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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended DECEMBER 31, 2002

OR

For the transition period from                          to                         

Commission File Number: 1-8847

TNP ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

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

(Address and zip code of principal executive offices)

Telephone number, including area code: 817-731-0099

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $0.

Commission File Number: 2-97230

TEXAS-NEW MEXICO POWER COMPANY

(Exact name of registrant as specified in its charter)

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

(Address and zip code of principal executive offices)

Telephone number, including area code: 817-731-0099

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $0.

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TNP ENTERPRISES INC. AND SUBSIDIARIES

TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

Combined Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2002

This combined annual report on Form 10-K is filed separately by TNP Enterprises, Inc. (TNP) and Texas-New Mexico Power Company (TNMP). Information contained in this report relating to Texas-New Mexico Power Company is filed by TNP Enterprises, Inc. and separately by Texas-New Mexico Power Company on its own behalf. Texas-New Mexico Power Company makes no representation as to information relating to TNP Enterprises, Inc. or to any other affiliate or subsidiary of TNP Enterprises, Inc., except as it may relate to Texas-New Mexico Power Company.

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Statement Regarding Forward Looking Information

The discussions in this document that are not historical facts, including, but not limited to, future cash flows and the potential recovery of stranded costs are based upon current expectations. Actual results may differ materially. Among the facts that could cause the results to differ materially from expectations are the following: our ability to adapt to open market competition; resolution of problems with computer systems of the Electric Reliability Council of Texas (ERCOT) and other market participants that support the competitive market in Texas and facilitate the customer switching process; the ability of First Choice Power, Inc. (First Choice) to attract and retain customers as competition moves forward; the effects of accounting pronouncements that may be issued periodically; changes in regulations affecting TNP’s and TNMP’s businesses; decisions in connection with regulatory proceedings; insurance coverage available for claims made in litigation; general business and economic conditions, and price fluctuations in the electric power and natural gas markets; completion of a new receivables financing arrangement; collections experience; extensions and refinancings of expiring credit facilities; and other factors described from time to time in TNP’s and TNMP’s reports filed with the Securities and Exchange Commission (SEC). TNP and TNMP wish 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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PART I

Item 1. BUSINESS.

Introduction

TNP was organized as a holding company in 1983 and transacts business through its subsidiaries. TNMP is a public utility operating in two electricity markets. In New Mexico, TNMP provides integrated electricity services under traditional cost-of-service rate regulation. Those services include transmitting, distributing, purchasing and selling electricity to its New Mexico customers. In Texas, TNMP provides regulated transmission and distribution services under the provisions of the legislation that established retail competition in Texas (Senate Bill 7). TNMP’s predecessor was organized in 1925. First Choice was organized in 2000 to act as TNMP’s affiliated retail electric provider, as required by Senate Bill 7. First Choice is a wholly owned subsidiary of TNP.

TNMP has two subsidiaries, Texas Generating Company (TGC), and Texas Generating Company II (TGC II). These subsidiaries were formed in 1988 and 1991, respectively, to facilitate the financing of the construction of the two generating units of TNP One. In June 2001, TNMP implemented a plan to restructure the ownership of TNP One to comply with provisions of Senate Bill 7. As a result, TGC was converted from a corporation to a limited partnership, TGC II was converted from a corporation to a limited liability company, and the ownership of TNP One was transferred to TGC. TNMP sold TNP One in October 2002. As a result of the sale, TGC and TGC II neither own property nor engage in any operating activities.

TNP, TNMP, and First Choice are all Texas corporations. TGC is a Texas limited partnership and TGC II is a Texas limited liability company. The executive offices of TNP, TNMP, TGC, TGC II and First Choice are located at 4100 International Plaza, P.O. Box 2943, Fort Worth, Texas 76113 and the telephone number is (817) 731-0099. TNP also has executive offices located at 2 Robbins Lane, Suite 201, Jericho, NY 11753 and the telephone number is (516) 933-3100. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis.

Acquisition

On April 7, 2000, pursuant to an Agreement and Plan of Merger among TNP, ST Acquisition Corp. (ST Corp) and SW Acquisition, L.P. (SW Acquisition), the parent of ST Corp., ST Corp. merged with and into TNP (Merger). TNP is the surviving corporation in the Merger.

TNMP’s Service Areas

TNMP provides electric service to more than 246,000 customers in 85 Texas and New Mexico municipalities and adjacent rural areas. The company serves a market niche of smaller- to medium-sized communities. Only three of the 85 communities in TNMP’s service territory have populations exceeding 50,000. TNMP’s service territory is organized into two operating areas: Texas and New Mexico.

