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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 September 30, 2004



or



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



For the transition period from  to



Commission File Number: 1-8847



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TNP ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)



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|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Texas                    |  | 75-1907501                             
|(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. has no publicly traded shares of common stock outstanding.



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##### Table of Contents

TNP Enterprises, Inc. And Subsidiaries

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



TABLE OF CONTENTS



|                             |  |                                                                                       |  |                     |  |                                                                                                                       |  |  
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | -
|PART 1. FINANCIAL STATEMENTS |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Financial Statements.                                                                 |  |                    
|                             |  |                                                                                      
|                             |  | TNP Enterprises, Inc. (TNP) and Subsidiaries:                                         |  |                    
|                             |  |                                                                                       |  |                    
|                             |  |                                                                                       |  |                     |  | Consolidated Statements of Income (Loss) Three and Nine Month Periods Ended September 30, 2004 and 2003               |  | 3
|                             |  |                                                                                       |  |                    
|                             |  |                                                                                       |  |                     |  | Consolidated Statements of Comprehensive Income (Loss) Three and Nine Month Periods Ended September 30, 2004 and 2003 |  | 4
|                             |  |                                                                                       |  |                    
|                             |  |                                                                                       |  |                     |  | Consolidated Statements of Cash Flows Nine Month Periods Ended September 30, 2004 and 2003                            |  | 5
|                             |  |                                                                                       |  |                    
|                             |  |                                                                                       |  |                     |  | Consolidated Balance Sheets September 30, 2004, and December 31, 2003                                                 |  | 6
|                             |  |                                                                                      
|                             |  | Notes to Consolidated Interim Financial Statements                                    |  | 7                  
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19                 
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                               |  | 28                 
|                             | 
|PART 2. OTHER INFORMATION    |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 29                 
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 29                 
|                             |  |                                                                                       | 
|                             |  | (a)                                                                                   |  | Exhibit Index       |  | 29                                                                                                                   
|                             |  |                                                                                       | 
|                             |  | (b)                                                                                   |  | Reports on Form 8-K |  | 29                                                                                                                   
|                             |  |                                                                                      
|                             |  | Statement Regarding Forward Looking Information                                       |  | 29                 
|                             | 
|Signature page               |  | 30                                                                                   
|                             | 
|Certifications               |  | 31                                                                                   



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##### Table of Contents

TNP ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)



|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                           |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|                                                                           |  | (In thousands)                  |        
|OPERATING REVENUES                                                         |  | $                               | 216,637 |   |                                | $ | 252,687 |      |  | $ | 556,291 |   |  | $ | 659,933 |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES:                                                        |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Purchased power                                                            |  |                                 | 109,416 |   |                                |   | 143,144 |      |  |   | 276,909 |   |  |   | 418,137 |  
|Other operating and maintenance                                            |  |                                 | 47,622  |   |                                |   | 55,837  |      |  |   | 142,004 |   |  |   | 162,847 |  
|Accrual for payment (credit) to TNMP                                       |  |                                 |        |   |                                |   | 3,589   |      |  |   | (48     | ) |  |   | 4,008   |  
|Depreciation                                                               |  |                                 | 7,541   |   |                                |   | 7,277   |      |  |   | 22,471  |   |  |   | 21,597  |  
|Taxes other than income taxes                                              |  |                                 | 8,362   |   |                                |   | 8,328   |      |  |   | 22,652  |   |  |   | 22,037  |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                   |  |                                 | 172,941 |   |                                |   | 218,175 |      |  |   | 463,988 |   |  |   | 628,626 |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|OPERATING INCOME                                                           |  |                                 | 43,696  |   |                                |   | 34,512  |      |  |   | 92,303  |   |  |   | 31,307  |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|INTEREST CHARGES, PREFERRED DIVIDENDS, AND OTHER INCOME AND DEDUCTIONS:    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest on long-term debt                                                 |  |                                 | 15,535  |   |                                |   | 15,416  |      |  |   | 46,620  |   |  |   | 43,915  |  
|Other interest and amortization of debt-related costs                      |  |                                 | 1,097   |   |                                |   | 2,669   |      |  |   | 3,330   |   |  |   | 6,035   |  
|Dividends on preferred stock and other                                     |  |                                 | 6,327   |   |                                |   |        |      |  |   | 18,561  |   |  |   |        |  
|Carrying charges on deferred stranded costs                                |  |                                 | (928    | ) |                                |   |        |      |  |   | (928    | ) |  |   |        |  
|Other income and deductions, net                                           |  |                                 | (334    | ) |                                |   | (787    | )    |  |   | (1,378  | ) |  |   | (1,663  | )
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                      |  |                                 | 21,697  |   |                                |   | 17,298  |      |  |   | 66,205  |   |  |   | 48,287  |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) BEFORE INCOME TAXES                                          |  |                                 | 21,999  |   |                                |   | 17,214  |      |  |   | 26,098  |   |  |   | (16,980 | )
|Income tax expenses (benefits)                                             |  |                                 | 10,443  |   |                                |   | 6,698   |      |  |   | 15,966  |   |  |   | (6,452  | )
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                    |  |                                 | 11,556  |   |                                |   | 10,516  |      |  |   | 10,132  |   |  |   | (10,528 | )
|Extraordinary item - disallowance of stranded costs, net of taxes (Note 3) |  |                                 |        |   |                                |   |        |      |  |   | (97,836 | ) |  |   |        |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|NET INCOME (LOSS)                                                          |  |                                 | 11,556  |   |                                |   | 10,516  |      |  |   | (87,704 | ) |  |   | (10,528 | )
|Dividends on preferred stock and other                                     |  |                                 |        |   |                                |   | 5,515   |      |  |   |        |   |  |   | 16,179  |  
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|INCOME (LOSS) APPLICABLE TO COMMON STOCK                                   |  | $                               | 11,556  |   |                                | $ | 5,001   |      |  | $ | (87,704 | ) |  | $ | (26,707 | )
|                                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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



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##### Table of Contents

TNP ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



|                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                 |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|                                                                 |  | (In thousands)                  |       
|NET INCOME (LOSS)                                                |  | $                               | 11,556 |   |                                | $ | 10,516 |      |  | $ | (87,704 | ) |  | $ | (10,528 | )
|                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Other comprehensive income, net of tax:                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gas hedge, net of reclassification adjustment (Note 5)           |  |                                 | (2,297 | ) |                                |   | (2,563 | )    |  |   | (2,456  | ) |  |   | (4,825  | )
|Interest rate hedge, net of reclassification adjustment (Note 5) |  |                                 | 255    |   |                                |   | 364    |      |  |   | 702     |   |  |   | (1,271  | )
|                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total other comprehensive income                                 |  |                                 | (2,042 | ) |                                |   | (2,199 | )    |  |   | (1,754  | ) |  |   | (6,096  | )
|                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|COMPREHENSIVE INCOME (LOSS)                                      |  | $                               | 9,514  |   |                                | $ | 8,317  |      |  | $ | (89,458 | ) |  | $ | (16,624 | )
|                                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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



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##### Table of Contents

TNP ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                   |  |                                |          |   |      |   |          |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                   |  | Nine Months EndedSeptember 30, |         
|                                                                                   |  | 2004                           |          |   | 2003 |  
|                                                                                   |  | (In thousands)                 |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                                |          |   |      |   |          |  
|Cash received from sales to customers                                              |  | $                              | 528,387  |   |      | $ | 613,008  |  
|Purchased power costs paid                                                         |  |                                | (276,484 | ) |      |   | (389,594 | )
|Natural gas option premiums paid                                                   |  |                                |         |   |      |   | (19,642  | )
|Cash paid for payroll and to other suppliers                                       |  |                                | (119,763 | ) |      |   | (140,041 | )
|Interest paid, net of amounts capitalized                                          |  |                                | (38,822  | ) |      |   | (39,023  | )
|Income taxes refunded                                                              |  |                                | 673      |   |      |   | 585      |  
|Other taxes paid                                                                   |  |                                | (21,975  | ) |      |   | (19,877  | )
|Other operating cash receipts and payments, net                                    |  |                                | 863      |   |      |   | 751      |  
|                                                                                   |  |                                |          |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |  |                                | 72,879   |   |      |   | 6,167    |  
|                                                                                   |  |                                |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                                |          |   |      |   |          |  
|Additions to utility plant and other investing activities                          |  |                                | (34,519  | ) |      |   | (28,361  | )
|                                                                                   |  |                                |          |   |      |   |          |  
|NET CASH USED IN INVESTING ACTIVITIES                                              |  |                                | (34,519  | ) |      |   | (28,361  | )
|                                                                                   |  |                                |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                                |          |   |      |   |          |  
|Issuances:                                                                         |  |                                |          |   |      |   |          |  
|TNMP senior notes, net of discount                                                 |  |                                |         |   |      |   | 248,923  |  
|TNP senior secured credit facility                                                 |  |                                |         |   |      |   | 112,500  |  
|Repayments to TNMP/First Choice credit facility - net                              |  |                                |         |   |      |   | (171,000 | )
|Redemptions:                                                                       |  |                                |          |   |      |   |          |  
|TNMP senior notes                                                                  |  |                                | (8,375   | ) |      |   |         |  
|TNP senior secured credit facility                                                 |  |                                | (844     | ) |      |   | (281     | )
|TNP term loan                                                                      |  |                                |         |   |      |   | (71,300  | )
|Financing and redemption costs                                                     |  |                                | (1,033   | ) |      |   | (5,534   | )
|                                                                                   |  |                                |          |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                |  |                                | (10,252  | ) |      |   | 113,308  |  
|                                                                                   |  |                                |          |   |      |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                            |  |                                | 28,108   |   |      |   | 91,114   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |  |                                | 117,788  |   |      |   | 16,690   |  
|                                                                                   |  |                                |          |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |  | $                              | 145,896  |   |      | $ | 107,804  |  
|                                                                                   |  |                                |          |   |      |   |          |  
|RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: |  |                                |          |   |      |   |          |  
|Net loss                                                                           |  | $                              | (87,704  | ) |      | $ | (10,528  | )
|Adjustments to reconcile net loss to net cash provided by operating activities:    |  |                                |          |   |      |   |          |  
|Extraordinary item - disallowance of stranded costs, net of taxes                  |  |                                | 97,836   |   |      |   |         |  
|Accrued dividends on preferred stock and other                                     |  |                                | 18,561   |   |      |   |         |  
|Accrual for payment (credit) to TNMP                                               |  |                                | (48      | ) |      |   | 4,008    |  
|Depreciation                                                                       |  |                                | 22,471   |   |      |   | 21,597   |  
|Credit for Texas system benefit fund regulatory asset                              |  |                                | (244     | ) |      |   | (3,960   | )
|Amortization of debt-related costs and other deferred charges                      |  |                                | 3,331    |   |      |   | 6,171    |  
|Carrying charges on deferred stranded costs                                        |  |                                | (928     | ) |      |   |         |  
|Allowance for funds used during construction                                       |  |                                | (661     | ) |      |   | (693     | )
|Deferred income taxes                                                              |  |                                | 28,070   |   |      |   | 1,573    |  
|Investment tax credits                                                             |  |                                | (794     | ) |      |   | (635     | )
|Deferred purchased power and fuel costs                                            |  |                                | 540      |   |      |   | 2,513    |  
|                                                                                   |  |                               
|Cash flows impacted by changes in current assets and liabilities:                  |  |                                |          |   |      |   |          |  
|Accounts receivable                                                                |  |                                | (1,997   | ) |      |   | (21,815  | )
|Accounts payable                                                                   |  |                                | (4,567   | ) |      |   | 20,432   |  
|Accrued interest                                                                   |  |                                | 8,108    |   |      |   | 9,333    |  
|Accrued taxes                                                                      |  |                                | (9,000   | ) |      |   | (4,622   | )
|Changes in other current assets and liabilities                                    |  |                                | (1,086   | ) |      |   | (5,131   | )
|Interest rate lock on issuance of senior notes                                     |  |                                |         |   |      |   | (4,162   | )
|Other, net                                                                         |  |                                | 991      |   |      |   | (7,914   | )
|                                                                                   |  |                                |          |   |      |   |          |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |  | $                              | 72,879   |   |      | $ | 6,167    |  
|                                                                                   |  |                                |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                   |  |                                |          |   |      |   |          |  
|Payment of dividends on preferred stock by issuance of additional preferred shares |  | $                              | 11,595   |   |      | $ | 10,080   |  
|                                                                                   |  |                                |          |   |      |   |          |  



