provides transmission and distribution services at regulated rates to various retail electric providers that, in turn,
provide retail electric service within TNMPs Texas service area.



Final Fuel Reconciliation. In January 2004, the PUCT issued an order that disallowed $15.7 million of fuel and energy-related purchased power costs that TNMP incurred in 2000 and 2001, prior to retail competition. TNMP recorded the
$10.1 million net of tax effect of the disallowance in the fourth quarter of 2003. As a result of the PUCT decision, TNMP had an over-recovered balance of fuel and energy-related purchased power costs of $41.1 million, including interest. TNMP is
appealing the PUCT decision.



2004 True-Up Proceeding.
On July 22, 2004, the PUCT issued its decision in TNMPs stranded cost true-up proceeding in Docket No. 29206. The purpose of the true-up proceeding was to quantify and reconcile the amount of stranded costs that TNMP may recover from its
transmission and distribution customers. The proceeding examined a number of issues, including the sale of TNP One that occurred in October 2002, the final fuel reconciliation and the clawback. The PUCT decision established $128.4 million as
TNMPs stranded costs and allows TNMP to recover $87.3 million of the $266.5 million that TNMP requested for its true-up balance TNMPs original request included approximately $307.6 million of stranded costs related to the sale of TNP
One, which occurred in October 2002, and the credit of approximately $41.1 million related to TNMPs over-recovered balance of fuel and energy-related purchased power costs.



The PUCTs decision resulted in a loss of $155.1 million before an income tax benefit of $57.3 million ($97.8 million
after tax). TNMP recorded the $97.8 million after tax loss as an extraordinary item in the second quarter of 2004. The loss was classified as an extraordinary item in accordance with SFAS 101, Regulated Enterprises  Accounting for the
Discontinuance of the Application of FASB Statement No. 71.



In addition to the decision regarding stranded costs, the PUCT order confirmed that First Choices clawback liability to TNMP is $15.9 million. Senate Bill 7 requires First Choice to credit TNMP with the clawback amount. TNMP must then
pass the credit received from First Choice to its transmission and distribution customers.



In the decision, the PUCT found that TNMPs selection of an affiliate of TNMP to serve as its financial advisor to the sale of TNP One, as well as deficiencies in the process, resulted in a sale transaction that
was not a bona fide third party transaction under a competitive offering. Additionally, the PUCT disallowed costs associated with TNMPs failure to reduce costs associated with a renegotiated long-term lignite contract. Also, the PUCT grossed
up certain disallowances for income tax effects. TNMP disagrees with the PUCT decision, and intends to vigorously pursue all avenues of appeal of this order.



In the third quarter of 2004, TNMP began accruing carrying charges on stranded costs for the period subsequent to the July 22, 2004 stranded cost order.
In accordance with PUCT rules in effect at the time that TNMP filed its true-up proceeding, TNMP is allowed to accrue and recover carrying charges on the stranded cost balance from the date of the final order.



On August 11, 2004, TNMP filed a motion for rehearing of the PUCT decision.
On October 7, 2004, the PUCT denied all of TNMPs motions for rehearing except for an issue related to a June 2004 Texas Supreme Court ruling that addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the
date that competition began in Texas. Hearings were held in December 2004. In accordance with the June 2004 Texas Supreme Court ruling, and consistent with the application in the true-up case of another utility, TNMP expects to recover $41.7 million
of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. Accordingly, TNMP recorded $27.2 million of carrying charges for the period January 1, 2002 through July 21, 2004, in the fourth quarter of 2004. In
accordance with provisions within SFAS 92  Regulated Enterprises  Accounting for Phase-In Plans, TNMP was limited in its recognition for income statement purposes to only the debt related portion of the carrying charges, and TNMP was
prohibited from income statement recognition of $14.5 million associated with the equity portion of the carrying charges until the actual receipt of those amounts from customers. A final order in the True-Up Proceeding is expected to be issued in
the second quarter of 2005.



60-Day Rate Review. Sixty
days following the date on which a true-up order becomes final and appealable, TNMP is required to make a 60-Day Rate Review filing. First Choice is required to make a filing to reset its price-to-beat rates on a schedule consistent with the TNMP
60-Day Rate Review. TNMPs case will set rates for recovery of the true-up balance and address the clawback liability. First Choices case will consider a reset of price-to-beat rates.



As discussed in Note 2, the stipulation resolving the Texas proceeding
related to PNM Resourcess acquisition of TNP provides that TNMP will file the 60-Day Rate Review no later than 60 days following the date on which the true-up order becomes final and appealable. First Choice will file its price-to-beat base
rate case no later than 30 days after TNMP files its



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60-Day Rate Review. TNMPs and First Choices resulting rates will take effect simultaneously no later than 30 days following a final order on
TNMPs 60-Day Rate Review. The Texas acquisition stipulation also provides that First Choice will request that the PUCT recognize in its new price-to-beat rates the TNMP rate reduction and the synergy savings credit provided for in the
stipulation.



Acquisition Settlement. During the fourth
quarter of 2003, several Texas cities passed resolutions requiring TNMP to file certain financial information with the cities so that the cities may determine whether TNMPs transmission and distribution rates are reasonable. TNMP filed
information in response to the resolutions in November 2003 and has responded to additional requests for information from the cities.



As discussed in Note 2, as a result of the settlement discussions in Texas associated with PNM Resources acquisition of TNP, TNMP agreed to
implement a $13 million annual reduction to its Texas retail delivery base rates. The rate reduction will be effective for customer billings beginning May 1, 2005.



ST Corp. Merger Commitments. As conditions for approval of the ST Corp. Merger, TNMP made a number of commitments to
both the PUCT and NMPRC. The commitments cover a wide range of financial, operational, electric reliability, and other standards with which TNMP agreed to comply. TNMP made 55 commitments in New Mexico and Texas, of which 18 are currently in effect.
TNMP monitors compliance on a monthly basis and could be subject to financial penalties for non-compliance with certain commitments. As of December 31, 2004, TNMP was in compliance with all of its ST Corp. Merger commitments, with the exception of
nominal penalties in regard to certain reliability standards in Texas. Some of the commitments have been extended or renewed as part of the PNM Resources acquisition settlement in Texas and New Mexico.



Transmission Cost Recovery Factor. On January 14, 2005, TNMP filed for
an updated Transmission Cost Recovery Factor (TCRF) at the PUCT. PUCT rules authorize TNMP to make such adjustments when a change in a Transmission Service Providers (TSPs) wholesale transmission rate being charged to TNMP has been
approved or allowed by the PUCT. PUCT rules authorizes Distribution Service Providers (DSPs) to update their TCRF on March 1 and September 1 of each year in order to pass through changes in wholesale transmission costs that are billed by TSPs to
DSPs such as TNMP. TNMP sought administrative approval of an adjustment to its TCRF Rider for the changes in wholesale transmission rates that have been approved or allowed by the PUCT. The filing, which was approved on February 23, 2005, will
increase annual revenues $1.9 million for TNMP effective March 1, 2005.



New Mexico



Affiliate Guarantee. In
October 2003, the NMPRC granted TNMPs request for authority to extend a portion of the guarantees that TNMP provided for certain power supply obligations of First Choice. TNMPs authority to guarantee the power supply obligations of First
Choice terminated on June 2, 2004, when First Choice established a bankruptcy remote special purpose entity under authorization granted by the PUCT in Docket No. 29081. The special purpose entity was established in connection with First
Choices power supply agreement with Constellation.



New Mexico Fuel and Purchased Power. In January 2002, as part of the final order in Docket No. 3643, TNMP established a FPPCAC in New Mexico. This clause allowed TNMP to recover actual purchased power costs from customers. New Mexico
regulations require TNMP to seek approval for continuation of the FPPCAC every two years. In July 2004, the staff of the NMPRC notified TNMP that it had failed to file for the continuation of the FPPCAC.



Amounts collected from February through June 2004 are subject to
refund. In September 2004, the NMPRC authorized TNMP to begin collecting an interim FPPCAC effective October 1, 2004. On December 14, 2004, the NMPRC approved the permanent FPPCAC. TNMPs earnings were reduced by $0.5 million after tax ($0.8
million before tax) for the year ended December 31, 2004, as a result of the temporary expiration of FPPCAC.



Acquisition settlement. As discussed in Note 2, as a result of the settlement discussions in New Mexico associated with PNM Resources
acquisition of TNP, TNMP agreed to implement an approximate $9.6 million (1.851 cents per Khw) annual reduction, which includes synergy savings, effective January 1, 2006, to most of its New Mexico customers, subject to completion of the PNM
Resources acquisition of TNMP. Phelps Dodge, TNMPs largest New Mexico commercial customer is served through a contractual arrangement, and is excluded from the rate reduction. PNM Resources has also agreed to integrate the New Mexico
operations of TNMP into PNM Resources by January 1, 2007. Effective January 1, 2008, TNMPs rates will be reduced by an additional 0.1 cents per Kwh through December 31, 2008; and on January 1, 2009, TNMPs rates will be reduced by an
additional 0.1 cents per Khw, for a total reduction of 2.051 cents per Kwh in effect through December 31, 2010. As part of the rate reduction, the current TNMP FPPCAC will be eliminated once amounts in the balancing account as of December 31, 2005
are collected or returned to customers.



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Note 4. Accounting Developments



Employers Disclosures about Pensions and Other Postretirement Benefits



TNMP has applied the revised disclosure provisions of SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS 132). The revisions to SFAS 132 were issued in
December 2003, and require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The disclosures that are required by SFAS 132
are included in Note 7.



Derivative Instruments and Hedging
Activities



TNMP adopted SFAS No.149,
Amendments of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149), on June 30, 2003. The adoption had no impact on the financial position, results of operations, or cash flows of TNMP. SFAS 149 amends SFAS 133 for
decisions made by the Derivatives Implementation Group that required amendments to SFAS 133, in connection with other FASB projects regarding financial instruments, and for implementation issues regarding the application of the definition of a
derivative.



Accounting for Asset Retirement Obligations



TNMP adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, (SFAS143) on January 1, 2003. The adoption had no impact on the financial position, results of operations, or cash flows of TNMP. As a result of the adoption of SFAS 143, TNMP identified costs recorded in accumulated
depreciation related to inclusion of removal costs of utility plant in TNMPs rates by the PUCT and NMPRC. Such costs do not arise from legal obligations. Rather, they represent long-standing regulatory policy to include charges for removal
costs of utility plant in accumulated depreciation. Accordingly, TNMP reclassified the estimated utility plant removal costs of $38.2 million as of December 31, 2003, from accumulated depreciation to a regulatory liability included in long-term and
other liabilities on the balance sheet.