Texas

TNMP’s Texas territory consists of three non-contiguous areas. One portion of this territory extends from Lewisville, which is approximately 10 miles north of DFW International Airport, eastward to municipalities near the Red River, and to communities south and west of Fort Worth. A second portion of its territory includes the area along the Texas Gulf Coast between Houston and Galveston, and a third includes areas of far west Texas between Midland and El Paso. In Texas, TNMP provides transmission and distribution service to a variety of entities, including customers engaged in the agricultural, food processing, oil and gas, petrochemical, and tourism industries.

New Mexico

This region includes areas in southwest and south central New Mexico. The economy depends primarily upon mining and agriculture, with copper mines as the major industrial customer.

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Franchises and Certificates of Public Convenience and Necessity

Texas and New Mexico laws do not require an electric utility to execute a franchise agreement with a municipality to be entitled to provide or continue to provide electrical service within the municipality. A franchise agreement does, however, document the mutually agreeable terms under which the service will be provided within a municipality. TNMP holds 82 franchises with terms ranging from 15 to 50 years, one franchise with a five-year term, and two franchises with indefinite terms from the 85 municipalities to which it provides electric service. These franchises will expire on various dates from 2003 to 2039. Two Texas franchises, comprising 3 percent of total company revenues, are scheduled to expire in 2003. TNMP intends to negotiate and execute new or amended franchise agreements to be effective before existing franchises expire.

TNMP also holds Public Utility Commission of Texas (PUCT) certificates of public convenience and necessity covering all Texas areas that TNMP serves. These certificates include terms that are customary in the public utility industry. TNMP generally has not been required to have certificates of public convenience and necessity to provide electric service in New Mexico.

First Choice’s Service Areas

First Choice had approximately 223,000 Texas customers at December 31, 2002. This number consists of approximately 186,000 price-to-beat customers and 37,000 customers (residential, commercial, industrial and aggregated municipalities) acquired through competition. The price-to-beat customers are former customers of TNMP that have chosen to remain with First Choice, TNMP’s affiliated retail electric provider. First Choice focuses its competitive customer acquisition efforts in the major metropolitan areas that are open to electric choice within ERCOT, including Dallas-Fort Worth, Houston, Corpus Christi, and McAllen-Harlingen-Brownsville. First Choice is one of ten retail electric providers competing for mass market customers (residential and small commercial), and one of more than twenty retail electric providers competing for large commercial, industrial and aggregated municipal customers. At December 31, 2002, First Choice’s gigawatt-hour (GWh) sales market share in the competitive regions of ERCOT was slightly greater than 3 percent.

Seasonality of Business

TNMP and First Choice experience increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather. In 2002, approximately 43 percent of TNP’s consolidated annual revenues were recorded in June, July, August, and September.

Sources and Cost of Energy

First Choice assumed the energy supply activities of TNMP on January 1, 2002. First Choice purchases all of the power needed to supply the electricity requirements of its customers. First Choice’s power purchases are transmitted to its customers over transmission lines owned by TNMP and other utilities. First Choice is a member, and TNMP is an associate member, of ERCOT, the entity responsible for managing the operations of the competitive electricity market in Texas.

Generation from TNP One served the load of First Choice customers during the first quarter of 2002. From April 2002 until the sale in October 2002, the output of TNP One was sold to third parties. Overall, TNP One provided approximately 21 percent of TNP’s energy requirements, including sales to third parties, for the year ended December 31, 2002.

To maintain a reliable power supply for its New Mexico customers and to coordinate interconnected operations, TNMP is a member of the Western Systems Coordinating Council.

In January 2002, TNMP’s power contracts for Texas operations were assigned to First Choice, and Constellation Power Source, Inc. (Constellation) began managing those contracts on behalf of First Choice. Constellation is the primary supplier of power for First Choice’s price-to-beat customers. As First Choice gains competitive customers, it procures power for those competitive customers from a number of suppliers.

Strategy for mitigating fluctuation in costs of energy supply.    First Choice has adopted a risk management policy that establishes minimal amounts of risk that First Choice may assume. First Choice’s basic strategy is to minimize its exposure to fluctuations in energy prices by matching fixed price sales contracts with fixed price supply or by purchasing options to limit exposure to upward movements in prices in its energy supply. In addition, for price-to-beat customers, First Choice may, at its option, request that the PUCT change the price-to-beat fuel factor twice a year to recognize increases or decreases in gas prices.

