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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, 2004

OR

For the transition period from              to             

TNP ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

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.

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TNP ENTERPRISES INC. AND SUBSIDIARIES (TNP)

Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2004

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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 factors that could cause the results to differ materially from expectations are:

TNP wishes to caution readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

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PART I

Item 1. BUSINESS

Introduction

TNP Enterprises Inc. (TNP), is a holding company that conducts its principal operations through its wholly-owned subsidiaries, Texas-New Mexico Power Company (TNMP), First Choice Power, L.P. (FCP) and First Choice Power Special Purpose, L.P. (FCPSP) (FCP and FCPSP collectively, First Choice). TNP has been wholly owned by SW Acquisition, L.P., (SW Acquisition) since April 7, 2000, the date of the closing of a merger transaction between TNP and ST Acquisition Corp (the ST Corp. Merger).

TNMP is a regulated utility operating in Texas and New Mexico. In Texas, it is a regulated utility engaged solely in the transmission and distribution of electricity. Its transmission and distribution network serves 85 municipalities and adjacent suburban and rural areas throughout its operating regions. Its operating regions include suburbs of Houston, Dallas and Galveston and rural areas throughout central, north and west Texas. Its Texas customers are retail electric providers operating within those areas. In New Mexico, it provides integrated electricity services in portions of southern New Mexico under traditional cost of service regulation, including transmitting, distributing, purchasing and selling electricity to New Mexico customers. It serves the load of its New Mexico customers under a long-term wholesale power contract with Public Service Company of New Mexico. 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 that TNMP has invested and dedicated to providing electric service. TNMP’s predecessor was organized in 1925.

First Choice is a certified retail electric provider operating in Texas, which allows it to provide electricity to residential, small commercial and large commercial, industrial and institutional customers. First Choice performs all activities in Texas with Texas retail customers, including acquiring new retail customers, setting up retail accounts, handling customer inquiries and complaints, and acting as a liaison between the transmission and distribution companies and retail customers. First Choice was organized in 2000 to act as TNMP’s affiliated retail electric provider, as required by the Texas Electric Choice Act, the legislation that established retail competition in Texas (also known as Senate Bill 7).

First Choice consists of FCP and FCPSP. FCP converted from a corporation to a limited partnership in March 2004. On June 1, 2004, FCP established FCPSP, a wholly owned bankruptcy remote special purpose entity in connection with its power supply arrangement with Constellation Energy Commodities Group, Inc. (formerly known as Constellation Power Source, Inc.)(Constellation). FCPSP holds First Choice’s retail electric provider certificate issued by the Public Utility Commission of Texas (PUCT), all customer contracts and wholesale power and gas contracts previously held by FCP, with the exception of certain financial instruments held for hedging purposes. FCP provides personnel, operational and management services to FCPSP under a services agreement.

Prior to January 2002, TNMP provided integrated electricity services in Texas. In January 2002, it transferred its Texas retail operations to FCP. Through December 31, 2001, TNMP operated as an integrated electric utility in Texas, generating, transmitting and distributing electricity to customers in its Texas service territory. On January 1, 2002, with the advent of the deregulation of the generation and supply markets pursuant to Senate Bill 7, FCP began to provide retail electric service to all TNMP customers that did not select another retail provider and to customers that chose FCP to provide them with electric service. All classes of customers of most investor-owned Texas utilities can choose their retail electric provider. Municipal utilities and electric cooperatives may participate in the competitive marketplace, but to date, none have chosen to do so.

TNMP has two subsidiaries, Texas Generating Company, L.P. (TGC) and Texas Generating Company II, LLC (TGCII), whose predecessors were formed in the late 1980s to facilitate the financing of the construction of TNP One, TNMP’s sole power generation facility. TNMP, TGC and TGCII held title to TNP One until May and June 2001. At that time TNMP converted TGC and TGCII to their present forms, and consolidated the ownership of TNP One into TGC to comply with the provisions of Senate Bill 7. TNMP and TGC sold TNP One in October 2002. As a result of the sale, TGC and TGCII neither own property nor engage in any operating activities.

TNP and TNMP are Texas corporations. FCP and FCPSP are each Texas limited partnerships. FCP’s general partner, First Choice Power GP, LLC, and FCPSP’s general partner, First Choice Special Purpose GP, LLC, are each Delaware limited liability companies. TGC is a Texas limited partnership and TGC II is a Texas limited liability company. The executive offices of TNP, TNMP, FCP, FCPSP, 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. TNP also has an executive office located at 2 Robbins Lane, Suite 201, Jericho, NY 11753, with the telephone number (516) 933-3100. Unless otherwise indicated, all financial information in this report is presented on a consolidated basis.

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

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

Under the terms of the agreement, TNP’s common shareholder will receive consideration, consisting of approximately 4.7 million newly issued PNM Resources shares and the remainder being paid in cash, subject to closing adjustments. PNM Resources shares were valued at $20.20 on the date the agreement was entered into. The final sale price will be based on the share price on the day of closing. PNM Resources shares closed at $26.24 on February 28, 2005. The existing indebtedness and preferred securities at TNP will be retired. All debt at TNMP, TNP’s wholly-owned electric utility subsidiary, will remain outstanding.

