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      The interim consolidated financial statements of TNP and subsidiaries, and 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 financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in TNP's and TNMP's 2001 Combined Annual Report on Form 10-K.

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

   Texas

      Retail Competition. As reported in the 2001 Combined Annual Report on Form 10-K, retail competition began under the provisions of the legislation (Senate Bill 7) that established retail competition in Texas on January 1, 2002. In accordance with Senate Bill 7, TNMP separated its Texas utility operations into three components. First Choice Power (First Choice), TNMP's affiliated retail electric provider, assumed the activities related to the sale of electricity to retail customers in Texas, Texas Generating Company (TGC) became the unregulated entity performing generation activities and TNMP continues to operate its regulated transmission and distribution business in Texas. The operations of First Choice are included in the consolidated financial statements of TNP and the operations of TGC are included in the consolidated finanial statements of both TNP and TNMP.

      First Choice must offer former TNMP customers whose loads are less than 1 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 former TNMP customers any other rate before the loss of 40 percent of its price-to-beat customers or December 31, 2004, whichever occurs first.

      The beginning of retail competition affected the methods by which companies recover their purchased power and fuel costs. Prior to December 31, 2001, TNMP recovered fuel and the energy-related portion of purchased power costs from customers through the fuel adjustment clause authorized by the Public Utility Commission of Texas (PUCT). The demand-related portion of purchased power was recovered through base rates and, unlike the fuel and energy-related portion, was not subject to adjustment or future reconciliation. Effective January 1, 2002, First Choice assumed the energy supply activities related to the sale of electricity to retail customers in Texas. Senate Bill 7 created a competitive retail electricity market in Texas and contains no provisions for the specific recovery of fuel and purchased power costs, although First Choice can request that the PUCT change the price-to-beat to recognize changes in natural gas prices. The rates charged to new customers acquired by First Choice outside of TNMP's service territory are not regulated by the PUCT, but are negotiated with each customer. As a result, changes in fuel and purchased power costs will affect First Choice's operating results.

      As of June 30, 2002, TNMP had an over-recovered balance of fuel and energy-related purchased power costs of $22.3 million. TNMP will carry its over-recovered balance of fuel and energy related purchased power costs to the 2003 final fuel reconciliation. This proceeding will reconcile fuel and energy-related purchased power costs incurred between January 1, 2000, and December 31, 2001, in accordance with the provisions of Senate Bill 7. TNMP's over-recovered balance of fuel and energy-related purchased power costs from the final fuel reconciliation will be included in the true-up of stranded costs that will occur in 2004. Subject to the results of the final fuel reconciliation, the over-recovered balance would reduce the amount of stranded costs TNMP would be entitled to recover from its transmission and distribution customers. See Note 4 for additional discussion of TNMP's stranded costs.

      Clawback. Senate Bill 7 includes a provision, commonly known as the "clawback" that would require First Choice to credit TNMP the difference between the price-to-beat and the market price of electricity during the years 2002 and 2003. TNMP will include the credit, if any, in the true-up proceeding that will occur in 2004. The maximum credit to TNMP is limited to $150 multiplied by the difference between the number of First Choice price-to-beat customers and the number of First Choice competitively acquired residential and small commercial customers as of January 1, 2004. First Choice and TNMP are currently unable to predict the actual amount of the clawback. However, based on current expectations, the clawback could range between $0 and $18.4 million.

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      2001 Excess Earnings. In March 2002, TNMP filed its Annual Report with the PUCT. The Annual Report detailed TNMP's calculation of excess earnings under the provisions of Senate Bill 7. The Annual Report showed that TNMP had no excess earnings for the year ended December 31, 2001. Accordingly, TNMP's financial results for the six months ended June 30, 2002, reflect the reversal of $0.7 million of excess earnings that had been estimated and accrued as of December 31, 2001.

      Merger Commitments. As conditions for approval of TNP's acquisition by SW Acquisition, L.P. (the Merger), TNMP made a number of commitments to both the PUCT and New Mexico Public Regulation Commission. The commitments cover a wide range of financial, operational, electric reliability, and other standards that TNMP agreed to honor. TNMP made 55 commitments in New Mexico and Texas, of which 47 are currently in effect. TNMP monitors compliance on a monthly basis and could be subject to financial penalties for non-compliance with certain commitments. During the year ended December 31, 2001, TNMP was not in compliance with certain commitments regarding electric reliability standards in Texas. TNMP estimates that penalties for non-compliance with these commitments will be approximately $0.1 million and expects resolution of this matter in the second half of 2002.

