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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 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



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TEXAS-NEW MEXICO POWER COMPANY

(Exact name of registrant as specified in its charter)



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



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



Indicate by check mark 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.



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##### Table of Contents

Texas New-Mexico Power Company and Subsidiaries

Quarterly Report on Form 10-Q for the period ended June 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 Six Month Periods Ended June 30, 2004 and 2003               |  | 3 
|                                                |  | Consolidated Statements of Comprehensive Income (Loss)Three and Six Month Periods Ended June 30, 2004 and 2003 |  | 4 
|                                                |  | Consolidated Statements of Cash FlowsThree and Six Month Periods Ended June 30, 2004 and 2003                  |  | 5 
|                                                |  | Consolidated Balance Sheets June 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                          |  | 11
|                                                |  |                                                                                                               
|Item 4.                                         |  | Controls and Procedures                                                                                        |  | 15
|                                                | 
|PART 2. OTHER INFORMATION                       |  |                                                                                                               
|                                                |  |                                                                                                               
|Item 1.                                         |  | Legal Proceedings                                                                                              |  | 16
|                                                |  |                                                                                                               
|Item 6.                                         |  | Exhibits and Reports on Form 8-K                                                                               |  | 16
|                                                |  |                                                                                                               
|                                                |  | (a) Exhibit Index                                                                                              |  | 16
|                                                |  |                                                                                                               
|                                                |  | (b) Reports on Form 8-K                                                                                        |  | 16
|                                                | 
|Statement Regarding Forward Looking Information |  | 16                                                                                                            
|                                                | 
|Signature page                                  |  | 17                                                                                                            
|                                                | 
|Certifications                                  |  | 18                                                                                                            



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)



|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                           |  | 2004                       |         |   | 2003                     |   |        | 2004 |  |   | 2003    |  
|                                                                           |  | (In thousands)             |        
|OPERATING REVENUES                                                         |  | $                          | 65,069  |   |                          | $ | 67,761 |      |  | $ | 126,722 |   |  | $ | 129,126 |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES:                                                        |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Purchased power                                                            |  |                            | 17,527  |   |                          |   | 16,342 |      |  |   | 34,972  |   |  |   | 33,301  |  
|Other operating and maintenance                                            |  |                            | 19,253  |   |                          |   | 17,217 |      |  |   | 37,166  |   |  |   | 33,990  |  
|Depreciation of utility plant                                              |  |                            | 7,403   |   |                          |   | 7,122  |      |  |   | 14,752  |   |  |   | 14,177  |  
|Taxes other than income taxes                                              |  |                            | 5,952   |   |                          |   | 5,055  |      |  |   | 11,190  |   |  |   | 10,112  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                   |  |                            | 50,135  |   |                          |   | 45,736 |      |  |   | 98,080  |   |  |   | 91,580  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                           |  |                            | 14,934  |   |                          |   | 22,025 |      |  |   | 28,642  |   |  |   | 37,546  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|INTEREST CHARGES AND OTHER INCOME AND DEDUCTIONS:                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest on long-term debt                                                 |  |                            | 6,460   |   |                          |   | 7,792  |      |  |   | 12,991  |   |  |   | 12,078  |  
|Other interest and amortization of debt-related costs                      |  |                            | 574     |   |                          |   | 1,020  |      |  |   | 1,143   |   |  |   | 1,700   |  
|Other income and deductions, net                                           |  |                            | (411    | ) |                          |   | (501   | )    |  |   | (885    | ) |  |   | (847    | )
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total                                                                      |  |                            | 6,623   |   |                          |   | 8,311  |      |  |   | 13,249  |   |  |   | 12,931  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|INCOME BEFORE INCOME TAXES                                                 |  |                            | 8,311   |   |                          |   | 13,714 |      |  |   | 15,393  |   |  |   | 24,615  |  
|Income taxes                                                               |  |                            | 2,711   |   |                          |   | 4,882  |      |  |   | 5,049   |   |  |   | 8,735   |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|INCOME BEFORE EXTRAORDINARY ITEM                                           |  |                            | 5,600   |   |                          |   | 8,832  |      |  |   | 10,344  |   |  |   | 15,880  |  
|Extraordinary item - disallowance of stranded costs, net of taxes (Note 3) |  |                            | (97,836 | ) |                          |   |       |      |  |   | (97,836 | ) |  |   |        |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME (LOSS)                                                          |  | $                          | (92,236 | ) |                          | $ | 8,832  |      |  | $ | (87,492 | ) |  | $ | 15,880  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  