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

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

Texas. On September 9, 2004, TNMP and PNM Resources filed a joint application with the PUCT seeking a finding that the acquisition is consistent with the public interest. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources filed a stipulation settling all issues in the acquisition docket and providing for rate reductions by TNMP, timing of the 60-day rate review and effective dates for the resulting rates, extension or renewal of certain service quality and reliability commitments, a synergy savings rate credit to be effective after closing, and a finding that the acquisition is consistent with the public interest. Various parties, including the staff of the PUCT executed the stipulation and all parties agreed not to oppose its approval. Management expects the PUCT to find the acquisition to be consistent with the public interest and implement the stipulation no later than April 2005. See Note 3 – Regulatory Matters - Texas for additional information associated with the settlement.

New Mexico. On September 9, 2004, TNMP and PNM Resources filed a joint application with the NMPRC seeking approval of the acquisition. Various parties intervened in the proceeding. In February 2005, TNMP and PNM Resources filed a stipulation settling all issues in the acquisition docket including rate reductions by TNMP over five years, the sharing of synergy savings with customers of TNMP and various PNM Resources subsidiaries, and the agreement of the parties that the acquisition should be approved. Management expects that the NMPRC will approve the acquisition settlement in the second quarter of 2005. See Note 3 – Regulatory Matters – New Mexico for additional information associated with the settlement.

FERC. On December 23, 2004, TNMP and PNM Resources filed a joint application requesting approval of the acquisition. On January 28, 2005, El Paso Electric Company (EPE) filed a protest to the acquisition stating that EPE needed more information on competitive issues before the application could be approved. Xcel Energy also filed a motion to intervene in the matter but did not protest approval of the transaction. The application requested FERC to issue all necessary approvals by March 2, 2005.

SEC. During the first quarter of 2005, PNM Resources filed for all required action needed for approval of the acquisition by the SEC.

Federal Trade Commission. On February 2, 2005, PNM Resources received anti-trust clearance under the Hart-Scott-Rodino Act from the Federal Trade Commission.

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

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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 255,000 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, it is the exclusive provider of transmission and distribution services.

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 north, west and south 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, 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 non-contiguous New Mexico service territories include 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 79 franchises with terms ranging from 15 to 50 years, three franchises with five year terms, one franchise with a ten 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 2005 to 2039. Three Texas franchises, Sweeny, Lewisville, and Texas City, and one New Mexico franchise, Silver City, are scheduled to expire in 2005. These franchises account for approximately 21 percent of total company revenues. The Texas City franchise is currently renewed on a month-to-month basis. 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 64 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.

First Choice’s Service Areas

First Choice had approximately 219,000 customers in Texas as of December 31, 2004. This number consists of approximately 163,000 price-to-beat customers and 56,000 customers (residential, commercial, 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. First Choice is one of 15 retail electric providers competing for mass market customers (residential and small commercial), and one of 59 retail electric providers competing for large commercial, and aggregated municipal customers. At December 31, 2004, First Choice’s gigawatt-hour (GWH) sales market share in competitive regions of ERCOT was approximately 2.9 percent.

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ERCOT

TNMP and First Choice are both members of ERCOT. The ERCOT independent system operator, or ISO, is responsible for maintaining reliable operations of the bulk electric power supply system in the electric market served by ERCOT. Its responsibilities include ensuring that information relating to a customer’s choice of retail electric provider is conveyed in a timely manner to anyone needing the information. It is also responsible for ensuring that electricity production and delivery are accurately accounted for among the generation resources and wholesale buyers and sellers in the ERCOT region. The ERCOT ISO does not operate a centrally dispatched pool and does not procure energy on behalf of its members other than to maintain the reliable operation of the transmission system. The ERCOT ISO also serves as agent for procuring ancillary services for those who elect not to secure their own ancillary services requirements.

Members of ERCOT include retail customers, investor and municipal owned electric utilities, rural electric cooperatives, river authorities, independent generators, power markets and retail electric providers. The electric market served by ERCOT operates under the reliability standards set by the North American Electric Reliability Council. The PUCT has primary jurisdictional authority over the electric market served by ERCOT and the reliability of electricity across Texas’ main interconnected power grid.

Seasonality of Business

First Choice experiences increased sales and operating revenues during the summer months as a result of increased air conditioner usage in hot weather. In 2004 approximately 41 percent of First Choice’s consolidated annual revenues were recorded in June, July, August, and September.

TNMP’s sales and operating revenues remain relatively constant throughout the year. A significant portion of TNMP’s revenues are based on customer peak loads which are set annually and do not fluctuate with monthly Kilowatt-Hour (Kwh) consumption. TNMP’s quarterly revenues were 23 percent, 24 percent, 28 percent and 25 percent of total revenues for the 1^st, 2^nd, 3^rd and 4^th quarters of 2004, respectively.