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



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##### Table of Contents

TNP ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                      |  |                               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                      |  | September 30, 2004(Unaudited) |           |   | December 31,2003 |  
|                                                                                      |  | (In thousands)                |          
|ASSETS                                                                                |  |                               |           |   |                  |   |           |  
|                                                                                      |  |                              
|CURRENT ASSETS:                                                                       |  |                               |           |   |                  |   |           |  
|Cash and cash equivalents                                                             |  | $                             | 145,896   |   |                  | $ | 117,788   |  
|Special deposits                                                                      |  |                               | 3,081     |   |                  |   | 2,520     |  
|Accounts receivable, net                                                              |  |                               | 96,984    |   |                  |   | 94,987    |  
|Federal income tax receivable                                                         |  |                               | 20,293    |   |                  |   |          |  
|Materials and supplies, at lower of cost or market                                    |  |                               | 1,235     |   |                  |   | 1,082     |  
|Gas hedges                                                                            |  |                               | 1,435     |   |                  |   | 6,237     |  
|Other current assets                                                                  |  |                               | 4,130     |   |                  |   | 2,914     |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total current assets                                                                  |  |                               | 273,054   |   |                  |   | 225,528   |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|UTILITY PLANT:                                                                        |  |                               |           |   |                  |   |           |  
|Electric plant                                                                        |  |                               | 683,238   |   |                  |   | 642,732   |  
|Construction work in progress                                                         |  |                               | 5,285     |   |                  |   | 13,666    |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total                                                                                 |  |                               | 688,523   |   |                  |   | 656,398   |  
|Less accumulated depreciation                                                         |  |                               | 115,650   |   |                  |   | 94,974    |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Net utility plant                                                                     |  |                               | 572,873   |   |                  |   | 561,424   |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|LONG-TERM AND OTHER ASSETS:                                                           |  |                               |           |   |                  |   |           |  
|Other property and investments, at cost                                               |  |                               | 1,273     |   |                  |   | 1,273     |  
|Goodwill                                                                              |  |                               | 270,256   |   |                  |   | 270,256   |  
|Recoverable stranded costs                                                            |  |                               | 88,244    |   |                  |   | 298,651   |  
|Regulatory tax assets                                                                 |  |                               | 2,362     |   |                  |   | 1,685     |  
|Deferred charges                                                                      |  |                               | 48,996    |   |                  |   | 49,956    |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total long-term and other assets                                                      |  |                               | 411,131   |   |                  |   | 621,821   |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|                                                                                      |  | $                             | 1,257,058 |   |                  | $ | 1,408,773 |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                  |  |                               |           |   |                  |   |           |  
|                                                                                      |  |                              
|CURRENT LIABILITIES:                                                                  |  |                               |           |   |                  |   |           |  
|Current maturities of long-term debt                                                  |  | $                             | 1,125     |   |                  | $ | 1,125     |  
|Accounts payable                                                                      |  |                               | 50,287    |   |                  |   | 57,379    |  
|Accrued interest                                                                      |  |                               | 23,387    |   |                  |   | 15,279    |  
|Accrued taxes                                                                         |  |                               | 18,047    |   |                  |   | 6,754     |  
|Accrued payroll and benefits                                                          |  |                               | 4,426     |   |                  |   | 5,367     |  
|Customers deposits                                                                   |  |                               | 7,999     |   |                  |   | 6,342     |  
|Other current liabilities                                                             |  |                               | 5,697     |   |                  |   | 5,689     |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total current liabilities                                                             |  |                               | 110,968   |   |                  |   | 97,935    |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|LONG-TERM AND OTHER LIABILITIES:                                                      |  |                               |           |   |                  |   |           |  
|Deferred purchased power and fuel costs                                               |  |                               |          |   |                  |   | 40,844    |  
|Accumulated deferred income taxes                                                     |  |                               | 106,275   |   |                  |   | 136,882   |  
|Accumulated deferred investment tax credits                                           |  |                               | 2,564     |   |                  |   | 18,459    |  
|Regulatory liability-accrued cost of removal                                          |  |                               | 40,013    |   |                  |   | 38,218    |  
|Deferred credits and other liabilities                                                |  |                               | 52,958    |   |                  |   | 52,283    |  
|Long-term debt, less current maturities                                               |  |                               | 800,463   |   |                  |   | 809,439   |  
|Redeemable cumulative preferred stock                                                 |  |                               | 181,100   |   |                  |   | 162,538   |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total long-term and other liabilities                                                 |  |                               | 1,183,373 |   |                  |   | 1,258,663 |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|COMMON SHAREHOLDERS EQUITY                                                           |  |                               |           |   |                  |   |           |  
|Common stock - no par value per share. Authorized 1,000,000 shares; issued 100 shares |  |                               | 100,000   |   |                  |   | 100,000   |  
|Accumulated deficit                                                                   |  |                               | (136,197  | ) |                  |   | (48,493   | )
|Accumulated other comprehensive income-gas hedge                                      |  |                               | 888       |   |                  |   | 3,344     |  
|Accumulated other comprehensive loss-other                                            |  |                               | (1,974    | ) |                  |   | (2,676    | )
|                                                                                      |  |                               |           |   |                  |   |           |  
|Total common shareholders equity                                                     |  |                               | (37,283   | ) |                  |   | 52,175    |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                |  |                               |           |   |                  |   |           |  
|                                                                                      |  |                               |           |   |                  |   |           |  
|                                                                                      |  | $                             | 1,257,058 |   |                  | $ | 1,408,773 |  
|                                                                                      |  |                               |           |   |                  |   |           |  



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



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TNP Enterprises Inc. and Subsidiaries

Notes to Consolidated Interim Financial Statements



Note 1. Interim Financial Statements



The interim consolidated financial statements of TNP 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 TNPs 2003 Annual Report on Form 10-K.



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



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



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



Under the terms of the agreement, TNPs common shareholders will receive
approximately $189 million in consideration, consisting of approximately 4.7 million newly issued PNM Resources shares and the remainder being paid in cash, subject to closing adjustments. The existing indebtedness and preferred securities at TNP
will be retired. All debt at TNMP, TNPs wholly-owned electric utility subsidiary, will remain outstanding.



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



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



Texas. On September 9, 2004, TNMP and PNM Resources filed a joint application with the PUCT seeking a finding that the acquisition is in the public
interest. Various parties have intervened. The PUCT has adopted a schedule under which Management expects an order to be issued in April 2005.



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



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



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



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



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Note 3. Regulatory Matters



Texas



Retail Competition. As reported in TNP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. First Choice Power (First Choice), TNMPs affiliated retail electric provider, performs activities related to the sale of electricity to retail customers in Texas.



First Choice must offer customers that reside in TNMPs service area,
and whose loads are less than one megawatt, a regulated price, commonly called the price-to-beat. The price-to-beat will be offered through December 31, 2006, and First Choice cannot offer those customers any other rate before the loss of 40 percent
of the energy consumed by its price-to-beat customers, or January 1, 2005, whichever occurs first. In January 2004, the PUCT approved a stipulation among TNMP and other parties, which found that First Choice had lost more than 40 percent of the
energy consumed by its small commercial price-to-beat customers. As a result of the PUCTs action, First Choice may offer small commercial customers who reside in TNMPs service area rates other than the price-to-beat. First Choice remains
below the 40 percent loss threshold with respect to residential price-to-beat customers. Accordingly, First Choice continues to be prohibited from offering rates other than the price-to-beat to residential customers in TNMPs service area until
January 1, 2005.



On June 1, 2004, several changes to
customer protection rules in Texas became effective. Of the changes, the rules related to disconnection for non-payment and the required amount of a customer deposit are expected to have the greatest impact on First Choice. The new rule for
disconnection for non-payment states that if a customer does not make a payment or payment arrangement until after the final due date specified in the disconnect notice, the retail electric provider is allowed to disconnect the customer. The
previous rule only allowed the retail electric provider to terminate service and drop the customer to the retail electric provider that was affiliated with the customers transmission and distribution service provider, or to the provider of
last resort for non-payment. The new rule for the required amount of deposit states that the deposit shall not exceed the greater of one-fifth of the estimated annual billing or the sum of the next two months estimated billings. The previous
rule stated that the deposit could not exceed the greater of one-sixth of the estimated annual billing or the sum of the next two months estimated billings.



Special Purpose Entity. On June 2, 2004, First Choice established a wholly owned bankruptcy remote Special Purpose
Entity (SPE). The SPE holds all customer contracts and wholesale power and gas contracts previously held by First Choice, with the exception of certain financial instruments held for hedging purposes. First Choice issued a filing with the PUCT on
August 13, 2004, stating that it has complied with the terms of the final order in Docket No. 29081, which approved First Choices request to establish a bankruptcy remote SPE.



2004 True-Up Proceeding. On July 22, 2004, the PUCT issued its decision in TNMPs stranded cost true-up
proceeding in Docket No. 29206. The PUCT decision allows TNMP to recover $87.3 million of the $266.5 million that TNMP requested as stranded costs. TNMPs original request included approximately $307.6 million of stranded costs related to the
sale of TNP One, which occurred in October 2002, and a credit of approximately $41.1 million related to TNMPs over-recovered balance of fuel and energy-related purchased power costs.



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



In addition to the decision regarding stranded costs, the PUCT order confirmed that First Choices clawback liability to TNMP is $15.9 million.



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



In the third quarter of 2004, TNMP began accruing carrying charges on stranded costs for the period subsequent to the July 22, 2004 stranded cost order. In accordance with PUCT rules, TNMP is allowed to accrue and recover carrying charges
on the stranded cost balance from the date of the final order.



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On August 11, 2004, TNMP filed a motion for rehearing of the PUCT decision. On October 7, 2004, the PUCT
denied all of TNMPs motions for rehearing except for an issue related to a recent Texas Supreme Court ruling which addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the date that competition began in
Texas. A hearing is scheduled in December 2004. The sole issue under consideration is expected to be the recovery of carrying charges on the recoverable stranded costs retroactive to January 1, 2002, and a final order in the True-Up Proceeding is
expected to be issued in the first quarter of 2005.



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



Price-to-Beat
Fuel Factor. Effective July 7, 2004, First Choice increased its price-to-beat fuel factor by 8.3% following the PUCTs approval of a request that First Choice made in May 2004. First Choice estimates that the July 2004 increase in the
price-to-beat fuel factor will increase annual revenues by approximately $9.0 million.



On October 29, 2004, First Choice filed to increase its price-to-beat fuel factor by 15.4%. The filing is in response to recent increases in market natural gas prices. First Choice estimates that the price-to-beat
fuel factor will increase annual revenues by approximately $16.7 million. First Choice expects the PUCT to approve the increase in December 2004. The October 2004 price-to-beat fuel filing was First Choices second for 2004, the maximum number
of changes to the price-to-beat fuel filing that First Choice is allowed to request for 2004.



Cities Rate Review. During the fourth quarter of 2003, several Texas cities passed resolutions requiring TNMP to file certain financial information with the cities so that the cities may determine whether
TNMPs transmission and distribution rates are reasonable. TNMP filed information in response to the resolutions in November 2003 and has responded to additional requests for information from the cities. Due to the passage of time, these rate
reviews are no longer effective.



New Mexico



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



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



Amounts collected from February through June 2004 are subject to refund. In September 2004, the NMPRC authorized TNMP
to begin collecting an interim FFPCAC effective October 1, 2004, subject to refund. Hearings on a permanent FFPCAC are scheduled for the fourth quarter of 2004. TNMPs earnings were reduced by $0.1 million and $0.5 million after tax ($0.1
million and $0.8 million before tax) for the three and nine months ended September 30, 2004, respectively, as a result of the temporary expiration of FFPCAC.



SEC Holding Company Exemption. In July 2004, TNP was notified by the SEC that it appeared that TNP does not meet the formal requirements for
exemption under the Public Utility Holding Company Act. TNP responded by filing information with the SEC that demonstrates that TNP does meet the exemption requirements. Through November 3, 2004, TNP has received no response from the SEC.



Note 4. Accounting Developments



Employers Disclosures about Pensions and Other Postretirement
Benefits



TNP 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.



Financial Instruments with Characteristics of both Liabilities and Equity



TNP and TNMP adopted SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150), on December 31, 2003. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability or, in some circumstances, as an asset. As a result of the



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adoption of SFAS 150, TNP reclassified the balance of its redeemable cumulative preferred stock at December 31, 2003, as
a liability. For the nine months ended September 30, 2004, TNP classified dividends on preferred stock as interest expense. SFAS 150 does not permit the restatement of prior year expenses or balances of reclassified financial instruments.
Accordingly, the dividends upon TNPs redeemable preferred stock for periods prior to adoption have not been reclassified.



Accounting for Asset Retirement Obligations



TNP and 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 TNP and TNMP. As a result of the adoption of SFAS 143, TNP and TNMP identified costs recorded in accumulated depreciation related to inclusion of removal costs of utility plant in
TNMPs rates by the PUCT and NMPRC. Such costs do not arise from legal obligations. Rather, they represent long-standing regulatory policy to include charges for removal costs of utility plant in accumulated depreciation. Accordingly, TNMP has
reclassified the estimated utility plant removal costs, which were $40.0 million and $38.2 million as of September 30, 2004 and December 31, 2003, respectively, from accumulated depreciation to a regulatory liability included in long-term and other
liabilities on the balance sheet.