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



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



|                                                                 |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  
|---------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ----- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                 |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                 |  | 2004                        |         |   | 2003                      |   |       | 2004 |  |   | 2003    |  
|                                                                 |  | (In thousands)              |        
|NET INCOME (LOSS)                                                |  | $                           | (92,236 | ) |                           | $ | 8,832 |      |  | $ | (87,492 | ) |  | $ | 15,880 |  
|                                                                 |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  
|Cash flow hedges, net of tax:                                    |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  
|Interest rate hedge, net of reclassification adjustment (Note 5) |  |                             | 129     |   |                           |   | (941  | )    |  |   | 258     |   |  |   | (1,369 | )
|                                                                 |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  
|Total cash flow hedges                                           |  |                             | 129     |   |                           |   | (941  | )    |  |   | 258     |   |  |   | (1,369 | )
|                                                                 |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  
|COMPREHENSIVE INCOME (LOSS)                                      |  | $                           | (92,107 | ) |                           | $ | 7,891 |      |  | $ | (87,234 | ) |  | $ | 14,511 |  
|                                                                 |  |                             |         |   |                           |   |       |      |  |   |         |   |  |   |        |  



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



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                         |  |                          |         |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                         |  | Six Months EndedJune 30, |        
|                                                                                         |  | 2004                     |         |   | 2003 |  
|                                                                                         |  | (In thousands)           |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                          |         |   |      |   |          |  
|Cash received from sales to customers                                                    |  | $                        | 111,260 |   |      | $ | 118,807  |  
|Purchased power costs paid                                                               |  |                          | (34,656 | ) |      |   | (33,348  | )
|Cash paid for payroll and to other suppliers                                             |  |                          | (24,743 | ) |      |   | (31,245  | )
|Interest paid, net of amounts capitalized                                                |  |                          | (13,215 | ) |      |   | (15,884  | )
|Income taxes paid                                                                        |  |                          | (1,366  | ) |      |   | (7,504   | )
|Other taxes paid                                                                         |  |                          | (14,551 | ) |      |   | (13,404  | )
|Other operating cash receipts and payments, net                                          |  |                          | 487     |   |      |   | 534      |  
|                                                                                         |  |                          |         |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                          | 23,216  |   |      |   | 17,956   |  
|                                                                                         |  |                          |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                          |         |   |      |   |          |  
|Additions to utility plant and other investing activities                                |  |                          | (22,351 | ) |      |   | (19,848  | )
|                                                                                         |  |                          |         |   |      |   |          |  
|NET CASH USED IN INVESTING ACTIVITIES                                                    |  |                          | (22,351 | ) |      |   | (19,848  | )
|                                                                                         |  |                          |         |   |      |   |          |  
|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    | ) |      |   | (1,407   | )
|                                                                                         |  |                          |         |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                      |  |                          | (15,296 | ) |      |   | 43,559   |  
|                                                                                         |  |                          |         |   |      |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                  |  |                          | (14,431 | ) |      |   | 41,667   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                         |  |                          | 56,907  |   |      |   | 284      |  
|                                                                                         |  |                          |         |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |  | $                        | 42,476  |   |      | $ | 41,951   |  
|                                                                                         |  |                          |         |   |      |   |          |  
|RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:        |  |                          |         |   |      |   |          |  
|Net income (loss)                                                                        |  | $                        | (87,492 | ) |      | $ | 15,880   |  
|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                                                            |  |                          | 14,752  |   |      |   | 14,177   |  
|Amortization of debt-related costs and other deferred charges                            |  |                          | 1,316   |   |      |   | 1,546    |  
|Allowance for funds used during construction                                             |  |                          | (555    | ) |      |   | (457     | )
|Deferred income taxes                                                                    |  |                          | 25,658  |   |      |   | 540      |  
|Investment tax credits                                                                   |  |                          | (556    | ) |      |   | (397     | )
|Deferred purchased power and fuel costs                                                  |  |                          | 540     |   |      |   | 1,324    |  
|                                                                                         |  |                         
|Cash flows impacted by changes in current assets and liabilities:                        |  |                          |         |   |      |   |          |  
|Accounts receivable                                                                      |  |                          | (559    | ) |      |   | (670     | )
|Accounts payable                                                                         |  |                          | (996    | ) |      |   | (497     | )
|Accrued interest                                                                         |  |                          | (193    | ) |      |   | 529      |  
|Accrued taxes                                                                            |  |                          | (24,610 | ) |      |   | (2,238   | )
|Changes in other current assets and liabilities                                          |  |                          | (2,239  | ) |      |   | (5,009   | )
|Interest rate lock on issuance of senior notes                                           |  |                          |        |   |      |   | (4,162   | )
|Other, net                                                                               |  |                          | 314     |   |      |   | (2,610   | )
|                                                                                         |  |                          |         |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  | $                        | 23,216  |   |      | $ | 17,956   |  
|                                                                                         |  |                          |         |   |      |   |          |  