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Price-to-Beat Customers. Customers subject to the price-to-beat rates accounted for 55 percent of First Choice energy sales in 2002. First Choice anticipates that purchases to supply price-to-beat customers will account for a smaller share of its total purchases in 2003, because it expects sales to competitive customers to grow faster than sales to price-to-beat customers. First Choice purchases supply for price-to-beat customers primarily from Constellation at prices that vary with monthly natural gas prices, although it has the ability to purchase supply at fixed prices under its contract with Constellation. Currently, First Choice has purchased supply for the 2003 estimated load of price-to-beat customers at prices that will vary with natural gas prices. To manage the risk inherent in this strategy, First Choice may, at its option, request that the PUCT change the price-to-beat fuel factor twice a year to recognize increases or decreases in gas prices. First Choice is not required to reduce the price-to-beat fuel factor to recognize decreases in natural gas prices, but could reduce the factor in response to competitive forces.

The price-to-beat fuel factor plus a fixed component of price-to-beat rates of approximately $19 per megawatt hour (MWh) comprise the total price-to-beat fuel recovery rate. First Choice implemented one change in the price-to-beat fuel factor in August 2002, and requested a second change in the factor in December 2002, which became effective on February 4, 2003 and increased the price-to-beat fuel rate to approximately $50 per MWh. First Choice requested another change in the factor in February 2003, subsequent to the effective date of its December 2002 request. The PUCT approved First Choice’s request on March 21, 2003. As a result, the total price-to-beat fuel rate increased to approximately $55 per MWh.

On March 14, 2003, First Choice requested another change in the price-to-beat fuel factor. The request is First Choice’s second in 2003, the maximum number allowed for the year. First Choice expects the requested price-to-beat fuel factor to become effective in April 2003. If the PUCT approves First Choice’s request as filed, the total price-to-beat fuel rate would increase to $60 per MWh.

Changes in the price-to-beat fuel factor are applied prospectively. Accordingly, First Choice is exposed to increases in natural gas prices during the period between the date it requests a change in the price-to-beat fuel factor and the date upon which the requested change goes into effect. That period of time typically ranges from thirty to forty-five days. Since First Choice has requested both of its allowed changes in the price-to-beat fuel factor for 2003, it is also exposed to changes in gas prices above the price inherent in the March 14 price-to-beat fuel factor request. This exposure to gas price risk was to be addressed by a new hedging strategy developed in 2002, which is explained below.

Competitive Customers. Competitively acquired customers accounted for 45 percent of First Choice energy sales in 2002. As noted above, First Choice expects sales to competitive customers to grow faster than sales to price-to-beat customers. Accordingly, First Choice anticipates that purchases to supply competitively acquired customers will account for a larger share of total energy purchases in 2003.

First Choice has firm commitments to supply approximately 4.0 million MWh of energy to competitive customers during 2003. First Choice has purchased approximately 0.7 million MWh of the energy necessary to supply its 2003 firm commitments at a fixed price. In an effort to limit credit exposure, First Choice has purchased the remaining 3.3 million MWh of the energy to meet its firm commitments from suppliers at prices that vary with natural gas prices. This approach minimizes collateral postings and would result in lower purchased power expense for First Choice if gas prices fall, but creates exposure to the risk of increasing natural gas prices. This exposure was to be addressed by a new hedging strategy developed in 2002, which is explained below.

The following table presents First Choice’s firm commitments to competitive customers during 2003 and the energy purchases made to supply that load.

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Hedging Strategy to Manage Natural Gas Price Risk. Early in 2002, First Choice purchased supplies at fixed prices for the entire term of a customer’s contract at the time the customer signed a contract. During 2002, First Choice recognized that purchasing fixed price supply during periods of high gas prices subjected it to additional credit requirements. Should gas prices fall below the levels of the fixed price purchase commitments, First Choice would be required to post collateral to its suppliers. First Choice’s ability to post collateral is limited by factors discussed in the “Liquidity and Capital Resources” section of Item 7 and Note 8. To address this issue, First Choice developed a strategy based on the purchase of call options to mitigate the risk of increasing gas prices, which was adopted in November 2002. In early November 2002, First Choice began purchasing call options to cover contracted fixed price energy sales to customers where the price of the firm commitments from suppliers fluctuates with natural gas prices.

Self-Dealing by an Employee and its Effects. Shortly after the initial option purchase, First Choice discovered that the initial option purchase was made from an organization created by a now former First Choice employee who had the responsibility to negotiate and contract with energy counterparties. The undisclosed self-dealing by the employee was discovered immediately and action was taken to freeze the funds transferred to the employee-controlled organization. Reassessment of internal controls, as well as the negotiation with acceptable counterparties, further delayed the implementation of First Choice’s hedging strategy until January 2003. At the Company’s request, federal authorities are currently investigating the self-dealing transactions. During this time gas prices increased significantly due to, among other factors, unusually cold weather in certain regions, a corresponding decrease in gas storage levels and general disruption in world and United States energy markets related to the threat of war in the Middle East and reduced supply from Venezuela.