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



Normal
Purchases and Sales.In the normal course of business, TNMP and First Choice enter 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 and First Choice has determined that their
respective contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP and First Choice do not account for their respective electricity contracts as derivatives.



Hedging Activities



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



TNP Interest Rate Swaps. In October 2002, TNP executed a $70 million interest rate swap transaction designed to manage interest rate risk
associated with the Senior Credit Facility. The swap terminated in October 2004. Under the terms of the swap, TNP paid a fixed rate of approximately 2.5 percent and received variable rates that were set at approximately 1.6 percent. As of September
30, 2004, the variable interest rate on the Senior Credit Facility was approximately 7.4 percent, including the effects of the swap.



The fair value of TNPs swap as of September 30, 2004, was a liability of $0.1 million, which is recorded on its balance sheet in deferred credits
and other liabilities.



The interest rate swap is designated as
a cash flow hedge. The swap is highly effective in offsetting future cash flow volatility caused by changes in interest rates. For the three months and nine months ended September 30, 2004 and 2003, TNP recorded unrealized gains (losses), net of
reclassification adjustments, associated with its interest rate swap in other comprehensive income as shown in the following tables.



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|                                  |  |                                       |     |                                      |   |      |                 |  |                  |     |  |                      |      |   |                 |   |      |   |  |   |      |  
|--------------------------------- |  | ------------------------------------- | --- | ------------------------------------ | - | ---- | --------------- |  | ---------------- | --- |  | -------------------- | ---- | - | --------------- | - | ---- | - |  | - | ---- | -
|                                  |  | Three Months Ended September 30, 2004 |     | Nine Months Ended September 30, 2004 |  
|                                  |  | Before-TaxAmount                      |     | Tax Benefit(Expense)                 |   |      | After-TaxAmount |  | Before-TaxAmount |     |  | Tax Benefit(Expense) |      |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |    
|Change in market value            |  | $                                     | 34  |                                      | $ | (13  | )               |  | $                | 21  |  | $                    | (132 | ) |                 | $ | 50   |   |  | $ | (82  | )
|Reclassification adjustments      |  |                                       | 169 |                                      |   | (64  | )               |  |                  | 105 |  |                      | 641  |   |                 |   | (244 | ) |  |   | 397  |  
|                                  |  |                                       |     |                                      |   |      |                 |  |                  |     |  |                      |      |   |                 |   |      |   |  |   |      |  
|Other comprehensive income (loss) |  | $                                     | 203 |                                      | $ | (77  | )               |  | $                | 126 |  | $                    | 509  |   |                 | $ | (194 | ) |  | $ | 315  |  
|                                  |  |                                       |     |                                      |   |      |                 |  |                  |     |  |                      |      |   |                 |   |      |   |  |   |      |  
|                                  |  |                                      
|                                  |  | Three Months Ended September 30, 2003 |     | Nine Months Ended September 30, 2003 |  
|                                  |  | Before-TaxAmount                      |     | Tax Benefit(Expense)                 |   |      | After-TaxAmount |  | Before-TaxAmount |     |  | Tax Benefit(Expense) |      |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |    
|Change in market value            |  | $                                     | 140 |                                      | $ | (53  | )               |  | $                | 87  |  | $                    | (669 | ) |                 | $ | 255  |   |  | $ | (414 | )
|Reclassification adjustments      |  |                                       | 239 |                                      |   | (91  | )               |  |                  | 148 |  |                      | 619  |   |                 |   | (236 | ) |  |   | 383  |  
|                                  |  |                                       |     |                                      |   |      |                 |  |                  |     |  |                      |      |   |                 |   |      |   |  |   |      |  
|Other comprehensive income (loss) |  | $                                     | 379 |                                      | $ | (144 | )               |  | $                | 235 |  | $                    | (50  | ) |                 | $ | 19   |   |  | $ | (31  | )
|                                  |  |                                       |     |                                      |   |      |                 |  |                  |     |  |                      |      |   |                 |   |      |   |  |   |      |  



Over the next twelve
months TNP anticipates that $0.1 million of unrealized after-tax losses will be reclassified from other comprehensive income to interest expense. The estimated amounts to be reclassified represent the earnings volatility that is avoided by using the
interest rate swaps.



TNMP Interest Rate Hedges. In
October 2002, TNMP executed two $75 million interest rate swap transactions designed to manage interest rate risk associated with the expired TNMP/First Choice Credit Facility. TNMP terminated the swaps in June 2003 in connection with the issuance
of its $250 million of 6.125 percent Senior Notes due in 2008.



In May 2003, TNMP executed a $250 million Treasury rate lock transaction designed to manage interest rate risk associated with the issuance of its $250 million of 6.125 percent Senior Notes due in 2008. The rate lock effectively fixed the
five-year Treasury yield upon which the yield of the Senior Notes was based at approximately 2.6 percent. TNMP paid $4.2 million upon the issuance of the Senior Notes in June 2003 to settle the rate lock. The cost of the rate lock was recorded in
accumulated other comprehensive income and will be amortized to interest expense over the life of the Senior Notes.



The interest rate swaps and the Treasury rate lock were designated as cash flow hedges. The instruments were highly effective in offsetting future cash
flow volatility caused by changes in interest rates. For the three months and nine months ended September 30, 2004 and 2003, TNMP recorded unrealized gains (losses), net of reclassification adjustments, associated with its interest rate swaps and
Treasury rate lock in other comprehensive income as shown in the following tables.



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



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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.



Natural Gas Hedges. Beginning in the third quarter of 2003, First
Choice took advantage of favorable conditions in the natural gas market to enter into natural gas swaps, fixing the price of a portion of its power supply. The fair value of the natural gas swaps as of September 30, 2004, was an asset of $1.4
million, which is recorded on TNPs balance sheet as a current asset. For the three and nine months ended September 30, 2004, First Choices purchased power expense includes pre-tax gains of $0.9 million ($0.6 million after tax) and $9.1
million ($5.6 million after tax), respectively, related to the settlement of natural gas swaps and options.



In addition, First Choice recorded unrealized gains (losses), net of reclassification adjustments, associated with its natural gas hedges in other
comprehensive income as shown in the following tables.



|                                  |  |                                       |         |   |                                      |   |        |                 |  |   |                  |   |  |                      |         |   |                 |   |        |   |  |   |         |  
|--------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------ | - | ------ | --------------- |  | - | ---------------- | - |  | -------------------- | ------- | - | --------------- | - | ------ | - |  | - | ------- | -
|                                  |  | Three Months Ended September 30, 2004 |         |   | Nine Months Ended September 30, 2004 |  
|                                  |  | Before-TaxAmount                      |         |   | Tax Benefit(Expense)                 |   |        | After-TaxAmount |  |   | Before-TaxAmount |   |  | Tax Benefit(Expense) |         |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |        
|Change in market value            |  | $                                     | (2,800  | ) |                                      | $ | 1,067  |                 |  | $ | (1,733           | ) |  | $                    | 5,082   |   |                 | $ | (1,936 | ) |  | $ | 3,146   |  
|Reclassification adjustments      |  |                                       | (911    | ) |                                      |   | 347    |                 |  |   | (564             | ) |  |                      | (9,049  | ) |                 |   | 3,447  |   |  |   | (5,602  | )
|                                  |  |                                       |         |   |                                      |   |        |                 |  |   |                  |   |  |                      |         |   |                 |   |        |   |  |   |         |  
|Other comprehensive income (loss) |  | $                                     | (3,711  | ) |                                      | $ | 1,414  |                 |  | $ | (2,297           | ) |  | $                    | (3,967  | ) |                 | $ | 1,511  |   |  | $ | (2,456  | )
|                                  |  |                                       |         |   |                                      |   |        |                 |  |   |                  |   |  |                      |         |   |                 |   |        |   |  |   |         |  
|                                  |  |                                      
|                                  |  | Three Months Ended September 30, 2003 |         |   | Nine Months Ended September 30, 2003 |  
|                                  |  | Before-TaxAmount                      |         |   | Tax Benefit(Expense)                 |   |        | After-TaxAmount |  |   | Before-TaxAmount |   |  | Tax Benefit(Expense) |         |   | After-TaxAmount |  
|                                  |  | (In thousands)                        |        
|Change in market value            |  | $                                     | (10,723 | ) |                                      | $ | 4,085  |                 |  | $ | (6,638           | ) |  | $                    | (17,651 | ) |                 | $ | 6,725  |   |  | $ | (10,926 | )
|Reclassification adjustments      |  |                                       | 6,583   |   |                                      |   | (2,508 | )               |  |   | 4,075            |   |  |                      | 9,856   |   |                 |   | (3,755 | ) |  |   | 6,101   |  
|                                  |  |                                       |         |   |                                      |   |        |                 |  |   |                  |   |  |                      |         |   |                 |   |        |   |  |   |         |  
|Other comprehensive income (loss) |  | $                                     | (4,140  | ) |                                      | $ | 1,577  |                 |  | $ | (2,563           | ) |  | $                    | (7,795  | ) |                 | $ | 2,970  |   |  | $ | (4,825  | )
|                                  |  |                                       |         |   |                                      |   |        |                 |  |   |                  |   |  |                      |         |   |                 |   |        |   |  |   |         |  



First Choice also
estimates that $0.9 million of unrealized after-tax gains related to natural gas swaps will be reclassified through other comprehensive income to purchased power expense.



Note 6. Employee Benefit Plans



Pension and Postretirement Benefits Plans



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



-12-



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##### Table of Contents

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



|                                                   |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|-------------------------------------------------- |  | ------------------------------------------------- | ------ | - | -------------------------------------------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                                   |  | Pension Benefits Three Months Ended September 30, |        |   | Postretirement Benefits Three Months Ended September 30, |  
|                                                   |  | 2004                                              |        |   | 2003                                                     |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                       |  | $                                                 | 523    |   |                                                          | $ | 524    |      |  | $ | 104  |   |  | $ | 97   |  
|Interest cost                                      |  |                                                   | 1,197  |   |                                                          |   | 1,292  |      |  |   | 199  |   |  |   | 172  |  
|Expected return on plan assets                     |  |                                                   | (1,598 | ) |                                                          |   | (1,559 | )    |  |   | (88  | ) |  |   | (78  | )
|Amortization of prior service cost                 |  |                                                   | 5      |   |                                                          |   | 5      |      |  |   |     |   |  |   |     |  
|Amortization of transitional (asset) or obligation |  |                                                   |       |   |                                                          |   |       |      |  |   |     |   |  |   |     |  
|Recognized actuarial (gain) loss                   |  |                                                   | 501    |   |                                                          |   | 419    |      |  |   | 107  |   |  |   | 55   |  
|                                                   |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                          |  | $                                                 | 628    |   |                                                          | $ | 681    |      |  | $ | 322  |   |  | $ | 246  |  
|                                                   |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|                                                   |  |                                                  
|                                                   |  | Pension Benefits Nine Months Ended September 30,  |        |   | Postretirement Benefits Nine Months Ended September 30,  |  
|                                                   |  | 2004                                              |        |   | 2003                                                     |   |        | 2004 |  |   | 2003 |  
|Components of net periodic benefit cost            |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|Service cost                                       |  | $                                                 | 1,568  |   |                                                          | $ | 1,573  |      |  | $ | 308  |   |  | $ | 291  |  
|Interest cost                                      |  |                                                   | 3,591  |   |                                                          |   | 3,876  |      |  |   | 509  |   |  |   | 515  |  
|Expected return on plan assets                     |  |                                                   | (4,529 | ) |                                                          |   | (4,867 | )    |  |   | (236 | ) |  |   | (240 | )
|Settlements                                        |  |                                                   |       |   |                                                          |   | 163    |      |  |   |     |   |  |   |     |  
|Amortization of prior service cost                 |  |                                                   | 15     |   |                                                          |   | 15     |      |  |   |     |   |  |   |     |  
|Recognized actuarial (gain) loss                   |  |                                                   | 1,505  |   |                                                          |   | 1,257  |      |  |   | 209  |   |  |   | 164  |  
|                                                   |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                          |  | $                                                 | 2,150  |   |                                                          | $ | 2,017  |      |  | $ | 790  |   |  | $ | 730  |  
|                                                   |  |                                                   |        |   |                                                          |   |        |      |  |   |      |   |  |   |      |  



TNP 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. TNP does not expect that its 2004 contributions will vary significantly from the previously
disclosed amounts.



Note 7. Related Party Transactions



In accordance with the SW Acquisition limited partnership agreement, TNP and
Laurel Hill Capital Partners (Laurel Hill) are parties to a Management Services Agreement under which Laurel Hill provides certain management and financial advisory services to TNP. For the three and nine month periods ended September 30, 2004, TNP
paid Laurel Hill $0.1 million and $0.4 million, respectively, under the agreement. During the same time periods in 2003, TNP paid Laurel Hill $0.3 million and $0.9 million, respectively.



