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Index to Financial Statements

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, 2003

OR

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)

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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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES (TNMP)

Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2003

TABLE OF CONTENTS

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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: decisions in connection with regulatory proceedings, including Public Utility Commission of Texas (PUCT) Docket No. 29206, the stranded cost true-up proceeding of 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; and other factors described from time to time in its reports filed with the Securities and Exchange Commission (SEC). TNMP wishes to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

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PART I

Introduction

TNMP is a regulated utility operating in Texas and New Mexico. In Texas, TNMP provides regulated transmission and distribution services under the provisions of the legislation that established retail competition in Texas (Senate Bill 7). In New Mexico, TNMP provides integrated electricity services that include transmitting, distributing, purchasing and selling electricity to its New Mexico customers. TNMP’s Texas and New Mexico operations are subject to traditional cost of service regulation. Traditional cost-of-service regulation is a method of regulation that sets rates that TNMP can charge to its electricity customers based upon its cost of providing that service. The cost of providing that service includes a return of and on the capital, which TNMP has invested and dedicated to providing electric service. TNMP’s predecessor was organized in 1925.

TNMP has two subsidiaries, Texas Generating Company, LP (TGC), a Texas limited partnership, and Texas Generating Company II, LLC (TGC II), a Texas limited liability company. TNMP formed TGC and TGC II as Texas corporations to finance construction of TNP One, formerly its sole generation facility. Until May 2001, TNMP owned TNP One together with TGC and TGC II. At that time, TNMP converted TGC and TGC II to their present forms and consolidated the ownership of TNP One into TGC to comply with the Senate Bill 7.

Effective January 1, 2002, Senate Bill 7 established retail competition in the Texas electricity market. Prior to January 1, 2002, TNMP operated as an integrated electric utility in Texas, generating, transmitting and distributing electricity to customers in its Texas service territory. As required by Senate Bill 7, and in accordance with a plan approved by the PUCT, TNMP separated its Texas utility operations into three components:

Upon separation, TNMP provided First Choice equity capitalization of $23 million. No other payments or considerations were exchanged between First Choice, TGC or TNMP in connection with the separation.

First Choice and TNMP are wholly owned subsidiaries of TNP Enterprises, Inc. (TNP). As such, TNMP is subject to TNP’s control. TNP controls decisions regarding TNMP’s business and has control over its management and affairs. As a member of the TNP’s corporate group, TNMP operates within strategies and policies, including dividend strategies, that TNP may establish from time to time. There are currently no formal dividend strategies or mandatory dividend requirements. TNMP has agreed with the New Mexico Public Regulation Commission (NMPRC) that TNMP will not pay excessive dividends to TNP, and are required to provide notice to the NMPRC at least 15 days prior to the payment of any dividends. The NMPRC could prevent the payment of dividends that it deems excessive.

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

TNMP provides First Choice and TNP Enterprises with corporate support services, including accounting, finance, information services, legal and human resources, under a shared services agreement with First Choice dated March 1, 2001 and a similar agreement with TNP dated June 6, 1997. These services are billed at TNMP’s cost and, in return, TNP and First Choice compensate TNMP for the use of the services. These arrangements are discussed in the Note 9.

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TNMP is a Texas corporation. TGC is a Texas limited partnership and TGC II is a Texas limited liability company. The executive offices of TNMP, TGC and TGC II are located at 4100 International Plaza, P.O. Box 2943, Fort Worth, Texas 76113 and the telephone number is (817) 731-0099. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis.

TNMP’s Service Areas

TNMP serves a market niche of smaller- to medium-sized communities. TNMP provides electric service, either directly or through retail electric providers, to more than 252,000 customers in 85 Texas and New Mexico municipalities and adjacent rural areas. 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. In most areas that TNMP serves, TNMP is the exclusive provider of transmission and distribution services.

Texas

TNMP’s Texas service 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 TNMP’s 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, through retail electric providers, to a variety of entities, including customers engaged in the agricultural, food processing, oil and gas, petrochemical, and tourism industries.

TNMP’s Texas operations lie entirely within the Electric Reliability Council of Texas (ERCOT) region. ERCOT is the independent system operator that is responsible for maintaining reliable operations of the bulk electric power supply system in the ERCOT region, which is located entirely within Texas and serves about 85 percent of the electrical load in Texas.

New Mexico

TNMP’s New Mexico service territory includes areas in southwest and south central New Mexico. TNMP engages in the transmission, distribution, purchase and sale of electricity to residential customers and a variety of commercial and industrial entities, including customers engaged in mining and agriculture, with copper mines as the major industrial customer.