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



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##### Table of Contents

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED BALANCE SHEETS



|                                                                                         |  |                          |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                         |  | June 30, 2004(Unaudited) |         |   | December 31,2003 |  
|                                                                                         |  | (In thousands)           |        
|ASSETS                                                                                   |  |                          |         |   |                  |   |         |  
|                                                                                         |  |                         
|CURRENT ASSETS:                                                                          |  |                          |         |   |                  |   |         |  
|Cash and cash equivalents                                                                |  | $                        | 42,476  |   |                  | $ | 56,907  |  
|Special deposits                                                                         |  |                          | 3,076   |   |                  |   | 2,520   |  
|Accounts receivable, net                                                                 |  |                          | 33,002  |   |                  |   | 32,443  |  
|Federal income tax receivable                                                            |  |                          | 26,453  |   |                  |   |        |  
|Materials and supplies, at lower of cost or market                                       |  |                          | 1,157   |   |                  |   | 1,082   |  
|Other current assets                                                                     |  |                          | 2,121   |   |                  |   | 662     |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total current assets                                                                     |  |                          | 108,285 |   |                  |   | 93,614  |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|UTILITY PLANT:                                                                           |  |                          |         |   |                  |   |         |  
|Electric plant                                                                           |  |                          | 826,374 |   |                  |   | 804,622 |  
|Construction work in progress                                                            |  |                          | 8,670   |   |                  |   | 13,666  |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total                                                                                    |  |                          | 835,044 |   |                  |   | 818,288 |  
|Less accumulated depreciation                                                            |  |                          | 270,055 |   |                  |   | 259,670 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Net utility plant                                                                        |  |                          | 564,989 |   |                  |   | 558,618 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|LONG-TERM AND OTHER ASSETS:                                                              |  |                          |         |   |                  |   |         |  
|Other property and investments, at cost                                                  |  |                          | 343     |   |                  |   | 343     |  
|Recoverable stranded costs                                                               |  |                          | 87,316  |   |                  |   | 298,651 |  
|Regulatory tax assets                                                                    |  |                          | 2,236   |   |                  |   | 1,685   |  
|Deferred charges                                                                         |  |                          | 28,752  |   |                  |   | 28,437  |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total long-term and other assets                                                         |  |                          | 118,647 |   |                  |   | 329,116 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|                                                                                         |  | $                        | 791,921 |   |                  | $ | 981,348 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                     |  |                          |         |   |                  |   |         |  
|                                                                                         |  |                         
|CURRENT LIABILITIES:                                                                     |  |                          |         |   |                  |   |         |  
|Accounts payable                                                                         |  | $                        | 9,781   |   |                  | $ | 13,302  |  
|Accrued interest                                                                         |  |                          | 7,372   |   |                  |   | 7,565   |  
|Accrued taxes                                                                            |  |                          | 10,634  |   |                  |   | 8,791   |  
|Accrued payroll and benefits                                                             |  |                          | 3,938   |   |                  |   | 5,048   |  
|Customers deposits                                                                      |  |                          | 757     |   |                  |   | 702     |  
|Other current liabilities                                                                |  |                          | 4,530   |   |                  |   | 3,808   |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total current liabilities                                                                |  |                          | 37,012  |   |                  |   | 39,216  |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|LONG-TERM AND OTHER LIABILITIES:                                                         |  |                          |         |   |                  |   |         |  
|Deferred purchased power and fuel costs                                                  |  |                          |        |   |                  |   | 40,844  |  
|Accumulated deferred income taxes                                                        |  |                          | 121,147 |   |                  |   | 152,167 |  
|Accumulated deferred investment tax credits                                              |  |                          | 2,803   |   |                  |   | 18,459  |  
|Regulatory liability-accrued cost of removal                                             |  |                          | 39,485  |   |                  |   | 38,218  |  
|Deferred credits and other liabilities                                                   |  |                          | 23,308  |   |                  |   | 22,839  |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total long-term and other liabilities                                                    |  |                          | 186,743 |   |                  |   | 272,527 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|LONG-TERM DEBT                                                                           |  |                          | 415,421 |   |                  |   | 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)                                                              |  |                          | (43,094 | ) |                  |   | 50,398  |  
|Accumulated other comprehensive loss                                                     |  |                          | (2,019  | ) |                  |   | (2,277  | )
|                                                                                         |  |                          |         |   |                  |   |         |  
|Total common shareholders equity                                                        |  |                          | 152,745 |   |                  |   | 245,979 |  
|                                                                                         |  |                          |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                   |  |                          |         |   |                  |   |         |  
|                                                                                         |  | $                        | 791,921 |   |                  | $ | 981,348 |  
|                                                                                         |  |                          |         |   |                  |   |         |  