Sources and Cost of Energy

First Choice

First Choice assumed the energy supply activities of TNMP in Texas on January 1, 2002. The competitive market created under the provisions of Senate Bill 7 contains no provisions for the specific recovery of fuel and purchased power costs, although First Choice can request that the PUCT change the price-to-beat twice a year to recognize changes in natural gas prices. Also, as discussed in Note 3, 60 days following the issuance of a final stranded cost true-up order, TNMP is required to make a rate review filing. Under the Texas acquisition settlement described in Note 2, shortly before the PUCT’s order in TNMP’s 60-day rate case review becomes final, the PUCT will adjust First Choice’s fuel factor portion of the price-to-beat downward if natural gas prices are below the prices embedded in the then-current factor. As a result of these competitive market conditions, changes in the market prices of fuel and purchased power will affect First Choice’s operating results. To manage this risk, First Choice has established a strategy to mitigate the effects of changing prices.

Strategy for Mitigating Fluctuation in Costs of Energy Supply. In 2003, First Choice and Constellation executed a three-year power supply agreement that resulted in Constellation being the primary supplier of power for First Choice’s customers, both price-to-beat and competitive. The Constellation agreement allows First Choice to execute a risk management policy that establishes limits upon the amount of risk that First Choice may assume. First Choice’s basic strategy is to minimize its exposure to fluctuations in market energy prices by matching fixed price sales contracts with fixed price supply. In addition, First Choice can use its ability to change the price-to-beat fuel factor to mitigate fluctuations in the cost of its price-to-beat energy supply and use various financial instruments to hedge against the risk of adverse changes in natural gas prices.

Benefits Provided by Constellation Agreement. As part of the agreement, and as discussed in Note 12, First Choice granted a security interest in its accounts receivable to Constellation, which has provided First Choice with sufficient credit for its operations. As a result, First Choice has locked in prices for price-to-beat customers’ supply through May 2005, and has secured supply to serve all of its forecasted commitments to existing price-to-beat and competitive customers through 2006. First Choice has secured fixed price supply for fixed price sales contracts for approximately 86 percent of its competitive load through 2006. For the remaining competitive load, First Choice has secured supply at rates that fluctuate with natural gas prices. First Choice has the ability, on 45 days notice, to change the rate billed to these competitive customers. First Choice has secured supply to serve its forecasted commitments to price-to-beat customers through 2006 at prices that currently vary with monthly natural gas prices. To mitigate the risk of changes to monthly natural gas prices, First Choice has the ability to file with the PUCT to change the price-to-beat twice each year, in the event of significant changes in natural gas prices, or use financial instruments, as discussed previously.

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Load Forecasting Risks. First Choice’s load fluctuates continuously due to among other things, customer additions and losses, changes in customers’ usage, severe or unexpected weather and timing of customer switching. First Choice continually monitors and revises its load forecast to account for changing customer loads (both price-to-beat and competitive). First Choice develops short-term load forecasts to identify short-term load surpluses and shortages, and to ensure that hedges are in place to cover expected sales. To the extent these short-term load forecasts identify shortages, First Choice covers shortages through short-term power purchases or through purchases on the ERCOT balancing market.

The power supply agreement with Constellation resulted in Constellation assuming weather related risks. First Choice retained the risks associated with customer attrition.

New Mexico

TNMP purchases all electricity for its New Mexico customers’ needs and energy-scheduling services under terms of a long-term wholesale power contract with Public Service Company of New Mexico (PNM). Purchases under the contract are at fixed rates to provide price stability to TNMP’s New Mexico customers. The contract extends through December 2006. PNM is a wholly-owned subsidiary of PNM Resources.

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

New Mexico Purchased Power Recovery. TNMP is allowed to recover all New Mexico purchased power costs through a Fuel and Purchased Power Cost Adjustment Clause (FPPCAC) authorized by the NMPRC. The purchased power recovery factor changes monthly to reflect over-collections or under-collections of purchased power costs. As described in Note 3, the FPPCAC temporarily expired in February 2004 but was reinstated in October 2004.

Purchased Power Costs

During 2004, TNP’s consolidated average cost per Kwh of purchased power was 4.9 cents. In 2003, TNP’s consolidated average cost of purchased power was 5.4 cents per Kwh.

The following table illustrates the composition of TNP’s sources of electric energy in 2004.

Government Regulation

TNMP is subject to various federal, state and local regulations. TNMP possesses all necessary franchises, licenses and certificates to enable it 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 system 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, TNMP incurred expenses related to air, water, and solid waste pollution abatement (including ash removal) of approximately $3.1 million. Substantially all of TNMP’s environmental expenses were incurred at TNP One, which TNMP sold in October 2002.