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 81 franchises with terms ranging from 15 to 50 years, two franchises with a five-year term, and two franchises with indefinite terms from the 85 municipalities to which TNMP provides electric service. These franchises will expire on various dates from 2004 to 2039. Two Texas franchises and one New Mexico franchise, which account for 11 percent of total company revenues, are scheduled to expire in 2004. TNMP intends to negotiate and execute new or amended franchise agreements with these municipalities to be effective before the existing franchises expire. The sales within the 85 franchises currently contribute approximately 62 percent of TNMP’s total revenues. The remainder of TNMP’s revenues are earned from service provided to facilities in TNMP’s service area that lie outside the territorial jurisdiction of the municipalities with which TNMP has franchise agreements.

TNMP also holds PUCT certificates of public convenience and necessity covering all Texas areas that it 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. In both Texas and New Mexico, TNMP is the exclusive transmission and distribution provider in nearly all of the areas it serves.

Seasonality of Business

TNMP experiences increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather. In 2003, approximately 37 percent of TNMP’s annual revenues were recorded in June, July, August and September.

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Customer Concentration

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. As of December 31, 2003, 31 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice, TNMP’s affiliated retail electric provider, is TNMP’s largest customer. For the year ended December 31, 2003, First Choice provided $109.3 million of revenue to TNMP. That amount represents approximately 44 percent of TNMP’s total revenue for the year ended December 31, 2003.

Sources and Cost of Energy

TNMP purchases all electricity for its New Mexico customers’ needs and energy-scheduling services under a long-term wholesale power contract with Public Service Company of New Mexico (PNM). TNMP’s electricity purchases under this contract, which extends through December 2006, are at fixed rates to provide price stability to its New Mexico customers. For the year ended December 31, 2003, TNMP’s cost of purchased power was 6.83 cents per kilowatt-hour (KWH), which reflects the cost of its New Mexico power supply. As discussed previously, First Choice assumed the energy supply activities of TNMP on January 1, 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.

Government Regulation

TNMP is subject to various federal, state and local regulations. TNMP possesses all necessary franchises, licenses and certificates to enable TNMP to conduct its business. Within Texas, TNMP is a rate-regulated electric transmission and distribution utility and is subject to the jurisdiction of the PUCT and certain municipalities with respect to rates and service. Within New Mexico, TNMP is subject to the jurisdiction of the NMPRC. TNMP is subject in some of its activities, including the issuance of securities and the acquisition or disposition of properties in New Mexico, to the jurisdiction of the FERC. TNMP’s transmission and distribution activities in Texas are not subject to FERC regulation, because those activities occur solely within the ERCOT region of Texas.

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 and 2001, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $3.1 million and $3.8 million, respectively. Substantially all of TNMP’s environmental expenses were incurred at TNP One, which TNMP sold in October 2002.

In October, 2003, the Texas Commission on Environmental Quality (TCEQ) notified various parties, including TNMP, that releases of hazardous substances had been documented from a site owned and operated by a vendor with whom those parties had a business relationship. TNMP purchased transformers from the vendor and also sent some transformers to the vendor for repair and/or disposal. TCEQ has requested that TNMP provide records and information relevant to its business relationship with the vendor, which TNMP has done. The TCEQ has not yet identified potentially responsible parties. TNMP is cooperating fully with TCEQ in the ongoing investigation of the vendor and the vendor’s site.

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Employees and Executive Officers

At December 31, 2003, TNMP had 584 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 TNMP, who are elected annually by and serve at the discretion of the board of directors, are as follows:

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.

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 Chief Financial Officer of First Choice in October 2003, and Senior Vice President & Chief Financial 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.

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.

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.

C. Adam Carte became Vice President & Treasurer of TNMP in August 2003. Prior to joining TNMP, Mr. Carte served in several treasury and finance positions with NRG Energy, Inc., of Minneapolis, Minnesota. He was NRG’s Vice President and Treasurer in 2002, its Assistant Treasurer from 2000 to 2002, Director of Treasury Operations and Corporate Finance from 1999 to 2000, and Senior Treasury Analyst/Treasury Analyst, Treasury Assistant from 1995 to 1999.

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Joseph B. Hegwood was elected Vice President and Controller of TNMP in August 2003. He was also named TNMP’s Chief Accounting Officer at that time. He was TNMP’s Assistant Controller from August 2002 until August 2003. 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.

Joel K. Ivy was elected Vice President - Technical Services of TNMP in February 2004. Mr. Ivy has served in several engineering and technical capacities with TNMP since July 1983. He was Director of Technical Services of TNMP from August 2001 until February 2004. He was a Business Unit Manager in TNMP’s Bay Area Business Unit from July 2000 until August 2001 and Regional Engineering Coordinator in TNMP’s Gulf Coast Region from October 1996 until July 2000.

Neal Walker was elected Vice President - Market Operations of TNMP in February 2004. Mr. Walker has served in several customer operations and management positions with TNMP since April 1990. He was Business Unit Manager of TNMP’s North Texas region from October 2001 until February 2004. He was director of Customer Operations of the North Texas Region from May 2000 until October 2001, and a Business Unit Manager of two different business units in TNMP’s North Texas region from October 1996 until May 2000.

