“Fourth quarter 2008 earnings declined relative to fourth quarter 2007 earnings largely as the result of an increase in interest expense reflecting a June 2008 debt issuance and increased rates on our Pollution Control Bonds, a decrease in retail revenues reflecting a softening economy and higher operating costs,” said David W. Stevens, chief executive officer. “However, calendar year 2008 earnings were still $0.09 per share above 2007 even with the fourth quarter earnings impact.”

Fourth Quarter 2008

Earnings for the quarter ended December 31, 2008 when compared to the same period last year were positively affected by:

Increased retail sales of deregulated Palo Verde Unit 3 power as the unit did not operate in the fourth quarter of 2007 due to its refueling and replacement of steam generators.

Higher retained margins on off-system sales as a result of higher margins per MWh along with a significant increase in MWh sales.

Earnings for the quarter ended December 31, 2008 when compared to the same period last year were negatively affected by:

Increased interest expense on long-term debt as a result of the June 2008 issuance of $150 million of 7.5% Senior Notes and higher interest rates on auction rate pollution control bonds.

Lower retail non-fuel base revenues of $4.2 million or 3.7% in 2008 primarily due to two factors. One, non-fuel revenues to public authorities decreased $2.0 million largely as a result of a non-recurring revenue adjustment in the fourth quarter of 2007 and two, non-fuel base revenues to large commercial and industrial customers decreased $1.4 million as a result of a 24.7% decline in kilowatt-hour sales.

Increased Palo Verde non-fuel operations and maintenance expenses in 2008 due to higher operating costs at all three units.

Full Year 2008

Earnings for the twelve months ended December 31, 2008, when compared to the same period last year, were positively affected by:

Higher proxy market prices and increased sales of deregulated Palo Verde Unit 3 power to retail customers as the unit did not operate in the fourth quarter of 2007 due to its refueling and replacement of steam generators.

Higher retained margins on off-system sales primarily as a result of increased sales and margins from off-system sales to a wholesale customer.

Higher retail non-fuel base revenues in 2008 largely due to increased kilowatt-hour sales to small commercial and industrial customers and other public authorities.

Increased AFUDC and capitalized interest in 2008 due to higher balances of construction work in progress subject to AFUDC and nuclear fuel inventory subject to capitalized interest.

Increased revenues for transmission wheeling in 2008 largely due to increased wheeling of power in southern New Mexico and Arizona partially offset by the reversal of $2.5 million of 2006 wheeling revenues from Tucson Electric Power pursuant to an order of the Federal Energy Regulatory Commission.

Earnings for the twelve months ended December 31, 2008, when compared to the same period last year, were negatively affected by:

Increased Palo Verde non-fuel operations and maintenance expenses in 2008 due to higher operating costs at all three units and higher maintenance costs during refueling outages in 2008 than during refueling outages in 2007.

Increased interest expense on long-term debt due to the June 2008 issuance of $150 million of 7.5% Senior Notes and higher interest rates on auction rate pollution control bonds.

Increased depreciation and amortization as a result of higher depreciable plant balances.

A decline in interest and investment income in 2008 due to impairments of equity securities in our Palo Verde decommissioning trust funds and a decrease in the fair value of our investments in auction rate securities.

Increased O&M costs at our fossil-fueled generating plants as planned major maintenance was performed at Newman Unit 3 and Four Corners Unit 5 in 2008. In 2007, no major maintenance was performed at our fossil-fueled generating units.

Retail Non-fuel Base Revenues

Retail non-fuel base revenues decreased by $4.2 million, pre-tax, or 3.7% in the fourth quarter of 2008 compared to the same period in 2007 reflecting a decline in weather-related sales and a decline in industrial sales. In addition, non-fuel base revenue from public authorities decreased primarily due to a non-recurring revenue adjustment in the fourth quarter of 2007. Kilowatt-hour sales to large commercial and industrial customers in the fourth quarter of 2008 decreased around 25% compared to the same quarter in 2007, reflecting the impact of the softening economy. Kilowatt-hour sales and non-fuel revenues for residential and small commercial and industrial customers declined relative to 2007, primarily as a result of milder fall and winter weather in 2008, partially offset by increased kWh sales and revenues from a 1.8% increase in the average number of customers served. Non-fuel base revenues and kilowatt-hour sales are provided by customer class on page 11 of the Release.

For the twelve months ended December 31, 2008, retail non-fuel base revenues increased $5.6 million, pre-tax, or 1.2% primarily as a result of a 1.9% increase in the average number of customers served, partially offset by declines in weather-related sales and sales to large commercial and industrial customers. Non-fuel base revenues and kilowatt-hour sales are provided by customer class on page 13 of the Release. During the twelve months ended December 31, 2008, retail kWh sales to residential customers were constrained by cooler than normal summer weather and warmer than normal winter weather. Cooling degree days in the twelve months ended December 31, 2008 were 10% lower and heating degree days were 5% lower than in the twelve months ended December 31, 2007. Non-fuel base revenues for public authority customers increased primarily as a result of increased sales to military bases and colleges and universities. Non-fuel base revenues to small commercial and industrial customers and other public authority customers also increased due to a full year of the base rate increase in New Mexico which became effective in July 2007. The decrease in large commercial and industrial sales reflects the decline in fourth quarter sales and the loss of several industrial customers earlier in 2008.

Palo Verde Operations

We own around 633 MW (undivided interest) of generating capacity in the three generating units at the Palo Verde Nuclear Generating Station. The operation of Palo Verde not only affects our ability to make off-system sales but also impacts fuel costs to native load customers and represents a significant portion of our non-fuel operation and maintenance expenses. Palo Verde generation accounted for over 58% of total Company generation in 2008 and 55% of total Company generation in 2007. Megawatt-hours (MWh) generated by Palo Verde increased 32.2% in the fourth quarter of 2008 and 9.3% in the twelve months ended December 31, 2008 compared to the same periods in 2007.

Palo Verde operation and maintenance expenses increased $3.0 million, pre-tax, or 10.9% in the fourth quarter of 2008 compared to the fourth quarter of 2007. In the twelve months ended December 31, 2008, Palo Verde operation and maintenance expenses increased $12.3 million, pre-tax, or 13.8% compared to the same period in 2007. This increase is primarily due to increased operating costs at the plant and to a lesser extent increased maintenance costs incurred during the 2008 spring refueling outage at Palo Verde Unit 2 when compared to the spring refueling outage in 2007. The Nuclear Regulatory Commission (NRC) placed Palo Verde Unit 3 in the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix in February 2007 which has resulted in an enhanced NRC inspection regimen for the entire plant.