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



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##### 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., / TNP Enterprises, Inc. Merger



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. for approximately $189 million comprised of equal amounts of PNM Resources common stock and cash. TNMP is a
wholly owned subsidiary of TNP. 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. Such approvals are expected to take approximately 9-12 months.



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.



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. 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.



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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 intends to file a motion for rehearing of the final true-up order with the
PUCT. TNMP disagrees with the PUCT decision, and intends to vigorously pursue all avenues of appeal of this order.



In addition to the decision regarding stranded costs, the PUCT order confirmed that First Choices clawback liability to TNMP is $15.9 million. The
clawback liability will be included in a rate adjustment proceeding that TNMP will file within sixty days of the time that consideration of the final order, including motions for rehearing, is complete.



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. TNMP cannot predict what action the cities may take, or what effects any such action may have on its financial position, cash flows, or results of
operation at this time.



New Mexico



Affiliated Guarantee. In October 2003, the New Mexico Public
Regulation Commission (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. TNMPs authority to guarantee the power supply
obligations of First Choice terminated on June 2, 2004, when First Choice established a bankruptcy remote Special Purpose Entity (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 TNMP had failed to file for the continuation of
the FPPCAC.



Amounts collected from February through June 2004
are subject to refund TNMP made a filing in July with the NMPRC to re-establish the FFPCAC in the fourth quarter of 2004. TNMPs earnings were reduced by $0.4 million after tax ($0.7 million before tax), for the three and six months ended June
30, 2004, as a result of discontinuing the FPPCAC retroactive to February 2004.



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 $39.5 million and $38.2 million as of June 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.



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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 ended June 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.