Michael H. Kennemer was elected Vice President - Audit Services of TNMP in February 2004. Mr. Kennemer was Director of Audit Services for TNMP from August 2001 until February 2004. He was an internal auditor of Hunt Corporation, Dallas, Texas from April 1993 until August 2001.

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.

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.

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.

Transmission and Distribution Facilities

TNMP’s facilities are located within its Texas and New Mexico service areas. TNMP’s Texas transmission and distribution facilities are located in three non-contiguous areas. One area 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 area includes portions of Galveston and Brazoria counties, located along the Texas Gulf Coast between Houston and Galveston, and a third includes areas of far west Texas between Midland and El Paso, extending from the cities of Kermit and Pecos south to Fort Stockton and Sanderson. Our New Mexico transmission and distribution facilities are located in southwest and south central New Mexico, including the cities of Alamogordo, Ruidoso, Silver City, Lordsburg and surrounding communities.

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

TNMP’s corporate headquarters are located in an office building in Fort Worth, Texas. TNMP has leased space in this building through October 2007. The mailing address for TNMP’s principal executive offices is 4100 International Plaza, P.O. Box 2943, Fort Worth, Texas 76113. TNMP’s telephone number is (817) 731-0099.

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

Final Fuel Reconciliation. In January 2004, the PUCT issued its final order related to TNMP’s reconciliation of fuel and energy-related costs incurred between January 1, 2000 and December 31, 2001. The reconciliation was required under the provisions of Senate Bill 7. The PUCT’s final order disallowed $15.7 million of fuel and energy-related purchased power costs. TNMP intends to appeal portions of the final order.

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

No matters were submitted to a vote of security holders in the fourth quarter of 2003.

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PART II

TNP holds all 10,705 outstanding common shares of TNMP. During 2003 and 2002, TNMP declared common dividends to TNP as follows (in thousands):

In the fourth quarter of 2002, TNMP used the proceeds from the sale of TNP One to declare and pay a dividend of $84.3 million to TNP.

The following table sets forth selected financial data of TNP and TNMP for 1999 through 2003.

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TEXAS-NEW MEXICO POWER COMPANY

SELECTED OPERATING STATISTICS

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Competitive Conditions

Retail competition began in Texas January 1, 2002, when, in accordance with Senate Bill 7, TNMP and other investor-owned utilities separated their 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. TNMP continues to operate its regulated transmission and distribution business in Texas. As a company regulated by the PUCT in Texas and the NMPRC in New Mexico, TNMP is not subject to competition.

The beginning of competition has resulted in a number of issues that affected TNMP’s operations. In particular, 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. In addition, the technical problems resulted in impaired data flows between the market participants. As a result, some of the bills TNMP issued to customers were not accurate, and either overstated or understated the amount owed. TNMP is required to cancel inaccurate bills and replace them with corrected bills. The overall effect was not significant to TNMP’s financial condition, results of operations or cash flows. Other market participants were similarly affected. TNMP has participated in efforts to improve the infrastructure and processes that support the competitive market. Those efforts have resulted in improvements in the switching process compared with its condition at the beginning of competition and the billing inaccuracies TNMP experienced at the beginning of competition have decreased.

TNMP provides transmission and distribution services within its Texas service area at regulated rates to various retail electric providers that, in turn, provide retail electric service to customers. As of December 31, 2003, 31 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice provided electric service to customers that accounted for approximately 56 percent of the energy delivered by TNMP during the year ended December 31, 2003. TNMP’s next largest customer was a non-affiliated retail electric provider that served customers that accounted for approximately 18 percent of the energy delivered by TNMP during the year ended December 31, 2003.

Senate Bill 7 provides for recovery of stranded costs. Stranded costs are the difference between the regulatory value of TNMP’s investment in generation assets and the market price for energy in a competitive market. On January 22, 2004, TNMP filed its true-up proceeding with the PUCT. The PUCT assigned Docket No. 29206 to the true-up proceeding. The purpose of the true-up proceeding is to quantify and reconcile the amount of stranded costs that TNMP may recover from its transmission and distribution customers. The proceeding will examine a number of issues, including the sale of TNP One that occurred in October 2002, the final fuel reconciliation and the clawback. The issues that will be examined in the true-up proceeding are described more fully in Note 2. The schedule established for the true-up proceeding calls for a final order to be issued near the end of the second quarter of 2004.

Critical Accounting Policies

Accounting policies that TNMP and its subsidiaries employed in the preparation of the consolidated financial statements are discussed in Note 1. TNMP is 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. 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 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.

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Accounting for Derivatives – Normal Purchases and Sales. In the normal course of business TNMP enters into commodity contracts, which include “swing” components for additional purchases of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (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, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” Based on the FASB’s guidance, 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.

