##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



---



FORM 10-Q



---



(Mark One)

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



For the quarterly period ended September 30, 2004



or



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



For the transition period from  to



Commission File Number: 2-97230



---



TEXAS-NEW MEXICO POWER COMPANY

(Exact name of registrant as specified in its charter)



---



|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Texas                    |  | 75-0204070                             
|(State of incorporation) |  | (I.R.S. employer identification number)



4100 International
Plaza, P. O. Box 2943, Fort Worth, Texas 76113

(Address and zip code of principal executive offices)



Registrants telephone number, including area code 817-731-0099



---



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 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.



---



---

##### Table of Contents

Texas New-Mexico Power Company and Subsidiaries

Quarterly Report on Form 10-Q for the period ended September 30, 2004



TABLE OF CONTENTS



|                                                |  |                                                                                       |  |                                                                                                                      |  |   
|----------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | --
|PART 1. FINANCIAL STATEMENTS                   
|                                                |  |                                                                                      
|Item 1.                                         |  | Financial Statements.                                                                 |  |                                                                                                                     
|                                                |  |                                                                                      
|                                                |  | Texas-New Mexico Power Company (TNMP) and Subsidiaries:                               |  |                                                                                                                     
|                                                |  |                                                                                       | 
|                                                |  |                                                                                       |  | Consolidated Statements of Income (Loss) Three and Nine Month Periods Ended September 30, 2004 and 2003              |  | 3 
|                                                |  |                                                                                       |  | Consolidated Statements of Comprehensive Income (Loss) Three and Nine Month Periods Ended September 30,2004 and 2003 |  | 4 
|                                                |  |                                                                                       |  | Consolidated Statements of Cash Flows Nine Month Periods Ended September 30, 2004 and 2003                           |  | 5 
|                                                |  |                                                                                       |  | Consolidated Balance Sheets September 30, 2004, and December 31, 2003                                                |  | 6 
|                                                |  |                                                                                      
|                                                |  | Notes to Consolidated Interim Financial Statements                                    |  | 7                                                                                                                   
|                                                |  |                                                                                      
|Item 2.                                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13                                                                                                                  
|                                                |  |                                                                                      
|Item 4.                                         |  | Controls and Procedures                                                               |  | 17                                                                                                                  
|                                               
|PART 2. OTHER INFORMATION                      
|                                                |  |                                                                                      
|Item 1.                                         |  | Legal Proceedings                                                                     |  | 18                                                                                                                  
|                                                |  |                                                                                      
|Item 6.                                         |  | Exhibits and Reports on Form 8-K                                                      |  | 18                                                                                                                  
|                                                |  |                                                                                       | 
|                                                |  | (a)                                                                                   |  | Exhibit Index                                                                                                        |  | 18
|                                                |  |                                                                                       | 
|                                                |  | (b)                                                                                   |  | Reports on Form 8-K                                                                                                  |  | 18
|                                                | 
|Statement Regarding Forward Looking Information |  | 18                                                                                   
|                                                | 
|Signature page                                  |  | 19                                                                                   
|                                                | 
|Certifications                                  |  | 20                                                                                   



-2-



---

##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)



|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                           |  | 2004                             |        |   | 2003                            |   |        | 2004 |  |   | 2003    |  
|                                                                           |  | (In thousands)                   |       
|OPERATING REVENUES                                                         |  | $                                | 74,732 |   |                                 | $ | 69,953 |      |  | $ | 201,454 |   |  | $ | 199,079 |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES:                                                        |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Purchased power                                                            |  |                                  | 19,628 |   |                                 |   | 17,542 |      |  |   | 54,600  |   |  |   | 50,843  |  
|Other operating and maintenance                                            |  |                                  | 18,322 |   |                                 |   | 13,554 |      |  |   | 55,487  |   |  |   | 47,544  |  
|Depreciation of utility plant                                              |  |                                  | 7,433  |   |                                 |   | 7,197  |      |  |   | 22,186  |   |  |   | 21,374  |  
|Taxes other than income taxes                                              |  |                                  | 6,509  |   |                                 |   | 5,976  |      |  |   | 17,700  |   |  |   | 16,088  |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                   |  |                                  | 51,892 |   |                                 |   | 44,269 |      |  |   | 149,973 |   |  |   | 135,849 |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                           |  |                                  | 22,840 |   |                                 |   | 25,684 |      |  |   | 51,481  |   |  |   | 63,230  |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|INTEREST CHARGES AND OTHER INCOME AND DEDUCTIONS:                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Interest on long-term debt                                                 |  |                                  | 6,432  |   |                                 |   | 6,592  |      |  |   | 19,423  |   |  |   | 18,670  |  
|Other interest and amortization of debt-related costs                      |  |                                  | 539    |   |                                 |   | 277    |      |  |   | 1,682   |   |  |   | 1,977   |  
|Carrying charges on deferred stranded costs                                |  |                                  | (928   | ) |                                 |   |       |      |  |   | (928    | ) |  |   |        |  
|Other income and deductions, net                                           |  |                                  | (208   | ) |                                 |   | (783   | )    |  |   | (1,094  | ) |  |   | (1,631  | )
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total                                                                      |  |                                  | 5,835  |   |                                 |   | 6,086  |      |  |   | 19,083  |   |  |   | 19,016  |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|INCOME BEFORE INCOME TAXES                                                 |  |                                  | 17,005 |   |                                 |   | 19,598 |      |  |   | 32,398  |   |  |   | 44,214  |  
|Income tax expenses                                                        |  |                                  | 6,196  |   |                                 |   | 7,295  |      |  |   | 11,245  |   |  |   | 16,031  |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|INCOME BEFORE EXTRAORDINARY ITEM                                           |  |                                  | 10,809 |   |                                 |   | 12,303 |      |  |   | 21,153  |   |  |   | 28,183  |  
|Extraordinary item - disallowance of stranded costs, net of taxes (Note 3) |  |                                  |       |   |                                 |   |       |      |  |   | (97,836 | ) |  |   |        |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME (LOSS)                                                          |  | $                                | 10,809 |   |                                 | $ | 12,303 |      |  | $ | (76,683 | ) |  | $ | 28,183  |  
|                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



