The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of our 2008 Form 10-K.

Certain matters discussed in this Quarterly Report on Form 10-Q other than statements of historical information are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we "believe", "anticipate", "target", "expect", "pro forma", "estimate", "intend" and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning and include, but are not limited to such things as:

• capital expenditures,

• earnings,

• liquidity and capital resources,

• litigation,

• accounting matters,

• possible corporate restructurings, acquisitions and dispositions,

• compliance with debt and other restrictive covenants,

• interest rates and dividends,

• environmental matters,

• nuclear operations, and

• the overall economy of our service area.

These forward-looking statements involve known and unknown risks that may cause our actual results in future periods to differ materially from those expressed in any forward-looking statement. Factors that would cause or contribute to such differences include, but are not limited to, such things as:

• our rates in Texas following the five-year moratorium on rate increases which ends June 30, 2010,

• our rates in New Mexico pending the final order by the NMPRC on the rate case filed on May 29, 2009,

• any changes in our New Mexico fuel and purchased power adjustment clause after the 2009 continuation filing,

• loss of margins on off-system sales due to changes in wholesale power prices or availability of competitive generation resources,

• ability of our operating partners to maintain plant operations and manage operation and maintenance costs at the Palo Verde and Four Corners Plants,

• reductions in output at generation plants operated by the Company,

• unscheduled outages including outages at Palo Verde,

• the size of our construction program and our ability to complete construction on budget and on a timely basis,

• electric utility deregulation or re-regulation,

• regulated and competitive markets,

• ongoing municipal, state and federal activities,

• changes in accounting requirements and other accounting matters,

• changing weather trends,

• rates, cost recoveries and other regulatory matters including the ability to recover fuel costs on a timely basis,

• changes in environmental regulations,

• political, legislative, judicial and regulatory developments,

• the impact of lawsuits filed against us,

• the impact of changes in interest rates,

• changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan assets,

• the impact of changing cost escalation and other assumptions on our nuclear decommissioning liability for Palo Verde,

• Texas, New Mexico and electric industry utility service reliability standards,

• homeland security considerations,

• coal, uranium, natural gas, oil and wholesale electricity prices and availability, and

• other circumstances affecting anticipated operations, sales and costs.

These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in this document under the headings "Risk Factors" and in the 2008 Form 10-K under the headings "Management's Discussion and Analysis" "-Summary of Critical Accounting Policies and Estimates" and "-Liquidity and Capital Resources." This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter. Any forward-looking statement speaks only as of the date such statement was made, and we are not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made except as required by applicable laws or regulations.

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented and actual results could differ in future periods from those estimates. Critical accounting policies and estimates are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments and are more fully described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2008 Form 10-K.

                                    Summary

The following is an overview of our results of operations for the three, six and
twelve month periods ended June 30, 2009 and 2008. Income for the three, six and
twelve month periods ended June 30, 2009 and 2008 is shown below:



                                           Three Months Ended       Six Months Ended       Twelve Months Ended
                                                June 30,                June 30,                June 30,
                                            2009         2008       2009        2008        2009          2008
Net income (in thousands)                $    15,431   $ 19,234   $  25,040   $ 33,722   $    68,939    $ 83,757
Basic earnings per share                        0.34       0.43        0.56       0.75          1.54        1.85

The following table and accompanying explanations show the primary factors affecting the after-tax change in income between the 2009 and 2008 periods presented (in thousands):

                                                                                    Three Months        Six Months        Twelve Months
                                                                                       Ended              Ended               Ended
June 30, 2008 net income                                                           $       19,234      $     33,722      $        83,757
Change in (net of tax):
Decreased operations and maintenance at coal and gas-fired generating plants (a)              841             1,593                  943
Increased AFUDC and capitalized interest (b)                                                  907             1,549                2,642
Increased (decreased) retail non-fuel base revenues (c)                                       458              (658 )             (5,551 )
Decreased (increased) Palo Verde operations and maintenance expense (d)                       455               710               (1,558 )
Deregulated Palo Verde Unit 3 revenues (e)                                                 (3,253 )          (2,409 )              4,246
Impairments and losses on equity securities in nuclear decommissioning trusts              (1,853 )          (3,677 )             (6,643 )
Increased interest on long-term debt (f)                                                   (1,020 )          (3,426 )             (8,537 )
Decreased off-system sales margins retained (g)                                              (495 )          (4,414 )             (1,223 )
Other                                                                                         157             2,050                  863

June 30, 2009 net income                                                           $       15,431      $     25,040      $        68,939

(a) Operation and maintenance costs decreased at our fossil-fueled generating plants as more planned major maintenance was performed in 2008 periods (Newman Unit 3 and Four Corners Unit 5 generating units) than was performed in 2009 periods (Newman Unit 4 and Rio Grande Unit 8 generating units). In 2007 no major maintenance was performed at our fossil-fueled generating units.