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In October, 2003, the Texas Commission on Environmental Quality (TCEQ) notified approximately 50 companies, including TNMP, that releases of hazardous substances had been documented from a site owned and operated by a vendor with whom those companies did business. TNMP purchased transformers from the vendor and also sent some transformers to the vendor for repair and/or disposal. The owner and operator of the site has filed for bankruptcy and the site is under the control of the bankruptcy trustee. In August 2004, 15 of the companies identified by TCEQ as Potentially Responsible Parties (PRPs), including TNMP, formed an initial working group to manage the remediation efforts and determine the allocation of responsibility among the PRPs. As a result of the initial allocation of responsibility, in 2004, TNMP recorded a liability of $0.6 million for its share of the clean up of this site.

First Choice operates under a certificate issued by the PUCT and is subject to PUCT rules concerning various aspects of customer service and protection. The PUCT also has the authority to approve and, in limited circumstances, change the price-to-beat First Choice charges to its customers.

Employees and Executive Officers

At December 31, 2004, TNP, First Choice and TNMP had 804 employees. The employees are not represented by a union or covered by a collective bargaining agreement. Management believes relations with its employees are good. Executive officers of TNP are elected annually by and serve at the discretion of the board of directors.

The executive officers of TNP and the presidents of its principal operating subsidiaries are as follows:

William J. Catacosinos has been Chairman and Chief Executive Officer of TNP since the closing of the ST Corp. Merger in April 2000 and serves on TNMP’s board of directors. He was President of TNP from April 2000 until January 2004. Since November 1998, Dr. Catacosinos has also served as Managing Partner of Laurel Hill Capital Partners. Dr. Catacosinos was Chairman and Chief Executive Officer of Long Island Lighting Company (LILCO) from January 1984 to July 1998. Dr. Catacosinos is a director of Preservation Sciences, Inc., a company in St. Petersburg, Florida, that researches, develops and markets preservatives and preservative technologies for food, beverage and industrial products; and of International Coal Group, a publicly held coal company.

Michael E. Bray became President and Chief Operating Officer of TNP on January 19, 2004. He became a director of TNP on January 14, 2004. He became a director of TNMP and Chairman of First Choice on February 4, 2004. From July 2000 until September 2003 he was President of PPL Electric Utilities and Vice Chair of PPL Gas Utilities, electric and gas utilities based in Allentown, Pennsylvania. From April 2000 to July 2000 he was Senior Vice President of PPL Electric. From February 1999 to April 2000 he was President and Chief Executive Officer of Consolidated Edison Development, Inc., a power generation subsidiary of Consolidated Edison Company of New York, New York.

Theodore A. Babcock joined TNP upon the closing in April 2000 of the ST Corp. 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.

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 ST Corp. Merger in April 2000.

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 ST Corp. Merger in April 2000.

Kathleen A. Marion joined TNP in April 2000 upon the closing of the ST Corp. Merger as Corporate 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.

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Item 2. PROPERTIES

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 north, west and south 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. TNMP’s 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

TNP’s, TNMP’s, and First Choice’s corporate headquarters are located in Fort Worth, Texas. Office space is leased through December 31, 2008. TNP also has an office in Jericho, New York, which is leased through May 1, 2006.

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 it serves. In addition to these facilities, TNMP owns or leases offices in 12 Texas communities that are shared with First Choice.

Item 3. LEGAL PROCEEDINGS

Since 1998, TNMP has been engaged in litigation in the state and federal courts with Power Resource Group, Inc. (PRG) involving the effectiveness of certain PUCT rules that implement Public Utility Regulatory Policy Act (PURPA) regulations. PRG claims that if the FERC regulations had been properly implemented in Texas, TNMP would have been required to make a long-term purchase of electricity from PRG. Currently, PRG is appealing to the United States District Court of Appeals for the Fifth Circuit, the ruling in favor of TNMP and the PUCT by the United States District Court for the Western District of Texas. The District Court denied PRG’s claims that: (1) the PUCT’s rules inappropriately implemented the PURPA statute and FERC implementing rules; (2) the District Court should direct the PUCT to promulgate new rules implementing PURPA to PRG’s satisfaction; and (3) the District Court should direct that the new rules, as required to be adopted, be applied to PRG’s claim against TNMP as if such rules existed from the beginning of the dispute. The District Court determined that PRG’s claim was an “as applied” claim over which the Court had no jurisdiction. TNMP is defending the appeal to the Fifth Circuit and continues to believe that it will be successful in defending against PRG’s claims.

Information regarding additional regulatory and legal matters is provided in Notes 3 and 12.

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 2004.

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PART II

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

TNP has no publicly traded shares of common stock outstanding.

Item 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of TNP for 2000 through 2004.

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TEXAS-NEW MEXICO POWER COMPANY

SELECTED OPERATING STATISTICS

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FIRST CHOICE POWER, INC. AND SUBSIDIARIES

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

Competitive Conditions

First Choice Energy Supply

A discussion of the competitive position of TNP with regard to energy supply is included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

First Choice Customer Operations

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

Price-to-Beat. First Choice must offer customers that take service in TNMP’s service area, and whose loads are less than 1 megawatt a regulated price, commonly called the price-to-beat. The price-to-beat will be offered through December 31, 2006, and First Choice could not offer those customers any other rate before the loss of 40 percent of the energy consumed by its price-to-beat customers, or January 1, 2005, whichever occurred first. In January 2004, the PUCT approved a stipulation among TNMP and other parties, which found that First Choice had lost more than 40 percent of the energy consumed by its small commercial price-to-beat customers. As a result of PUCT’s action, First Choice has been authorized to offer small commercial customers who reside in TNMP’s service area rates other than the price-to-beat since January 2004. First Choice remained below the 40 percent loss threshold with respect to residential price-to-beat customers through December 31, 2004, As of January 1, 2005, First Choice may offer prices lower than the price-to-beat to residential customers in TNMP’s service area.

