10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0-296

El Paso Electric Company

(Exact name of registrant as specified in its charter)

Texas	74-0607870
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Stanton Tower, 100 North Stanton, El Paso, Texas	79901
(Address of principal executive offices)	(Zip Code)

(915) 543-5711

(Registrant’s telephone number, including area code)

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 whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of July 31, 2009, there were 44,968,985 shares of the Company’s no par value common stock outstanding.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

INDEX TO FORM 10-Q

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Balance Sheets – June 30, 2009 and December 31, 2008		1
Consolidated Statements of Operations – Three Months, Six Months and Twelve Months Ended June 30, 2009 and 2008		3
Consolidated Statements of Comprehensive Operations – Three Months, Six Months and Twelve Months Ended June  30, 2009 and 2008		5
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2009 and 2008		6
Notes to Consolidated Financial Statements		7
Report of Independent Registered Public Accounting Firm		33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 4.	Submission of Matters to a Vote of Security Holders	54
Item 6.	Exhibits	55

(i)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	June 30, 2009			December 31, 2008
	(Unaudited)
ASSETS (In thousands)
Utility plant:
Electric plant in service	$	2,331,614		$	2,223,066
Less accumulated depreciation and amortization		(945,718	)		(919,053	)
Net plant in service		1,385,896			1,304,013
Construction work in progress		190,947			205,748
Nuclear fuel; includes fuel in process of $61,220 and $51,352, respectively		127,790			115,749
Less accumulated amortization		(31,711	)		(29,904	)
Net nuclear fuel		96,079			85,845
Net utility plant		1,672,922			1,595,606
Current assets:
Cash and cash equivalents		83,709			91,642
Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,644 and $3,123, respectively		93,008			96,507
Accumulated deferred income taxes		15,375			—
Inventories, at cost		38,140			40,153
Undercollection of fuel revenues		1,218			41,034
Prepayments and other		16,138			16,292
Total current assets		247,588			285,628
Deferred charges and other assets:
Decommissioning trust funds		119,149			111,306
Undercollection of fuel revenues, non current		—			5,823
Regulatory assets		52,444			48,616
Investments in debt securities		2,425			2,264
Other		20,574			19,840
Total deferred charges and other assets		194,592			187,849
Total assets	$	2,115,102		$	2,069,083

See accompanying notes to consolidated financial statements.

1

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Continued)

	June 30, 2009			December 31, 2008
	(Unaudited)
CAPITALIZATION AND LIABILITIES (In thousands except for share data)
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 64,654,847 and 64,604,852 shares issued, and 160,360 and 127,800 restricted shares, respectively	$	64,815		$	64,733
Capital in excess of stated value		296,328			295,346
Retained earnings		668,362			643,322
Accumulated other comprehensive loss, net of tax		(23,522	)		(29,364	)
		1,005,983			974,037
Treasury stock, 19,848,900 shares, at cost		(279,808	)		(279,808	)
Common stock equity		726,175			694,229
Long-term debt, net of current portion		739,674			739,652
Financing obligations, net of current portion		69,464			70,066
Total capitalization		1,535,313			1,503,947
Current liabilities:
Current portion of long-term debt and financing obligations		34,029			23,587
Accounts payable, principally trade		42,861			61,550
Accumulated deferred income taxes		—			4,209
Taxes accrued		24,072			23,798
Interest accrued		9,671			7,519
Overcollection of fuel revenues		5,979			—
Other		24,299			24,146
Total current liabilities		140,911			144,809
Deferred credits and other liabilities:
Accumulated deferred income taxes		195,033			175,816
Accrued postretirement benefit liability		87,995			85,797
Asset retirement obligation		81,696			78,037
Accrued pension liability		36,833			39,101
Regulatory liabilities		13,874			14,469
Other		23,447			27,107
Total deferred credits and other liabilities		438,878			420,327
Commitments and contingencies
Total capitalization and liabilities	$	2,115,102		$	2,069,083

See accompanying notes to consolidated financial statements.

2

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Operating revenues	$	203,649		$	284,405		$	394,085		$	524,645
Energy expenses:
Fuel		43,883			86,804			86,176			147,735
Purchased and interchanged power		28,295			61,218			57,693			116,576
		72,178			148,022			143,869			264,311
Operating revenues net of energy expenses		131,471			136,383			250,216			260,334
Other operating expenses:
Other operations		50,634			49,905			99,938			96,739
Maintenance		16,404			20,574			29,775			38,070
Depreciation and amortization		18,706			18,774			36,385			37,391
Taxes other than income taxes		12,511			12,321			25,028			24,099
		98,255			101,574			191,126			196,299
Operating income		33,216			34,809			59,090			64,035
Other income (deductions):
Allowance for equity funds used during construction		2,623			1,852			5,212			3,658
Investment and interest income, net		(1,150	)		1,406			(1,636	)		2,035
Miscellaneous non-operating income		549			145			761			351
Miscellaneous non-operating deductions		(726	)		(249	)		(2,041	)		(2,226	)
		1,296			3,154			2,296			3,818
Interest charges (credits):
Interest on long-term debt and financing obligations		12,196			10,577			26,120			20,682
Other interest		82			345			252			557
Capitalized interest		(246	)		(833	)		(496	)		(2,128	)
Allowance for borrowed funds used during construction		(1,691	)		(888	)		(3,373	)		(1,750	)
		10,341			9,201			22,503			17,361
Income before income taxes		24,171			28,762			38,883			50,492
Income tax expense		8,740			9,528			13,843			16,770
Net income	$	15,431		$	19,234		$	25,040		$	33,722
Basic earnings per share	$	0.34		$	0.43		$	0.56		$	0.75
Diluted earnings per share	$	0.34		$	0.43		$	0.56		$	0.75
Weighted average number of shares outstanding		44,782,749			44,686,103			44,769,843			44,823,527
Weighted average number of shares and dilutive potential shares outstanding		44,792,345			44,836,274			44,791,380			45,013,668

See accompanying notes to consolidated financial statements.

3

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)

	Twelve Months Ended June 30,
	2009			2008
Operating revenues	$	908,370		$	994,364
Energy expenses:
Fuel		228,257			284,277
Purchased and interchanged power		151,600			181,411
		379,857			465,688
Operating revenues net of energy expenses		528,513			528,676
Other operating expenses:
Other operations		203,607			199,461
Maintenance		58,815			66,378
Depreciation and amortization		74,565			72,654
Taxes other than income taxes		50,735			49,187
		387,722			387,680
Operating income		140,791			140,996
Other income (deductions):
Allowance for equity funds used during construction		9,833			7,178
Investment and interest income, net		127			7,767
Miscellaneous non-operating income		2,887			1,375
Miscellaneous non-operating deductions		(3,434	)		(4,287	)
		9,413			12,033
Interest charges (credits):
Interest on long-term debt and financing obligations		53,043			39,492
Other interest		903			1,013
Capitalized interest		(1,988	)		(4,035	)
Allowance for borrowed funds used during construction		(5,596	)		(3,570	)
		46,362			32,900
Income before income taxes		103,842			120,129
Income tax expense		34,903			36,372
Net income	$	68,939		$	83,757
Basic earnings per share	$	1.54		$	1.85
Diluted earnings per share	$	1.53		$	1.84
Weighted average number of shares outstanding		44,751,020			45,070,647
Weighted average number of shares and dilutive potential shares outstanding		44,819,062			45,305,418

See accompanying notes to consolidated financial statements.

4

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)

(In thousands)

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2009			2008			2009			2008			2009			2008
Net income	$	15,431		$	19,234		$	25,040		$	33,722		$	68,939		$	83,757
Other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs:
Net gain (loss) arising during period		—			—			—			—			(30,587	)		40,625
Reclassification adjustments included in net income for amortization of:
Prior service benefit		(677	)		(677	)		(1,377	)		(1,377	)		(2,754	)		(2,755	)
Net (gain) loss		412			(100	)		812			(75	)		735			1,602
Net unrealized gains (losses) on marketable securities:
Net holding gains (losses) arising during period		7,749			(1,209	)		2,358			(8,023	)		(19,398	)		(5,744	)
Reclassification adjustments for net (gains) losses included in net income		2,798			481			5,271			675			7,472			(831	)
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income		79			73			156			146			307			287
Total other comprehensive income (loss) before income taxes		10,361			(1,432	)		7,220			(8,654	)		(44,225	)		33,184
Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and postretirement benefit costs		96			168			205			412			11,715			(17,518	)
Net unrealized gains (losses) on marketable securities		(2,110	)		145			(1,526	)		1,469			2,386			1,315
Losses on cash flow hedges		(29	)		(26	)		(57	)		(53	)		(112	)		(106	)
Total income tax benefit (expense)		(2,043	)		287			(1,378	)		1,828			13,989			(16,309	)
Other comprehensive income (loss), net of tax		8,318			(1,145	)		5,842			(6,826	)		(30,236	)		16,875
Comprehensive income	$	23,749		$	18,089		$	30,882		$	26,896		$	38,703		$	100,632

See accompanying notes to consolidated financial statements.

5

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net income	$	25,040		$	33,722
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service		36,385			37,391
Amortization of nuclear fuel		11,001			9,379
Deferred income taxes, net		(4,186	)		15,160
Allowance for equity funds used during construction		(5,212	)		(3,658	)
Other amortization and accretion		7,247			6,992
Unrealized (gain) loss on investment in debt securities		(161	)		971
Other operating activities		3,760			1,823
Change in:
Accounts receivable		3,499			(21,442	)
Inventories		1,764			(1,878	)
Net overcollection (undercollection) of fuel revenues		51,618			(38,635	)
Prepayments and other		(2,947	)		3,763
Accounts payable		(13,687	)		15,949
Taxes accrued		2,344			(6,001	)
Interest accrued		2,152			1,018
Other current liabilities		153			(221	)
Deferred charges and credits		(7,459	)		(5,511	)
Net cash provided by operating activities		111,311			48,822
Cash flows from investing activities:
Cash additions to utility property, plant and equipment		(99,795	)		(94,725	)
Cash additions to nuclear fuel		(20,199	)		(18,958	)
Proceeds from sale of assets		466			144
Capitalized interest and AFUDC:
Utility property, plant and equipment		(8,585	)		(5,408	)
Nuclear fuel		(496	)		(2,128	)
Allowance for equity funds used during construction		5,212			3,658
Decommissioning trust funds:
Purchases, including funding of $3.9 and $3.6 million, respectively		(24,715	)		(22,375	)
Sales and maturities		20,812			16,813
Proceeds from sale of investment in debt securities		—			16,000
Other investing activities		(2	)		(2,938	)
Net cash used for investing activities		(127,302	)		(109,917	)
Cash flows from financing activities:
Proceeds from exercise of stock options		—			1,004
Repurchases of common stock		—			(9,892	)
Proceeds from issuance of long-term notes		—			148,719
Financing obligations:
Proceeds		171,305			64,843
Payments		(161,465	)		(52,762	)
Excess tax benefits from long-term incentive plans		—			373
Other financing activities		(1,782	)		(2,141	)
Net cash provided by financing activities		8,058			150,144
Net increase (decrease) in cash and cash equivalents		(7,933	)		89,049
Cash and cash equivalents at beginning of period		91,642			4,976
Cash and cash equivalents at end of period	$	83,709		$	94,025

See accompanying notes to consolidated financial statements.

6

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. Principles of Preparation

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”). Capitalized terms used in this report and not defined herein have the meaning ascribed for such terms in the 2008 Form 10-K. In the opinion of the Company’s management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 2009 and December 31, 2008; the results of its operations and comprehensive operations for the three, six and twelve months ended June 30, 2009 and 2008; and its cash flows for the six months ended June 30, 2009 and 2008. The results of operations and comprehensive operations and the cash flows for the six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full calendar year.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with the current period presentation.

Investments in Debt Securities. The Company invested excess cash in auction rate securities with contract maturity dates that extended beyond three months. These securities are classified as trading securities by the Company. These investments pay interest and are reported at fair value in deferred charges and other assets. See Note K.

Investments. The Company’s marketable securities, including those in decommissioning trust funds on the balance sheets, are reported at fair value and consist of cash, equity securities and municipal, federal and corporate bonds in trust funds established for decommissioning of its interest in Palo Verde. Such marketable securities are classified as “available-for-sale” securities and, as such, unrealized gains and losses are included in accumulated other comprehensive income as a separate component of common stock equity. However, if declines in fair value of marketable securities below original cost basis are determined to be other than temporary, then the declines are reported as losses in the consolidated statement of operations and a new cost basis is established for the affected securities at fair value. Gains and losses are determined using the cost of the security based on the specific identification basis. See Note K.

Revenues. Accounts receivable include accrued unbilled revenues of $22.2 million and $18.6 million at June 30, 2009 and December 31, 2008, respectively. The Company presents sales net of sales taxes in its consolidated statements of operations.

Stock-Based Compensation. The Company has a stock-based long-term incentive plan. SFAS No. 123 (revised) “Accounting for Stock-Based Compensation,” requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with some limited exceptions). Such costs are recognized over the period during which an employee is required to provide service in exchange for the award (the “requisite

7

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

service period”) which typically is the vesting period. Compensation cost is not recognized for anticipated forfeitures prior to vesting of equity instruments. See Note E.

New Accounting Standards. Effective January 1, 2009, the Company adopted the FASB Staff Position EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”) which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and diluted earnings per share. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. The Company awards unvested restricted stock which qualifies as participating securities, and has reflected the effects of FSP EITF 03-6-1 in its basic and diluted earnings per share for all periods presented. See Note E.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. On April 9, 2009, the FASB issued FASB Staff Position 157-4 (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. FSP 157-4 did not have a significant impact on the Company’s consolidated financial statements. See Note K.

Effective April 1, 2009, the Company adopted the FASB Staff Position 107-1 and Accounting Principles Board Opinion 28-1 (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting.” FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 did not impact amounts reported in the Company’s consolidated financial statements but resulted in additional footnote disclosure. See Note K.

Effective April 1, 2009, the Company adopted the FASB Staff Position 115-2 and 124-2 (“FSP 115-2 and FSP 124-2”). FSP 115-2 and FSP 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and FSP 124-2 did not have a significant impact on amounts reported in the Company’s consolidated financial statements. See Note K.

Effective April 1, 2009, the Company adopted the SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated subsequent events for recording and disclosure through August 6, 2009.

8

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In December 2008, the FASB issued FASB Staff Position 132(R)-1 (“FSP 132(R)-1”), which amends FASB No. 132(R), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement benefit plan. FSP 132(R)-1 requires additional disclosure on investment policies and strategies, categories and fair value measurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. FSP 132(R)-1 requires additional disclosure on pensions and other postretirement benefits but does not impact the consolidated financial results.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS No. 168 states that the FASB Accounting Standard Codification™ (the “Codification”) will become the source of authoritative U.S. Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”). SFAS No. 168 applies to financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. SFAS No. 168 should not have a significant impact on the Company’s consolidated financial statements although references to GAAP will change to Codification references.

Supplemental Cash Flow Disclosures (in thousands)

	Six Months Ended June 30,
	2009		2008
Cash paid for:
Interest on long-term debt and financing obligations	$	23,522	$	18,393
Other interest		4		192
Income taxes paid		12,938		1,417
Non-cash financing activities:
Grants of restricted shares of common stock		1,230		2,273

B. Regulation

General

The rates and services of the Company are regulated by incorporated municipalities in Texas, the Public Utility Commission of Texas (the “PUCT”), the New Mexico Public Regulation Commission (the “NMPRC”), and the Federal Energy Regulatory Commission (the “FERC”). The PUCT and the NMPRC have jurisdiction to review municipal orders, ordinances, and utility agreements regarding rates and services within their respective states and over certain other activities of the Company. The FERC

9

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

has jurisdiction over the Company’s wholesale transactions. The decisions of the PUCT, NMPRC and the FERC are subject to judicial review.

Texas Regulatory Matters

Texas Freeze Period. The Company has entered into agreements (“Texas Rate Agreements”) with El Paso, PUCT Staff and other parties in Texas that provide for most retail base rates to remain at their current level through June 30, 2010. During the rate freeze period, if the Company’s return on equity falls below the bottom of a defined range, the Company has the right to initiate a rate case and seek an adjustment to base rates. If the Company’s return on equity exceeds the top of the range, the Company will refund an amount equal to 50% of the Texas jurisdictional pretax return in excess of the ceiling. The range is based upon a risk premium analysis used in rate proceedings to establish a utility’s return on equity, and as of June 30, 2009, the range would be approximately 9.8% to 13.8%. The Company’s return on equity fell within the then prevailing range during the latest calendar year reporting period. Also pursuant to the Texas Rate Agreements, the Company agreed to share with its Texas customers 25% of off-system sales margins and wheeling revenues increasing to 90% of off-system sales margins after June 30, 2010 through June 30, 2015.

Fuel and Purchased Power Costs. Although the Company’s base rates are frozen pursuant to the Texas Rate Agreements, the Company’s actual fuel costs, including purchased power energy costs, are recoverable from its customers. The PUCT has adopted a rule establishing the recovery of fuel costs (“Texas Fuel Rule”) that allows the Company to seek adjustments to its fixed fuel factor three times per year in February, June and October. The Texas Fuel Rule provides for the fixed fuel factor to be based upon projected fuel and purchased power costs and projected kilowatt-hour sales for a twelve-month period. The Texas Fuel Rule also allows for the Company to request a formula to determine its fuel factor. Once a formula is approved, the Company could seek to revise its fixed fuel factor based upon the approved formula at least four months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects to continue to be materially under-recovered. Fuel over and under recoveries are considered material when they exceed 4% of the previous twelve months fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in fuel reconciliation proceedings.

On January 8, 2008, the Company filed a request with the PUCT in PUC Docket No. 35204 to surcharge approximately $30.1 million, including interest, of under-recovered fuel and purchased power costs to be collected over a twelve-month period. The fuel under-recoveries were incurred during the period December 2005 through November 2007. On April 11, 2008, the PUCT issued a final order approving the fuel surcharge to be collected over a twelve-month period beginning in May 2008.

On July 8, 2008, the Company filed a petition in PUC Docket No. 35856 with the PUCT to increase its fixed fuel factors and to surcharge $39.5 million of under-recovered fuel and purchased power costs including interest, beginning in 2008. The surcharge was based upon actual under-

10

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

recoveries for the period December 2007 through May 2008 and expected under-recoveries for June and July 2008. On September 25, 2008, the PUCT issued a final order approving an increase in the Company’s Texas jurisdictional fixed fuel factors of $38.8 million or 21.5% annually beginning with customer bills rendered in October 2008. In addition, the PUCT approved the recovery of $39.5 million in fuel under-recoveries over an 18-month period beginning in October 2008.

On April 1, 2009, the Company filed with the PUCT to terminate the interim fuel surcharge authorized in Docket No. 35856. This request was assigned Docket No. 36864. The Company’s request was a result of the over-recovery of fuel costs under the Company’s fixed fuel factor effective in October 2008 which largely offset the remaining balance of the fuel surcharge. The fuel over-recoveries were the result of the significant drop in natural gas prices since the fixed fuel factor went into effect in October 2008. On April 23, 2009, the Company received approval from the PUCT to terminate the fuel surcharge effective for customer bills rendered in May 2009 and thereafter.

On June 5, 2009, the Company filed a petition with the PUCT to decrease its fixed fuel factors by 13.1%, or $27.9 million, beginning with bills rendered in September 2009 or August 2009, if feasible. This petition was assigned PUCT Docket No. 37086. On July 30, 2009, the PUCT approved a stipulation which provided for approval of the new factors effective for customer bills rendered beginning in August 2009.

New Mexico Regulatory Matters

2007 New Mexico Stipulation. In July 2007, the NMPRC issued a final order approving a stipulation (“2007 New Mexico Stipulation”) addressing all issues in the 2006 rate filing in Case No. 06-00258-UT. The 2007 New Mexico Stipulation provided for a $5.8 million non-fuel base rate increase, established the amount of fuel and purchased power included in base rates at $0.04288 per kWh, and modified the Company’s Fuel and Purchased Power Cost Adjustment Clause (the “FPPCAC”). Any difference between actual fuel and purchased power costs and the amount included in base rates is recovered or refunded through the FPPCAC. Rates will continue in effect until changed by the NMPRC following the Company’s pending rate case.

The 2007 New Mexico Stipulation provides for recovery through the FPPCAC of the cost of capacity and energy provided to New Mexico retail customers from the deregulated Palo Verde Unit 3. The amount to be recovered is based upon the monthly contract cost of capacity and energy for power purchased under the existing Southwestern Public Service Company (“SPS”) purchased power contract. In February and March 2009, the volumes delivered to the Company over the transmission tie used to import SPS power were materially lower than normal due to operational constraints. This reduction in volume resulted in contract formula prices for Palo Verde Unit 3 power that were significantly higher than what were foreseen by the 2007 New Mexico Stipulation. The Company addressed this price spike due to operational constraints by proposing to adjust the proxy price in February 2009 to $54.27 per MWh (January 2009 monthly calculated price) and in March 2009 to $64.38 per MWh (12 months ending January 2009 average price) which is approximately 28% and 55% of the price calculated utilizing the formula from the 2007 New Mexico Stipulation. Because the operational constraints limiting the SPS purchases are expected to continue during 2009, the Company on April 24, 2009

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

requested approval of an unopposed variance to the calculation of the Palo Verde Unit 3 proxy price to be the lower of the monthly cost of capacity and energy under the SPS purchased power contract or the average cost of capacity and energy under the SPS purchased power contract for the twelve months ended January 2009 of $64.38 per MWh. The variance is based on language in the 2007 New Mexico Stipulation governing repricing should the SPS contract be modified or terminated.

The 2007 New Mexico Stipulation also requires 25% of jurisdictional off-system sales margins to be credited to customers through the FPPCAC until July 2010 when 90% of jurisdictional off-system sales margins will be credited to customers.

On May 29, 2009, the Company filed with the NMPRC a new and pending rate case (Case No. 09-00171-UT) to increase non-fuel and purchased power base rates by $12.7 million annually. The filing reflects a projected reduction of $21.3 million in fuel related revenues (based upon the difference in test year period ended December 31, 2008 and the Forecast Period of forecasted fuel and purchased power costs for the twelve month period beginning July 1, 2010 when new rates would be expected to become effective under full statutory rate suspension periods) for a projected net decrease in New Mexico jurisdictional fuel and purchased power revenues of $8.6 million. The filing complied with the requirement in the NMPRC’s Final Order in Case No. 06-00258-UT to file a general rate case by May 30, 2009 using a test year period ended December 31, 2008.

On June 10, 2009, the NMPRC issued an order suspending the effective date of new rates for nine months from July 1, 2009, designating a hearing examiner and mediator and establishing an initial mediation conference on July 28, 2009. A procedural schedule has been adopted that provides for a hearing in the case to begin on November 2, 2009.

FPPCAC Rulemaking and Workshops. The NMPRC has docketed workshops (Case No. 07-00389-UT) to review consistency and potential changes to the FPPCAC rule in New Mexico. Comments have been filed by parties and workshops have been held for discussion and consideration of any changes to the existing FPPCAC rule that could be included in a new rulemaking proceeding.

Pollution Control Bond Refunding. On March 20, 2008, the Company filed an application with the NMPRC requesting authority for long-term securities transactions necessary to refund and reissue certain Pollution Control Refunding Revenue Bonds (the “PCBs”). On April 22, 2008, the NMPRC issued a final order granting the Company the authority to enter into the securities transactions necessary to refund and reissue the Company’s Series B and Series C PCBs. On March 26, 2009, the Company completed a refunding transaction related to an aggregate principal amount of $100.6 million in pollution control indebtedness. See Note F.

Notice of Investigation of Rates. On August 3, 2007, the Company received a “Notice of Investigation of Rates of El Paso Electric Company” from the NMPRC in Case No. 07-00317-UT. On August 21, 2007, the NMPRC requested that the Company file a response to the issues, including the reasonableness of fuel and purchased power costs. On September 7, 2007, the Company filed its response and requested that the NMPRC suspend its investigation and close the docket. No further

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

action has been taken by the NMPRC. The Company is unable at this time to predict the ultimate outcome of this docket.

New Mexico Investigation into Executive Compensation. In December 2007, the NMPRC initiated an investigation into executive compensation of investor-owned gas and electric public utilities. In its order initiating the investigation, the NMPRC required each utility to provide information on compensation of executive officers and directors for the period 1977-2006. The Company provided the requested information. No further action has been taken by the NMPRC.

2009 New Mexico Integrated Resource Plan Filing. On July 16, 2009, the Company submitted its initial Integrated Resource Plan (“IRP”) pursuant to the requirements of NMPRC Rule, 17.7.3. The filing identifies the Company’s four-year action plan to meet resource needs based upon a twenty-year resource plan. The four-year action plan includes the addition of a natural gas fired combustion turbine in 2012; a competitive-bid request for proposals to add a combined cycle plant in three phases in 2013, 2014, and 2016; evaluation of a direct load control project for possible integration in the resource plan; and a competitive-bid request for proposals to acquire additional wind and biomass renewable resources in 2013 and 2015 to comply with the New Mexico Renewable Portfolio Standard Requirements. The NMPRC may accept the proposed IRP as compliant with its rules without a hearing or may conduct a hearing on the plan. Protests must be filed before August 16, 2009. If there are no protests, a final resolution is expected in the third quarter.

2009 New Mexico Annual Renewable Procurement Plan Filing. On July 1, 2009, the Company filed its 2009 Annual Renewable Procurement Plan in compliance with the New Mexico Renewable Energy Act. The Company’s 2009 plan is designed to meet the full renewable portfolio standard (“RPS”) of 6 percent of New Mexico jurisdictional retail energy sales for 2010 and 10 percent beginning in 2011. The Company requested approval by the NMPRC of the following proposals: 1) to increase the solar resources used for RPS compliance pursuant to the long-term contract with New Mexico SunTower, LLC; 2) to pay an additional $0.015 per kWh for renewable energy credits (“RECs”) obtained from a biomass energy facility; and 3) to modify and expand the Company’s existing REC purchase program for customer-installed qualifying facilities up to 10 kW and to add a program for customer-installed qualifying facilities of 10 kW to 100 kW. Hearings are scheduled to begin October 1, 2009 and a final order is expected in December 2009.

Federal Regulatory Matters

Transmission Dispute with Tucson Electric Power Company (“TEP”). In January 2006, the Company filed a complaint with the FERC to interpret the terms of a Power Exchange and Transmission Agreement (the “Transmission Agreement”) entered into with TEP in 1982. TEP filed a complaint with the FERC one day later raising virtually identical issues. TEP claimed that, under the Transmission Agreement, it was entitled to up to 400 MW of firm transmission rights on the Company’s transmission system that would enable it to transmit power from a generating station (the Luna Energy Facility (“LEF”) located near Deming, New Mexico) to Springerville or Greenlee in Arizona. The Company asserted that TEP’s rights under the Transmission Agreement do not include transmission rights

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

necessary to transmit such power as contemplated by TEP and that TEP must acquire any such rights in the open market from the Company at applicable tariff rates or from other transmission providers. On April 24, 2006, the FERC ruled in the Company’s favor, finding that TEP does not have the transmission rights under the Transmission Agreement to transmit power from the LEF to Arizona. The ruling was based on written evidence presented and without an evidentiary hearing. TEP’s request for a rehearing of the FERC’s decision was granted in part and denied in part in an order issued October 4, 2006, and hearings on the disputed issues were held before an administrative law judge. In the initial decision dated September 6, 2007, the administrative law judge found that the Transmission Agreement allows TEP to transmit power from the LEF to Arizona but limits that transmission to 200 MW on any segment of the circuit and to non-firm service on the segment from Luna to Greenlee. The Company and TEP filed exceptions to the initial decision.

On November 13, 2008, the FERC issued an order on the initial decision finding that the transmission rights given to TEP in the Transmission Agreement are firm and are not restricted for transmission of power from Springerville as the receipt point to Greenlee as the delivery point. Therefore, pursuant to the order, TEP can use its transmission rights granted under the Transmission Agreement to transmit power from the LEF to either Springerville or Greenlee so long as it transmits no more than 200 MW over all segments at any one time. The FERC also ordered that the Company refund to TEP all sums with interest that TEP had paid it for transmission under the applicable transmission service agreements since February 2006 for service relating to the LEF. On December 3, 2008 the Company refunded $9.7 million to TEP. The Company had established a reserve for rate refund of approximately $7.2 million as of September 30, 2008, resulting in a pre-tax charge to earnings of approximately $2.5 million in 2008. The Company also paid TEP interest on the refunded balance of approximately $0.9 million which was also charged to earnings in 2008. If the order is not reversed, the Company will lose the opportunity to receive compensation from TEP for such transmission service in the future. The Company filed a request for rehearing of the FERC’s decision on December 15, 2008, seeking reversal of the order on the merits and a return of any refunds made in the interim, as well as compensation for all service that the Company may provide to TEP from the LEF over the Company’s transmission system on a going forward basis. The FERC suspended the period for ruling on the motion for rehearing on January 14, 2009. If the FERC denies the Company’s request for rehearing or again finds against the Company on rehearing, the Company will have the right to seek judicial review of the order. The Company cannot predict the outcome of such potential future proceedings.

Pollution Control Bond Refunding. On April 4, 2008, the Company filed an application with the FERC requesting authority for long-term securities transactions necessary to refund and reissue the Company’s Series B and Series C PCBs. The FERC issued an order on May 1, 2008 granting authority for the securities transactions. On March 26, 2009, the Company completed a refunding transaction related to an aggregate principal amount of $100.6 million in pollution control indebtedness. See Note F.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

C. Regulatory Assets and Liabilities

The Company’s operations are regulated by the PUCT, the NMPRC and the FERC. The provisions of SFAS No. 71 are applied to its regulated operations. Regulatory assets represent probable future recovery of previously incurred costs, which will be collected from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets and liabilities reflected in the Company’s consolidated balance sheets are presented below (in thousands):

	Amortization Period Ends	June 30, 2009		December 31, 2008
Regulatory assets
New Mexico procurement plan costs	(a)	$	503	$	464
New Mexico and FERC loss on reacquired debt (b)	May 2030		5,479		5,585
New Mexico renewable energy credits	(a)		2,617		2,278
New Mexico 2006 rate case costs (b)	June 2010		186		294
New Mexico 2009 rate case costs	(c)		450		—
New Mexico Palo Verde deferred depreciation (b)	(d)		2,333		1,713
New Mexico energy efficiency	(e)		261		231
New Mexico transition costs (b)	June 2010		287		575
Unrecovered issuance costs due to reissuance of PCBs	April 2040		635		—
Texas energy efficiency	(f)		2,005		986
Regulatory assets pursuant to SFAS No. 109 (g)	(d)		26,214		24,326
Final coal reclamation (g)	July 2016		9,532		9,682
Nuclear fuel postload daily financing charge	(e)		1,942		2,482
Total regulatory assets		$	52,444	$	48,616
Regulatory liabilities
Regulatory liabilities pursuant to SFAS No. 109 (g)	(d)	$	8,424	$	8,839
Accumulated deferred investment tax credit (h)	(d)		5,450		5,630
Total regulatory liabilities		$	13,874	$	14,469

(a) A two year amortization period was requested in the New Mexico general rate case filed in May 2009.

(b) This item is included in rate base which earns a return on investment.

(c) A one year amortization period was requested in the New Mexico general rate case filed in May 2009.

(d) The amortization period for this asset is based upon the life of the associated assets.

(e) This asset will be recovered through a recovery factor after expenses are incurred.

(f) Amortization period will be established in next general rate case.

(g) No specific return on investment is required since related assets and liabilities, including accumulated deferred income taxes and reclamation liability, offset.

(h) This item is excluded from rate base.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

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(Unaudited)

D. Palo Verde

NRC. The NRC regulates the operation of all commercial nuclear power reactors in the United States, including Palo Verde. The NRC periodically conducts inspections of nuclear facilities and monitors performance indicators to enable the agency to arrive at objective conclusions about a licensee’s safety performance. Based on this assessment information and using a cornerstone evaluation system, the NRC determines the appropriate level of agency response and oversight, including supplemental inspections and pertinent regulatory actions as necessary. The NRC had placed Palo Verde Unit 3 in the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix for which corrective actions resulted in increased operating costs at the plant. On March 24, 2009, the NRC announced that it is removing Palo Verde Unit 3 from the “multiple/repetitive degraded cornerstone” column of the NRC’s action matrix and returning all three units of the plant to routine inspection and oversight. This notification follows the NRC’s completion of its inspections of the corrective actions taken by Palo Verde to address performance deficiencies. The NRC has closed the confirmatory action letter that outlined the performance deficiencies and associated corrective actions.

E. Common Stock

Long-Term Incentive Plan

On May 2, 2007, the Company’s shareholders approved a stock-based long-term incentive plan and authorized the issuance of up to one million shares of common stock for the benefit of directors and employees. Under the plan, common stock may be issued through the award or grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock, performance stock, cash-based awards and other stock-based awards. The Company may issue new shares, purchase shares on the open market, or issue shares from shares the Company has repurchased to meet the share requirements of these plans. As discussed in Note A, the Company accounts for its stock-based long-term incentive plan under SFAS No. 123 (revised).