TNP also incurred fees of $0.3 million and $0.8 million for the three and nine months ended September 30, 2004, for advisory
services by the original limited partners of SW Acquisition, pursuant to provisions of the SW Acquisition limited partnership agreement.



Note 8. Segment and Related Information



TNP has two reportable segments that reflect the separation of TNMPs business according to the provisions of Senate Bill 7. The first segment
includes TNMPs regulated transmission and distribution business in Texas and its New Mexico operations, and the second includes the unregulated activities of First Choice relating to the sale of electricity to retail customers in Texas.



The following tables present information about revenues,
profits, and assets of TNPs reportable segments (in thousands).



-13-



---

##### Table of Contents

Three Months Ended September 30, 2004



|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------- | - | ------- | ------------------------ |  | - | --------------- | - |  | - | --------- | -
|                                                                            |  | RegulatedTransmissionand Distribution |         |   | FirstChoice |   |         | All OtherandEliminations |  |   | TNPConsolidated |  
|Income Statement Data                                                       |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Revenue from external customers                                             |  | $                                     | 44,760  |   |             | $ | 171,877 |                          |  | $ |                |   |  | $ | 216,637   |  
|Intercompany revenue                                                        |  |                                       | 29,972  |   |             |   |        |                          |  |   | (29,972         | ) |  |   |          |  
|Purchased power                                                             |  |                                       | (19,628 | ) |             |   | (89,788 | )                        |  |   |                |   |  |   | (109,416  | )
|Other direct costs                                                          |  |                                       | (6,329  | ) |             |   | (46,653 | )                        |  |   | 29,542          |   |  |   | (23,440   | )
|Depreciation expense                                                        |  |                                       | (7,433  | ) |             |   | (107    | )                        |  |   | (1              | ) |  |   | (7,541    | )
|Other operating expenses                                                    |  |                                       | (18,502 | ) |             |   | (12,719 | )                        |  |   | (1,323          | ) |  |   | (32,544   | )
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Operating income (loss)                                                     |  |                                       | 22,840  |   |             |   | 22,610  |                          |  |   | (1,754          | ) |  |   | 43,696    |  
|Other income and deductions, net                                            |  |                                       | 1,136   |   |             |   | 99      |                          |  |   | (6,300          | ) |  |   | (5,065    | )
|Interest charges                                                            |  |                                       | (6,971  | ) |             |   | (100    | )                        |  |   | (9,561          | ) |  |   | (16,632   | )
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Income (loss) before taxes                                                  |  |                                       | 17,005  |   |             |   | 22,609  |                          |  |   | (17,615         | ) |  |   | 21,999    |  
|Income taxes                                                                |  |                                       | (6,196  | ) |             |   | (8,131  | )                        |  |   | 3,884           |   |  |   | (10,443   | )
|Extraordinary Items - disallowance of stranded cost (net of taxes)          |  |                                       |        |   |             |   |        |                          |  |   |                |   |  |   |          |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Net income (loss)                                                           |  |                                       | 10,809  |   |             |   | 14,478  |                          |  |   | (13,731         | ) |  |   | 11,556    |  
|Dividends on preferred stock and other                                      |  |                                       |        |   |             |   |        |                          |  |   |                |   |  |   |          |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Income (loss) applicable to common stock                                    |  | $                                     | 10,809  |   |             | $ | 14,478  |                          |  | $ | (13,731         | ) |  | $ | 11,556    |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Cash Flow Data                                                              |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash received from sales to customers                                       |  | $                                     | 66,497  |   |             | $ | 161,704 |                          |  | $ | (27,900         | ) |  | $ | 200,301   |  
|Purchased power costs paid                                                  |  |                                       | (19,253 | ) |             |   | (76,324 | )                        |  |   |                |   |  |   | (95,577   | )
|Cash paid for payroll and to other suppliers                                |  |                                       | (10,208 | ) |             |   | (9,350  | )                        |  |   | (1,121          | ) |  |   | (20,679   | )
|Transmission and distribution charges                                       |  |                                       |        |   |             |   | (44,081 | )                        |  |   | 27,471          |   |  |   | (16,610   | )
|Interest and other taxes paid                                               |  |                                       | (7,801  | ) |             |   | (1,995  | )                        |  |   | (2,112          | ) |  |   | (11,908   | )
|Intercompany dividends, income taxes refunded (paid), and other             |  |                                       | (2,066  | ) |             |   | (3,616  | )                        |  |   | 5,921           |   |  |   | 239       |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) operations                                   |  |                                       | 27,169  |   |             |   | 26,338  |                          |  |   | 2,259           |   |  |   | 55,766    |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Net cash used in investing activities, primarily additions to utility plant |  |                                       | (10,812 | ) |             |   | (862    | )                        |  |   |                |   |  |   | (11,674   | )
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Borrowings from (repayments of) credit facilities                           |  |                                       |        |   |             |   |        |                          |  |   | (281            | ) |  |   | (281      | )
|Redemption of senior notes                                                  |  |                                       |        |   |             |   |        |                          |  |   |                |   |  |   |          |  
|Intercompany dividends                                                      |  |                                       |        |   |             |   | (12,000 | )                        |  |   | 12,000          |   |  |   |          |  
|Other                                                                       |  |                                       |        |   |             |   |        |                          |  |   |                |   |  |   |          |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) financing activities                         |  | $                                     |        |   |             | $ | (12,000 | )                        |  | $ | 11,719          |   |  | $ | (281      | )
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Balance Sheet Data as of September 30, 2004                                 |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash and cash equivalents                                                   |  | $                                     | 58,833  |   |             | $ | 68,283  |                          |  | $ | 18,780          |   |  | $ | 145,896   |  
|Accounts receivable                                                         |  |                                       | 34,274  |   |             |   | 76,604  |                          |  |   | (13,894         | ) |  |   | 96,984    |  
|Other current assets                                                        |  |                                       | 30,388  |   |             |   | 2       |                          |  |   | (216            | ) |  |   | 30,174    |  
|Net utility plant                                                           |  |                                       | 568,996 |   |             |   | 3,862   |                          |  |   | 15              |   |  |   | 572,873   |  
|Goodwill                                                                    |  |                                       |        |   |             |   |        |                          |  |   | 270,256         |   |  |   | 270,256   |  
|Recoverable stranded costs                                                  |  |                                       | 88,244  |   |             |   |        |                          |  |   |                |   |  |   | 88,244    |  
|Other property, regulatory tax assets and deferred charges                  |  |                                       | 31,381  |   |             |   | 39      |                          |  |   | 21,211          |   |  |   | 52,631    |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Total assets                                                                |  | $                                     | 812,116 |   |             | $ | 148,790 |                          |  | $ | 296,152         |   |  | $ | 1,257,058 |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Current maturities of long-term debt                                        |  | $                                     |        |   |             | $ |        |                          |  | $ | 1,125           |   |  | $ | 1,125     |  
|Accounts payable                                                            |  |                                       | 9,762   |   |             |   | 53,493  |                          |  |   | (12,968         | ) |  |   | 50,287    |  
|Other current liabilities                                                   |  |                                       | 33,371  |   |             |   | 12,819  |                          |  |   | 13,367          |   |  |   | 59,557    |  
|Accumulated deferred income taxes and investment tax credits                |  |                                       | 125,770 |   |             |   | (7,204  | )                        |  |   | (9,727          | ) |  |   | 108,839   |  
|Deferred credits                                                            |  |                                       | 24,022  |   |             |   | 15,878  |                          |  |   | 13,058          |   |  |   | 52,958    |  
|Regulatory liability-accrued cost of removal                                |  |                                       | 40,013  |   |             |   |        |                          |  |   |                |   |  |   | 40,013    |  
|Long-term debt, less current maturities                                     |  |                                       | 415,495 |   |             |   |        |                          |  |   | 384,968         |   |  |   | 800,463   |  
|Redeemable cumulative preferred stock                                       |  |                                       |        |   |             |   |        |                          |  |   | 181,100         |   |  |   | 181,100   |  
|Common shareholder's equity                                                 |  |                                       | 163,683 |   |             |   | 73,804  |                          |  |   | (274,771        | ) |  |   | (37,284   | )
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  
|Total liabilities and shareholder's equity                                  |  | $                                     | 812,116 |   |             | $ | 148,790 |                          |  | $ | 296,152         |   |  | $ | 1,257,058 |  
|                                                                            |  |                                       |         |   |             |   |         |                          |  |   |                 |   |  |   |           |  



-14-



---

##### Table of Contents

Three Months Ended September 30, 2003



|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------- | - | -------- | ------------------------ |  | - | --------------- | - |  | - | --------- | -
|                                                                            |  | RegulatedTransmissionand Distribution |         |   | FirstChoice |   |          | All OtherandEliminations |  |   | TNPConsolidated |  
|Income Statement Data                                                       |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Revenue from external customers                                             |  | $                                     | 40,054  |   |             | $ | 212,631  |                          |  | $ | 2               |   |  | $ | 252,687   |  
|Intercompany revenue                                                        |  |                                       | 29,899  |   |             |   |         |                          |  |   | (29,899         | ) |  |   |          |  
|Purchased power and fuel                                                    |  |                                       | (17,542 | ) |             |   | (125,602 | )                        |  |   |                |   |  |   | (143,144  | )
|Other direct costs                                                          |  |                                       | (5,257  | ) |             |   | (60,125  | )                        |  |   | 29,502          |   |  |   | (35,880   | )
|Depreciation expense                                                        |  |                                       | (7,197  | ) |             |   | (79      | )                        |  |   | (1              | ) |  |   | (7,277    | )
|Other operating expenses                                                    |  |                                       | (14,273 | ) |             |   | (16,243  | )                        |  |   | (1,358          | ) |  |   | (31,874   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Operating income (loss)                                                     |  |                                       | 25,684  |   |             |   | 10,582   |                          |  |   | (1,754          | ) |  |   | 34,512    |  
|Other income and deductions, net                                            |  |                                       | 783     |   |             |   | (21      | )                        |  |   | 25              |   |  |   | 787       |  
|Interest charges                                                            |  |                                       | (6,869  | ) |             |   | (363     | )                        |  |   | (10,853         | ) |  |   | (18,085   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) before taxes                                                  |  |                                       | 19,598  |   |             |   | 10,198   |                          |  |   | (12,582         | ) |  |   | 17,214    |  
|Income taxes                                                                |  |                                       | (7,295  | ) |             |   | (3,681   | )                        |  |   | 4,278           |   |  |   | (6,698    | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net income (loss)                                                           |  |                                       | 12,303  |   |             |   | 6,517    |                          |  |   | (8,304          | ) |  |   | 10,516    |  
|Dividends on preferred stock and other                                      |  |                                       |        |   |             |   |         |                          |  |   | 5,515           |   |  |   | 5,515     |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) applicable to common stock                                    |  | $                                     | 12,303  |   |             | $ | 6,517    |                          |  | $ | (13,819         | ) |  | $ | 5,001     |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Cash Flow Data                                                              |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash received from customers                                                |  | $                                     | 69,951  |   |             | $ | 212,854  |                          |  | $ | (32,520         | ) |  | $ | 250,285   |  
|Purchased power and fuel costs paid                                         |  |                                       | (16,060 | ) |             |   | (140,534 | )                        |  |   |                |   |  |   | (156,594  | )
|Natural gas option premiums paid                                            |  |                                       |        |   |             |   | (495     | )                        |  |   |                |   |  |   | (495      | )
|Cash paid for payroll and to other suppliers                                |  |                                       | (11,098 | ) |             |   | (7,246   | )                        |  |   | (1,438          | ) |  |   | (19,782   | )
|Transmission and distribution charges                                       |  |                                       |        |   |             |   | (59,683  | )                        |  |   | 32,126          |   |  |   | (27,557   | )
|Interest and other taxes paid                                               |  |                                       | (8,110  | ) |             |   | (1,901   | )                        |  |   | (1,285          | ) |  |   | (11,296   | )
|Intercompany dividends, income taxes refunded (paid), and other             |  |                                       | (3,000  | ) |             |   | (20      | )                        |  |   | 3,212           |   |  |   | 192       |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) operations                                   |  |                                       | 31,683  |   |             |   | 2,975    |                          |  |   | 95              |   |  |   | 34,753    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash used in investing activities, primarily additions to utility plant |  |                                       | (8,238  | ) |             |   | (44      | )                        |  |   | (5              | ) |  |   | (8,287    | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Borrowings from (repayments of) credit facilities                           |  |                                       |        |   |             |   | (7,000   | )                        |  |   | (70,781         | ) |  |   | (77,781   | )
|Issuance of senior notes, net of discount                                   |  |                                       |        |   |             |   |         |                          |  |   |                |   |  |   |          |  
|Issuance of term loan under TNP senior credit facility                      |  |                                       |        |   |             |   |         |                          |  |   | 112,500         |   |  |   | 112,500   |  
|Intercompany dividends                                                      |  |                                       |        |   |             |   |         |                          |  |   |                |   |  |   |          |  
|Intercompany financing                                                      |  |                                       |        |   |             |   | 25,000   |                          |  |   | (25,000         | ) |  |   |          |  
|Intercompany borrowing                                                      |  |                                       |        |   |             |   |         |                          |  |   |                |   |  |   |          |  
|Other                                                                       |  |                                       | (176    | ) |             |   | (322     | )                        |  |   | (2,704          | ) |  |   | (3,202    | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) financing activities                         |  | $                                     | (176    | ) |             | $ | 17,678   |                          |  | $ | 14,015          |   |  | $ | 31,517    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Balance Sheet Data as of September 30, 2003                                 |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash and cash equivalents                                                   |  | $                                     | 65,218  |   |             | $ | 22,493   |                          |  | $ | 20,093          |   |  | $ | 107,804   |  
|Accounts receivable                                                         |  |                                       | 31,349  |   |             |   | 99,297   |                          |  |   | (14,447         | ) |  |   | 116,199   |  
|Other current assets                                                        |  |                                       | 2,088   |   |             |   | 3,732    |                          |  |   | 101             |   |  |   | 5,921     |  
|Net utility plant                                                           |  |                                       | 511,316 |   |             |   | 2,810    |                          |  |   | 22              |   |  |   | 514,148   |  
|Goodwill                                                                    |  |                                       |        |   |             |   |         |                          |  |   | 270,256         |   |  |   | 270,256   |  
|Recoverable stranded costs                                                  |  |                                       | 298,748 |   |             |   |         |                          |  |   |                |   |  |   | 298,748   |  
|Other property, regulatory tax assets and deferred charges                  |  |                                       | 28,621  |   |             |   | 363      |                          |  |   | 21,170          |   |  |   | 50,154    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total assets                                                                |  | $                                     | 937,340 |   |             | $ | 128,695  |                          |  | $ | 297,195         |   |  | $ | 1,363,230 |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Current maturities of long-term debt                                        |  | $                                     |        |   |             | $ |         |                          |  | $ | 1,125           |   |  | $ | 1,125     |  
|Accounts payable                                                            |  |                                       | 8,602   |   |             |   | 67,207   |                          |  |   | (13,390         | ) |  |   | 62,419    |  
|Other current liabilities                                                   |  |                                       | 35,344  |   |             |   | 9,297    |                          |  |   | 3,697           |   |  |   | 48,338    |  
|Deferred purchased power and fuel costs                                     |  |                                       | 24,321  |   |             |   |         |                          |  |   |                |   |  |   | 24,321    |  
|Accumulated deferred income taxes and investment tax credits                |  |                                       | 172,842 |   |             |   | (11,149  | )                        |  |   | (10,169         | ) |  |   | 151,524   |  
|Deferred credits                                                            |  |                                       | 24,142  |   |             |   | 16,733   |                          |  |   | 11,072          |   |  |   | 51,947    |  
|Long-term debt, less current maturities                                     |  |                                       | 423,552 |   |             |   |         |                          |  |   | 386,093         |   |  |   | 809,645   |  
|Redeemable cumulative preferred stock                                       |  |                                       |        |   |             |   |         |                          |  |   | 156,631         |   |  |   | 156,631   |  
|Common shareholders equity                                                 |  |                                       | 248,537 |   |             |   | 46,607   |                          |  |   | (237,864        | ) |  |   | 57,280    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total liabilities and shareholders equity                                  |  | $                                     | 937,340 |   |             | $ | 128,695  |                          |  | $ | 297,195         |   |  | $ | 1,363,230 |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  