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



-3-



---

##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



|                                                                 |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  
|---------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | - | ------- | - |  | - | ------ | -
|                                                                 |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |  
|                                                                 |  | 2004                             |        | 2003                            |   | 2004   |  |   | 2003    |  
|                                                                 |  | (In thousands)                   |       
|NET INCOME (LOSS)                                                |  | $                                | 10,809 |                                 | $ | 12,303 |  | $ | (76,683 | ) |  | $ | 28,183 |  
|                                                                 |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  
|Other comprehensive income, net of tax:                          |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  
|Interest rate hedge, net of reclassification adjustment (Note 5) |  |                                  | 129    |                                 |   | 129    |  |   | 387     |   |  |   | (1,240 | )
|                                                                 |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  
|Total other comprehensive income                                 |  |                                  | 129    |                                 |   | 129    |  |   | 387     |   |  |   | (1,240 | )
|                                                                 |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  
|COMPREHENSIVE INCOME (LOSS)                                      |  | $                                | 10,938 |                                 | $ | 12,432 |  | $ | (76,296 | ) |  | $ | 26,943 |  
|                                                                 |  |                                  |        |                                 |   |        |  |   |         |   |  |   |        |  



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



-4-



---

##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                         |  |                                 |         |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                         |  | Nine Months Ended September 30, |        
|                                                                                         |  | 2004                            |         |   | 2003 |  
|                                                                                         |  | (In thousands)                  |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                 |         |   |      |   |          |  
|Cash received from sales to customers                                                    |  | $                               | 177,757 |   |      | $ | 188,758  |  
|Purchased power costs paid                                                               |  |                                 | (53,909 | ) |      |   | (49,409  | )
|Cash paid for payroll and to other suppliers                                             |  |                                 | (34,951 | ) |      |   | (42,342  | )
|Interest paid, net of amounts capitalized                                                |  |                                 | (18,462 | ) |      |   | (21,365  | )
|Income taxes paid                                                                        |  |                                 | (3,526  | ) |      |   | (10,691  | )
|Other taxes paid                                                                         |  |                                 | (17,105 | ) |      |   | (16,034  | )
|Other operating cash receipts and payments, net                                          |  |                                 | 581     |   |      |   | 721      |  
|                                                                                         |  |                                 |         |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                                 | 50,385  |   |      |   | 49,638   |  
|                                                                                         |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                 |         |   |      |   |          |  
|Additions to utility plant and other investing activities                                |  |                                 | (33,163 | ) |      |   | (28,087  | )
|                                                                                         |  |                                 |         |   |      |   |          |  
|NET CASH USED IN INVESTING ACTIVITIES                                                    |  |                                 | (33,163 | ) |      |   | (28,087  | )
|                                                                                         |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                 |         |   |      |   |          |  
|Dividends paid on common stock                                                           |  |                                 | (6,000  | ) |      |   | (18,400  | )
|Issuance of Senior Notes, net of discount                                                |  |                                 |        |   |      |   | 248,923  |  
|Repayments to credit facility - net                                                      |  |                                 |        |   |      |   | (171,000 | )
|Redemptions:                                                                             |  |                                 |         |   |      |   |          |  
|Senior Notes                                                                             |  |                                 | (8,375  | ) |      |   |         |  
|Notes payable to affiliate                                                               |  |                                 |        |   |      |   | (14,557  | )
|Financing and redemption costs                                                           |  |                                 | (921    | ) |      |   | (1,583   | )
|                                                                                         |  |                                 |         |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                      |  |                                 | (15,296 | ) |      |   | 43,383   |  
|                                                                                         |  |                                 |         |   |      |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                  |  |                                 | 1,926   |   |      |   | 64,934   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                         |  |                                 | 56,907  |   |      |   | 284      |  
|                                                                                         |  |                                 |         |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |  | $                               | 58,833  |   |      | $ | 65,218   |  
|                                                                                         |  |                                 |         |   |      |   |          |  
|RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:        |  |                                 |         |   |      |   |          |  
|Net income (loss)                                                                        |  | $                               | (76,683 | ) |      | $ | 28,183   |  
|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                                                            |  |                                 | 22,186  |   |      |   | 21,374   |  
|Credit for Texas system benefit fund regulatory asset                                    |  |                                 | (244    | ) |      |   | (3,960   | )
|Amortization of debt-related costs and other deferred charges                            |  |                                 | 1,945   |   |      |   | 2,207    |  
|Carrying charges on deferred stranded costs                                              |  |                                 | (928    | ) |      |   |         |  
|Allowance for funds used during construction                                             |  |                                 | (661    | ) |      |   | (693     | )
|Deferred income taxes                                                                    |  |                                 | 27,511  |   |      |   | 5,427    |  
|Investment tax credits                                                                   |  |                                 | (794    | ) |      |   | (635     | )
|Deferred purchased power and fuel costs                                                  |  |                                 | 540     |   |      |   | 2,513    |  
|Cash flows impacted by changes in current assets and liabilities:                        |  |                                 |         |   |      |   |          |  
|Accounts receivable                                                                      |  |                                 | (1,831  | ) |      |   | 2,990    |  
|Accounts payable                                                                         |  |                                 | (1,015  | ) |      |   | (879     | )
|Accrued interest                                                                         |  |                                 | 1,010   |   |      |   | 1,655    |  
|Accrued taxes                                                                            |  |                                 | (18,306 | ) |      |   | 530      |  
|Changes in other current assets and liabilities                                          |  |                                 | (1,182  | ) |      |   | (4,316   | )
|Interest rate lock on issuance of senior notes                                           |  |                                 |        |   |      |   | (4,162   | )
|Other, net                                                                               |  |                                 | 1,001   |   |      |   | (596     | )
|                                                                                         |  |                                 |         |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  | $                               | 50,385  |   |      | $ | 49,638   |  
|                                                                                         |  |                                 |         |   |      |   |          |  