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.

Recoverable Stranded Costs – Sale of TNP One. TNMP sold TNP One in October 2002. Based on TNMP’s true-up filing, as discussed in Note 2, the fair value of TNP One, less cost to sell, was approximately $117.6 million. The book value included in the true-up filing was approximately $425.1 million. TNMP believes that the difference between the fair value of TNP One, net of selling costs, and its book value is recoverable from its Texas transmission and distribution customers under the provisions of Senate Bill 7.

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 true-up proceeding. In addition to the sale of TNP One, other issues will affect the amount of stranded costs that TNMP will recover from its customers. Those other issues include, among others, the final fuel reconciliation, as discussed in Note 2.

Action taken by the PUCT in the true-up proceeding could affect the ultimate recovery of the amounts requested as recoverable stranded costs. PUCT action that limits the recovery of requested stranded costs could have a material impact on TNMP’s financial position and cash flows.

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Results of Operations

2003 Compared to 2002

Overall Results

TNMP had income applicable to common stock of $25.3 million for the year ended December 31, 2003, compared with income applicable to common stock of $36.1 million for the year ended December 31, 2002. The changes in TNMP’s earnings for 2003 compared to 2002 are attributable to the factors listed below (in millions):

Gross Profit

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

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 year ended December 31, 2003, compared with the same period in 2002 (in thousands).

Gross profit for the year ended December 31, 2003, decreased $23.7 million compared with the corresponding 2002 period. The decrease is attributable to the loss of revenue from the sale of TNP One output, which TNMP sold in October 2002, and a disallowance of fuel and energy-related purchased power costs that occurred in the final fuel reconciliation in Texas. The final fuel reconciliation is discussed in Note 2. In addition, 2002 gross profit included revenues from the billing of bundled rates in January 2002 that were not present in 2003.

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Although retail competition began on January 1, 2002, TNMP’s former customers were transferred to First Choice following their January 2002 meter reading. As a result, TNMP’s January 2002 revenues include charges for service rendered through January 2002 meter reading dates at prices that reflect its integrated operations prior to competition. Beginning in February 2002, TNMP’s revenues reflected rates designed to recover its cost of providing transmission and distribution service under the provisions of Senate Bill 7. Those rates are lower than the rates TNMP charged prior to the beginning of competition, and resulted in decreased gross profit in the year ended December 31, 2003. The table above quantifies the impact of changing TNMP’s rates to recover its cost of providing only transmission and distribution service.

In the first quarter of 2002, TNMP sold the output of TNP One to First Choice at cost, which was 2.5 cents per kilowatt-hour (KWH). First Choice used the power to serve the load of its customers. Beginning in April 2002, TNMP sold the output of TNP One to third parties at prices that averaged 2.8 cents per KWH, until the sale of TNP One in October 2002. TNMP realized pre-tax income of $4.3 million related to third party sales for the year ended December 31, 2002.

Electric service revenues increased because TNMP provided a greater number of fee-based services to retail electric providers in the year ended December 31, 2003, compared with the same period in 2002. The fee-based services included account initiation charges, service call charges, disconnect/reconnect charges and various metering charges, among others. Some of the charges for fee-based services that TNMP provided to retail electric providers were included in the bundled rates TNMP charged its customers prior to competition.

The $3.2 million gross profit increase described as “price/sales mix and other” for the year ended December 31, 2003, compared to the corresponding 2002 period, is primarily attributable to increased revenues from commercial and industrial customers in Texas. A significant portion of those customers’ revenues are calculated based upon those customers’ highest peak demand for electricity in the twelve month period ending in the month that the customers are billed. Customers’ bills during 2003 were based upon a full twelve months of demand data, but some customers’ bills during 2002 were based upon less than twelve months of demand data due to the beginning of retail competition in January 2002. As a result, some 2002 bills were lower than they normally would be, because the demand data for the summer months of 2001, during which these customers typically have their highest demand, could not be included in the calculation of the customers’ bills.

Purchased power and fuel expenses decreased $32.9 million for the year ended December 31, 2003, compared with the amount incurred in the same period in 2002. Expenses in 2002 included fuel costs of $35.5 million at TNP One, which was sold in October 2002.

The following table summarizes TNMP’s sales for the years ended December 31, 2003 and 2002 (amounts in GWH).

Residential and commercial sales increased in 2003 compared with 2002, primarily due to increases in the number of residential and commercial customers. The number of residential customers increased to approximately 216,000 in 2003 from approximately 211,000 in 2002. The number of commercial customers grew to approximately 36,000 in 2003 from approximately 35,000 in 2002. The increases in residential customers reflect economic growth in TNMP’s service territory, particularly in the suburbs of Houston and Dallas-Fort Worth. Average use per customer, which is affected by weather, grew less than one percent for residential customers and 1.4 percent for commercial customers. Industrial sales increased 13.3 percent in 2003 compared with 2002, but did not significantly impact revenues. Industrial revenues are generated from industrial customers’ capacity requirements rather than the amount of GWH sales. Capacity requirements of industrial customers did not change significantly in 2003 compared with 2002. Sales for resale in 2002 included the sale of the output from TNP One until October 2002, when TNP One was sold.