Note 5. Derivative Instruments, Hedging Activities, and Other Comprehensive Income



Normal Purchases and Sales.In the normal course of business, TNMP enters into commodity contracts, which include swing components for
additional purchases or sales of electricity, in order to meet customer requirements. The FASB has defined criteria by which option-type and forward contracts for electricity can qualify for the normal purchase and sales exception provided by SFAS
133, as amended by SFAS 149. Based on the FASBs guidance, the management of TNMP has determined that its respective contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP does not account for their
respective electricity contracts as derivatives.



Hedging Activities



TNMP may enter into agreements for derivative
instruments, including options and swaps, to manage risks related to changes in interest rates and commodity prices. At the inception of any such transactions, TNMP documents relationships between the hedging instruments and the items being hedged.
The documentation includes the strategy that supports executing the specific transaction.



TNMP Interest Rate Hedges. In October 2002, TNMP executed two $75 million interest rate swap transactions designed to manage interest rate risk associated with the TNMP/First Choice Credit Facility. TNMP issued
$250 million of 6.125 percent Senior Notes due in 2008, in June 2003. A portion of the proceeds from that borrowing was used to repay amounts outstanding under the TNMP/First Choice Credit Facility. As a result, TNMP terminated the swaps in June
2003 at a cost of $3.1 million, which was recorded as interest expense.



In May 2003, TNMP executed a $250 million Treasury rate lock transaction designed to manage interest rate risk associated with the issuance of its $250 million of Senior Notes discussed above. The rate lock effectively fixed the five-year
Treasury yield upon which the yield of the Senior Notes was based at approximately 2.6 percent. TNMP paid $4.2 million upon the issuance of the Senior Notes in June 2003 to settle the rate lock. The cost of the rate lock was recorded in accumulated
other comprehensive income and will be amortized to interest expense over the life of the Senior Notes.



The interest rate swaps and the Treasury rate lock were designated as cash flow hedges. The instruments were highly effective in offsetting future cash
flow volatility caused by changes in interest rates. For the years ended December 31, 2004 and 2003, TNMP recorded unrealized gains (losses), net of reclassification adjustments, associated with its interest rate swaps and Treasury rate lock in
other comprehensive income as shown in the following table.



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|                                  |  |                                       |     |                                       |   |      |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------------------------- | --- | ------------------------------------- | - | ---- | --------------- |  | ---------------- | --- |  | -------------------- | ------ | - | --------------- | - | ------ | - |  | - | ------ | -
|                                  |  | Twelve Months Ended December 31, 2004 |     | Twelve Months Ended December 31, 2003 |  
|                                  |  | Before-TaxAmount                      |     | Tax Benefit(Expense)                  |   |      | After-TaxAmount |  | Before-TaxAmount |     |  | Tax Benefit(Expense) |        |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |    
|Change in market value            |  | $                                     |    |                                       | $ |     |                 |  | $                |    |  | $                    | (5,923 | ) |                 | $ | 2,257  |   |  | $ | (3,666 | )
|Reclassification adjustments      |  |                                       | 832 |                                       |   | (317 | )               |  |                  | 515 |  |                      | 4,127  |   |                 |   | (1,572 | ) |  |   | 2,555  |  
|                                  |  |                                       |     |                                       |   |      |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|Other comprehensive income (loss) |  | $                                     | 832 |                                       | $ | (317 | )               |  | $                | 515 |  | $                    | (1,796 | ) |                 | $ | 685    |   |  | $ | (1,111 | )
|                                  |  |                                       |     |                                       |   |      |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  



TNMP displays cash
flows from interest rate hedging transactions in the cash flow statement as cash flow from operations, in accordance with the provisions of SFAS No. 104, Statement of Cash Flows-Net Reporting of Certain Cash Receipts and Cash Payments and
Classification of Cash Flows from Hedging Transactions.



Minimum
Pension Liability



SFAS 87, Employers
Accounting for Pensions, requires the recognition of a minimum liability when the accumulated benefit obligation of a pension plan exceeds the fair value of plan assets. TNMPs excess benefit plan is subject to this provision. Changes in
the minimum pension liability are a component of other comprehensive income.



Other comprehensive income for TNMP includes the amounts shown in the following table for the years ended December 31, 2004, 2003, and 2002.



|                             |  |                  |     |                      |   |      |                 |  |   |    
|---------------------------- |  | ---------------- | --- | -------------------- | - | ---- | --------------- |  | - | ---
|                             |  | Before-TaxAmount |     | Tax Benefit(Expense) |   |      | After-TaxAmount
|                             |  | (In thousands)  
|Year ended December 31, 2004 |  | $                | 1   |                      | $ |     |                 |  | $ | 1  
|Year ended December 31, 2003 |  |                  | 346 |                      |   | (132 | )               |  |   | 214
|Year ended December 31, 2002 |  |                  | 508 |                      |   | (194 | )               |  |   | 314



Note 6. Sale of TNP One



On
October 31, 2002, TNMP sold TNP One to Sempra Energy Resources for $120 million ($117.6 net of cost to sell). The sale completed a process that TNMP started in response to Senate Bill 7, which required electric utilities to separate their power
generation business activities from the regulated transmission and distribution business. Senate Bill 7 established various methods for quantifying stranded costs, one of which was the sale of generation plants.



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Note 7. Employee Benefit Plans



Pension and Postretirement Benefits Plans



TNMP and its subsidiaries sponsor a defined benefit pension plan covering substantially all of its employees. Benefits are based on an employees years of service and compensation. TNMPs funding policy is to contribute the
minimum amount required by federal funding standards. TNMP provides an excess benefit plan for certain key personnel and retired employees whose benefits in the principal plan federal law restricts. TNMP also sponsors a health care plan that
provides postretirement medical and death benefits to retirees who satisfied minimum age and service requirements during employment.



|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                  |  | Pension Benefits |        |   | Postretirement Benefits |  
|                                                                                  |  | 2004             |        |   | 2003                    |   |        | 2004 |  |   | 2003   |  
|                                                                                  |  | (In thousands)   |       
|Change in projected benefit obligation:                                           |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Benefit obligation at beginning of year                                           |  | $                | 85,297 |   |                         | $ | 86,485 |      |  | $ | 10,864 |   |  | $ | 10,985 |  
|Service cost                                                                      |  |                  | 2,091  |   |                         |   | 2,095  |      |  |   | 411    |   |  |   | 388    |  
|Interest cost                                                                     |  |                  | 4,789  |   |                         |   | 5,168  |      |  |   | 679    |   |  |   | 686    |  
|Participant contributions                                                         |  |                  |       |   |                         |   |       |      |  |   | 857    |   |  |   | 640    |  
|Plan amendments                                                                   |  |                  |       |   |                         |   | 207    |      |  |   |       |   |  |   |       |  
|Actuarial (gain) or loss, including changes in discount rate                      |  |                  | 164    |   |                         |   | 2,040  |      |  |   | 1,465  |   |  |   | 195    |  
|Curtailments/settlements                                                          |  |                  |       |   |                         |   | (3,403 | )    |  |   |       |   |  |   |       |  
|Benefits paid                                                                     |  |                  | (7,478 | ) |                         |   | (7,294 | )    |  |   | (2,067 | ) |  |   | (2,030 | )
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Benefit obligation at end of year                                                 |  | $                | 84,863 |   |                         | $ | 85,298 |      |  | $ | 12,209 |   |  | $ | 10,864 |  
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Change in plan assets:                                                            |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at beginning of year                                    |  | $                | 85,052 |   |                         | $ | 88,444 |      |  | $ | 5,688  |   |  | $ | 5,556  |  
|Actual return on plan assets, net of expenses                                     |  |                  | 4,625  |   |                         |   | 3,669  |      |  |   | 369    |   |  |   | 469    |  
|Settlements                                                                       |  |                  |       |   |                         |   | (3,403 | )    |  |   |       |   |  |   |       |  
|Employer contributions                                                            |  |                  | 165    |   |                         |   | 3,636  |      |  |   | 1,099  |   |  |   | 1,047  |  
|Participant contributions                                                         |  |                  |       |   |                         |   |       |      |  |   | 853    |   |  |   | 638    |  
|Benefits paid                                                                     |  |                  | (7,478 | ) |                         |   | (7,294 | )    |  |   | (2,053 | ) |  |   | (2,022 | )
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at end of year                                          |  | $                | 82,364 |   |                         | $ | 85,052 |      |  | $ | 5,956  |   |  | $ | 5,688  |  
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Reconciliation of funded status                                                   |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Funded status                                                                     |  | $                | (2,499 | ) |                         | $ | (245   | )    |  | $ | (6,253 | ) |  | $ | (5,175 | )
|Unrecognized actuarial gain                                                       |  |                  | (913   | ) |                         |   | (2,335 | )    |  |   | 975    |   |  |   | (436   | )
|Unrecognized transition obligation                                                |  |                  |       |   |                         |   |       |      |  |   | 2,594  |   |  |   | 2,918  |  
|Unrecognized prior service cost                                                   |  |                  | (1,432 | ) |                         |   | (1,632 | )    |  |   |       |   |  |   |       |  
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Accrued benefit liability                                                         |  | $                | (4,844 | ) |                         | $ | (4,212 | )    |  | $ | (2,684 | ) |  | $ | (2,693 | )
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Amounts recognized in the consolidated balance sheets                             |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Accrued benefit liability                                                         |  | $                | (4,844 | ) |                         | $ | (4,213 | )    |  | $ | (2,684 | ) |  | $ | (2,693 | )
|Accumulated other comprehensive loss                                              |  |                  |       |   |                         |   | 1      |      |  |   |       |   |  |   |       |  
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Accrued benefit liability                                                         |  | $                | (4,844 | ) |                         | $ | (4,212 | )    |  | $ | (2,684 | ) |  | $ | (2,693 | )
|                                                                                  |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Weighted-average assumptions used to determine benefit obligations at December 31 |  |                  |        |   |                         |   |        |      |  |   |        |   |  |   |        |  
|Discount rate                                                                     |  |                  | 5.75   | % |                         |   | 6.00   | %    |  |   | 5.75   | % |  |   | 6.00   | %
|Average rate of compensation increase                                             |  |                  | 3.50   | % |                         |   | 3.50   | %    |  |   | N/A    |   |  |   | N/A    |  



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The accumulated benefit obligation for all defined benefit pension plans was $82.7 million and $82.9
million at December 31, 2004 and 2003, respectively.