Implementation of Gas Price Hedging Strategy. By mid-March 2003, First Choice had secured call options for natural gas needed to cover 2.7 million MWh of projected sales for the period from April 2003 to December 2003. First Choice paid $11.0 million to purchase the call options. The remaining 0.6 million MWh of firm commitments represent load for the period January 2003 to March 2003. The natural gas needed to supply that load was purchased at market prices.

First Choice has firm commitments to supply approximately 0.7 million and 0.1 million MWh of energy to competitive customers during 2004 and 2005, respectively. Supplier commitments to serve the majority of this load have not been secured. First Choice expects to purchase natural gas call options to hedge the risk of increasing gas prices associated with these firm commitments during the second quarter of 2003.

To address the price risk associated with supplying the price-to-beat customers, First Choice has also purchased natural gas call options covering approximately 3.1 million MWh, which represents substantially all of First Choice’s estimated price-to-beat load for the period from April 2003 through February 2004. First Choice paid $7.4 million to purchase the options. The purchase of the options effectively limits the price of the energy needed to supply First Choice’s price-to-beat load to slightly lower than the price inherent in its March 14 price-to-beat fuel factor request.

Financial Impact of Gas Price Movement. When First Choice executed contracts to provide energy for the 3.3 million MWh of firm commitments whose cost fluctuated with natural gas price movements, it estimated that energy prices would average $35 per MWh based on gas costs of $3.99 per million British Thermal Units (mmbtu) at that time, and comparable forward gas costs for the prior year, which ranged between $2.50 and $4.00 per mmbtu. Natural gas prices started to rise above $3.99 per mmbtu in December 2002. Due to the increase above $3.99 per mmbtu, First Choice expects increased purchased power expenses of approximately $12.2 million in the first quarter of 2003, during which gas peaked at $18.60 per mmbtu and averaged $6.60 per mmbtu. If gas prices remain above $3.99 per mmbtu First Choice will continue to experience purchased power cost greater than originally expected. For the remainder of 2003, First Choice has limited its exposure to gas prices as discussed above. In the worst case if all options were exercised to cover gas exposure, the average cost of gas would be $5.52 per mmbtu resulting in increased purchased power costs of approximately $39.0 million for the last three quarters of 2003. Based on current forward prices, which suggest an average price for the remainder of the year of $5.15 per mmbtu, the impact on purchased power cost is approximately $30.1 million. Should gas prices return to the original estimate of $3.99 per mmbtu, there would be no impact on purchased power cost for remainder of the year. For every $0.50 per mmbtu change in average gas price for the remainder of the year, we would expect a change in energy cost of approximately $11.4 million.

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February Ice Storm. During February 2003, an ice storm hit portions of First Choice’s service territory. The ice storm caused extreme demand for electricity in ERCOT. As a result, the “market-clearing” price charged within ERCOT averaged 3.5 times higher for February 2003 than under more normal weather conditions. The market-clearing price is the price of power that ERCOT charges to balance supply and demand within the competitive market. Due to market-clearing prices resulting from the ice storm, First Choice incurred approximately $6.2 million of additional purchased power expense in February 2003. The increased market-clearing price had a significant impact on all market participants that were purchasing power in the ERCOT balancing market. As a result of the abnormally high market-clearing prices, the PUCT has begun an investigation into the circumstances that led to the high prices.

New Mexico. Under terms of a long-term wholesale power contract with Public Service Company of New Mexico (PNM) signed in 2001, PNM supplied power to complement TNMP’s existing New Mexico supply contracts during 2002 and became the sole supplier of power to serve TNMP’s New Mexico load beginning January 1, 2003. The contact extends through December 2006.

Purchased Power Costs. During 2002, TNP’s consolidated average cost per Kilowatt-Hour (kWh) of purchased power was 4.05 cents per kWh. In 2001, prior to retail competition, TNMP’s average cost of purchased power was 4.58 cents per kWh.

The following table illustrates the composition of TNP’s sources of electric energy in 2002.

Recovering Purchased Power and Fuel Costs

As discussed above, First Choice assumed the energy supply activities of TNMP on January 1, 2002. The competitive retail electricity market in Texas contains no provisions for the specific recovery of purchased power costs, although First Choice can request that the PUCT change the price-to-beat fuel factor twice a year to recognize increases or decreases in natural gas prices. As a result, changes in natural gas prices will affect First Choice’s operating results.

In New Mexico, TNMP recovers all purchased power costs through the fuel and purchased power adjustment clause authorized by the New Mexico Public Regulation Commission (NMPRC). The purchased power recovery factor changes monthly to reflect over-collections or under-collections of purchased power costs.