-15-



---

##### Table of Contents

Nine Months Ended September 30, 2004



|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------- | - | -------- | ------------------------ |  | - | --------------- | - |  | - | --------- | -
|                                                                            |  | RegulatedTransmissionand Distribution |         |   | FirstChoice |   |          | All OtherandEliminations |  |   | TNPConsolidated |  
|Income Statement Data                                                       |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Revenue from external customers                                             |  | $                                     | 127,117 |   |             | $ | 429,174  |                          |  | $ |                |   |  | $ | 556,291   |  
|Intercompany revenue                                                        |  |                                       | 74,337  |   |             |   |         |                          |  |   | (74,337         | ) |  |   |          |  
|Purchased power                                                             |  |                                       | (54,600 | ) |             |   | (222,309 | )                        |  |   |                |   |  |   | (276,909  | )
|Other direct costs                                                          |  |                                       | (19,001 | ) |             |   | (123,715 | )                        |  |   | 73,046          |   |  |   | (69,670   | )
|Depreciation expense                                                        |  |                                       | (22,186 | ) |             |   | (282     | )                        |  |   | (3              | ) |  |   | (22,471   | )
|Other operating expenses                                                    |  |                                       | (54,186 | ) |             |   | (36,292  | )                        |  |   | (4,460          | ) |  |   | (94,938   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Operating income (loss)                                                     |  |                                       | 51,481  |   |             |   | 46,576   |                          |  |   | (5,754          | ) |  |   | 92,303    |  
|Other income and deductions, net                                            |  |                                       | 2,022   |   |             |   | 201      |                          |  |   | (18,478         | ) |  |   | (16,255   | )
|Interest charges                                                            |  |                                       | (21,105 | ) |             |   | (262     | )                        |  |   | (28,583         | ) |  |   | (49,950   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) before taxes                                                  |  |                                       | 32,398  |   |             |   | 46,515   |                          |  |   | (52,815         | ) |  |   | 26,098    |  
|Income taxes                                                                |  |                                       | (11,245 | ) |             |   | (16,656  | )                        |  |   | 11,935          |   |  |   | (15,966   | )
|Extraordinary Items - disallowance of stranded cost (net of taxes)          |  |                                       | (97,836 | ) |             |   |         |                          |  |   |                |   |  |   | (97,836   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net income (loss)                                                           |  |                                       | (76,683 | ) |             |   | 29,859   |                          |  |   | (40,880         | ) |  |   | (87,704   | )
|Dividends on preferred stock and other                                      |  |                                       |        |   |             |   |         |                          |  |   |                |   |  |   |          |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) applicable to common stock                                    |  | $                                     | (76,683 | ) |             | $ | 29,859   |                          |  | $ | (40,880         | ) |  | $ | (87,704   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Cash Flow Data                                                              |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash received from sales to customers                                       |  | $                                     | 177,757 |   |             | $ | 422,526  |                          |  | $ | (71,896         | ) |  | $ | 528,387   |  
|Purchased power costs paid                                                  |  |                                       | (53,909 | ) |             |   | (222,575 | )                        |  |   |                |   |  |   | (276,484  | )
|Cash paid for payroll and to other suppliers                                |  |                                       | (34,951 | ) |             |   | (28,040  | )                        |  |   | (4,228          | ) |  |   | (67,219   | )
|Transmission and distribution charges                                       |  |                                       |        |   |             |   | (123,162 | )                        |  |   | 70,618          |   |  |   | (52,544   | )
|Interest and other taxes paid                                               |  |                                       | (35,567 | ) |             |   | (4,603   | )                        |  |   | (20,627         | ) |  |   | (60,797   | )
|Intercompany dividends, income taxes refunded (paid), and other             |  |                                       | (2,945  | ) |             |   | (7,552   | )                        |  |   | 12,033          |   |  |   | 1,536     |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) operations                                   |  |                                       | 50,385  |   |             |   | 36,594   |                          |  |   | (14,100         | ) |  |   | 72,879    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash used in investing activities, primarily additions to utility plant |  |                                       | (33,163 | ) |             |   | (1,356   | )                        |  |   |                |   |  |   | (34,519   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Borrowings from (repayments of) credit facilities                           |  |                                       |        |   |             |   |         |                          |  |   | (844            | ) |  |   | (844      | )
|Redemption of senior notes                                                  |  |                                       | (8,375  | ) |             |   |         |                          |  |   |                |   |  |   | (8,375    | )
|Intercompany dividends                                                      |  |                                       | (6,000  | ) |             |   | (12,000  | )                        |  |   | 18,000          |   |  |   |          |  
|Other                                                                       |  |                                       | (921    | ) |             |   |         |                          |  |   | (112            | ) |  |   | (1,033    | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) financing activities                         |  | $                                     | (15,296 | ) |             | $ | (12,000  | )                        |  | $ | 17,044          |   |  | $ | (10,252   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Balance Sheet Data as of September 30, 2004                                 |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |         |  
|Cash and cash equivalents                                                   |  | $                                     | 58,833  |   |             | $ | 68,283   |                          |  | $ | 18,780          |   |  | $ | 145,896   |  
|Accounts receivable                                                         |  |                                       | 34,274  |   |             |   | 76,604   |                          |  |   | (13,894         | ) |  |   | 96,984    |  
|Other current assets                                                        |  |                                       | 30,388  |   |             |   | 2        |                          |  |   | (216            | ) |  |   | 30,174    |  
|Net utility plant                                                           |  |                                       | 568,996 |   |             |   | 3,862    |                          |  |   | 15              |   |  |   | 572,873   |  
|Goodwill                                                                    |  |                                       |        |   |             |   |         |                          |  |   | 270,256         |   |  |   | 270,256   |  
|Recoverable stranded costs                                                  |  |                                       | 88,244  |   |             |   |         |                          |  |   |                |   |  |   | 88,244    |  
|Other property, regulatory tax assets and deferred charges                  |  |                                       | 31,381  |   |             |   | 39       |                          |  |   | 21,211          |   |  |   | 52,631    |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total assets                                                                |  | $                                     | 812,116 |   |             | $ | 148,790  |                          |  | $ | 296,152         |   |  | $ | 1,257,058 |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Current maturities of long-term debt                                        |  | $                                     |        |   |             | $ |         |                          |  | $ | 1,125           |   |  | $ | 1,125     |  
|Accounts payable                                                            |  |                                       | 9,762   |   |             |   | 53,493   |                          |  |   | (12,968         | ) |  |   | 50,287    |  
|Other current liabilities                                                   |  |                                       | 33,371  |   |             |   | 12,819   |                          |  |   | 13,367          |   |  |   | 59,557    |  
|Accumulated deferred income taxes and investment tax credits                |  |                                       | 125,770 |   |             |   | (7,204   | )                        |  |   | (9,727          | ) |  |   | 108,839   |  
|Deferred credits                                                            |  |                                       | 24,022  |   |             |   | 15,878   |                          |  |   | 13,058          |   |  |   | 52,958    |  
|Regulatory liability-accrued cost of removal                                |  |                                       | 40,013  |   |             |   |         |                          |  |   |                |   |  |   | 40,013    |  
|Long-term debt, less current maturities                                     |  |                                       | 415,495 |   |             |   |         |                          |  |   | 384,968         |   |  |   | 800,463   |  
|Redeemable cumulative preferred stock                                       |  |                                       |        |   |             |   |         |                          |  |   | 181,100         |   |  |   | 181,100   |  
|Common shareholders equity                                                 |  |                                       | 163,683 |   |             |   | 73,804   |                          |  |   | (274,771        | ) |  |   | (37,284   | )
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total liabilities and shareholders equity                                  |  | $                                     | 812,116 |   |             | $ | 148,790  |                          |  | $ | 296,152         |   |  | $ | 1,257,058 |  
|                                                                            |  |                                       |         |   |             |   |          |                          |  |   |                 |   |  |   |           |  