The
projected benefit obligation of the excess benefit plan, which has an accumulated benefit obligation in excess of plan assets, was $3.6 million and $3.5 million at December 31, 2004 and 2003, respectively. The accumulated benefit obligation of the
excess benefit plan was $3.6 million and $3.4 million at December 31, 2004 and 2003, respectively. The excess benefit plan had no plan assets at December 31, 2004 and 2003, respectively.



The 2003 projected benefit obligation and 2003 net periodic benefit cost of the excess benefit plan were affected by the
settlement of obligations related to the termination of a former member of TNMPs senior management. The benefits payable to the former member of senior management under the excess benefit plan were a significant portion of the total
obligations of the excess benefit plan.



|                                                                                                    |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|--------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - | ---- | - | ----- | - |  | - | ---- | -
|                                                                                                    |  | Pension Benefits |        |   | Postretirement Benefits |  
|                                                                                                    |  | 2004             |        |   | 2003                    |   |        | 2002 |  |   | 2004   |   |  | 2003 |       |   | 2002 |  
|                                                                                                    |  | (In thousands)   |       
|Components of net periodic benefit cost                                                             |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|Service cost                                                                                        |  | $                | 2,091  |   |                         | $ | 2,095  |      |  | $ | 2,321  |   |  | $    | 411   |   |      | $ | 389   |   |  | $ | 345  |  
|Interest cost                                                                                       |  |                  | 4,789  |   |                         |   | 5,168  |      |  |   | 5,564  |   |  |      | 679   |   |      |   | 686   |   |  |   | 732  |  
|Expected return on plan assets                                                                      |  |                  | (6,040 | ) |                         |   | (6,959 | )    |  |   | (7,722 | ) |  |      | (315  | ) |      |   | (334  | ) |  |   | (412 | )
|Settlements                                                                                         |  |                  |       |   |                         |   | 362    |      |  |   |       |   |  |      |      |   |      |   |      |   |  |   |     |  
|Amortization of prior service cost                                                                  |  |                  | (200   | ) |                         |   | (200   | )    |  |   | (220   | ) |  |      |      |   |      |   |      |   |  |   |     |  
|Amortization of transitional (asset) or obligation                                                  |  |                  |       |   |                         |   |       |      |  |   |       |   |  |      | 324   |   |      |   | 324   |   |  |   | 324  |  
|Recognized actuarial (gain) loss                                                                    |  |                  | 157    |   |                         |   | 298    |      |  |   | 193    |   |  |      |       |   |      |   | (17   | ) |  |   | (126 | )
|                                                                                                    |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|Net periodic benefit cost                                                                           |  | $                | 797    |   |                         | $ | 764    |      |  | $ | 136    |   |  | $    | 1,099 |   |      | $ | 1,048 |   |  | $ | 863  |  
|                                                                                                    |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|Increase (decrease) in minimum pension liability included in other comprehensive income             |  | $                | (1     | ) |                         | $ | (346   | )    |  | $ | (509   | ) |  | $    |      |   |      | $ |      |   |  | $ |     |  
|                                                                                                    |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|Weighted-average assumptions to determine net periodic benefit cost for the years ended December 31 |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |      |  
|Discount rate                                                                                       |  |                  | 6.00   | % |                         |   | 6.50   | %    |  |   | 7.25   | % |  |      | 6.00  | % |      |   | 6.50  | % |  |   | 7.25 | %
|Expected long-term rate of return on plan assets                                                    |  |                  | 7.80   | % |                         |   | 8.50   | %    |  |   | 9.00   | % |  |      | 5.50  | % |      |   | 6.00  | % |  |   | 6.00 | %
|Average rate of compensation increase                                                               |  |                  | 3.50   | % |                         |   | 3.50   | %    |  |   | 4.00   | % |  |      | N/A   |   |      |   | N/A   |   |  |   | N/A  |  



The expected long-term
rate of return on pension plan assets is based on an investment strategy that allocates pension plan assets among equity, Treasury Inflation-Protected Securities (TIPS), and money market assets based on a formula dependent upon the composite
price/earnings ratio of the S&P 500 index and the current yield on TIPS. In developing the expected long-term rate of return assumption, TNMP utilized expectations of asset class returns as well as long-term inflation assumptions developed by
independent consultants and economists. Projected investment returns were based on equity and fixed income indices, which represent broad market expectations. TNMP determines the expected long-term rate of return by weighting the expected return on
each asset class by the expected asset allocation produced by the investment strategy.



The assumed health care cost trend rate used to measure the expected cost of benefits was 8 percent for 2004 and is assumed to trend downward slightly each year to 5 percent for 2007 and thereafter. TNMPs
exposure to cost increases in the postretirement benefit plan is minimized by a provision that limits TNMPs share of costs under the plan. Costs of the plan in excess of the limit are borne wholly by the participants. TNMP reached the cost
limit at the end of 2001. As a result, a one-percentage-point change in assumed health care cost trend rates would have no effect on either the 2004 net periodic expense or the year-end 2004 postretirement benefit obligation.



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|                                                                    |  |                     |   |  |                                     |   |  |      |   |  |      |  
|------------------------------------------------------------------- |  | ------------------- | - |  | ----------------------------------- | - |  | ---- | - |  | ---- | -
|                                                                    |  | Pension Plan Assets |   |  | Postretirement Benefits Plan Assets |  
|                                                                    |  | 2004                |   |  | 2003                                |   |  | 2004 |   |  | 2003 |  
|Weighted-average asset allocations by asset category at December 31 |  |                     |   |  |                                     |   |  |      |   |  |      |  
|Equities                                                            |  | 23                  | % |  | 11                                  | % |  | 23   | % |  | 13   | %
|Debt securities (composed entirely of TIPS)                         |  |                    |   |  | 11                                  | % |  |     |   |  | 10   | %
|Other (money market assets)                                         |  | 77                  | % |  | 78                                  | % |  | 77   | % |  | 77   | %
|                                                                    |  |                     |   |  |                                     |   |  |      |   |  |      |  
|                                                                    |  | 100                 | % |  | 100                                 | % |  | 100  | % |  | 100  | %
|                                                                    |  |                     |   |  |                                     |   |  |      |   |  |      |  



TNMPs investment
policy for both the pension plan and postretirement benefit plan is to have a reasonably balanced investment approach, with a long-term bias toward equity investments. TNMPs investment strategy allocates plan assets among equity, TIPS, and
money market assets based on a formula dependent upon the composite price/earnings ratio of the S&P 500 index and the current yield on TIPS. For the pension plan, the target equity allocation is a function of the price/earnings ratio of the
S&P 500 index, as shown in the following table.



|               |  |                                                   |  |                          |   |  |                
|-------------- |  | ------------------------------------------------- |  | ------------------------ | - |  | ---------------
|PE Ratio Bands |  | S&P 500 PE Ratio                                  |  | Target Equity Allocation |   |  | Allowable Range
|I              |  | Greater than 23.5                                 |  | 10                       | % |  | 5% to 15%      
|II             |  | Less than or equal to 23.5 and greater than 19.25 |  | 20                       | % |  | 15% to 25%     
|III            |  | Less than or equal to 19.25 and greater than 13.0 |  | 50                       | % |  | 45% to 55%     
|IV             |  | Less than or equal to 13.0 and greater than 11.0  |  | 70                       | % |  | 65% to 75%     
|V              |  | Less than or equal to 11.0                        |  | 90                       | % |  | 85% to 95%     



The target equity
allocation for the postretirement benefit plan is also a function of the price/earnings ratio of the S&P 500 index, as shown in the following table.



|               |  |                                                   |  |                          |   |  |                
|-------------- |  | ------------------------------------------------- |  | ------------------------ | - |  | ---------------
|PE Ratio Bands |  | S&P 500 PE Ratio                                  |  | Target Equity Allocation |   |  | Allowable Range
|I              |  | Greater than 23.5                                 |  | 10.25                    | % |  | 5.25% to 15.25%
|II             |  | Less than or equal to 23.5 and greater than 19.25 |  | 22                       | % |  | 17% to 27%     
|III            |  | Less than or equal to 19.25 and greater than 13.0 |  | 54                       | % |  | 49% to 59%     
|IV             |  | Less than or equal to 13.0 and greater than 11.0  |  | 75                       | % |  | 70% to 80%     
|V              |  | Less than or equal to 11.0                        |  | 96                       | % |  | 91% to 100%    



Assets not held in
equities will be invested in fixed income investments, excluding an amount held in cash to pay current benefits and expenses. Once the target equity allocation for the plans has been determined, the remaining assets of the plans will be invested in
TIPS subject to the limitations in the following tables.



|                               |  |                                                  |  |                        |   |  |                
|------------------------------ |  | ------------------------------------------------ |  | ---------------------- | - |  | ---------------
|If Yield on TIPS is declining.
|Yield Bands                    |  | Yield on TIPS Investments                        |  | Target TIPS Allocation |   |  | Allowable Range
|I                              |  | Less than 2.00                                   |  | 0                      | % |  | 0%             
|II                             |  | Greater than or equal to 2.00 and less than 2.50 |  | 5                      | % |  | 0% to 15%      
|III                            |  | Greater than or equal to 2.50 and less than 2.65 |  | 20                     | % |  | 15% to 25%     
|IV                             |  | Greater than or equal to 2.65 and less than 2.80 |  | 40                     | % |  | 35% to 45%     
|V                              |  | Greater than or equal to 2.80 and less than 3.00 |  | 70                     | % |  | 65% to 75%     
|VI                             |  | Greater than or equal to 3.00                    |  | 100                    | % |  | 95% to 100%    



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|                                |  |                                                  |  |                        |   |  |                
|------------------------------- |  | ------------------------------------------------ |  | ---------------------- | - |  | ---------------
|If Yield on TIPS is increasing.
|Yield Bands                     |  | Yield on TIPS Investments                        |  | Target TIPS Allocation |   |  | Allowable Range
|I                               |  | Less than 2.00                                   |  | 0                      | % |  | 0%             
|II                              |  | Greater than or equal to 2.00 and less than 2.60 |  | 5                      | % |  | 0% to 15%      
|III                             |  | Greater than or equal to 2.60 and less than 2.75 |  | 20                     | % |  | 15% to 25%     
|IV                              |  | Greater than or equal to 2.75 and less than 2.90 |  | 40                     | % |  | 35% to 45%     
|V                               |  | Greater than or equal to 2.90 and less than 3.10 |  | 70                     | % |  | 65% to 75%     
|VI                              |  | Greater than or equal to 3.10                    |  | 100                    | % |  | 95% to 100%    



Assets of the plans
that are not invested in equities or TIPS at any point in time will be invested in money market investments.