Government Regulation

TNMP is subject to PUCT and NMPRC regulation. Some of its activities, such as issuing securities, are also subject to Federal Energy Regulatory Commission (FERC) regulation. Utility industry regulation continues to change both in reaction to, and as a primary force behind, a more competitive industry. These changes are discussed in Item 7, “Competitive Conditions” and Notes 1 and 2.

In addition to regulation as a utility, TNMP’s facilities are regulated by the Environmental Protection Agency and Texas and New Mexico environmental agencies. During 2002, 2001, and 2000, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $3.1 million, $3.8 million, and $4.7 million, respectively. Substantially all of TNMP’s environmental expenses were incurred at TNP One, which TNMP sold in October 2002.

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Employees and Executive Officers

At December 31, 2002, TNP, First Choice and TNMP had 742 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are excellent.

Executive officers of TNP and TNMP, who are elected annually by the respective boards of directors and serve at the discretion of the boards, are as follows:

William J. Catacosinos joined TNP upon the closing of the Merger as Chairman, President & Chief Executive Officer. He also serves on TNMP’s board of directors. Since 1998, Dr. Catacosinos has served as Managing Partner of Laurel Hill Capital Partners, LLC (Laurel Hill). Dr. Catacosinos served as Chairman and Chief Executive Officer of Long Island Lighting Company (LILCO) from 1984 to 1998.

Jack V. Chambers was named Chairman, President & Chief Executive Officer of TNMP in April 2001. Prior to that time, Mr. Chambers had served as Senior Vice President & Chief Operations Officer of TNMP since October 2000. Mr. Chambers was Senior Vice President and Chief Customer Officer of TNMP from 1994 until October 2000, and Senior Vice President of TNP from April 1996 until the closing of the Merger.

Theodore A. Babcock joined TNP upon the closing of the Merger as Chief Financial Officer. Since 1999, Mr. Babcock has been a Managing Director of Laurel Hill. From 1996 to 1998, Mr. Babcock served as Vice President and Treasurer of LILCO.

Manjit S. Cheema was elected President of First Choice in August 2001 and Treasurer of TNP in May 2000. He was Senior Vice President & Chief Financial Officer of TNMP from July 1996 until August 2002. Mr. Cheema was Senior Vice President & Chief Financial Officer of TNP from May 1997 until the closing of the Merger.

W. Douglas Hobbs became Senior Vice President & Chief Operations Officer in August 2002. He had served as TNMP’s Vice President – T&D Operations since June 2002. Prior to that, he had served as TNMP’s Vice President – Texas Transmission and Distribution Operations since October 2000. He was Vice President and Regional Customer Officer of TNMP from March 1999 to October 2000. He served as Vice President – Business Development of TNP from May 1997 until May 1999.

Scott Forbes became Senior Vice President & Chief Financial and Accounting Officer of TNMP in August 2002. Previously, he had served as Vice President – Chief Accounting & Information Officer of TNMP since January 2001. Prior to that, he had served as Chief Accounting & Information Officer of TNMP since April 2000. He was elected Chief Information Officer of TNMP in June 1998. He was Controller of TNMP from February 1997 to June 1998 and was Controller of TNP from May 1997 to June 1998.

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Melissa D. Davis was appointed Vice President – Human Resources of TNMP effective March 1999. She served as TNMP Vice President and Regional Customer Officer from February 1997 until March 1999.

Larry W. Dillon became Vice President – Power Resources of TNMP effective March 1999. He had served as TNMP Vice President and Regional Customer Officer from 1994 until March 1999.

Michael D. Blanchard became Vice President & General Counsel of TNMP in February 1998. He also served as Vice President & General Counsel of TNP from February 1998 until the closing of the Merger. He was Corporate Secretary and General Counsel of TNMP and TNP from 1987 to February 1998.

Patrick L. Bridges has served as Vice President & Treasurer of TNMP since November 1999. He also served as Vice President & Treasurer of TNP from November 1999 until the closing of the Merger. He served as Treasurer of TNMP and TNP from September 1995 until November 1999.

Georgia (Cookie) Chambers has served as Chief Information Officer of TNMP since September 2002. From 1999 through 2001, she served as Vice President of Information Technology for Paging Network, Inc. and from 1997 through 1998, she served as Director of Application Development. Ms. Chambers is unrelated to Jack V. Chambers.

Kathleen A. Marion joined TNP upon the closing of the Merger as Secretary. Since 1999, Ms. Marion has been Executive Administrator of Laurel Hill. From 1994 to 1998, she served as Vice President of Corporate Services and Corporate Secretary of LILCO.

Paul W. Talbot was elected Corporate Secretary of TNMP in February 1998. He was elected Corporate Secretary of First Choice in August 2001. He served as Corporate Secretary of TNP from February 1998 until the closing of the Merger. He has been Senior Counsel of TNMP since August 1996.