      Price-to-Beat Fuel Factor. As discussed in Retail Competition, above, First Choice can request that the PUCT change the price-to-beat to recognize changes in natural gas prices. In May 2002, First Choice filed a request with the PUCT to increase its price-to-beat fuel fator by approximately 25 percent. On July 2, 2002, the Administrative Law Judge assigned to the case issued a Proposal for Decision that recommended approval of First Choice's requested increase. On July 11, 2002, the PUT remanded the price-to-beat fuel factor request back to the State Offie of Administrative Hearings for clarification of issues that were approved in a previous rule making. First Choice does not expect a final deicsion from the PUCT before the end of the third quarter of 2002.

       In late July 2002, TNMP filed suit in District Court against the PUCT. TNMP asked the Court for an injunction ordering the PUCT to stop the remand of the price-to-beat fuel factor to the State Office of Administrative Hearings, and to direct the PUCT to proceed to a final order on First Choice's request to increase the price-to-beat fuel factor. Four other affiliated retail electric providers have filed lawsuists against the PUCT challenging similar PUCT action in their respective requests to increase their price-to-beat fuel factors. TNMP cannot predict what action the District Court may take on its suit.

      Provider of Last Resort Rulemaking. Senate Bill 7 included a provision establishing providers of last resort, entities which ensure that customers who cannot otherwise procure electric service in the competitive market have access to such service. First Choice, using the Certain Energy brand, is currently the provider of last resort for customers in West Texas who reside in the transmission and distribution service area of TXU Electric Company (now named Oncor). The PUCT has proposed a new rule governing the activities of providers of last resort that is scheduled to become effective on January 1, 2003.

       Under the new rule, First Choice would be the provider of last resort for customers in TNMP's transmission and distribution service territory, and would no longer be the provider of last resort for the customers in Oncor's West Texas transmission and distribution service territory. In addition, First Choice would have the right to disconnect customers for non-payment. Under current rules, First Choice cannot disconnect non-provider of last resort customers for non-payment. Its only rememdy for such customers is to transfer the customer to the designated provider of last resort. Following such transfer, First Choice pursues collection of the amounts owed to it by the transferred customers.

       A number of interested parties, including First Choice, have commented on various provisions of the proposed rule. The Staff of the PUCT has scheduled publication of the final rule in August 2002, after which the PUCT will consider the proposed rule for adoption, along with any applicable transition provisions.

   Accounting for Goodwill and Other Intangible Assets

      In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which TNP adopted on January 1, 2002. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. TNP stopped amortizing goodwill recorded as a result of the Merger upon adoption of SFAS 142. For the three and six months ended June 30, 2001, goodwill amortization was $2.9 million and $5.8 million, respectively. In conjunction with the adoption of SFAS 142, TNP tested the goodwill related to the Merger for impairment and concluded that the fair value of the goodwill exceeded its carrying value. Accordingly, TNP made no adjustment to goodwill upon the adoption of SFAS 142. TNP will test the goodwill for impairment on an annual basis, or more frequently if certain circumstances require.

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   Change in Accounting for Major Maintenance Costs

   Proposed Sale of TNP One

      In June 2002, TNMP announced that it had agreed to sell TNP One, its lignite-fueled generating facility located in Robertson County, Texas, to Sempra Energy Resources, the power generation subsidiary of Sempra Energy. Sempra Energy Resources will pay TNMP $120 million for TNP One. The closing of the sale is subject to certain conditions and the completion of regulatory approvals. The agreement calls for all approvals to be obtained prior to October 31, 2002. If such approvals are not obtained by that time, then either party may take action to terminate the agreement. All regulatory approvals have been obtained except for TNMP's request for certain findings from the PUCT that are necessary for obtaining status for TNP One as an Exempt Wholesale Generator. TNMP has filed a request for such findings, which is pending at the PUCT. TNMP cannot predict whether the PUCT will grant the findings requested by TNMP prior to October 31, 2002.

      TNP and TNMP adopted SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," during the fourth quarter of 2001. SFAS 144 requires entities to measure long-lived assets held for sale at the lower of the asset's carrying amount or fair value less cost to sell and to cease depreciation.