TNMP expects to contribute $0.8 million to the pension plan and $1.0 million to the postretirement benefits plan in 2005.



|                                                                                    |  |                 |        |                          |   |      
|----------------------------------------------------------------------------------- |  | --------------- | ------ | ------------------------ | - | -----
|                                                                                    |  | PensionBenefits |        | Post -RetirementBenefits
|                                                                                    |  | (In thousands) 
|Expected future benefit payments, reflecting expected future service, to be paid in |  |                 |        |                          |   |      
|2005                                                                                |  | $               | 7,820  |                          | $ | 990  
|2006                                                                                |  |                 | 7,660  |                          |   | 926  
|2007                                                                                |  |                 | 7,460  |                          |   | 898  
|2008                                                                                |  |                 | 7,675  |                          |   | 886  
|2009                                                                                |  |                 | 8,030  |                          |   | 883  
|2010 - 2014                                                                         |  |                 | 39,000 |                          |   | 4,869



In 2003, TNMP
recognized a reduction in postretirement benefits plan liabilities due to changes resulting from the Medicare Prescription Drug and Modernization Act of 2003. The following table summarizes the impact of the act on 2004 expense and on future
postretirement benefit payments:



|                                      |  |                     |       |   |                  |   |       |  
|------------------------------------- |  | ------------------- | ----- | - | ---------------- | - | ----- | -
|                                      |  | 2004 (In thousands) |      
|                                      |  | With Medicare       |       |   | Without Medicare |  
|Net periodic benefit cost             |  |                     |       |   |                  |   |       |  
|Service cost                          |  | $                   | 411   |   |                  | $ | 419   |  
|Interest cost                         |  |                     | 679   |   |                  |   | 705   |  
|Expected return on plan assets        |  |                     | (315  | ) |                  |   | (315  | )
|Amortization of transition obligation |  |                     | 324   |   |                  |   | 324   |  
|                                      |  |                     |       |   |                  |   |       |  
|Net periodic benefit cost             |  | $                   | 1,099 |   |                  | $ | 1,133 |  
|                                      |  |                     |       |   |                  |   |       |  
|Expected future benefit payments      |  |                     |       |   |                  |   |       |  
|2005                                  |  | $                   | 990   |   |                  | $ | 990   |  
|2006                                  |  |                     | 926   |   |                  |   | 970   |  
|2007                                  |  |                     | 898   |   |                  |   | 940   |  
|2008                                  |  |                     | 886   |   |                  |   | 925   |  
|2009                                  |  |                     | 883   |   |                  |   | 920   |  
|2010 - 2014                           |  |                     | 4,869 |   |                  |   | 5,050 |  



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Incentive Plans



TNMP has two incentive compensation plans. All employees participate in one or both of these plans. Incentive compensation is based on meeting key
financial and operational performance goals such as earnings before interest expense, taxes, depreciation and amortization, customer satisfaction, and system reliability measures.



TNMPs operating expenses for 2003 and 2002 included costs for the various plans and bonuses in employment agreements
of $1.9 million, and $2.7 million, respectively. No incentive compensation was paid for 2004.



Change of Control Agreements



TNMP entered into change in control agreements with certain members of TNMPs officers and key employees. Under such agreements, if a Change in Control occurs, as defined by the agreements, and the officer or key employees
employment is terminated without Cause (as the agreements define such term) or the officer resigns following a significant change in duties, responsibilities, authority, title, reporting responsibilities, compensation or benefits, then the officer
would become entitled to receive the benefits provided by the applicable agreement. These benefits include: (i) one to three times annual salary, (ii) medical and dental insurance at a cost to such officer equal to that paid by TNMP employees for a
period of one to three years, (iii) a prorated portion of annual bonus as established by the annual Incentive Plans and (iii) any excise tax taxes payable as a result of these benefits, grossed up for any additional excise and income taxes that
result from each gross up payment. The completion of the PNM Acquisition as contemplated by the Stock Purchase Agreement would be a Change in Control under these agreements. The maximum aggregate estimated liability of the employment agreements and
the Change in Control Agreements is approximately $6.4 million.



Other Employee Benefits



TNMP and its
subsidiaries have a 401(k) plan designed to enhance the other retirement plans available to its employees. Employees may invest their contributions in various mutual funds. TNMPs contributions are invested in the same manner as the
employees contributions. TNMPs operating expenses for 2004, 2003, and 2002 included contribution costs of $0.4 million, $0.4 million and $0.6 million, respectively.



Note 8. Income Taxes



Components
of income taxes were as follows:



|                               |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | 2004           |        |   | 2003 |   |        | 2002 | 
|                               |  | (In thousands) |       
|Taxes on net operating income: |  |                |        |   |      |   |        |      |  |   |        |  
|Federal - current              |  | $              | 5,920  |   |      | $ | 12,958 |      |  | $ | (757   | )
|State - current and deferred   |  |                | 3,048  |   |      |   | 1,354  |      |  |   | 2,501  |  
|Federal - deferred             |  |                | 17,701 |   |      |   | (394   | )    |  |   | 18,650 |  
|ITC adjustments                |  |                | (722   | ) |      |   | (874   | )    |  |   | (1,459 | )
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|                               |  |                | 25,947 |   |      |   | 13,044 |      |  |   | 18,935 |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Taxes on other income (loss):  |  |                |        |   |      |   |        |      |  |   |        |  
|Federal - current              |  |                | 444    |   |      |   | 661    |      |  |   | 231    |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|                               |  |                | 444    |   |      |   | 661    |      |  |   | 231    |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  
|Total income taxes             |  | $              | 26,391 |   |      | $ | 13,705 |      |  | $ | 19,166 |  
|                               |  |                |        |   |      |   |        |      |  |   |        |  



The amounts for total
income taxes differ from the amounts computed by applying the appropriate federal income tax rate to earnings (loss) before income taxes for the following reasons:



|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Tax at statutory tax rate                |  | $    | 24,342 |   |      | $ | 13,451 |      |  | $ | 18,430 |  
|Amortization of accumulated deferred ITC |  |      | (722   | ) |      |   | (874   | )    |  |   | (1,459 | )
|Amortization of excess deferred taxes    |  |      | (216   | ) |      |   | (198   | )    |  |   | (141   | )
|State income taxes                       |  |      | 3,048  |   |      |   | 1,354  |      |  |   | 2,501  |  
|Permanent differences                    |  |      |       |   |      |   | (34    | )    |  |   | (57    | )
|Other, net                               |  |      | (61    | ) |      |   | 6      |      |  |   | (108   | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Actual income taxes                      |  | $    | 26,391 |   |      | $ | 13,705 |      |  | $ | 19,166 |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  



39



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##### Table of Contents

The tax effects of temporary differences that gave rise to significant portions of net current and net non-current
deferred income taxes as of December 31, 2004, and 2003, are presented below.



|                                                                                                                  |  |                |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                  |  | 2004           |          |   | 2003 |  
|                                                                                                                  |  | (In thousands) |         
|Current deferred income taxes:                                                                                    |  |                |          |   |      |   |          |  
|Deferred tax assets: other                                                                                        |  | $              |         |   |      | $ | 70       |  
|                                                                                                                  |  |                |          |   |      |   |          |  
|Non-current deferred income taxes:                                                                                |  |                |          |   |      |   |          |  
|Deferred tax assets:                                                                                              |  |                |          |   |      |   |          |  
|Minimum tax carryforwards                                                                                         |  |                |         |   |      |   | 19,567   |  
|Regulatory related items                                                                                          |  |                | 2,236    |   |      |   | 10,910   |  
|Deferred purchased power                                                                                          |  |                |         |   |      |   | 12,812   |  
|Accrued employee benefit costs                                                                                    |  |                | 2,462    |   |      |   | 2,967    |  
|Excess earnings                                                                                                   |  |                |         |   |      |   | 14,296   |  
|Contribution in aid of construction                                                                               |  |                |         |   |      |   | 2,676    |  
|Other                                                                                                             |  |                | 196      |   |      |   | 167      |  
|                                                                                                                  |  |                |          |   |      |   |          |  
|                                                                                                                  |  |                | 4,894    |   |      |   | 63,395   |  
|                                                                                                                  |  |                |          |   |      |   |          |  
|Deferred tax liabilities:                                                                                         |  |                |          |   |      |   |          |  
|Utility plant, principally due to depreciation and basis differences, including TNP One recoverable stranded cost |  |                | (86,456  | ) |      |   | (185,896 | )
|Deferred charges                                                                                                  |  |                | (5,232   | ) |      |   | (21,080  | )
|Other recoverable stranded costs (non-current)                                                                    |  |                | (51,455  | ) |      |   | (4,684   | )
|Regulatory related items                                                                                          |  |                |         |   |      |   | (3,902   | )
|                                                                                                                  |  |                |          |   |      |   |          |  
|                                                                                                                  |  |                | (143,143 | ) |      |   | (215,562 | )
|                                                                                                                  |  |                |          |   |      |   |          |  
|Non-current deferred income taxes, net                                                                            |  | $              | (138,249 | ) |      | $ | (152,167 | )
|                                                                                                                  |  |                |          |   |      |   |          |  



Federal tax
carryforwards as of December 31, 2004, were as follows (in thousands):



|                    |  |   |     
|------------------- |  | - | ----
|Minimum tax credits |  |   |     
|Amount              |  | $ |    
|Expiration period   |  |   | None



Note 9. Long-Term Debt



TNMPs $175 million 6.25 percent Senior Notes due in 2009 were issued in 1999, and are unsecured.



On June 10, 2003, TNMP completed the sale of $250 million of 6.125 percent Senior Notes due in 2008. On or after May 1, 2005, TNMP will be required to
redeem the Senior Notes to the extent that it receives proceeds from the securitization of stranded costs. TNMP believes that it has adequate cash to meet its working capital needs without the need for additional bank financing through at least the
end of 2005. TNMPs cash balance as of December 31, 2004, was approximately $65.8 million.