Stock Options. Stock options have been granted at exercise prices equal to or greater than the market value of the underlying shares at the date of grant. No options were exercised during the first six months of 2009. The Company received $1.0 million in cash for the 88,000 stock options exercised in the first six months of 2008. All of the 465,888 options outstanding at June 30, 2009 have vested. Stock options have not been granted since 2003. For a full discussion of stock options, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

Restricted Stock. The Company has awarded restricted stock under its long-term incentive plans. Restrictions from resale generally lapse and awards vest over periods of one to three years. The market value of the unvested restricted stock at the date of grant is amortized to expense over the restriction period net of anticipated forfeitures. The Company awarded 93,605 shares of unvested restricted stock with a grant date fair value of $1.3 million to its directors and officers during the six months ended June 30, 2009. The Company awarded 74,095 shares of unvested restricted stock with a grant date fair value of $1.6 million during the six months ended June 30, 2008. During the six months ended June 30, 2009, 49,995 restricted shares vested and 11,050 shares were forfeited. As of June 30, 2009, there are 160,360 unvested shares of restricted stock with a grant date fair value of $1.7 million remaining to be

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

expensed. For a full discussion of restricted stock, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

Performance Shares. The Company has granted performance share awards to certain officers under the Company’s existing long-term incentive plans, which provide for issuance of Company stock based on the achievement of certain performance criteria over a three-year period. The payout varies between 0% and 200% of performance share awards. Performance shares vesting on January 1, 2009 did not meet the minimum payout threshold and no shares were issued. During the six months ended June 30, 2009, the Company granted 131,500 performance shares to its officers with a grant date fair value of $1.6 million which is being expensed over the three-year vesting period. During the six months ended June 30, 2009, 36,350 performance shares were forfeited. During the six months ended June 30, 2008, the Company granted 63,500 performance shares with a grant date fair value of $1.1 million which is expensed over the three-year vesting period. As of June 30, 2009, there were 197,900 outstanding performance shares with a grant date fair value of $1.5 million remaining to be expensed. For a full discussion of performance shares, see Note F of Notes to Consolidated Financial Statements in the 2008 Form 10-K.

The Company recorded total compensation expense for all stock-based incentive plans of approximately $0.3 million, $1.1 million and $2.3 million for the three, six and twelve month periods ended June 30, 2009. For the three, six and twelve month periods ended June 30, 2008, the Company recorded total compensation expense of $0.5 million, $0.9 million and $2.5 million for all stock-based incentive plans which included the cumulative adjustment for Mr. Redd’s forfeiture discussed below.

Separation Agreement with Ershel Redd

On February 12, 2008, the Company entered into an employment separation agreement with Ershel Redd, the Company’s former chief executive officer. In satisfaction of any and all obligations resulting from Mr. Redd’s service to the Company, he received a $1.65 million lump sum payment, in addition to two years of Company-paid medical benefits. All of Mr. Redd’s unvested restricted shares and performance shares awarded were forfeited in accordance with the Company’s long-term incentive plan which resulted in a net cumulative adjustment of $0.2 million recorded as a reduction of compensation costs in the first quarter of 2008.

Common Stock Repurchase Program

In November 2007, the Board authorized the repurchase of up to 2 million shares of the Company’s outstanding common stock (the “2007 Plan”). No shares remain available under previous plans. No shares were repurchased during the first six months of 2009. As of June 30, 2009, the Company had 1,521,366 shares authorized for repurchase under the 2007 Plan. Since the inception of the stock repurchase program in 1999, the Company has repurchased a total of approximately 19.8 million shares of its common stock at an aggregate cost of $279.3 million, including commissions. The Company may in the future make purchases of its common stock pursuant to the 2007 Plan in open market transactions at prevailing prices and may engage in private transactions where appropriate. The repurchased shares will be available for issuance under employee benefit and stock incentive plans, or may be retired.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basic and Diluted Earnings Per Share

Effective January 1, 2009, the Company adopted the FSP EITF 03-6-1 which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and diluted earnings per share to the extent they are dilutive. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. The Company awards unvested restricted stock which qualifies as participating securities. The basic and diluted earnings per share for the three and six months ended June 30, 2008 were unchanged after adopting FSP EITF 03-6-1. Basic and diluted earnings per share for the twelve months ended June 30, 2008 decreased by $0.01. The basic and diluted earnings per share including the effects of adopting FSP EITF 03-6-1 are presented below:

	Three Months Ended June 30,
	2009			2008
Weighted average number of common shares outstanding:
Basic number of common shares outstanding		44,782,749			44,686,103
Dilutive effect of unvested performance awards		—			—
Dilutive effect of stock options		9,596			150,171
Diluted number of common shares outstanding		44,792,345			44,836,274
Basic net income per common share:
Net income	$	15,431		$	19,234
Income allocated to participating restricted stock		(58	)		(45	)
Net income available to common shareholders	$	15,373		$	19,189
Diluted net income per common share:
Net income	$	15,431		$	19,234
Income reallocated to participating restricted stock		(58	)		(45	)
Net income available to common shareholders	$	15,373		$	19,189
Basic net income per common share	$	0.34		$	0.43
Diluted net income per common share	$	0.34		$	0.43

The calculation of the weighted average number of common shares and dilutive potential shares outstanding for the three months ended June 30, 2009 and 2008, excludes 44,363 and 30,873 shares, respectively, of restricted stock awards because their effect was antidilutive.

Performance shares of 222,267 were excluded from the computation of diluted earnings per share for the three months ended June 30, 2009 as no payouts would be required based upon current performance. These amounts assume a 100% performance level payout. Performance shares of 138,344 were excluded from the computation of diluted earnings per share for the three months ended June 30, 2008.

Stock options of 214,440 were excluded from the computation of diluted earnings per share for the three months ended June 30, 2009 as the exercise price was greater than the average stock price for these periods. No options were excluded from the computation of diluted earnings per share in 2008.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Weighted average number of common shares outstanding:
Basic number of common shares outstanding		44,769,843			44,823,527
Dilutive effect of unvested performance awards		—			25,281
Dilutive effect of stock options		21,537			164,860
Diluted number of common shares outstanding		44,791,380			45,013,668
Basic net income per common share:
Net income	$	25,040		$	33,722
Income allocated to participating restricted stock		(88	)		(82	)
Net income available to common shareholders	$	24,952		$	33,640
Diluted net income per common share:
Net income	$	25,040		$	33,722
Income reallocated to participating restricted stock		(88	)		(82	)
Net income available to common shareholders	$	24,952		$	33,640
Basic net income per common share	$	0.56		$	0.75
Diluted net income per common share	$	0.56		$	0.75

The calculation of the weighted average number of common shares and dilutive potential shares outstanding for the six months ended June 30, 2009 and 2008, excludes 62,365 and 51,770 shares, respectively, of restricted stock awards because their effect was antidilutive.

Performance shares of 224,734 were excluded from the computation of diluted earnings per share for the six months ended June 30, 2009 as no payouts would be required based upon current performance. These amounts assume a 100% performance level payout. Performance shares of 122,619 were excluded from the computation of diluted earnings per share for the six months ended June 30, 2008.

Stock options of 107,220 were excluded from the computation of diluted earnings per share for the six months ended June 30, 2009 as the exercise price was greater than the average stock price for these periods. No options were excluded from the computation of diluted earnings per share in 2008.

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EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Twelve Months Ended June 30,
	2009			2008
Weighted average number of common shares outstanding:
Basic number of common shares outstanding		44,751,020			45,070,647
Dilutive effect of unvested performance awards		3,180			47,097
Dilutive effect of stock options		64,862			187,674
Diluted number of common shares outstanding		44,819,062			45,305,418
Basic net income per common share:
Net income	$	68,939		$	83,757
Income allocated to participating restricted stock		(205	)		(220	)
Net income available to common shareholders	$	68,734		$	83,537
Diluted net income per common share:
Net income	$	68,939		$	83,757
Income reallocated to participating restricted stock		(205	)		(219	)
Net income available to common shareholders	$	68,734		$	83,538
Basic net income per common share	$	1.54		$	1.85
Diluted net income per common share	$	1.53		$	1.84

The calculation of the weighted average number of common shares and dilutive potential shares outstanding for the twelve months ended June 30, 2009 and 2008, excludes 56,045 and 53,533 shares, respectively, of restricted stock awards because their effect was antidilutive.

Performance shares of 153,039 were excluded from the computation of diluted earnings per share for the twelve months ended June 30, 2009 as no payouts would be required based upon current performance. These amounts assume a 100% performance level payout. Performance shares of 72,158 were excluded from the computation of diluted earnings per share for the twelve months ended June 30, 2008.

Stock options of 53,160 were excluded from the computation of diluted earnings per share for the twelve months ended June 30, 2009 as the exercise price was greater than the average stock price for these periods. No options were excluded from the computation of diluted earnings per share in 2008.

F. Long-Term Debt

Pollution Control Bonds (“PCBs”)

On March 26, 2009, the Company completed a refunding transaction whereby the 2005 Series B $63.5 million bonds and the 2005 Series C $37.1 million bonds were refunded and replaced by 2009 Series A bonds in the aggregate principal amount of $63.5 million (the “2009 Series A Bonds”) and 2009 Series B bonds in the aggregate principal amount of $37.1 million (the “2009 Series B Bonds”). The 2009 Series A Bonds and the 2009 Series B Bonds were issued as unsecured obligations and both have a fixed interest rate of 7.25%. The 2009 Series A Bonds will mature on February 1, 2040. The 2009 Series B Bonds will mature on April 1, 2040. The 2005 Series B $63.5 million and the 2005 Series C $37.1 million bonds, which were to mature in 2040, had variable interest rates that were

20

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

repriced weekly. The Company experienced increased yields and resulting interest expense for the auction rate PCBs as a consequence of the turbulent condition of the financial markets.

G. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal jurisdiction for years prior to 2005 and in the state jurisdictions for years prior to 1998. The Company’s federal tax returns are currently under audit for 2005 and 2006. A deficiency notice relating to the Company’s 1998 through 2003 income tax returns in Arizona contests a pollution control credit and apportionment factors. The Company is contesting these adjustments.

For the three months ended June 30, 2009 and 2008, the Company’s consolidated effective tax rate from continuing operations was 36.16% and 33.13%, respectively. For the six months ended June 30, 2009 and 2008, the Company’s consolidated effective tax rate from continuing operations was 35.60% and 33.21%, respectively, and for the twelve months ended June 30, 2009 and 2008 the Company’s consolidated effective tax rate from continuing operations was 33.61% and 30.28%, respectively. The Company’s effective tax rates differ from the federal statutory tax rate of 35% primarily due to state income taxes, the allowance for equity funds used during construction, the tax rate on qualified decommissioning trust investment and permanent tax differences.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A reconciliation of the June 30, 2009 and 2008 amount of unrecognized tax benefits is as follows (in millions):

	2009		2008
Balance at January 1	$	0.5	$	8.5
Reductions for tax positions related to the current year		—		(0.7	)
Additions for tax positions of prior years		—		2.6
Reductions for tax positions of prior years		—		(0.3	)
Balance at June 30	$	0.5	$	10.1

The amount of unrecognized tax benefits at June 30, 2008 includes $7.9 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period for these issues does not change the amount of tax expense other than associated interest and penalties. However, the timing of cash payments to the federal taxing authority would be affected. The Company recognized income tax expense for an unrecognized tax position of $0.1 million for the twelve months ended June 30, 2008, associated with state income taxes.

21

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recognizes in tax expense interest and penalties related to tax benefits that have not been recognized. During the three, six and twelve month periods ended June 30, 2009, the Company recognized approximately $0.1 million in interest. The Company had approximately $0.5 million for the payment of interest and penalties accrued at June 30, 2009.

H. Commitments, Contingencies and Uncertainties

For a full discussion of commitments and contingencies, see Note J of Notes to Consolidated Financial Statements in the 2008 Form l0-K. In addition, see Note B above and Notes B and D of Notes to Consolidated Financial Statements in the 2008 Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent fuel storage, disposal of low-level radioactive waste, reactor vessel heads and liability and insurance matters. See Note G for a discussion of tax contingencies and uncertainties.

Power Purchase and Sale Contracts

The Company entered into a contract on April 18, 2007 (as amended on August 29, 2008, March 31, 2009 and May 8, 2009) to sell up to 100 MW of firm energy and 50 MW of contingent energy to Imperial Irrigation District (“IID”), which began May 1, 2007 and continues through October 31, 2009. The contract also provides for the Company to sell up to 100 MW of firm energy and 40 MW of contingent energy beginning November 1, 2009 through April 30, 2010. To ensure that power is available to meet the IID contract demand, the Company entered into a contract effective May 1, 2007 (as amended and restated on September 3, 2008 and March 30, 2009) to purchase up to 100 MW of firm energy from Credit Suisse Energy, LLC. This contract provides for up to 100 MW of firm energy to be delivered at Palo Verde through April 30, 2010 and 50 MW of energy delivered at Four Corners in the months of July through September in 2007 and May through September for the years 2008 through 2010.

In addition to the contracts disclosed in the Company’s 2008 Form 10-K, the Company has entered into several agreements with various counterparties for forward firm purchases and sales of electricity:

Type of Contract	Quantity	Term
Purchase Off-Peak Energy	50 MW	April through October 2009
Purchase Off-Peak Energy	25 MW	November 2009 through April 2010
Purchase On-Peak Energy	Up to 40 MW	June 2009 through December 2009
Sale On-Peak Energy	Up to 40 MW	June 2009 through December 2009

To supplement its own generation and operating reserves, the Company engages in firm and non-firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company’s resource needs and the economics of the transactions. In 2004, the Company entered into a 20-year contract, beginning in 2006, for the purchase of up to 133 MW of capacity and associated energy from SPS. The Company received notice from SPS in late 2006 that SPS had been subject to

22

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

adverse regulatory action by the PUCT regarding transactions under the contract and that SPS wished to exercise its right to terminate the contract early. As a result, on January 29, 2008, the Company and SPS entered into an amendment to the contract and the contract will terminate on September 30, 2009.

The Company entered into an agreement to purchase capacity and energy from Shell Energy North America (“Shell”). Under the agreement, the Company provides natural gas to Pyramid Unit No. 4 where Shell has the right to convert natural gas to electric energy. The Company may schedule up to 100% of Pyramid Unit No. 4’s output, approximately 40 MW, from January 1, 2010 through December 31, 2010.

The Company entered into a 20-year contract with New Mexico SunTower, LLC (“eSolar”) on October 17, 2008. The contract is a power purchase agreement for the full capacity of a 92 MW concentrated solar plant to be built in Southern New Mexico. The plant is expected to be operational by the summer of 2011.

Environmental Matters

The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state, tribal and local authorities. Those authorities govern current facility operations and have continuing jurisdiction over facility modifications. Failure to comply with these environmental regulatory requirements can result in actions by regulatory agencies or other authorities that might seek to impose on the Company administrative, civil and/or criminal penalties. In addition, unauthorized releases of pollutants or contaminants into the environment can result in costly cleanup obligations that are subject to enforcement by regulatory agencies. These laws and regulations are subject to change and, as a result of those changes, the Company may face additional capital and operating costs to comply.

Another way in which environmental matters may impact the Company’s operations and business is the implementation of the U.S. Environmental Protection Agency’s (“EPA”) Clean Air Interstate Rule (“CAIR”) which, as applied to the Company, may result in a requirement that it substantially reduce emissions of nitrogen oxides from its power plants in Texas and/or purchase allowances representing other parties’ emissions reductions starting in 2009. These requirements become more stringent in 2015, and are anticipated to require even further emissions reductions or additional allowance purchases. On July 11, 2008, the U.S. Court of Appeals for the District of Columbia vacated CAIR in its entirety. On December 23, 2008 the DC Circuit Panel granted rehearing and remanded CAIR without vacating the original statute. As a result, the Company must comply with CAIR as written until the EPA rewrites the CAIR as required by the court’s earlier opinion.

The Company takes its environmental compliance seriously and is monitoring these issues so that the Company is best able to effectively adapt to any changes. While the Company strives to prepare for and implement actions necessary to comply with changing environmental regulations, substantial expenditures may be required for the Company to comply with such regulations in the future and, in

23

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

some instances, those expenditures may be material. The Company believes it is impossible at present to meaningfully quantify the costs of these potential impacts.

The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis and believes it has made adequate provision in its financial statements to meet such obligations. As a result of this analysis, the Company has a provision for environmental remediation obligations of approximately $0.9 million as of June 30, 2009, related to compliance with federal and state environmental standards. However, unforeseen expenses associated with environmental compliance or remediation may occur and could have a material adverse effect on the future operations and financial condition of the Company.

The Company incurred the following expenditures during the three, six and twelve months ended June 30, 2009 and 2008 to comply with federal environmental statutes (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,				Twelve Months Ended June 30,
	2009		2008		2009		2008		2009		2008
Clean Air Act (1)	$	243	$	131	$	593	$	255	$	922	$	1,258
Clean Water Act (2)		72		318		131		821		553		1,230

(1) Includes $0.3 million related to excess emissions at the Rio Grande generating station discussed below for the six and twelve months ended June 30, 2009.

(2) Excludes a $0.6 million adjustment reducing estimated remediation costs for a property previously owned by the Company for the three, six and twelve months ended June 30, 2009. Includes a $0.2 million reserve for remediation costs for the Gila River Boundary Site discussed below for the twelve months ended June 30, 2009. For the twelve months ended June 30, 2008 a $0.5 million adjustment was recorded reducing the estimated costs of remediation at the Rio Grande and Copper generating stations.

Along with many other companies, the Company received from the Texas Commission on Environmental Quality (“TCEQ”) a request for information in 2003 in connection with environmental conditions at a facility in San Angelo, Texas that was operated by the San Angelo Electric Service Company (“SESCO”). In November 2005, TCEQ proposed the SESCO site for listing on the registry of Texas state superfund sites and mailed notice to more than five hundred entities, including the Company, indicating that TCEQ considers each of them to be a “potentially responsible party” at the SESCO site. The Company received from the SESCO working group of potentially responsible parties a settlement offer in May 2006 for remediation and other expenses expected to be incurred in connection with the SESCO site. The Company’s position is that any liability it may have related to the SESCO site was discharged in the Company’s bankruptcy. At this time, the Company has not agreed to a settlement or to otherwise participate in the cleanup of the SESCO site and is unable to predict the outcome of this matter. While the Company has no reason at present to believe that it will incur material liabilities in connection with the SESCO site, it has accrued $0.3 million for potential costs related to this matter.

24

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The EPA has investigated control releases or potential releases of hazardous substances, pollutants or contaminants at the Gila River Boundary Site, on the Gila River Indian Community (“GRIC”) reservation in Arizona and designated it as a Superfund Site. The Company currently owns 16.29% of the site and will share in the cost of cleanup of this site. Negotiations with the EPA are ongoing and the Company has accrued $0.2 million for potential costs related to this matter.

On September 30, 2008, the State of New Mexico, acting on behalf of the New Mexico Environment Department (“NMED”), filed a complaint in New Mexico district court alleging that, on approximately 650 occasions between May 2000 and September 2005, the Company’s Rio Grande Generating Station, located in Dona Ana County, New Mexico, emitted sulfur dioxide, nitrogen oxides or carbon monoxide in excess of its permitted emission rates, and failed to properly report these allegedly excess emissions. These allegations were previously made by the NMED in a previously disclosed compliance order, which the NMED withdrew on September 30, 2008. On October 27, 2008, the State of New Mexico amended its complaint to allege approximately 300 additional exceedances of permitted nitrogen dioxide and carbon monoxide emission rates and associated reporting failures between October 2005 and July 2007. The amended complaint seeks civil penalties in the amount of $15,000 per day for each alleged violation. On July 30, 2009, the Company and NMED entered into a consent decree resolving all issues in this suit. In the consent decree, the Company denied any violations of air emissions standards but agree to pay a civil penalty $0.3 million to avoid further defense costs in this matter. In addition, the Company agreed to complete a supplemental environmental project at the Rio Grande Generation Station at a cost not to exceed $0.3 million. The New Mexico district court approved the consent decree and dismissed the lawsuit on July 31, 2009.

In 2006, the Company experienced an oil discharge at the Rio Grande Generating Station. The Company remediated the site by removing the contaminated soil and installing monitoring wells to monitor for the presence of hydrocarbons in the ground water. Recently, a monitoring well showed signs of contamination at levels exceeding New Mexico ground water standards. The Company notified the NMED of its findings and submitted an abatement plan to the NMED addressing the soil and ground water impacts. Upon approval of the abatement plan by the NMED, the Company will begin a detailed assessment of the site and perform further remediation of the site as appropriate. The Company believes this matter will not have a material effect on the future operations and financial condition of the Company.

On April 4, 2007, the Company submitted its application for a New Source Review Air Quality Permit/Prevention of Significant Deterioration (“PSD”) permit to the TCEQ for Newman Unit 5. The Company received approval of its PSD application on May 22, 2008. Additional environmental permits other than the PSD were not required to begin construction of Newman Unit 5 because it is being constructed at an existing plant site, and other permits are currently in place which will encompass the operation of Newman Unit 5.

In May 2007, the EPA finalized a new federal implementation plan which addresses emissions at the Four Corners Station in northwestern New Mexico of which the Company owns a 7% interest in Units 4 and 5. APS, the Four Corners operating agent, has filed suit against the EPA relating to this new federal implementation plan in order to resolve issues involving operating flexibility for emission opacity standards. The Company cannot predict the outcome of the suit filed against the EPA or whether compliance with the new requirements could have an adverse effect on its capital and operating costs.

25

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In December 2008, the Company was notified by El Paso that a property purchased from the Company in May 2005, (Santa Fe Facility), has revealed past contamination consistent with the Company’s past practices conducted at this site. The Company cooperated with El Paso to address and undertake partial disposal of certain subsurface contaminated materials. On April 7, 2009, El Paso was notified by the TCEQ that the remediation of the site met pre-spill conditions, and no further action was required. The Company’s remediation expenses were less than the reserve previously established by the Company and the Company recorded a reduction in environmental expense of $0.6 million in the second quarter of 2009.

Except as described herein, the Company is not aware of any other active investigation of its compliance with environmental requirements by the EPA, the TCEQ or the NMED which is expected to result in any material liability. Furthermore, except as described herein, the Company is not aware of any unresolved, potentially material liability it would face pursuant to the Comprehensive Environmental Response, Comprehensive Liability Act of 1980, also known as the Superfund law.

I. Litigation

The Company is a party to various legal actions. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. Based upon a review of these claims and applicable insurance coverage, to the extent that the Company has been able to reach a conclusion as to its ultimate liability, it believes that none of these claims will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

See Note B for discussion of the effects of government legislation and regulation on the Company.

J. Employee Benefits

Retirement Plans

The net periodic benefit cost recognized for the three, six and twelve months ended June 30, 2009 and 2008 is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2009			2008			2009			2008			2009			2008
Components of net periodic benefit cost:
Service cost	$	1,367		$	1,213		$	2,767		$	2,538		$	5,304		$	5,355
Interest cost		3,317			3,125			6,592			6,300			12,892			12,329
Expected return on plan assets		(3,845	)		(3,563	)		(7,720	)		(7,138	)		(14,815	)		(13,407	)
Amortization of:
Net loss		412			287			812			587			1,398			2,296
Prior service cost		33			33			58			58			115			115
Net periodic benefit cost	$	1,284		$	1,095		$	2,509		$	2,345		$	4,894		$	6,688

During the six months ended June 30, 2009, the Company contributed $3.9 million of its projected $6.3 million 2009 annual contribution to its retirement plans.

26

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Postretirement Benefits

The net periodic benefit cost recognized for the three, six and twelve months ended June 30, 2009 and 2008 is made up of the components listed below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
	2009			2008			2009			2008			2009			2008
Components of net periodic benefit cost:
Service cost	$	773		$	780		$	1,698		$	1,580		$	3,278		$	3,200
Interest cost		1,596			1,525			3,246			3,100			6,345			5,740
Expected return on plan assets		(375	)		(477	)		(750	)		(927	)		(1,676	)		(1,774	)
Amortization of:
Prior service benefit		(710	)		(710	)		(1,435	)		(1,435	)		(2,869	)		(2,869	)
Net gain		—			(387	)		—			(662	)		(663	)		(694	)
Net periodic benefit cost	$	1,284		$	731		$	2,759		$	1,656		$	4,415		$	3,603

During the six months ended June 30, 2009, the Company contributed $2.0 million of its projected $3.4 million 2009 annual contribution to its postretirement plan.

K. Financial Instruments and Investments

SFAS No. 107, “Disclosure about Fair Value of Financial Instruments,” requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt and financing obligations, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Investments in debt securities and decommissioning trust funds are carried at fair value.

The fair values of the Company’s long-term debt and financing obligations, including the current portion thereof, are based on estimated market prices for similar issues and are presented below (in thousands):

	June 30, 2009
	Carrying Amount		Estimated Fair Value
Pollution Control Bonds	$	193,135	$	184,713
Senior Notes		546,539		465,038
Nuclear Fuel Financing (1)		103,493		103,493
Total	$	843,167	$	753,244

(1) The interest rate on the Company’s financing for nuclear fuel purchases is reset every quarter to reflect current market rates. Consequently, the carrying value approximates fair value.

27

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Marketable Securities. The Company’s marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair value which was $119.1 million at June 30, 2009 and $111.3 million at December 31, 2008. These securities are classified as available for sale under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The reported fair values include gross unrealized losses on marketable securities whose impairment the Company has deemed to be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009 (in thousands):

	June 30, 2009
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Description of Securities (1):
U.S. Government Debt Securities	$	5,358	$	(183	)	$	—	$	—		$	5,358	$	(183	)
Federal Agency Mortgage Backed Securities		2,014		(8	)		48		(2	)		2,062		(10	)
Municipal Obligations		3,016		(17	)		10,528		(308	)		13,544		(325	)
Corporate Obligations		132		(38	)		1,473		(94	)		1,605		(132	)
Total debt securities		10,520		(246	)		12,049		(404	)		22,569		(650	)
Common stock		26,699		(4,148	)		1,188		(324	)		27,887		(4,472	)
Mutual Fund		8,375		—			—		—			8,375		—
Total equity securities		35,074		(4,148	)		1,188		(324	)		36,262		(4,472	)
Total temporarily impaired securities	$	45,594	$	(4,394	)	$	13,237	$	(728	)	$	58,831	$	(5,122	)

(1) Includes approximately 154 securities.

The Company monitors the length of time a security trades below its cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value below cost is considered to be other than temporary. In addition, the Company will research the future prospects of individual securities as necessary. As a result of these factors, as well as the Company’s intent and ability to hold these securities until their market price recovers, these securities are considered temporarily impaired. The Company will not have a requirement to expend monies held in trust before 2024 or a later period when the Company begins to decommission Palo Verde.

28

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The reported fair values also include gross unrealized gains on marketable securities which have not been recognized in the Company’s net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category at June 30, 2009 (in thousands):

	June 30, 2009
	Fair Value		Unrealized Gains
Description of Securities:
Federal Agency Mortgage Backed Securities	$	13,412	$	515
U.S. Government Debt Securities		2,125		101
Municipal Obligations		17,411		558
Corporate Obligations		2,735		112
Total debt securities		35,683		1,286
Common Stock		22,998		3,883
Total equity securities		22,998		3,883
Temporary investments		1,637		—
Total	$	60,318	$	5,169

The Company’s marketable securities include investments in municipal debt obligations and corporate debt obligations. The contractual year for maturity of these available-for-sale securities as of June 30, 2009 is as follows (in thousands):

	Total		2010		2011 through 2014		2015 through 2019		2020 and Beyond
Municipal Debt Obligations	$	30,955	$	3,800	$	11,233	$	9,635	$	6,287
Corporate Debt Obligations		4,340		529		1,718		1,739		354
U.S. Government Debt Securities and Federal Agency Mortgage Backed Securities		22,957		1,185		3,072		3,112		15,588

The Company has recognized impairment losses on certain of its securities deemed to be other than temporary and, in accordance with SFAS No. 115, these impairment losses have been recognized in net income and a lower cost basis has been established for these securities. For the three, six and twelve months ended June 30, 2009, $2.6 million, $5.2 million and $11.6 million of gross impairments deemed to be other than temporary were recognized in the consolidated statement of operations. For the three, six and twelve months ended June 30, 2008, $0.6 million, $1.3 million and $1.3 million of gross impairments were deemed to be other than temporary and recognized in the consolidated statement of operations.

29

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s marketable securities in its decommissioning trust funds are sold from time to time and the Company uses the specific identification basis to determine the amount of gain or loss. Gains or losses previously recognized in accumulated other comprehensive income are reclassified into net income. The proceeds from the sale of these securities during the three and six months ended June 30, 2009, and the related effects of realized and unrealized gains and losses on pre-tax income are as follows (in thousands):

	Three Months Ended			Six Months Ended
Proceeds from sales of available-for-sale securities	$	8,396		$	20,812
Gross realized gains included in pre-tax income	$	87		$	289
Gross realized losses included in pre-tax income		(503	)		(1,871	)
Net unrealized losses included in pre-tax income		(2,382	)		(3,689	)
Net losses in pre-tax income	$	(2,798	)	$	(5,271	)
Net unrealized holding gains included in accumulated other comprehensive income	$	7,749		$	2,358
Net losses reclassified out of accumulated other comprehensive income		2,798			5,271
Net gains in other comprehensive income	$	10,547		$	7,629

Fair Value Measurements. SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company’s decommissioning trust investments and investments in debt securities. The Company has no liabilities that are measured at fair value on a recurring basis. This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

• Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities and U.S. treasury securities that are in a highly liquid and transparent market.

• Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in other fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences.

• Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analyses. Financial assets utilizing Level 3 inputs include the Company’s investments in debt securities.

30

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of June 30, 2009, the Company had $4.0 million invested in debt securities which consisted of two $2.0 million investments in auction rate securities maturing in 2042 and 2044. The Company classifies these securities as trading securities. These auction rate securities are collateralized with student loans which are re-insured by the Department of Education as part of the Federal Family Education Loan Program (“FFELP”) and have credit ratings of “A” by Standard & Poors and “A2” by Moody’s. The principal on the securities can be realized at maturity, sold in a successful auction, or sold in the secondary market. Interest rates on the auction rate securities are reset every 28 days. At June 30, 2009 upon a failed auction, the maximum interest rates would be based upon the interest paid on the student loan portfolio, less service costs and one month LIBOR plus 2.5%. At June 30, 2009, the interest rates were 0.675% to 2.821%.

The auction process historically provided a liquid market to sell the securities to meet cash requirements. These auction rate securities had successful auctions through January 2008. However, since February 2008, auctions for these securities have not been successful, resulting in the inability to liquidate these investments. The Company’s valuation as of June 30, 2009 is based upon the average of a discounted cash flow model valuation and a market comparables method.

The discounted cash flow model valuation is based on expected cash flows using the maximum expected interest rates discounted by an expected yield reflecting illiquidity and credit risk. In order to more accurately forecast cash flows, treasury and LIBOR yields curves were created using swap rates, data provided on the U.S. Department of the Treasury website and the British Banker’s Association website. After thorough analysis, future cash flows were projected based on interest rate models over a term, which was based on an estimate of the weighted average life of the student loan portfolio within the issuing trusts. The applied discount yield was based on the applicable forward LIBOR rate and a yield spread of 600 basis points based on the securities’ (i) credit risk, (ii) illiquidity, (iii) subordinated status, (iv) interest rate limitations, and (v) FFELP guarantees.

The market comparables method is based upon sales and purchases of auction rate securities in secondary market transactions. The secondary market discounts of 39% to 41% are based on discounts indicated in secondary market transactions involving comparable Student Loan Auction Rate Securities. The average of the values provided by the discounted cash flow calculation and the market comparables method are used to arrive at the concluded value of the securities.

The securities in the Company’s decommissioning trust funds are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. SFAS No. 157 identifies this valuation technique as the “market approach” with observable inputs. The Company analyzes available for sale securities to determine if losses are other than temporary.

31

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of the Company’s decommissioning trust funds and investments in debt securities, at June 30, 2009, and the level within the three levels of the fair value hierarchy defined by SFAS No. 157 are presented in the table below (in thousands):

Description of Securities	Fair Value as of June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	2,425	$	—	$	—	$	2,425
Available for Sale Securities:
Decommissioning Trust Funds:
U.S. Government Debt Securities		10,147		10,147		—		—
Federal Agency Mortgage Backed Securities		12,811		—		12,811		—
Municipal Bonds		30,955		—		30,955		—
Corporate Asset Backed Obligations		4,340		—		4,340		—
Total Debt Securities		58,253		10,147		48,106		—
Common Stock		50,884		50,884		—		—
Mutual Fund		8,375		8,375		—		—
Total Equity Securities		59,259		59,259		—		—
Cash and Cash Equivalents		1,637		1,637		—		—
Total Decommissioning Trust Funds	$	119,149	$	71,043	$	48,106	$	—

The change in the fair value of the investments in debt securities resulted in a credit to income of $0.2 million for the three and six months ended June 30, 2009 and a charge to income of $0.6 million for the twelve months ended June 30, 2009. For the three, six and twelve months ended June 30, 2008, the decline in the fair value of the investments in debt securities resulted in a charge to income of $0.4 million, $1.0 million and $1.0 million, respectively. These amounts are reflected in the Company’s consolidated statement of operations as an adjustment to investment and interest income. Below is a reconciliation of the beginning and ending balances of the investments in debt securities (in thousands):

	2009			2008
Balance at January 1	$	2,264		$	—
Transfers into Level 3 (1)		—			4,000
Unrealized gain (loss) in fair value recognized in income		(52	)		(529	)
Balance at March 31		2,212			3,471
Transfers into Level 3 (1)		—			—
Unrealized gain (loss) in fair value recognized in income		213			(442	)
Balance at June 30	$	2,425		$	3,029
(1)    Amounts presented as being transferred in are based on the fair value at the beginning of the period.

32

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

El Paso Electric Company:

We have reviewed the consolidated balance sheet of El Paso Electric Company and subsidiary as of June 30, 2009, the related consolidated statements of operations and comprehensive operations for the three-month, six-month and twelve-month periods ended June 30, 2009 and 2008, and the related consolidated statements of cash flows for the six-month periods ended June 30, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of E1 Paso Electric Company and subsidiary as of December 31, 2008, and the related consolidated statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Houston, Texas

August 5, 2009

33

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

FORWARD-LOOKING STATEMENTS

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,

34

• economic and capital market conditions,

• 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.

Summary of Critical Accounting Policies and Estimates

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.

35

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 June 30,				Six Months Ended June 30,				Twelve Months Ended 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 Ended			Six Months Ended			Twelve Months 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.

36

(e) Revenues from retail sales of deregulated Palo Verde Unit 3 power decreased for the three and six month periods ended June 30, 2009 compared to the same periods last year as the unit did not operate for most of April and May 2009 due to a refueling outage and a lower proxy market price in June 2009. Increased revenues from sales of deregulated Palo Verde Unit 3 power for the twelve months ended June 30, 2009 reflects increased Unit 3 power sold to retail customers.