(b) AFUDC (allowance for funds used during construction) and capitalized interest increased for all periods in 2009 due to increased construction work in progress subject to AFUDC partially offset by lower capitalized interest on nuclear fuel due to lower interest rates.

(c) Non-fuel retail base revenues increased for the three month period ending June 30, 2009 compared to the same period last year primarily due to a 4.4% increase in kWh sales to residential customers partially offset by a decline in sales to commercial and industrial customers. Non-fuel retail base revenues decreased for the six and twelve month periods ending June 30, 2009 compared to the same periods last year primarily due to a 17.4% and a 16.2% decrease in kWh sales to large commercial and industrial customers, respectively. Non-fuel retail base revenues exclude fuel recovered through New Mexico base rates.

(d) Palo Verde non-fuel operations and maintenance expenses decreased for the three and six months ended June 30, 2009 compared to the same periods last year due to lower maintenance costs during the Spring 2009 refueling outage for Unit 3 compared to the Spring 2008 refueling outage for Unit 2. Palo Verde non-fuel operations and maintenance expenses increased for the twelve months ended June 30, 2009 compared to the twelve months ended June 30, 2008 due to increased operating costs at all three units partially offset by lower maintenance costs associated with the refueling outage in the Spring of 2009.

(f) Interest expense on long-term debt increased for all periods in 2009 due to the issuance of $150 million of 7.5% Senior Notes in June 2008 and to a smaller extent higher interest rates on auction rate pollution control bonds. The auction rate pollution control bonds were refunded and reissued at a fixed interest rate of 7.25% on March 26, 2009.

(g) Off-system sales margins retained decreased as a result of reduced margins per MWh due to lower market prices for all periods. These decreases were partially offset by increases in MWh sales.

The following discussion includes descriptions of factors affecting individual line items in the results of operations. The amounts presented below are presented on a pre-tax basis.

Operating revenues

We realize revenue from the sale of electricity to retail customers at regulated rates and the sale of energy in the wholesale power market generally at market based prices. Sales for resale (which are wholesale sales within our service territory) accounted for less than 1% of revenues. Off-system sales are wholesale sales into markets outside our service territory. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Under the terms of our rate agreements in Texas and New Mexico, we share 25% of our off-system sales margins with our customers in Texas and New Mexico. We are also sharing 25% of our off-system sales margins with our sales for resale customer under the terms of a contract which was effective April 1, 2008. In July 2010, off-system sales margins shared with customers increases to 90%.

Revenues from the sale of electricity include fuel costs that are recovered from our customers through fuel adjustment mechanisms. A significant portion of fuel costs are also recovered through base rates in New Mexico. We record deferred fuel revenues for the difference between actual fuel costs and recoverable fuel revenues until such amounts are collected from or refunded to customers. "Non-fuel base revenues" refers to our revenues from the sale of electricity excluding such fuel costs.

Retail non-fuel base revenue percentages by customer class are presented below:

                                         Three Months Ended            Six Months Ended           Twelve Months Ended
                                              June 30,                     June 30,                    June 30,
                                        2009            2008          2009          2008         2009            2008
Residential                                 39 %            37 %         39 %          39 %          40 %            39 %
Commercial and industrial, small            37              38           37            37            37              37
Commercial and industrial, large             7               8            7             8             7               8
Sales to public authorities                 17              17           17            16            16              16

Total retail non-fuel base revenues        100 %           100 %        100 %         100 %         100 %           100 %

No retail customer accounted for more than 2% of our base revenues during such periods. As shown in the table above, residential and small commercial customers comprise more than 75% of our revenues. While this customer base is more stable, it is also more sensitive to changes in weather conditions. As a result, our business is seasonal, with higher kWh sales and revenues during the summer cooling season.

Weather significantly impacts our residential, small commercial and industrial customers, and to a lesser extent, our sales to public authorities. Heating and cooling degree days can be used to evaluate the effect of weather on energy use. For each degree the average outdoor temperature varies from a standard of 65 degrees Fahrenheit a degree day is recorded. The table below shows heating and cooling degree days compared to a 10-year average.

                                     Three Months Ended                 Six Months Ended                Twelve Months Ended
                                          June 30,          10-Year         June 30,         10-Year          June 30,          10-Year
                                     2009         2008      Average     2009        2008     Average     2009         2008      Average*
Heating degree days                       82           83        66      1,112       1,274     1,265       2,026        2,185      2,295
Cooling degree days                    1,013        1,008       995      1,050       1,032     1,012       2,290        2,687      2,502

* Calendar year basis.