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



-5-



---

##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED BALANCE SHEETS



|                                                                                         |  |                               |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                         |  | September 30, 2004(Unaudited) |         |   | December 31, 2003 |  
|                                                                                         |  | (In thousands)                |        
|ASSETS                                                                                   |  |                               |         |   |                   |   |         |  
|                                                                                         |  |                              
|CURRENT ASSETS:                                                                          |  |                               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                |  | $                             | 58,833  |   |                   | $ | 56,907  |  
|Special deposits                                                                         |  |                               | 3,081   |   |                   |   | 2,520   |  
|Accounts receivable, net                                                                 |  |                               | 34,274  |   |                   |   | 32,443  |  
|Federal income tax receivable                                                            |  |                               | 24,659  |   |                   |   |        |  
|Materials and supplies, at lower of cost or market                                       |  |                               | 1,235   |   |                   |   | 1,082   |  
|Other current assets                                                                     |  |                               | 1,413   |   |                   |   | 662     |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total current assets                                                                     |  |                               | 123,495 |   |                   |   | 93,614  |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|UTILITY PLANT:                                                                           |  |                               |         |   |                   |   |         |  
|Electric plant                                                                           |  |                               | 838,470 |   |                   |   | 804,622 |  
|Construction work in progress                                                            |  |                               | 4,637   |   |                   |   | 13,666  |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total                                                                                    |  |                               | 843,107 |   |                   |   | 818,288 |  
|Less accumulated depreciation                                                            |  |                               | 274,111 |   |                   |   | 259,670 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Net utility plant                                                                        |  |                               | 568,996 |   |                   |   | 558,618 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|LONG-TERM AND OTHER ASSETS:                                                              |  |                               |         |   |                   |   |         |  
|Other property and investments, at cost                                                  |  |                               | 343     |   |                   |   | 343     |  
|Recoverable stranded costs                                                               |  |                               | 88,244  |   |                   |   | 298,651 |  
|Regulatory tax assets                                                                    |  |                               | 2,362   |   |                   |   | 1,685   |  
|Deferred charges                                                                         |  |                               | 28,676  |   |                   |   | 28,437  |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total long-term and other assets                                                         |  |                               | 119,625 |   |                   |   | 329,116 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|                                                                                         |  | $                             | 812,116 |   |                   | $ | 981,348 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                     |  |                               |         |   |                   |   |         |  
|                                                                                         |  |                              
|CURRENT LIABILITIES:                                                                     |  |                               |         |   |                   |   |         |  
|Accounts payable                                                                         |  | $                             | 9,762   |   |                   | $ | 13,302  |  
|Accrued interest                                                                         |  |                               | 8,575   |   |                   |   | 7,565   |  
|Accrued taxes                                                                            |  |                               | 15,144  |   |                   |   | 8,791   |  
|Accrued payroll and benefits                                                             |  |                               | 4,238   |   |                   |   | 5,048   |  
|Customers deposits                                                                      |  |                               | 741     |   |                   |   | 702     |  
|Other current liabilities                                                                |  |                               | 4,673   |   |                   |   | 3,808   |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total current liabilities                                                                |  |                               | 43,133  |   |                   |   | 39,216  |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|LONG-TERM AND OTHER LIABILITIES:                                                         |  |                               |         |   |                   |   |         |  
|Deferred purchased power and fuel costs                                                  |  |                               |        |   |                   |   | 40,844  |  
|Accumulated deferred income taxes                                                        |  |                               | 123,206 |   |                   |   | 152,167 |  
|Accumulated deferred investment tax credits                                              |  |                               | 2,564   |   |                   |   | 18,459  |  
|Regulatory liability-accrued cost of removal                                             |  |                               | 40,013  |   |                   |   | 38,218  |  
|Deferred credits and other liabilities                                                   |  |                               | 24,022  |   |                   |   | 22,839  |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total long-term and other liabilities                                                    |  |                               | 189,805 |   |                   |   | 272,527 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|LONG-TERM DEBT                                                                           |  |                               | 415,495 |   |                   |   | 423,626 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|COMMON SHAREHOLDERS EQUITY:                                                             |  |                               |         |   |                   |   |         |  
|Common stock, $10 par value per share Authorized 12,000,000 shares; issued 10,705 shares |  |                               | 107     |   |                   |   | 107     |  
|Capital in excess of par value                                                           |  |                               | 197,751 |   |                   |   | 197,751 |  
|Retained earnings (deficit)                                                              |  |                               | (32,285 | ) |                   |   | 50,398  |  
|Accumulated other comprehensive loss                                                     |  |                               | (1,890  | ) |                   |   | (2,277  | )
|                                                                                         |  |                               |         |   |                   |   |         |  
|Total common shareholders equity                                                        |  |                               | 163,683 |   |                   |   | 245,979 |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                   |  |                               |         |   |                   |   |         |  
|                                                                                         |  |                               |         |   |                   |   |         |  
|                                                                                         |  | $                             | 812,116 |   |                   | $ | 981,348 |  
|                                                                                         |  |                               |         |   |                   |   |         |  