TNMP/First Choice Credit Facility. The TNMP/First Choice Credit Facility expired in October 2003. Prior to the issuance of the 6.125 percent Senior
Notes due in 2008, TNMP and First Choice used the TNMP/First Choice Credit Facility to finance their working capital requirements. For the years ended December 31, 2003 and 2002, the average interest rate on the TNMP/First Choice Credit Facility was
3.5 percent and 3.0 percent, respectively.



Maturities



As of December 31, 2004, TNMP has maturities of long-term debt for the five
years following 2004 of $248.9 million in 2008, which is the scheduled maturity of TNMPs 6.125 percent Senior Notes, and $167.7 million in 2009, which is the scheduled maturity of TNMPs 6.25 percent Senior Notes.



40



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##### Table of Contents

Note 10. Related Party Transactions



Under an agreement between TNMP and its parent TNP, dated June 6, 1997 and an agreement between First Choice, TNMPs affiliated retail electric provider, and TNMP, dated March 1, 2001, TNMP supplies various services, facilities, and
supplies to TNP and First Choice. These services include accounting, information services, legal, and human resources, billed at TNMPs cost. In return, TNP and First Choice compensate TNMP for the use of the services, facilities and supplies.
For the years ended December 31, 2004, 2003 and 2002, TNMP recorded the following amounts associated with related party transactions. Shared services billings are recorded on the balance sheet as accounts receivable. Transmission and distribution
charges are recorded as revenue in the income statement.



|                                                             |  |               |      |      |   |       |  |   |      
|------------------------------------------------------------ |  | ------------- | ---- | ---- | - | ----- |  | - | -----
|                                                             |  | 2004          |      | 2003 |   | 2002 
|                                                             |  | (in millions)
|First Choice                                                 |  |               |      |      |   |       |  |   |      
|Shared services billings                                     |  | $             | 15.0 |      | $ | 13.9  |  | $ | 11.4 
|Shared services owed as of December 31                       |  |               | 1.5  |      |   | 2.9   |  |   | 3.0  
|                                                             |  |               |     
|Transmission and distribution charges billed                 |  |               | 93.7 |      |   | 109.3 |  |   | 107.7
|Transmission and distribution charges owed as of December 31 |  |               | 11.8 |      |   | 11.2  |  |   | 16.6 
|                                                             |  |               |     
|                                                             |  | 2004          |      | 2003 |   | 2002 
|                                                             |  | (in millions)
|TNP                                                          |  |               |      |      |   |       |  |   |      
|Shared services billings                                     |  | $             | 2.4  |      | $ | 1.8   |  | $ | 2.1  
|Shared services owed as of December 31                       |  |               | 0.4  |      |   | 0.1   |  |   | 1.1  



The $93.7 million of
transmission and distribution charges shown above represents approximately 35 percent of TNMPs total revenue for the year ended December 31, 2004.



During 2002, TNMP borrowed excess cash from First Choice. During 2003, all intercompany loans were repaid. Due to cash on hand as a result of the 2003
sale of the 6.125 percent Senior Notes due in 2008 discussed in Note 9, TNMP does not expect to have intercompany borrowings during 2005.



During the first quarter of 2002, TNMP sold the output of TNP One to First Choice at cost. TNMP billed First Choice $15.4 million for the power.



In 2002, TNMP paid Laurel Hill a transaction fee of $1.3
million for acting as TNMPs financial advisor in connection with the sale of TNP One. Laurel Hill received the fee pursuant to provisions of the SW Acquisition limited partnership agreement.



TNMP paid a dividend of $6.0 million to TNP in the second quarter of 2004.



Note 11. Commitments and Contingencies



Energy Supply



New Mexico. TNMPs
power requirements in New Mexico are supplied by PNM under a long-term wholesale power contract that expires in December 2006. In addition to providing power supply, PNM acts as TNMPs agent to procure, schedule and dispatch wholesale power on
TNMPs behalf throughout the term of the contract.



Take or Pay Obligations. At December 31, 2004, TNMP and First Choice had various outstanding commitments for take or pay provisions in their energy supply agreements with PNM and Constellation, respectively. Detailed below are the
fixed and determinable portion of the obligations (amounts in millions):



|                           |  |      |      |      |   |      |  |      |   |      |   |   |  |   |  
|-------------------------- |  | ---- | ---- | ---- | - | ---- |  | ---- | - | ---- | - | - |  | - | -
|                           |  | 2005 |      | 2006 |   | 2007 |  | 2008 |   | 2009
|Purchased power agreements |  | $    | 14.6 |      | $ | 13.7 |  | $    |  |      | $ |  |  | $ | 



41



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##### Table of Contents

Legal Actions



Environmental Site. In October, 2003, the TCEQ notified approximately 50 companies, including TNMP, that releases of hazardous substances had been
documented from a site owned and operated by a vendor with whom those companies did business. TNMP purchased transformers from the vendor and also sent some transformers to the vendor for repair and/or disposal. The owner and operator of the site
has filed for bankruptcy and the site is under the control of the bankruptcy trustee. In August 2004, 15 of the companies identified by TCEQ as PRPs, including TNMP, formed an initial working group to manage the remediation efforts and determine the
allocation of responsibility among the PRPs. As a result of the initial allocation of responsibility, TNMP recorded a liability of $0.6 million for its share of the clean up of this site in 2004.



Other



TNMP is involved in various claims and other legal proceedings arising in the ordinary course of business. In the opinion of
management, the dispositions of these matters will not have a material adverse effect on TNMPs consolidated financial condition or results of operations.



Note 12. Selected Quarterly Consolidated Financial Data (unaudited)



The following selected quarterly consolidated financial data for TNMP is unaudited, and, in the opinion of TNMPs management, is a fair summary of
the results of operations for such periods:



|                                        |  |                |        |               |   |         |              |  |             |        |  |   |        |  
|--------------------------------------- |  | -------------- | ------ | ------------- | - | ------- | ------------ |  | ----------- | ------ |  | - | ------ | -
|                                        |  |                |        | Quarter Ended |   |         |             
|                                        |  | March 31       |        | June 30       |   |         | September 30 |  | December 31 |       
|                                        |  | (In thousands) |       
|2004                                    |  |                |        |               |   |         |              |  |             |        |  |   |        |  
|Operating revenues                      |  | $              | 61,653 |               | $ | 65,069  |              |  | $           | 74,732 |  | $ | 68,211 |  
|Operating income                        |  |                | 13,708 |               |   | 14,934  |              |  |             | 22,840 |  |   | 16,970 |  
|Income (loss) before extraordinary item |  |                | 4,744  |               |   | 5,600   |              |  |             | 10,809 |  |   | 25,490 |  
|Extraordinary item                      |  |                |       |               |   | (97,836 | )            |  |             |       |  |   |       |  
|Net income (loss)                       |  |                | 4,744  |               |   | (92,236 | )            |  |             | 10,809 |  |   | 25,490 |  
|                                        |  |                |       
|                                        |  |                |        | Quarter Ended |   |         |             
|                                        |  | March 31       |        | June 30       |   |         | September 30 |  | December 31 |       
|2003                                    |  |                |        |               |   |         |              |  |             |        |  |   |        |  
|Operating revenues                      |  | $              | 61,365 |               | $ | 67,761  |              |  | $           | 69,953 |  | $ | 50,409 |  
|Operating income                        |  |                | 15,521 |               |   | 22,025  |              |  |             | 25,684 |  |   | 2,578  |  
|Net income (loss)                       |  |                | 7,048  |               |   | 8,832   |              |  |             | 12,303 |  |   | (2,901 | )



Generally, the
variations between quarters reflect the seasonal fluctuations of the businesses of TNMP. In the second quarter of 2004, TNMP recorded an extraordinary item of $97.8 million as discussed in Note 3.



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



None.



Item 9A. CONTROLS AND PROCEDURES.



As of December 31, 2004, the Chief Executive Officer and Chief Financial Officer of TNMP evaluated the effectiveness of the companies disclosure controls and procedures pursuant to applicable Exchange Act Rules. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer of TNMP have each concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its
consolidated subsidiaries) that is required to be included in TNMPs periodic SEC filings.



There were no significant changes in TNMPs internal controls or in other factors that could significantly affect these controls for the quarter
ended December 31, 2004.



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##### Table of Contents

PART III



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Directors



Michael E.
Bray, 57, became President and Chief Operating Officer of TNP on January 19, 2004. He became a director of TNP on January 14, 2004. He became a director of TNMP and Chairman of First Choice on February 4, 2004. From July 2000 until September
2003 he was President of PPL Electric Utilities and Vice Chair of PPL Gas Utilities, electric and gas utilities based in Allentown, Pennsylvania. From April 2000 to July 2000 he was Senior Vice President of PPL Electric. From February 1999 to April
2000 he was President and Chief Executive Officer of Consolidated Edison Development, Inc., a power generation subsidiary of Consolidated Edison Company of New York, New York. From March 1997 to February 1999 he was Senior Vice President - Electric
Business Unit of Long Island Lighting Company (LILCO).



Tim H. Carter, 49, became a director of TNMP on May 1, 2004. Since September 1, 2004, he has served as President and Chief Executive Officer of United Way of Metropolitan Tarrant County. From June 2001 to August
2004, he served as President and Chef Executive Officer of Harris Methodist Health Foundation. From January 1999 to March 2001, he served as Chairman of JP Morgan Chase Bank in Fort Worth, Texas. He has been a member of the board of directors of
Jagee Corporation, a privately held, commercial real estate company based in Fort Worth, Texas, since 2001 and a member of the board of directors of the Worthington National Bank in Arlington, Texas since June 2002. He also serves as director of
various non-profit organizations.



William J.
Catacosinos, 74, has been a member of TNMPs board of directors and Chairman, and Chief Executive Officer of TNP since the closing of the ST Corp. Merger in April 2000. In addition, he was President of TNP from April 2000 until January
2004. Since November 1998, Dr. Catacosinos has also served as Managing Partner of Laurel Hill Capital Partners. Dr. Catacosinos was Chairman and Chief Executive Officer of LILCO from January 1984 to July 1998. Dr. Catacosinos is a director of
Preservation Sciences, Inc., of Fort Lauderdale, Florida, a company that researches and manufactures preservation technologies and products used with food, beverage and industrial products, and International Coal Group of New York, New York, a
publicly held coal company.