(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.

Historical Results of Operations

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 June 30,				Six Months Ended June 30,				Twelve Months Ended 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.

37

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 June 30,		10-Year	Six Months Ended June 30,		10-Year	Twelve Months Ended 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.

38

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.

39

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 June 30,				Six Months Ended June 30,				Twelve Months Ended 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.

40

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.

41

						Increase (Decrease)
Six Months Ended June 30:	2009			2008		Amount			Percent
kWh sales:
Retail:
Residential		1,058,633			1,050,390		8,243		0.8	%
Commercial and industrial, small		1,058,965			1,075,574		(16,609	)	(1.5	)
Commercial and industrial, large		478,175			579,094		(100,919	)	(17.4	)
Sales to public authorities		707,377			703,687		3,690		0.5
Total retail sales		3,303,150			3,408,745		(105,595	)	(3.1	)
Wholesale:
Sales for resale		28,958			25,753		3,205		12.4	%
Off-system sales		1,692,481			1,676,805		15,676		0.9
Total wholesale sales		1,721,439			1,702,558		18,881		1.1
Total kWh sales		5,024,589			5,111,303		(86,714	)	(1.7	)
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	88,264		$	86,972	$	1,292		1.5	%
Commercial and industrial, small		83,552			84,173		(621	)	(0.7	)
Commercial and industrial, large		16,568			18,347		(1,779	)	(9.7	)
Sales to public authorities		37,118			37,055		63		0.2
Total retail non-fuel base revenues		225,502			226,547		(1,045	)	(0.5	)
Wholesale:
Sales for resale		882			895		(13	)	(1.5	)
Total non-fuel base revenues		226,384			227,442		(1,058	)	(0.5	)
Fuel revenues:
Recovered from customers during the period		97,908			85,629		12,279		14.3	(1)
Under (over) collection of fuel		(36,641	)		42,772		(79,413	)	—
New Mexico fuel in base rates		31,804			32,725		(921	)	(2.8	)
Total fuel revenues		93,071			161,126		(68,055	)	(42.2	)
Off-system sales		61,081			123,599		(62,518	)	(50.6	)
Other		13,549			12,478		1,071		8.6	(2)
Total operating revenues	$	394,085		$	524,645	$	(130,560	)	(24.9	)
Average number of retail customers:
Residential		324,542			319,062		5,480		1.7	%
Commercial and industrial, small		35,839			35,616		223		0.6
Commercial and industrial, large		49			53		(4	)	(7.5	)
Sales to public authorities		4,934			4,864		70		1.4
Total		365,364			359,595		5,769		1.6

(1) Excludes $16.3 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.

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						Increase (Decrease)
Twelve Months Ended June 30:	2009			2008		Amount			Percent
kWh sales:
Retail:
Residential		2,236,081			2,274,320		(38,239	)	(1.7	)%
Commercial and industrial, small		2,238,976			2,270,646		(31,670	)	(1.4	)
Commercial and industrial, large		1,001,358			1,195,066		(193,708	)	(16.2	)
Sales to public authorities		1,452,344			1,440,982		11,362		0.8
Total retail sales		6,928,759			7,181,014		(252,255	)	(3.5	)
Wholesale:
Sales for resale		53,353			49,942		3,411		6.8
Off-system sales		3,522,446			2,704,093		818,353		30.3
Total wholesale sales		3,575,799			2,754,035		821,764		29.8
Total kWh sales		10,504,558			9,935,049		569,509		5.7
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	186,092		$	188,160	$	(2,068	)	(1.1	)%
Commercial and industrial, small		173,972			175,123		(1,151	)	(0.7	)
Commercial and industrial, large		34,539			38,077		(3,538	)	(9.3	)
Sales to public authorities		74,490			76,543		(2,053	)	(2.7	)
Total retail non-fuel base revenues		469,093			477,903		(8,810	)	(1.8	)
Wholesale:
Sales for resale		1,633			1,854		(221	)	(11.9	)
Total non-fuel base revenues		470,726			479,757		(9,031	)	(1.9	)
Fuel revenues:
Recovered from customers during the period		210,571			187,939		22,632		12.0	(1)
Under (over) collection of fuel		(36,661	)		50,218		(86,879	)	—
New Mexico fuel in base rates		67,710			69,837		(2,127	)	(3.0	)
Total fuel revenues		241,620			307,994		(66,374	)	(21.6	)
Off-system sales		169,982			183,252		(13,270	)	(7.2	)
Other		26,042			23,361		2,681		11.5	(2)
Total operating revenues	$	908,370		$	994,364	$	(85,994	)	(8.6	)
Average number of retail customers:
Residential		323,062			317,641		5,421		1.7	%
Commercial and industrial, small		35,878			35,270		608		1.7
Commercial and industrial, large		49			54		(5	)	(9.3	)
Sales to public authorities		4,927			4,853		74		1.5
Total		363,916			357,818		6,098		1.7

(1) Excludes $37.4 million and $12.8 million of deferred fuel revenues recovered through Texas fuel surcharges, respectively.

(2) Represents revenues with no related kWh sales.

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Energy expenses

Our sources of energy include electricity generated from our nuclear, natural gas and coal generating plants and purchased power. Palo Verde represents approximately 42% of our available net generating capacity and approximately 59%, 64% and 60% of our Company generated energy for the three, six and twelve months ended June 30, 2009, respectively. Recent decreases in the price of natural gas which also influences the price of purchased power have had a significant impact on our cost of energy in each of the three, six, and twelve month periods ended June 30, 2009.

Our energy expenses decreased $75.8 million or 51% for the three months ended June 30, 2009 when compared to 2008 primarily due to (i) decreased natural gas costs of $43.9 million due to a 46% decrease in the average price of natural gas and a 19% decrease in MWhs generated with natural gas, and (ii) decreased costs of purchased power of $32.9 million due to a 54% decrease in market prices for power. Increased MWhs generated from our less expensive coal and nuclear plants allowed us to reduce MWhs generated from our more expensive gas-fired plants. The table below details the sources and costs of energy for the three months ended June 30, 2009 and 2008.

	Three Months Ended June 30,
	2009					2008
Fuel Type	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	34,275	582,427	$	58.85	$	78,210	717,202	$	109.05
Coal		2,853	186,566		15.29		3,104	132,529		23.42
Nuclear		6,755	1,093,069		6.18		5,490	1,003,759		5.47
Total		43,883	1,862,062		23.57		86,804	1,853,490		46.83
Purchased power		28,295	729,839		38.77		61,218	722,243		84.76
Total energy	$	72,178	2,591,901		27.85	$	148,022	2,575,733		57.47

Our energy expenses decreased $120.4 million or 46% for the six months ended June 30, 2009 when compared to 2008 primarily due to (i) decreased natural gas costs of $64.3 million due to a 36% decrease in the average price of natural gas and a 21% decrease in MWhs generated with natural gas, and (ii) decreased costs of purchased power of $58.9 million due to a 46% decrease in market prices for power and an 8% decrease in the MWhs purchased. Increased MWhs generated from our less expensive coal and nuclear plants allowed us to reduce MWhs generated from our more expensive gas-fired plants. The table below details the sources and costs of energy for the six months ended June 30, 2009 and 2008.

	Six Months Ended June 30,
	2009					2008
Fuel Type	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	64,991	1,013,951	$	64.10	$	129,322	1,290,278	$	100.23
Coal		6,879	385,956		17.82		6,006	284,512		21.11
Nuclear		14,306	2,446,153		5.85		12,407	2,265,287		5.48
Total		86,176	3,846,060		22.41		147,735	3,840,077		38.47
Purchased power		57,693	1,442,013		40.01		116,576	1,570,626		74.22
Total energy	$	143,869	5,288,073		27.21	$	264,311	5,410,703		48.85

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Our energy expenses decreased $88.5 million or 19% for the twelve months ended June 30, 2009 when compared to 2008 primarily due to (i) decreased natural gas costs of $65.5 million due to an 11% decrease in the average price of natural gas and a 17% decrease in MWhs generated with natural gas, and (ii) decreased costs of purchased power of $29.8 million due to a 26% decrease in market prices for power partially offset by a 12% increase in the MWhs purchased. Increased MWhs generated from our less expensive coal and nuclear plants allowed us to reduce MWhs generated from our more expensive gas-fired plants. The table below details the sources and costs of energy for the twelve months ended June 30, 2009 and 2008.

	Twelve Months Ended June 30,
	2009					2008
Fuel Type	Cost		MWh	Cost per MWh		Cost			MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	186,036	2,403,357	$	77.41	$	251,503	(a)	2,897,933	$	86.79
Coal		14,393	822,395		17.50		11,912		697,835		17.07
Nuclear		27,828	4,803,706		5.79		23,574		4,245,132		5.55
Total		228,257	8,029,458		28.43		286,989		7,840,900		36.60
Purchased power		151,600	3,023,783		50.14		181,411		2,691,533		67.40
Total energy	$	379,857	11,053,241		34.37	$	468,400		10,532,433		44.47

(a) Excludes a refund of $2.7 million of gas transmission reservation costs recorded in the fourth quarter of 2007.

Other operations expense

Other operations expense increased $0.7 million, or 1.5%, for the three months ended June 30, 2009 compared to the same period last year primarily due to increased Palo Verde operations expense of $0.6 million.

Other operations expense increased $3.2 million, or 3.3%, for the six months ended June 30, 2009 compared to the same period last year primarily due to (i) increased Palo Verde operations expense of $1.9 million, (ii) increased operations expense at our fossil-fueled generating plants of $0.7 million and (iii) increased transmission operations expense of $0.7 million.

Other operations expense increased $4.1 million, or 2.1%, for the twelve months ended June 30, 2009 compared to the same period last year primarily due to (i) increased Palo Verde operations expense of $5.5 million, (ii) increased operations expense at our fossil-fueled generating plants of $1.4 million and (iii) increased distribution operations expense of $1.1 million. These increases were partially offset by (i) decreased administrative and general expenses of $3.0 million primarily due to lower pension and other post-retirement benefits expenses reflecting an increase in the discount rate for the associated liabilities in 2008 and executive severance costs; and (ii) decreased customer accounts operations expense of $0.8 million primarily due to decreased payroll costs.

Maintenance expense

Maintenance expense decreased $4.2 million, or 20.3%, for the three months ended June 30, 2009 compared to the same period last year primarily due to (i) decreased Palo Verde maintenance expense of $1.4 million due to decreased maintenance expenses associated with the Spring refueling

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outages in 2009 compared to the Spring refueling in 2008, (ii) decreased maintenance expense at our fossil-fueled generating plants of $1.3 million as a result of the timing of planned maintenance, and (iii) decreased distribution maintenance expense of $0.5 million.

Maintenance expense decreased $8.3 million, or 21.8%, for the six months ended June 30, 2009 compared to the same period last year primarily due to (i) decreased maintenance expense at our fossil-fueled generating plants of $3.2 million as a result of the timing of planned maintenance, (ii) decreased Palo Verde maintenance expense of $3.0 million due to decreased maintenance expenses associated with the Spring refueling outage in 2009 compared to the Spring refueling outage in 2008, (iii) decreased administrative and general maintenance expense of $1.0 million primarily due to the reversal of a reserve for environmental remediation costs and (iv) decreased distribution maintenance expense of $1.0 million.

Maintenance expense decreased $7.6 million, or 11.4%, for the twelve months ended June 30, 2009 compared to the same period last year primarily due to (i) decreased Palo Verde maintenance expense of $3.1 million due to decreased maintenance expenses associated with the Spring refueling outages in 2009 compared to 2008, (ii) decreased maintenance expense at our fossil-fueled generating plants of $2.9 million as a result of the timing of planned maintenance and (iii) decreased distribution maintenance expense of $1.7 million.

Depreciation and amortization expense

Depreciation and amortization expense remained relatively unchanged for the three months ended June 30, 2009 compared to the same period last year. Depreciation and amortization expense decreased $1.0 million, or 2.7%, for the six months ended June 30, 2009 compared to the same period last year primarily due to completing the amortization of certain fair value adjustments in December 2008. Depreciation and amortization expense increased $1.9 million, or 2.6%, for the twelve months ended June 30, 2009 compared to the same period last year due to increases in depreciable plant balances partially offset by the completion of the amortization of certain fair value adjustments in December 2008.

Taxes other than income taxes

Taxes other than income taxes remained relatively unchanged for the three months ended June 30, 2009 compared to the same period last year. Taxes other than income taxes increased $0.9 million, or 3.9%, for the six months ended June 30, 2009 compared to the same period last year primarily due to higher revenue-related taxes in Texas resulting from a higher fixed fuel factor and the collection of fuel surcharges. Taxes other than income taxes increased $1.5 million, or 3.1%, for the twelve months ended June 30, 2009 compared to the same period last year primarily due to higher revenue related taxes in Texas.

Other income (deductions)

Other income (deductions) decreased $1.9 million for the three months ended June 30, 2009 compared to the same period last year due to a $2.3 million decrease in income from our decommissioning trust funds as a result of losses and impairments in equity investments when compared to the same period last year. These decreases were partially offset by increased allowance for equity

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funds used during construction (“AEFUDC”) of $0.8 million due to higher balances of construction work in progress in 2009.

Other income (deductions) decreased $1.5 million for the six months ended June 30, 2009 compared to the same period last year due to a $4.6 million decrease in income from our decommissioning trust funds as a result of losses and impairments in equity investments when compared to the same period last year. These decreases were partially offset by (i) increased AEFUDC of $1.6 million due to higher balances of construction work in progress in 2009, and (ii) the decrease in fair value of our investments in auction rate securities of $1.0 million in 2008 with no comparable activity in 2009.

Other income (deductions) decreased $2.6 million for the twelve months ended June 30, 2009 compared to the same period last year due to an $8.2 million decrease in income from our decommissioning trust funds as a result of losses and impairments in equity investments when compared to the same period last year. These decreases were partially offset by (i) increased AEFUDC of $2.7 million due to higher balances of construction work in progress in 2009, (ii) a $2.1 million increase in interest income included in the surcharge recovery of under-collection of deferred fuel, and (iii) an increase in miscellaneous non-operating income of $1.5 million primarily related to an increase in the cash surrender value of key-man life insurance policies from a 10-year interest rate adjustment and the settlement of a death benefit in the last quarter of 2008.

Interest charges (credits)

Interest charges (credits) increased $1.1 million, or 12.4%, for the three months ended June 30, 2009 compared to the same period last year primarily due to (i) a $1.9 million increase in interest related to the issuance of our 7.5% Senior Notes in June 2008, (ii) a $0.3 million increase in interest on our auction rate pollution control bonds. The increase in interest charges (credits) was partially offset by a $0.8 million increase in allowance for funds used during construction (“AFUDC”) as a result of increased construction work in progress subject to AFUDC.

Interest charges (credits) increased $5.1 million, or 29.6%, for the six months ended June 30, 2009 compared to the same period last year primarily due to (i) a $4.8 million increase in interest related to the issuance of our 7.5% Senior Notes in June 2008 and (ii) a $2.0 million increase in interest on our auction rate pollution control bonds. The interest rates bid in the weekly auctions of our pollution control bonds increased substantially in 2008. These auction rate pollution control bonds were refunded and reissued at a fixed interest rate of 7.25% on March 26, 2009. The increase in interest charges (credits) was partially offset by a $1.6 million increase in AFUDC as a result of increased construction work in progress subject to AFUDC.

Interest charges (credits) for the twelve month period ended June 30, 2009 increased $13.5 million, or 40.9%, compared to the same period last year primarily due to (i) a $10.4 million increase in interest related to the issuance of our 7.5% Senior Notes in June 2008; and (ii) a $5.1 million increase in interest related to our auction rate pollution control bonds discussed above. The increase in interest charges (credits) was partially offset by a $2.0 million increase in AFUDC as a result of increased construction work in progress subject to AFUDC.

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Income tax expense

Income tax expense decreased by $0.8 million, or 8.3%, in the second quarter of 2009 compared to the second quarter of 2008 primarily as a result of decreased pre-tax income and a lower tax rate on decommissioning trust losses in 2009. Income tax expense decreased by $2.9 million, or 17.5%, in the six months ended June 30, 2009 compared to the six months ended June 30, 2008 due to decreased pre-tax income offset by a lower tax rate on decommissioning trust losses in 2009. Income tax expense decreased $1.5 million, or 4.0%, in the twelve months ended June 30, 2009 compared to the same period last year as a result of decreased pre-tax income and a lower tax rate on decommissioning trust losses in the 2009 period. In addition, income taxes for the twelve-months ended June 30, 2008 were reduced for adjustments to income tax accruals related to prior years including an adjustment to deferred income taxes associated with the accrual of other post-retirement benefits.

New Accounting Standards

Effective January 1, 2009, we adopted the FASB Staff Position EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”) which requires a public entity to include share-based compensation awards that qualify as participating securities in both basic and diluted earnings per share. A share-based compensation award is considered a participating security if it receives non-forfeitable dividends or may participate in undistributed earnings with common stock. We award unvested restricted stock which qualifies as participating securities, and have reflected the effects of FSP EITF 03-6-1 to our basic and diluted earnings per share for all periods presented. See Note E of Notes to Consolidated Financial Statements.

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. On April 9, 2009, the FASB issued FASB Staff Position 157-4 (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. FSP 157-4 did not have a significant impact on our consolidated financial statements. See Note K of Notes to Consolidated Financial Statements.

Effective April 1, 2009, we adopted the FASB Staff Position 107-1 and Accounting Principles Board Opinion 28-1 (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting.” FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 did not impact amounts reported in our consolidated financial statements but resulted in additional footnote disclosure. See Note K of Notes to Consolidated Financial Statements.

Effective April 1, 2009, we adopted the FASB Staff Position 115-2 and 124-2 (“FSP 115-2 and FSP 124-2”). FSP 115-2 and FSP 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and FSP 124-2 did not have a significant impact on amounts reported in our consolidated financial statements. See Note K of Notes to Consolidated Financial Statements.

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Effective April 1, 2009, we adopted the SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued. We have evaluated subsequent events for recording and disclosure through August 6, 2009.

In December 2008, the FASB issued FASB Staff Position 132(R)-1 (“FSP 132(R)-1”), which amends FASB No. 132(R), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement benefit plan. FSP 132(R)-1 requires additional disclosure on investment policies and strategies, categories and fair value measurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. FSP 132(R)-1 requires additional disclosure on pensions and other postretirement benefits but does not impact our consolidated financial results.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS No. 168 states that the FASB Accounting Standard Codification™ (the “Codification”) will become the source of authoritative U.S. Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”). SFAS No. 168 applies to financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. SFAS No. 168 should not have a significant impact on our consolidated financial statements although references to GAAP will change to Codification references.

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Liquidity and Capital Resources

We continue to maintain a strong capital structure which allows us the ability to access financing from the capital markets at a reasonable cost. At June 30, 2009, our capital structure, including common stock, long-term debt, the current portion of long-term debt and financing obligations, consisted of 46.3% common stock equity and 53.7% debt. In June 2008, we issued $150 million of 7.5% Senior Notes to meet current and future cash requirements. The net proceeds from the 7.5% Senior Notes were used to pay down working capital borrowings under our credit facility and the remaining proceeds are expected to fund our construction program through most of 2009. We believe that we will have adequate liquidity through our current cash balances, cash from operations, and our credit facility to meet all of our anticipated cash requirements through 2009. At June 30, 2009, we had a balance of $83.7 million in cash and cash equivalents. Substantially all of our cash and cash equivalents are currently held in federally insured accounts.

Our principal liquidity requirements in the near-term are expected to consist of capital expenditures to expand and support electric service obligations, expenditures for nuclear fuel inventory, interest payments on our indebtedness and operating expenses including fuel costs, non-fuel operation and maintenance costs and taxes. In addition, we may repurchase common stock in the future.

Capital requirements and resources have been impacted by the timing of the recovery of fuel costs through fuel recovery mechanisms in Texas and New Mexico and our sales for resale customer. We recover actual fuel costs from customers through fuel adjustment mechanisms in Texas, New Mexico, and from our sales for resale customer. We record deferred fuel revenues for the under-recovery or over-recovery of fuel costs until they can be recovered from or refunded to customers. In Texas, fuel costs are recovered through a fixed fuel factor which may be adjusted three times a year. In the six months ending June 30, 2009 we over recovered our current fuel costs by $36.6 million due to a decline in natural gas prices since the current Texas fixed fuel factor was implemented in October 2008. We also collected $16.3 million of deferred fuel revenues, including interest, in the first six months of 2009 through two fuel surcharges implemented in 2008. At June 30, 2009, we had a fuel over-recovery balance of $4.8 million including a $5.8 million over-recovery in Texas, $1.2 million under-recovery in New Mexico, and $0.2 million over-recovery from our FERC customer.

At current gas prices, we expect to continue to over-recover fuel costs in Texas until the fixed fuel factor is revised. Our first fuel surcharge was completed in April 2009, and the PUCT issued an order on April 23, 2009, terminating our second fuel surcharge effective in May 2009. Fuel over-recoveries have resulted in the recovery of the remaining balance of the second fuel surcharge. In addition, on July 30, 2009, we received approval from the PUCT to reduce our fixed fuel factor in August 2009. If fuel over-recoveries in Texas become material ($7.4 million) we will file to refund such over-recoveries.

Capital Requirements. During the six months ended June 30, 2009, our cash requirements primarily consisted of capital expenditures and operations and maintenance costs. Projected utility construction expenditures will consist primarily of expanding and updating our transmission and distribution systems, adding new generation, and making capital improvements and replacements at Palo Verde and other generating facilities. We are constructing Newman Unit 5, a 288 MW gas-fired combined cycle combustion turbine generating unit, which will be completed in two phases at an estimated cost of approximately $245 million. The first phase of Newman Unit 5 was completed in May 2009 and the second phase is currently expected to be completed before the summer of 2011. As of

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June 30, 2009, we had expended $118.6 million on Newman Unit 5. See Part I, Item 1, “Business –Construction Program” in our 2008 Form 10-K. Capital expenditures were $99.8 million in the six months ended June 30, 2009 compared to $94.7 million in the six months ended June 30, 2008.

Our capital requirements for nuclear fuel are financed through a trust that borrows under our $200 million credit facility to acquire and process the nuclear fuel. Borrowings under the credit facility for nuclear fuel were $103.5 million as of June 30, 2009 and $95.1 million as of June 30, 2008. Up to $120 million of the credit facility may be used to finance nuclear fuel. Amounts not drawn for nuclear fuel are available for general corporate purposes. No borrowings were outstanding at June 30, 2009 for general corporate purposes.

The Company does not pay dividends on common stock. Since 1999, we have repurchased approximately 19.8 million shares of common stock at an aggregate cost of $279.3 million, including commissions. No shares were repurchased during the first six months of 2009. As of June 30, 2009, 1,521,366 shares remain available for repurchase under the currently authorized program. We may make purchases of our stock in the future pursuant to our stock repurchase plan at open market prices and may engage in private transactions, where appropriate. The repurchased shares will be available for issuance under employee benefit and stock incentive plans, or may be retired.

Our cash requirements for federal and state income taxes are impacted by changes in net income as well as when revenues are reflected in taxable income and expenses are deducted from taxable income. Since deferred fuel revenues are not taxable until collected from customers, the collection of fuel under-recoveries have increased income taxes payable in 2009.

We continually evaluate our funding requirements related to our retirement plans, other postretirement benefit plans, and decommissioning trust funds. We contributed $3.9 million of the projected $6.3 million 2009 annual contribution to our retirement plans during the six months ended June 30, 2009. In the six months ended June 30, 2009, we contributed $2.0 million of the projected $3.4 million 2009 annual contribution to our other postretirement benefit plan, and $3.9 million of the projected $7.9 million 2009 annual contribution to our decommissioning trust funds. We are in compliance with the funding requirements of the federal government for our benefit plans and decommissioning trust. We will continue to review our funding for these plans in order to meet our future obligations.

Capital Resources. Cash flow from operations funded our capital requirements during the first six months of 2009. Cash generated from operations increased $62.5 million in the six months ended June 30, 2009 compared to the same period in 2008 primarily due to the collection of deferred fuel revenues in 2009 net of related tax impacts. We expect that a significant portion of our construction expenditures will continue to be financed with internal sources of funds.

We issued $150 million of 7.5% Senior Notes in June 2008 to meet our current and future cash requirements. The net proceeds of $148.7 million from the 7.5% Senior Notes were used to repay $44.0 million of working capital borrowings under our credit facility. The remaining proceeds are expected to help fund our construction program through most of 2009. Our Senior Notes are rated “Baa2” by Moody’s and “BBB” by Standard & Poors. We continue to maintain a $200 million credit facility to provide funds for the purchase of nuclear fuel and to provide liquidity to meet our capital requirements before they can be financed with long-term capital sources. At June 30, 2009, we had an outstanding balance of $103.5 million on our credit facility, all of which pertained to our purchases of

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nuclear fuel. We anticipate the need for additional external funds to finance capital requirements in 2010. We could seek to issue additional long-term debt or obtain funds through an additional credit facility to finance capital requirements in addition to funds from operations and our existing credit facility.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk due to changes in interest rates, equity prices and commodity prices. See our 2008 Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” for a complete discussion of the market risks we face and our market risk sensitive assets and liabilities. As of June 30, 2009, there have been no material changes in the market risks we faced or the fair values of assets and liabilities disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2008 Form 10-K.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our chief executive officer and our principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934. These controls and procedures are designed to ensure that material information relating to the company and its subsidiaries is communicated to the chief executive officer and the principal financial officer by others within those entities. Based on that evaluation, our chief executive officer and our principal financial officer concluded that, as of June 30, 2009, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to the chief executive officer and the principal financial officer, and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15, that occurred during the quarter ended June 30, 2009, that materially affected, or that were reasonably likely to materially affect, our internal control over financial reporting.

53

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We hereby incorporate by reference the information set forth in Part I of this report under Notes B and I of Notes to Consolidated Financial Statements.

Item 1A. Risk Factors

Our 2008 Form 10-K includes a detailed discussion of our risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities.

In November 2007, our Board of Directors authorized a stock repurchase program permitting the repurchase of up to 2.0 million additional shares of its outstanding common stock. Approximately 1.5 million shares remain authorized to be repurchased under the program. No shares were repurchased during the second quarter of 2009.

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of shareholders was held on May 7, 2009. As of the record date on March 10, 2009, the total number of common shares outstanding and entitled to vote at this annual meeting was 44,923,710, of which 42,490,104 shares were represented in person or by proxy. The purpose of the annual meeting was to give shareholders the opportunity to vote on two matters: (i) the election of Class III directors; and (ii) the ratification of the selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2009. The shareholders approved the Class III directors and ratified KPMG LLP as our independent registered public accounting firm.

54

Election of Class III Directors

The following Class III directors were elected to hold office for a three-year term expiring at our annual meeting of shareholders to be held in 2012:

Director	Votes For	Votes Withheld
James W. Harris	41,544,429	945,675
David W. Stevens	41,745,468	744,636
Stephen N. Wertheimer	41,545,435	944,669
Charles A. Yamarone	41,538,382	951,722

In addition to the individuals set forth above, the following individuals continued as directors following the meeting: George W. Edwards, Jr., James W. Cicconi, Patricia Z. Holland-Branch, Kenneth R. Heitz, Michael K. Parks and Eric B. Siegel.

Appointment of Independent Registered Public Accounting Firm

At the annual meeting, our shareholders ratified the selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2009 by the following vote:

Description	Number of Votes
FOR	41,763,513
AGAINST	715,101
ABSTAIN	11,490

Item 6. Exhibits

See Index to Exhibits incorporated herein by reference.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EL PASO ELECTRIC COMPANY
By:	/s/ DAVID G. CARPENTER
	David G. Carpenter
	Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Dated: August 6, 2009

56

EL PASO ELECTRIC COMPANY

INDEX TO EXHIBITS

Exhibit Number	Exhibit
†10.05	Form of Directors’ Restricted Stock Award Agreement between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.06	Amended Confirmation of Power Sales Transaction, dated May 8, 2009, between the Company and Imperial Irrigation District. Amendment to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
††10.07	Solar Energy Purchase Power Agreement, dated October 17, 2008, between the Company and New Mexico SunTower, LLC.
15	Letter re Unaudited Interim Financial Information
31.01	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

† In lieu of non-employee director cash compensation, three agreements, dated as of July 1, 2009, substantially identical in all material respects to this Exhibit, have been entered into with Catherine A. Allen; Kenneth R. Heitz; and Patricia Z. Holland-Branch; directors of the Company.

In lieu of non-employee director cash compensation, twelve agreements, dated as of May 7, 2009, substantially identical in all material respects to this Exhibit, were entered into with Catherine A. Allen; J. Robert Brown; James W. Cicconi; George W. Edwards, Jr.; James W. Harris; Kenneth R. Heitz; Patricia Z. Holland-Branch; Michael K. Parks; Eric B. Siegel; Stephen N. Wertheimer; and Charles A. Yamarone; directors of the Company.

†† Confidential treatment has been requested for the redacted portions of this Exhibit. The copy filed omits the information subject to the confidentiality request. Omissions are designated as “****”. A complete version of this Exhibit has been filed separately with the Securities and Exchange Commission.

57

EX-10.06

EXHIBIT 10.06

P.O. Box 982 El Paso, Texas 79960-0982 (915) 543-5711

Imperial Irrigation District	May 8, 2009
Supply & Trading Section
1561 W. Main St., Suite 11A
El Centro, CA 92243

Amendment No. 3 to the April 18, 2007 Confirmation between El Paso Electric Company and Imperial Irrigation District

This third amended confirmation shall replace and supersede the sections of the April 18, 2007 Confirmation (“Original Confirmation) titled “Contract Quantity” and “Total Quantity” in their entirety to read as shown below. All other terms and conditions remain as set forth in the Original Confirmation as amended by (i) Amendment Number 1 dated August 29, 2008 and (ii) Amendment Number 2 dated March 31, 2009, thereto.

Contract Quantity:	Up to 100 MW of firm capacity (and associated energy) and up to 50 MW of system contingent capacity (and associated energy) In Year 1, Year 2 and through October 31st of Year 3.
	For the remaining Year 3 period (beginning November 1st, 2009) through April 30th, 2010, up to 100 MW of firm capacity (and associated energy) and up to 40 MW of system contingent capacity (and associated energy).
Contract Quantity:	Up to 3,902,160 MWh

The signatories below hereto represent that they have been appropriately authorized to enter into this amendment on behalf of the Party for whom they sign. This Amendment is executed as of the date first written above.