-16-



---

##### Table of Contents

Nine Months Ended September 30, 2003



|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ----------- | - | -------- | ------------------------ |  | - | --------------- | - |  | - | --------- | -
|                                                                            |  | RegulatedTransmissionand Distribution |          |   | FirstChoice |   |          | All OtherandEliminations |  |   | TNPConsolidated |  
|Income Statement Data                                                       |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |          |  
|Revenue from external customers                                             |  | $                                     | 115,263  |   |             | $ | 544,668  |                          |  | $ | 2               |   |  | $ | 659,933   |  
|Intercompany revenue                                                        |  |                                       | 83,816   |   |             |   |         |                          |  |   | (83,816         | ) |  |   |          |  
|Purchased power and fuel                                                    |  |                                       | (50,920  | ) |             |   | (367,294 | )                        |  |   | 77              |   |  |   | (418,137  | )
|Other direct costs                                                          |  |                                       | (15,616  | ) |             |   | (162,702 | )                        |  |   | 82,626          |   |  |   | (95,692   | )
|Depreciation expense                                                        |  |                                       | (21,374  | ) |             |   | (219     | )                        |  |   | (4              | ) |  |   | (21,597   | )
|Other operating expenses                                                    |  |                                       | (47,939  | ) |             |   | (41,221  | )                        |  |   | (4,040          | ) |  |   | (93,200   | )
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Operating income (loss)                                                     |  |                                       | 63,230   |   |             |   | (26,768  | )                        |  |   | (5,155          | ) |  |   | 31,307    |  
|Other income and deductions, net                                            |  |                                       | 1,631    |   |             |   | 91       |                          |  |   | (59             | ) |  |   | 1,663     |  
|Interest charges                                                            |  |                                       | (20,647  | ) |             |   | (982     | )                        |  |   | (28,321         | ) |  |   | (49,950   | )
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) before taxes                                                  |  |                                       | 44,214   |   |             |   | (27,659  | )                        |  |   | (33,535         | ) |  |   | (16,980   | )
|Income taxes                                                                |  |                                       | (16,031  | ) |             |   | 10,757   |                          |  |   | 11,726          |   |  |   | 6,452     |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net income (loss)                                                           |  |                                       | 28,183   |   |             |   | (16,902  | )                        |  |   | (21,809         | ) |  |   | (10,528   | )
|Dividends on preferred stock and other                                      |  |                                       |         |   |             |   |         |                          |  |   | 16,179          |   |  |   | 16,179    |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Income (loss) applicable to common stock                                    |  | $                                     | 28,183   |   |             | $ | (16,902  | )                        |  | $ | (37,988         | ) |  | $ | (26,707   | )
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Cash Flow Data                                                              |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |          |  
|Cash received from customers                                                |  | $                                     | 188,758  |   |             | $ | 510,507  |                          |  | $ | (86,257         | ) |  | $ | 613,008   |  
|Purchased power and fuel costs paid                                         |  |                                       | (49,192  | ) |             |   | (340,185 | )                        |  |   | (217            | ) |  |   | (389,594  | )
|Natural gas option premiums paid                                            |  |                                       |         |   |             |   | (19,642  | )                        |  |   |                |   |  |   | (19,642   | )
|Cash paid for payroll and to other suppliers                                |  |                                       | (42,560  | ) |             |   | (28,039  | )                        |  |   | (3,860          | ) |  |   | (74,459   | )
|Transmission and distribution charges                                       |  |                                       |         |   |             |   | (150,657 | )                        |  |   | 85,075          |   |  |   | (65,582   | )
|Interest and other taxes paid                                               |  |                                       | (37,399  | ) |             |   | (4,097   | )                        |  |   | (17,404         | ) |  |   | (58,900   | )
|Intercompany dividends, income taxes refunded (paid), and other             |  |                                       | (9,969   | ) |             |   | 675      |                          |  |   | 10,630          |   |  |   | 1,336     |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) operations                                   |  |                                       | 49,638   |   |             |   | (31,438  | )                        |  |   | (12,033         | ) |  |   | 6,167     |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash used in investing activities, primarily additions to utility plant |  |                                       | (28,087  | ) |             |   | (271     | )                        |  |   | (3              | ) |  |   | (28,361   | )
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Borrowings from (repayments of) credit facilities                           |  |                                       | (171,000 | ) |             |   |         |                          |  |   | (71,581         | ) |  |   | (242,581  | )
|Issuance of senior notes, net of discount                                   |  |                                       | 248,923  |   |             |   |         |                          |  |   |                |   |  |   | 248,923   |  
|Issuance of term loan under TNP senior credit facility                      |  |                                       |         |   |             |   |         |                          |  |   | 112,500         |   |  |   | 112,500   |  
|Intercompany dividends                                                      |  |                                       | (18,400  | ) |             |   |         |                          |  |   | 18,400          |   |  |   |          |  
|Intercompany financing                                                      |  |                                       |         |   |             |   | 35,000   |                          |  |   | (35,000         | ) |  |   |          |  
|Intercompany borrowing                                                      |  |                                       | (14,557  | ) |             |   | 14,557   |                          |  |   |                |   |  |   |          |  
|Other                                                                       |  |                                       | (1,583   | ) |             |   | (568     | )                        |  |   | (3,383          | ) |  |   | (5,534    | )
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Net cash provided by (used in) financing activities                         |  | $                                     | 43,383   |   |             | $ | 48,989   |                          |  | $ | 20,936          |   |  | $ | 113,308   |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Balance Sheet Data as of September 30, 2003                                 |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|                                                                            |  |                                       |          |  
|Cash and cash equivalents                                                   |  | $                                     | 65,218   |   |             | $ | 22,493   |                          |  | $ | 20,093          |   |  | $ | 107,804   |  
|Accounts receivable                                                         |  |                                       | 31,349   |   |             |   | 99,297   |                          |  |   | (14,447         | ) |  |   | 116,199   |  
|Other current assets                                                        |  |                                       | 2,088    |   |             |   | 3,732    |                          |  |   | 101             |   |  |   | 5,921     |  
|Net utility plant                                                           |  |                                       | 511,316  |   |             |   | 2,810    |                          |  |   | 22              |   |  |   | 514,148   |  
|Goodwill                                                                    |  |                                       |         |   |             |   |         |                          |  |   | 270,256         |   |  |   | 270,256   |  
|Recoverable stranded costs                                                  |  |                                       | 298,748  |   |             |   |         |                          |  |   |                |   |  |   | 298,748   |  
|Other property, regulatory tax assets and deferred charges                  |  |                                       | 28,621   |   |             |   | 363      |                          |  |   | 21,170          |   |  |   | 50,154    |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total assets                                                                |  | $                                     | 937,340  |   |             | $ | 128,695  |                          |  | $ | 297,195         |   |  | $ | 1,363,230 |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Current maturities of long-term debt                                        |  | $                                     |         |   |             | $ |         |                          |  | $ | 1,125           |   |  | $ | 1,125     |  
|Accounts payable                                                            |  |                                       | 8,602    |   |             |   | 67,207   |                          |  |   | (13,390         | ) |  |   | 62,419    |  
|Other current liabilities                                                   |  |                                       | 35,344   |   |             |   | 9,297    |                          |  |   | 3,697           |   |  |   | 48,338    |  
|Deferred purchased power and fuel costs                                     |  |                                       | 24,321   |   |             |   |         |                          |  |   |                |   |  |   | 24,321    |  
|Accumulated deferred income taxes and investment tax credits                |  |                                       | 172,842  |   |             |   | (11,149  | )                        |  |   | (10,169         | ) |  |   | 151,524   |  
|Deferred credits                                                            |  |                                       | 24,142   |   |             |   | 16,733   |                          |  |   | 11,072          |   |  |   | 51,947    |  
|Long-term debt, less current maturities                                     |  |                                       | 423,552  |   |             |   |         |                          |  |   | 386,093         |   |  |   | 809,645   |  
|Redeemable cumulative preferred stock                                       |  |                                       |         |   |             |   |         |                          |  |   | 156,631         |   |  |   | 156,631   |  
|Common shareholders equity                                                 |  |                                       | 248,537  |   |             |   | 46,607   |                          |  |   | (237,864        | ) |  |   | 57,280    |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  
|Total liabilities and shareholders equity                                  |  | $                                     | 937,340  |   |             | $ | 128,695  |                          |  | $ | 297,195         |   |  | $ | 1,363,230 |  
|                                                                            |  |                                       |          |   |             |   |          |                          |  |   |                 |   |  |   |           |  



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As of September 30, 2004, TNP had assigned approximately $178.7 million of goodwill to the Regulated
Transmission and Distribution segment and approximately $91.6 million to First Choice. As discussed in Note 3, TNMP recorded an after tax loss of $97.8 million in the second quarter of 2004 related to the PUCT true-up proceeding regarding
TNMPs stranded costs. TNP did not assign goodwill to the Regulated Transmission and Distribution segment based upon the potential cash flows resulting from stranded cost recovery. Accordingly, the loss recorded as a result of the PUCT decision
in the true-up proceeding did not result in impairment of the goodwill assigned to the Regulated Transmission and Distribution segment.



Note 9. Commitments and Contingencies



Energy Supply



Constellation Agreement.As reported in the 2003 Annual Report on Form 10-K, First Choice and Constellation executed a new power supply
agreement in October 2003 under which Constellation will supply First Choice the majority of its power requirements through the end of 2006. The new agreement included provisions that provided First Choice with sufficient credit for its operations.
As a result, First Choice has secured supply to serve most of its forecasted commitments to existing competitive customers for 2004 at fixed prices. In addition, First Choice has fixed the price of energy for forecasted commitments to price-to-beat
customers through December 2004.



First Choice implemented the
new agreement with Constellation in three phases. Phase one began and ended in 2003. Phase two of the agreement began in December 2003 and ended on June 1, 2004. On that date, phase three commenced and First Choice transferred all of First
Choices customers and receivables into a bankruptcy remote subsidiary, First Choice Power Special Purpose, LP (SPE), which operates as a retail electric provider, as discussed in Note 3. First Choice took this action to comply with the PUCT
order issued on March 16, 2004 that authorized the transfer of customers to the SPE.



The SPE holds all customer contracts and wholesale power and natural gas contracts previously held by First Choice. Constellation received a lien against the assets of SPE, including billed and unbilled receivables,
all cash of the SPE, customer contracts, and the equity of the SPE, to cover the settlement exposure and mark-to-market exposure rather than requiring the SPE to post alternate collateral for purchase power supply. In addition, the SPE is restricted
by covenants that limit the size of the SPEs unhedged market positions and require that sales by the SPE retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its
credit exposure under the agreement. If, however, a change in electricity or gas forward prices increases Constellations credit exposure to the SPE beyond a limit based on Constellations liens in cash and accounts receivable,
Constellation will have no obligation to supply additional customers of the SPE unless the SPE provides letters of credit or other collateral acceptable to Constellation, and the SPE will be constrained in its ability to sign up additional customers
until that credit shortfall is corrected. In connection with the formation of the SPE, Constellation released TNMP from its $25 million guarantee of certain power supply obligations of First Choice.



Phase three commitments to supply power for new customers will continue until
December 31, 2006, although Constellation has agreed to supply power in certain transactions under the agreement beyond the date when that commitment expires. The SPE may terminate the agreement upon thirty days prior notice to Constellation, for
any reason, but the agreement and all liens securing the agreement remain in effect with respect to transactions entered into prior to the termination, until both parties have fulfilled all of their obligations with respect to such transactions or
such transactions have been terminated for default or certain reasons related to regulatory changes. Provisions of the power supply agreements that by their terms survive terminations would expire on their original expiration dates.



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



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Other



TNP and TNMP are 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 TNPs and 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



First Choice Customer Operations



As discussed in Note 3, the Texas electricity market has been open to retail competition since January 1, 2002. First Choice has addressed, and continues
to address, a number of issues related to the development of retail competition.



Customer Retention and Acquisition. At September 30, 2004, First Choice served approximately 166,000 customers at price-to-beat rates and approximately 54,000 customers at competitive rates. At September 30,
2003, First Choice served approximately 179,000 and 74,000 price-to-beat and competitive customers, respectively. In response to the factors discussed in Bad Debt and Delinquency, below, First Choice has not actively pursued mass market
customers. Mass market customers who choose First Choice as their retail electric provider may be required to make a deposit before First Choice begins service.



Bad Debt and Delinquency.Under PUCT rules prior to June 1, 2004, First Choice had the right to disconnect customers that reside in TNMPs
transmission and distribution service territory for nonpayment. However, First Choice was prohibited from disconnecting customers who resided outside TNMPs transmission and distribution service territory for nonpayment, but could transfer such
a customer to the affiliated retail electric provider of the transmission and distribution service provider that served the transferred customer.



The structure described above limited First Choices collection activities, and affected both bad debt expense and the level of delinquent accounts
receivable. Bad debt expense as a percentage of operating revenues for First Choice was approximately 2.1 percent at September 30, 2004, compared with 1.6 percent at September 30, 2003. On average, delinquent accounts receivable were approximately
7.1 percent of monthly operating revenue for the nine months ended September 30, 2004, compared with a 4.6 percent delinquency rate for the nine months ended September 30, 2003.



As discussed in Note 3, the PUCT has implemented changes to the current customer protection rules. As a result, First Choice
began disconnecting customers that reside outside of TNMPs transmission and distribution service territory for nonpayment in June 2004. Prior to the change in customer protection rules, First Choice was only able to disconnect customers within
TNMPs transmission and distribution service territory for nonpayment. First Choice expects that both its bad debt and delinquency rates will decrease for competitive customers as it implements more aggressive credit and collection policies
based on the new customer protection rules.



First Choice
Energy Supply



Strategy for mitigating fluctuation in
costs of energy supply. As reported in the 2003 Annual Report on Form 10-K, First Choice and Constellation executed a new power supply agreement in October 2003 under which Constellation will supply First Choice the majority of its power
requirements through the end of 2006. The new agreement included provisions that provided First Choice with sufficient credit for its operations. As a result, First Choice has secured supply to serve most of its forecasted commitments to existing
competitive customers for 2004 at fixed prices. In addition, First Choice has fixed the price of energy for forecasted commitments to price-to-beat customers through December 2004.



First Choice implemented the new agreement with Constellation in three phases. Phase one began and ended in 2003. Phase two
of the agreement began in December 2003 and ended on June 1, 2004. On that date, phase three commenced and First Choice transferred all of First Choices customers and receivables into a bankruptcy remote subsidiary, First Choice Power Special
Purpose, LP (SPE), which operates as a retail electric provider, as discussed in Note 3. First Choice took this action to comply with the PUCT order issued on March 16, 2004 that authorized the transfer of customers to the SPE.