|                                  |  |                                  |        |   |                                |   |        |                 |  |   |                  |   |  |                      |        |   |                 |   |        |   |  |   |        |  
|--------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | --------------- |  | - | ---------------- | - |  | -------------------- | ------ | - | --------------- | - | ------ | - |  | - | ------ | -
|                                  |  | Three Months Ended June 30, 2004 |        |   | Six Months Ended June 30, 2004 |  
|                                  |  | Before-Tax Amount                |        |   | Tax Benefit(Expense)           |   |        | After-TaxAmount |  |   | Before-TaxAmount |   |  | Tax Benefit(Expense) |        |   | After-TaxAmount |  
|                                  |  | (In thousands)                   |       
|Change in market value            |  | $                                | 0      |   |                                | $ | 0      |                 |  | $ | 0                |   |  | $                    | 0      |   |                 | $ | 0      |   |  | $ | 0      |  
|Reclassification adjustments      |  |                                  | 208    |   |                                |   | (79    | )               |  |   | 129              |   |  |                      | 416    |   |                 |   | (158   | ) |  |   | 258    |  
|                                  |  |                                  |        |   |                                |   |        |                 |  |   |                  |   |  |                      |        |   |                 |   |        |   |  |   |        |  
|Other comprehensive income (loss) |  | $                                | 208    |   |                                | $ | (79    | )               |  | $ | 129              |   |  | $                    | 416    |   |                 | $ | (158   | ) |  | $ | 258    |  
|                                  |  |                                  |        |   |                                |   |        |                 |  |   |                  |   |  |                      |        |   |                 |   |        |   |  |   |        |  
|                                  |  |                                 
|                                  |  | Three Months Ended June 30, 2003 |        |   | Six Months Ended June 30, 2003 |  
|                                  |  | Before-TaxAmount                 |        |   | Tax Benefit(Expense)           |   |        | After-TaxAmount |  |   | Before-TaxAmount |   |  | Tax Benefit(Expense) |        |   | After-TaxAmount |  
|                                  |  | (In thousands)                   |       
|Change in market value            |  | $                                | (4,856 | ) |                                | $ | 1,850  |                 |  | $ | (3,006           | ) |  | $                    | (5,922 | ) |                 | $ | 2,256  |   |  | $ | (3,666 | )
|Reclassification adjustments      |  |                                  | 3,336  |   |                                |   | (1,271 | )               |  |   | 2,065            |   |  |                      | 3,711  |   |                 |   | (1,414 | ) |  |   | 2,297  |  
|                                  |  |                                  |        |   |                                |   |        |                 |  |   |                  |   |  |                      |        |   |                 |   |        |   |  |   |        |  
|Other comprehensive income (loss) |  | $                                | (1,520 | ) |                                | $ | 579    |                 |  | $ | (941             | ) |  | $                    | (2,211 | ) |                 | $ | 842    |   |  | $ | (1,369 | )
|                                  |  |                                  |        |   |                                |   |        |                 |  |   |                  |   |  |                      |        |   |                 |   |        |   |  |   |        |  



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.



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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 six months ended June 30, 2004 and 2003 are shown in the following table (amounts in thousands).



|                                                   |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|-------------------------------------------------- |  | ------------------------------------------- | ------ | - | ------------------------------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                                   |  | Pension BenefitsThree Months Ended June 30, |        |   | Postretirement BenefitsThree Months EndedJune 30, |  
|                                                   |  | 2004                                        |        |   | 2003                                              |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                       |  | $                                           | 496    |   |                                                   | $ | 524    |      |  | $ | 102  |   |  | $ | 97   |  
|Interest cost                                      |  |                                             | 1,168  |   |                                                   |   | 1,292  |      |  |   | 155  |   |  |   | 172  |  
|Expected return on plan assets                     |  |                                             | (1,412 | ) |                                                   |   | (1,558 | )    |  |   | (74  | ) |  |   | (77  | )
|Settlements                                        |  |                                             |       |   |                                                   |   |       |      |  |   |     |   |  |   |     |  
|Amortization of prior service cost                 |  |                                             | (50    | ) |                                                   |   | (50    | )    |  |   |     |   |  |   |     |  
|Amortization of transitional (asset) or Obligation |  |                                             |       |   |                                                   |   |       |      |  |   | 81   |   |  |   | 81   |  
|Recognized actuarial (gain) loss                   |  |                                             | 41     |   |                                                   |   | 74     |      |  |   |     |   |  |   | (5   | )
|                                                   |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                          |  | $                                           | 243    |   |                                                   | $ | 282    |      |  | $ | 264  |   |  | $ | 268  |  
|                                                   |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|                                                   |  |                                            
|                                                   |  | Pension Benefits Six Months EndedJune 30,   |        |   | Postretirement BenefitsSix Months Ended June 30,  |  
|                                                   |  | 2004                                        |        |   | 2003                                              |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                       |  | $                                           | 1,045  |   |                                                   | $ | 1,047  |      |  | $ | 204  |   |  | $ | 194  |  
|Interest cost                                      |  |                                             | 2,394  |   |                                                   |   | 2,584  |      |  |   | 310  |   |  |   | 343  |  
|Expected return on plan assets                     |  |                                             | (2,932 | ) |                                                   |   | (3,309 | )    |  |   | (148 | ) |  |   | (163 | )
|Settlements                                        |  |                                             |       |   |                                                   |   | 362    |      |  |   |     |   |  |   |     |  
|Amortization of prior service cost                 |  |                                             | (100   | ) |                                                   |   | (100   | )    |  |   |     |   |  |   |     |  
|Amortization of transitional (asset) or Obligation |  |                                             |       |   |                                                   |   |       |      |  |   | 162  |   |  |   | 162  |  
|Recognized actuarial (gain) loss                   |  |                                             | 80     |   |                                                   |   | 150    |      |  |   |     |   |  |   | (8   | )
|                                                   |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                          |  | $                                           | 487    |   |                                                   | $ | 734    |      |  | $ | 528  |   |  | $ | 528  |  
|                                                   |  |                                             |        |   |                                                   |   |        |      |  |   |      |   |  |   |      |  



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.