Imperial Irrigation District
By:	/s/ Brian J. Brady
Name: Brian J. Brady
Title: General Manager
El Paso Electric Company
By:	/s/ Steven Buraczyk
Name: Steven Buraczyk
Title: Vice President

EX-10.07

EXHIBIT 10.07

SOLAR ENERGY PURCHASE POWER AGREEMENT

BETWEEN

NEW MEXICO SUNTOWER, LLC AND

EL PASO ELECTRIC COMPANY

OCTOBER 17, 2008

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

SOLAR ENERGY PURCHASE POWER AGREEMENT

BETWEEN

NEW MEXICO SUNTOWER, LLC AND

EL PASO ELECTRIC COMPANY

OCTOBER 17, 2008

TABLE OF CONTENTS

ARTICLE 1 -	RULES OF CONSTRUCTION, INTERPRETATION, AND DEFINITIONS	1
1.1	Rules of Construction	1
1.2	Interpretation with Interconnection Agreement	2
1.3	Interpretation of Arrangements for Electric Supply to the Facility	2
1.4	Definitions	3
ARTICLE 2 -	TERM	14
2.1	Term	14
ARTICLE 3 -	FACILITY DESCRIPTION	14
3.1	Summary Description	14
3.2	General Design and Operation of the Facility	14
3.3	Environmental Compliance	15
ARTICLE 4 -	PRE-COMMERCIAL OPERATION	15
4.1	Construction of the Facility	15
4.2	Monitoring and Inspection	15
4.3	Construction Milestones	16
4.4	Extension of Construction Milestones	16
4.5	Progress Reports	16
4.6	Commissioning Tests	16
4.7	Site Report	17
4.8	Facility Contracts	17
4.9	Conditions to Commercial Operation	17
4.10	Test Energy	18
ARTICLE 5 -	DELIVERY AND METERING	19
5.1	Delivery Arrangements	19
5.2	Metering	19
5.3	Adjustment for Inaccurate Meters	20
ARTICLE 6 -	EPE CONDITIONS PRECEDENT	21
6.1	EPE Conditions Precedent	21

ii

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

ARTICLE 7 -	SALE AND PURCHASE OF SOLAR ENERGY	21
7.1	Sale and Purchase	21
7.2	Committed Solar Energy	22
7.3	Title and Risk of Loss	22
7.4	Temporary Disconnection of the Facility	22
ARTICLE 8 -	ENERGY PAYMENT CALCULATIONS	22
8.1	Energy Payments	22
8.2	Non-Solar Energy	22
8.3	Curtailed Energy Payment Rate	23
8.4	Payment Support Requirement	23
8.5	Survival on Termination	23
ARTICLE 9 -	BILLING AND PAYMENT	24
9.1	Seller’s Invoices	24
9.2	EPE’s Invoices	24
9.3	Payments	24
9.4	Billing Disputes	24
9.5	Statement Errors	25
9.6	Set-Off and Payment Adjustments	25
9.7	Survival on Termination	25
ARTICLE 10 -	RENEWABLE ENERGY CERTIFICATES AND LIMITED SALE OF ENVIRONMENTAL ATTRIBUTES	25
10.1	Compliance with New Mexico Renewable Energy Act	25
10.2	Monthly RECs	25
10.3	Seller’s Failure to Provide Solar RECs	25
10.4	Limited Sale of Environmental Attributes	27
10.5	Administrative Compliance Cost Obligations	28
ARTICLE 11 -	SECURITY FOR PERFORMANCE	28
11.1	Security Fund	28
ARTICLE 12 -	DEFAULT AND REMEDIES	31
12.1	Construction Events of Default	31
12.2	Operational Events of Default	32
12.3	Seller’s Abandonment of Construction or Operation of the Facility	32
12.4	EPE Events of Default	33
12.5	Actual Damages	33
12.6	No Incidental, Consequential, or Indirect Damages	33
12.7	Duty to Mitigate	34
12.8	Dispute Resolution	34
12.9	Mediation	34
12.10	Other Dispute Processes	34
12.11	Cost of Dispute Resolution	35
12.12	Operation by EPE Following a Construction Event of Default, an Operational Event of Default, or Seller’s Abandonment of Construction or Operation of the Facility	35

iii

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

12.13	Specific Performance	36
12.14	Remedies Cumulative	37
12.15	Payment of Amounts Due to EPE	37
ARTICLE 13 -	FACILITY OPERATION AND CONTRACT ADMINISTRATION	37
13.1	Facility Operation	37
13.2	Operating Committee and Operating Procedures	37
13.3	Scheduling	38
13.4	Forced Outages	38
13.5	Scheduled Maintenance	38
13.6	Additional Maintenance Outages	39
13.7	Access to and Inspection of Facility	40
13.8	Operating Parameters	40
13.9	Operating Records	40
13.10	Operating Log	40
13.11	Availability Reporting	41
13.12	Examination and Retention of Records	41
13.13	Facility Development Records and Data Submissions	41
ARTICLE 14 -	FORCE MAJEURE	42
14.1	Definition of a Force Majeure Event	42
14.2	Applicability of Force Majeure	43
14.3	Effect of Seller’s Force Majeure	43
14.4	Effect of EPE’s Force Majeure	46
14.5	Limitations on Effect of Force Majeure	47
ARTICLE 15 -	REPRESENTATIONS, WARRANTIES AND COVENANTS	48
15.1	Seller’s Representations, Warranties and Covenants	48
15.2	EPE’s Representations, Warranties and Covenants	49
ARTICLE 16 -	INSURANCE	50
16.1	Evidence of Insurance	50
16.2	Term and Modification of Insurance	51
16.3	Endorsements to Fire and All-Perils and Machinery Breakdown Policies	51
16.4	Insurance Reports	51
ARTICLE 17 -	INDEMNITY	51
17.1	Indemnification	51
17.2	Indemnification for Fines and Penalties	52
17.3	Notice of Claim, Loss or Proceeding	52
17.4	Defense of Claims	52
17.5	Subrogation	53
ARTICLE 18 -	ASSIGNMENT AND OTHER TRANSFER RESTRICTIONS	53
18.1	No Assignment Without Consent	53
18.2	Restriction on Transfers	54
18.3	Permitted Transfers	54
18.4	Collateral Assignment	54
18.5	Change of Control	54

iv

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

18.6	Transfer without Consent is Null and Void	54
18.7	Prohibited Transfers	54
18.8	Reimbursement for EPE’s Costs from Transfers or Assignments	54
ARTICLE 19 -	MISCELLANEOUS	55
19.1	Waiver	55
19.2	Taxes	55
19.3	Monetary Penalties	56
19.4	Notices in Writing	56
19.5	Exhibit Changes	56
19.6	Other Changes	56
19.7	Disclaimer of Third Party Beneficiary Rights	56
19.8	Relationship of the Parties	57
19.9	Equal Employment Opportunity Compliance Certification	57
19.10	Survival of Obligations	57
19.11	Severability	57
19.12	Complete Agreement; Amendments	57
19.13	Binding Effect	58
19.14	Headings	58
19.15	Counterparts	58
19.16	Governing Law	58
19.17	Confidentiality	58
19.18	Compliance with Applicable Law	60
19.19	Press Releases and Media Contact	60
19.20	Due Authority	60

v

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

EXHIBIT A	CONSTRUCTION MILESTONES
EXHIBIT B	FACILITY DESCRIPTION AND SITE MAPS
EXHIBIT C	NOTICE ADDRESSES
EXHIBIT D	INSURANCE COVERAGE
EXHIBIT E	SELLER’S REQUIRED GOVERNMENTAL AUTHORITY PERMITS, CONSENTS, APPROVALS, LICENSES AND AUTHORIZATIONS TO BE OBTAINED
EXHIBIT F	COMMITTED SOLAR ENERGY AND SOLAR ENERGY PAYMENT RATES
EXHIBIT G	SELLER’S FORMAT FOR RENEWABLE ENERGY CERTIFICATES

vi

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

SOLAR ENERGY PURCHASE POWER AGREEMENT

BETWEEN

NEW MEXICO SUNTOWER, LLC

AND

EL PASO ELECTRIC COMPANY

This Solar Energy Purchase Power Agreement (including all exhibits attached hereto, this “Agreement”) is made this 17th day of October, 2008, (the “Execution Date”) by and between New Mexico SunTower, LLC (“Seller”), a Delaware corporation with a principal place of business at 130 W. Union Street, Pasadena, CA 91103, and El Paso Electric Company (“EPE”), a Texas corporation with headquarters in El Paso, Texas (EPE and Seller each being sometimes referred to in this Agreement as a “Party” or, collectively, as the “Parties”).

WHEREAS, Seller desires to develop, design, construct, own or lease and operate a solar electric generating facility with a Designed Maximum Output of approximately 92 MW (the “Facility,” as more fully described and defined below); and

WHEREAS, Seller intends to locate the Facility at the Site (as defined below) and to interconnect the Facility with the Transmission Provider (as defined below) as provided for in a separate Interconnection Agreement; and

WHEREAS, Seller desires to sell and deliver to EPE at the Point of Delivery (as defined below) the Solar Energy (as defined below) produced by the Facility, and EPE desires to buy the same from Seller; and

WHEREAS, Seller desires to provide EPE with the Solar Energy, which will be documented by solar Renewable Energy Certificates, and it is the intention of the Parties that all solar Renewable Energy Certificates documenting and associated with the Solar Energy provided shall be transferred to and owned by EPE at no additional cost; and

NOW THEREFORE, in consideration of the mutual covenants herein contained, the sufficiency and adequacy of which are hereby acknowledged, the Parties agree to the following:

ARTICLE 1 - RULES OF CONSTRUCTION, INTERPRETATION, AND

DEFINITIONS

1.1 Rules of Construction. Capitalized terms defined in this Article 1 shall have the meanings set forth herein whenever the terms appear in this Agreement, whether in the singular or the plural or in the present or past tense. Words not otherwise defined herein that have well known and generally accepted technical or trade meanings are used herein in accordance with such recognized meanings. In addition, the following rules of construction shall apply:

(A) References to “Articles,” “Sections,” or “Exhibits” shall be to articles, sections, or exhibits of this Agreement.

(B) The Exhibits attached hereto are incorporated in and are intended to be a part of this Agreement; provided, that, in the event of a conflict between the terms of any Exhibit and the terms of this Agreement, the terms of this Agreement shall control.

1

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

(C) This Agreement was negotiated and prepared by both Parties with the advice and participation of counsel. The Parties have agreed to the wording of this Agreement, and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author of this Agreement or any part hereof.

(D) The Parties shall act in a commercially reasonable manner and in accordance with the principles of good faith and fair dealing in the performance of this Agreement. Unless expressly provided otherwise in this Agreement, where this Agreement requires the consent, approval, or similar action by a Party, such consent or approval shall not be unreasonably withheld, conditioned or delayed. Wherever this Agreement gives a Party a right to determine, require, specify or take similar action with respect to a matter, such determination, requirement, specification or similar action shall be commercially reasonable.

(E) Use of the words “include” or “including” or similar words shall be interpreted as “include without limitation” or “including, without limitation.”

(F) Use of the words “tax” or “taxes” shall be interpreted to include taxes, fees, surcharges, and the like.

1.2 Interpretation with Interconnection Agreement. Each Party represents that it conducts its operations in a manner intended to comply with FERC Order No. 2004, “Standards of Conduct for Transmission Providers,” requiring the separation of its transmission and merchant functions. Moreover, the Parties acknowledge that EPE’s transmission function offers transmission service on its system in a manner intended to comply with FERC policies and requirements relating to the provision of open-access transmission service. The Parties recognize that Seller will enter into a separate Interconnection Agreement with the Transmission Provider.

(A) The Parties acknowledge and agree that the Interconnection Agreement shall be a separate and free-standing contract and that the terms of this Agreement are not binding upon the Transmission Provider. However, to avoid confusion between the two agreements, this Agreement may define certain terms by referencing their definition in the Interconnection Agreement.

(B) Notwithstanding any other provision in this Agreement, nothing in the Interconnection Agreement shall alter or modify Seller’s or EPE’s rights, duties and obligations under this Agreement. This Agreement shall not be construed to create any rights between Seller and the Transmission Provider.

(C) Seller expressly recognizes that, for purposes of this Agreement, the Transmission Provider shall be deemed to be a separate entity and separate contracting party whether or not the Interconnection Agreement is entered into with EPE or an Affiliate of EPE, if any.

1.3 Interpretation of Arrangements for Electric Supply to the Facility. The Parties recognize that this Agreement does not provide for the supply of any retail electric service by EPE to Seller or to the Facility, and Seller must enter into separate arrangements for the supply of retail electric services to the Facility.

2

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

(A) The Parties acknowledge and agree that the arrangements for the supply of electric services to the Facility shall be separate and free-standing arrangements and that the terms of this Agreement are not binding upon the supplier of such electric services.

(B) Notwithstanding any other provision in this Agreement, nothing in the arrangements for the supply of retail electric services to the Facility shall alter or modify Seller’s or EPE’s rights, duties and obligations under this Agreement. This Agreement shall not be construed to create any rights between Seller and the supplier of such retail electric services.

(C) Seller expressly recognizes that, for purposes of this Agreement, the supplier of retail electric services to the Facility shall be deemed to be a separate entity and a separate contracting party whether or not the arrangement for the supply of retail electric services to the Facility is entered into with EPE or an Affiliate of EPE, if any.

1.4 Definitions. Unless defined elsewhere herein, capitalized terms used in this Agreement will have the following scope and meaning:

1.4.1 “Abandonment” means (i) the relinquishment of all possession and control of the Facility by Seller, other than a transfer or sale permitted under this Agreement, or (ii) if prior to the Commercial Operation Date, the cessation of the design, construction, testing and inspection of the Facility for ninety (90) consecutive Days by Seller, or Seller’s contractors, unless such relinquishment or cessation is (x) pursuant to Section 4.4(i) or 4.4(ii), (y) at EPE’s express request, or (z) caused by or attributable to a Force Majeure Event.

1.4.2 “Account” has the meaning set forth in Section 11.1(C)(2) of this Agreement.

1.4.3 “Additional Consents” means the approvals, consents, authorizations or other requirements not listed in the definition of Governmental Approvals in this Agreement that are required from any Government Authority with respect to the Facility.

1.4.4 “Additional Maintenance Outages” has the meaning assigned to it in Section 13.6 hereof.

1.4.5 “Affiliate” of any named person or entity means any other person or entity that controls, is under the control of, or is under common control with, the named entity. The term “control” (including the terms “controls,” “under the control of” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management of the policies of a person or entity, whether through ownership interest, by contract or otherwise.

1.4.6 “Agreement Approval” has the meaning set forth in Section 6.1 of this Agreement.

1.4.7 “Agreement Approval Date” means the date that, following full execution of this Agreement, the NMPRC issues a final order approving EPE’s 2008

3

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Procurement Plan and all periods for appeal of a final NMPRC order as described in Section 6.1 of this Agreement have expired under NMPRC requirements.

1.4.8 “Applicable Law” means all applicable laws, statutes, treaties, codes, ordinances, regulations, certificates, orders, licenses and permits of any Governmental Authority, now in effect or hereafter enacted, amendments to any of the foregoing, interpretations of any of the foregoing by a Governmental Authority having jurisdiction, and all applicable judicial, administrative, arbitration and regulatory decrees, judgments, injunctions, writs, orders, awards or like actions (including those relating to human health, safety, the natural environment, or otherwise).

1.4.9 “As-Available Solar Energy” means Solar Energy that Seller is obligated to deliver and sell and that EPE is obligated to purchase and receive whenever such energy is capable of being generated by the Facility.

1.4.10 “Back-Up Metering” means redundant Electric Metering Devices installed by either Party pursuant to Section 5.2(B) of this Agreement.

1.4.11 “Business Day” means any calendar day that is not a Saturday, a Sunday, or a NERC recognized holiday.

1.4.12 “CAMD” has the meaning set forth in Section 10.4(B) of this Agreement.

1.4.13 “Close of the Business Day” means 5:00 PM prevailing time in El Paso, Texas, on a Business Day.

1.4.14 “Commercial Operation” means the period beginning on the Commercial Operation Date and continuing through the Term of this Agreement.

1.4.15 “Commercial Operation Date” means the date designated by Seller to begin delivering Solar Energy to EPE pursuant to the terms of this Agreement, which shall take effect no sooner than thirty (30) Days after Seller provides notification to EPE, pursuant to Section 4.9 of this Agreement, that all of the Conditions specified in Section 4.9 have occurred or otherwise been satisfied.

1.4.16 “Commercial Operation Milestone” means the Construction Milestone for the Commercial Operation Date as specified in Exhibit A to this Agreement.

1.4.17 “Commercial Operation Year” means any twelve (12) consecutive month period during the Term of this Agreement, commencing with the first day of the Month following the Commercial Operation Date or any of its anniversaries.

1.4.18 “Commissioning” means, with respect to the Facility, the commencement of the period during which the Facility has begun Commissioning Testing and ending when the Facility has been approved for the production of Solar Energy and authorized to commence delivery of Solar Energy.

4

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.19 “Commissioning Tests” or “Commissioning Testing” has the meaning assigned to it in Section 4.6 of this Agreement.

1.4.20 “Committed Solar Energy” has the meaning set forth in Section 7.2 of this Agreement.

1.4.21 “Compliance Obligations” has the meaning ascribed to it in Section 4.9(E) of this Agreement.

1.4.22 “Conditions” has the meaning set forth in Section 4.9 of this Agreement.

1.4.23 “Confidential Information” has the meaning set forth in Section 19.17(D) of this Agreement.

1.4.24 “Construction Event(s) of Default” has the meaning set forth in Section 12.1 of this Agreement.

1.4.25 “Construction Milestone(s)” means the date(s) set forth in Exhibit A to this Agreement by which Seller agrees to achieve the corresponding result(s) specified for such date(s), including, but not limited to, the Commercial Operation Milestone.

1.4.26 “Curtailed Energy” has the meaning set forth in Section 8.3(A)(2) of this Agreement.

1.4.27 “Day” means a calendar day.

1.4.28 “Delivery Excuse” means an event solely due to actions or omissions by EPE that prevents or delays delivery of Solar Energy hereunder.

1.4.29 “Designed Maximum Output” means the maximum output of the Facility in kW as designated by Seller.

1.4.30 “Disclosing Party” has the meaning set forth in Section 19.17(A) of this Agreement.

1.4.31 “Dispute” has the meaning assigned to it in Section 12.8 of this Agreement.

1.4.32 “Dispute Notice” has the meaning assigned to it in Section 12.8 of this Agreement.

1.4.33 “Electric Metering Device(s)” means metering equipment, and data processing equipment used to measure, record, or transmit data relating to the Solar Energy output from the Facility and that are specified in the Interconnection Agreement. Electric Metering Devices include the metering current transformers (“CTs”) and the metering voltage transformers (“VTs”).

5

****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.34 “Emergency Condition” means a condition or situation that presents an imminent physical threat of danger to life, health or property, or could reasonably be expected, in the opinion of the Interconnection Provider, to cause a significant disruption to the Interconnection Provider’s system or otherwise be required in accordance with the requirements of the NMPRC or any system condition not consistent with Good Utility Practices.

1.4.35 “Environmental Attributes” has the meaning assigned to it in Section 10.4(B) of this Agreement.

1.4.36 “Environmental Contamination” means the introduction or presence of Hazardous Materials at such levels, quantities or location, or of such form or character, as to constitute a violation of federal, state or local laws or regulations, and present a material risk under federal, state or local laws and regulations that the Site will not be available or usable for the purposes contemplated by this Agreement.

1.4.37 “EPC Contract” means the Construction Contract entered into between Seller and the Contractor in relation to construction of the Facility.

1.4.38 “EPC Contractor” means the Contractor as identified to EPE once selected by Seller.

1.4.39 “EPE Event(s) of Default” has the meaning set forth in Section 12.4 of this Agreement.

1.4.40 “EPE Procurement Plan” has the meaning set forth in Section 6.1 of this Agreement.

1.4.41 “EPE System Operations Center” or “EPE SOC” means EPE’s organization responsible for dispatch of generating units, including the Facility.

1.4.42 “Event of Default” has the meaning set forth in Section 12.5 of this Agreement.

1.4.43 “Execution Date” has the meaning set forth in the first paragraph of this Agreement.

1.4.44 “Expected Solar Energy” means the number of kilowatt hours (kWh) of Solar Energy that Seller expects the Facility to generate for delivery to the Point of Delivery and sale to EPE during each Commercial Operation Year. The Expected Solar Energy level shall be the value calculated in accordance with the following formula:

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Expected Solar Energy level, in kWh = ****

Where:

****

****

****

1.4.45 “Facility” means Seller’s electric generating facility and Seller’s Interconnection Facilities, as identified and described in Article 3 and Exhibit B to this Agreement, including, but not limited to, all of the following, the purpose of which is to produce electricity from Solar Energy and deliver such electricity to the Point of Delivery: the Site, Seller’s equipment, buildings, all of Seller’s generation facilities, including generators, step up transformers, output breakers, Seller’s facilities necessary to connect to the Point of Interconnection, protective and associated equipment, improvements, and other tangible assets or contract rights reasonably necessary for the construction, operation, and maintenance of the electric generating facility that produces the Solar Energy subject to this Agreement. The address of the Facility is as described in Exhibit B. A scaled map that identifies the Site, the location of the Facility at the Site, the location of the Point of Interconnection and the location of the important ancillary facilities and Interconnection Facilities, is included in Exhibit B to this Agreement.

1.4.46 “Facility Debt” means the obligations of Seller to any lender pursuant to the Financing Documents, including without limitation, principal of, premium and interest on indebtedness, fees, expenses or penalties, amounts due upon acceleration, payment or restructuring, swap or interest rate hedging breakage costs and any claims or interest due with respect to any of the foregoing.

1.4.47 “Facility Lender” means, collectively, any lender(s) providing any Facility Debt and any successor(s) or assigns thereto.

1.4.48 “FERC” means the Federal Energy Regulatory Commission or any successor agency.

1.4.49 “Financing Documents” means the loan and credit agreements, notes, bonds, indentures, security agreements, lease financing agreements, mortgages, deeds of trust, interest rate exchanges, swap agreements and other documents relating to the development, bridge, construction or permanent debt or equity financing for the Facility, including any credit enhancement, credit support, working capital financing, or refinancing documents, and any and all amendments, modifications, or supplements to the foregoing that may be entered into from time to time at the discretion of Seller subject to any required approvals, whether in this Agreement, or otherwise, in connection with development, construction, ownership, leasing, operation or maintenance of the Facility.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.50 “Firm Transmission Service” means, as applicable, firm or network transmission service from the Point of Delivery provided by the Transmission Provider in accordance with its Open Access Transmission Tariff.

1.4.51 “Force Majeure Event” has the meaning set forth in Article 14 of this Agreement.

1.4.52 “Forced Outage” means a reduction of, or cessation in the delivery of, or inability to deliver, Solar Energy that is not the result of (i) a Scheduled Maintenance Outage, (ii) a Force Majeure Event, (iii) a Delivery Excuse, or (iv) an Emergency Condition.

1.4.53 “Good Utility Practice(s)” means any of the practices, methods and acts engaged in or approved by a significant portion of the electric industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather to be practices, methods, or acts generally accepted in the region. With respect to the Facility, Good Utility Practice(s) includes, without limitation, reasonable steps to ensure that: (i) equipment, materials, resources, and supplies, including spare parts inventories, are available to meet the Facility’s needs; (ii) sufficient operating personnel are available at all times and are adequately experienced and trained and licensed as necessary to operate the Facility properly, efficiently, and in coordination with EPE and are capable of responding to reasonably foreseeable emergency conditions whether caused by events on or off the Site; (iii) preventive, routine, and non-routine maintenance and repairs are performed on a basis that ensures reliable, long-term and safe operation, and are performed by knowledgeable, trained, and experienced personnel utilizing proper equipment and tools; (iv) appropriate monitoring and testing are performed to ensure equipment is functioning as designed; (v) equipment is not operated in a reckless manner, in violation of manufacturer’s guidelines or in a manner unsafe to workers, the general public, or the interconnected system or contrary to environmental laws, permits or regulations or without regard to defined limitations such as flood conditions, safety inspection requirements, operating voltage, current, volt-ampere reactive loading, frequency, rotational speed, polarity, synchronization, and control system limits; (vi) equipment and components meet or exceed the standard of durability that is generally used for electric generation operations in the region and will function properly over the full range of ambient temperature and weather conditions reasonably expected to occur at the Site and under both normal and emergency conditions; and (vii) equipment, components, and processes are appropriately permitted with any local, state, or federal Governmental Authority and are operated and maintained in accordance with applicable permit and regulatory requirements.

1.4.54 “Governmental Approval” means any authorization, consent, permission, approval, license, ruling, permit, exemption, variance, order, judgment, instruction, condition, direction, directive, decree, declaration of or regulation by any Governmental Authority relating to the construction, development, ownership,

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

occupation, start-up, testing, operation or maintenance of the Facility or to the execution, delivery or performance of this Agreement or the procurement pursuant to this Agreement of Solar Energy and solar Renewable Energy Certificates for inclusion in EPE’s renewable energy portfolio pursuant to the New Mexico Renewable Energy Act and recovery of the related costs, and shall also mean, where and as applicable and the context so dictates, any and all authorization, consent, permission, approval, license, ruling, permit, exemption, variance, order, judgment, instruction, condition, direction, directive, decree, declaration of or regulation with regard to any Compliance Obligations.

1.4.55 “Governmental Authority” means any federal, state, local or other governmental regulatory or administrative agency, court, commission, department, board, or other governmental subdivision, legislature, rulemaking board, tribunal, or other governmental authority having jurisdiction over the Parties, their respective facilities, or the respective services they provide, and exercising or entitled to exercise any administrative, executive, police, or taxing authority or power.

1.4.56 “Guaranty” shall have the meaning set forth in Section 11.1(C)(3) of this Agreement.

1.4.57 “Hazardous Materials” means any substance, material, gas, or particulate matter that is regulated by any Governmental Authority as an environmental pollutant or dangerous to public health, public welfare, or the natural environment including, without limitation, protection of non-human forms of life, land, water, groundwater, and air, including, without limitation, any material or substance that is: (i) defined as “toxic,” “polluting,” “hazardous waste,” “hazardous material,” “hazardous substance,” “extremely hazardous waste,” “solid waste” or “restricted hazardous waste” under any provision of local, state, or federal law; (ii) petroleum, including any fraction, derivative or additive; (iii) asbestos; (iv) polychlorinated biphenyls; (v) radioactive material; (vi) designated as a “hazardous substance” pursuant to the Clean Water Act, 33 U.S.C. §1251 et seq. (33 U.S.C. §1251); (vii) defined as a “hazardous waste” pursuant to the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq. (42 U.S.C. §6901); (viii) defined as a “hazardous substance” pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §9601 et seq. (42 U.S.C. §9601); (ix) defined as a “chemical substance” under the Toxic Substances Control Act, 15 U.S.C. §2601 et seq. (15 U.S.C. §2601); or (x) defined as a pesticide under the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. §136 et seq. (7 U.S.C. §136).

1.4.58 “Indemnified Party” has the meaning set forth in Section 17.1 of this Agreement.

1.4.59 “Indemnifying Party” has the meaning set forth in Section 17.1 of this Agreement.

1.4.60 “Interconnection Agreement” means the separate agreement between Seller and the Transmission Provider, as such agreement may be amended from time to time, for interconnection of the Facility to the Transmission System.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.61 “Interconnection Facilities” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.62 “Interest Rate” has the meaning assigned to it in Section 5.3(C) of this Agreement.

1.4.63 “Interests” has the meaning set forth in Section 18.2 of this Agreement.

1.4.64 “Interim Period” means a period of less than three hundred sixty-five Days during which time EPE, upon Seller’s Construction Event of Default, Operational Event of Default or Abandonment of Construction or Operation of the Facility, shall have the right but not the obligation to possess, assume control of, and operate the Facility in accordance with Seller’s rights, obligations and interest under this Agreement.

1.4.65 “Issuer” has the meaning set forth in Section 11.1(C) of this Agreement.

1.4.66 “kW” means kilowatt.

1.4.67 “kWh” means kilowatt hour.

1.4.68 “Letter of Credit” shall have the meaning set forth in Section 11.1(C)(1) of this Agreement.

1.4.69 “Month” means a calendar month.

1.4.70 “Mountain Prevailing Time” or “MPT” means the time in effect in the Mountain Time Zone of the United States of America, whether Mountain Standard Time or Mountain Daylight Saving Time.

1.4.71 “MW” means megawatt or one thousand kW.

1.4.72 “MWh” means megawatt hours.

1.4.73 “NERC” means the North American Electric Reliability Council or any successor organization.

1.4.74 “NMPRC” means the New Mexico Public Regulation Commission and any predecessor or successor organization.

1.4.75 “Non-Conforming Order” has the meaning set forth in Section 6.1 of this Agreement.

1.4.76 “Non-Scheduled Maintenance Period” has the meaning set forth in Section 13.5(A) of this Agreement.

1.4.77 “Operating Committee” means one representative each from EPE and Seller pursuant to Section 13.2(A) of this Agreement.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.78 “Operating Procedures” means those procedures developed pursuant to Section 13.2(B) of this Agreement.

1.4.79 “Operation and Maintenance Agreement” means that certain operation and maintenance agreement between Seller and the Operation and Maintenance Contractor with respect to the Facility, if applicable.

1.4.80 “Operation and Maintenance Contractor” means an operation and maintenance contractor as identified to EPE, if used by Seller.

1.4.81 “Operational Events of Default” has the meaning set forth in Section 12.2 of this Agreement.

1.4.82 “Parent” has the meaning set forth in Section 18.2 of this Agreement.

1.4.83 “Party Representative” or “Parties’ Representatives” has the meaning set forth in Section 12.8 of this Agreement.

1.4.84 “Permitted Transfer” has the meaning set forth in Section 18.3 of this Agreement.

1.4.85 “Person” means any natural person, corporation, limited liability company, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or Governmental Authority.

1.4.86 “Point of Delivery” means the point at which electricity generated by Seller’s Facility is delivered to EPE, adjusted for any applicable metering losses. In general, the Point of Interconnection shall be the same as the Point of Delivery. Any differences between the Point of Interconnection and Point of Delivery shall be identified in Exhibit B to this Agreement.

1.4.87 “Point of Interconnection” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.88 “Project Contracts” means this Agreement, the EPC Contract, the Interconnection Agreement, and the Operation and Maintenance Agreement.

1.4.89 “Projected Schedule” has the meaning assigned to it in Section 13.3(A) of this Agreement.

1.4.90 “Rate Schedule No. 16 Rate” means the time-of-use energy rates in EPE’s twenty-sixth revised Rate No. 16, or its successor, as filed with the NMPRC that are in effect at the time.

1.4.91 “Receiving Party” has the meaning set forth in Section 19.17(A) of this Agreement.

1.4.92 “Renewable Energy Certificate(s)” or “REC(s)” means a certificate(s) that complies in all respects with the New Mexico Renewable Energy Act, the NMPRC’s

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Renewable Rule 572, and any applicable NMPRC Final Orders, each in effect as of the Execution Date, which documents that the energy delivered under this Agreement is Solar Energy as defined by the New Mexico Renewable Energy Act and is provided with the associated energy from Seller at no additional cost to EPE, except as set forth in Section 10.1 of this Agreement. RECs are the documentation required by the NMPRC to document that the associated energy is, in fact, Solar Energy. Compliance with EPE’s Renewable Portfolio Standard under the New Mexico Renewable Energy Act is documented by solar RECs.

1.4.93 “Replacement Energy Costs” means those damages suffered by EPE as a direct result of Seller’s failure to perform its obligations under this Agreement, including (i) all incremental costs suffered by EPE to replace the Solar Energy or the RECs that Seller fails to deliver to EPE under this Agreement with alternative Solar Energy that meets the requirements of the NMPRC, (ii) any replacement solar capacity necessary to make up for any shortfall in the capacity to be provided under this Agreement (to comply with the NMPRC’s Renewable Energy Standard) which shortfall was caused by Seller or the Facility, (iii) costs and penalties imposed by the NMPRC, or by any other Governmental Authority, paid or required to be paid by EPE as a result of Seller’s failure to perform under this Agreement and absence of fault or responsibility of EPE, and (iv) EPE’s expenses including reasonable attorneys’ fees suffered as a result of Seller’s failure to perform under this Agreement.

1.4.94 “Representative” has the meaning set forth in Section 19.17(B) of this Agreement.

1.4.95 “Required Commercial Operation Date” is July 31, 2011, except as otherwise provided in this Agreement.

1.4.96 “Restoration” and “Restoration Schedule” have the meanings set forth in Section 14.3(E)(2) of this Agreement.

1.4.97 “Restoration Report” has the meaning set forth in Section 14.3(E) of this Agreement.

1.4.98 “Revised Commercial Operation Milestone” means a date specified by Seller pursuant to Section 12.1(F) of this Agreement.

1.4.99 “Scheduled Maintenance Outage” means a time period during which the Facility is shut down or its output reduced to undergo scheduled maintenance in accordance with this Agreement, or as otherwise agreed by Seller and EPE.

1.4.100 “Security Fund” has the meaning set forth in Section 11.1 of this Agreement.

1.4.101 “Seller’s Interconnection Facilities” means the facilities owned and operated by the Seller as identified in the Interconnection Agreement. Arrangements for the installation and operation of the Seller’s Interconnection Facilities shall be governed by the Interconnection Agreement.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.102 “Site” means real estate on which the Facility will be constructed and located, including any interests, easements, water rights, and access rights reasonably necessary for the construction, operation and maintenance of the Facility. The Site is more specifically described in Exhibit B to this Agreement.

1.4.103 “Solar Energy” means the net electrical energy generated in MWh using solar generation technologies and delivered to EPE at nominal voltage to the Point of Delivery as measured by Electric Metering Devices installed pursuant to Section 5.2 of this Agreement. Solar Energy should be of a power quality of 60 cycle, three-phase alternating current that is compliant with the Interconnection Agreement.

1.4.104 “Solar Energy Payment Rate” means the rate paid for Solar Energy by EPE to Seller as specified in Exhibit F to this Agreement.

1.4.105 “Tariff” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.106 “Tax Credits” means investment tax credits under Section 48 of the Internal Revenue Code as in effect on the Execution Date or any successor or other provision providing for a federal tax credit determined by reference to renewable electric energy produced from Solar Energy resources, or any federal, state or local investment tax credit or federal, state or local production tax credit determined by reference to renewable electric energy produced from Solar Energy resources in effect in the state of New Mexico.

1.4.107 “Term” means the period of time during which this Agreement shall remain in full force and effect, and which is further defined in Article 2 of this Agreement.

1.4.108 “Test Date” means the date on which Seller shall commence Commissioning of the Facility and shall be the date falling no later than forty-five (45) Days prior to the Commercial Operation Date or such other date as Seller and EPE may agree in writing.

1.4.109 “Test Energy” means that Solar Energy produced by the Facility in order to perform testing of the Facility prior to Commercial Operation.

1.4.110 “Transmission Owner” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.111 “Transmission Provider” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.112 “Transmission Provider’s Interconnection Facilities” means the facilities owned and operated by the Transmission Provider as identified in the Interconnection Agreement. Arrangements for the installation and operation of the Transmission Provider’s Interconnection Facilities shall be governed by the Interconnection Agreement.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

1.4.113 “Transmission System” has the same meaning as that same term is defined in the Interconnection Agreement.

1.4.114 “WECC” means the Western Electricity Coordinating Council, a NERC regional electric reliability council, or any successor organization.

1.4.115 “Year” means a calendar year consisting of 365 Days.

ARTICLE 2 - TERM

2.1 Term. This Agreement shall be in full force and effect from the date shown in the first paragraph hereof and shall remain in effect until the last Day of the twentieth (20^th) Commercial Operation Year, subject to any early termination or extension provisions set forth herein.

ARTICLE 3 - FACILITY DESCRIPTION

3.1 Summary Description. Seller shall construct, own or lease, operate, and maintain the Facility, which shall consist of devices for generating electricity and associated equipment having a Designed Maximum Output of approximately 92 MW which shall qualify as Solar Energy and which shall be located in New Mexico. As of the Execution Date, there are two prospective sites for the Facility, which are identified in Exhibit B. Prior to the Financial Commitment Milestone, Seller shall revise Exhibit B and provide notice to EPE of Seller’s determination, made in its sole discretion, of its final selection of the site for the Facility, such selection to be made from the two sites shown in Exhibit B. Exhibit B to this Agreement provides a detailed description of the Facility, including identification of the major equipment and components that comprise the Facility. The Expected Solar Energy generated from the Facility shall be ****. Seller may, in its sole discretion, but upon notice to EPE no later than ninety (90) Days prior to the Commercial Operation Date, make a one-time adjustment to increase or decrease the Expected Solar Energy generated from the Facility, such adjustment not to exceed **** of the Expected Solar Energy. In order to make this adjustment, Seller must also provide a revised Exhibit B to this Agreement describing the Facility and Site, including any increase or decrease not to exceed **** of the Expected Solar Energy.

(A) Sale/Leaseback. Subject to and conditioned upon the prior written consent of EPE, which consent shall not be unreasonably withheld, Seller may sell the Facility to a third party and lease-back and operate the Facility in accordance with the terms of this Agreement, provided that, (i) a copy of the applicable section of any such sale/leaseback agreement is provided to EPE at least thirty (30) Days prior to its execution, and (ii) any such sale and lease-back of the Facility by Seller shall fully preserve EPE’s right to assume the position of the Seller if EPE would have the right to purchase or lease the Facility as provided in Sections 12.12(A) or 14.3 of this Agreement.