Joseph B. Hegwood was named Assistant Controller of TNMP in August 2002. From July 2002 to August 2002, he served as Director of Accounting of TNMP. He served as Director of Finance of TNMP from July 2000 to July 2002. He was TNMP’s Manager of Budgets, Projects & Property Accounting from July 1998 to July 2000. From April 1998 to July 1998, he served as TNMP’s Supervisor of Budgets, Projects & Property Accounting. From November 1997 until April 1998, he served as TNMP’s Supervisor of Projects & Property Accounting.

B. Jan Adkins became Assistant Corporate Secretary of TNMP in August 1987. She also served as Assistant Corporate Secretary of TNP from August 1987 until the closing of the Merger.

Item 2. PROPERTIES.

Generating Facilities

TNP One is a two-unit, lignite-fueled generating plant, located in Robertson County, Texas. In October 2002, TNMP sold TNP One. See Note 5 for a discussion of TNMP’s sale of TNP One.

Transmission and Distribution Facilities

Management believes that TNMP’s transmission and distribution facilities have sufficient capacity to serve existing customers adequately and that those facilities can be extended and expanded to serve customer growth for the foreseeable future. These facilities primarily consist of overhead and underground lines, substations, transformers, and meters. TNMP generally constructs its transmission and distribution facilities on easements or public rights of way and not on real property held in fee simple.

Administrative and Service Facilities

TNP’s and TNMP’s corporate headquarters are located in an office building in Fort Worth, Texas. Space in this building is leased through October 2007. TNP also has offices in Jericho, New York.

TNMP owns or leases 26 construction centers or other office facilities in Texas and New Mexico. First Choice owns or leases local offices in 20 of the Texas municipalities that it serves. In addition to these facilities, TNMP owns or leases offices in 12 Texas communities that are shared with First Choice. This sharing of facilities is allowed through a waiver granted by the PUCT.

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Item 3. LEGAL PROCEEDINGS.

Power Resource Group. In October 2002, the Texas Supreme Court declined Power Resource Group’s appeal of a summary judgment in TNMP’s favor in the suit styled Power Resource Group, Inc. vs. Public Utility Commission of Texas and Texas-New Mexico Power Company, which was heard in the 345th District Court of Travis County, Texas. The Supreme Court’s ruling had the effect of upholding the district court’s January 2001 dismissal of this lawsuit.

Information regarding additional regulatory and legal matters is provided in Notes 2 and 11.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders in the fourth quarter of 2002.

PART II

Item 5. MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

TNP has no publicly traded shares of common stock outstanding.

TNP holds all 10,705 outstanding common shares of TNMP. During 2002 and 2001, TNMP declared common dividends to TNP as follows (in thousands):

TNMP and First Choice have the ability to borrow under a Credit Facility (TNMP/First Choice Credit Facility) that restricts the payment of cash dividends by TNMP. Details regarding the restrictions are discussed in Note 9.

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Item 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data of TNP and TNMP for 1998 through 2002.

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TEXAS-NEW MEXICO POWER COMPANY

SELECTED OPERATING STATISTICS

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FIRST CHOICE POWER INC.

SELECTED OPERATING STATISTICS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

SIGNIFICANT EVENTS AND KNOWN TRENDS AFFECTING TNP AND TNMP

Competitive Conditions

First Choice

Retail competition began in Texas under the provisions of Senate Bill 7 on January 1, 2002. In accordance with Senate Bill 7, TNMP separated its Texas utility operations into three components. First Choice, TNMP’s affiliated retail electric provider, assumed the activities related to the sale of electricity to retail customers in Texas, TGC became the unregulated entity performing the generation activities, and TNMP continues to operate its regulated transmission and distribution business in Texas. The beginning of competition has resulted in a number of issues that affect the operations of First Choice and TNMP. As noted in the following discussion, First Choice and TNMP have responded to these issues as they have become apparent, and will continue to monitor the competitive market as it evolves.

Price-to-Beat. First Choice must offer former TNMP customers whose loads are less than 1 megawatt a regulated price, commonly called the “price-to-beat”. When competition began in January 2002, approximately 195,000 former TNMP customers became customers of First Choice and were subject to the price-to-beat. During 2002, First Choice retained approximately 184,000, or 94 percent, of the customers it inherited from TNMP. In addition, approximately 2,000 new customers in TNMP’s service area that could have chosen any retail electric provider chose First Choice during 2002. As result, First Choice provided electric service to approximately 186,000 customers at the price-to-beat as of December 31, 2002.

Customer Acquisition. During 2002, First Choice acquired customers in the competitive market in a controlled manner. As of December 31, 2002, First Choice had acquired approximately 20,000 residential customers, 6,000 commercial customers, and 11,000 aggregated municipal customers. Customers acquired include approximately 3,000 customers added during the competition pilot program that was in effect in the second half of 2001.