The SPE holds all customer contracts and wholesale power and natural gas
contracts previously held by First Choice. Constellation received a lien against the assets of SPE, including billed and unbilled receivables, all cash of the SPE, customer contracts, and the equity of the SPE, to cover the settlement exposure and
mark-to-market exposure rather than requiring the SPE to post alternate collateral for purchase power supply. In addition, the SPE is restricted by covenants that limit the size of the SPEs unhedged market positions and require that sales by
the SPE retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward prices
increases Constellations credit exposure to the SPE



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beyond a limit based on Constellations liens in cash and accounts receivable, Constellation will have no obligation
to supply additional customers of the SPE unless the SPE provides letters of credit or other collateral acceptable to Constellation, and the SPE will be constrained in its ability to sign up additional customers until that credit shortfall is
corrected. In connection with the formation of the SPE, Constellation released TNMP from its $25 million guarantee of certain power supply obligations of First Choice.



Phase three commitments to supply power for new customers will continue until December 31, 2006, although Constellation has
agreed to supply power in certain transactions under the agreement beyond the date when that commitment expires. The SPE may terminate the agreement upon thirty days prior notice to Constellation, for any reason, but the agreement and all liens
securing the agreement remain in effect with respect to transactions entered into prior to the termination, until both parties have fulfilled all of their obligations with respect to such transactions or such transactions have been terminated for
default or certain reasons related to regulatory changes. Provisions of the power supply agreements that by their terms survive terminations would expire on their original expiration dates.



Load Forecasting.First Choices load fluctuates continuously due
to among other things, customer additions and losses, changes in customers usage, severe or unexpected weather and timing of customer switching. First Choice continually monitors and revises its load forecast to account for changing customer
loads (both price-to-beat and competitive). First Choice develops short-term load forecasts to identify short-term load surpluses and shortages, and to insure that hedges are in place to cover expected sales. To the extent these short-term load
forecasts identify shortages, First Choice generally covers shortages through short-term power purchases. First Choice may cover off-peak shortages through purchases on the Electric Reliability Council of Texas (ERCOT) balancing market where
off-peak prices are generally lower than can be contracted through short-term purchases.



The restructured power supply agreement with Constellation resulted in Constellation assuming the risks related to changes in expected customers usage and weather-related risks. First Choice retained the risks
associated with customer attrition.



TNMP



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



Critical Accounting Policies



TNP 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.



In
addition, purchased power expenses are subject to adjustment due to revisions that ERCOT may make to the metered load of First Choice during ERCOTs settlement process. Through September 30, 2004, First Choice has reduced purchased power
expense by $2.3 million for the estimated ERCOT settlement adjustment for the year ended December 31, 2003.



TNP 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.



Goodwill and Intangible Assets. TNP has goodwill
related to the April 7, 2000 Merger that had a carrying value of $270.3 million as of September 30, 2004. TNP has apportioned the carrying value of the goodwill between its Regulated Transmission and Distribution segment and First Choice for
purposes of evaluating carrying value. As of September 30, 2004, TNP had assigned approximately $178.7 million of goodwill to the Regulated Transmission and Distribution segment and approximately $91.6 million to First Choice.



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SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires TNP to test goodwill
for impairment at least annually and more frequently when indicators of impairment exist. TNP performed its annual goodwill impairment test as of December 31, 2003, and concluded that the fair value of the goodwill related to the Merger exceeded its
carrying value.



Based on the proposed transaction discussed in
Note 2, management has concluded that the fair value of the goodwill related to the Merger exceeded its carrying value.



Accounting for Derivatives  Normal Purchases and Sales. In the normal course of business, TNMP and First Choice enter 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 and First Choice do not account for their respective electricity contracts as derivatives.



If TNMP and First Choice were required to account for their
respective 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



TNP had net income applicable to common stock of $11.6 million for the
quarter ended September 30, 2004, compared with net income applicable to common stock of $5.0 million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, TNP had a loss applicable to common stock of $87.7 million
compared with a loss applicable to common stock of $26.7 million for the nine months ended September 30, 2003. The changes in TNPs earnings for the quarter and nine months ended September 30, 2004 are attributable to the factors listed below
(in millions):



|                                         |  |                                             |      |   |                                            |   |        |  
|---------------------------------------- |  | ------------------------------------------- | ---- | - | ------------------------------------------ | - | ------ | -
|                                         |  | Earnings Increase (Decrease)                |     
|                                         |  | Three MonthsEnded September 30,2004 v. 2003 |      |   | Nine MonthsEnded September 30,2004 v. 2003 |  
|Change in First Choice net income (loss) |  | $                                           | 8.0  |   |                                            | $ | 46.8   |  
|Change in TNMP net income (loss)         |  |                                             | (1.5 | ) |                                            |   | (104.9 | )
|TNP Preferred stock dividends            |  |                                             | (0.8 | ) |                                            |   | (2.4   | )
|All other and intercompany eliminations  |  |                                             | 0.9  |   |                                            |   | (0.5   | )
|                                         |  |                                             |      |   |                                            |   |        |  
|TNP consolidated net income              |  | $                                           | 6.6  |   |                                            | $ | (61.0  | )
|                                         |  |                                             |      |   |                                            |   |        |  



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First Choice Results



First Choice had net income of $14.5 million for the quarter ended September 30, 2004, compared with a net income of $6.5
million for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, First Choice had net income of $29.9 million, compared with a net loss of $16.9 million for the nine months ended September 30, 2003. The changes in
First Choices earnings for the quarter ended September 30, 2004 are attributable to the factors listed below (in millions):



|                                                            |  |                                             |      |   |                                            |   |       |  
|----------------------------------------------------------- |  | ------------------------------------------- | ---- | - | ------------------------------------------ | - | ----- | -
|                                                            |  | Earnings Increase (Decrease)                |     
|                                                            |  | Three MonthsEnded September 30,2004 v. 2003 |      |   | Nine MonthsEnded September 30,2004 v. 2003 |  
|Changes in gross profit                                     |  | $                                           | 8.5  |   |                                            | $ | 68.5  |  
|Other operating and maintenance                             |  |                                             | 3.5  |   |                                            |   | 4.9   |  
|All other (including income tax effects on the items above) |  |                                             | (4.0 | ) |                                            |   | (26.6 | )
|                                                            |  |                                             |      |   |                                            |   |       |  
|Change in First Choice net income (loss)                    |  | $                                           | 8.0  |   |                                            | $ | 46.8  |  
|                                                            |  |                                             |      |   |                                            |   |       |  



First Choice
Gross Profit



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



|                                                               |  |                                  |         |      |                                 |                    |  |   |         |   |  |      |         |                    |  |   |         |  |   |          |  
|-------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | ------------------------------- | ------------------ |  | - | ------- | - |  | ---- | ------- | ------------------ |  | - | ------- |  | - | -------- | -
|                                                               |  | Three Months Ended September 30, |         |      | Nine Months Ended September 30, |                   
|                                                               |  | 2004                             |         | 2003 |                                 | Increase(Decrease) |  |   | 2004    |   |  | 2003 |         | Increase(Decrease) | 
|Operating revenues                                             |  | $                                | 171,877 |      | $                               | 212,631            |  | $ | (40,754 | ) |  | $    | 429,174 |                    |  | $ | 544,668 |  | $ | (115,494 | )
|Transmission and distribution costs                            |  |                                  | 46,653  |      |                                 | 56,536             |  |   | (9,883  | ) |  |      | 123,763 |                    |  |   | 158,694 |  |   | (34,931  | )
|                                                               |  |                                  |         |      |                                 |                    |  |   |         |   |  |      |         |                    |  |   |         |  |   |          |  
|Operating revenues, net of transmission and distribution costs |  |                                  | 125,224 |      |                                 | 156,095            |  |   | (30,871 | ) |  |      | 305,411 |                    |  |   | 385,974 |  |   | (80,563  | )
|Purchased power                                                |  |                                  | 89,788  |      |                                 | 125,602            |  |   | (35,814 | ) |  |      | 222,309 |                    |  |   | 367,294 |  |   | (144,985 | )
|Clawback accrual                                               |  |                                  |        |      |                                 | 3,589              |  |   | (3,589  | ) |  |      | (48     | )                  |  |   | 4,008   |  |   | (4,056   | )
|                                                               |  |                                  |         |      |                                 |                    |  |   |         |   |  |      |         |                    |  |   |         |  |   |          |  
|Gross profit                                                   |  | $                                | 35,436  |      | $                               | 26,904             |  | $ | 8,532   |   |  | $    | 83,150  |                    |  | $ | 14,672  |  | $ | 68,478   |  
|                                                               |  |                                  |         |      |                                 |                    |  |   |         |   |  |      |         |                    |  |   |         |  |   |          |  



Transmission and
distribution costs are included in the Other operating and maintenance line of TNPs consolidated income statement. The following table summarizes the components of the change in First Choices gross profit for the three months
and nine months ended September 30, 2004, compared with the same periods in 2003 (in thousands).



|                                                                                         |  |                                             |         |   |                                            |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | - | ------------------------------------------ | - | ------- | -
|                                                                                         |  | Increase (Decrease)                         |        
|                                                                                         |  | Three MonthsEnded September 30,2004 v. 2003 |         |   | Nine MonthsEnded September 30,2004 v. 2003 |  
|Price variances                                                                          |  |                                             |         |   |                                            |   |         |  
|Changes in price-to-beat rates, primarily fuel factor increases                          |  | $                                           | 6,970   |   |                                            | $ | 9,934   |  
|Changes in competitive rates                                                             |  |                                             | 6,050   |   |                                            |   | 19,681  |  
|Decreased purchased power expenses attributable to lower prices                          |  |                                             | 7,814   |   |                                            |   | 35,024  |  
|                                                                                         |  |                                            
|Quantity variances                                                                       |  |                                             |         |   |                                            |   |         |  
|Decreased sales to competitive customers, net of transmission and distribution charges   |  |                                             | (32,558 | ) |                                            |   | (71,575 | )
|Decreased purchased power expenses attributable to lower sales to customers              |  |                                             | 38,258  |   |                                            |   | 110,852 |  
|Decreased sales to price-to-beat customers, net of transmission and distribution charges |  |                                             | (11,910 | ) |                                            |   | (37,831 | )
|Prior period ERCOT Settlements to purchased power expense                                |  |                                             | (10,259 | ) |                                            |   | (891    | )
|Clawback Expense                                                                         |  |                                             | 3,589   |   |                                            |   | 4,056   |  
|All other                                                                                |  |                                             | 578     |   |                                            |   | (772    | )
|                                                                                         |  |                                             |         |   |                                            |   |         |  
|Gross profit increase                                                                    |  | $                                           | 8,532   |   |                                            | $ | 68,478  |  
|                                                                                         |  |                                             |         |   |                                            |   |         |  



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##### Table of Contents

Gross profit for the three and nine months ended September 30, 2004, increased $8.5 million and $68.5
million compared with the corresponding 2003 periods. The increase in both periods resulted from lower purchased power expenses and was partially offset by decreased revenues from competitive and price-to-beat customers.



Revenues from price-to-beat customers for the three and nine months ended
September 30, 2004, net of transmission and distribution charges, decreased $4.9 million and $27.9 million, respectively, compared to the same period in 2003. The decrease was caused by milder weather conditions in 2004 compared to 2003, and a
decrease in the number of price-to-beat customers.



Revenues
from competitive customers, net of transmission and distribution charges, decreased $26.5 million and $51.9 million for the three and nine months ended September 30, 2004, respectively, compared with the three and nine months ended September 30,
2003. Decreased sales resulting from milder weather in 2004 compared to 2003 and the net decrease in customers were primarily responsible for the decrease in revenue. The decrease in sales was partially offset by increases in rates of $6.1 million
and $19.7 million for the three and nine months ended September 30, 2004, respectively, compared with the three and nine months ended September 30, 2003. Beginning in the second quarter of 2003, First Choice charged competitive customers higher
rates to offset increasing natural gas prices.



Retail electric
providers such as First Choice include a transmission and distribution charge in the prices they charge their customers for electric service. The transmission and distribution charge is regulated by the PUCT and is designed to allow the utility that
provides transmission and distribution services within a specific service area, referred to as the transmission and distribution service provider, to recover its cost of service. During the three and nine months ended September 30, 2004, First
Choice incurred transmission and distribution costs related to sales to price-to-beat and competitive customers of $46.7 million and $123.8 million, compared with $56.5 million and $158.7 million for the three and nine months ended September 30,
2003. As noted above, the decreases reflect a decrease in the number of price-to-beat and competitive customers along with lower weather-related sales for the three and nine months ended September 30, 2004 compared to the three and nine months ended
September 30, 2003.



