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 NMPRC in 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,

• economic and capital market conditions,

• 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 heading "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, nine
and twelve month periods ended September 30, 2009 and 2008. Income for the
three, nine and twelve month periods ended September 30, 2009 and 2008 is shown
below:



                                           Three Months Ended       Nine Months Ended       Twelve Months Ended
                                             September 30,            September 30,            September 30,
                                            2009         2008        2009        2008        2009          2008
Net income (in thousands)                $    33,932   $ 33,074   $   58,972   $ 66,796   $    69,797    $ 80,743
Basic earnings per share                        0.76       0.74         1.31       1.49          1.56        1.80

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          Nine Months          Twelve Months
                                                 Ended                 Ended                 Ended
September 30, 2008 net income                $       33,074        $      66,796        $        80,743
Change in (net of tax):
Increased retail non-fuel base revenues
(a)                                                   6,859                6,200                  3,547
Decreased (increased) investment and
interest income (b)                                   1,407               (1,687 )               (2,520 )
Decreased (increased) interest on
long-term debt (c)                                      244               (3,182 )               (6,199 )
Decreased off-system sales margins
retained (d)                                         (1,939 )             (6,353 )               (4,669 )
Deregulated Palo Verde Unit 3 revenues
(e)                                                  (1,766 )             (4,175 )                1,328
Decreased (increased) administrative and
general expense (f)                                  (1,499 )               (941 )                1,178
Increased Palo Verde operations and
maintenance expense (g)                                (740 )                (30 )               (1,928 )
Decreased (increased) operations and
maintenance expense at coal and
gas-fired generating plants (h)                        (347 )              1,245                  1,107
Increased (decreased) AFUDC and
capitalized interest (i)                               (279 )              1,270                  1,425
Other                                                (1,082 )               (171 )               (4,215 )

September 30, 2009 net income                $       33,932        $      58,972        $        69,797

(a) Non-fuel retail base revenues increased for the three, nine, and twelve month periods ending September 30, 2009 compared to the same periods last year primarily due to a 13.6%, 5.8%, and 4.2% increase in kWh sales to residential customers. Non-fuel retail base revenues exclude fuel recovered through New Mexico base rates.

(b) Investment and interest income increased for the three month period ended September 30, 2009 compared to the same period last year primarily due to reduced impairments and losses on equity securities in our Palo Verde decommissioning trust funds. Investment and interest income decreased for the nine and twelve month periods in 2009 compared to the same periods last year due to increased impairments of equity securities in our Palo Verde decommissioning trust funds in the current periods.

(c) Interest expense on long-term debt increased for the nine and twelve month periods ended September 30, 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.

(d) Off-system sales margins retained decreased primarily as lower market prices resulted in reduced margins per MWh for all periods. For the three and nine month periods ended September 30, 2009, off-system sales margins retained also decreased due to declines in MWh sold.

(e) Revenues from retail sales of deregulated Palo Verde Unit 3 power decreased for the three and nine month periods ended September 30, 2009 compared to the same periods last year due to a lower proxy market price. For the nine month period the decrease was also due to decreased production at Palo Verde Unit 3 due mostly to a refueling outage in April and May 2009. Increased revenues from sales of deregulated Palo Verde Unit 3 power for the twelve months ended September 30, 2009 reflects increased Palo Verde Unit 3 power sold to retail customers.

(f) Administrative and general expense increased for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008 due to increased accruals for employee incentive compensation and increased pension and benefit costs related to increased costs associated with postretirement benefits and medical insurance. Administrative and general expense decreased for the twelve months ended September 30, 2009 compared to the same period in 2008 due to reduced rent and general maintenance costs.

(g) Palo Verde non-fuel operations and maintenance expenses increased for the three periods ended September 30, 2009 compared to the same periods last year due to higher Palo Verde administrative and general expense in 2009. The increase for the three month period was partially offset by a decrease in operating costs at all three units in the current period. The increase for the nine month period was partially offset by lower maintenance costs during the Spring 2009 refueling outage for Unit 3 compared to the Spring 2008 refueling outage for Unit 2.