Customer Service Issues. During the first eight months of 2002, First Choice operated under customer protection rules that the PUCT developed and put into effect at the beginning of retail competition. The rules limited First Choice’s ability to pursue collection activities, primarily because the rules prohibited retail electric providers from disconnecting nonpaying customers. The rules gave the right of disconnect exclusively to the provider of last resort, an entity established under the provisions of Senate Bill 7 so that customers who cannot otherwise procure electric service in the competitive market have access to such service.

Due to the limitations placed on First Choice’s collection activities, both bad debt expense and the level of delinquent accounts receivable increased in 2002 compared with the experience of TNMP prior to competition. Bad debt expense as a percentage of operating revenues for First Choice was approximately 1.3 percent in 2002, compared to a pre-competition level of approximately 0.5 percent. On average, delinquent accounts receivable were approximately 9.7 percent of monthly operating revenue in 2002. First Choice expects that its delinquency rate will decrease during 2003 due to a number of internal and external factors that are discussed in the remainder of this section.

As discussed in Note 2, the PUCT has modified the provider of last resort rule. Under the new rule, First Choice became the provider of last resort in TNMP’s transmission and distribution service territory in September 2002. In addition, First Choice now has the right to disconnect customers for non-payment. The right to disconnect applies to price-to-beat customers and customers in TNMP’s transmission and distribution service territory that choose another retail electric provider.

First Choice continues to be prohibited from disconnecting customers outside TNMP’s transmission and distribution service territory for non-payment. As a result, First Choice has changed certain customer service policies. Those policies include, but are not limited to, the transfer of nonpaying customers to the provider of last resort, requirement of additional deposits for credit-risk customers, and adherence to strict credit standards when evaluating new customers requesting service.

Switching Issues. The Texas electric market opened to competition with a series of market-wide system and technical problems. These problems limited the ability of retail electric providers to switch customers from one retailer to another. Retail electric providers, transmission and distribution service providers and ERCOT are all working together to address these problems in order to improve the infrastructure and processes that support the competitive electric market. The efforts of the various market participants have resulted in improvements in the switching process compared with the condition of the switching process at the beginning of retail competition. TNMP and First Choice expect these improvements to continue.

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Billing Issues. The opening of the retail electric market has also introduced several billing challenges that were not present for the integrated utility in a regulated market. During 2002, transactions and data did not flow between the market participants as accurately or in the volumes that the system was designed to accommodate. The impaired data flow caused billing inaccuracies at First Choice. As noted above, the efforts of the market participants to improve the infrastructure and processes supporting the competitive market have reduced the number of billing issues and attendant billing inaccuracies.

Billing issues have also increased due to the number and complexity of rates under which First Choice competitive customers have been billed since the beginning of retail competition. The frequency of these issues has decreased as First Choice has gained experience under retail competition. However, First Choice expects that the level of billing issues related to rate complexity that First Choice will experience in the competitive market will be greater than the level of rate complexity issues that TNMP experienced in the regulated market.

As indicated in the preceding discussion, the development of retail competition is an ongoing process, and neither First Choice nor TNMP can predict how the market will ultimately develop. First Choice and TNMP will continue to monitor the development of retail competition and expect to be active participants in that development.

TNMP

TNMP is providing transmission and distribution services at regulated rates to customers within its service area. Senate Bill 7 provides for recovery of “stranded” costs, the difference between the regulatory value of TNMP’s investment in generation assets and the market price for energy in a competitive market. Any such stranded costs would be recoverable from TNMP’s Texas transmission and distribution customers. The PUCT will conduct a proceeding in 2004 that will quantify and reconcile the amount of recoverable stranded costs, if any. The proceeding will consider a number of issues, including the sale of TNP One, the final fuel reconciliation and the amount of the clawback. Notes 2 and 5 provide additional information regarding stranded costs and the clawback.

While TNMP provides transmission and distribution services to individual consumers in its service area, its customers are the various retail electric providers that provide retail electric service within its service area. As of December 31, 2002, 21 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice provides electric service to 94 percent of the customers for whom TNMP provides transmission and distribution services. The non-affiliated retail electric provider that provides electric service to the next highest number of TNMP transmission and distribution customers serves approximately 3 percent of TNMP’s transmission and distribution customers.

Critical Accounting Policies

The accounting policies employed by TNP, TNMP and their respective subsidiaries in the preparation of the consolidated financial statements are discussed in Note 1. TNP and TNMP are required to use estimates in order to prepare the consolidated 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. TNP and TNMP also employ certain critical accounting policies that require use of judgments and assumptions that are subject to uncertainty. The amounts reported in the consolidated 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.