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Operating Expenses

For the year ended December 31, 2003, TNMP incurred operating expenses of $183.7 million, a decrease of $43.6 million from the amount incurred during the corresponding period of 2002. The primary reason for the decrease was the absence of the operating expenses related to TNP One in 2003 resulting from the sale of TNP One in October 2002. TNMP does not expect similar decreases in operating expenses in the future.

Operating expenses include purchased power and fuel, and transmission expense. Those expenses decreased $30.7 million for the year ended December 31, 2003, compared with the same period in 2002.

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

Other Operating and Maintenance

Other operating and maintenance expenses decreased $11.4 million for the year ended December 31, 2003, compared with the same period in 2002. The decrease is related to operating expenses of TNP One, which was sold in October 2002 and to TNMP’s establishment of a regulatory asset related to unrecovered System Benefit Fund payments, as discussed in Note 2.

Taxes Other Than Income Taxes

Taxes other than income taxes decreased $3.3 million for the year ended December 31, 2003, compared with the corresponding 2002 period. The decrease is primarily related to ad valorem taxes on TNP One, which was sold in October 2002.

Interest Expenses

Interest expenses increased $7.1 million for the year ended December 31, 2003, compared to the same period in 2002. The increase reflects interest on TNMP’s issuance of $250 million of 6.125 percent Senior Notes in June 2003 and $3.1 million of charges associated with the termination of its interest rate swaps upon the issuance of the Senior Notes in June 2003.

2002 Compared to 2001

Overall Results

When full retail competition began in Texas on January 1, 2002, TNMP separated its previously integrated Texas utility operations into three components. Since First Choice has assumed the activities related to the sale of electricity to retail customers in Texas, the amounts shown in TNMP’s financial statements for 2002 and 2001 are not comparable.

TNMP had consolidated income applicable to common stock of $36.1 million for the year ended December 31, 2002, compared with a consolidated income of $50.9 million for the year ended December 31, 2001.

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

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Gross Profit

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

Gross profit for the year ended December 31, 2002, decreased $83.6 million, or 31.3 percent compared with the corresponding 2001 period. The decrease resulted from the change in TNMP’s business resulting from the beginning of retail competition and the change in its transmission revenue and expenses resulting from the annual PUCT allocation of transmission costs. As discussed in the remainder of this section, the beginning of retail competition resulted in TNMP charging lower prices for the transmission and distribution service it provided to REPs beginning in 2002, as opposed to the prices TNMP charged for integrated electricity service prior to 2002. In addition, the annual allocation of transmission costs by the PUCT reduced the revenue TNMP received, and increased the charges it paid, for transmission service in the area served by the ERCOT during 2002. Details of TNMP’s transmission revenue and expenses are discussed later in this section.

Operating revenues, excluding transmission, decreased $343.0 million for the year ended December 31, 2002, compared with the same period in 2001. Retail competition began in Texas on January 1, 2002. On that date, First Choice, TNMP’s affiliated electric retail provider, assumed the activities related to the sale of electricity to retail customers in Texas. TNMP provides transmission and distribution services to customers within its service area and its regulated rates reflect the cost of providing those services. These rates are lower than the rates TNMP charged prior to the beginning of competition, when it billed its customers at rates that reflected its integrated electric utility services, which included generation, energy supply and customer service activities in addition to transmission and distribution. The revenue decrease in 2002 compared with 2001 is a result of TNMP’s charging the lower rates that reflect only transmission and distribution in 2002.

Purchased power and fuel expenses decreased $269.2 million for the year ended December 31, 2002, compared with the amount incurred in the same period in 2001. The decrease occurred due to the transfer at the beginning of retail competition to First Choice of responsibility for energy supply activities that TNMP formerly performed. As a result, amounts incurred by TNMP for energy supply were incurred by First Choice in 2002.

During February 2002, the PUCT implemented an updated method of allocating transmission costs within ERCOT. TNMP’s share of transmission costs within ERCOT was smaller in 2002 than in 2001. Accordingly, the updated allocation reduced the revenue that TNMP realized from providing transmission service during the year ended December 31, 2002, and increased the payments TNMP made for using the transmission facilities of other ERCOT utilities. The updated allocation caused TNMP to incur $3.4 million of net transmission expense for the year ended December 31, 2002 compared with net transmission revenue of $6.4 million for the year ended December 31, 2001.

The following table summarizes TNMP’s sales for the years ended December 31, 2002 and 2001 (amounts in GWH).