Customer Retention and Acquisition. At December 31, 2004, First Choice served approximately 163,000 customers at price-to-beat rates and approximately 56,000 customers at competitive rates. At December 31, 2003, First Choice served approximately 176,000 and 72,000 price-to-beat and competitive customers, respectively. In response to the factors discussed in Bad Debt and Delinquency, below, First Choice did not actively pursue mass market customers in 2004. Mass market customers who choose First Choice as their retail electric provider are required to pass a credit check or make a deposit before First Choice begins service. In 2005, First Choice will reevaluate its strategy with regard to marketing to the mass market.

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

The structure described above limited First Choice’s collection activities prior to June 1, 2004 and affected both bad debt expense and the level of delinquent accounts receivable. First Choice’s bad debt and delinquency rates have decreased for competitive customers as it has implemented more aggressive credit and collection policies based on the new customer protection rules. Bad debt expense as a percentage of operating revenues for First Choice was approximately 1.6 percent for the seven months of 2004 after June 1^st, compared with 1.9 percent for the twelve months ended December 31, 2003. On average, delinquent accounts receivable were approximately 4.5 percent of monthly operating revenue for the seven months ended December 31, 2004, as compared with a 6.0 percent delinquency rate for the twelve months ended December 31, 2003.

TNMP

TNMP provides transmission and distribution services within TNMP’s Texas service area at regulated rates to various retail electric providers that, in turn, provide retail electric service. As of December 31, 2004, 36 retail electric providers served customers that receive transmission and distribution services from TNMP. First Choice provided electric service to customers that accounted for approximately 49 percent of the energy delivered by TNMP for the year ended December 31, 2004. TNMP’s next largest customer was a non-affiliated retail electric provider that served customers that accounted for approximately 24 percent of the energy delivered by TNMP during the year ended December 31, 2004.

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Senate Bill 7 provides for recovery of stranded costs, which is 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. On July 22, 2004, the PUCT issued its decision in TNMP’s stranded cost true-up proceeding in Docket No. 29206. The PUCT decision allows TNMP to recover a true-up balance of $87.3 million of the $266.5 million that TNMP requested. The $87.3 million is composed of stranded costs of $128.1 million reduced by an over-recovered fuel balance of $40.8 million

In the third quarter of 2004, TNMP began accruing carrying charges on stranded costs for the period subsequent to the July 22, 2004 stranded cost order. In accordance with PUCT rules in effect at the time that TNMP filed its true-up proceeding, TNMP is allowed to accrue and recover carrying charges on the stranded cost balance from the date of the final order.

On August 11, 2004, TNMP filed a motion for rehearing of the PUCT decision. On October 7, 2004, the PUCT denied all of TNMP’s motions for rehearing except for an issue related to a June 2004 Texas Supreme Court ruling that addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the date that competition began in Texas. The hearing was held in December 2004. In accordance with the June 2004 Texas Supreme Court ruling, and consistent with the application in the true-up case of another utility, TNMP expects to recover $41.7 million of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. Accordingly, TNMP recorded $27.2 million of carrying charges for the period January 1, 2002 through July 21, 2004, in the fourth quarter of 2004. In accordance with provisions within SFAS 92 – Regulated Enterprises – Accounting for Phase-In Plans, TNMP was limited in its recognition for income statement purposes to only the debt related portion of the carrying charges. TNMP was prohibited from income statement recognition of $14.5 million associated with the equity portion of the carrying charges until the receipt of those amounts from customers. A final order in the true-up proceeding is expected to be issued in the second quarter of 2005.

Critical Accounting Policies

The accounting policies that TNP employed in the preparation of the consolidated financial statements are discussed in Note 1. TNP is required to use estimates in order to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. 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 and power delivery 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, purchased power and power delivery expenses are adjusted to the actual amounts billed or incurred in the following month. In addition, purchased power expenses are subject to adjustment due to revisions that ERCOT may make to the metered load of First Choice during ERCOT’s settlement process. These adjustments may occur several months after the actual usage and the amounts of these adjustments can be significant.

TNP also employs certain critical accounting policies that require use of judgments and assumptions that are subject to uncertainty. The amounts reported in the consolidated 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.

