Texas New Mexico Power 10-Q 2004 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2004

or

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

For the transition period from            to            

Commission File Number: 2-97230

TEXAS-NEW MEXICO POWER COMPANY

(Exact name of registrant as specified in its charter)

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

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

(Address and zip code of principal executive offices)

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

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

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

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

Texas New-Mexico Power Company and Subsidiaries

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

TABLE OF CONTENTS

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

-2-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

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

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

-3-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

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

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

-4-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2004			2003
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales to customers	$	177,757		$	188,758
Purchased power costs paid		(53,909	)		(49,409	)
Cash paid for payroll and to other suppliers		(34,951	)		(42,342	)
Interest paid, net of amounts capitalized		(18,462	)		(21,365	)
Income taxes paid		(3,526	)		(10,691	)
Other taxes paid		(17,105	)		(16,034	)
Other operating cash receipts and payments, net		581			721
NET CASH PROVIDED BY OPERATING ACTIVITIES		50,385			49,638
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant and other investing activities		(33,163	)		(28,087	)
NET CASH USED IN INVESTING ACTIVITIES		(33,163	)		(28,087	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid on common stock		(6,000	)		(18,400	)
Issuance of Senior Notes, net of discount		—			248,923
Repayments to credit facility - net		—			(171,000	)
Redemptions:
Senior Notes		(8,375	)		—
Notes payable to affiliate		—			(14,557	)
Financing and redemption costs		(921	)		(1,583	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(15,296	)		43,383
NET CHANGE IN CASH AND CASH EQUIVALENTS		1,926			64,934
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		56,907			284
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	58,833		$	65,218
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)	$	(76,683	)	$	28,183
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Extraordinary item - disallowance of stranded costs, net of taxes		97,836			—
Depreciation of utility plant		22,186			21,374
Credit for Texas system benefit fund regulatory asset		(244	)		(3,960	)
Amortization of debt-related costs and other deferred charges		1,945			2,207
Carrying charges on deferred stranded costs		(928	)		—
Allowance for funds used during construction		(661	)		(693	)
Deferred income taxes		27,511			5,427
Investment tax credits		(794	)		(635	)
Deferred purchased power and fuel costs		540			2,513
Cash flows impacted by changes in current assets and liabilities:
Accounts receivable		(1,831	)		2,990
Accounts payable		(1,015	)		(879	)
Accrued interest		1,010			1,655
Accrued taxes		(18,306	)		530
Changes in other current assets and liabilities		(1,182	)		(4,316	)
Interest rate lock on issuance of senior notes		—			(4,162	)
Other, net		1,001			(596	)
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	50,385		$	49,638

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

-5-

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED BALANCE SHEETS

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

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

-6-

Texas-New Mexico Power Company and Subsidiaries

Notes to Consolidated Interim Financial Statements

Note 1. Interim Financial Statements

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

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

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

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

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

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

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

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

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

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

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

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

-7-

Note 3. Regulatory Matters

Texas

Retail Competition. As reported in TNMP’s 2003 Annual Report on Form 10-K, the Texas electricity market has been open to retail competition since January 1, 2002. In accordance with Senate Bill 7, Texas-New Mexico Power Company (TNMP) provides transmission and distribution services at regulated rates to various retail electric providers that, in turn, provide retail electric service within TNMP’s Texas service area.

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

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

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

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

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

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

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

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

New Mexico

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

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

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

-8-

Note 4. Accounting Developments

Employers’ Disclosures about Pensions and Other Postretirement Benefits

TNMP has applied the revised disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The revisions to SFAS 132 were issued in December 2003, and require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The disclosures that are required by SFAS 132 are included in Note 6.

Accounting for Asset Retirement Obligations

TNMP adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” on January 1, 2003. The adoption had no impact on the financial position, results of operations, or cash flows of TNMP. As a result of the adoption of SFAS 143, TNMP identified costs recorded in accumulated depreciation related to inclusion of removal costs of utility plant in TNMP’s rates by the PUCT and NMPRC. Such costs do not arise from legal obligations. Rather, they represent long-standing regulatory policy to include charges for removal costs of utility plant in accumulated depreciation. Accordingly, TNMP has reclassified the estimated utility plant removal costs, which were $40.0 million and $38.2 million as of September 30, 2004 and December 31, 2003, respectively, from accumulated depreciation to a regulatory liability included in long-term and other liabilities on the balance sheet.

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

Normal Purchases and Sales.In the normal course of business, TNMP enters into commodity contracts, which include “swing” components for additional purchases or sales of electricity, in order to meet customer requirements. The Financial Accounting Standards Board (FASB) has defined criteria by which option-type and forward contracts for electricity can qualify for the normal purchase and sales exception provided by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” Based on the FASB’s guidance, the management of TNMP has determined that its contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP does not account for its electricity contracts as derivatives.