3.2 General Design and Operation of the Facility. Seller shall construct and operate the Facility according to Good Utility Practice(s) and the Interconnection Agreement. During Commercial Operation, Seller shall maintain the Facility according to Good Utility Practice(s)

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and the Interconnection Agreement, and in accordance with manufacturers’ recommendations. In addition to the requirements of the Interconnection Agreement, the Facility shall at all times:

(A) have the required panel space and 125VDC battery supplied voltage to accommodate metering, generator telemetering equipment and communications equipment; and

(B) use communication circuits from the Facility to EPE’s SOC for the purpose of telemetering, supervisory control/data acquisition, and voice communications as required by EPE.

3.3 Environmental Compliance. Seller must obtain and pay for all applicable environmental permits from any Governmental Authority needed for construction, operation, maintenance, and decommissioning of the Facility, copies of which will be provided by Seller to EPE within ten (10) Business Days of the issuance of such permits. Seller shall promptly notify EPE of any and all violations and any and all investigations, actions, claims, suits, notices of violation, fines, penalties, orders, revocations, and other proceedings related to violations or alleged violations of environmental laws, including, but not limited to, permits issued thereunder, which are asserted against Seller or any of Seller’s personnel in connection with the Facility or their activities on, along, adjacent to or near the Site by any Governmental Authority. Seller will keep EPE informed on a regular basis of the progress made and resolution of such events.

ARTICLE 4 - PRE-COMMERCIAL OPERATION

4.1 Construction of the Facility.

(A) Seller shall use commercially reasonable efforts to obtain any land rights necessary for the Facility.

(B) Other than the rights and obligations of EPE specified in this Agreement and any documents ancillary hereto, neither this Agreement nor any such ancillary document shall be interpreted to create in favor of EPE, and EPE specifically disclaims, any present right, title or interest in any part of the Facility.

(C) In the event Seller should determine that the expected Commercial Operation Date is not feasible or is impossible to achieve, Seller shall promptly notify EPE and shall advise EPE of the new expected Commercial Operation Date; provided, however, such new expected Commercial Operation Date shall not exceed the Required Commercial Operation Date.

4.2 Monitoring and Inspection. EPE shall have the right to monitor the construction, start-up and testing of the Facility, and Seller shall comply with all reasonable requests of EPE with respect to the monitoring of these events. Seller shall cooperate in such physical inspections of the Facility as may be reasonably requested by EPE during and after completion of construction. EPE’s technical review and inspection of the Facility shall neither be construed as endorsing the design thereof nor as any warranty of safety, durability, or reliability of the Facility. Persons visiting the Facility on behalf of EPE shall comply with Seller’s applicable safety and health rules and requirements.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

4.3 Construction Milestones. In order to achieve the Commercial Operation Date by the Commercial Operation Milestone, Seller agrees to meet the Construction Milestones set forth in Exhibit A to this Agreement.

4.4 Extension of Construction Milestones. After executing this Agreement and subject to Section 14.3(E)(5) herein, Seller may extend any Construction Milestone as a result of the occurrence of one or more Force Majeure Events; provided, however, that such extension for reasons of Force Majeure Events may not delay achievement of any Construction Milestone beyond December 31, 2011. Delays that are due to (i) failure of the EPE Procurement Plan to be approved or deemed approved by the NMPRC by December 30, 2008 or (ii) failure of the Transmission Provider for any reason to complete the construction of the Transmission Provider’s Interconnection Facilities, to the extent such delay causes a delay in the Construction Milestone, shall extend each Construction Milestone day-for-day and the December 31, 2011, limitation on extensions shall not apply. Changes in a Construction Milestone for any other reason are not allowed.

4.5 Progress Reports. Commencing upon the Agreement Approval Date, Seller shall submit to EPE, on the first Business Day of each calendar quarter until construction of the Facility begins, progress reports in a form reasonably satisfactory to EPE. Once construction of the Facility begins, Seller shall submit such Progress Reports to EPE on the first Business Day of each Month. These progress reports shall notify EPE of the current status of each Construction Milestone and an updated completion schedule for the Facility. Such Monthly reports shall provide a schedule showing items completed and to be completed and a best estimate time-frame within which Seller expects the EPC Contractor to complete such non-completed works. Seller shall, from time to time, upon reasonable advance request from EPE, meet with EPE to discuss the progress of the construction of the Facility. None of the foregoing shall be deemed to be in lieu of, or in substitution for, the general record and reporting obligations of Seller in accordance with Article 13 of this Agreement.

4.6 Commissioning Tests.

(A) Seller shall give EPE at least three (3) Months prior notice of the approximate Test Date and of the proposed tests scheduled relating to the Commissioning of the Facility (“Commissioning Tests”). Representatives of EPE shall have the right to be present at all such testing. Seller shall promptly notify EPE of any changes to the Test Date or the date of any Commissioning Tests relating to the Facility in order that EPE may arrange for its respective representatives to attend.

(B) The results of Commissioning Tests shall determine the Facility’s Designed Maximum Output in MW.

(C) Nothing herein shall prevent or limit Seller or EPE, upon their mutual written agreement to same, subject to any required Governmental Approval, from establishing a new Committed Solar Energy at any level that they mutually agree is appropriate and desirable under this Agreement.

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

(D) Solar Energy produced during any Commissioning Tests shall be delivered by Seller for EPE at the Point of Delivery, and EPE shall purchase such Solar Energy at the rate described in Section 8.1(A).

(E) EPE shall have the right to require that Seller, not more than once in any twelve (12) Month period beginning with the Commercial Operation Date, re-demonstrate the Designed Maximum Output in MW of the Facility within sixty (60) Days of the demand; provided, however, that such demand shall be coordinated among EPE and Seller so that the sixty (60) Day period for re-demonstration avoids, if practical, previously notified periods of Scheduled Maintenance Outages and Additional Maintenance Outages pursuant to this Article 4.

4.7 Site Report. Seller shall conduct, at its sole expense, a Phase I environmental investigation of the Site and shall provide EPE, prior to the Financial Commitment Milestone, with a copy of the report summarizing such investigation, together with any data or information generated pursuant to such investigation. Seller shall provide to EPE confirmation from an environmental engineer that (i) the Site has been inspected for Environmental Contamination and (ii) a Phase I environmental assessment has been completed. Such report, or other written confirmation provided by Seller, shall include a confirmation that, based upon such investigation and to the best of Seller’s knowledge, no conditions involving Environmental Contamination exist at or under the Site that would prevent or materially delay construction and operation of the Facility at the Site.

4.8 Facility Contracts. Upon reasonable notice and request by EPE, Seller shall provide EPE with copies of (or, in the case of agreements and contracts subject to non-disclosure covenants or similar provisions, summaries of): (i) contracts for the manufacture, delivery and installation of the generator and step-up transformer; (ii) engineering, procurement and construction, or other general contractor agreements; (iii) applicable operating agreements; and (iv) the applicable electric Transmission Agreement and Interconnection Agreement. Upon request, Seller shall also provide EPE with reasonable evidence that it has or will have the capability to finance construction of the Facility. Seller shall provide sufficient information for EPE to be reasonably assured that Seller has contracted with financially responsible vendors as part of the Facility construction process.

4.9 Conditions to Commercial Operation. Seller will (i) notify EPE when the Facility has achieved all of the conditions set forth in this Section 4.9 (“Conditions”), (ii) provide evidence reasonably acceptable to EPE of the satisfaction or occurrence of such Conditions, and (iii) designate the Commercial Operation Date for the Facility to occur no sooner than thirty (30) Days from the date that Seller provides such notification to EPE (“Notification Date”). EPE must accept or challenge Seller’s declaration that all Conditions have been satisfied or occurred within thirty (30) Days of the Notification Date, and any Condition that EPE does not challenge within thirty (30) Days of the Notification Date will be deemed satisfied. The Parties shall attempt to resolve any dispute that may arise regarding the satisfaction or occurrence of any Condition(s) through direct discussion or mediation, as set forth below in Sections 12.8 and 12.9 of this Agreement. Review and approval of the Conditions may occur on an ongoing and incremental basis, pending resolution of any dispute, as such Conditions are satisfied or occur. All costs and expenses necessary to meet the Conditions shall be borne solely by Seller. The Conditions, which must be met after the Agreement Approval Date has occurred, are:

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(A) Seller has satisfied all the requirements of the Interconnection Agreement and commenced interconnected parallel operation with the Transmission Provider;

(B) Seller has made all arrangements and executed all agreements required to deliver the Solar Energy from the Facility to the Point of Delivery in accordance with the provisions of this Agreement;

(C) Seller has provided EPE with copies of certificates of insurance evidencing that the coverage required by Article 16 of this Agreement has been obtained and submitted to EPE;

(D) Seller has submitted to EPE a certificate of an officer of Seller specifically familiar with the Facility stating, after due inquiry, that all permits, consents, licenses, approvals, and authorizations required to be obtained by Seller from any Governmental Authority to operate the Facility in compliance with applicable law and this Agreement have been obtained and are in full force and effect, and to the knowledge of that officer, Seller is in compliance with the terms and conditions of this Agreement in all material respects;

(E) As applicable, Seller has made all necessary governmental filings and applications for RECs and other accreditation or registration with the Western Renewable Energy Generation Information System (WREGIS). Additionally, Seller shall be in compliance with all applicable and required existing national and regional reliability standards, including standards set by WECC, NERC, FERC, and the NMPRC, or any successor agencies setting reliability standards for the operation of solar generation facilities in the location of the Facility. Prior to Commercial Operation Date, Seller shall register and provide documentation to EPE showing that it has registered with the appropriate Regional Reliability Organization (“RRO”) as a generator owner and has registered the generator operator to the extent required by NERC and the RRO. Except for FERC regulations, all of the foregoing requirements shall constitute the “Compliance Obligations” under this Agreement;

(F) An officer of Seller specifically familiar with the Facility has certified that the Designed Maximum Output of the entire Facility complies with the description of the Facility provided in Exhibit B to this Agreement on the date of certification, as such exhibit may be revised pursuant to Section 3.1 of this Agreement; and

(G) The Facility has achieved initial synchronization with the Transmission System and has demonstrated the reliability of its communications systems and communications with the EPE SOC.

None of the foregoing Conditions shall be deemed to be in lieu of, or in substitution for, the obligations of Seller in accordance with Section 13.13 of this Agreement.

4.10 Test Energy. Seller shall coordinate the production and delivery of Test Energy with EPE. EPE shall cooperate with Seller to facilitate Seller’s testing of the Facility necessary to satisfy the Conditions set forth in Section 4.9 above.

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ARTICLE 5 - DELIVERY AND METERING

5.1 Delivery Arrangements.

(A) Seller shall be responsible for negotiating, entering into, and performing the Interconnection Agreement with the Transmission Provider and any other necessary entities for the design, installation and operation of the Interconnection Facilities.

(B) Seller shall request that the Transmission Provider design the Interconnection Facilities such that Seller’s Facility shall qualify as a Network Resource for EPE (as that term is defined in the Tariff) that uses firm or network transmission service.

(C) Within thirty (30) Days after the completion of any transmission studies by the Transmission Provider, Seller shall provide WECC, the Transmission Provider, and any applicable transmission owners with written permission to release such transmission study results to EPE. Alternatively, Seller may provide a copy of such study results to EPE.

(D) Seller shall be responsible for all interconnection, electric losses, and costs required to deliver the Solar Energy and Test Energy from the Facility to EPE up to the Point of Delivery.

(E) EPE shall be responsible for all electric losses, transmission and ancillary service arrangements and costs required to receive the Solar Energy at the Point of Delivery and to deliver such energy to points beyond the Point of Delivery.

5.2 Metering.

(A) All Electric Metering Devices used to measure the Solar Energy made available to EPE by Seller under this Agreement and to monitor and coordinate operation of the Facility shall be owned, installed, and maintained in accordance with the Interconnection Agreement at no cost to EPE under this Agreement. Such Electric Metering Devices shall be capable of measuring the energy output of the Facility on an hourly basis for all hours in a Month. Seller, at its own expense, shall inspect and test such Electric Metering Devices upon installation and at least annually thereafter. Upon request from EPE, Seller also shall perform additional inspections or tests of such Electric Metering Devices. Seller shall provide EPE with reasonable advance notice of, and permit a representative of EPE to witness and verify, all such inspections and tests, provided, however, that any such representative of EPE shall not unreasonably interfere with or disrupt Seller’s operation of the Facility and shall comply with all applicable safety standards as in effect and established by Seller from time to time. The actual expense of any EPE requested additional inspections or tests shall be borne by EPE, unless, upon such inspection or test, such Electric Metering Devices are found to register inaccurately by more than the allowable limits established in this Article 5, in which event the expense of the requested additional inspection or test shall be borne by Seller. If requested in writing, Seller shall provide copies of any inspection or test reports to EPE.

(B) Either EPE or Seller may elect to install and maintain, at its own expense, Back-up Metering devices in addition to the Electric Metering Devices, which installation and maintenance shall be performed in a manner acceptable to EPE. The installing Party, at its own

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expense, shall inspect and test Back-Up Metering upon installation and at least annually thereafter. The installing Party shall provide the other Party with reasonable advance notice of, and permit a representative of such other Party to witness and verify, such inspections and tests, provided, however, that such other Party shall not unreasonably interfere with or disrupt the activities of the installing Party and shall comply with all applicable safety standards. Upon request, the installing Party shall perform additional inspections or tests of Back-Up Metering and shall permit a qualified representative of the other Party to inspect or witness the testing of Back-Up Metering; provided, however, that such other Party shall not unreasonably interfere with or disrupt the activities of the installing Party and shall comply with all applicable safety standards as in effect and established by the installing Party from time to time. The actual expense of any such requested additional inspection or testing shall be borne by the Party requesting the test, unless, upon such inspection or testing, Back-Up Metering is found to register inaccurately by more than the allowable limits established in this Article 5, in which event the expense of the requested additional inspection or testing shall be borne by the installing Party. If requested in writing, the installing Party shall provide copies of any inspection or testing reports to the requesting Party.

(C) If Electric Metering Devices or Back-Up Metering are not installed at the Point of Delivery, meters or meter readings shall be adjusted to reflect losses from the Electric Metering Devices or Back-Up Metering to the Point of Delivery.

(D) If any Electric Metering Device, or Back-Up Metering, is found to be defective or inaccurate, it shall be adjusted, repaired, replaced and recalibrated, as necessary, as near as practicable to a condition of zero error by the Party owning such defective or inaccurate device and at that Party’s expense.

5.3 Adjustment for Inaccurate Meters. If any Electric Metering Device, or Back-Up Metering, fails to register, or if the measurement made by an Electric Metering Device, or Back-Up Metering, is found upon testing to be inaccurate by more than one percent (1.0%), an adjustment shall be made correcting all measurements by the inaccurate or defective Electric Metering Device, or Back-Up Metering, for both the amount of the inaccuracy and the period of the inaccuracy, in the following manner:

(A) In the event that the Electric Metering Device is found to be defective or inaccurate, the Parties shall use Back-up Metering, if installed, to determine the amount of such inaccuracy, provided, however, that Back-Up Metering has been tested and maintained in accordance with the provisions of this Article 5. In the event that either Party did not install Back-Up metering, or Back-Up Metering is also found to be inaccurate by more than one percent (1.0%), the Parties shall estimate the amount of the necessary adjustment on the basis of deliveries of Solar Energy from the Facility and to the Point of Delivery during periods of similar operating conditions when the Electric Metering Device was registering accurately. The adjustment shall be made for the period during which inaccurate measurements were made.

(B) In the event that the Parties cannot agree on the actual period during which the inaccurate measurements were made, the period during which the measurements are to be adjusted shall be the shorter of (i) the last one-half of the period from the last previous test of the Electric Metering Device to the test that found the Electric Metering Device to be defective or

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inaccurate, or (ii) the one hundred eighty (180) Days immediately preceding the test that found the Electric Metering Device to be defective or inaccurate.

(C) To the extent that the adjustment period covers a period of deliveries for which payment has already been made by EPE, EPE shall use the corrected measurements as determined in accordance with this Article 5 to re-compute the amount due for the period of the inaccuracy and shall subtract the previous payments by EPE for this period from such re-computed amount. If the difference is a positive number, the difference shall be paid by EPE to Seller; if the difference is a negative number, that difference shall be paid by Seller to EPE. In either case, the owing Party, at its discretion, may offset such payments due the other Party against undisputed amounts owed by the other Party as specified in Section 9.3(A) of this Agreement. The owing Party shall provide the other Party with notice and supporting documentation of the amount due. Except for offsets to payments, which may be offset immediately, payment of such difference by the owing Party shall be made not later than thirty (30) Days after the owing Party receives notice and supporting documentation of the amount due. Interest shall be computed for any payments or offsets to payments made pursuant to this Section 5.3(C) at a rate equal to one-twelfth (1/12) of the prime rate published in the Wall Street Journal on the invoice due date (the “Interest Rate”).

ARTICLE 6 - EPE CONDITIONS PRECEDENT

6.1 EPE Conditions Precedent. This Agreement shall become effective upon execution by the Parties, provided that the 2008 Procurement Plan filed by EPE pursuant to the New Mexico Renewable Energy Act (the “EPE Procurement Plan”), which includes a request for approval to procure renewable energy, or capacity, or both, and RECs pursuant to this Agreement for use in meeting the renewable portfolio standard of the New Mexico Renewable Energy Act and to recover the cost of such procurement, is (i) approved without material change by the NMPRC by final NMPRC order, and (ii) all periods for appeal of the order have expired under NMPRC requirements (the “Agreement Approval”). The date for Agreement Approval is anticipated to be no later than December 30, 2008 (the “Agreement Approval Date”). Should the NMPRC issue an order approving the EPE Procurement Plan with conditions or modifications that materially change this Agreement, or rejecting this Agreement on the basis of reasons set forth in such order (in either case a “Non-Conforming Order”), the Parties agree to use good faith efforts to renegotiate this Agreement. If, within sixty (60) days of the issuance of a Non-Conforming Order, no agreement is reached, either Party may terminate this Agreement upon delivery of notice to the other Party, in which case the Parties shall have no further liability to each other under this Agreement.

ARTICLE 7 - SALE AND PURCHASE OF SOLAR ENERGY

7.1 Sale and Purchase. Beginning on the Commercial Operation Date, Seller shall generate from the Facility, deliver to the Point of Delivery, and sell to EPE, at the applicable prices set forth in Article 8 of this Agreement, all Solar Energy generated by the Facility. Except as otherwise expressly provided for herein, this Agreement shall not be construed to constitute a “take-or-pay” contract, and EPE shall have no obligation to pay for any energy that has not actually been generated by the Facility, measured by the Electric Metering Device(s), and delivered to EPE at the Point of Delivery. As provided in Article 10 of this Agreement,

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Renewable Energy Certificates associated with the Solar Energy generated by the Facility shall be transferred to and owned by EPE at no additional cost.

7.2 Committed Solar Energy. Committed Solar Energy is set forth in Exhibit F to this Agreement and is the number of megawatt hours (MWh) of Solar Energy committed to be delivered by Seller to EPE in each Commercial Operation Year. The Committed Solar Energy level is ****, and takes into account all factors, including any expected Facility unavailability due to scheduled and forced outages as well as degradation of equipment at the Facility.

7.3 Title and Risk of Loss. As between the Parties, Seller shall be deemed to be in control of the Solar Energy output from the Facility up to and until delivery and receipt at the Point of Delivery, and EPE shall be deemed to be in control of such energy at and beyond delivery and receipt at the Point of Delivery. Title and risk of loss related to the Solar Energy shall transfer from Seller to EPE at the Point of Delivery.

7.4 Temporary Disconnection of the Facility. No payments shall be due Seller for curtailments of delivery of Solar Energy resulting from a temporary disconnection of the Facility by the Interconnection Provider pursuant to the Interconnection Agreement.

ARTICLE 8 - ENERGY PAYMENT CALCULATIONS

8.1 Energy Payments. Energy payments to Seller shall be calculated as follows for each Month:

(A) Prior to Commercial Operation. EPE shall pay Seller the Rate Schedule No. 16 Rate times the Test Energy delivered to EPE during the Month. If the Rate Schedule No. 16 Rate no longer exists, EPE shall pay for such Test Energy at its then-current avoided cost.

(B) During Commercial Operation. Provided that the cumulative deliveries in the Commercial Operation Year do not exceed ****, EPE shall pay Seller ****. For all Solar Energy delivered by Seller to EPE in a Commercial Operation Year that is in excess of ****.

8.2 Non-Solar Energy.

(A) Except as provided by Section 8.3 of this Agreement, EPE shall not be obligated to make any payment, regardless of reason or Force Majeure Event, affecting either Party, for energy that (i) does not qualify as Solar Energy; (ii) is not measured by the Electric Metering Device(s) installed pursuant to Section 5.2 of this Agreement, as such measurement may be adjusted pursuant to Section 5.3 of this Agreement; and (iii) is not delivered to EPE at the Point of Delivery.

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(B) For energy that does not qualify as Solar Energy, EPE shall have the option, at its sole discretion, to purchase such non-Solar Energy from Seller and shall pay Seller EPE’s then-current avoided cost. If EPE declines to purchase such non-Solar Energy, then Seller may sell such non-Solar Energy to a third party.

8.3 Curtailed Energy Payment Rate.

(A) If delivery of Solar Energy is curtailed by EPE, then:

(1) Seller may sell the Solar Energy from the Facility to a third party;

(2) If Seller does not sell the Solar Energy to a third party, the Parties shall determine the quantity of Solar Energy that would have been generated by the Facility and delivered to the Point of Delivery had its generation not been so curtailed (“Curtailed Energy”), and EPE shall pay to Seller for such Curtailed Energy all amounts that Seller would have received from EPE under this Agreement had generation not been so curtailed;

(3) The rate to be paid by EPE to Seller for Curtailed Energy is ****. However, any Solar Energy sold by Seller to a third party pursuant to (1) above shall not count toward the calculation of the rate payment as set forth in this subsection (3) annual curtailment hour total.

(B) Notwithstanding anything in this Section 8.3 to the contrary, no payment shall be due to Seller from EPE under paragraph (A) above for curtailments of delivery of Solar Energy resulting from:

(1) an Emergency Condition, or Force Majeure Event,

(2) any action taken by the Interconnection Provider under the Interconnection Agreement,

(3) any curtailment of Firm Transmission Service by the applicable Transmission Provider, to provide transmission of Solar Energy from the Point of Delivery, or

(4) any notification from EPE’s SOC requiring Seller to curtail deliveries of Solar Energy if Seller has failed to obtain or maintain in full force and effect any Governmental Approval which has the effect of preventing delivery of Solar Energy pursuant to this Agreement.

8.4 Payment Support Requirement. Neither Party shall initiate any action before any Governmental Authority to deny recovery of payments under this Agreement. Each Party shall use commercially reasonable efforts to defend all terms and conditions of this Agreement consistent with Applicable Law.

8.5 Survival on Termination. The provisions of this Article 8 shall survive the repudiation, termination or expiration of this Agreement for so long as may be necessary to give

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effect to any outstanding payment obligations of the Parties due and payable prior to any such repudiation, termination or expiration.

ARTICLE 9 - BILLING AND PAYMENT

9.1 Seller’s Invoices. The monthly billing period shall be the Month. No later than five (5) Business Days after the end of each Month, Seller shall provide to EPE, by electronic means or first-class mail, an invoice showing the invoice date, the invoice due date and all billing parameters, rates, and any other data reasonably pertinent to the invoice, including information required by Section 10.2 of this Agreement, for the amount owed to Seller from EPE for Solar Energy provided by Seller and purchased by EPE pursuant to Section 8.1 of this Agreement during the previous Month billing period.

9.2 EPE’s Invoices. No later than five (5) Business Days after the end of a Month in which Seller owes payments to EPE under this Agreement, EPE shall provide the Seller, by electronic means or first-class mail, an invoice showing the invoice date, the invoice due date and all billing parameters, rates, and any other data reasonably pertinent to the invoice for any amount owed by Seller to EPE under this Agreement.

9.3 Payments. Unless otherwise specified herein, payments owed under this Agreement shall be due and payable by check or by electronic funds transfer, as designated by the invoicing Party, on or before the twentieth (20th) Business Day following the date of the billing invoice provided that such invoice was rendered within the five-day period set forth in Sections 9.1 and 9.2 of this Agreement and, if not so rendered, such payment shall be due on the 20^th Business Day of the following month. Remittances received by mail will be considered to have been paid when due if the postmark indicates the payment was mailed on or before the fifteenth (15th) Business Day following receipt of the invoice.

(A) EPE may offset any amounts that it owes Seller against any undisputed amounts that Seller owes EPE, including damages, interest payments, and other payments. Seller may include in its invoices and offset any amounts that it owes EPE against any undisputed amounts that EPE owes Seller for the purchase of Solar Energy under this Agreement, including damages, interest payments, and other payments. Any such offsets by either Party shall be clearly represented in the invoices described in Sections 9.1 or 9.2 of this Agreement.

(B) Undisputed and non-offset portions of amounts invoiced under Sections 9.1 or 9.2 of this Agreement not paid on or before the invoice due date shall be subject to the late payment interest charges calculated as set forth in this Section 9.3(B). The late payment interest charge rate per month shall be at the Interest Rate. The late payment interest charge shall equal this rate times the unpaid balance of undisputed and non-offset portions of amounts invoiced. The late payment interest charge shall be added and itemized in the next billing invoice of either EPE or Seller, whichever is appropriate.

9.4 Billing Disputes. Either Party may dispute invoiced amounts but shall pay to the other Party at least the undisputed portion of invoiced amounts on or before the invoice due date pending resolution of the dispute. Full payment of an invoice shall not waive a Party’s right to later dispute the invoice provided that notice of a disputed invoice is presented by the disputing Party to the other Party within twelve (12) months of an invoice due date, accompanied by an

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explanation of the specifics of the dispute as well as a request for a refund or an additional payment, whichever is appropriate. When a billing dispute is resolved, EPE or Seller, as appropriate, shall invoice the other Party the amount agreed to by the Parties no later than fifteen (15) Business Days after the end of the Month in which the dispute is resolved. The amount owed shall include any late payment interest charges calculated from the original invoice due date in accordance with the provisions of Section 9.3(B) above. Either Seller or EPE may elect to offset amounts owed to the other Party pursuant to Section 9.3(A) above.

9.5 Statement Errors. If, within two (2) years of a Statement Date, either Party becomes aware of any error in any statement, such Party shall, immediately upon discovery of the error, notify in writing the other Party of such error and the other Party shall rectify such error (whether such error was in the form of an underpayment or overpayment) within thirty (30) Days of such notification. Provided that the other Party is satisfied (in its sole and reasonable discretion) that the aforementioned notification requirements have been complied with in good faith by the Party who has made the error, interest shall be payable in respect of any amount that was erroneously overpaid or underpaid at the Interest Rate.

9.6 Set-Off and Payment Adjustments. Except as otherwise expressly provided for in this Agreement, all payments between the Parties under this Agreement shall be made free of any restriction or condition and without deduction or withholding on account of any other amount, whether by way of set-off or otherwise. Payments to be made under this Agreement shall, for a period of not longer than two (2) years, remain subject to adjustment based on billing adjustments due to error or omission by either Party, provided that such adjustments have been agreed to between the Parties or resolved in accordance with the provisions of Section 12.8 hereof.

9.7 Survival on Termination. The provisions of this Article 9 shall survive the repudiation, termination or expiration of this Agreement for so long as may be necessary to give effect to any outstanding payment obligations of the Parties that became due and payable prior to any such repudiation, termination or expiration.

ARTICLE 10 - RENEWABLE ENERGY CERTIFICATES AND LIMITED SALE OF

ENVIRONMENTAL ATTRIBUTES

10.1 Compliance with New Mexico Renewable Energy Act. Seller must comply with the New Mexico Renewable Energy Act and provide associated solar RECs, in the format to be provided by EPE and in compliance with NMPRC Rule 572. Seller shall provide the solar RECs associated with the Solar Energy sold and delivered to EPE under this Agreement at no additional cost.

10.2 Monthly RECs. Seller shall provide solar RECs monthly using the format in Exhibit G to this Agreement and shall include the appropriate number of solar RECs associated with the Solar Energy purchased during the month in each monthly invoice.

10.3 Seller’s Failure to Provide Solar RECs. Except for Force Majeure Event(s) and any curtailments pursuant to Sections 7.4 or 8.3 of this Agreement, if Seller’s failure to provide the Committed Solar Energy causes EPE to need additional solar RECs to meet its obligations under NMPRC Renewable Rule 572, Seller shall first use commercially reasonable efforts to

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obtain replacement solar RECs and deliver them to EPE for the quantity of solar RECs EPE notifies Seller that it requires up to the quantity of solar RECs associated with the Committed Solar Energy. EPE must notify Seller that it requires such replacement solar RECs within ninety (90) Days of Seller’s failure to provide the solar RECs associated with the Committed Solar Energy. Seller must deliver replacement solar RECs within thirty (30) Days of EPE’s notice to Seller of the required quantity of solar RECs. EPE will reimburse Seller for the actual cost of the replacement RECs. However, should the total of the actual cost of the replacement RECs that Seller purchases and the replacement energy that EPE actually purchased to replace the Solar Energy not provided by Seller, assuming that such replacement energy is an As Available energy product excluding RECs, exceed the price of energy sold to EPE under this Agreement per Exhibit F, such incremental costs may be deducted from the monies owed to Seller for the replacement RECs. Notwithstanding the actual cost of replacement solar RECs and the cost of replacement energy that EPE actually purchased, Seller’s minimum liability to EPE shall be **** and maximum liability to EPE shall be **** for each REC not delivered, such maximum liability to escalate at **** per year after the first ten (10) years of this Agreement.

(A) If such replacement solar RECs are not obtained and delivered by Seller to EPE, EPE may, at its discretion but no later than ninety (90) Days after Seller’s failure to provide the solar RECs associated with the Committed Solar Energy, attempt to obtain replacement solar RECs up to the quantity of solar RECs associated with the Committed Solar Energy. EPE will be responsible for the costs for these replacement RECs. However, should the total of the actual cost of the replacement RECs that EPE purchases and the replacement energy that EPE actually purchased to replace the Solar Energy not provided by Seller exceed the price of energy sold to EPE under this Agreement per Exhibit F, such incremental costs will be paid by Seller to EPE. EPE’s failure to obtain replacement solar RECs associated with the Committed Solar Energy does not relieve Seller of the obligation to obtain replacement solar RECs in an amount equal to the Committed Solar Energy. Notwithstanding the actual cost of replacement solar RECs and the cost of replacement energy that EPE actually purchased, Seller’s minimum liability to EPE shall be **** and maximum liability to EPE shall be **** for each REC not delivered, such maximum liability to escalate at **** per year after the first ten (10) years of this Agreement.

(B) If sufficient replacement solar RECs are unavailable, Seller shall pay EPE the cost of any NMPRC fines incurred by EPE as a result of EPE’s failure to meet its obligations under NMPRC Renewable Rule 572 caused by Seller’s failure to provide the Committed Solar Energy and associated solar RECs. EPE shall allocate any applicable fines to Seller and other sellers of Solar Energy with whom EPE has a contract and which failed to meet their obligations for delivery of RECs to EPE on a prorata basis based upon contract commitments and shortfalls.

(C) Seller shall not be responsible for paying EPE for its purchase of replacement solar RECs that are due to: (i) delays in the Commercial Operation Milestone caused by events described in Section 4.4(i) and (ii) of this Agreement, or (ii) a Force Majeure Event as described in Article 14 of this Agreement.

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10.4 Limited Sale of Environmental Attributes.

(A) Effective from the Commercial Operation Date, EPE shall purchase all of the Solar Energy associated with the Solar Energy delivered by Seller. EPE shall also acquire, and retain ownership of, and the right to market and sell all of the Environmental Attributes (defined below) associated with the generation of Solar Energy associated with the Committed Solar Energy delivered by Seller; provided, however, that nothing in this Section 10.4 shall have any effect upon the monetary amounts for payments for energy, as the same may otherwise be provided for herein.

(B) “Environmental Attributes” means all attributes, excluding Tax Credits, of an environmental or other nature that are created or otherwise arise from the Facility’s generation of electricity from solar energy in contrast with the generation of electricity using nuclear or fossil fuels or other traditional resources. Forms of such attributes include any and all environmental air quality credits, green credits, carbon credits, emissions reduction credits, certificates, tags, offsets, allowances, or similar products or rights, howsoever entitled, (i) resulting from the avoidance of the emission of any gas, chemical, or other substance, including mercury, nitrogen oxide, sulfur dioxide, carbon dioxide, carbon monoxide, particulate matter or similar pollutants or contaminants of air, water, or soil gas, chemical, or other substance, and (ii) attributable to the generation, purchase, sale or use of solar energy associated with the Committed Solar Energy delivered by Seller from or by the Facility, or otherwise attributable to the Facility during the Term. Environmental Attributes include those currently existing or arising during the Term under local, state, regional, federal, or international legislation or regulation relevant to the avoidance of any emission described in this Section 10.4 under any governmental, regulatory or voluntary program, including the United Nations Framework Convention on Climate Change and related Kyoto Protocol or other programs, laws or regulations involving or administered by the Clean Air Markets Division of the Environmental Protection Agency or successor administrator (collectively with any local, state, regional, or federal entity given jurisdiction over a program involving transferability of Environmental Attributes, the “CAMD”). Seller and EPE shall execute all documents and instruments necessary to effect retention of the Environmental Attributes by EPE or its respective designees. Should the CAMD notify EPE that it will not authorize the retention by EPE of any Environmental Attributes as contemplated by this Agreement, Seller shall cooperate with the CAMD and take all reasonable action to enable EPE to retain the Environmental Attributes as herein described. Seller shall not submit to the CAMD, under §1605(b) of the Energy Policy Act of 1992 or any other applicable program, any reports describing any of the Environmental Attributes as belonging to anyone other than EPE or its respective designees. Seller and EPE will promptly give to one another copies of any documents they submit to the CAMD.