Jack V. Chambers,
55, has served as Chairman, President and Chief Executive Officer of TNMP since April 2001. He was chairman of First Choice from September 2001 until January 2004. He was Senior Vice President and Chief Operations Officer of TNMP from October 2000
to April 2001. He was Senior Vice President and Chief Customer Officer of TNMP from 1994 until October 2000, and was a Senior Vice President of TNP from April 1996 until the closing of the ST Corp. Merger in April 2000.



James T. Flynn, 71, became a director of TNMP at the time of
the ST Corp. Merger in April 2000 and of TNP in November 2000. Mr. Flynn, prior to his retirement, was President and Chief Operating Officer of LILCO from December 1996 to January 1999.



Leeam Lowin, 59, became a director of both TNP and TNMP at the time of the ST Corp. Merger in April
2000. For the past 36 years, Mr. Lowin has been an investment manager for private accounts. From 1984 to 1998, Mr. Lowin served as a consultant to LILCO. From July 1992 to March 1996, he was a member of the board of directors of AEL Industries and
managed the sale of that company to Tracor.



Committees and Meetings



TNMPs Board of Directors maintains the following two standing committees.



| |  | Audit Committee. This committee oversees the financial reporting process; reviews the annual and quarterly financial statements; recommends to the full board the appointment
of the independent accountants and evaluates their performance and fees charged; reviews the internal audit function; meets with the independent accountants and with appropriate financial personnel and internal auditors regarding corporate financial
reporting, accounting procedures and controls, and the scope of internal and independent audits; and evaluates officers compliance with ethics policies, national and state laws and regulations related to securities, criminal conduct and the
environment. Messrs. Flynn and Lowin are the members of the TNMP Audit Committee, and Mr. Flynn is its chair. The Board of Directors has determined that both members of the Audit Committee are financial experts (as defined by SEC).
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



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##### Table of Contents

| |  | Compensation Committee.This committee reviews the performance of the Companys officers and establishes the appropriate level of base compensation ranges and specific
base salaries within such ranges for the officers who report to the Chief Executive Officer; recommends actions with respect to adoption, amendment, administration or termination of compensation, welfare, benefit, pension and other plans related to
compensation of employees; reviews the terms and conditions of all employee benefit plans; establishes performance goals for all incentive compensation plans and designates participants in incentive compensation plans for management; oversees the
management organization; and makes recommendations to the full board with respect to directors compensation. Messrs. Flynn and Lowin comprise the Compensation Committee of TNMP, and Mr. Lowin is its chair.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During 2004, TNMPs board of directors held four meetings. The TNMP
Audit Committee held four meetings and took action by unanimous consent once. The TNMP Compensation Committee held three meetings. All directors attended at least 75 percent of the meetings of the Board of Directors and committees on which they
served during 2004.



Director Compensation



Directors
of TNMP who are not employed by TNMP or its affiliates and who are not also directors of TNP receive an annual retainer of $20,000 from TNMP. Non-employee directors who are also TNP directors receive an annual retainer of $5,000 from TNMP. Each
non-employee director receives a fee of $1,250 for each meeting of the TNMP board and committees that he attends. Directors and committee members are also reimbursed for travel and other incidental expenses incurred in connection with their duties.
Directors who are employees receive no additional compensation for serving as directors.



Compensation Committee Interlocks and Insider Participation



No Compensation Committee member is a director of or serves on the compensation committee of an entity that has an executive officer serving on TNMPs Board of Directors or Compensation Committee or the board or
compensation committee of TNP.



Executive Officers



The
information set forth under Employees and Executives in Part 1 is incorporated here by reference.



Code of Ethics



TNMP
has adopted an ethics policy that applies to all of their respective employees. A copy of the policy was filed with the 2003 Form 10-K .



44



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##### Table of Contents

Item 11. EXECUTIVE COMPENSATION.



The following table summarizes the compensation paid to the Chief Executive Officer of TNMP and the other most highly compensated executive officers of TNMP (the Named Executive Officers) for services rendered in all capacities
to TNMP and its affiliated companies during 2002, 2003 and 2004.



|                                                                                                           |  |              |  |                     |                       |                          |   |                 |  |   |                  
|---------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | --------------------- | ------------------------ | - | --------------- |  | - | -----------------
|                                                                                                           |  |              |  | Annual Compensation |                       | All OtherCompensation(3)
|Name & Principal Position(1)                                                                               |  | Year         |  | Salary(2)           |                       | Bonus                    |  
|Jack V. Chambers, Chairman, President and Chief Executive Officer of TNMP                                  |  | 200420032002 |  | $                   | 394,616380,000380,000 |                          | $ | 276,831371,831 |  | $ | 7,8586,91410,577 
|W. Douglas Hobbs, Senior Vice President  Chief Operations Officer of TNMP                                 |  | 200420032002 |  | $                   | 221,401208,154184,752 |                          | $ | 189,372174,679 |  | $ | 8,37014,70613,531
|Scott Forbes, Senior Vice President-Chief Financial Officer, TNMP, Chief Financial Officer of First Choice |  | 200420032002 |  | $                   | 223,581208,962182,089 |                          | $ | 104,169119,985 |  | $ | 27,92511,6306,582
|Michael D. Blanchard, Vice President and General Counsel, TNMP                                             |  | 200420032002 |  | $                   | 175,394168,898168,898 |                          | $ | 49,296161,102  |  | $ | 7,4409,46411,321 
|Melissa D. Davis, Vice President - Human Resources, TNMP                                                   |  | 200420032002 |  | $                   | 175,394168,898168,898 |                          | $ | 146,752161,102 |  | $ | 7,2627,8689,727  

---

|(1) | The Named Executive Officers of TNMP are Messrs. Chambers, Hobbs, Forbes, Blanchard and Ms. Davis.
|--- | --------------------------------------------------------------------------------------------------

|(2) | The 2004 amounts shown in this column reflect that, due to TNMPs biweekly pay schedule, one additional salary payment was made during 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The amounts in this column consist of the following items earned or paid during the year noted: (a) company contributions to TNMPs 401(k) plan; (b) premiums for group life
insurance paid by the Company (none of the Named Executive Officers has any cash value rights related to such insurance); and (c) cash paid in lieu of unused personal time off (PTO) for the preceding year. The table below describes such amounts paid
out or earned during 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|              |  |             |       |                         |   |                   |  |   |       
|------------- |  | ----------- | ----- | ----------------------- | - | ----------------- |  | - | ------
|              |  | 401(k) Plan |       | Life Insurance Premiums |   | Unused PTOPayment
|Mr. Chambers  |  | $           | 6,150 |                         | $ | 1,708             |  | $ |      
|Mr. Hobbs     |  |             | 6,150 |                         |   | 1,299             |  |   | 1,281 
|Mr. Forbes    |  |             | 6,150 |                         |   | 1,073             |  |   | 20,702
|Mr. Blanchard |  |             | 5,262 |                         |   | 554               |  |   | 1,624 
|Ms. Davis     |  |             | 5,262 |                         |   | 823               |  |   | 1,177 



Pension Plan



The pension plan is
a noncontributory defined benefit plan. Effective October 1, 1997, we amended our pension plan to change it to a cash balance retirement plan. As amended, the pension plan provides benefits based on an account balance rather than a formula-based
benefit. Employees who, as of October 1, 1997, were at least 55 years of age, or were at least 50 years of age and had at least 10 years of service, can be grandfathered in the prior pension plan, and will receive benefits under the plan
that provides the greater retirement payments.



The amended
pension plan bases its benefits on an employees account balance when he or she retires or leaves the company. An employees initial account balance was based on his or her accrued pension benefits under the pre-amendment plan or at the
time of his or her employment. The account balance grows as the company adds benefit credits consisting of a percentage of compensation and interest credits based on one-year Treasury constant maturities rates. All employees are eligible to
participate in the pension plan. All Named Executive Officers participate in the pension plan, as amended. Participants may receive plan benefits as an annuity or as a lump sum.



45



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##### Table of Contents

The following table lists the estimated annual benefits payable at normal retirement age for the Named
Executive Officers, which are based upon the current qualified pay limits ($210,000 in 2005) projected forward, if such officer elects to receive plan benefits as an annuity. Benefits based upon pay above the qualified pay limits are nonqualified
and are paid from the Excess Benefit Plan, discussed below:



|                      |  |               |        |                      |   |                             |  |   |       
|--------------------- |  | ------------- | ------ | -------------------- | - | --------------------------- |  | - | ------
|Name                  |  | Total Annuity |        | Pension Plan Annuity |   | Excess Benefit Plan Annuity
|Chambers, Jack V.     |  | $             | 86,000 |                      | $ | 47,000                      |  | $ | 39,000
|Hobbs, William D.     |  |               | 28,000 |                      |   | 20,000                      |  |   | 8,000 
|Forbes, Scott         |  |               | 53,000 |                      |   | 40,000                      |  |   | 13,000
|Blanchard, Michael D. |  |               | 45,000 |                      |   | 39,000                      |  |   | 6,000 
|Davis, Melissa D.     |  |               | 52,000 |                      |   | 46,000                      |  |   | 6,000 



Employment Contracts and Termination, Severance and Change of Control and Arrangements



Change of Control Agreements. Each of the Named Executive Officers of TNMP has entered into a change of control agreement. Under such
agreements, if, within the period beginning 90 days prior to and ending 365 days after a change of control of TNP, TNMP or, in the case of Messrs. Chambers, Blanchard, Forbes and Ms. Davis, First Choice, the officers employment is terminated
without Cause (as the agreements define such term) or the officer resigns following a significant change in duties, responsibilities, authority, title, reporting responsibilities, compensation or benefits, then the officer would become entitled to
receive:



| | (a) | an amount equal to the officers (i) unpaid annual base salary and accrued vacation pay through the effective date of termination, plus (ii) the target annual bonus under the
TNMP short-term incentive plan then in effect, pro-rated for the completed portion of the then-existing fiscal year;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | a lump sum equal to three times the officers annual base salary, in the case of Messrs. Chambers, Forbes and Hobbs, or two times such salary, in the case of Mr. Blanchard and
Ms. Davis; such amount would be grossed up by the amounts of any excise taxes payable on such lump sum, pursuant to Section 4999 of the Internal Revenue Code of 1986, and any additional excise and income taxes that result from each gross up payment;
and
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | health and dental insurance at a cost to such officer equal to that paid by TNMP employees for a period of three years, in the case of Messrs. Chambers, Forbes and Hobbs, or two
years, in the case of Mr. Blanchard and Ms. Davis.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If the officer is terminated for Cause, or terminates his or her employment other than for the reasons giving rise in the change of control benefits, the officer will not receive any change in control benefits. In addition, each officer
will be entitled to receive the benefits described in paragraphs (b) and (c), above only if the officer executes a release in such form as TNMP requires releasing TNMP from any and all further liability in connection with such termination, and such
release becomes effective by its terms.