Hedging Activities

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

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

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

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

-9-

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

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

Note 6. Employee Benefit Plans

Pension and Postretirement Benefits Plans

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

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

	Pension 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	)
Settlements		—			—			—			—
Amortization of prior service cost		(50	)		(50	)		—			—
Amortization of transitional (asset) or Obligation		—			—			81			81
Recognized actuarial (gain) loss		39			75			—			(4	)
Net periodic benefit cost	$	111		$	282		$	296		$	268

-10-

	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		$	1,571		$	308		$	291
Interest cost		3,591			3,876			509			515
Expected return on plan assets		(4,529	)		(4,867	)		(236	)		(240	)
Settlements		—			362			—			—
Amortization of prior service cost		(150	)		(150	)		—			—
Amortization of transitional (asset) or Obligation		—			—			243			243
Recognized actuarial (gain) loss		118			224			—			(13	)
Net periodic benefit cost	$	598		$	1,016		$	824		$	796

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

Note 7. Related Party Transactions

Under an agreement between TNMP and its parent TNP Enterprises (TNP), dated June 6, 1997 and an agreement between First Choice and TNMP, dated March 1, 2001, TNMP supplies various services, facilities, and supplies to TNP and First Choice. These services include accounting, information services, legal, and human resources, billed at TNMP’s cost. In return, TNP and First Choice compensate TNMP for the use of the services, facilities and supplies. Shared services billings are recorded on the balance sheet as accounts receivable. Transmission and distribution charges are recorded as revenue in the income statement.

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

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

-11-

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

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

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

Note 8. Commitments and Contingencies

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

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

-12-

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

Competitive Conditions

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

Critical Accounting Policies

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

Accounting for Derivatives – Normal Purchases and Sales. In the normal course of business, TNMP enters into commodity contracts, which can include “swing” components for additional purchases or sales of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under SFAS 133. However, the FASB has defined criteria by which option-type and forward contracts for electricity could qualify for the normal purchase and sales exception provided by SFAS 133, as amended by SFAS 149. Based on the FASB’s guidance, the management of TNMP and First Choice has determined that their respective contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP does not account for their respective electricity contracts as derivatives.

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

Results of Operations

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

-13-

Overall Results

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

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

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

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

-14-

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

Operating Expenses

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

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

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

Other Operating and Maintenance

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

Taxes Other Than Income Taxes

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

Extraordinary Item (net of taxes)

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

-15-

Financial Condition

TNMP Liquidity

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

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

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

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

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

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

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

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

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

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

-16-

Item 4. Controls and Procedures.

As of September 30, 2004, the Chief Executive Officer and Chief Financial Officer of TNMP evaluated the effectiveness of the companies’ disclosure controls and procedures pursuant to applicable Exchange Act Rules. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of TNMP have each concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to their respective companies (including their consolidated subsidiaries) that is required to be included in TNMP’s periodic SEC filings.

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

-17-

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

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

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

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

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

(b) Reports on Form 8-K: None

Statement Regarding Forward Looking Information

The discussions in this document that are not historical factors, including, but not limited to, future cash flows and the potential recovery of stranded costs are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: the outcome of any appeals of the PUCT order in the stranded cost true-up proceeding; the results of any future regulatory proceedings including the inclusion of the clawback liability in a rate adjustment proceeding; the outcome of efforts to re-establish the New Mexico FPPCAC; the payment of dividends by TNMP; the effects of accounting pronouncements that may be issued periodically; changes in regulations affecting TNMP’s businesses; insurance coverage available for claims made in litigation; general business and economic conditions; These factors include risks and uncertainties relating to the receipt of regulatory approvals of the proposed acquisition of TNP by PNM Resources, Inc. (the “PNM Transaction”), the risks that the businesses will not be integrated successfully, the risk that the benefits of the PNM Transaction will not be fully realized or will take longer to realize than expected, the risk that TNP debt and preferred retirements will not occur as expected, and that disruption from the PNM Transaction making it more difficult to maintain relationships with customers, employees, suppliers or other third parties, additional factors include conditions in the financial markets relevant to the proposed transaction, interest rates, weather, fuel costs, changes in supply and demand in the market for electric power, wholesale power prices, market liquidity, the competitive environment in the electric and natural gas industries, state and federal regulatory and legislative decisions and actions, the outcome of legal proceedings and the performance of state, regional and national economies; and other factors described from time to time in TNMP’s reports filed with the Securities and Exchange Commission. TNMP wishes to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

-18-

SIGNATURES

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

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

-19-