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



-6-



---

##### Table of Contents

Texas-New Mexico Power Company and Subsidiaries

Notes to Consolidated Interim Financial Statements



Note 1. Interim Financial Statements



The interim consolidated financial statements of TNMP and subsidiaries are
unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be
expected for a full year or for previously reported periods due in part to seasonal revenue fluctuations. It is suggested that these consolidated interim financial statements be read in conjunction with the audited consolidated financial statements
and notes thereto included in TNMPs 2003 Annual Report on Form 10-K.



Prior period statements have been reclassified in order to be consistent with current period presentation. The reclassification had no effect on net income or common shareholders equity.



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 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 shareholders will receive approximately $189 million in consideration,
consisting of approximately 4.7 million newly issued PNM Resources shares and the remainder being paid in cash, subject to closing adjustments. 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 the 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 Public Utility Commission of Texas (PUCT), New Mexico
Public Regulation Commission (NMPRC), the Federal Energy Regulatory Commission (FERC), the Securities and Exchange Commission (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 in the public interest. Various parties have intervened. The PUCT has adopted a schedule under
which Management expects an order to be issued in April 2005.



New Mexico. On September 9, 2004, TNMP and PNM Resources filed a joint application with the NMPRC seeking approval of the acquisition. Various parties have intervened. The NMPRC has adopted a schedule under which hearings begin on
March 28, 2005. Management expects that an order will be issued in the second quarter of 2005.



FERC. TNMP and PNM Resources expect to file a joint application requesting approval of the acquisition with FERC in late November 2004.



SEC. PNM Resources expects to file for all required SEC action in accordance with the timetables adopted by the SEC.



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.



-7-



---

##### Table of Contents

Note 3. Regulatory Matters



Texas



Retail Competition. As reported in TNMPs 2003Annual Report on Form 10-K, the Texas electricity market has been open to retail
competition since January 1, 2002. In accordance with Senate Bill 7, Texas-New Mexico Power Company (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.



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 PUCT decision allows TNMP to recover $87.3 million of the $266.5 million that TNMP requested as stranded costs.
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 a 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 results 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.



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, 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 recent Texas Supreme Court
ruling which addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the date that competition began in Texas. A hearing is scheduled in December 2004. The sole issue under consideration is expected to be the
recovery of carrying charges on the recoverable stranded costs retroactive to January 1, 2002. A final order in the True-Up Proceeding is expected to be issued in the first quarter of 2005.



60-Day Rate Review. Sixty days following the issuance of a final
stranded cost true-up order, TNMP is required to make a 60-Day Rate Review filing. The review will set rates for recovery of stranded costs, address the clawback liability and allow for a reset of First Choice price-to-beat rates.



Cities Rate Review. 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. Due to the passage of time, these rate reviews are no longer effective.



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 SPE under authorization granted by
the PUCT in Docket No. 29081. The SPE 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 fuel and purchased power
cost adjustment clause (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
FFPCAC effective October 1, 2004, subject to refund. Hearings on a permanent FFPCAC are scheduled for the fourth quarter of 2004. TNMPs earnings were reduced by $0.1 million and $0.5 million after tax ($0.1 million and $0.8 million before tax)
for the three and nine months ended September 30, 2004, respectively, as a result of the temporary expiration of FFPCAC.



-8-



---

##### Table of Contents

Note 4. Accounting Developments



Employers Disclosures about Pensions and Other Postretirement Benefits



TNMP has applied the revised disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits. 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 6.



Accounting for Asset Retirement Obligations



TNMP adopted SFAS No. 143, Accounting for Asset Retirement
Obligations, 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 has reclassified the estimated utility plant removal costs, which were $40.0 million and $38.2 million as of September 30, 2004 and December 31, 2003, respectively, 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 Financial Accounting Standards Board (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, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. Based on the
FASBs guidance, the management of 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.



Hedging Activities



TNMP may enter into agreements for derivative instruments, including options
and swaps, to manage risks related to changes in interest rates. 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 expired TNMP/First Choice Credit Facility. TNMP terminated the swaps in June 2003 in connection
with the issuance of its $250 million of 6.125 percent Senior Notes due in 2008.



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 6.125 percent Senior Notes due in 2008. 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 three months and nine months ended September 30, 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 tables.