(C) Ownership by EPE of Environmental Attributes shall be for the entire Term of this Agreement, including any Environmental Attributes that are reserved or “banked” throughout the Term of this Agreement but not used, sold, assigned or otherwise transferred during the Term of this Agreement. EPE may, to the extent permitted by Applicable Law and this Agreement, assign its rights, title and interest in and to any Environmental Attributes associated with the Facility to one or more third parties under any transaction permitted by Applicable Law.

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(D) Tax Credits in effect on the date of this Agreement or any successor or other provision providing for a federal, state or local tax credit determined by reference to renewable electric energy produced from Solar Energy resources shall be owned by Seller.

(E) Environmental Attributes in the form of solar RECs associated with Solar Energy purchased pursuant to this Agreement shall be owned by EPE, who shall have the right to use such solar RECs to satisfy (i) any applicable legal requirements, including a renewable portfolio standard, or (ii) the purchase requirements of its retail customers.

10.5 Administrative Compliance Cost Obligations.

(A) Up to an annual amount of $25,000, Seller shall be solely responsible for the cost of administrative compliance with all Compliance Obligations, as well as all costs of complying with NMPRC Rule 572 and any NMPRC Rule(s) governing the registration and accounting for RECs that may be enacted or amended after the Execution Date.

(B) For any annual amount in excess of $25,000 for purposes described in (A) above, EPE and Seller shall each pay half of such amount provided, however, that Seller shall provide, within 30 days of the end of the year, an accounting of all such administrative compliance costs incurred for the year.

(C) Administrative compliance cost obligations referenced in this Section 10.5 shall not include costs associated with Seller’s obligations pursuant to Sections 3.3 and 4.7 of this Agreement or any fines or penalties assessed against Seller.

ARTICLE 11 - SECURITY FOR PERFORMANCE

11.1 Security Fund.

(A) Seller shall establish, fund, and maintain a security fund, pursuant to the provisions of this Article 11 (“Security Fund”), which shall be available to (i) pay any amount due EPE pursuant to this Agreement, whether arising before, on, or after the Commercial Operation Date or termination of this Agreement, (ii) provide EPE security that Seller will construct the Facility to meet the Construction Milestones, and (iii) provide security to EPE to cover damages, including Replacement Energy Costs, should the Facility fail to achieve the Commercial Operation Date or otherwise not operate in accordance with this Agreement. Seller shall establish the Security Fund at a level of twenty dollars per kilowatt ($20/kW) of Designed Maximum Output no later than thirty (30) Days following the Execution Date. Seller shall increase the Security Fund by twenty dollars per kilowatt ($20/kW) of Designed Maximum Output, to a total level of forty dollars per kilowatt ($40/kW) within thirty (30) Days of the later of (y) obtaining construction permits or (z) execution of the Interconnection Agreement, but in no event later than June 1, 2010. Seller shall increase the Security Fund by twenty dollars per kilowatt ($20/kW) of Designed Maximum Output, to a total level of sixty dollars per kilowatt ($60/kW) of Designed Maximum Output, at least thirty (30) days prior to the Commercial Operation Date. Seller shall maintain the Security Fund at such required level throughout the remainder of the Term. Seller shall replenish the Security Fund to the applicable required level within ten (10) Business Days after any draw on the Security Fund by EPE.

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(B) In addition to any other remedy available to it under this Agreement or at law, EPE may, to the extent Seller fails to perform or abide by the terms of this Agreement, or by order of a Governmental Authority of competent jurisdiction, before, on, or after termination of this Agreement, draw from the Security Fund such amounts as are necessary to recover amounts owing to EPE pursuant to this Agreement. Such amounts include any damages due to EPE and any amounts for which EPE is entitled to indemnification under this Agreement. EPE must provide notice to Seller ten (10) Business Days prior to drawing such amounts from the Security Fund. If Seller fails to deliver payment of such amounts by check or electronic funds transfer to EPE within ten (10) Business Days of such notification, EPE may, in its sole discretion, draw all or any part of such amounts due to it from any form of security to the extent available pursuant to this Section 11.1, and from all such forms, and in any sequence EPE may select. Any failure to draw upon the Security Fund or other security for any damages or other amounts due to EPE shall not prejudice EPE’s rights to recover such damages or amounts in any other manner.

(C) The Security Fund shall be established in the amounts specified in Section 11.1(A) above, shall be maintained at Seller’s sole expense, shall be originated by or deposited in a financial institution or company acceptable to EPE and meeting the requirements specified in Section 11.1(C)(1) below (“Issuer”), and, prior to the Commercial Operation Date, shall be (i) in the form of the instrument described in Section 11.1(C)(1) below, or (ii) at Seller’s election and at EPE’s reasonable discretion, in the form described in Section 11.1(C)(2) or 11.1(C)(3) below:

(1) An irrevocable standby letter of credit in a form and substance acceptable to EPE, from an Issuer with an unsecured bond rating (not enhanced by third-party support) equivalent to A- or better as determined by both Standard & Poor’s and Moody’s, or, if either one or both are not available, equivalent ratings from alternate rating sources acceptable to EPE (“Letter of Credit”). In addition, if such unsecured bond rating of the Issuer is exactly equivalent to A-, the Issuer must not be on credit watch or similar classification, or have a negative outlook by a rating agency. Such Letter of Credit must be consistent with this Agreement and shall include a provision for at least thirty (30) Days advance notice to EPE of any expiration or earlier termination of the Letter of Credit, so as to allow EPE sufficient time to exercise its rights under the Letter of Credit should Seller fail to extend or replace the same. The form of the Letter of Credit must meet EPE’s requirements to ensure that claims or draw-downs can be made unilaterally by EPE in accordance with the terms of this Agreement. Such security must be issued for a minimum term of three hundred and sixty (360) Days. Seller shall cause the renewal or extension of the security for additional consecutive terms of three hundred and sixty (360) Days or more (or, if shorter, the remainder of the Term) no later than thirty (30) Days prior to each expiration date of the Letter of Credit. If the Letter of Credit is not renewed or extended as required herein, EPE shall have the right to draw immediately upon the Letter of Credit and to place the amounts so drawn, at Seller’s cost and with Seller’s funds, in an interest bearing escrow account in accordance with Section 11.1(C)(2) below. The Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits (2007 Revision), International Chamber of Commerce Brochure No. 500 (the “UCP”), except to the extent that the terms hereof are inconsistent with the

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provisions of the UCP, in which case the terms of the Letter of Credit shall govern.

(2) United States currency deposited with an Issuer, in which EPE holds a first and exclusive security interest perfected by control, either: (i) in an account under which EPE is designated as beneficiary with sole authority to draft from the account or otherwise access the security; or (ii) in an account held by Issuer as escrow agent with instructions to pay claims made by EPE pursuant to this Agreement, such instructions to be in a form satisfactory to EPE (each an “Account”). Security provided in this form shall include a requirement for immediate notice to EPE from Issuer and Seller in the event that the sums held as security in the account do not at any time meet the required level for the Security Fund as set forth in this Section 11.1. Funds held in the account may be deposited in a money-market fund, short-term treasury obligations, investment-grade commercial paper and other liquid investment-grade investments with maturities of three months or less, with all investment income thereon to be taxable to, and to accrue for the benefit of, Seller. After the Commercial Operation Date is achieved, annual account sweeps for recovery of interest earned by the Security Fund shall be allowed by Seller. At such times as the balance in the escrow account exceeds the amount of Seller’s obligation to provide security under this Agreement, EPE shall remit to Seller on demand any excess in the escrow account above Seller’s obligations.

(3) A guaranty in a form and substance acceptable to EPE, from an Issuer with a senior unsecured credit rating (not enhanced by third-party support) equivalent to BBB+ or better as determined by both Standard & Poor’s and Moody’s, or if either one or both are not available, equivalent ratings from alternate rating sources acceptable to EPE (“Guaranty”). In addition, if such senior unsecured credit rating of the Issuer is exactly equivalent to BBB+, the Issuer must not be on credit watch or similar classification, or have a negative outlook by a rating agency. EPE may reevaluate from time to time the value of any Guaranty posted by Seller for possible downgrade or for other negative circumstances. If the credit rating of the Issuer is downgraded or EPE otherwise has commercially reasonable grounds to believe that there has been a material adverse change in the creditworthiness of the Issuer, then Seller shall be required to convert the Guaranty provided by such Issuer (i) to a Letter of Credit meeting the criteria set forth in Section 11.1(C)(1) above, or, (ii) at Seller’s election and at EPE’s reasonable discretion, to an Account or a Guaranty meeting the criteria set forth in Sections 11.1(C)(2) above and 11.1(C)(3), herein, respectively, no later than thirty (30) Days after receiving notice from EPE that such conversion is required pursuant to this Section 11.1(C)(3).

(D) Promptly following the end of the Term and the completion of all of Seller’s obligations under this Agreement, EPE shall release the balance of the Security Fund (including any accumulated interest, if applicable) to Seller.

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(E) If there is an early termination of this Agreement that is not due to default by Seller and no amounts remain outstanding and unpaid by Seller under the Agreement, EPE shall refund the Security Fund to Seller.

(F) Seller shall reimburse EPE for the incremental direct expenses (including the reasonable fees and expenses of counsel) incurred by EPE in connection with the preparation, negotiation, execution or release of any security instruments, and other related documents, used by Seller to establish and maintain the Security Fund pursuant to Seller’s obligations under this Section 11.1.

ARTICLE 12 - DEFAULT AND REMEDIES

12.1 Construction Events of Default. Subject to the notice and cure provision set forth below, any Construction Event of Default shall give EPE the unconditional right, in its sole discretion, to: (i) either terminate the Agreement or complete construction of the Facility at the expense of and for the account of Seller and operate the Facility during the Interim Period or beyond pursuant to Section 12.12 below, (ii) draw upon or otherwise negotiate and liquidate the Security Fund, and (iii) in the event EPE elects not to terminate this Agreement under Section 12.1(i) above, negotiate changes to this Agreement. EPE shall provide notice to Seller thirty (30) Days prior to taking any of the actions set forth in Section 12.1(i) above, specifying the Construction Event(s) of Default triggering such action(s), and shall not take such action(s) if Seller has remedied or is making significant progress towards remedying the specified Construction Event(s) of Default within the thirty (30) Day period following EPE’s notification; provided, however, such notice period shall be fifteen (15) Days with respect to Sections 12.1(B) and (C) herein. The following shall constitute Construction Events of Default:

(A) Seller becomes insolvent, becomes a debtor in any bankruptcy or receivership proceedings, or dissolves as a legal business entity;

(B) Any representation or warranty made by Seller is false or misleading in any material respect, and Seller fails to comply or make significant progress towards compliance with such representation or warranty within thirty (30) Days after a demand by EPE to do so;

(C) Seller fails to comply with any other material terms and conditions of the Agreement within sixty (60) Days after a demand by EPE to do so;

(D) Seller fails to meet any Construction Milestone, unless such failure is due to the action(s) or inaction(s) of EPE or is otherwise excused under this Agreement;

(E) Seller fails to diligently pursue construction after the Construction Commencement Date;

(F) The Facility fails, for reasons other than Force Majeure, to meet the Commercial Operation Milestone, unless Seller (i) notifies EPE ninety (90) Days prior to the Commercial Operation Milestone of a Revised Commercial Operation Milestone that is no later than December 31, 2011, as may be extended pursuant to Sections 4.4(i)-(ii) of this Agreement, and (ii) pursuant to Section 10.3 of this Agreement, agrees to obtain and deliver replacement solar RECs to EPE for the quantity of solar RECs that EPE notifies Seller EPE requires, up to the

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quantity of solar RECs associated with the Committed Solar Energy for the period between the Commercial Operation Milestone and the Revised Commercial Operation Milestone, in order for EPE to meet its obligations under NMPRC Rule 572 as a result of EPE’s acceptance of the Revised Commercial Operation Milestone;

(G) The Facility fails to meet the Commercial Operation Milestone or the Revised Commercial Operation Milestone; or

(H) The Facility is transferred by Seller without the requisite consent of EPE, as provided in Section 18.6 of this Agreement.

12.2 Operational Events of Default. Subject to the notice and cure provisions set forth below, any Operational Event of Default shall give EPE the unconditional right, in its sole discretion, to: (i) either terminate this Agreement or operate the Facility during the Interim Period pursuant to Section 12.12 below, (ii) draw upon or otherwise negotiate and liquidate the Security Fund, and (iii) in the event EPE elects not to terminate this Agreement under Section 12.1(i) above, negotiate changes to this Agreement. EPE shall provide notice to Seller thirty (30) Days prior to taking any of the actions set forth in Section 12.1(i) above, specifying the Operational Event(s) of Default triggering such action(s), and shall not take such action(s) if Seller has remedied or is making significant progress towards remedying the specified Operational Event(s) of Default within the thirty (30) Day period following EPE’s notification; provided, however, such notice period shall be fifteen (15) Days with respect to Sections 12.2(B) and (C) herein. The following shall constitute Operational Events of Default:

(A) Seller becomes insolvent, becomes a debtor in any bankruptcy or receivership proceedings, or dissolves as a legal business entity;

(B) Any representation or warranty made by Seller is false or misleading in any material respect, and Seller fails to comply or make significant progress towards compliance with such representation or warranty within thirty (30) Days after a demand by EPE to do so;

(C) Seller fails to comply with any other material terms and conditions of the Agreement within sixty (60) Days after a demand by EPE to do so;

(D) The Facility fails to generate at least fifty percent (50%) of Expected Solar Energy to be delivered to EPE under this Agreement for any eighteen (18) consecutive -month period, unless such failure is due to a Force Majeure Event(s). If such failure is due to a Force Majeure Event(s), EPE may terminate this Agreement as provided herein, but the failure does not constitute a default. Prior to such termination, however, EPE agrees to use good faith efforts to renegotiate this Agreement with Seller. If EPE does not terminate this Agreement as provided herein, Seller, pursuant to Section 10.3 of this Agreement, shall still be obligated to provide solar RECs associated with Solar Energy not produced; or

(E) The Facility is transferred by Seller without the requisite consent of EPE, as provided in Section 18.6 of this Agreement.

12.3 Seller’s Abandonment of Construction or Operation of the Facility. Subject to the notice and cure provision set forth below, any event(s) of Abandonment described in Section

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1.4.1 of this Agreement shall give EPE the unconditional right, in its sole discretion, to: (i) either terminate this Agreement or complete construction of the Facility at the expense of an for the account of Seller and operate the Facility during the Interim Period or beyond pursuant to Section 12.12 below, (ii) draw upon or otherwise negotiate and liquidate the Security Fund, and (iii) in the event EPE elects not to terminate this Agreement under Section 12.1(i) above, negotiate changes to the Agreement. EPE shall provide notice to Seller thirty (30) Days prior to taking any of the actions set forth in Section 12.1(i), (ii) or (iv) above, specifying the event(s) of Abandonment triggering such action(s), and shall not take such action(s) if Seller has remedied or is making significant progress towards remedying the specified event(s) of Abandonment within the thirty (30) Day period following EPE’s notification.

12.4 EPE Events of Default. Subject to the notice and cure provision set forth below, any EPE Event of Default shall give Seller the unconditional right, in its sole discretion, to terminate this Agreement. Seller shall provide notice to EPE thirty (30) Days prior to terminating this Agreement specifying the Event(s) of Default triggering such termination, and shall not terminate if EPE has remedied or is making significant progress towards remedying the specified Event(s) of Default within the specified cure period, and if no such cure period is provided, within the thirty (30) Day period following Seller’s notification; provided, however, such notice period shall be fifteen (15) Days with respect to Sections 12.4 (B) and (C) herein. The following shall constitute EPE Events of Default:

(A) EPE becomes insolvent, becomes a debtor in any bankruptcy or receivership proceedings, or dissolves as a legal business entity;

(B) Any representation or warranty made by EPE is false or misleading in any material respects, and EPE fails to comply or make significant progress towards compliance with such representation or warranty within thirty (30) Days after a demand by Seller to do so; or

(C) EPE fails to comply with any other material terms and conditions of the Agreement within sixty (60) Days after a demand by Seller to do so.

12.5 Actual Damages. For all events of default described in Sections 12.1, 12.2, 12.3 and 12.4 above (each an “Event of Default”), the non-defaulting Party shall be entitled to receive from the defaulting Party all actual damages incurred by the non-defaulting Party in connection with such Event of Default. If Seller is the defaulting Party, the damages recoverable by EPE on account of a Construction Event of Default or an Operational Event of Default shall include Replacement Energy Costs, provided that damages associated with a Construction Event of Default shall not exceed the amount of the Security Fund provided by Seller. If EPE is the defaulting Party, Seller shall use commercially reasonable efforts to sell the Expected Solar Energy, and EPE shall pay Seller the differential between the contract price under this Agreement and sales price, which Seller shall estimate using commercially reasonable efforts if Seller is unable to enter into a sales transaction of the same term as the remaining term of this Agreement.

12.6 No Incidental, Consequential, or Indirect Damages. Except for Seller’s obligations to make EPE whole for solar RECs as described in Article 10 and Section 12.1(F) of this Agreement and the potential penalties assessed to Seller pursuant to Section 19.3 of this Agreement, the express remedies and measures of damages provided in this Agreement satisfy

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the essential purposes hereof. If no remedy or measure of damages is expressly herein provided, the obligor’s liability shall be limited to direct, actual damages only. Neither Party shall be liable to the other Party for consequential, incidental, punitive, exemplary or indirect damages, lost profits or other business interruption damages by statute, in tort or contract (except in each case to the extent expressly provided herein); provided that, if either Party is held liable to a third party for such damages, and the Party held liable for such damages is entitled to indemnification under this Agreement from the other Party, the indemnifying Party shall be liable for, and obligated to reimburse the indemnified Party for, such damages, all in accordance with the indemnification provisions of Article 17 of this Agreement.

12.7 Duty to Mitigate. Each Party agrees that it has a duty to mitigate damages and agrees that it will use commercially reasonable efforts to minimize any damages that may incur as a result of the other Party’s performance or non-performance of the Agreement.

12.8 Dispute Resolution.

(A) In the event of any dispute arising under this Agreement (“Dispute”), within ten (10) Days following the delivered date of a written request by either Party (a “Dispute Notice”), (i) each Party shall appoint a representative (individually, a “Party Representative” and collectively “Parties’ Representatives”), and (ii) the Parties’ Representatives shall meet, negotiate and attempt in good faith to resolve the Dispute quickly, informally and inexpensively.

(B) In the event the Parties’ Representatives cannot resolve the Dispute within thirty (30) Days after commencement of negotiations, within ten (10) Days of the conclusion of such negotiations at the written request of either Party, each Party Representative shall (i) independently prepare a written summary of the Dispute describing the issues and claims, (ii) exchange its summary with the summary of the Dispute prepared by the other Party Representative, and (iii) submit a copy of both summaries to a senior officer of the Party Representative’s with authority to irrevocably bind the Party to a resolution of the Dispute.

(C) Within ten (10) Business Days after receipt of the Dispute summaries, the senior officers for both Parties shall negotiate in good faith to resolve the Dispute.

(D) In such meetings and exchanges, a Party shall have the right to designate as confidential any information that such Party offers. No confidential information exchanged in such meetings for the purpose of resolving a Dispute may be used by a Party in any proceeding against the other Party.

12.9 Mediation. Disputes not resolved under Section 12.8 above shall, upon mutual consent, be submitted to mediation pursuant to the Mediation Rules of the American Arbitration Association. The Parties shall select the mediator within fifteen (15) Days of the request for mediation. Mediation shall be conducted in New Mexico, at a location to be determined by the Parties, notwithstanding anything to the contrary under the Mediation Rules of the American Arbitration Association.

12.10 Other Dispute Processes. If neither the negotiations under Section 12.8 above nor mediation successfully resolves the dispute, the Parties agree that an action may be filed in the appropriate state or federal court located in New Mexico.

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12.11 Cost of Dispute Resolution. The cost of any mediation proceeding shall be shared equally by the Parties. The prevailing Party in any dispute that goes beyond mediation arising out of or relating to this Agreement or its breach shall be entitled to recover from the other Party reasonable attorneys’ fees, costs and expenses incurred by the prevailing Party in connection with such dispute.

12.12 Operation by EPE Following a Construction Event of Default, an Operational Event of Default, or Seller’s Abandonment of Construction or Operation of the Facility.

(A) Upon a Construction Event of Default, or an Operational Event of Default, as the case may be, EPE shall have the right, but not the obligation, to possess, assume control of, and operate the Facility (in accordance with Seller’s rights, obligations, and interest under this Agreement) during the Interim Period provided for herein. If a Construction Event of Default lasts more than three hundred sixty-five (365) Days, then within sixty (60) Days EPE shall have the right but not the obligation to elect to: (i) terminate this Agreement; (ii) continue to construct the Facility beyond the Interim Period for an additional period of up to sixty (60) Days; or (iii) purchase the Facility at fair market value. If an Operational Event of Default lasts more than 365 days, then EPE shall have the right to terminate the Agreement. Upon Seller’s Abandonment of construction or operation of the Facility, as the case may be, EPE shall have the right, but not the obligation, to possess, assume control of, and operate the Facility (in accordance with Seller’s rights, obligations, and interest under this Agreement), for (i) the Interim Period, or (ii) beyond the Interim Period on a permanent basis. Following the Interim Period, if EPE elects to takes over on a permanent basis, EPE shall, at its sole option, within sixty (60) Days, either buy or lease the Facility from Seller at fair market value, as determined in a commercially reasonable manner. Subject to the provisions of Section 3.1(A) of this Agreement, Seller shall not grant any person, other than the Facility Lender, a right to possess, assume control of, and operate the Facility that is equal to or superior to EPE’s right under this Section 12.12.

(B) EPE shall give Seller and the Facility Lender thirty (30) Days notice in advance of the contemplated exercise of EPE’s rights under this Section 12.12. Upon such notice, Seller shall collect and have available at a convenient, central location at the Facility all documents, contracts, books, manuals, reports, and records required to construct, operate, and maintain the Facility in accordance with Good Utility Practice. Upon such notice, EPE, its employees, contractors, or designated third parties shall have the unrestricted right to enter the Site and the Facility for the purpose of constructing and operating the Facility.

(C) In the event EPE exercises its option to assume possession, control and operation of the Facility under this Section 12.12, EPE shall do so on its own behalf and shall be solely responsible for any and all consequences of its actions and inactions, including consequences resulting from EPE’s negligence and misconduct. During the Interim Period, EPE agrees to keep Seller informed regarding construction and/or operation of the Facility. Seller shall not be bound by any contractual obligations created by EPE with third parties during any period that EPE has assumed possession, control or operation of the Facility.

(D) EPE shall be entitled to draw upon the Security Fund to cover any expenses incurred by EPE in exercising its rights under this Section 12.12, provided such draw shall not occur prior to Seller having been given a commercially reasonable opportunity to review and dispute such expenses, which shall not exceed twenty (20) Days.

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(E) During any period that EPE is in possession of and constructing, controlling or operating the Facility pursuant to this Section 12.12, EPE shall perform and comply with all of the obligations of Seller under this Agreement and shall use the proceeds from the sale of electricity generated by the Facility to (i) first, reimburse EPE for any and all expenses reasonably incurred by EPE in taking possession of and operating the Facility, and (ii) second, remit any remaining proceeds to Seller.

(F) Unless EPE elects to take over the Facility on a permanent basis and buys the Facility from Seller at fair market value as provided in Section 12.12(A) above, during any period that EPE assumes possession, control or operation of the Facility, Seller shall retain legal title to and ownership of the Facility.

(1) In the event that EPE is in possession, control or is operating the Facility for the Interim Period, Seller may resume possession, control and operation of the Facility (in accordance with the provisions of this Agreement) when Seller demonstrates, to EPE’s reasonable satisfaction, that Seller will cure the Construction Event of Default, or Operational Event of Default, as the case may be, that originally gave rise to EPE’s right to possess, control or operate the Facility.

(2) In the event that EPE is in possession, control or is operating the Facility for the Interim Period, the Facility Lender, or any nominee or transferee thereof, may foreclose and assume possession, control and operation of the Facility, and EPE shall relinquish its right to possess, control and operate the Facility when the Facility Lender or any nominee or transferee thereof, requests such relinquishment.

(G) EPE’s exercise of its rights under this Agreement to assume possession, control and operation of the Facility shall not be deemed an assumption by EPE of any liability attributable to Seller. If at any time after exercising its rights to take possession of, control and operate the Facility EPE elects to return such possession, control and operation to Seller, EPE shall provide Seller with at least fifteen (15) Days advance notice of the date EPE intends to return such possession, control and operation, and, upon receipt of such notice, Seller shall take all measures necessary to resume possession, control and operation of the Facility on such date.

(H) In the event EPE assumes possession, control and operation of the Facility under this Section 12.12, EPE shall do so in conformance with Good Utility Practice.

12.13 Specific Performance. In addition to the other remedies specified in this Article 12, in the event that any Construction Event of Default or Operational Event of Default is not cured within the applicable cure period set forth above, EPE may elect to treat this Agreement as being in full force and effect, and EPE shall have the right to specific performance. If the breach by Seller arises from a failure by third party operating the Facility pursuant to an operating agreement entered into with Seller, and Seller fails or refuses to enforce its rights under the operating agreement that would result in the cure, or partial cure, of the Construction Event of Default or Operational Event of Default, as the case may be, then EPE’s right to specific performance shall include the right to obtain a court order compelling Seller to enforce its rights under the operating agreement.

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12.14 Remedies Cumulative. The exercise, or the beginning of the exercise, by a Party of any one or more or the rights or remedies provided for herein shall not preclude the simultaneous or later exercise by such Party of any or all other rights or remedies provided for herein.

12.15 Payment of Amounts Due to EPE. Without limiting any other provisions of this Article 12 and at any time before or within two (2) years after termination of this Agreement, EPE may send Seller an invoice for such damages or other amounts as are due to EPE at such time from Seller under this Agreement, and such invoice shall be payable in the manner, and in accordance with the applicable provisions, set forth in Article 9, including the provision for late payment charges. EPE may withdraw funds from the Security Fund as needed to provide payment for such invoice if the invoice is not paid by Seller on or before the twentieth (20th) Business Day following the invoice due date.

ARTICLE 13 - FACILITY OPERATION AND CONTRACT ADMINISTRATION

13.1 Facility Operation. Seller shall staff, control, and operate the Facility at all times in a manner that:

(A) is consistent with Good Utility Practice(s), subject only to Emergency Conditions, Force Majeure Events and Delivery Excuses;

(B) complies with all applicable national and regional reliability standards, including standards set by WECC, NERC, the FERC, and the NMPRC, or any successor agencies setting reliability standards for the operation of generation facilities interconnected in the WECC; and

(C) complies with the Operating Procedures developed jointly with EPE.

13.2 Operating Committee and Operating Procedures.

(A) EPE and Seller shall each appoint one representative and one alternate representative to act in matters relating to the Parties’ performance obligations under this Agreement and to develop operating arrangements for the generation, delivery and receipt of Solar Energy. Such representatives shall constitute the “Operating Committee.” The Parties shall notify each other in writing of such appointments and any changes thereto. The Parties’ representatives designated above shall have authority to act for their respective principals in all technical matters relating to performance of this Agreement and to attempt to resolve disputes or potential disputes. The Operating Committee shall have no authority to modify the terms or conditions of this Agreement.

(B) Prior to the Commercial Operation Date, the Operating Committee shall develop mutually agreeable written operating procedures (“Operating Procedures”) that shall include, but not be limited to: (i) a key personnel list for applicable EPE and Seller operating centers; (ii) the method of day-to-day communications; (iii) metering, telemetering, telecommunications, data acquisition, and Facility status reporting procedures; (iv) procedures for the development and communication of weekly and daily forecasts of the hourly net generation from the Facility; (v) maintenance scheduling and reporting procedures; (vi) procedures as defined in Sections 13.3, 13.4, 13.5, 13.6, 13.7, 13.8, 13.9, 13.10, 13.11, 13.12, and 13.13 of this Agreement; and (v) such

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other matters as may be mutually agreed upon by the Parties. If any such procedures are not developed, Seller will operate the Facility using other procedures that comply with Section 13.1 of this Agreement until agreed procedures are developed.

13.3 Scheduling.

(A) Seller shall schedule energy deliveries from the Facility based upon a committed delivery of As-Available Solar Energy, except for Forced Outages, Scheduled Maintenance Outages, Additional Maintenance Outages, Force Majeure Events and Emergency Conditions. At least thirty (30) Days prior to the anticipated Commercial Operation Date, Seller shall provide EPE with a good faith estimate of the quantity of Solar Energy associated with the Expected Solar Energy that it expects to generate for the remainder of that Year and, thereafter, by August 1 of each succeeding Year, Seller shall provide EPE with a good faith estimate of the quantity of Solar Energy associated with the Expected Solar Energy that Seller expects to generate in each such Year (the “Projected Schedule”).

(B) Seller shall provide or cause the Operation and Maintenance Contractor to provide to EPE its good faith, non-binding estimates of the daily quantity of Solar Energy associated with the Expected Solar Energy to be delivered by Seller to the Point of Delivery for each week (starting on Sunday through Saturday) by 4:00 p.m. MPT on the date falling at least three (3) Days prior to the beginning of that week.

(C) Pursuant to scheduling instructions of EPE or any superseding policies or procedures of EPE’s SOC or otherwise, by 8:00 a.m. MPT on each Day, Seller shall submit to EPE a good faith estimate of the hourly quantities of Solar Energy associated with the Expected Solar Energy to be delivered for EPE at the Point of Delivery for the next three (3) subsequent Days.

(D) If, at any time following submission of a good faith estimate to EPE on the Day preceding the next subsequent Day, Seller becomes aware of any change to any of the values contained in the good faith estimate or predicts that such values will be subject to change before the end of the next subsequent Day, then Seller shall promptly notify EPE no later than sixty (60) minutes before the next scheduling hour of such change or predicted change.

13.4 Forced Outages. Seller shall notify EPE by telephone or e-mail (with confirmation to follow by written notice in each case) immediately upon discovering that the Facility is unable to deliver all or part of any scheduled quantity of Solar Energy associated with the Expected Solar Energy due to a Forced Outage and, as soon as reasonably practicable following such discovery, shall notify EPE in writing of its best estimate of the expected duration of such Forced Outage. Such estimate by Seller shall be based on the best information available to it. Should Seller expect any further changes in the duration of any such Forced Outage, it shall promptly notify EPE of the same.

13.5 Scheduled Maintenance.

(A) Three (3) Months prior to the Commercial Operation Date and, thereafter, by August 1 of each Year, Seller shall deliver to EPE the Projected Schedule for the Facility for the subsequent four (4) Year period, including Scheduled Maintenance Outages. Seller shall take

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manufacturers’ recommendations and Good Utility Practices into account when establishing the proposed schedule for Scheduled Maintenance Outages, which schedule shall correspond with the Projected Schedule. Unless otherwise required by Good Utility Practice, Scheduled Maintenance Outages and Additional Maintenance Outages may not be scheduled during the Months of June, July, August, or September unless agreed to in writing by EPE at its sole discretion (the “Non-Scheduled Maintenance Period”).

(B) Within thirty (30) Days of receiving the Projected Schedule for Scheduled Maintenance Outages from Seller, EPE may propose amendments thereto. Seller shall not unreasonably withhold its consent to such proposed amendments, provided that, it shall not be unreasonable for Seller to withhold its consent to any such proposed amendments that would be contrary to Good Utility Practices, and EPE shall pay the incremental costs of implementing such proposed amendments.

(C) In the event that Seller should reject any proposed amendments of EPE as set forth in Section 13.5(B) above, Seller shall promptly notify EPE of its reasons for such rejection, whereupon Seller and EPE shall in good faith negotiate a reasonable schedule of Scheduled Maintenance Outages. If such agreement is not reached within ten (10) Days of receipt by EPE of Seller’s rejection notice, Seller shall submit a final schedule of Scheduled Maintenance Outages based on Good Utility Practices and the availability of the Operation and Maintenance Contractor which final schedule shall, to the extent reasonably possible, take into account the proposed amendments of EPE.

(D) Seller shall be entitled to change any Scheduled Maintenance Outages for the then current Year if such changes are required to comply with Good Utility Practices or, in the alternative, if EPE consents to the change, provided that: (i) any changes in annual scheduled maintenance of up to two (2) Days’ duration shall require one (1) week’s prior written notice to EPE, (ii) any changes in annual scheduled maintenance of greater than two (2) Days but less than three (3) weeks’ duration shall require one (1) Months’ prior written notice to EPE and (iii) any changes shall not be scheduled during the Non-Scheduled Maintenance Period unless otherwise required by Good Utility Practice. Seller shall not unreasonably refuse to change the schedule of Scheduled Maintenance Outages if requested to do so by EPE upon not less than thirty (30) Days prior notice, provided that: (y) any such change would not be contrary to Good Utility Practices, and (z) the Operation and Maintenance Contractor is available.

(E) Any maintenance outages that do not correspond to the descriptions contained in clauses (A)-(D) of this Section 13.5 shall be deemed to be Additional Maintenance Outages under Section 13.6 below.

13.6 Additional Maintenance Outages. As the need arises for Seller to conduct further maintenance on the Facility in addition to that conducted pursuant to Section 13.2, 13.5 and elsewhere in this Agreement (“Additional Maintenance Outages”), Seller shall notify EPE of such required maintenance, together with proposed dates for carrying out such additional maintenance and the estimated duration of the work to be carried out. Unless deferral of such maintenance would cause an Emergency Condition, without prejudice to the commitment of Seller in respect of the availability of the Facility, Seller and EPE shall negotiate in good faith a reasonable schedule during which such Additional Maintenance Outages shall take place. If agreement is not reached within twenty (20) Days of receipt of such notice, Seller shall prepare a

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schedule of such Additional Maintenance Outages based on Good Utility Practices taking into account the reasonable requests of EPE to the extent reasonably possible.