(h) Operation and maintenance costs decreased at our fossil-fueled generating plants for the nine and twelve month periods ended September 30, 2009 compared to the same periods in 2008 as more planned major maintenance was performed in the 2008 periods than was performed in the 2009 periods.

(i) AFUDC (allowance for funds used during construction) and capitalized interest increased for the nine and twelve month periods ended September 30, 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.

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           Nine Months Ended           Twelve Months Ended
                                            September 30,               September 30,                September 30,
                                        2009            2008          2009           2008        2009            2008
Residential                                 44 %            43 %          41 %         40 %          40 %            39 %
Commercial and industrial, small            34              36            36           37            37              37
Commercial and industrial, large             7               7             7            8             7               8
Sales to public authorities                 15              14            16           15            16              16

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

No retail customer accounted for more than 2% of our non-fuel 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                Nine Months Ended                Twelve Months Ended
                                          September 30,        10-Year      September 30,       10-Year       September 30,        10-Year
                                        2009         2008      Average     2009        2008     Average     2009         2008      Average*
Heating degree days                           2            1         1      1,114       1,275     1,266       2,027        2,186      2,295
Cooling degree days                       1,601        1,147     1,441      2,651       2,160     2,453       2,744        2,330      2,502

* Calendar year basis.

Customer growth is a primary driver of the growth of retail sales. The average number of retail customers grew more than 1.7% for all three periods in 2009 when compared to the same periods 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 $10.9 million or 8.1% for the three months ended September 30, 2009 when compared to the same period last year reflecting a 13.6% increase in kWh sales to residential customers and a 6.1% increase in kWh sales to other public authorities. Non-fuel base revenues from residential customers increased $7.3 million, or 12.8% and non-fuel base revenues from public authorities increased $2.5 million, or 13.1%. Increased kWh sales to residential customers in the third quarter of 2009 were the result of hotter summer weather and 1.8% growth in the average number of customers served. During the third quarter of 2009, cooling degree days were 40% above the same period in 2008 and 11% above the 10-year average. Kilowatt-hour sales to public authorities reflect increased sales to Ft. Bliss and White Sands Missile Range. Kilowatt-hour sales to other public authorities were also positively affected by the hotter summer weather. The increase in revenues was partially offset by recession-related declines in revenues from large commercial and industrial customers of $0.3 million or 3.0% due to a 5.8% decrease in kWh sales compared to the same quarter in 2008.

For the nine months ended September 30, 2009, retail non-fuel base revenues increased by $9.8 million, or 2.7%, primarily reflecting an increase of 5.8% in kWh sales to residential customers and a 2.5% increase in kWh sales to public authorities. These increases reflected the hotter summer weather in 2009 as well as increased sales to Ft. Bliss and White Sands Missile Range. Cooling degree days were 23% above the same period in 2008 and 8% above the 10-year average. The increase in kWh sales to residential customers also reflects 1.7% growth in the average number of customers served. These increases were partially offset by a recession-related decline in sales to large commercial and industrial customers. Revenues from large commercial and industrial customers decreased $2.1 million, or 7.4% in the nine months ended September 30, 2009 compared to the same period in 2008.

Retail non-fuel base revenues for the twelve months ended September 30, 2009 increased by $5.6 million, or 1.2%, compared to the same period in 2008 primarily reflecting an increase of 4.2% in kWh sales to residential customers. Non-fuel base revenues from residential customers increased $8.3 million, or 4.5%. Increased kWh sales to residential customers during the twelve months ended September 30, 2009 compared to the same period in 2008 are the result of hotter summer weather in 2009 and 1.7% growth in the average number of customers served. During the twelve months ended September 30, 2009, cooling degree days were 18% above the same period in 2008 and 10% above the 10-year average. Kilowatt-hour sales to public authorities reflect increased sales to Ft. Bliss and White Sands Missile Range. Kilowatt-hour sales to other public authorities were also positively affected by the hotter summer weather as non-fuel base revenues from public authorities increased $0.6 million, or 0.7%. The increase in revenues was partially offset by recession-related declines in revenues from large commercial and industrial customers of $3.5 million or 9.3%. Kilowatt-hour sales to large commercial and industrial customers in the twelve month period ending September 30, 2009 decreased approximately 16.4% compared to the same period in 2008.