Clawback. First Choice is subject to a provision of Senate Bill 7 commonly known as the “clawback.” The clawback 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. Additional details regarding the clawback are discussed in Note 2. First Choice recorded a pre-tax reserve of $12.7 million in the fourth quarter of 2002 related to its estimated clawback liability. First Choice’s estimated clawback liability is based upon its current estimates of the number of competitive customers it will acquire and the number of price-to-beat customers it will lose through January 1, 2004. To the extent First Choice’s acquisition of competitive customers and loss of price-to-beat customers differs from current projections, the amount of the clawback liability would be different. First Choice estimates that variations from its current projections could increase its clawback liability by an additional $4.9 million.

Goodwill and Intangible Assets. TNP has goodwill related to the Merger that had a carrying value of $270.3 million as of December 31, 2002. As discussed in Note 10, TNP has apportioned the carrying value of the goodwill between its Regulated Transmission and Distribution segment and First Choice. As of December 31, 2002, 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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Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” 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, 2002, and concluded that the fair value of the goodwill related to the Merger exceeded its carrying value.

To determine the fair value of the goodwill, TNP estimated the fair value of the Regulated Transmission and Distribution and First Choice segments. TNP’s estimate was based on the present value of the projected cash flows of each segment. Projected cash flows for the segments were derived from TNP’s five-year financial forecasts.

The five-year forecast is subject to a number of estimates, including projections of customer growth and margins at First Choice. To the extent the assumptions are not achieved, or cannot be sustained, future assumptions may require modification, and such modifications would affect the estimates of expected cash flows contained in TNP’s annual goodwill impairment test. Accordingly, TNP’s conclusion regarding the fair value of goodwill would be affected by changes in the five-year financial forecast.

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 of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” However, the Financial Accounting Standards Board (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. 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. Changes in the fair values of the contracts would be recognized in earnings.

Recoverable Stranded Costs – Sale of TNP One. TNMP sold TNP One in October 2002. Based on the sale, the fair value of TNP One, less cost to sell, was $117.5 million. The book value of TNP One at December 31, 2001, was approximately $418.5 million. TNMP believes that the difference between the fair value of TNP One, net of selling costs, and its book value at December 31, 2001, is recoverable from TNMP’s Texas transmission and distribution customers under the provisions of Senate Bill 7. Accordingly, TNMP recorded a regulatory asset for recoverable stranded cost of approximately $301.0 million.

Under the provisions of Senate Bill 7, the amount and manner of stranded cost recovery is subject to review and approval by the PUCT as part of the stranded cost true-up proceeding that will occur in 2004. Accordingly, action taken by the PUCT in the true-up proceeding could affect the ultimate recovery of the amounts recorded as recoverable stranded costs. Recovery of significantly less than the $301 million of estimated stranded costs currently recorded could have a material impact on the financial position and cash flows of TNMP and TNP.

Results of Operations

On April 7, 2000, pursuant to an Agreement and Plan of Merger dated May 24, 1999, between TNP, ST Corp. and SW Acquisition, the parent of ST Corp., ST Corp. merged with and into TNP, the parent of TNMP. TNP is the surviving corporation in the Merger. The Merger was accounted for under the purchase method of accounting; accordingly, purchase accounting adjustments have been reflected in the financial statements of TNP for all periods subsequent to March 31, 2000. Financial statements for periods prior to that date were prepared using TNP’s historical basis of accounting and are designated as “predecessor.” For purposes of the discussion of 2000 annual operating results provided herein, the pre-merger financial information of the predecessor has been combined with the post-merger financial information. The business operations of TNP were not significantly changed as a result of the Merger and post-merger and pre-merger operating results, except as noted in the discussion, are comparable.

Amounts shown in the consolidated financial statements of TNMP continue to present the financial position and results of operations based on historical costs.

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Overall Results

When full retail competition began in Texas on January 1, 2002, TNMP separated its previously integrated Texas utility operations into three components. The operations of First Choice are included in the consolidated financial statements of TNP. Since First Choice has assumed the activities related to the sale of electricity to retail customers in Texas, the amounts shown in the financial statements of TNMP for 2002 and 2001 are not comparable. The following discussion will focus primarily on amounts presented in the consolidated financial statements of TNP, except as noted otherwise.

TNP had consolidated income applicable to common stock of $13.0 million for the year ended December 31, 2002, compared with a consolidated loss of $7.8 million for the year ended December 31, 2001, and a consolidated loss of $5.9 million for the year ended December 31, 2000.

The changes in TNP’s earnings for 2002 compared to 2001, and 2001 compared to 2000, are attributable to the factors listed below (in millions):

TNP Gross Profit

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