Customer growth is a primary driver of the growth of retail sales. The average number of retail customers grew 1.6% for the three and six month periods in 2009 and 1.7% for the twelve months ended June 30, 2009 when compared to the same period last year. See the tables presented on pages 41, 42 and 43 which provide detail on the average number of retail customers and the related revenues and kWh sales.

Retail non-fuel base revenues. Retail non-fuel base revenues increased by $0.7 million or 0.6% for the three months ended June 30, 2009 when compared to the same period last year primarily reflecting a 4.4% increase in kWh sales to residential customers. Kilowatt-hour sales to residential customers in the second quarter of 2009 reflect a 1.7% increase in the average number of customers served compared to the second quarter of 2008. Non-fuel base revenues from residential customers increased $2.2 million, or 4.8%. This increase in revenues was partially offset by recession-related declines in revenues from small commercial and industrial customers of $0.7 million or 1.5% and large commercial and industrial customers of $0.9 million or 9.5%. Kilowatt-hour sales to small commercial and industrial customers and large commercial and industrial customers in the second quarter of 2009 decreased approximately 2% and 17%, respectively, compared to the same quarter in 2008, reflecting the impact of the recession on our service territory economy. Non-fuel base revenues from public authorities increased $0.1 million or 0.6%.

For the six months ended June 30, 2009, retail non-fuel base revenues decreased by $1.0 million, or 0.5% primarily reflecting a recession-related decline in sales to large commercial and industrial customers and to a lesser extent, small commercial and industrial customers. Kilowatt-hour sales to large commercial and industrial customers decreased 17.4% in the six months ended June 30, 2009 compared to the same period in 2008 and kWh sales to small commercial and industrial customers decreased 1.5%. Non-fuel base revenues from large commercial and industrial customers decreased $1.8 million, or 9.7%, while non-fuel base revenues from small commercial and industrial customers decreased $0.6 million, or 0.7%. These decreases were partially offset by an increase in revenues of $1.3 million, or 1.5%, to residential customers. The increase in revenues from residential customers reflected a 1.7% increase in the average number of customers served in the six months ended June 30, 2009 compared to the same period in 2008.

Retail non-fuel base revenues for the twelve months ended June 30, 2009 decreased by $8.8 million, or 1.8%, compared to the same period in 2008. Non-fuel base revenues from large commercial and industrial customers decreased $3.5 million or 9.3% due to a 16.2% decrease in kWh sales, reflecting the impact of the recession in our service territory. Residential non-fuel base revenues decreased $2.1 million, or 1.1% reflecting the warmer than normal winter weather in the first quarter of 2009 and the cooler than normal summer weather in the third quarter of 2008 offset in part by a 1.7% increase in the average number of customers served. During the twelve months ended June 30, 2009, cooling degree days were 14.8% lower and heating degree days were 7.2% lower than in the twelve months ended June 30, 2008. As a result, retail kWh sales from residential customers and small commercial and industrial customers were negatively impacted. Non-fuel base rate revenues for public authority customers decreased $2.1 million, or 2.7% due to lower rates to a large customer in the 2009 period when compared to the 2008 period, offset in part by a 1.5% increase in the average number of customers served.

Fuel revenues. Fuel revenues consist of: (i) revenues collected from customers under fuel recovery mechanisms approved by the state commissions and FERC,
(ii) deferred fuel revenues which are comprised of the difference between fuel costs and fuel revenues collected from customers and (iii) fuel costs recovered in base rates in New Mexico. In New Mexico and with our sales for resale customer, the fuel adjustment clause allows us to recover under-recoveries or refund over-recoveries of current fuel costs above the amount recovered in base rates with a two-month lag. In Texas, fuel costs are recovered through a fixed fuel factor that may be adjusted up to three times per year. In addition, if we materially over-recover fuel costs, we must seek to refund the over-recovery, and if we materially under-recover fuel costs, we may seek a surcharge to recover those costs.

Natural gas prices have decreased significantly since August 2008 resulting in decreases in fuel costs including purchased power costs. In Texas our current fixed fuel factor, implemented in October 2008, is resulting in the over-recovery of fuel costs. As a result, we over-collected fuel costs for all three jurisdictions by $13.3 million, $36.6 million, and $36.6 million in the three, six, and twelve month periods ending June 30, 2009 compared to under-recoveries of fuel costs during the same periods last year of $40.7 million, $42.8 million, and $50.2 million. In 2008, we implemented two fuel surcharges in Texas to collect under-recovered fuel costs. We have seen a significant decline in our deferred fuel under-recovery balances due to the fuel cost over-recoveries since October 2008 and as a result of the two fuel surcharges we implemented in 2008. In April 2009, we received approval from the PUCT to terminate the remaining fuel surcharge in Texas effective in May 2009. Fuel over-recoveries in the first six months of 2009 offset the remaining balance of the fuel surcharge. In addition, on July 30, 2009, we received approval from the PUCT to reduce our fixed fuel factor in Texas effective in August 2009. At June 30, 2009, we had a fuel over-recovery balance of $4.8 million, including a $5.8 million over-recovery in Texas, a $1.2 million under-recovery in New Mexico, and a $0.2 million over-recovery from our FERC customer.