Carrying Charges on Stranded Costs. As discussed above, TNMP expects to recover an estimated $41.7 million of carrying charges on stranded costs for the period January 1, 2002 through July 21, 2004. TNMP recorded $27.2 million of carrying charges for the period January 1, 2002 through July 21, 2004, in the fourth quarter of 2004. TNMP’s estimate of allowable carrying charges is based on the Supreme Court ruling, and the PUCT’s application of that ruling in a previous true up case of another utility. A final order in TNMP’s true-up proceeding is expected to be issued in the second quarter of 2005. Action taken by the PUCT could affect the ultimate recovery of accrued carrying costs.

Goodwill and Intangible Assets. TNP has goodwill related to the ST Corp. Merger that had a carrying value of $270.3 million as of December 31, 2004. As discussed in Note 11, TNP has apportioned the carrying value of the goodwill between its Regulated Transmission and Distribution segment and First Choice. As of December 31, 2004, TNP had assigned approximately $178.7 million of goodwill to the Regulated Transmission and Distribution segment and approximately $91.6 million to First Choice.

Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) requires TNP to test goodwill for impairment at least annually and more frequently when indicators of impairment exist. TNP performed its annual goodwill impairment test as of December 31, 2004, and concluded that the fair value of the goodwill related to the ST Corp. Merger exceeded its carrying value. To determine the fair value of the goodwill, TNP utilized the PNM Resources proposed acquisition price discussed in Note 2.

Accounting for Derivatives – Normal Purchases and Sales. In the normal course of business, TNMP and First Choice enter into commodity contracts, which include “swing” components for additional purchases or sales of electricity, in order to meet customer requirements. In most circumstances, such contracts would be defined as derivatives under SFAS 133, “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

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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, the management of TNMP and First Choice has determined that their respective contracts for electricity qualify for the normal purchases and sales exception. Accordingly, TNMP and First Choice do not account for their respective electricity contracts as derivatives.

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

Results of Operations

2004 Compared With 2003

Overall Results

For the year ended December 31, 2004, TNP had a loss applicable to common stock of $75.6 million compared with a loss applicable to common stock of $40.3 million for the year ended December 31, 2003. The changes in TNP’s earnings for 2004 compared with 2003 are attributable to the factors listed below (in millions):

First Choice Results

For the year ended December 31, 2004, First Choice had a net income of $30.5 million, compared with a loss of $13.3 million for the year ended December 31, 2003. The changes in First Choice’s earnings for 2004 compared with 2003 are attributable to the factors listed below (in millions):

First Choice Gross Profit

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

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Transmission and distribution costs are included in the “Other operating and maintenance” line of TNP’s consolidated income statement. The clawback accrual is shown on the income statement as “Accrual for payment to TNMP”. The following table summarizes the components of the change in First Choice’s gross profit for 2004 compared with 2003 (in thousands).

Gross profit for the year ended December 31, 2004, increased $61.9 million compared with the corresponding 2003 period. The increase resulted primarily from the decreased purchase power expense and increases to both competitive and price-to-beat rates.

Revenues from price-to-beat customers, net of transmission and distribution charges, decreased $32.2 million for the year ended December 31, 2004, compared with the year ended December 31, 2003. The decrease was caused by milder weather conditions in 2004 compared to 2003, and a decrease in the number of price to beat customers. The decrease was partially offset by the increase of price-to-beat rates.

Revenues from competitive customers, net of transmission and distribution charges, decreased $66.7 million for the year ended December 31, 2004, compared with the year ended December 31, 2003. Decreased sales resulting from milder weather in 2004 compared to 2003, and the net decrease in customers were primarily responsible for the decrease in revenue. The decrease in sales was partially offset by increases in rates of $23.2 million. During 2004, First Choice charged competitive customers higher rates to offset increasing natural gas prices.

Retail electric providers such as First Choice include a transmission and distribution charge in the prices they charge their customers for electric service. The transmission and distribution charge is regulated by the PUCT and is designed to allow the utility that provides transmission and distribution services within a specific service area, referred to as the transmission and distribution service provider, to recover its cost of service. For the year ended December 31, 2004, First Choice incurred transmission and distribution costs related to sales to price-to-beat and competitive customers of $161.4 million, compared with $207.0 million for the year ended December 31, 2003.

Purchased power and fuel expenses decreased $163.7 million for the year ended December 31, 2004, compared with the amount incurred in the same period in 2003. Decreases in sales accounted for $129.8 million, and decreases in the cost of fuel were responsible for $34.4 million of the decrease. As energy prices began to increase, First Choice responded by seeking increases in the price-to-beat fuel factor and by purchasing natural gas hedges to mitigate the risk of increasing natural gas prices. The current purchase power agreement with Constellation allows First Choice the ability to purchase natural gas at fixed prices, thereby locking in the cost of its energy supply.