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Residential sales increased in 2002 compared with 2001. The increase in sales is primarily attributable to increases in the number of residential customers, which increased to approximately 211,000 in 2002 from approximately 206,000 in 2001. Average use per customer grew less than 1 percent in 2002 from 2001. Industrial sales decreased significantly, reflecting the end of economy sales agreements with two cogeneration customers. Under the agreements, TNMP purchased the output from the cogeneration customers, and resold that output to the two customers at very low margins. The agreements expired when retail competition began in January 2002. The increase in sales for resale reflects the sale of the output from TNP One to First Choice during the first quarter of 2002, and to third parties from April 2002 until the sale of TNP One in October 2002.

Operating Expenses

TNMP incurred operating expenses of $227.3 million for the year ended December 31, 2002, a decrease of $319.5 million from the amount incurred during the corresponding period of 2001. The assumption of the energy supply and customer service activities by First Choice at the beginning of retail competition in January 2002 was a primary factor in the decrease in TNMP’s operating expenses. TNMP does not expect similar changes in its operating expenses in the future.

Operating expenses, which include purchased power, fuel and transmission, decreased $259.4 million.

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

Other Operating and Maintenance

Other operating and maintenance expenses for the year ended December 31, 2002 decreased $28.4 million compared with 2001. The decrease is primarily attributable to First Choice assuming customer service activities at the beginning of retail competition that TNMP performed in 2001. In addition, TNMP made payments of $3.6 million to the System Benefit Fund in 2001. In 2002, the costs of the System Benefit Fund are passed through to customers, and are not recorded in operating and maintenance expense. The System Benefit Fund was mandated by the 1999 Restructuring Legislation and requires utilities within Texas to contribute annually to a PUCT administered fund at a rate not to exceed 50 cents per megawatt hour through December 31, 2002 and a rate not to exceed 65 cents per megawatt thereafter. The fund is used to provide assistance to low-income customers, fund customer education programs and to reimburse schools for reduced property tax collections due to decreases in the taxable value of generation plants. The termination of TNMP’s factoring arrangement in February 2002 contributed approximately $3.0 million to the decrease.

Depreciation of Utility Plant

TNMP stopped depreciating TNP One when it was reclassified to assets held for sale as of December 31, 2001. As a result, depreciation of utility plant decreased $14.8 million during the year ended December 31, 2002, compared with the corresponding period of 2001.

Charge for Recovery of Stranded Plant

Effective with the start of retail competition on January 1, 2002, the earnings cap under which TNMP operated in 2001 was no longer in effect. Accordingly, TNMP is no longer required to accrue for excess earnings. During the year ended December 31, 2002, the charge for recovery of stranded plant decreased $2.1 million compared with the same period in 2001. The decrease resulted from TNMP’s no longer accruing for excess earnings, and from its recording an adjustment to its 2001 excess earnings accrual in the first quarter of 2002.

Taxes Other than Income Taxes

Taxes other than income taxes for the year ended December 31, 2002, decreased $10.2 million compared with the same period in 2001. At the beginning of retail competition, First Choice became responsible for paying certain revenue-related taxes that TNMP had been responsible for paying in 2001.

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Interest Charges

Interest charges decreased by $5.4 million for the year ended December 31, 2002, compared with 2001. The decrease was due to lower interest rates on the TNMP/First Choice Credit Facility, a shared bank borrowing facility. The decrease was partially offset by increased borrowings under the TNMP/First Choice Credit Facility that resulted primarily from the termination of the factoring arrangement in February 2002.

Cumulative Effect of Change in Accounting

Cumulative effect of change in accounting decreased $1.2 million for the year ended December 31, 2002, compared with the corresponding period in 2001. The changes reflect the charge TNMP recorded in the first quarter of 2001 to write off the balance of previously deferred major maintenance costs. Effective January 1, 2001, TNMP began charging the costs of major maintenance to expense as incurred.

Liquidity and Capital Resources

TNMP Liquidity

TNMP Liquidity. On June 10, 2003, TNMP completed the sale of $250 million of 6.125 percent Senior Notes due in 2008. The proceeds from this sale were used to repay all of TNMP’s outstanding borrowings under the TNMP/First Choice Credit Facility, which were $207 million as of June 10, 2003. TNMP believes that cash flow from its operations and cash on hand as a result of the issuance of the Senior Notes, will be sufficient to meet its working capital requirements at least through the end of 2005, without the need for additional bank financing. TNMP’s cash balance as of December 31, 2003, was approximately $56.9 million

Expiration of TNMP/First Choice Credit Facility and Other Developments. The TNMP/First Choice Credit Facility expired in October 2003. Prior to the issuance of the 6.125 percent Senior Notes due in 2008, TNMP used the TNMP/First Choice Credit Facility to finance its working capital requirements.