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 and purchased power costs. As a result, we over-collected fuel costs for all three jurisdictions by $23.0 million, $59.7 million, and $75.5 million in the three, nine, and twelve month periods ending September 30, 2009 compared to under-recoveries of fuel costs during the same periods last year of $15.8 million, $58.6 million, and $63.5 million. In 2008, we implemented two fuel surcharges in Texas to collect fuel under-recovery balances in 2008. Both of these surcharges were terminated effective with May 2009 billings. 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 September 30, 2009, we had a fuel over-recovery balance of $27.8 million, including a $23.1 million over-recovery in Texas, a $4.5 million over-recovery in New Mexico, and a $0.2 million over-recovery from our FERC customer. On October 22, 2009, we received approval from the PUCT to refund fuel over recoveries through August 2009 of $16.8 million and interest to customers in November and December 2009.

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, nine, and twelve month periods (in thousands except for MWhs).

                     Three Months Ended         Nine Months Ended          Twelve Months Ended
                       September 30,              September 30,               September 30,
                      2009        2008         2009          2008          2009          2008
 MWh sales            715,641     891,632     2,408,122     2,568,437     3,346,455     3,059,328
 Sales revenues    $   28,349   $  63,371   $    89,430   $   186,970   $   134,960   $   215,723
 Fuel cost         $   25,314   $  56,233   $    78,530   $   162,656   $   118,895   $   189,811
 Total margin      $    3,035   $   7,138   $    10,900   $    24,314   $    16,065   $    25,912
 Retained margin   $    2,278   $   5,355   $     8,178   $    18,262   $    12,052   $    19,464

Off-system sales revenues decreased in the three, nine, and twelve month periods ended September 30, 2009 when compared to the same periods last year as a result of lower average market prices for power. Market power prices reflect lower natural gas prices in 2009. Off-system sales revenues also decreased in the three and nine month periods in 2009 compared to the same periods in 2008 due to decreased MWh sales. 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 September 30:                     2009             2008         Amount        Percent
kWh sales:
Retail:
Residential                                      779,282          686,247       93,035         13.6 %
Commercial and industrial, small                 667,321          655,669       11,652          1.8
Commercial and industrial, large                 278,158          295,298      (17,140 )       (5.8 )
Sales to public authorities                      419,487          395,313       24,174          6.1

Total retail sales                             2,144,248        2,032,527      111,721          5.5

Wholesale:
Sales for resale                                  18,215           14,981        3,234         21.6
Off-system sales                                 715,641          891,632     (175,991 )      (19.7 )

Total wholesale sales                            733,856          906,613     (172,757 )      (19.1 )

Total kWh sales                                2,878,104        2,939,140      (61,036 )       (2.1 )


Operating revenues:
Non-fuel base revenues:
Retail:
Residential                                  $    64,833      $    57,485   $    7,348         12.8 %
Commercial and industrial, small                  50,017           48,714        1,303          2.7
Commercial and industrial, large                   9,358            9,648         (290 )       (3.0 )
Sales to public authorities                       21,867           19,341        2,526         13.1

Total retail non-fuel base revenues              146,075          135,188       10,887          8.1

Wholesale:
Sales for resale                                     753              411          342         83.2

Total non-fuel base revenues                     146,828          135,599       11,229          8.3

Fuel revenues:
Recovered from customers during the period        59,373           58,791          582          1.0 (1)
Under (over) collection of fuel                  (23,038 )         15,784      (38,822 )         -
New Mexico fuel in base rates                     21,171           20,317          854          4.2

Total fuel revenues                               57,506           94,892      (37,386 )      (39.4 )
Off-system sales                                  28,349           63,371      (35,022 )      (55.3 )
Other                                              8,215            7,937          278          3.5 (2)

Total operating revenues                     $   240,898      $   301,799   $  (60,901 )      (20.2 )


Average number of retail customers:
Residential                                      326,816          321,004        5,812          1.8 %
Commercial and industrial, small                  36,158           35,977          181          0.5
. . .