13.7 Access to and Inspection of Facility.

(A) Seller shall provide EPE and its authorized agents, employees and inspectors with reasonable access to the Facility for the purposes set forth in this Article 13. EPE acknowledges that such access does not provide EPE with the right to direct or modify the operation of the Facility in any way and further acknowledges that any exercise by EPE of its rights under this Section 13.7 shall be at its own risk and expense.

(B) No inspections of the Facility, whether by EPE or otherwise, shall relieve Seller of its obligation to maintain the Facility and operate the same in accordance with Good Utility Practices. In no event shall any statement, representation, or lack thereof by EPE, either express or implied, relieve Seller of its exclusive responsibility for the Facility. Any inspection of property or equipment owned or controlled by Seller by EPE or any review by EPE or consent by EPE to Seller plans, shall not be construed as an endorsement by EPE of the design, fitness or operation of the Facility equipment or a warranty by EPE as to the safety, durability or reliability of the Facility equipment.

13.8 Operating Parameters.

(A) Seller shall: (i) have the sole responsibility to, and shall at its sole expense, operate and maintain the Facility in accordance with all requirements set forth in this Agreement, and (ii) comply with reasonable requirements of EPE regarding Day-to-Day or hour-by-hour communications with EPE. Seller agrees to operate the Facility in such a manner that Solar Energy delivered by Seller will meet all applicable requirements for voltage level, harmonics, power factor, vars, ancillary services and other electrical specifications required by the Transmission Provider.

(B) Seller shall operate the Facility in accordance with all system protection equipment as required by the Interconnection Agreement.

13.9 Operating Records. Seller and EPE shall each keep and maintain complete and accurate records and all other data required by each of them for the purposes of proper administration of this Agreement, including such records as may be required by Governmental Authorities and WECC in the prescribed format of those entities. Such requirements shall be specified in the Operating Procedures described in Section 13.2(B) of this Agreement. All records of Seller and EPE pertaining to this Agreement or to the operation of the Facility, as specified herein or otherwise shall be maintained for a period of two (2) years in either hard copy (paper) or in electronic form by Seller at the Facility or by EPE, as applicable, in the Las Cruces, New Mexico, metropolitan area in such format as may be required by Applicable Law or any Governmental Authority.

13.10 Operating Log. Seller shall maintain an accurate and up-to-date operating log in electronic format as defined in the Operating Procedures, with records of production for each hour and changes in operating status.

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13.11 Availability Reporting. Seller shall comply with all current EPE, NERC, and WECC generating unit outage reporting requirements as they may be revised from time to time and as they apply to the Facility. Such outage reporting requirements shall be specified in the Operating Procedures.

13.12 Examination and Retention of Records. Seller or EPE may examine, and each at its own expense obtain copies, of the operating records and data kept by the other Party relating to transactions under and administration of this Agreement, at any time during the period the records are required to be maintained, upon prior request and during normal business hours. A Party’s review of any such data shall in no way relieve the other Party of its responsibility for the professional quality, technical accuracy and completeness of such data. Each Party shall retain such operating records and data for the period of time required by applicable law.

13.13 Facility Development Records and Data Submissions. Seller shall submit or cause to be submitted to EPE the following documents on or before the dates specified below:

(1) In addition to the progress reports required under Section 4.5 of this Agreement, commencing on the Agreement Approval Date and ending on the Commercial Operation Date, (i) a summary of such other reports as are submitted to Seller by its engineer, and (ii) written notification, when and as Seller becomes aware, of any new condition or event that may have a material adverse effect on the timely completion of the Facility.

(2) Seller shall maintain all records, invoices and other information relating to the costs of construction of the Facility. Quarterly, beginning no later than ninety (90) Days after the Agreement Approval Date and ending when all costs have been determined or incurred, a statement from Seller showing the percentage of the level of completion of the Facility.

(3) No later than thirty (30) Days prior to the Commercial Operation Date, (i) evidence demonstrating that Seller has obtained all Governmental Approvals then required to be obtained for the ownership, operation and maintenance of, and the supply of Solar Energy from, the Facility in accordance with this Agreement, and (ii) a list identifying the remaining Governmental Approvals for which Seller is responsible under the terms of this Agreement, which Governmental Approvals are not yet required for the operation and maintenance of, and the supply of Solar Energy from, the Facility, together with a plan reasonably acceptable to EPE for obtaining such Governmental Approvals and an estimate of the time within which such Governmental Approvals will be obtained by Seller.

(4) On or before the Commercial Operation Date, a certificate from its engineer to the effect that, based upon the engineer’s monitoring and review of construction, the Facility has been constructed in all material respects in compliance with the development plan for the Facility and all permanent equipment installed as part of the Facility was new (or remanufactured) and unused (as remanufactured, if applicable) when installed.

(5) A certificate dated as of the Commercial Operation Date signed by the representative of Seller, which certificate shall specify that no default or Event of Default

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by Seller has occurred that would, with or without the giving of notice or passage of time, or both, constitute an Event of Default by Seller.

(6) As soon as available, but not later than sixty (60) Days following the Commercial Operation Date, two (2) copies of all results of Commissioning Tests performed on the Facility, including Commissioning Testing of major equipment included in the Facility and the Transmission System.

(7) Upon request by EPE and at least thirty (30) Days following the Commercial Operation Date, a list of all manufacturers’ specifications and manufacturers’ operation manuals for all major items of equipment incorporated into the Facility.

(8) Upon request by EPE, a list of all as-built drawings for the Facility, including the civil and architectural works, and when provided to Seller, a list of all other design and engineering data and information necessary to enable the Operation and Maintenance Contractor to operate and maintain the Facility during any period when such operation and maintenance is required under the Operation and Maintenance Agreement. However, should EPE exercise its rights under this Agreement to operate and/or purchase the Facility, Seller shall immediately provide copies of the aforementioned documents to EPE, and EPE shall utilize such documents on a need-to-know basis for the sole purpose of operating the Facility.

(9) The receipt of the above schedules, data, certificates and reports by EPE shall not (i) be construed as an endorsement by EPE of the design of the Facility, (ii) constitute a warranty by EPE as to the safety, durability or reliability of the Facility, (iii) relieve Seller of any of its obligations or potential liabilities under the Project Contracts, or (iv) except with respect to the obligations of EPE to maintain the confidentiality of documents and information received by it, impose any obligation or liability on EPE.

ARTICLE 14 - FORCE MAJEURE

14.1 Definition of a Force Majeure Event.

(A) The term “Force Majeure Event,” as used in this Agreement, means causes or events beyond the reasonable control of, and without the fault or negligence of the Party claiming Force Majeure, including, without limitation: (i) acts of God; (ii) sudden actions of the elements such as floods, earthquakes, hurricanes, or tornadoes; (iii) high winds of sufficient strength or duration to materially damage a facility or significantly impair its operation for a period of time longer than normally encountered by similar businesses under comparable circumstances; (iv) material changes in the Facility’s Solar Energy potentially caused by climactic change; (v) lightning, fire, ice storms, or sabotage; (vi) vandalism beyond that which could reasonably be prevented by Seller; (vii) terrorism; (viii) war; (ix) riots; (x) explosion; (xi) blockades; (xii) insurrection; (xiii) strike; (xiv) slow down or labor disruptions (even if such difficulties could be resolved by conceding to the demands of a labor group); (xv) actions or inactions by any Governmental Authority taken after the date hereof (including the adoption or change in any rule or regulation or environmental constraints lawfully imposed by such Governmental Authority), but only if such requirements, actions, or failures to act prevent or delay performance; (xvi) inability, despite due diligence, to obtain any licenses, permits, or

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approvals required by any Governmental Authority; (xvii) construction delays beyond Seller’s control, including but not limited to litigation by a third party to prevent Construction of the Facility, that occur despite Seller’s commercially reasonable efforts to achieve the Construction Milestones set forth in Exhibit A to this Agreement, and (xviii) a national, regional, or local pandemic as declared by the United States government.

(B) The term Force Majeure Event does not include: (a) any acts or omissions of any third party, including, without limitation, any vendor, customer, or supplier of Seller, unless such acts or omissions are themselves excused by reason of a Force Majeure Event; (b) any failure or inability to make payments when due, (c) any full or partial curtailment in the electric output of the Facility that is caused by or arises from a mechanical or equipment breakdown or other mishap or events or conditions attributable to normal wear and tear or flaws (unless such mishap is caused by one of the following: (i) acts of God, (ii) sudden actions of the elements, including, but not limited to, floods, hurricanes, or tornadoes, (iii) sabotage, (iv) terrorism, (v) war, (vi) riots, and (vii) emergency orders issued by a Governmental Authority); or (d) changes in market conditions that affect the cost of EPE’s or Seller’s supplies, or that affect demand or price for any of EPE’s or Seller’s products, .

14.2 Applicability of Force Majeure.

(A) Except as otherwise provided in this Agreement, neither Party shall be responsible or liable for any delay or failure in its performance under this Agreement, nor shall any delay, failure, or other occurrence or event become a Construction Event of Default, an Operational Event of Default, or an EPE Event of Default, to the extent such delay, failure, occurrence or event is substantially caused by a Force Majeure Event, provided that the notification obligations and terms of Section 14.3(B) and 14.4(B) of this Agreement are complied with.

(B) Except as otherwise expressly provided for in this Agreement, the existence of a Force Majeure Event shall not relieve the Parties of their obligations under this Agreement to the extent that performance of such obligations is not precluded by a Force Majeure Event, provided, a Force Majeure Event shall not excuse either Party from any failure or inability to make payments when due.

14.3 Effect of Seller’s Force Majeure.

(A) Adjustment. (1) If Seller should suffer a Force Majeure Event that reduces the generating capability of the Facility below the Expected Solar Energy, Seller may, upon notice to EPE, temporarily adjust the Expected Solar Energy for up to twenty-four (24) consecutive Months; provided, however, that no more than one such temporary adjustment may be made by Seller within any twenty-four (24) Month period in relation to that Force Majeure Event, unless EPE otherwise consents to such additional temporary adjustment in writing, such consent not to be unreasonably withheld. Within three (3) Months after any such Force Majeure Event is cured, Seller may, on one occasion, and without penalty, designate a new Expected Solar Energy level to apply for the remainder of the Term; provided, however, that such new Expected Solar Energy level shall be at least seventy percent (70%) and no more than one hundred percent (100%) of the Expected Solar Energy at the time immediately prior to the Force Majeure Event. Any temporary or final adjustment or re-designation of the Expected Solar Energy pursuant to this subsection (A)(1) must be directly attributable to the Force Majeure Event and of a magnitude

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commensurate with the scope and impact of the Force Majeure Event. Such adjustment shall be effective upon the first Day immediately following receipt of such notice by EPE or such later date as may be specified by Seller, and shall not exceed the amount necessary to accommodate the Force Majeure Event. Any Dispute between Seller and EPE regarding the amount of such temporary or final re-designation shall be settled in accordance with Section 12.8 of this Agreement.

(2) If the Facility should be rendered completely inoperative as a result of a Force Majeure Event, Seller shall temporarily set the Committed Solar Energy at 0 kWh until such time as the Facility can partially or fully operate at the Committed Solar Energy level that existed prior to the Force Majeure Event. Except for amounts payable and owing to Seller by EPE under this Agreement, if the Committed Solar Energy is 0 kWh, EPE shall have no obligation to make any payments under this Agreement.

(3) Subject to (1) and (2) above, upon the cessation of a Force Majeure Event or upon its cure, the Expected Solar Energy shall be restored to the Expected Solar Energy level that existed immediately prior to such Force Majeure Event. Notwithstanding any other provisions of this Agreement, upon such cessation or cure, EPE shall have the right to require a test to demonstrate the Facility’s compliance with the requirements of this Section.

(4) Subject to subsection (E), Seller agrees to be responsible for and pay the costs necessary to reactivate the Facility and the interconnection with the Transmission Provider’s Interconnection System up to the Point of Delivery, if the same are rendered inoperable due to actions of Seller, its employees, representatives or agents, or Force Majeure Events affecting Seller, the Facility or the interconnection with the Transmission Provider’s Interconnection System.

(B) Seller’s Notification Obligations. In the event of any delay or nonperformance resulting from a Force Majeure Event, Seller shall notify EPE in writing as soon as practicable after becoming aware of such occurrence. Within fourteen (14) days of becoming aware of the occurrence of a Force Majeure Event, Seller shall notify EPE in writing of the nature, cause, date of commencement thereof and the anticipated duration, and shall indicate whether any deadlines or date(s) imposed under this Agreement may be affected thereby. The suspension of performance shall be of no greater scope and of no greater duration than the cure for the Force Majeure Event requires. A Party claiming that a Force Majeure Event has occurred shall not be entitled to any relief therefor unless conforming notice is provided within the time period required. Seller shall notify EPE of the cessation of the Force Majeure Event or of the conclusion of Seller’s cure for the Force Majeure Event, in either case within two (2) Business Days thereof.

(C) Seller’s Duty to Mitigate. Seller shall use commercially reasonable efforts to cure the cause(s) preventing its performance of this Agreement; provided, however, that the settlement of strikes, lockouts and other labor disputes shall be entirely within the discretion of Seller, and Seller shall not be required to settle such strikes, lockouts or other labor disputes by acceding to demands which Seller deems to be unreasonable.

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(D) Delay Caused by Seller’s Force Majeure Event. Upon the occurrence and during the continuance of a Force Majeure Event and the effects thereof, to the extent that a Force Majeure Event affects the ability of the Transmission Provider to accept Solar Energy from the Facility or to the extent that a Force Majeure Event affects the ability of Seller to test for Committed Solar Energy pursuant to Section 4.6 or to deliver Solar Energy from the Facility, then the hours during which the Force Majeure Event occurs shall be excluded from the payment calculations as set forth in Section 8.1 of this Agreement.

(E) Seller’s Force Majeure Restoration. (1) In the event that, as a result of one or more Force Majeure Event(s) or its or their effects or by any combination thereof, the construction or operation of the Facility or any part thereof is affected and is not restored or remedied within thirty (30) Days following the date the Force Majeure Event(s) began, then Seller shall prepare and deliver to EPE a Restoration Report pursuant to subsection (G) below and provisions (3)-(5) of this subsection (E) shall apply.

(2) Subject to clauses (3) and (4) below, Seller shall proceed with the remedying of the construction or operation of the Facility (“Restoration”) in accordance with a schedule contained in the relevant Restoration Report, as defined in subsection (G) hereof (the “Restoration Schedule”). The cost of such Restoration shall be the sole responsibility of Seller; and no compensation shall be payable by EPE to Seller with respect to any damage to the Facility as a result of the Force Majeure Event.

(3) If EPE does not agree with the Restoration Schedule contained in the Restoration Report, then EPE shall notify Seller within fifteen (15) Days of receipt of the Restoration Report and shall, in such notice, propose an alternative Restoration Schedule. If the Parties cannot agree upon a revised Restoration Schedule within the fifteen (15) Day period following the notice, then either Party may submit the matter to mediation pursuant to Section 12.9 of this Agreement to determine the proper Restoration Schedule. Notwithstanding the foregoing, Seller shall, subject to satisfying any of the conditions or requirements of the entity providing the financing for the Restoration (including any insurance company paying a claim to Seller), have the option to proceed with the Restoration while the issue of the Restoration Schedule is being resolved.

(4) If Restoration of the Facility is not technically feasible or the Restoration cost estimate is greater than Five Million Dollars ($5,000,000), then Seller shall have the right to terminate this Agreement, whereupon EPE shall have the right but not the obligation to purchase the Facility at fair market value, as determined in a commercially reasonable manner. Seller shall not be entitled to any compensation from EPE unless EPE elects that Seller shall sell the Facility to EPE or its designee(s). If Seller decides not to terminate this Agreement, Seller may seek to renegotiate this Agreement only if the market price for Solar Energy is more than 125 percent of the Solar Energy Payment Rate. EPE is not required to renegotiate, and any agreement resulting from a renegotiation may be subject to approval by the NMPRC.

(5) Where Seller is prevented from complying with its obligations under this Agreement as a result of one or more Force Majeure Event(s) or its or their effects or by any combination thereof for a continued period of three hundred sixty five (365) Days, then Section 14.5 below shall apply.

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(F) Seller’s Restoration Consents. Notwithstanding anything herein to the contrary, Seller shall not be required to proceed with any Restoration unless and until it shall have received all necessary Additional Consents and any Governmental Approvals required therewith. If Seller does not receive any such Additional Consents or any Governmental Approvals required therewith for any reason (other than an act, omission or default of Seller) within twelve (12) Months after the date that it becomes obligated to proceed with such Restoration, then both Seller and EPE shall have the right to terminate this Agreement. If Seller terminates this Agreement pursuant to this subsection (F), EPE shall have the right but not the obligation to purchase the Facility at fair market value, as determined in a commercially reasonable manner.

(G) Preparation of Seller’s Restoration Report. When required by subsection (E), Seller shall commence the preparation of an appraisal report (the “Restoration Report”) within thirty (30) Days after the date it was required to provide a notice under subsection (B) and shall deliver a copy of such Restoration Report to EPE within sixty (60) Days after provision of such notice was required. The Restoration Report shall be accompanied by reasonable supporting data and certificates and reports of financial and technical advisers of Seller, as appropriate or as reasonably requested by EPE, in support of the Force Majeure Event in question, and shall include (i) a description of such Force Majeure Event and its impact on the Facility, (ii) an estimate in good faith of the time required to restore the Facility (insofar as practicable) to its condition immediately prior to the occurrence of the Force Majeure Event and (iii) a proposed Restoration Schedule.

(H) Discussion of Seller’s Restoration Report. Within fifteen (15) Days of the delivery of a Restoration Report to EPE or such further time as the Parties may agree, the Parties shall meet to discuss the Restoration Report and any action to be taken. Seller shall promptly provide to EPE such additional financial and related information pertaining to the Restoration Report and the matters described therein as EPE may reasonably request in connection with its review of the Restoration Report.

14.4 Effect of EPE’s Force Majeure.

(A)(1) Adjustment. If EPE should suffer a Force Majeure Event that affects its ability to take Solar Energy from Seller under this Agreement, EPE may, upon notice to Seller, temporarily adjust the Expected Solar Energy for up to twenty-four (24) consecutive months; provided, however, that no more than one such temporary adjustment may be made by EPE within any twenty-four (24) month period in relation to that Force Majeure Event, unless Seller otherwise consents to such additional temporary adjustment in writing; such consent not to be unreasonably withheld. Within three (3) Months after any such Force Majeure Event is cured, EPE may, on one occasion, and without penalty, designate a new Expected Solar Energy level to apply for the remainder of the term; provided, however, that such new Expected Solar Energy level shall be at least seventy percent (70%) and no more than one hundred percent (100%) of the Expected Solar Energy at the time immediately prior to the Force Majeure Event. Any temporary or final adjustment or re-designation of the Expected Solar Energy pursuant to this subsection (A)(1) must be directly attributable to the Force Majeure Event and of a magnitude commensurate with the scope and impact of the Force Majeure Event. Such adjustment shall be effective upon the first Day immediately following receipt of such notice by Seller or such later date as may be specified by EPE. Any dispute between EPE and Seller regarding the amount of

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such temporary or final re-designation shall be settled in accordance with Section 12.8 of this Agreement.

(2) Subject to subsection (1) above, upon the cessation of a Force Majeure Event or upon its cure, the Expected Solar Energy shall be restored to the Expected Solar Energy level that existed immediately prior to such Force Majeure Event.

(B) EPE’s Notification Obligations. In the event of any delay or nonperformance resulting from a Force Majeure Event, EPE shall notify Seller in writing as soon as practicable after becoming aware of such occurrence. Within fourteen (14) days of becoming aware of the occurrence of a Force Majeure Event, EPE shall notify Seller in writing of the nature, cause, date of commencement thereof and the anticipated duration, and shall indicate whether any deadlines or date(s) imposed under this Agreement may be affected thereby. The suspension of performance shall be of no greater scope and of no greater duration than the cure for the Force Majeure Event requires. A Party claiming that a Force Majeure Event has occurred shall not be entitled to any relief therefor unless conforming notice is provided within the time period required. EPE shall notify Seller of the cessation of the Force Majeure Event or of the conclusion of EPE’s cure for the Force Majeure Event, in either case within two (2) Business Days thereof.

(C) EPE’s Duty to Mitigate. EPE shall use commercially reasonable efforts to cure the cause(s) preventing its performance of this Agreement; provided, however, that the settlement of strikes, lockouts and other labor disputes shall be entirely within the discretion of EPE, and EPE shall not be required to settle such strikes, lockouts or other labor disputes by acceding to demands which EPE deems to be unreasonable.

(D) Delay Caused by EPE’s Force Majeure Event. Upon the occurrence and during the continuance of a Force Majeure Event and the effects thereof, to the extent that a Force Majeure Event affects the ability of the Transmission Provider to deliver Solar Energy to EPE from the Facility, then the hours during which the Force Majeure Event occurs shall be excluded from the payment calculations as set forth in Section 8.1 of this Agreement.

14.5 Limitations on Effect of Force Majeure. In no event will any delay or failure of performance caused by a Force Majeure Event extend this Agreement beyond its stated Term. In the event that any delay or failure of performance caused by a Force Majeure Event continues for an uninterrupted period of three hundred sixty-five (365) Days from its occurrence or inception, the Party not claiming a Force Majeure Event may, so long as the Force Majeure Event is continuing beyond the three hundred sixty-five (365) Day period, terminate this Agreement upon no less than sixty (60) Days written notice to the affected Party and without further obligation by either Party, except as to the obligations incurred prior to the effective date of such termination. Once the right to terminate as provided in this Section 14.5 is triggered, the Party with the termination right must exercise such right within sixty (60) Days of the date such right is triggered, and the right to terminate this Agreement with respect the specific Force Majeure Event shall be waived after the expiration of such sixty (60) Day period. The Party not claiming a Force Majeure Event may, but shall not be obligated to, extend the three hundred sixty-five (365) Day period, for such additional time as it, at its sole discretion, deems appropriate, such additional time not to exceed two (2) years.

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ARTICLE 15 - REPRESENTATIONS, WARRANTIES AND COVENANTS

15.1 Seller’s Representations, Warranties and Covenants. Seller hereby represents and warrants as follows:

(A) Seller is a Delaware corporation duly organized, validly existing and in good standing under the laws of the State of its creation. Seller is qualified to do business in each other jurisdiction where the failure to so qualify would have a material adverse effect on the business or financial condition of Seller, and Seller has all requisite power and authority to conduct its business, to own its properties, and to execute, deliver, and perform its obligations under this Agreement.

(B) The execution, delivery, and performance of its obligations under this Agreement by Seller have been duly authorized by all necessary corporate action, and do not and will not:

(1) require any consent or approval by any governing body of Seller, other than that which has been obtained and is in full force and effect (evidence of which shall be delivered to EPE upon its request);

(2) violate any provision of law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award currently in effect having applicability to Seller or violate any provision in any formation documents of Seller, the violation of which could have a material adverse effect on the ability of Seller to perform its obligations under this Agreement;

(3) result in a breach or constitute a default under Seller’s formation documents or bylaws, or under any agreement relating to the management or affairs of Seller or any indenture or loan or credit agreement, or any other agreement, lease, or instrument to which Seller is a party or by which Seller or its properties or assets may be bound or affected, the breach or default of which could reasonably be expected to have a material adverse effect on the ability of Seller to perform its obligations under this Agreement; or

(4) result in, or require the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance of any nature (other than as may be contemplated by this Agreement) upon or with respect to any of the assets or properties Seller now owns or hereafter acquires, the creation or imposition of which could reasonably be expected to have a material adverse effect on the ability of Seller to perform its obligations under this Agreement.

(C) This Agreement is a valid and binding obligation of Seller, subject to the contingency identified in Section 6.1 of this Agreement.

(D) The execution and performance of this Agreement will not conflict with or constitute a breach or default under any contract or agreement of any kind to which Seller is a party or any judgment, order, statute, or regulation that is applicable to Seller or the Facility.

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(E) To the knowledge of Seller, Seller has identified in Exhibit E to this Agreement all permits, consents, approvals, licenses and authorizations which Seller anticipates will be obtained by Seller in the ordinary course of business, and all permits, consents, approvals, licenses, authorizations, or other action required by any Governmental Authority to authorize Seller’s execution, delivery and performance of this Agreement. Seller shall obtain all such permits, consents, approvals, licenses, and authorizations or other action required by any Governmental Authority identified in Exhibit E prior to the Commercial Operation Date to the extent required for Commercial Operation of the Facility. However, failure of Seller to identify a necessary permit, consent, approval, license or authorization in Exhibit E to this Agreement does not relieve Seller of the obligation under this Agreement to obtain all such necessary Governmental Approvals.

(F) Seller shall comply with all applicable local, state, and federal laws, regulations, and ordinances, including but not limited to equal opportunity and affirmative action requirements and all applicable federal, state, and local environmental laws and regulations presently in effect or which may be enacted during the Term of this Agreement.

(G) As soon as it is known to Seller, Seller shall disclose to EPE the nature and extent of any (i) Environmental Contamination on or relating to the Site (and Seller shall be solely responsible and liable for any corresponding clean-up and remediation costs), (ii) violation of any laws or regulations; or (iii) litigation, liens, or encumbrances arising out of the construction or operation of the Facility.

(H) Seller has obtained sufficient water rights or water supply agreements necessary for uninterrupted operation of the Facility.

15.2 EPE’s Representations, Warranties and Covenants. EPE hereby represents and warrants as follows:

(A) EPE is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and is qualified in each other jurisdiction where the failure to so qualify would have a material adverse effect upon the business or financial condition of EPE. EPE has all requisite power and authority to conduct its business, to own its properties, and to execute, deliver, and perform its obligations under this Agreement.

(B) The execution, delivery, and performance of its obligations under this Agreement by EPE have been duly authorized by all necessary corporate action, and do not and will not:

(1) require any consent or approval of EPE’s Board of Directors, or shareholders, other than that which has been obtained and is in full force and effect (evidence of which shall be delivered to Seller upon its request);

(2) violate any provision of law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award currently in effect having applicability to EPE or violate any provision in any corporate documents of EPE, the violation of which could have a material adverse effect on the ability of EPE to perform its obligations under this Agreement;

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(3) result in a breach or constitute a default under EPE’s corporate charter or bylaws, or under any agreement relating to the management or affairs of EPE, or any indenture or loan or credit agreement, or any other agreement, lease, or instrument to which EPE is a party or by which EPE or its properties or assets may be bound or affected, the breach or default of which could reasonably be expected to have a material adverse effect on the ability of EPE to perform its obligations under this Agreement; or

(4) result in, or require the creation or imposition of, any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance of any nature (other than as may be contemplated by this Agreement) upon or with respect to any of the assets or properties of EPE now owned or hereafter acquired, the creation or imposition of which could reasonably be expected to have a material adverse effect on the ability of EPE to perform its obligations under this Agreement.

(C) This Agreement is a valid and binding obligation of EPE, subject to the conditions precedent identified in Section 6.1 of this Agreement.

(D) The execution and performance of this Agreement will not conflict with or constitute a breach or default under any contract or agreement of any kind to which EPE is a party or any judgment, order, statute, or regulation that is applicable to EPE.

(E) To the knowledge of EPE, and except for the NMPRC approval(s) identified in Section 6.1 of this Agreement, all approvals, authorizations, consents, or other action required by any Governmental Authority to authorize EPE’s execution, delivery and performance of this Agreement, have been duly obtained and are in full force and effect.

ARTICLE 16 - INSURANCE

16.1 Evidence of Insurance. Seller shall, on or before June 1 of each Commercial Operation Year and pursuant to the requirements of Section 4.9(C) of this Agreement, provide EPE with copies of certificates of insurance evidencing that insurance coverages for the Facility are in compliance with the specifications for insurance coverage set forth in Exhibit D to this Agreement. Such certificates shall (a) provide that EPE shall receive thirty (30) Days prior written notice of non-renewal, cancellation of, or significant modification to any of the corresponding policies (except that such notice shall be ten (10) Days for non-payment of premiums) and (b) provide a waiver of any rights of subrogation against EPE, its Affiliates and their officers, directors, agents, subcontractors, and employees. All policies shall be written with insurers that EPE, in its reasonable discretion, deems acceptable (such acceptance will not be unreasonably withheld). All policies shall be written on an occurrence basis, except as provided in Section 16.2 below. All policies shall contain an endorsement that Seller’s policy shall be primary in all instances regardless of like coverage, if any, carried by EPE. Seller’s liability under this Agreement is not limited to the amount of insurance coverage required herein.

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16.2 Term and Modification of Insurance.

(A) All insurance required under this Agreement shall cover occurrences during the Term and claims for events occurring during the term of this Agreement for a period of two (2) years after the Term. In the event that any insurance as required herein is commercially available only on a “claims-made” basis, such insurance shall provide for a retroactive date not later than the date of this Agreement, and such insurance shall be maintained by Seller, with a retroactive date not later than the retroactive date required above, for a minimum of five (5) years after the Term. Any insurer shall carry at least a best rating of A-V or better and must include EPE as an additional insured. A waiver of subrogation will also be required.

(B) EPE shall have the right, at times deemed appropriate to EPE during the Term, to request Seller to modify the insurance minimum limits specified in Exhibit D to this Agreement in order to maintain reasonable coverage amounts. Seller shall comply with such request if commercially reasonable.

(C) If any insurance required to be maintained by Seller under this Agreement ceases to be reasonably available and commercially feasible in the commercial insurance market, Seller shall provide written notice to EPE, accompanied by a certificate from an independent insurance advisor of recognized national standing, certifying that such insurance is not reasonably available and commercially feasible in the commercial insurance market for electric generating plants of similar type, geographic location and design. Upon receipt of such notice, Seller shall use commercially reasonable efforts to obtain other insurance that would provide comparable protection against the risk to be insured, and EPE shall not unreasonably withhold its consent to modify or waive such requirement.

16.3 Endorsements to Fire and All-Perils and Machinery Breakdown Policies. Seller shall insure the Facility against all risks of physical loss or damage, including boiler and machinery breakdown and shall also maintain business interruption/extra expense endorsements as set forth in Exhibit D, and such coverage shall be reasonable and customary in the power generation industry for projects of the size and scope of the Facility and, further, shall cause its insurers and brokers to provide standard thirty (30) Day non-cancellation provisions in such policies naming EPE as additional named insured.

16.4 Insurance Reports. Seller shall provide EPE with copies of any technical underwriters’ reports or other technical reports received by it from any insurer; provided, however, that EPE shall not disclose such reports to any other Person except as necessary in connection with administration and enforcement of this Agreement or as may be required by any Governmental Authority or other relevant authority having jurisdiction over EPE, and shall use and internally distribute such reports only as necessary in connection with the administration and enforcement of this Agreement.

ARTICLE 17 - INDEMNITY

17.1 Indemnification. EACH PARTY (THE “INDEMNIFYING PARTY”) AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE OTHER PARTY (THE “INDEMNIFIED PARTY”) FROM AND AGAINST ALL THIRD PARTY CLAIMS, DEMANDS, LOSSES, LIABILITIES, PENALTIES, AND EXPENSES (INCLUDING

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REASONABLE ATTORNEYS’ FEES) TO THE EXTENT ARISING OUT OF, RESULTING FROM, OR CAUSED BY: (A) CONSTRUCTION EVENTS OF DEFAULT, OPERATIONAL EVENTS OF DEFAULT, OR EPE EVENTS OF DEFAULT, AS APPLICABLE, (B) VIOLATION OF ANY APPLICABLE ENVIRONMENTAL LAWS, OR (C) THE NEGLIGENT OR TORTIOUS ACTS, ERRORS, OR OMISSIONS OF THE INDEMNIFYING PARTY, ITS AFFILIATES, ITS DIRECTORS, OFFICERS, EMPLOYEES, OR AGENTS IN PERFORMING ITS OBLIGATIONS UNDER THIS AGREEMENT OR ITS FAILURE TO ABIDE BY THE PROVISIONS OF THIS AGREEMENT. NOTHING IN THIS ARTICLE 17 SHALL ENLARGE OR RELIEVE SELLER OR EPE OF ANY LIABILITY TO THE OTHER FOR ANY BREACH OF THIS AGREEMENT. NEITHER PARTY SHALL BE INDEMNIFIED FOR ITS DAMAGES RESULTING FROM ITS SOLE NEGLIGENCE, INTENTIONAL ACTS OR WILLFUL MISCONDUCT. THESE INDEMNITY PROVISIONS SHALL NOT BE CONSTRUED TO RELIEVE ANY INSURER OF ITS OBLIGATION TO PAY CLAIMS CONSISTENT WITH THE PROVISIONS OF A VALID INSURANCE POLICY.

17.2 Indemnification for Fines and Penalties. Except as otherwise provided in Sections 10.3(B) and 19.3 of this Agreement, any fines or other penalties incurred by a Party (other than fines or penalties due to the negligence or intentional acts or omissions of the other Party) for non-compliance with any municipal, state or federal laws shall be the sole responsibility of the non-complying Party.

17.3 Notice of Claim, Loss or Proceeding. Each Party shall promptly notify the other Party in writing of any claim, loss, suit, or administrative or legal proceeding in respect of which such notifying Party is or may be entitled to indemnification pursuant to Section 17.1 (an “Indemnification Event”). Such notice shall be given as soon as reasonably practicable after the relevant Party becomes aware of the Indemnification Event and that such Indemnification Event may give rise to an indemnification, but in any event no later than seven (7) Days after the Party seeking indemnification has notice or becomes aware of the Indemnification Event. The delay or failure of such Indemnified Party to provide the notice required pursuant to this Section 17.3 to the other Party shall not release the other Party from any indemnification obligation which it may have to such Indemnified Party except (i) to the extent that such failure or delay materially and adversely affects the Indemnifying Party’s ability to defend such Indemnification Event or increased the amount of the loss, and (ii) that the Indemnifying Party shall not be liable for any costs or expenses of the Indemnified Party in the defense of the Indemnification Event during such period of failure or delay.