Other factors affecting the change in gross profit included in All Other are; (1) a reduction to gross profit of $5.6 million recorded in 2004 at First Choice for transmission and distribution charges paid by First Choice in excess of amounts billed to First Choice customers. The difference primarily resulted from impaired data flows within the ERCOT market in 2002 and 2003, and as a result, First Choice and other retail electric providers had difficulty determining when to transfer ownership of customers that had switched from one retail electric provider to another. This resulted in delays in customer billings. PUCT rules, which restrict back-billing for consumption prior to 6 months, prevented First Choice from billing some of those customers. First Choice and the other market participants have been working to correct the impaired data flows and have made considerable

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progress. In December 2004, as a result of improvements in internal processes for estimating the amount of transmission and distribution charges not billed, First Choice recorded the gross profit reduction, and; (2) during 2003, First Choice increased its pre-tax reserve related to a provision of Senate Bill 7, commonly known as the clawback, by $3.2 million. The clawback provision requires First Choice to credit TNMP with the difference between the price-to-beat and the market price of electricity during the years 2002 and 2003. First Choice’s clawback liability is addressed through PUCT true-up proceedings as discussed in Note 3.

Other Operating and Maintenance

For the year ended December 31, 2004, other operating and maintenance expenses decreased $6.4 million compared with the same period in 2003. The decrease resulted from lower bad debt expense of $5.4 million and lower marketing expenses.

TNMP Results

For the year ended December 31, 2004, TNMP had a loss applicable to common stock of $51.2 million compared with income applicable to common stock of $25.3 million for the twelve months ended December 31, 2003. The changes in TNMP’s earnings for 2004 compared with 2003 are attributable to the factors listed below (in millions):

TNMP 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, 2004, compared with the same period in 2003 (in thousands).

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Gross profit for the year ended December 31, 2004, increased $8.5 million, or 5.3 percent compared with the corresponding 2003 period. The increase is driven by a $15.7 million disallowance of fuel and energy-related purchased power costs that occurred in the final fuel reconciliation in Texas in 2003. The final fuel reconciliation balance was included in the stranded costs true-up balance discussed in Note 3. Additionally, gross profit increased by $2.4 million due to revenues associated with a growth in customers.

Partially offsetting the increases in gross profit were lower revenues of $3.7 million related to milder than normal weather in 2004 compared to 2003. Transmission revenues, net of transmission costs, decreased by $2.9 million in 2004 compared with 2003 driven primarily by higher costs from TXU Electric Delivery Company and Lower Colorado River Authority. Additionally, electric service revenues decreased by $1.3 million primarily due to fewer customer disconnects in 2004.

Purchased power expenses, associated with TNMP New Mexico operations, increased by $8.2 million in 2004, compared with the amounts incurred in 2003. Throughout 2003, TNMP recovered all purchased power costs through the fuel and purchased power cost adjustment clause (FPPCAC) authorized by the NMPRC. The FPPCAC clause temporarily expired in February 2004 and was reinstated in October 2004, resulting in unrecovered purchased power costs of $0.9 million in 2004.

Operating Expenses

For the year ended December 31, 2004, TNMP incurred operating expenses of $201.2 million, an increase of $17.5 million from the amount incurred during the corresponding period of 2003.

Increases in purchased power and transmission expenses of $11.7 million are discussed above in “TNMP Gross Profit.” The remaining components of the changes in operating expenses are discussed below.

Other Operating and Maintenance

Other operating and maintenance expenses increased $3.1 million for the year ended December 31, 2004, compared with the same period in 2003. The increase is primarily attributable to a $3.1 million reduction to operating expenses in August 2003 related to the transfer of previously expensed System Benefit Fund costs from expense to a regulatory asset based on a PUCT ruling.

Taxes Other Than Income Taxes

Taxes other than income taxes increased $1.7 million for the year ended December 31, 2004, compared with the corresponding 2003 period. The increase is primarily related to higher ad valorem taxes.

Carrying Charges on Regulatory Assets

During 2004, TNMP recorded $31.0 million of carrying charges associated with its stranded costs in Texas. Of that amount, $27.2 million of carrying charges are related to the period January 1, 2002 through July 21, 2004. These charges resulted from a June 2004 Texas Supreme Court ruling that addressed recovery of carrying charges on recoverable stranded costs back to January 1, 2002, the date that competition began in Texas. Additionally, TNMP recorded carrying charges of $1.0 million related to other regulatory assets in Texas and New Mexico. In accordance with provisions within SFAS 92 – Regulated Enterprises – Accounting for Phase-In Plans, TNMP was limited in its recognition for income statement purposes to only the debt related portion of the carrying charges, TNMP was prohibited from income statement recognition of $17.1 million associated with the equity portion of the carrying charges until the actual receipt of those amounts from customers.

Extraordinary Item (net of taxes)

In the second quarter of 2004, TNMP recorded a loss of $97.8 million related to the PUCT true-up proceeding regarding TNMP’s stranded costs. The PUCT allowed TNMP to recover $87.3 million of the $266.5 million that TNMP requested as stranded cost. This decision resulted in a loss of $155.2 million before tax ($97.8 million after tax). TNMP recorded the $97.8 million after tax loss as an extraordinary item in accordance with the requirements of SFAS 101 – Regulated Enterprises – accounting for the discontinuance of the application of FASB Statement No.71.