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



|                                                         |  |                            |        |      |   |       
|-------------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------
|                                                         |  | Three Months EndedJune 30,
|                                                         |  | 2004                       |        | 2003
|First Choice                                             |  |                            |        |      |   |       
|Shared services billings                                 |  | $                          | 3,588  |      | $ | 3,522 
|Shared services owed as of June 30                       |  |                            | 1,579  |      |   | 2,530 
|                                                         |  |                           
|Transmission and distribution charges billed             |  |                            | 23,420 |      |   | 27,965
|Transmission and distribution charges owed as of June 30 |  |                            | 11,544 |      |   | 16,023
|                                                         |  |                           
|TNP                                                      |  |                            |        |      |   |       
|Shared services billings                                 |  |                            | 756    |      |   | 474   
|Shared services owed as of June 30                       |  |                            | 168    |      |   | 814   
|                                                         | 
|                                                         |  | Six Months EndedJune 30,  
|                                                         |  | 2004                       |        | 2003
|First Choice                                             |  |                            |        |      |   |       
|Shared services billings                                 |  | $                          | 7,264  |      | $ | 6,545 
|Shared services owed as of June 30                       |  |                            | 1,579  |      |   | 2,530 
|                                                         |  |                           
|Transmission and distribution charges billed             |  |                            | 43,505 |      |   | 53,124
|Transmission and distribution charges owed as of June 30 |  |                            | 11,544 |      |   | 16,023
|                                                         |  |                           
|TNP                                                      |  |                            |        |      |   |       
|Shared services billings                                 |  |                            | 1,201  |      |   | 1,138 
|Shared services owed as of June 30                       |  |                            | 168    |      |   | 814   



The $23.4 million and
$43.8 million of transmission and distribution charges shown above represents approximately 35 percent of TNMPs total revenue for the three and six months ended June 30, 2004.



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



Note 8. Commitments and Contingencies



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.



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 June 30, 2004, 34 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice provided electric service to customers that accounted for
approximately 49 percent of the energy delivered by TNMP for the six months ended June 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 27 percent of the energy delivered by TNMP during the six months ended June 30, 2004.



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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
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.



Overall Results



TNMP had a net loss of $92.2 million for the quarter ended June 30, 2004, compared with net income of $8.8 million for the
quarter ended June 30, 2003. For the six months ended June 30, 2004, TNMP had a net loss of $87.5 million compared with net income of $15.9 million for the six months ended June 30, 2003. The changes in TNMPs results for the quarter and six
months ended June 30, 2004 are attributable to the factors listed below (in millions):



|                                                            |  |                                        |        |   |                                        |   |        |  
|----------------------------------------------------------- |  | -------------------------------------- | ------ | - | -------------------------------------- | - | ------ | -
|                                                            |  | Earnings Increase (Decrease)           |       
|                                                            |  | Three MonthsEnded June 30,2004 v. 2003 |        |   | Six Months Ended June 30, 2004 v. 2003 |  
|Changes in gross profit                                     |  | $                                      | (5.7   | ) |                                        | $ | (6.4   | )
|Other operating and maintenance                             |  |                                        | (0.2   | ) |                                        |   | (0.9   | )
|Taxes other than income taxes                               |  |                                        | (0.9   | ) |                                        |   | (1.1   | )
|Interest charges                                            |  |                                        | 1.8    |   |                                        |   | (0.4   | )
|Extraordinary Item (net of taxes)                           |  |                                        | (97.8  | ) |                                        |   | (97.8  | )
|All other (including income tax effects on the items above) |  |                                        | 1.7    |   |                                        |   | 3.2    |  
|                                                            |  |                                        |        |   |                                        |   |        |  
|TNMP consolidated earnings increase (decrease)              |  | $                                      | (101.1 | ) |                                        | $ | (103.4 | )
|                                                            |  |                                        |        |   |                                        |   |        |  