Each agreement shall
terminate upon the earliest of (a) the date that all obligations of the parties to the respective agreement have been satisfied; (b) the date, prior to a change of control, that the officer is no longer employed by TNMP; (c) the second anniversary
of a change of control; and (d) April 7, 2006, the third anniversary of the effective date of the respective agreements.



Mr. ChambersTNMP has agreed to provide Mr. Chambers (or his estate, in the event of his death) with an additional lump sum retirement
benefit equal to $848,677 if his employment with TNMP is terminated for any reason.



Mr. Cheema. TNMP has also agreed to provide Manjit Cheema, the president of First Choice, (or his estate, in the event of his death) with an additional lump sum retirement benefit equal to $700,000 if
his employment with First Choice is terminated for any reason.



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##### Table of Contents

Report on Executive Compensation of TNMP Compensation Committee



The TNMP Compensation Committee oversees all executive compensation matters TNMP. Messrs. Flynn and Lowin are members of the Committee. This report describes the Committees compensation policies applicable to
TNMP executive officers during 2004.



Compensation Philosophy and
Strategy.



The Committee believes that
executives compensation should both be competitive with other companies in the competitive market in which it operates and serve to advance TNMPs interests. To that end, we believe that executives should be rewarded when TNMPs
operations and financial returns reflect above-average performance and continuing improvement in operations, customer satisfaction and shareholder value.



The key components of executives compensation are a base salary and annual incentive compensation. Under this approach, TNMP can pay salaries that
are competitive in the markets in which it operates, and provide an incentive to these officers to serve TNMPs interests by making a significant portion of their compensation  namely, the incentive compensation  contingent on
TNMPs performance.



The Committee relates total
compensation levels for TNMPs executive officers to the total compensation paid to similarly situated executives of a peer group of companies, both within and outside of the electric utility industry, that are of a similar size and have
performance characteristics similar to TNMP. TNMP relies on a number of industry-specific and general salary survey reports and studies in determining the levels of compensation and increases in compensation.



Base and total compensation are targeted to approximate the median of the
peer group. However, because of the performance-oriented nature of the incentive programs, total compensation may exceed market norms when TNMP exceeds its targeted performance goals. Likewise, total compensation may lag the market when they do not.



Base Salary. The Committee determines salaries
for all officers annually, based on the review of each executives level of responsibility, experience, expertise, sustained corporate performance and, in the case of officers other than the Chief Executive Officer, upon the recommendation of
the Chief Executive Officer. TNMPs base salaries approximate the median level of salaries paid to executives at similarly situated companies.



Incentive Compensation.A portion of each Named Executive Officers compensation under his or her employment agreement consists of an
annual incentive bonus paid under the TNMP Management Short-Term and Broad-Based Incentive Compensation Plans. This bonus may range from 0 percent to 37.5 percent of the officers base salary, and is based on the attainment of certain
pre-established financial and operational goals. It is also subject to the officers employment with TNMP through the end of the relevant year.



TNMP paid no incentive bonuses for the 2004 performance period, since neither TNMP nor First Choice attained the threshold financial goal required for the
payment of any incentive compensation. The performance measures for the Named Executive Officers other than Mr. Hobbs also included measures used by First Choice in its Management Short-Term and Broad-Based Incentive Compensation Plans. The
financial measures include (i) a financial measure of earnings before interest, taxes, dividends and amortization (EBITDA) for TNMP and First Choice, (ii) TNMP operational performance measures of customer satisfaction, system reliability and safety,
(iii) First Choice operational performance measures of customer satisfaction, customer retention, collections, billing accuracy and customer responsiveness, and (iv) measures of performance applicable to different TNMP departments.



In 2004, a portion of TNMPs matching contribution to the TNMP 401(k)
retirement plan for employees was based on the same financial performance measure used in the TNMP Management Short-Term and Broad-Based Incentive Compensation Plans. During the year, TNMP matches its employees 401(k) contributions in amounts up to
3 percent of their base salaries, up to a maximum of $6,150. TNMP did not make any incentive matching contributions to the 401(k) accounts of eligible participants, including the Named Executive Officers.



Compensation of TNMP Chairman and Chief Executive Officer.



Mr. Chambers compensation was as provided in his employment contract
until its expiration on April 8, 2004. Under that agreement, Mr. Chambers received a base salary of not less than $380,000 and was eligible to receive any annual, long-term or other incentive bonuses then in effect for TNMP officers, provided that
he remained employed by TNMP at the end of each calendar year during the term of his agreement.



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Since his agreement expired, Mr. Chambers compensation was determined using the same criteria used in
setting other officers compensation, namely, on the review of his level of responsibility, experience, expertise, sustained corporate performance. The Committee has continued to provide Mr. Chambers with the compensation provided under his
employment contract, with the same base salary, and with an additional lump sum retirement benefit equal to $848,677. Mr. Chambers may also participate in TNMPs management and broad-based incentive compensation programs that are available to
other TNMP officers.



Internal Revenue Code §162(m).



Internal Revenue Code Section 162(m) limits tax deductions for executive
compensation to $1 million. There are several exemptions to Section 162(m), including one for qualified performance-based compensation. To be qualified, performance-based compensation must meet various requirements, including shareholder approval.
The Committees policy with respect to the deductibility limit of Section 162(m) generally is to preserve the federal income tax deductibility of compensation paid when it is appropriate and is in the best interests of TNP and its shareholders.
However, the Committee reserves the right to authorize the payment of nondeductible compensation if it deems that such action is appropriate.



TNMP Compensation Committee

Leeam
Lowin, Chair

James T. Flynn



The Joint Compensation Committee Report on Executive Compensation will not be deemed incorporated by reference by any general statement incorporating
this report by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that TNMP specifically incorporates the information by reference.



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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.



TNP Enterprises owns 100% of the common equity interests of TNMP. SW Acquisition owns 100 percent of the common equity interests of TNP. The following
table sets forth the beneficial ownership of TNP as of the date of this report.



|                                          |  |                  |  
|----------------------------------------- |  | ---------------- | -
|Name of Beneficial Owner                  |  | Percent of Class |  
|TNP Enterprises(1)                        |  | 100.0            | %
|SW Acquisition (1)                        |  | 100.0            | %
|William J. Catacosinos (2)                |  | 100.0            | %
|Michael E. Bray(3)                        |  | 0.0              | %
|Jack V. Chambers(3)                       |  | 0.0              | %
|James T. Flynn(3)                         |  | 0.0              | %
|Leeam Lowin (3)                           |  | 0.0              | %
|W. Douglas Hobbs (3)                      |  | 0.0              | %
|Scott Forbes (3)                          |  | 0.0              | %
|Michael D. Blanchard (3)                  |  | 0.0              | %
|Melissa D. Davis (3)                      |  | 0.0              | %
|                                          | 
|All directors and officers as a group (2) |  | 100.0            | %

---

|(1) | The business address of TNP Enterprises and SW Acquisition is 2 Robbins Lane, Suite 201, Jericho, New York 11753.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Dr. William J. Catacosinos, who controls SW I Acquisition GP, L.P., the general partner of SW Acquisition, may also be deemed to have beneficial ownership of the equity interests
reported in the table. The business address of Dr. Catacosinos is 2 Robbins Lane, Suite 201, Jericho, New York 11753.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The address for Messrs. Bray, Flynn, Lowin, Chambers, Hobbs, Forbes, Blanchard and Ms. Davis is 4100 International Plaza, Fort Worth, Texas 76109.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



Neither TNMP nor any of its subsidiaries has any compensation plan, including
individual compensation arrangements, under which TNMP equity securities are authorized for issuance.



Changes in Control.



Proposed Acquisition of TNP Enterprises by PNM Resources.On July 24, 2004, SW Acquisition, L.P., the sole holder of TNP common stock, entered into
a Stock Purchase Agreement to sell all of the outstanding common stock of TNP to PNM Resources, Inc. for approximately $189 million comprised of equal amounts of PNM Resources common stock and cash. PNM Resources will also assume
approximately $835 million of TNPs net debt and senior redeemable cumulative preferred stock (preferred securities).



Under the terms of the agreement, TNPs common shareholder will receive consideration, consisting of approximately 4.7 million newly issued PNM
Resources shares and the remainder being paid in cash, subject to closing adjustments. PNM Resources shares were valued at $20.20 on the date the agreement was entered into. The final sale price will be based on the share price on the day of
closing. PNM Resources shares closed at $26.24 on February 28, 2005. The existing indebtedness and preferred securities at TNP will be retired. All debt at TNMP, TNPs wholly-owned electric utility subsidiary, will remain outstanding.



The transaction is subject to certain conditions, including,
to the extent they are required, receipt of necessary orders or other actions by the PUCT, NMPRC, the FERC, the SEC and clearance under applicable federal anti-trust statutes.



The transaction is also subject to certain rights of termination by each party, including rights of termination in the event
that required regulatory action is denied or not received. The Stock Purchase Agreement may also be terminated if the closing has not occurred on or prior to December 31, 2005.



Pledge of TNMP Stock. TNP has pledged all of the TNMP common stock that it holds as collateral under the Amended and
Restated Credit Agreement among TNP, the lenders thereunder, and Canadian Imperial Bank of Commerce, as Administrative Agent (the TNP Senior Credit Facility). The TNP Senior Credit Facility is to be retired in connection with the
completion of the acquisition of TNP by PNM Resources, and otherwise will expire on December 31, 2006.