      As a result of the pending sale, TNMP adjusted the carrying value of TNP One to its estimated fair market value, less cost to sell, of approximately $118.2 million at June 30, 2002. Cost to sell includes $1.3 million payable to Laurel Hill Capital Partners, a related party, for financial advisory services. The difference between the fair value of TNP One, net of selling costs, and its book value at December 31, 2001, of approximately $418.7 million will be recoverable from TNMP's Texas transmission and distribution customers under the provisions of Senate Bill 7. Accordingly, TNMP reccorded a regulatory asset for recoverable stranded cost of approximately $300.5 million at June 30, 2002. Recovery of stranded costs from TNMP's Texas transmission and distribution customers is subject to review and approval by the PUCT under the provisions of Senate Bill 7.

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      As discussed above TNMP stopped depreciating TNP One when it reclassified TNP One to Assets Held for Sale. Depreciation on TNP One was $3.8 million and $7.7 million for the three and six months ended June 30, 2001.

      Factoring Arrangement. In February 2002, TNMP's receivables factoring arrangement with an unaffiliated company, under which TNMP sold both billed and unbilled customer receivables on a nonrecourse basis, was terminated. The counterparty to this arrangement stopped factoring the receivables of non-affiliated businesses due to the significant changes resulting from the deregulation of the Texas electric market. Since the old factoring arrangement was terminated, First Choice and TNMP have worked to secure a new factoring or accounts receivable securitization arrangement for their respective operations. However, the process of securing a new arrangement has been complicated by the changes in First Choice's business resulting from competition. Among the factors complicating the process are new customer protection rules instituted by the PUCT, difficulties with the systems that switch customers from one retail provider to another, and issues regar ding billing of competitively acquired customers. The new customer protection rules have had the effect of limiting First Choice's ability to pursue the collection procedures that were in effect prior to the beginning of competition, resulting in an inrease in delinquencies. The switching difficulties have delayed the accurate and timely flow of data between market participants. These delays have contributed to billing inaccuracies at First Choice that result in billing adjustments which are greater in both volume and magnitude than previously experienced.

       The number and amount of billing adjustments, along with the relatively short operating history of the deregulated Texas market, have delayed First Choice in securing a new arrangement. First Choice and TNMP currently anticipate having a new factoring or receivables financing arrangement in place before the end of 2003.

       The termination of the factoring arrangement is the primary reason that TNP's consolidated accounts receivable and the amounts outstanding under TNMP's $325 Million Credit Facility have increased compared to prior periods. As of June 30, 2002, TNP's consolidated accounts receivable were $94.1 million, net of allowance for uncollectible acounts of $1.5 million, as compared to $9.5 million at December 31, 2001. The allowance for uncollectible accounts was zero at December 31, 2001, due to the presence of the factoring arrangement. The $325 Million Credit Facility had an outstanding balance of $241 million as of June 30, 2002, compared to $174 million as of December 31, 2001.

      $325 Million Credit Facility. Both First Choice and TNMP may borrow under TNMP's $325 Million Credit Facility. First Choice can borrow funds, or have letters of credit issued, under the credit facility subject to a guarantee by TNMP. TNMP's guarantee, and, therefore, First Choice's borrowings and issuances of letters of credit, is limited to $75 million.

      As of June 30, 2002, TNMP had guaranteed First Choice's performance under the power supply contract with Constellation for $25 million. Since June 30, 2002, TNMP has provided additional guarantees of First Choice's performance under power supply contracts with Constellation and other suppliers for $18.5 million, leaving $31.5 million available to First Choice to guarantee borrowings or letters of credit under the $325 Million Credit Facility. Based on current gas prices as of early August 2002, TNMP may be required to provide additional guarantees on behalf of First Choice up to $16 million. If TNMP provides such guarantees, the amount available to First Choice to guarantee borrowings or letters of credit under the $325 Million Credit Facility would be reduced to $15.5 million.

      Intercompany Loans. In March 2002, both TNP's $185 million senior credit facility (Senior Credit Facility) and the $325 Million Credit Facility were amended to allow intercompany loans to be made between TNMP and First Choice. As of June 30, 2002, TNMP had intercompany notes payable to First Choice of $19 million. The proceeds from the intercompany borrowing were used to retire debt outstanding under the $325 Million Credit Facility.

      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 the regulated transmission and distribution business of TNMP 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. Prior to January 1, 2002, TNP and TNMP had one reportable segment, which was the integrated utility operation of TNMP.

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      The following tables present information about revenues, profits, and assets of TNP's reportable segments (in thousands). Amounts below in "All Other and Eliminations" include amounts reclassified to Assets Held for Sale, as discussed in Note 4.