Purchased power expenses decreased $35.8
million and $145.0 million for the three and nine months ended September 30, 2004, respectively, compared with the amount incurred for the same period in 2003. Lower prices accounted for $7.8 million and $35.0 million of the decrease for the three
and nine months ended respectively. Natural gas prices began to rise late in 2002 and spiked in March 2003. First Choice responded to the increases by purchasing natural gas options to mitigate the risk of increasing natural gas prices. Since that
time, First Choice has restructured its purchase power agreement with Constellation. The new agreement included provisions that provided First Choice with sufficient credit for its operations, giving First Choice the ability to purchase natural gas
at fixed prices, thereby locking in the cost of its energy supply. An additional $38.3 million and $110.9 million of the decrease resulted from a decrease in sales during the three and nine months ended September 30, 2004 compared with the three and
nine months ended September 30, 2003 as discussed above. Also, for the three months ended September 30, 2004, prior period purchased power adjustments reduced gross profit by $10.3 million, when compared to the same period last year. The third
quarter of 2003 included $7.7 million of reduction to purchased power related to ERCOTs resettlement adjustments for 2002.



Other Operating and Maintenance



Other operating and maintenance expenses for the third quarter of 2004 decreased by $3.5 million compared with the same period in 2003. For the nine
months ended September 30, 2004, other operating and maintenance expenses decreased by $4.9 million compared with the same period in 2003. The decreases resulted primarily from lower bad debt.



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TNMP Results



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



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



TNMP Gross
Profit



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



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



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



The following table summarizes the components of the change in TNMPs gross profit for the three and nine months ended September 30, 2004, compared
with the same periods in 2003 (in thousands).



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



Gross profit for the
three months ended September 30, 2004, increased $1.6 million, or 3.4 percent compared with the corresponding 2003 period. The overall increase is driven by a $1.0 million increase in industrial revenue due to the timing of customer billings for the
quarter, and by a $0.7 million increase associated with growth in customers. In addition operating



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revenues increased by $0.8 million, as average customer usage was slightly higher in the third quarter of 2003 versus the
third quarter of 2004. Partially offsetting these increases were reductions in transmission revenues, net of expenses, of $0.9 million, resulting from an increase in expenses due to higher transmission costs from TXU Electric Delivery Company and
Lower Colorado River Authority. In addition there was a $0.4 million decrease in electric service revenues due to lower disconnect and reconnect fees.



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



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



Operating Expenses



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



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



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



Other Operating and Maintenance



Other operating and maintenance expenses increased by $3.7 million and by $4.5 million for the quarter and nine months ended September 30, 2004, compared
with the same periods in 2003 respectively. The three and nine month increases are primarily attributable to a $3.1 million reduction to operating expenses in August 2003 related to the transfer of previously expensed System Benefit Fund costs from
expense to a regulatory asset based on a PUCT ruling.



Taxes
Other Than Income Taxes



Taxes other than income taxes
increased $0.5 million and $1.6 million for the three and nine months ended September 30, 2004, compared with the corresponding periods in 2003. The increase is primarily related to higher ad valorem taxes.



Extraordinary Item (net of taxes)



In the second quarter of 2004, TNMP recorded a loss of $97.8 million related
to the PUCT true-up proceeding regarding TNMPs stranded costs. The PUCT allowed TNMP to recover $87.3 million of the $266.5 million that TNMP requested as stranded cost. This decision resulted in a loss of $155.2 million before tax ($97.8
million after tax). TNMP recorded the $97.8 million after tax loss as an extraordinary item.



TNP Preferred Stock Dividends



Dividends on preferred stock increased $0.8 million and $2.4 million for the three and nine months ended September 30, 2004, respectively, compared with the corresponding periods in 2003. The increases are
attributable to TNP paying dividends on preferred stock through the issuance of additional shares of preferred stock.



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Financial Condition



TNP Liquidity



TNPs main sources of liquidity, and its ability to service its debt, has depended primarily on the earnings of its subsidiaries, TNMP and First
Choice. TNP receives distributions of those earnings in the form of cash dividends, as well as payments from its subsidiaries under a tax sharing agreement.



For the nine months ended September 30, 2004, TNPs consolidated cash flow from operations was $66.7 million higher than in the nine months ended
September 30, 2003. The factors causing the increase in cash flow from operations are summarized in the following table (in millions).



|                                                                |  |                                            |      |  
|--------------------------------------------------------------- |  | ------------------------------------------ | ---- | -
|                                                                |  | Cash FlowIncrease(Decrease)                |     
|                                                                |  | Nine MonthsEnded September 30,2004 v. 2003 |     
|Cash paid in 2003 for natural gas options                       |  | $                                          | 19.6 |  
|Increased cash flow from sales, net of purchased power payments |  |                                            | 28.5 |  
|Decreased cash paid to suppliers                                |  |                                            | 20.3 |  
|All other                                                       |  |                                            | (1.7 | )
|                                                                |  |                                            |      |  
|TNP consolidated cash flow from operations                      |  | $                                          | 66.7 |  
|                                                                |  |                                            |      |  



In the first half of
2003, First Choice purchased natural gas options as part of a strategy to mitigate the risk of increasing natural gas prices. The purchasing strategy of natural gas options ended in the second half of 2003. Cash flow from sales net of purchased
power payments increased due to increases in the price-to-beat fuel factor along with lower natural gas prices. The decreased payments to suppliers are primarily attributable to decreased transmission and distribution charges due to lower sales in
2004.



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



As a result of the extraordinary charge, TNMPs equity balance is
currently 28 percent of its total capitalization. Due to the reduction in TNMPs equity balance, management does not currently expect TNMP to pay dividends to TNP. Management believes that dividends from First Choice, payments under the tax
sharing agreement, and cash on hand should be sufficient to meet TNPs working capital requirements through the end of 2005.



Rating Actions.In June 2004, as a result of the PUCT true-up order, Moodys downgraded TNPs senior unsecured debt to B1 from Ba2,
TNPs subordinated debt to B2 from Ba3 and TNPs preferred stock to B3 from B1. Also in June, Standard & Poors placed TNPs ratings on credit watch negative, primarily as a result of the PUCT true-up order. In July 2004,
Fitch downgraded TNPs senior secured bank facility to B+ from BB, TNPs senior subordinated notes to B from BB- and TNPs preferred stock to CCC from B+, with a rating outlook of negative. Fitch cited the PUCT true-up order and
weaker than expected 2004 results from FCP. TNP 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 TNP and TNMP to
positive from negative, and Standard & Poors revised its rating outlook on TNP and TNMP to developing from negative.



First Choice Liquidity



First Choice Liquidity. As reported in the 2003 Annual Report on Form 10-K, First Choice and Constellation executed a new power supply
agreement in October 2003 under which Constellation will supply First Choice the majority of its power requirements through the end of 2006. The new agreement included provisions that provided First Choice with sufficient credit for its operations.
As a result, First Choice has secured supply to serve most of its forecasted commitments to existing competitive customers for 2004 at fixed prices. In addition, First Choice has fixed the price of energy for forecasted commitments to price-to-beat
customers through December 2004.



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First Choice implemented the new agreement with Constellation in three phases. Phase one began and ended
in 2003. Phase two of the agreement began in December 2003 and ended on June 1, 2004. On that date, phase three commenced and First Choice transferred all of First Choices customers and receivables into a bankruptcy remote subsidiary, First
Choice Power Special Purpose, LP (SPE), which operates as a retail electric provider, as discussed in Note 3. First Choice took this action to comply with the PUCT order issued on March 16, 2004 that authorized the transfer of customers to the SPE.



The SPE holds all customer contracts and wholesale power and
natural gas contracts previously held by First Choice. Constellation received a lien against the assets of SPE, including billed and unbilled receivables, all cash of the SPE, customer contracts, and the equity of the SPE, to cover the settlement
exposure and mark-to-market exposure rather than requiring the SPE to post alternate collateral for purchase power supply. In addition, the SPE is restricted by covenants that limit the size of the SPEs unhedged market positions and require
that sales by the SPE retain a positive retail margin. The agreement does not, however, permit Constellation to demand additional collateral irrespective of its credit exposure under the agreement. If, however, a change in electricity or gas forward
prices increases Constellations credit exposure to the SPE beyond a limit based on Constellations liens in cash and accounts receivable, Constellation will have no obligation to supply additional customers of the SPE unless the SPE
provides letters of credit or other collateral acceptable to Constellation, and the SPE will be constrained in its ability to sign up additional customers until that credit shortfall is corrected. In connection with the formation of the SPE,
Constellation released TNMP from its $25 million guarantee of certain power supply obligations of First Choice.



Phase three commitments to supply power for new customers will continue until December 31, 2006, although Constellation has agreed to supply power in
certain transactions under the agreement beyond the date when that commitment expires. The SPE may terminate the agreement upon thirty days prior notice to Constellation, for any reason, but the agreement and all liens securing the agreement remain
in effect with respect to transactions entered into prior to the termination, until both parties have fulfilled all of their obligations with respect to such transactions or such transactions have been terminated for default or certain reasons
related to regulatory changes. Provisions of the power supply agreements that by their terms survive terminations would expire on their original expiration dates.



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



TNMP Liquidity



Affiliate Guarantee. In October 2003, the NMPRC granted TNMPs request for the authority to extend a portion of the guarantees that TNMP provided for certain power supply obligations of First Choice. On June 1, 2004, TNMP
terminated this authority to guarantee the power supply obligations of First Choice upon First Choices establishment of FCPSP under authorization granted by the PUCT in Docket No. 29081. FCPSP has been established in connection with First
Choices power supply agreement with Constellation.



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



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



Rating Actions.In June 2004, as a
result of the PUCT true-up order, Moodys downgraded TNMP to Ba2 from Baa3, and identified the ratings outlook as negative. Also in June, Standard & Poors placed TNMPs ratings on credit watch negative, primarily as a result of
the PUCT true-up order. 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 Enterprises, Moodys and Fitch revised their ratings outlook on TNP and TNMP to positive from negative, and Standard & Poors revised its rating outlook on TNP and TNMP to developing from negative.



Cash Flow.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.



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Item 4. Controls and Procedures.



As of September 30, 2004, the Chief Executive Officer and Chief Financial Officer of TNP 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 TNP 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 TNPs periodic SEC filings.



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



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PART II - OTHER INFORMATION



Item 1. Legal Proceedings



See Notes 3 and 9 for information regarding additional regulatory and legal matters.



Item 6. Exhibits and Reports on Form 8-K



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



|      |   |  |                                                                                                                        
|----- | - |  | -----------------------------------------------------------------------------------------------------------------------
|(31.1 | ) |  | Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act.                             
|      |  
|(31.2 | ) |  | Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act.                             
|      |  
|(32.1 | ) |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|      |  
|(32.2 | ) |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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



Statement Regarding Forward Looking Information



The discussions in this document that are not historical factors, including, but not limited to, future cash flows and the potential recovery of stranded costs are based upon current expectations. Actual results may
differ materially. Among the facts that could cause the results to differ materially from expectations are the following: the outcome of any appeals of the PUCT order in the stranded cost true-up proceeding; the results of any future regulatory
proceedings including the inclusion of the clawback liability in a rate adjustment proceeding; the outcome of efforts to re-establish the New Mexico FPPCAC; the payment of dividends by TNMP, First Choice or the FCPSP; the ability of TNPs
subsidiaries to adapt to open market competition; the ability of First Choice to attract and retain customers as competition moves forward; changes to First Choice purchased power costs resulting from the ERCOT settlement process; the effects of
accounting pronouncements that may be issued periodically; changes in regulations affecting TNPs businesses; insurance coverage available for claims made in litigation; general business and economic conditions; price fluctuations in the
electric power and natural gas markets; collections experience. 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, that the businesses will not be integrated successfully, and that disruption from the PNM Transaction making it more difficult to maintain relationships with customers, employees, suppliers or other third
parties, additional factors include conditions in the financial markets relevant to the proposed transaction, interest rates, weather, fuel costs, changes in supply and demand in the market for electric power, wholesale power prices, market
liquidity, the competitive environment in the electric and natural gas industries, state and federal regulatory and legislative decisions and actions, the outcome of legal proceedings and the performance of state, regional and national economies;
and other factors described from time to time in TNPs reports filed with the Securities and Exchange Commission. TNP 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.



|                       |  |                       |  |                           
|---------------------- |  | --------------------- |  | --------------------------
|(Registrant)           |  | TNP ENTERPRISES, INC.
|                       |  |                      
|Date: November 3, 2004 |  | By                    |  | \s\ WILLIAM J. CATACOSINOS
|                       |  |                       |  | William J. Catacosinos    
|                       |  |                       |  | Chief Executive Officer   
|                       |  |                      
|Date: November 3, 2004 |  | By                    |  | \s\ THEODORE A. BABCOCK   
|                       |  |                       |  | Theodore A. Babcock       
|                       |  |                       |  | Chief Financial Officer   



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