-9-



---

##### Table of Contents

|                                  |  |                                       |     |                                      |   |     |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------------------------- | --- | ------------------------------------ | - | --- | --------------- |  | ---------------- | --- |  | -------------------- | ------ | - | --------------- | - | ------ | - |  | - | ------ | -
|                                  |  | Three Months Ended September 30, 2004 |     | Nine Months Ended September 30, 2004 |  
|                                  |  | Before-TaxAmount                      |     | Tax Benefit(Expense)                 |   |     | After-TaxAmount |  | Before-TaxAmount |     |  | Tax Benefit(Expense) |        |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |    
|Change in market value            |  | $                                     |    |                                      | $ |    |                 |  | $                |    |  | $                    |       |   |                 | $ |       |   |  | $ |       |  
|Reclassification adjustments      |  |                                       | 208 |                                      |   | (79 | )               |  |                  | 129 |  |                      | 625    |   |                 |   | (238   | ) |  |   | 387    |  
|                                  |  |                                       |     |                                      |   |     |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|Other comprehensive income (loss) |  | $                                     | 208 |                                      | $ | (79 | )               |  | $                | 129 |  | $                    | 625    |   |                 | $ | (238   | ) |  | $ | 387    |  
|                                  |  |                                       |     |                                      |   |     |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|                                  |  |                                      
|                                  |  | Three Months Ended September 30, 2003 |     | Nine Months Ended September 30, 2003 |  
|                                  |  | Before-TaxAmount                      |     | Tax Benefit(Expense)                 |   |     | After-TaxAmount |  | Before-TaxAmount |     |  | Tax Benefit(Expense) |        |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |    
|Change in market value            |  | $                                     |    |                                      | $ |    |                 |  | $                |    |  | $                    | (5,922 | ) |                 | $ | 2,256  |   |  | $ | (3,666 | )
|Reclassification adjustments      |  |                                       | 208 |                                      |   | (79 | )               |  |                  | 129 |  |                      | 3,919  |   |                 |   | (1,493 | ) |  |   | 2,426  |  
|                                  |  |                                       |     |                                      |   |     |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  
|Other comprehensive income (loss) |  | $                                     | 208 |                                      | $ | (79 | )               |  | $                | 129 |  | $                    | (2,003 | ) |                 | $ | 763    |   |  | $ | (1,240 | )
|                                  |  |                                       |     |                                      |   |     |                 |  |                  |     |  |                      |        |   |                 |   |        |   |  |   |        |  



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.



Note 6.
Employee Benefit Plans



Pension and Postretirement
Benefits Plans



TNMP sponsors a defined benefit pension
plan covering substantially all of their 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.



The
components of net periodic benefit cost of TNMPs employee benefit plans for the three and nine months ended September 30, 2004 and 2003 are shown in the following table (amounts in thousands).



|                                                   |  |                                                 |        |   |                                                        |   |        |      |  |   |      |   |  |   |     |  
|-------------------------------------------------- |  | ----------------------------------------------- | ------ | - | ------------------------------------------------------ | - | ------ | ---- |  | - | ---- | - |  | - | --- | -
|                                                   |  | Pension BenefitsThree Months EndedSeptember 30, |        |   | Postretirement BenefitsThree Months EndedSeptember 30, |  
|                                                   |  | 2004                                            |        |   | 2003                                                   |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                                 |        |   |                                                        |   |        |      |  |   |      |   |  |   |     |  
|Service cost                                       |  | $                                               | 523    |   |                                                        | $ | 524    |      |  | $ | 104  |   |  | $ | 97  |  
|Interest cost                                      |  |                                                 | 1,197  |   |                                                        |   | 1,292  |      |  |   | 199  |   |  |   | 172 |  
|Expected return on plan assets                     |  |                                                 | (1,598 | ) |                                                        |   | (1,559 | )    |  |   | (88  | ) |  |   | (78 | )
|Settlements                                        |  |                                                 |       |   |                                                        |   |       |      |  |   |     |   |  |   |    |  
|Amortization of prior service cost                 |  |                                                 | (50    | ) |                                                        |   | (50    | )    |  |   |     |   |  |   |    |  
|Amortization of transitional (asset) or Obligation |  |                                                 |       |   |                                                        |   |       |      |  |   | 81   |   |  |   | 81  |  
|Recognized actuarial (gain) loss                   |  |                                                 | 39     |   |                                                        |   | 75     |      |  |   |     |   |  |   | (4  | )
|                                                   |  |                                                 |        |   |                                                        |   |        |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                          |  | $                                               | 111    |   |                                                        | $ | 282    |      |  | $ | 296  |   |  | $ | 268 |  
|                                                   |  |                                                 |        |   |                                                        |   |        |      |  |   |      |   |  |   |     |  



-10-



---

##### Table of Contents

|                                                   |  |                                                |        |   |                                                       |   |        |      |  |   |      |   |  |   |      |  
|-------------------------------------------------- |  | ---------------------------------------------- | ------ | - | ----------------------------------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                                   |  | Pension BenefitsNine Months EndedSeptember 30, |        |   | Postretirement BenefitsNine Months EndedSeptember 30, |  
|                                                   |  | 2004                                           |        |   | 2003                                                  |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                                |        |   |                                                       |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                       |  | $                                              | 1,568  |   |                                                       | $ | 1,571  |      |  | $ | 308  |   |  | $ | 291  |  
|Interest cost                                      |  |                                                | 3,591  |   |                                                       |   | 3,876  |      |  |   | 509  |   |  |   | 515  |  
|Expected return on plan assets                     |  |                                                | (4,529 | ) |                                                       |   | (4,867 | )    |  |   | (236 | ) |  |   | (240 | )
|Settlements                                        |  |                                                |       |   |                                                       |   | 362    |      |  |   |     |   |  |   |     |  
|Amortization of prior service cost                 |  |                                                | (150   | ) |                                                       |   | (150   | )    |  |   |     |   |  |   |     |  
|Amortization of transitional (asset) or Obligation |  |                                                |       |   |                                                       |   |       |      |  |   | 243  |   |  |   | 243  |  
|Recognized actuarial (gain) loss                   |  |                                                | 118    |   |                                                       |   | 224    |      |  |   |     |   |  |   | (13  | )
|                                                   |  |                                                |        |   |                                                       |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                          |  | $                                              | 598    |   |                                                       | $ | 1,016  |      |  | $ | 824  |   |  | $ | 796  |  
|                                                   |  |                                                |        |   |                                                       |   |        |      |  |   |      |   |  |   |      |  



TNMP reported expected
2004 contributions of $0.3 million to the pension plan and $1.0 million to the postretirement benefits plan in its 2003 Annual Report on Form 10-K. TNMP does not expect that its 2004 contributions will vary significantly from the previously
disclosed amounts.