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##### Table of Contents

Gross Profit



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



|                         |  |                             |        |      |                           |                    |  |   |        |   |      |   |                    |  |   |         |  |   |        |  
|------------------------ |  | --------------------------- | ------ | ---- | ------------------------- | ------------------ |  | - | ------ | - | ---- | - | ------------------ |  | - | ------- |  | - | ------ | -
|                         |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |                   
|                         |  | 2004                        |        | 2003 |                           | Increase(Decrease) |  |   | 2004   |   | 2003 |   | Increase(Decrease) | 
|Operating revenues       |  | $                           | 65,069 |      | $                         | 67,761             |  | $ | (2,692 | ) |      | $ | 126,722            |  | $ | 129,126 |  | $ | (2,404 | )
|                         |  |                             |        |      |                           |                   
|Purchased power and fuel |  |                             | 17,527 |      |                           | 16,342             |  |   | 1,185  |   |      |   | 34,972             |  |   | 33,301  |  |   | 1,671  |  
|Transmission expense     |  |                             | 7,084  |      |                           | 5,215              |  |   | 1,869  |   |      |   | 12,673             |  |   | 10,359  |  |   | 2,314  |  
|                         |  |                             |        |      |                           |                    |  |   |        |   |      |   |                    |  |   |         |  |   |        |  
|Gross profit             |  | $                           | 40,458 |      | $                         | 46,204             |  | $ | (5,746 | ) |      | $ | 79,077             |  | $ | 85,466  |  | $ | (6,389 | )
|                         |  |                             |        |      |                           |                    |  |   |        |   |      |   |                    |  |   |         |  |   |        |  



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 six months ended June 30, 2004, compared with
the same period in 2003 (in thousands).



|                                      |  |                                         |        |   |                                      |   |        |  
|------------------------------------- |  | --------------------------------------- | ------ | - | ------------------------------------ | - | ------ | -
|                                      |  | Earnings Increase (Decrease)            |       
|                                      |  | Three MonthsEnded June 30, 2004 v. 2003 |        |   | Six MonthsEnded June 30,2004 v. 2003 |  
|Weather related                       |  | $                                       | (1,928 | ) |                                      | $ | (3,852 | )
|Transmission expense, net of revenues |  |                                         | (1,793 | ) |                                      |   | (1,611 | )
|Electric service revenues             |  |                                         | (1,197 | ) |                                      |   | (13    | )
|Purchase power net of recovery        |  |                                         | (658   | ) |                                      |   | (660   | )
|Customer growth                       |  |                                         | 674    |   |                                      |   | 1,281  |  
|Price/sales mix and other             |  |                                         | (844   | ) |                                      |   | (1,534 | )
|                                      |  |                                         |        |   |                                      |   |        |  
|Gross profit Decrease                 |  | $                                       | (5,746 | ) |                                      | $ | (6,389 | )
|                                      |  |                                         |        |   |                                      |   |        |  



Gross profit for the
three months ended June 30, 2004, decreased $5.7 million, or 12.4 percent compared with the corresponding 2003 period. The overall decrease is driven by a $1.9 million decrease in revenue due to lower sales resulting from milder weather, and by a
$1.8 million increase in transmission expenses, net of transmission revenues, due to increased transmission costs from TXU Electric Delivery Company and Lower Colorado River Authority. In addition there was a $1.2 million decrease in electric
service revenues due to pole rent billing occurring the first quarter of 2004 versus the second quarter of 2003 . Partially offsetting these reductions were increases in revenues of $0.7 million associated with customer growth.



Gross profit for the six months ended June 30, 2004, decreased $6.4 million,
or 7.5 percent compared with the corresponding 2003 period. The overall decrease is attributed by a $3.9 million decrease in revenue due to milder weather, and the second quarters higher transmission costs by TXU Electric Delivery Company and
Lower Colorado River Authority. Partially offsetting these reductions were increases in revenues of $1.3 million associated with customer growth.



Purchased power expenses increased by $1.2 million and $1.7 million for the three and six months ended June 30, 2004 compared with the amounts incurred
during the same periods in 2003. Throughout 2003, TNMP recovered all purchased power costs through the fuel and purchased power adjustment clause authorized by the NMPRC. This clause expired in February 2004 resulting in a $0.7 million reduction to
purchased power recovery revenues in the second quarter of 2004. Additional details on the recovery of New Mexicos purchased power are discussed in Note 3 to the consolidated interim financial statements.