TNP Preferred Stock Dividends

Dividends on preferred stock increased $3.3 million for the year ended December 31, 2004, compared with the corresponding period in 2003. The increase is attributable to TNP paying dividends on preferred stock through the issuance of additional shares of preferred stock.

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Results of Operations

2003 Compared With 2002

Overall Results

For the year ended December 31, 2003, TNP had a loss applicable to common stock of $40.3 million compared with income applicable to common stock of $13.0 million for the year ended December 31, 2002. The changes in TNP’s earnings for 2003 compared with 2002 are attributable to the factors listed below (in millions):

First Choice Results

For the year ended December 31, 2003, First Choice had a net loss of $13.3 million, compared with net income of $26.0 million for the year ended December 31, 2002. The changes in First Choice’s earnings for 2003 compared with 2002 are attributable to the factors listed below (in millions):

First Choice Gross Profit

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

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Transmission and distribution costs are included in the “Other operating and maintenance” line of TNP’s consolidated income statement. The clawback accrual is shown on the income statement as “Accrual for payment to TNMP.” The following table summarizes the components of the change in First Choice’s gross profit for 2003, compared with 2002 (in thousands).

Gross profit for the year ended December 31, 2003, decreased $49.5 million compared with the corresponding 2002 period. The decrease resulted primarily from higher purchased power expenses, partially offset by higher revenues from both price-to-beat and competitive customers.

For the year ended December 31, 2003, revenues, net of transmission and distribution charges, from price-to-beat customers increased $31.2 million compared with the year ended December 31, 2002. The increase resulted from increases in the price-to-beat fuel factor during 2003, partially offset by losses of price-to-beat customers during 2003 in response to price increases, and milder than normal weather in the third quarter of 2003.

Revenues from competitive customers, net of transmission and distribution charges, increased $109.6 million for the year ended December 31, 2003, compared with the year ended December 31, 2002. Changes in rates accounted for $41.7 million of the increase. During 2003, First Choice charged competitive customers higher rates to offset increasing natural gas prices. The remaining $67.9 million increase reflects higher sales resulting from First Choice’s acquisition of customers in the competitive market.

Retail electric providers such as First Choice include a transmission and distribution charge in the prices they charge their customers for electric service. The transmission and distribution charge is regulated by the PUCT and is designed to allow the utility that provides transmission and distribution services within a specific service area, referred to as the transmission and distribution service provider, to recover its cost of service. For the year ended December 31, 2003, First Choice billed and incurred transmission and distribution costs related to sales to competitive customers of $103.6 million, compared with $60.1 million for the year ended December 31, 2002. As noted above, the increase reflects the acquisition of customers in the competitive market by First Choice.

Price-to-beat-related transmission and distribution revenues and costs were $103.4 million for the year ended December 31, 2003, compared with $101.6 million for the year ended December 31, 2003. The increase is primarily attributable to higher sales in the first half of 2003 compared with the first half of 2002, partially offset by losses of price-to-beat customers during 2003 in response to price increases, and lower sales due to milder than normal weather in the third quarter of 2003.

Purchased power and fuel expenses increased $203.7 million for the year ended December 31, 2003, compared with the amount incurred in the same period in 2002. Increases in the price of natural gas were primarily responsible for $140.6 million of the increase. The price increases accelerated in December 2002, and First Choice responded to the increases by seeking increases in the price-to-beat fuel factor and by purchasing natural gas hedges to mitigate the risk of increasing natural gas prices. First Choice began implementing its strategy in November 2002. An additional $67.3 million of the increase is primarily attributable to increased purchases of power to supply customers acquired by First Choice in the competitive market.

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These increases were partially offset in 2003 by adjustments resulting from the resettlement of 2002 purchased power expense by ERCOT. Participants in the competitive market experienced impaired data flows at the beginning of competition. As a result, First Choice and other retail electric providers had difficulty determining when to transfer ownership of customers that had switched from one retail electric provider to another. In addition, the metering data that ERCOT used to determine the various retail electric providers’ electric load during 2002 was not accurate in every case. First Choice and the other market participants have been working to correct the impaired data flows and have made considerable progress. In September 2003, as a result of this corrective process, ERCOT adjusted the metered load of First Choice for the period August through December 2002. The adjustment to metered load reduced purchased power expenses by $8.5 million, resulting in a net reduction to purchased power expense of $4.2 million for the year ended December 31, 2003.

During 2003, First Choice increased its pre-tax reserve related to a provision of Senate Bill 7, commonly known as the clawback, by $3.2 million. The clawback provision requires First Choice to credit TNMP with the difference between the price-to-beat and the market price of electricity during the years 2002 and 2003. During 2002, First Choice recorded $12.7 million related to the clawback liability. Additional details of the clawback are discussed in Note 3.

Other Operating and Maintenance

For the year ended December 31, 2003, other operating and maintenance expenses increased $14.4 million compared with the same period in 2002. The increase resulted from a higher reserve for uncollectible accounts receivable of $7.4 million, and increased personnel and outside services costs in First Choice’s customer service organization of $6.1 million.

TNMP Results

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

TNMP Gross Profit

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