Note 7. Related Party Transactions



Under an agreement between TNMP and its parent TNP Enterprises (TNP), dated
June 6, 1997 and an agreement between First Choice 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. Shared services billings are recorded on the balance sheet as accounts receivable. Transmission and distribution
charges are recorded as revenue in the income statement.



TNMPs related party transactions for the three and nine months ended September 30, 2004 and 2003 are shown in the table below (amounts in thousands).



|                                                              |  |                                 |        |      |   |       
|------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                                                              |  | Three Months EndedSeptember 30,
|                                                              |  | 2004                            |        | 2003
|First Choice                                                  |  |                                 |        |      |   |       
|Shared services billings                                      |  | $                               | 3,951  |      | $ | 3,379 
|Shared services owed as of September 30                       |  |                                 | 1,199  |      |   | 1,759 
|                                                              |  |                                
|Transmission and distribution charges billed                  |  |                                 | 29,542 |      |   | 29,502
|Transmission and distribution charges owed as of September 30 |  |                                 | 13,644 |      |   | 13,399
|                                                              |  |                                
|TNP                                                           |  |                                 |        |      |   |       
|Shared services billings                                      |  |                                 | 663    |      |   | 294   
|Shared services owed as of September 30                       |  |                                 | 379    |      |   | 535   



-11-



---

##### Table of Contents

|                                                              |  |                                 |        |      |   |       
|------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                                                              |  | Nine Months Ended September 30,
|                                                              |  | 2004                            |        | 2003
|First Choice                                                  |  |                                 |        |      |   |       
|Shared services billings                                      |  | $                               | 11,216 |      | $ | 9,924 
|Shared services owed as of September 30                       |  |                                 | 1,199  |      |   | 1,759 
|                                                              |  |                                
|Transmission and distribution charges billed                  |  |                                 | 73,047 |      |   | 82,626
|Transmission and distribution charges owed as of September 30 |  |                                 | 13,644 |      |   | 13,399
|                                                              |  |                                
|TNP                                                           |  |                                 |        |      |   |       
|Shared services billings                                      |  |                                 | 1,866  |      |   | 1,431 
|Shared services owed as of September 30                       |  |                                 | 379    |      |   | 535   



The $29.5 million and
$73.0 million of transmission and distribution charges shown above represents approximately 39 and 36 percent of TNMPs total revenue for the three and nine months ended September 30, 2004, respectively.



TNMP declared and paid a dividend of $6.0 million to TNP during the first
quarter of 2004.



Note 8. Commitments and Contingencies



Environmental Site. In October, 2003, the Texas Commission on
Environmental Quality (TCEQ) notified approximately fifty 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, fifteen
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, TNMP recorded a liability of $0.6 million for the clean up of its share of this site in the third quarter of 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.



-12-



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A).



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 September 30, 2004, 35 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice provided electric service to customers that accounted for
approximately 50 percent of the energy delivered by TNMP for the nine months ended September 30, 2004 as compared to 58 percent for the same period last year. TNMPs next largest customer was a non-affiliated retail electric provider that
served customers that accounted for approximately 25 percent of the energy delivered by TNMP during the nine months ended September 30, 2004.



Critical Accounting Policies



TNMP is required to use estimates in order to prepare the consolidated interim financial statements in accordance with generally accepted accounting
principles. 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 interim 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.



Accounting for Derivatives  Normal Purchases and Sales. In the normal course of business, TNMP enters into commodity contracts, which can
include swing components for additional purchases or sales of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under SFAS 133. However, the 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. Based on the FASBs guidance, the management of TNMP and First Choice
has determined that their respective contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP does not account for their respective electricity contracts as derivatives.



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
|------- | -------------



The following discussion should be read in conjunction with the related consolidated interim financial statements and notes.



-13-



---

##### Table of Contents

Overall Results



TNMP had income of $10.8 million for the quarter ended September 30, 2004, compared with income applicable to common stock
of $12.3 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, TNMP had a net loss of $76.7 million compared with income applicable to common stock of $28.2 million for the nine months ended September 30,
2003. The changes in TNMPs earnings for the quarter and nine months ended September 30, 2004 are attributable to the factors listed below (in millions):



|                                                            |  |                                               |      |   |                                             |   |        |  
|----------------------------------------------------------- |  | --------------------------------------------- | ---- | - | ------------------------------------------- | - | ------ | -
|                                                            |  | Earnings Increase (Decrease)                  |     
|                                                            |  | Three Months Ended September 30, 2004 v. 2003 |      |   | Nine MonthsEnded September 30, 2004 v. 2003 |  
|Changes in gross profit                                     |  | $                                             | 1.6  |   |                                             | $ | (4.8   | )
|Other operating and maintenance                             |  |                                               | (3.7 | ) |                                             |   | (4.5   | )
|Taxes other than income taxes                               |  |                                               | (0.5 | ) |                                             |   | (1.6   | )
|Extraordinary Item (net of taxes)                           |  |                                               |     |   |                                             |   | (97.8  | )
|All other (including income tax effects on the items above) |  |                                               | 1.1  |   |                                             |   | 3.8    |  
|                                                            |  |                                               |      |   |                                             |   |        |  
|TNMP consolidated earnings decrease                         |  | $                                             | (1.5 | ) |                                             | $ | (104.9 | )
|                                                            |  |                                               |      |   |                                             |   |        |  