17.4 Defense of Claims.

(A) Claim, Loss or Proceeding. Promptly after receipt by a Party of notice of an Indemnification Event, the Indemnifying Party shall have the option to assume the defense of the Indemnification Event, with counsel designated by such Indemnifying Party, provided, however, the Indemnified Party shall have the right to select and be represented by separate counsel if (i) the Indemnified Party shall have reasonably concluded and specifically notified the Indemnifying Party that there may be specific defenses available to it which are different from or additional to those available to the Indemnifying Party, or that such Indemnification Event involves or could have a material adverse effect upon the Indemnified Party beyond the scope of this Agreement, unless a liability insurer is willing to cover such effects; or (ii) the Indemnified

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Party shall have reasonably concluded and specifically notified the Indemnifying Party that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such Indemnification Event. If the Indemnified Party has the right to select and be represented by separate counsel as provided herein, then counsel for the Indemnified Party shall have the right to direct the defense of the Indemnification Event on behalf of the Indemnified Party and, to the extent possible, shall coordinate with counsel representing the Indemnifying Party.

(B) Unless and until the Indemnifying Party assumes control of the defense of an Indemnification Event in accordance with Section 17.2 above, the Indemnified Party shall have the right, but not the obligation, to contest, defend and litigate, with counsel of its own selection, any such Indemnification Event, and the reasonable costs and expenses thereof shall be subject to the indemnification obligations of the Indemnifying Party hereunder.

(C) Neither the Indemnifying Party nor the Indemnified Party shall be entitled to settle or compromise any Indemnification Event without the prior consent of the other; provided, however, that after agreeing in writing to indemnify the Indemnified Party, the Indemnifying Party may settle or compromise any claim without the approval of such Indemnified Party. Except where such consent is unreasonably withheld, if the Indemnified Party settles or compromises an Indemnification Event without the prior consent of the Indemnifying Party, the Indemnifying Party shall be excused from any indemnification obligation in respect of such settlement or compromise.

17.5 Subrogation. Upon payment of any indemnification pursuant to Section 17.1 above, the Indemnifying Party, without any further action, shall be subrogated to any and all claims that the Indemnified Party may have relating thereto, and the Indemnified Party shall, at the request and expense of the Indemnifying Party, cooperate with the Indemnifying Party and give at the request and expense of the Indemnifying Party such further assurances as are necessary or advisable to enable the Indemnifying Party vigorously to pursue such claims.

ARTICLE 18 - ASSIGNMENT AND OTHER TRANSFER RESTRICTIONS

18.1 No Assignment Without Consent. Except as permitted in this Article 18 of this Agreement, neither Party shall assign this Agreement or any portion thereof, without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed, provided, that: (i) at least thirty (30) Days’ prior notice of any such assignment is be given to the other Party; (ii) any assignee expressly assumes the assignor’s obligations under this Agreement, unless otherwise agreed to by the other Party, and no assignment, whether or not consented to, shall relieve the assignor of its obligations under this Agreement in the event the assignee fails to perform, unless the other Party agrees in writing in advance to waive the assignor’s continuing obligations pursuant to this Agreement; (iii) no such assignment impairs any security given by Seller under this Agreement; and (iv) before the Agreement is assigned by Seller, the assignee first obtains such approvals as may be required by all applicable Governmental Authorities.

(A) Consent to assignment shall not be required to assign this Agreement to an Affiliate of EPE or Seller, if any.

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(B) EPE’s consent shall not be required for Seller to assign this Agreement for collateral purposes to the Facility Lender. Seller shall notify EPE, pursuant to Section 19.4 of this Agreement, of any such assignment to the Facility Lender no later than thirty (30) Days after the assignment.

18.2 Restriction on Transfers. Except as otherwise permitted by this Agreement, Seller may not sell the Facility, and Seller’s parent company (the “Parent”) may not transfer all or any portion of its ownership interest in Seller (the “Interests”). In the event that the Parent should pledge or otherwise encumber any of its Interests as security for the payment of indebtedness under the Financing Documents, any such pledge or hypothecation shall be made pursuant to a pledge or hypothecation agreement that requires the pledgee or secured party to be bound by all of the terms and conditions of this Article 18.

18.3 Permitted Transfers. Subject to the conditions and restrictions set forth in Section 18.5 hereof and written notice to EPE within thirty (30) Days of a transfer, (A) Parent may at any time transfer all or any portion of its Interests to (i) any Affiliate of Parent, or (ii) any Purchaser and (B) Seller may at any time transfer all or any portion of its ownership interest in the Facility to (i) any Affiliate of Seller, or (ii) any Purchaser (any such Transfer being referred to in this Agreement as a “Permitted Transfer”).

18.4 Collateral Assignment. EPE’s consent shall not be required for Seller to assign this Agreement for collateral purposes to a lender under the Financing Documents. Seller shall notify EPE of any such assignment no later than thirty (30) Days after the assignment.

18.5 Change of Control. Any direct or indirect voluntary change of control of Seller, shall require the prior written consent of EPE, which shall not be unreasonably withheld. No consent of EPE shall be required, however, to any change of control resulting from (i) transactions among Affiliates of Seller, or (ii) any exercise by the Facility Lender of its rights and remedies under the Financing Documents.

18.6 Transfer without Consent is Null and Void. Any change of control or sale, transfer, or assignment of any interest in the Facility or in this Agreement, including, without limitation, any sale and lease-back of the Facility under Section 3.1(A) of this Agreement, made without fulfilling the requirements of this Agreement shall be null and void and shall constitute an Event of Default pursuant to Article 12.

18.7 Prohibited Transfers. Any purported transfer of Interests or transfer of the Facility that is not a Permitted Transfer shall be null and void and of no force or effect whatsoever.

18.8 Reimbursement for EPE’s Costs from Transfers or Assignments. Seller agrees that, in the event Seller assigns or transfers an interest in the Facility or the Agreement, as such transactions are described in Article 18, Seller shall be responsible for costs incurred by EPE, including reimbursement of costs, expenses and reasonable attorneys’ fees incurred to effectuate the consent to such proposed transaction.

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ARTICLE 19 - MISCELLANEOUS

19.1 Waiver. Unless specifically provided otherwise in this Agreement, the failure of either Party to enforce or insist upon compliance with or strict performance of any of the terms or conditions of this Agreement, or to take advantage of any of its rights under this Agreement, shall not constitute a waiver or relinquishment of any such terms, conditions, or rights, but the same shall be and remain at all times in full force and effect.

19.2 Taxes.

(A) Seller shall be solely responsible for:

(1) any and all present or future taxes and other impositions of Governmental Authorities relating to the construction, ownership or leasing, operation or maintenance of the Facility, the Site, or any components or appurtenances thereof, including, without limitation, taxes and impositions that vary based upon the amount of power produced, the amount or nature of fuel consumed, and the nature of wastes produced by the Facility;

(2) any and all present or future taxes and other impositions of Governmental Authorities on or with respect to the energy generated by the Facility or the transaction under this Agreement arising up to the Point of Delivery, including ad valorem taxes; and

(3) all ad valorem taxes relating to the Facility except for ad valorem taxes on or with respect to the energy generated by the Facility or the transaction under this Agreement arising at or beyond the Point of Delivery.

(B) Seller shall not be responsible for payment of gross receipts taxes on energy sales to EPE.

(C) EPE shall be solely responsible for any and all present or future taxes and other impositions of Governmental Authorities on or with respect to the energy generated by the Facility or the transaction under this Agreement arising at or beyond the Point of Delivery, including ad valorem taxes.

(D) In the event EPE is required by law or regulation to remit or pay such taxes or other impositions of Governmental Authorities that are Seller’s responsibility pursuant to Section 19.2(A) of this Agreement, Seller shall promptly reimburse EPE for such amounts. If Seller is required by law or regulation to remit or pay such taxes or other impositions of Governmental Authorities that are EPE’s responsibility pursuant to Section 19.2(C) of this Agreement, EPE shall promptly reimburse Seller for such amounts. Either Party may offset such amounts against any undisputed amounts owed to it by the other Party, as provided in Section 9.3(A) of this Agreement.

(E) The Parties shall cooperate to minimize tax exposure; however, neither Party shall be obligated to incur any financial burden to reduce taxes for which the other Party is responsible under this Agreement.

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19.3 Monetary Penalties. If fees, fines, penalties, or costs are claimed or assessed against EPE or Seller by any Governmental Authority that are in whole or in part contributed to or due to noncompliance by the other Party with this Agreement, any requirements of law, any permit or contractual obligation, the other Party shall promptly reimburse EPE or Seller for related monetary penalties to the extent of such contribution or attribution.

19.4 Notices in Writing. Notices required by this Agreement shall be addressed to the Party’s representative named in Exhibit C to this Agreement at the addresses noted in Exhibit C. Any notice, request, consent, or other communication required or authorized under this Agreement to be given by one Party to the other Party shall be in writing. It shall either be hand delivered or mailed, postage paid, to the representative of the other Party. If mailed, the notice, request, consent or other communication shall be simultaneously sent by facsimile or other electronic means. Any such notice, request, consent, or other communication shall be deemed to have been received by the Close of the Business Day on which it was hand delivered or transmitted electronically (unless hand delivered or transmitted after such close, in which case it shall be deemed received at the close of the next Business Day). Real-time or routine communications concerning Facility operations shall be exempt from this Section 19.4.

19.5 Exhibit Changes. Either Party may change its representative or the information for its notice addresses in Exhibit C at any time without the approval of the other Party. Exhibit A, Exhibit B, Exhibit F, and Exhibit G may be changed at any time with the mutual consent of both Parties. Exhibit E may be changed by the Seller at any time. Exhibit D may be changed in accordance with Section 16.2 (B) of this Agreement. A Party making a change that does not require the consent of the other Party shall provide thirty (30) Days notice of the change to the other Party.

19.6 Other Changes.

(A) The terms and conditions and the rates for service specified in this Agreement shall remain in effect for the term of the transaction described herein. Absent the Parties’ written agreement, this Agreement shall not be subject to change by application of either Party pursuant to Section 205 or 206 of the Federal Power Act.

(B) Absent the written agreement of all entities to a proposed change, the standard of review for changes to this Agreement whether proposed by a Party, a non-party, or the FERC acting sua sponte shall be the “public interest” standard of review set forth in United Gas Pipe Line v. Mobile Gas Service Corp., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956) (known as the “Mobile-Sierra doctrine”).

19.7 Disclaimer of Third Party Beneficiary Rights. In executing this Agreement, EPE does not, nor should it be construed to, extend its credit or financial support for the benefit of any third parties lending money to or having other transactions with Seller. Nothing in this Agreement shall be construed to create any duty to, or standard of care with reference to, or any liability to, any person not a Party to this Agreement.

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19.8 Relationship of the Parties.

(A) This Agreement shall not be interpreted to create an association, joint venture, or partnership between the Parties or to impose any partnership obligation or liability upon either Party. Neither Party shall have any right, power, or authority to enter into any agreement or undertaking for, or act on behalf of, or to act as an agent or representative of, the other Party.

(B) Seller shall be solely liable for the payment of all wages, taxes, and other costs related to the employment of persons to perform such services, including all federal, state, and local income, social security, payroll, and employment taxes and statutorily mandated workers’ compensation coverage. None of the persons employed by Seller shall be considered employees of EPE for any purpose; nor shall Seller represent to any person that he or she is or shall become an EPE employee.

19.9 Equal Employment Opportunity Compliance Certification. Seller acknowledges that, as a government contractor, EPE is subject to various federal laws, executive orders, and regulations regarding equal employment opportunity and affirmative action. All applicable equal employment opportunity and affirmative action clauses shall be deemed to be incorporated herein as required by federal laws, executive orders, and regulations, including, but not limited to, 41 C.F.R. §60 1.4(a)(1-7) but shall not thereby apply to Seller.

19.10 Survival of Obligations. Cancellation, expiration, or earlier termination of this Agreement shall not relieve the Parties of obligations that by their nature should survive such cancellation, expiration, or termination, prior to the term of the applicable statute of limitations, including without limitation warranties, remedies, or indemnities, which shall survive for the period of the applicable statute(s) of limitation. Applicable provisions of this Agreement shall continue in effect after termination, including early termination, to the extent necessary to enforce or complete the duties, obligations or responsibilities of the Parties arising prior to termination and, as applicable, to provide for final billings and adjustments related to the period prior to termination, payment of any money due and owing to either Party pursuant to this Agreement, payment of principal and interest associated with the Security Fund, and the indemnifications specified in this Agreement.

19.11 Severability. In the event any of the terms, covenants, or conditions of this Agreement, its Exhibits, or the application of any such terms, covenants, or conditions, shall be held invalid, illegal, or unenforceable by any court or administrative body having jurisdiction, all other terms, covenants, and conditions of the Agreement and their application not adversely affected thereby shall remain in force and effect; provided, however, that EPE and Seller shall negotiate in good faith to attempt to implement an equitable adjustment in the provisions of this Agreement with a view toward effecting the purposes of this Agreement by replacing the provision that is held invalid, illegal, or unenforceable with a valid provision the economic effect of which comes as close as possible to that of the provision that has been found to be invalid, illegal or unenforceable.

19.12 Complete Agreement; Amendments. The terms and provisions contained in this Agreement and its Exhibits constitute the entire agreement between EPE and Seller with respect to the Facility and shall supersede all previous communications, representations, or agreements, either verbal or written, between EPE and Seller with respect to the sale of Solar Energy from the

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Facility. This Agreement may be amended, changed, modified, or altered, provided that such amendment, change, modification, or alteration shall be in writing and signed by both Parties hereto, and provided further, that the Exhibits attached hereto may be changed according to the provisions of Section 19.5 of this Agreement.

19.13 Binding Effect. This Agreement, as it may be amended from time to time pursuant to this Article, shall be binding upon and inure to the benefit of the Parties hereto and their respective successors in interest, legal representatives, and permitted assigns.

19.14 Headings. Captions and headings used in this Agreement are for ease of reference only and do not constitute a part of this Agreement.

19.15 Counterparts. This Agreement may be executed in any number of counterparts, and each executed counterpart shall have the same force and effect as an original instrument.

19.16 Governing Law. The interpretation and performance of this Agreement and each of its provisions shall be governed and construed in accordance with the laws of the State of New Mexico. The Parties hereby submit to the exclusive jurisdiction of the courts of the State of New Mexico, and venue is hereby stipulated as New Mexico.

19.17 Confidentiality.

(A) For purposes of this Section 19.17, “Disclosing Party” refers to the Party disclosing information to the other Party, and the term “Receiving Party” refers to the Party receiving information from the other Party.

(B) Other than in connection with this Agreement, the Receiving Party shall not use the Confidential Information (as defined in clause (D) below) and shall keep the Confidential Information confidential. The Confidential Information may be disclosed to the Receiving Party’s or its affiliates’ directors, officers, employees, financial advisors, legal counsel and accountants (collectively, “Representatives”), but only if such Representatives need to know the Confidential Information in connection with this Agreement. The Parties agree that (i) such Representatives will be informed by the Receiving Party of the confidential nature of the Confidential Information and the requirement and the limitations of its use, (ii) such Representatives will be required to agree to and be bound by the terms of this Section 19.17 as a condition of receiving the Confidential Information, and (iii) in any event, the Receiving Party will be responsible for any disclosure of Confidential Information, or any other breach of confidentiality provisions of this Agreement, by any of its Representatives. The Receiving Party shall not disclose the Confidential Information to any person other than as permitted hereby, and shall safeguard the Confidential Information from unauthorized disclosure using the same degree of care as it takes to preserve its own confidential information (but in any event no less than a reasonable degree of care). To the extent the Disclosing Party is required to submit Confidential Information to a Governmental Authority, the Disclosing Party shall use all available means to ensure that such Confidential Information is not made public.

(C) If the Receiving Party or its Representatives are requested or required (by oral question, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process, or by applicable law) to disclose any Confidential Information, the

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Receiving Party shall promptly notify the Disclosing Party of such request or requirement, if that notification can be made without violating the terms of such compelled disclosure, so that the Disclosing Party may seek an appropriate protective order or waive compliance with this Section 19.17 with respect to such disclosure. If, in the absence of a protective order or the receipt of a waiver under this Agreement, the Receiving Party or its Representatives are, in the opinion of their legal counsel, compelled to disclose the Confidential Information, the Receiving Party and its Representatives may disclose only such of the Confidential Information to the party compelling disclosure as is required by law and, in connection with such compelled disclosure, the Receiving Party and its Representatives shall use their reasonable efforts to obtain from the party to whom disclosure is made written assurance that confidential treatment will be accorded to such portion of the Confidential Information as is disclosed.

(D) As used in this Section 19.17, “Confidential Information” means all information that is furnished in connection with this Agreement to the Receiving Party or its Representatives by the Disclosing Party, or to which the Receiving Party or its Representatives have access by virtue of this Agreement (in each case, whether such information is furnished or made accessible in writing, orally, visually or by any other (including electronic) means), or which concerns this Agreement, the Disclosing Party or the Disclosing Party’s stockholders, members, affiliates or subsidiaries, and which is designated by the Disclosing Party at the time of its disclosure, or promptly thereafter, as “confidential” (whether by stamping any such written material or by memorializing in writing the confidential nature of any such oral or visual information). Any such information furnished to the Receiving Party or its Representatives by a director, officer, employee, affiliate, stockholder, consultant, agent or representative of the Disclosing Party will be deemed furnished by the Disclosing Party for the purpose of this Agreement. Notwithstanding the foregoing, the following will not constitute Confidential Information for purposes of this Agreement:

(1) information that is or becomes generally available to the public other than as a result of a disclosure or other act by the Receiving Party or its Representatives;

(2) information that can be shown by the Receiving Party to have been already known to the Receiving Party on a non-confidential basis prior to being furnished to the Receiving Party by the Disclosing Party;

(3) information that becomes available to the Receiving Party on a non-confidential basis from a source other than the Disclosing Party or a representative of the Disclosing Party if such source was not subject to any prohibition against transmitting the information to the Receiving Party; and

(4) information developed by the Parties during the negotiation of this Agreement that relates solely to this Agreement (as opposed to confidential business or operating information of either Party, including pricing), which information shall be deemed proprietary to both Parties, each of whom shall be free to use such information, as they would any information already known to the Parties prior to the negotiation of this Agreement.

(E) The Confidential Information will remain the property of the Disclosing Party. Any Confidential Information that is reduced to writing, except for that portion of the

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****=Confidential treatment has been requested for the redacted portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as ****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

Confidential Information that may be found in analyses, compilations, studies or other documents prepared by or for the Receiving Party in connection with this Agreement, will be returned to the Disclosing Party immediately upon its request after expiration or termination of this Agreement, unless such Confidential Information has been destroyed by the Receiving Party, and no copies will be retained by the Receiving Party or its Representatives, unless the Parties agree otherwise. That portion of the Confidential Information that may be found in analyses, compilations, studies or other documents prepared by or for the Receiving Party, oral or visual Confidential Information, and written Confidential Information not so required to be returned will be held by the Receiving Party and kept subject to the terms of this Agreement, or destroyed.

(F) It is understood and agreed that neither this Agreement nor disclosure of any Confidential Information by the Disclosing Party to the Receiving Party shall be construed as granting to the Receiving Party or any of its Representatives any license or rights in respect of any part of the Confidential Information disclosed to it, including any trade secrets included in any such Confidential Information.

19.18 Compliance with Applicable Law. This Agreement and the obligations of the Parties under this Agreement are subject to all present and future laws with respect to the subject matter hereof, either state or federal, and to all valid present and future orders, rules, and regulations of duly constituted Governmental Authorities having jurisdiction. The Parties agree to comply with any and all such applicable federal, state, and local laws, orders, and regulations in connection with the performance of their respective obligations under this Agreement.

19.19 Press Releases and Media Contact. Upon the request of either Party, the Parties shall develop a mutually agreed joint press release to be issued describing the location, size, type and timing of the Facility, the long-term nature of this Agreement, and other relevant factual information about the relationship. In the event during the Term, either Party is contacted by the media concerning this Agreement, the contacted Party shall inform the other Party of the existence of the inquiry, and the Parties shall jointly agree upon the substance of any information to be provided to the media.

19.20 Due Authority. Each Party represents and warrants that it has full and complete authority to enter into and perform this Agreement. Each person who executes this Agreement on behalf of either Party represents and warrants that he or she has full and complete authority to do so and that such Party will be bound thereby.

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IN WITNESS WHEREOF, the Parties have executed this Agreement.

Seller:
New Mexico SunTower, LLC
By:	/s/ Asif Ansari
EPE:
El Paso Electric Company
By:	/s/ Gary Sanders
By:	/s/ J. Frank Bates

DATED: October 17, 2008	APPROVED AS TO FORM
	OFFICE OF THE GENERAL COUNSEL 65
	10/17/08

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EXHIBIT A

CONSTRUCTION MILESTONES

Seller shall specify the following Construction Milestones. If not applicable, enter “NA.”

1. Financial Commitment Milestone: the date that Seller delivers documents to EPE showing that financing for the Facility has been secured. 4/30/2010

2. Project Construction Commencement Milestone: the date on which grading and excavation for the Facility begins and substantial construction at the facility site thereafter continues. 6/1/2010

3. Generator Installation Milestone: the date that the installation of the generator commences. 4/1/2011

4. Interconnection Milestone: the date that the Interconnection Facilities are to be completed. 4/1/2011

5. Commercial Operation Milestone: the Commercial Operation Date. 7/31/2011

Exhibit A

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EXHIBIT B

FACILITY DESCRIPTION AND SITE MAPS

Bid Specific

1. Generating Facility Description.

The Facility consists of two 46 MW units on approximately 400 acres. Each unit employs a modular architecture, where fields of dual-axis heliostats point to a thermal receiver, converting water directly to steam. Steam from 16 receivers is aggregated at a central steam turbine and generator and is used to produce 46 MW (net) of electric energy. The electric output from each unit is aggregated in a collector line, which will interconnect to EPE’s transmission system.

The following are renderings of the 92 MW project:

Exhibit B

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2. Site Description.

The maps below show the two prospective sites for the Facility.

The Facility in Deming will be located on either the cluster of private land parcels or the larger single parcel of City land directly to the west of the private land. The Facility will interconnect at 345 kV to EPE’s Luna substation.

The Facility in Santa Teresa will be located on private land as indicated by the green rectangle on the left side of the map below. The Facility will interconnect to EPE’s 115 kV transmission line directly adjacent to and on the north side of the property. The Facility may be located further east along EPE’s 115 kV line that terminates at EPE’s Diablo substation, which is marked by a red box directly below Sunland Park.

Exhibit B

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Exhibit B

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EXHIBIT C

NOTICE ADDRESSES

EPE	Seller
Notices: El Paso Electric Company Attn: Ricardo Acosta Manager, Resource Planning PO Box 982 El Paso, TX 79901 Phone:         915-543-2040 Facsimile:   915-521-4799	Notices: Attn:     Jim Shandalov, VP Business Development Street:  130 West Union St. City:     Pasadena, CA 91103 Phone:             626-685-1846 Facsimile:       626-535-2701 Email:  jim.shandalov@esolar.com
Reference Numbers: Duns:     007928955 Federal Tax ID Number: 74-0607870	Reference Numbers: Duns:   To be provided by Seller Federal Tax ID Number: 26-3543476
Contract Administration: Attn:     To be provided by Buyer Phone and Fax: To be provided by Buyer	Contract Administration: Attn:     To be provided by Seller Phone: Phone and Fax:                 To be provided by Seller
Maintenance Forecasting/Scheduling: Attn:     Control Room Phone and Fax:                  To be provided by Buyer	Maintenance Forecasting/Scheduling: Attn:     Control Room Phone and Fax:                 To be provided by Seller
Day Ahead, Hour Ahead, and Real Time Forecasting/Scheduling: Phone: To be provided by Seller	Day Ahead, Hour Ahead, and Real Time Forecasting/Scheduling: Phone: To be provided by Seller
Payments, Security: Attn:     To be provided by Buyer	Payments, Security: Attn:     John Faieta, Controller Phone:             626-685-1830 Facsimile:       626-535-2701 Email: john.faieta@esolar.com
With additional Notices of an Event of Default or Potential Event of Default to:	With additional Notices of an Event of Default or Potential Event of Default to:

Exhibit C

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Attn:     Gary Sanders, General Counsel Phone: (915) – 543 -2285 Facsimile: (915) – 543-4728   Email: gsande1@epelectric.com Attn:     Asif Ansari, CEO Phone: (626) 685-4966 Facsimile:       626-535-2701   Email: asif.ansari@esolar.com

Exhibit C

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EXHIBIT D

INSURANCE COVERAGE

Type of Insurance	Minimum Limits of Coverage
1.    Commercial General Liability (CGL)	$2,000,000 per occurrence and $5,000,000 combined single limit each and commercial umbrella occurrence and the aggregate, where applicable. If CGL insurance contains a general aggregate limit, it shall apply separately to the Facility.

CGL insurance shall be written on ISO occurrence form CG 00 01 01 96 (or a substitute form providing equivalent coverage) and shall cover liability arising from premises, operations, independent contractors, products/completed operations, contracts, property damage, personal injury and advertising injury, and liability assumed under an insured contract (including the tort liability of another assumed in a business contract), all with limits as specified above. CGL insurance shall include ISO endorsement CG 24 17 (or an equivalent endorsement) which modifies the definition of “Insured contract” to eliminate the exclusion of easement or license agreements in connection with construction or demolition operations on or within 50 feet of a railroad. There shall be no endorsement or modification of the CGL insurance limiting the scope of coverage for liability arising from explosion, collapse, or underground property damage.

EPE shall be included as an insured under the CGL policy, using ISO additional insured endorsement CG 20 10 (or a substitute providing equivalent coverage), and under the commercial umbrella insurance. The commercial umbrella insurance shall provide coverage over the top of the CGL insurance, the Business Automobile Liability insurance, and the Employers Liability insurance.

The CGL and commercial umbrella insurance to be obtained by or on behalf of Seller shall be endorsed as follows:

Such insurance as afforded by this policy for the benefit of EPE shall be primary as respects any claims, losses, damages, expenses, or liabilities arising out of that certain Solar Energy Purchase Power Agreement dated October 17, 2008 and insured hereunder, and any insurance carried by EPE shall be excess of and noncontributing with insurance afforded by this policy.

2.    Business Automobile Liability $1,000,000 combined single limit (each accident), including all Owned, Non Owned, Hired and Leased Autos

Business Automobile Liability insurance shall be written on ISO form CA 00 01, CA 00 05, CA 00 12, CA 00 20, or a substitute form providing equivalent liability coverage. If necessary, the policy shall be endorsed to provide contractual liability coverage equivalent to that provided in the 1990 and later editions of CA 00 01.

Exhibit D

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3.    Workers Compensation	$1,000,000 minimum and Statutory Requirements. Seller may comply with these requirements through the use of a qualified self-insurance plan.
4.    Employers Liability	$1,000,000 each accident for bodily injury by accident, or $1,000,000 each employee for bodily injury by disease.
5.    Excess Liability Coverage	$6,500,000 general aggregate
6.    Business Interruption/Extra Expense Endorsements	$5,000,000 general aggregate

Exhibit D

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EXHIBIT E

SELLER’S REQUIRED GOVERNMENTAL AUTHORITY PERMITS, CONSENTS,

APPROVALS, LICENSES AND AUTHORIZATIONS TO BE OBTAINED

The following is a list of key environmental compliance activities.

1. National Environmental Policy Act (NEPA) review: Not required as the project will not be sited on public lands.

2. Federal Aviation Agency (FAA) Notice of Obstruction: eSolar will submit this application, even through the project design is within FAA guidelines for sites close to airports.

3. Clean Water Act (CWA), Wetlands and Waters of the United States: The project is expected to have no impact on wetlands and waters of the United States, nevertheless, eSolar will consult with appropriate federal and/or state agencies to confirm.

4. Endangered Species Act - Section 10: the Santa Teresa site is not located in any designated critical habitats. For the Deming site, eSolar will perform preconstruction surveys to ensure that no federal or state threatened endangered or special status species will be affected by the project.

5. Clean Air Act (CAA) Permits: Cooling towers will be designed, constructed, and operated according to New Mexico Environmental Department (NMED) air quality requirements.

6. National Historic Preservation Act (NHPA) – Historically and culturally significant areas have previously been identified at Santa Teresa. For the Deming site, eSolar will consult with the New Mexico Historic Preservation Division (NMHPD) to identify and avoid potentially eligible historic sites. If necessary, eSolar will obtain the required antiquities permits consult with the state archaeologist during construction, as required.

7. Renewable Energy Credit Generator Certification: eSolar will file for certification by the NMPRC so that the facility to participate in the renewable energy credit program.

8. Spill Prevention Containment and Control Plan (SPCC Plan): eSolar will complete an SPCC Plan for the site that complies with all EPA and NMED requirements.

9. Storm Water Management: eSolar will obtain a general construction permit for authorization to discharge storm water under the New Mexico Pollution Discharge Elimination System. The goal of the project will be to maintain the site’s pre-existing storm runoff characteristics during both construction and operation of the facility.

10. Construction Permits: The project will obtain local construction permits from the City of Deming, Luna County or Dona Ana County, as applicable, such as those required for storm-water management, driveway easements, the completion of sewer or septic facilities, and transportation of over-size materials.

Exhibit E

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EXHIBIT F

SELLER’S EXPECTED AND COMMITTED RENEWABLE ENERGY

AND RENEWABLE ENERGY PAYMENT RATE

Commercial Operation Year	Expected Renewable Energy (in MWh)	Committed Renewable Energy (in MWh)	Renewable Energy Payment Rate (in $/MWh) for Deming site	Renewable Energy Payment Rate (in $/MWh) for Santa Teresa site
1	****	****	****	****
2	****	****	****	****
3	****	****	****	****
4	****	****	****	****
5	****	****	****	****
6	****	****	****	****
7	****	****	****	****
8	****	****	****	****
9	****	****	****	****
10	****	****	****	****
11	****	****	****	****
12	****	****	****	****
13	****	****	****	****
14	****	****	****	****
15	****	****	****	****
16	****	****	****	****
17	****	****	****	****
18	****	****	****	****
19	****	****	****	****
20	****	****	****	****

If Seller is not awarded the solar Renewable Energy Production Tax Credit, pursuant to New Mexico Statute §7-2A-19, the Renewable Energy Payment Rate shall increase by ****.

If a change in law eliminates the availability of the federal Investment Tax Credit of 30% for solar technology prior to the Required Commercial Operation Date, Seller and EPE shall negotiate in good faith for a price adjustment commensurate with the reduction of tax benefits to the Seller.

If the Seller’s cost of interconnection, including generator-step up transformers and tap, to the EPE electric system exceeds $4 million, then for each additional $1 million of network upgrades, the Renewable Energy Payment Rate shall increase by **** and for each additional $1 million of transmission upgrades that are not network upgrades by ****.

Exhibit F

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EXHIBIT G

SELLER’S FORMAT FOR RENEWABLE ENERGY CERTIFICATES

In accordance with Article 10 of this Agreement, Seller shall provide EPE with RECs in the format prescribed in this exhibit.

RENEWABLE ENERGY CERTIFICATE

Period: For the month of                                         , 20__.

Source of REC: Renewable Energy Provider

[Seller Name, Address, Facility Name]

Contact:

[Seller contact person, address, telephone, fax and email]

Generator type:                                         

Nameplate capacity:                          (in MW)

Date of generator start-up:                                                      

Fuel source:                                                      

Revenue Meter manufacturer and identification / serial number:

Location of generator:                                                                                               

Renewable Energy Purchaser:

Interconnection Utility: El Paso Electric Company

Control Area Operator: El Paso Electric Company

EPE Contact:

Evan Evans

P.O. Box 982

El Paso, TX 79960

(915)543-5995

Fax (915) 521-4729

Exhibit G

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MONTHLY STATEMENT OF RECS

Renewable energy delivery for the month of                                         , 20        

Energy Delivered:                                          kWh

Weighted Value of Energy Delivered                                          kWh (multiply by RPS multiplier)

SUPPLIER CERTIFICATION

I,                                                                                               , hereby certify that:

The energy produced, sold and delivered by [Seller] to El Paso Electric Company from these facilities is from a renewable energy resource, as defined by the New Mexico Renewable Energy Act, NMSA 1978, Section 62-16-1 et seq., and the NMPRC Rule 572, Renewable Energy For Electric Utilities, 17.9.572 NMAC;

Each kilowatt hour of electricity is generated using a                  fuel source; and

No other Renewable Energy Certificates associated with the renewable energy produced and delivered by [Seller] to El Paso Electric Company have been traded, sold, retired or otherwise transferred by [Seller] to any other person or entity.

[SELLER]

By:
	[Name/Title]
	Date

Exhibit G

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EX-15

EXHIBIT 15

August 5, 2009

El Paso Electric Company

El Paso, Texas

Re: Registration Statement Nos. 333-17971, 333-82129, 333-123646, 333-142557, and 333-151021

With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated August 5, 2009 related to our review of interim financial information.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.

/s/ KPMG LLP

Houston, Texas

EX-31.01

EXHIBIT 31.01

CERTIFICATIONS

I, David W. Stevens, certify that:

1. I have reviewed this quarterly report on Form 10-Q of El Paso Electric Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s

auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 6, 2009

EL PASO ELECTRIC COMPANY
By:	/s/ David W. Stevens
	David W. Stevens
	Chief Executive Officer
	(Principal Executive Officer)

I, David G. Carpenter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of El Paso Electric Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Dated: August 6, 2009

EL PASO ELECTRIC COMPANY
By:	/s/ David G. Carpenter
	David G. Carpenter
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.01

EXHIBIT 32.01

August 6, 2009

The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the “Report”) of El Paso Electric Company (the “Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

David W. Stevens and David G. Carpenter, each certifies that, to the best of his knowledge:

1. such Report fully complies with the requirements of Section 13(a) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David W. Stevens

David W. Stevens

Chief Executive Officer

/s/ David G. Carpenter

David G. Carpenter

Senior Vice President and Chief Financial Officer