Off-system sales. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. Typically, we realize a significant portion of our off-system sales margins in the first quarter of each calendar year when our native load is lower than at other times of the year allowing for the sale in the wholesale market of relatively larger amounts of off-system energy generated from lower cost generating resources. Palo Verde's availability is an important factor in realizing these off-system sales margins. The table below shows the MWhs, sales revenue, fuel costs, total margins, and retained margins made on off-system sales for the three, six, and twelve month periods (in thousands except for MWhs).

                     Three Months Ended         Six Months Ended           Twelve Months Ended
                          June 30,                  June 30,                    June 30,
                      2009        2008         2009          2008          2009          2008
 MWh sales            634,078     564,119     1,692,481     1,676,805     3,522,446     2,704,093
 Sales revenues    $   22,464   $  50,082   $    61,081   $   123,599   $   169,982   $   183,252
 Fuel cost         $   21,321   $  47,890   $    53,216   $   106,423   $   149,813   $   160,536
 Total margin      $    1,143   $   2,192   $     7,865   $    17,175   $    20,169   $    22,716
 Retained margin   $      857   $   1,644   $     5,900   $    12,907   $    15,130   $    17,072

Off-system sales revenues decreased in the three, six, and twelve month periods ended June 30, 2009 when compared to the same periods last year as a result of lower average market prices for power. Customers are credited 25% of the off-system sales margins through fuel recovery mechanisms pursuant to rate agreements in each jurisdiction. Prior to April 1, 2008, we retained 100% of off-system sales margins allocated to our sales for resale customer.

Comparisons of kWh sales and operating revenues are shown below (in thousands):

                                                                              Increase (Decrease)
Quarter Ended June 30:                          2009             2008         Amount        Percent
kWh sales:
Retail:
Residential                                      569,004          544,942       24,062          4.4 %
Commercial and industrial, small                 585,678          597,315      (11,637 )       (1.9 )
Commercial and industrial, large                 255,178          305,688      (50,510 )      (16.5 )
Sales to public authorities                      392,328          389,213        3,115          0.8

Total retail sales                             1,802,188        1,837,158      (34,970 )       (1.9 )

Wholesale:
Sales for resale                                  18,564           15,874        2,690         16.9
Off-system sales                                 634,078          564,119       69,959         12.4

Total wholesale sales                            652,642          579,993       72,649         12.5

Total kWh sales                                2,454,830        2,417,151       37,679          1.6


Operating revenues:
Non-fuel base revenues:
Retail:
Residential                                  $    48,073      $    45,862   $    2,211          4.8 %
Commercial and industrial, small                  45,888           46,569         (681 )       (1.5 )
Commercial and industrial, large                   8,762            9,678         (916 )       (9.5 )
Sales to public authorities                       20,741           20,627          114          0.6

Total retail non-fuel base revenues              123,464          122,736          728          0.6

Wholesale:
Sales for resale                                     575              501           74         14.8

Total non-fuel base revenues                     124,039          123,237          802          0.7

Fuel revenues:
Recovered from customers during the period        47,447           47,015          432          0.9 (1)
Under (over) collection of fuel                  (13,285 )         40,737      (54,022 )          -
New Mexico fuel in base rates                     16,444           16,631         (187 )       (1.1 )

Total fuel revenues                               50,606          104,383      (53,777 )      (51.5 )
Off-system sales                                  22,464           50,082      (27,618 )      (55.1 )
Other                                              6,540            6,703         (163 )       (2.4 )(2)

Total operating revenues                     $   203,649      $   284,405   $  (80,756 )      (28.4 )


Average number of retail customers:
Residential                                      325,302          319,766        5,536          1.7 %
Commercial and industrial, small                  35,892           35,843           49          0.1
Commercial and industrial, large                      49               53           (4 )       (7.5 )
Sales to public authorities                        4,929            4,864           65          1.3

Total                                            366,172          360,526        5,646          1.6

(1) Excludes $4.0 million and $4.9 million, respectively, of prior periods deferred fuel revenues recovered through Texas fuel surcharges.

(2) Represents revenues with no related kWh sales.