TNMP Gross
Profit



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



|                     |  |                                  |        |                                 |   |                    |  |      |       |      |   |                    |  |   |         |  |   |        |  
|-------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------------------ |  | ---- | ----- | ---- | - | ------------------ |  | - | ------- |  | - | ------ | -
|                     |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |  
|                     |  | 2004                             |        | 2003                            |   | Increase(Decrease) |  | 2004 |       | 2003 |   | Increase(Decrease) | 
|Operating revenues   |  | $                                | 74,732 |                                 | $ | 69,953             |  | $    | 4,779 |      | $ | 201,454            |  | $ | 199,079 |  | $ | 2,375  |  
|                     |  |                                  |        |                                 |   |                   
|Purchased power      |  |                                  | 19,628 |                                 |   | 17,542             |  |      | 2,086 |      |   | 54,600             |  |   | 50,843  |  |   | 3,757  |  
|Transmission expense |  |                                  | 6,329  |                                 |   | 5,257              |  |      | 1,072 |      |   | 19,001             |  |   | 15,616  |  |   | 3,385  |  
|                     |  |                                  |        |                                 |   |                    |  |      |       |      |   |                    |  |   |         |  |   |        |  
|Gross profit         |  | $                                | 48,775 |                                 | $ | 47,154             |  | $    | 1,621 |      | $ | 127,853            |  | $ | 132,620 |  | $ | (4,767 | )
|                     |  |                                  |        |                                 |   |                    |  |      |       |      |   |                    |  |   |         |  |   |        |  



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 three and nine months ended September 30, 2004, compared
with the same periods in 2003 (in thousands).



|                                       |  |                                              |       |   |                                             |   |        |  
|-------------------------------------- |  | -------------------------------------------- | ----- | - | ------------------------------------------- | - | ------ | -
|                                       |  | Earnings Increase (Decrease)                 |      
|                                       |  | Three MonthsEnded September 30, 2004 v. 2003 |       |   | Nine MonthsEnded September 30, 2004 v. 2003 |  
|Customer growth                        |  | $                                            | 686   |   |                                             | $ | 1,967  |  
|Weather/customer usage related         |  |                                              | 796   |   |                                             |   | (3,056 | )
|Transmission revenues, net of expenses |  |                                              | (866  | ) |                                             |   | (2,477 | )
|Price/sales mix and other              |  |                                              | 401   |   |                                             |   | (715   | )
|Electric service revenues              |  |                                              | (431  | ) |                                             |   | (444   | )
|Industrial                             |  |                                              | 1,035 |   |                                             |   | (42    | )
|                                       |  |                                              |       |   |                                             |   |        |  
|Gross profit increase (decrease)       |  | $                                            | 1,621 |   |                                             | $ | (4,767 | )
|                                       |  |                                              |       |   |                                             |   |        |  



Gross profit for the
three months ended September 30, 2004, increased $1.6 million, or 3.4 percent compared with the corresponding 2003 period. The overall increase is driven by a $1.0 million increase in industrial revenue due to the timing of customer billings for the
quarter, and by a $0.7 million increase associated with growth in customers. In addition operating revenues increased by $0.8 million, as average customer usage was slightly higher in the third quarter of 2004 versus the third quarter of 2003.
Partially offsetting these increases were reductions in transmission revenues, net of expenses, of $0.9 million, resulting from an increase in expenses due to higher transmission costs from TXU Electric Delivery Company and Lower Colorado River
Authority. In addition there was a $0.4 million decrease in electric service revenues due to lower disconnect and reconnect fees.



Gross profit for the nine months ended September 30, 2004, decreased $4.8 million, or 3.6 percent compared with the corresponding 2003 period. The overall
decrease is attributed to a $3.1 million decrease in revenue due to milder weather, and to a $2.5 million increase in transmission costs from TXU Electric Delivery Company and Lower Colorado River Authority. Partially offsetting these reductions
were increases in revenues of $2.0 million associated with growth in customers.



-14-



---

##### Table of Contents

Purchased power expenses increased by $2.1 million and $3.8 million for the three and nine months ended
September 30, 2004 compared with the amounts incurred during the same periods in 2003. Throughout 2003, TNMP recovered New Mexico purchased power costs through the fuel and purchased power adjustment clause authorized by the NMPRC. This clause
expired in February 2004 resulting in $0.1 million and $0.8 million reduction to purchased power recovery revenues for the three and nine months ended September 30, 2004. As discussed in Note 3, TNMP is taking step to reinstate the New Mexico
purchased power adjustment clause in the fourth quarter of 2004.



Operating Expenses



TNMP incurred
operating expenses of $51.9 million for the quarter ended September 30, 2004, an increase of $7.6 million from the amount incurred during the corresponding period of 2003. For the nine months ended September 30, 2004, TNMP incurred operating
expenses of $150.0 million, an increase of $14.1 million from the amount incurred during the corresponding period of 2003.



Operating expenses include purchased power and transmission expense. Those expenses increased by $3.2 million and $7.1 million for the three and nine
months ended September 30, 2004, compared with the same periods in 2003.



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



Other Operating and Maintenance



Other operating and maintenance expenses increased by
$3.7 million and by $4.5 million for the quarter and nine months ended September 30, 2004, compared with the same periods in 2003 respectively. The three and nine month increases are 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 $0.5 million and $1.6 million for the three and nine months ended September 30, 2004, compared with the
corresponding periods in 2003. The increase is primarily related to higher ad valorem taxes.