Operating Expenses



TNMP incurred operating expenses of $50.1 million for the quarter ended June
30, 2004, an increase of $4.4 million from the amount incurred during the corresponding period of 2003. For the six months ended June 30, 2004 TNMP, incurred operating expenses of $98.1 million, an increase of $6.5 million from the amount incurred
during the same period in 2003. Operating expenses include purchased power and transmission expense. These expenses increased $3.1 million and $4.0 million for the three and six months ended June 30, 2004, compared with the same periods in 2003.



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



Other Operating and Maintenance



Other operating and maintenance expenses increased $0.2 million and $0.9 million for the quarter and six months ended June 30, 2004, compared with the
same periods in 2003 respectively. The increases are due to expenses incurred in connection with TNMPs true-up proceeding discussed in Note 3.



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Taxes Other Than Income Taxes



Taxes other than income taxes increased $0.9 million and $1.1 million for
the three and six months ended June 30, 2004, compared with the corresponding periods in 2003. The increase is primarily related to higher ad valorem taxes.



Interest Expenses



Interest expenses decreased $1.8 million for the three months ended June 30, 2004, and increased $0.4 million for the six months ended June 30, 2004, as
compared with the same periods in 2003 respectively. The $1.8 million second quarter decrease is primarily attributed to $3.1 million in charges associated with the termination of TNMPs interest rate swap in the second quarter of 2003.
Partially offsetting these charges are increased interest expenses, due to higher outstanding debt balances during the second quarter of 2004 as compared to the same period in 2003. For the six months ended June 30, 2004, interest expenses increased
due to higher outstanding debt balances.



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 in the second quarter of 2004.



Financial Condition



TNMP Liquidity



Cash Flow.TNMPs cash flow from operations for the six months ended June 30, 2004 was $5.3 million higher than in the six months ended June
30, 2003. The factors causing the increase in cash flow from operations are summarized in the following table (in millions).



|                                                                |  |                                       |      |  
|--------------------------------------------------------------- |  | ------------------------------------- | ---- | -
|                                                                |  | Cash FlowIncrease (Decrease)          |     
|                                                                |  | Six Months Ended June 30,2004 v. 2003 |     
|Decreased cash flow from sales, net of purchased power payments |  | $                                     | (8.9 | )
|Decrease in cash paid to suppliers                              |  |                                       | 6.5  |  
|Decrease in income taxes paid                                   |  |                                       | 6.1  |  
|Interest paid, net of amounts capitalized                       |  |                                       | 2.7  |  
|Other taxes paid                                                |  |                                       | (1.1 | )
|                                                                |  |                                       |      |  
|TNMP consolidated cash flow from operations                     |  | $                                     | 5.3  |  
|                                                                |  |                                       |      |  



Increases in the cash
flow for the six months ended June 30, 2004 were primarily attributable lower cash paid to suppliers for the six months ended June 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 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.



Affiliated 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.



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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.



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 was reduced to approximately 27 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.



Item 4. Controls and Procedures.



As of June 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 June 30, 2004.



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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:
|--- | --------------------



TNMP filed an 8-K dated June 3, 2004 to report the decision of the true-up proceeding by the administrative law judges.



TNMP filed an 8-K on July 28, 2004 to report (a) the proposed acquisition of
TNP by PNM Resources, Inc., and (b) the PUCT order in the true-up proceeding.



Statement Regarding Forward Looking Information



The discussions in this document that are not historical facts, including, but not limited to, future cash flows and the potential recovery of stranded costs are based upon current expectations. Actual results may
differ materially. Among the 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, disruption from the PNM Transaction making it more difficult to maintain relationships with customers,
employees, suppliers or other third parties, 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.



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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: August 5, 2004 |  | By                             |  | \s\ JACK V. CHAMBERS                           
|                     |  |                                |  | Jack V. Chambers                               
|                     |  |                                |  | Chief Executive Officer                        
|                     |  |                               
|Date: August 5, 2004 |  | By                             |  | \s\ SCOTT FORBES                               
|                     |  |                                |  | Scott Forbes                                   
|                     |  |                                |  | Senior Vice President & Chief Financial Officer



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