In October 2003, the NMPRC granted TNMP’s request for the authority to extend a portion of the guarantees that TNMP provides for certain power supply obligations of First Choice. The NMPRC originally granted TNMP authority to guarantee up to $75 million of First Choice obligations in December 2001, and was set to expire at the end of October 2003. TNMP agreed to a number of conditions in return for the authority to guarantee First Choice’s power supply obligations, including the following:

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TNMP’s cash flow from operations for the year ended December 31, 2003 was $38.9 million higher than in the year ended December 31, 2002. The factors causing the increase in cash flow from operations are summarized in the following table (in millions).

Cash flow in 2002 was reduced due to the termination of TNMP’s factoring agreement in February 2002 and increased by tax benefits from the sale of TNP One. In addition, the sale of TNP One resulted in lower ad valorem tax payments in 2003 compared with the corresponding period in 2002, resulting in increased cash flows in 2003. Cash flow in 2003 was reduced by increased interest payments as a result of the issuance of the 6.125 percent Senior Notes in June 2003.

Intercompany Loans. During 2002, TNMP borrowed excess cash from First Choice. During 2003, all intercompany loans were repaid. Due to cash on hand as a result of the sale of the 6.125 percent Senior Notes discussed above, TNMP does not expect to have intercompany borrowings during 2004.

Dividend Payments. TNMP is required to provide notice to the NMPRC prior to paying dividends to TNP. For the years ended December 31, 2003, 2002 and 2001, TNMP paid dividends of $29.4 million, $102.3 million and $35.0 million, respectively, to TNP. Dividends paid in 2002 include $84.3 million of the proceeds from the sale of TNP One.

Tax Sharing Payments. TNMP is a party to a tax sharing agreement with TNP. Under the provisions of the tax sharing agreement, TNMP made payments of $15.7 to TNP for the year ended December 31, 2003. TNMP received $3.4 million in tax sharing from TNP for the year ended December 31, 2002. For the year ended December 31, 2001, TNMP made tax sharing payments of $13.4 million to TNP.

Pension Plans. TNMP maintains a qualified defined benefit pension plan, retiree medical plan, and retiree life insurance plan that cover its subsidiaries’ eligible employees. TNMP also maintains an excess benefit plan, which provides pension benefits in excess of amounts permitted for qualified plans under U.S. tax law to affected participants of the qualified pension plan.

TNMP’s retirement plan expense for the qualified pension plan, retiree medical plan, retiree life insurance plan and excess benefit plan was approximately $1.8 million, $1.0 million, and $0.8 million for 2003, 2002 and 2001, respectively.

Retirement plan expense has been calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets of 8.5 percent for 2003 and 9.0 percent for 2002. Reducing this assumption by 50 basis points increased the 2003 retirement plan expense by approximately $0.4 million.

In developing the expected long-term rate of return assumption, TNMP evaluated input from its actuary, including a review of asset class return expectations as well as long-term inflation assumptions developed by independent consultants and economists. Projected investment returns are based on equity and fixed income indices, which represent broad market expectations. Based on this input, TNMP believes it is reasonable to assume that its pension plan investment strategy will generate long-term returns of at least 7.8 percent in 2004 and beyond.

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The expected long-term rate of return on pension plan assets is based on an investment strategy that allocates pension plan assets among equity, Treasury Inflation Protected Securities (TIPS), and money market assets based on a formula dependent upon the composite price/earnings ratio of the S&P 500 index and the current yield on TIPS. As of December 31, 2003, the plan’s target allocation was 10 percent equity index fund, 10 percent TIPS, and 80 percent money market fund. TNMP believes that 7.8 percent is a reasonable long-term rate of return for its pension plan assets based on simulated returns of the investment strategy over the last 5, 15 and 20 years. The plan’s return on average plan assets during 2003 was approximately 4.3 percent. TNMP will continue to evaluate its actuarial assumptions, including the expected rate of return, at least annually, and will make adjustments as necessary.

TNMP bases its determination of retirement plan expense on a market-related valuation of assets, which reduces year-to-year volatility. The market-related valuation recognizes realized and unrealized gains or losses over a five-year period. Therefore, future asset values will be impacted as previously deferred realized and unrealized gains and losses are recognized. Recent investment gains and losses will be recognized in the market-related value of assets over the next five years.

The discount rate that TNMP utilizes for determining its benefit obligations and retirement plan expense is based on a review of long-term corporate bonds. The Moody’s Aa index as of December 31st has been used to establish the discount rate. The discount rate determined on this basis decreased from 6.5 percent at December 31, 2002 to 6.0 percent at December 31, 2003.

The value of qualified pension plan assets has decreased from $88.4 million at December 31, 2002 to $85.1 million at December 31, 2003, primarily due to payments to beneficiaries. The decline in value and declining discount rates have reduced the funded status (the difference between plan assets and projected benefit obligation) for the qualified pension plan and excess benefit plan from $2.0 million at December 31, 2002 to ($0.2) million at December 31, 2003.