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 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.



-15-



---

##### Table of Contents

Financial Condition



TNMP Liquidity



Cash Flow.TNMPs cash flow from operations for the nine months ended September 30, 2004 was $0.7 million higher than in the nine months ended
September 30, 2003. The factors causing the increase in cash flow from operations are summarized in the following table (in millions).



|                                                                |  |                                              |       |  
|--------------------------------------------------------------- |  | -------------------------------------------- | ----- | -
|                                                                |  | Cash Flow Increase(Decrease)                 |      
|                                                                |  | Nine Months Ended September 30, 2004 v. 2003 |      
|Decreased cash flow from sales, net of purchased power payments |  | $                                            | (15.5 | )
|Decrease in cash paid to suppliers                              |  |                                              | 7.4   |  
|Decrease in income taxes paid                                   |  |                                              | 7.2   |  
|Interest paid, net of amounts capitalized                       |  |                                              | 2.7   |  
|Other taxes paid                                                |  |                                              | (1.1  | )
|                                                                |  |                                              |       |  
|TNMP consolidated cash flow from operations                     |  | $                                            | 0.7   |  
|                                                                |  |                                              |       |  



Increases in the cash
flow for the nine months ended September 30, 2004 were primarily attributable lower cash paid to suppliers for the nine months ended September 2004, which primarily reflects a non-recurring SERP (supplemental executive retirement plan) payment of
$3.4 million made in 2003 and the timing of funding for inter-company services. Additionally, income taxes paid are lower due primarily to lower taxable income in 2004 and interest costs are lower in 2004 due to interest rate lock and interest rate
swap payments made in the second quarter of 2003 related to senior debt issued in 2003. Partially offsetting these increases to cash flow are lower cash flow from sales, net of purchased power due primarily to lower weather related sales as
discussed in TNMP Gross Profit.



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



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 a bankruptcy remote SPE under
authorization granted by the PUCT in Docket No. 29081. The SPE has been established in connection with First Choices power supply agreement with Constellation.



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 the third quarter of 2004.



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.



As a result of the extraordinary charge, TNMPs equity balance is currently 28 percent of its total capitalization. Due to the reduction in
TNMPs equity balance, management does not currently expect for TNMP to pay dividends to TNP.



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 rating
outlook as negative. Also in June, Standard & Poors placed TNMPs rating on credit watch negative, primarily as a result of the PUCT true-up order. In July 2004, Fitch downgraded TNMP from BB+ to BB with a rating outlook of 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.



Subsequent to the announcement that PNM Resources has agreed to acquire TNP, Moodys and Fitch revised their ratings outlook on TNMP to positive from
negative, and Standard & Poors revised its rating outlook on TNMP to developing from negative.



-16-



---

##### Table of Contents

Item 4. Controls and Procedures.



As of September 30, 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 their respective companies
(including their consolidated subsidiaries) that is required to be included in TNMPs periodic SEC filings.



There have been no significant changes in TNMPs internal controls or in other factors that could significantly affect these controls during the
three months ended September 30, 2004.



-17-



---

##### Table of Contents

PART II - OTHER INFORMATION



Item 1. Legal Proceedings



See Notes 3 and 8 for information regarding additional regulatory and legal matters.



Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



(31.1) Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act.



(31.2) Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act.



(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.



(32.2)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|(b) | Reports on Form 8-K: None
|--- | -------------------------



Statement Regarding Forward Looking Information



The discussions in this document that are not historical factors, 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 facts that could cause the results to differ materially from expectations are the following: the outcome of any appeals of the PUCT order in the stranded cost true-up proceeding; the results of any future regulatory
proceedings including the inclusion of the clawback liability in a rate adjustment proceeding; the outcome of efforts to re-establish the New Mexico FPPCAC; the payment of dividends by TNMP; the effects of accounting pronouncements that may be
issued periodically; changes in regulations affecting TNMPs businesses; insurance coverage available for claims made in litigation; general business and economic conditions; These factors include risks and uncertainties relating to the receipt
of regulatory approvals of the proposed acquisition of TNP by PNM Resources, Inc. (the PNM Transaction), the risks that the businesses will not be integrated successfully, 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 TNP debt and preferred retirements will not occur as expected, and that disruption from the PNM Transaction making it more difficult to maintain relationships with customers,
employees, suppliers or other third parties, additional factors include conditions in the financial markets relevant to the proposed transaction, interest rates, weather, fuel costs, changes in supply and demand in the market for electric power,
wholesale power prices, market liquidity, the competitive environment in the electric and natural gas industries, state and federal regulatory and legislative decisions and actions, the outcome of legal proceedings and the performance of state,
regional and national economies; and other factors described from time to time in TNMPs reports filed with the Securities and Exchange Commission. 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.



-18-



---

##### Table of Contents

SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |                                |  |                                                
|---------------------- |  | ------------------------------ |  | -----------------------------------------------
|                       |  | TEXAS-NEW MEXICO POWER COMPANY
|                       |  |                               
|Date: November 3, 2004 |  | By                             |  | \s\ JACK V. CHAMBERS                           
|                       |  |                                |  | Jack V. Chambers                               
|                       |  |                                |  | Chief Executive Officer                        
|                       |  |                               
|Date: November 3, 2004 |  | By                             |  | \s\ SCOTT FORBES                               
|                       |  |                                |  | Scott Forbes                                   
|                       |  |                                |  | Senior Vice President & Chief Financial Officer



-19-