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##### Table of Contents

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



At the time of the ST Corp. Merger, and in accordance with the SW Acquisition limited partnership agreement, TNP, the parent of TNMP, and Laurel Hill Capital Partners (Laurel Hill) entered into a
Management Services Agreement under which TNP engaged Laurel Hill as its agent to provide certain management and financial advisory services to TNP. These services include an assessment of TNPs competitive environment, development and
implementation of a strategic plan, assessment and implementation of financing strategies, development and implementation of operating budgets, development and implementation of marketing and sales initiatives, regulatory advice, and other advice
relating to the enhancement of shareholder value, all for the purpose of assisting TNP in developing and executing its long-term business goals and strategy. During the term of this agreement through March 2004, TNP paid Laurel Hill an annual fee of
$1,200,000, payable in monthly installments. Beginning April 2004, this amount was reduced to an annual fee of $250,000. This agreement had a three-year initial term that expired in 2003, and now automatically renews for successive one-year terms.
Either party may terminate the agreement upon written notice to the other party 30 days prior to the end of each renewal term. It provides that TNP will indemnify Laurel Hill, its agents and the companies controlling Laurel Hill for losses arising
out of the Agreement or Laurel Hills duties thereunder. William J. Catacosinos, a TNMP director and the chairman of TNP, is the Manager of Laurel Hill. PNM Resources has indicated that they do not intend to renew the agreement.



Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.



The following table shows the fees paid or accrued (in thousands) by TNMP for the audit and other services provided by Deloitte & Touche LLP for the years ended December 31, 2004 and 2003.



|                      |  |      |     |      |   |    
|--------------------- |  | ---- | --- | ---- | - | ---
|                      |  | 2004 |     | 2003
|Audit fees(1)         |  | $    | 467 |      | $ | 380
|Audit-related Fees(2) |  |      | 28  |      |   | 40 
|Tax fees(3)           |  |      | 5   |      |   | 5  
|All other fees(4)     |  |      |    |      |   | 131
|                      |  |      |     |      |   |    
|Total                 |  | $    | 500 |      | $ | 556
|                      |  |      |     |      |   |    



The Audit Committee
must pre-approve audit-related and non-audit services not prohibited by law to be performed by TNMPs independent auditors. The Audit Committee pre-approved all audit-related and non-audit services in 2004 and 2003.



---

|(1) | Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements and audit
services provided in connection with other statutory or regulatory filings.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related fees consisted primarily of accounting consultations, employee benefit plan audits, and other attestation services.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes fees for tax compliance, tax planning and tax advice.
|--- | --------------------------------------------------------------

|(4) | All other fees principally include risk assessment services related to First Choice energy supply.
|--- | --------------------------------------------------------------------------------------------------



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PART IV



Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)The following financial statements are filed as part of this report:



|                                                                                            |  |     
|------------------------------------------------------------------------------------------- |  | ----
|                                                                                            |  | Page
|Independent Auditors Report                                                                |  | 22  
|                                                                                            | 
|Consolidated Statements of Income, Three Years Ended December 31, 2004                      |  | 23  
|Consolidated Statements of Cash Flows, Three Years Ended December 31, 2004                  |  | 24  
|Consolidated Balance Sheets, December 31, 2004, and 2003                                    |  | 25  
|Consolidated Statements of Capitalization, December 31, 2004, and 2003                      |  | 26  
|Consolidated Statements of Common Shareholders Equity, Three Years Ended December 31, 2004 |  | 27  
|Notes to Consolidated Financial Statements                                                  |  | 28  
|Selected Quarterly Consolidated Financial Data  TNMP                                       |  | 42  



Reports on Form 8-K:



| |  | TNMP filed an 8-K dated November 4, 2004 to report the issuance of its third quarter 2004 Earnings Release.
|- |  | -----------------------------------------------------------------------------------------------------------



| |  | TNMP filed an 8-K dated February 8, 2005 to report the execution and filing of the Stipulation and Agreement filed by TNMP with the PUCT in connection with the proceedings before
the PUCT related to the PNM Acquisition.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | TNMP filed an 8-K dated March 4, 2005 to report the execution and filing of the Stipulation filed by TNMP and PNM Resources with the NMPRC in connection with the proceedings before
the PUCT related to the PNM Acquisition. The filing also reported the FERC approval of PNM Resources acquisition of TNP.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) The Exhibit Index on page 53 is incorporated here by reference.



(c) All financial statement schedules are omitted, as the required information is not applicable or the information is presented in the consolidated financial
statements or related Notes.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.



|                    |  |                                |  |                                                              
|------------------- |  | ------------------------------ |  | -------------------------------------------------------------
|                    |  | TEXAS-NEW MEXICO POWER COMPANY
|                    |  |                               
|Date: March 8, 2005 |  | By:                            |  | \s\ Jack V. Chambers                                         
|                    |  |                                |  | Jack V. Chambers, President & Chief Executive Officer        
|                    |  |                               
|Date: March 8, 2005 |  | By:                            |  | \s\ Scott Forbes                                             
|                    |  |                                |  | Scott Forbes, Senior Vice President & Chief Financial Officer
|                    |  |                               
|Date: March 8, 2005 |  | By:                            |  | \s\ Joseph Hegwood                                           
|                    |  |                                |  | Joseph Hegwood, Vice President & Controller                  



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the dates indicated.



|   |  |                                                  |  |                                                      |  |        
|-- |  | ------------------------------------------------ |  | ---------------------------------------------------- |  | -------
|   |  |                                                  |  | Title                                                |  | Date   
|By |  | \s\ Jack V. ChambersJack V. Chambers             |  | Chairman, President & ChiefExecutive Officer of TNMP |  | 3/08/05
|   |  |                                                  | 
|By |  | \s\ William J. CatacosinosWilliam J. Catacosinos |  | Director                                             |  | 3/08/05
|   |  |                                                  | 
|By |  | \s\ Michael E. BrayMichael E. Bray               |  | Director                                             |  | 3/08/05
|   |  |                                                  | 
|By |  | \s\ James T. FlynnJames T. Flynn                 |  | Director                                             |  | 3/08/05
|   |  |                                                  | 
|By |  | \s\ Leeam LowinLeeam Lowin                       |  | Director                                             |  | 3/08/05
|   |  |                                                  | 
|By |  | \s\ Tim H. CarterTim H. Carter                   |  | Director                                             |  | 3/08/05



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EXHIBIT INDEX



| |  | Exhibits filed with this registration statement are denoted by *.
|- |  | -------------------------------------------------------------------



| |  | Agreements with management are denoted by +.
|- |  | ----------------------------------------------



| |  | Certain exhibits are incorporated by reference to the exhibits and prior filings noted in parentheses.
|- |  | ------------------------------------------------------------------------------------------------------



|            |  |                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                       
|3(i)        |  | Amended and Restated Articles of Incorporation. (Ex. 3(b)(i), TNMP Form 10-Q, quarter ended March 31, 2000).                                                                                                      
|            | 
|3(ii)       |  | Amended and Restated Bylaws. (Ex. 3(ii), TNMP Form S-4/A filed Nov. 4, 2003).                                                                                                                                     
|            | 
|3(iii)      |  | Articles of Amendment filed April 25, 2001. (Ex. 3, TNMP Form 10-Q, quarter ended June 30, 2001).                                                                                                                 
|            | 
|3(iv)       |  | Articles of Amendment filed August 16, 2001. (Ex. 3(iv), TNMP 2001 Form 10-K)                                                                                                                                     
|            | 
|4(a)        |  | Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N. A. (Ex. 4(w), TNMP 1998 Form 10-K).                                                                                                     
|            | 
|4(b)        |  | First Supplemental Indenture dated Jan. 1, 1999 to Indenture dated Jan. 1, 1999 between TNMP and the Chase Bank of Texas, N. A. (Ex. 4(x), TNMP 1998 Form 10-K).                                                  
|            | 
|4(c)        |  | Second Supplemental Indenture dated June 1, 2003, to Indenture dated Jan. 1, 1999 between TNMP and JPMorgan Bank (successor to The Chase Bank of Texas, N.A.) (Ex. 4, TNMP Form 10-Q, quarter
ended June 30, 2003)
|            | 
|10(a)       |  | Contract dated April 29, 1987, between TNMP and El Paso Electric Company (Ex. 10(f), Form 8 applicable to TNMP 1986 Form 10-K).                                                                                   
|            | 
|10(b)       |  | Interconnection Agreement between TNMP and Plains Electric Generation and Transmission Cooperative, Inc. dated July 19, 1984 (Ex. 10(j), Form 8 applicable to TNMP 1986 Form
10-K).                               
|            | 
|10(c)       |  | Interchange Agreement between TNMP and El Paso Electric Company dated April 29, 1987 (Ex. 10(l), Form 8 applicable to TNMP 1986 Form 10-K).                                                                       
|            | 
|10(d)       |  | Amendment No. 1, dated Nov. 21, 1994, to Interchange Agreement between TNMP and El Paso Electric Company (Ex. 10(nn)1, TNP and TNMP 1994 Form 10-K).                                                              
|            | 
|10(e)       |  | DC Terminal Participation Agreement between TNMP and El Paso Electric Company dated Dec. 8, 1981 as amended (Ex. 10(m), Form 8 applicable to TNMP 1986 Form 10-K).                                                
|            | 
|10(f)+      |  | Form of Change in Control Agreement between TNMP and each of Jack V. Chambers, Scott Forbes, W. Douglas Hobbs, Michael D. Blanchard, and Melissa D. Davis. (Ex, 10(h), Form S-4/A, filed Nov.
4, 2003)            
|            | 
|10(g)       |  | Wholesale Requirements Power Sale and Services Agreement between Public Service Company of New Mexico and Texas-New Mexico Power Company dated June 29, 2001. (Exhibit 10(i), Form S/4A filed
Nov. 4, 2003).      
|            | 
|14          |  | Code of Ethics                                                                                                                                                                                                    
|            | 
|*21         |  | Subsidiaries of the Registrant.                                                                                                                                                                                   
|            | 
|*31.1       |  | Certification of Jack V. Chambers pursuant to Rule 13a-14(a) /Rule 15d-14(a) of the Securities Exchange Act.                                                                                                      
|            | 
|*31.2       |  | Certification of Scott Forbes pursuant to Rule 13a-14(a) /Rule 15d-14(a) of the Securities Exchange Act.                                                                                                          
|            | 
|*32.1       |  | Certification of Jack V. Chambers pursuant to 18 U.S.C. §1350, adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                                                                 
|            | 
|*32.2       |  | Certification of Scott Forbes pursuant to 18 U.S.C. §1350, adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                                                                     



53