TNMP has recognized the reduction in postretirement benefits plan liabilities due to the changes in Medicare that became law in December 2003. Recognition of the provisions of the new law reduced the accumulated benefit obligation of the postretirement benefits plan by approximately $0.4 million. TNMP has not determined how the reduction in the accumulated benefit obligation will be reflected in the net postretirement benefit costs of the years 2004 and beyond. There have been no changes to estimates of either participation rates or per capita claims cost as a result of the new law. Accounting guidance on the accounting for the federal subsidy included in the new law is pending. Accordingly, authoritative guidance that may be issued in the future could require changes to the information reported here. Based on the advice of TNMP’s actuary, TNMP has concluded that its plan is at least actuarially equivalent to Medicare Part D.

TNMP Capital Resources

As of December 31, 2003, TNMP’s common equity and long-term debt ratios were 36.7 percent and 63.3 percent, respectively, compared to common equity and long-term debt ratios of 42.1 percent and 57.9 percent as of December 31, 2002, respectively. The change is attributable to the issuance of the 6.125 percent Senior Notes in June 2003.

TNMP’s capital requirements through 2008 are projected to be as follows (amounts in millions):

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Aggregate Contractual Obligations

The table below presents TNMP’s aggregate contractual obligations as of December 31, 2003, adjusted for the issuance of the existing notes (amounts in millions):

Off-Balance Sheet Arrangements

TNMP guaranteed First Choice’s borrowings and issuances of letters of credit under the TNMP/First Choice Credit Facility until its expiration in October 2003. As previously discussed in “Liquidity and Capital Resources,” TNMP guarantees $25 million of the obligations of First Choice under its power supply agreement with Constellation and $10 million of the obligations of First Choice under an additional power supply agreement under authority granted by the NMPRC.

Cash on hand as a result of the issuance of the 6.125 percent Senior Notes due in 2008, along with cash flow from TNMP’s operations, is expected to be sufficient to meet its liquidity requirements without the need for additional financing. Accordingly, TNMP’s guarantees of the performance of First Choice under its power supply agreements with Constellation and additional power suppliers do not have a direct bearing on its liquidity, capital resources, or credit risk support. However, the ability of First Choice to grow its operations depends on the availability of adequate credit capacity to First Choice. TNMP’s guarantees support the credit capacity of First Choice and that support enhances the liquidity of First Choice. First Choice and TNMP are related parties under the common control of TNP. TNMP’s financial condition is evaluated, in part, as a function of the consolidated financial condition of TNP. TNMP’s guarantees of First Choice’s performance under its power supply agreements with Constellation and other power suppliers enhance the consolidated financial condition of TNP and, as a result, its guarantee of First Choice benefits TNMP.

Other Matters

Changes in Accounting Standards

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

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

Derivative Instruments and Hedging Activities. TNMP adopted SFAS No.149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149), on June 30, 2003. The adoption had no impact on TNMP’s financial position, results of operations, or cash flows. SFAS 149 amends SFAS 133 for decisions made by the Derivatives Implementation Group that required amendments to SFAS 133, in connection with other Financial Accounting Standards Board projects regarding financial instruments, and for implementation issues regarding the application of the definition of a derivative.

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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 TNP and 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 $38.2 million, and $35.8 million as of December 31, 2003, and 2002, respectively, from accumulated depreciation to a regulatory liability included in long-term and other liabilities on the balance sheet.

TNMP’s use of market risk sensitive instruments for trading purposes is minimal and does not have a material impact to its financial condition or results of operations.

Commodity Prices

Under terms of a long-term wholesale power contract with PNM signed in 2001, PNM became the sole supplier of power to serve TNMP’s New Mexico load beginning January 1, 2003. The contract extends through December 2006 and provides energy supply at fixed prices.

Interest Rates

TNMP manages its exposure to interest rate risk through the issuance of fixed rate debt or through the issuance of financial instruments to convert variable rate debt to fixed rates.

TNMP’s ratio of fixed rate debt to total debt was 100 percent and 51 percent at December 31, 2003 and 2002, respectively. During 2002, TNMP had two open swap transactions designed to manage interest rate risk associated with the TNMP/First Choice Credit Facility. The swaps effectively converted TNMP’s variable rate borrowings in 2002 to fixed rates. The swaps were terminated on June 10, 2003, when TNMP issued the 6.125 percent Senior Notes due in 2008.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEPENDENT AUDITORS’ REPORT

To the Shareholder and Board of Directors of Texas-New Mexico Power Company:

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Texas-New Mexico Power Company and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows and common shareholder’s equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas-New Mexico Power Company and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for major maintenance costs in 2001.

DELOITTE & TOUCHE LLP

Dallas, Texas

March 2, 2004

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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31,

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

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TEXAS-NEW MEXICO POWER COMPANY AND SUBSIDIARIES

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,