States, including New Mexico, that contain any areas designated as nonattainment are required to complete development of implementation plans in the 2020-2021 timeframe. Most nonattainment areas are expected to have until 2020 or 2023 to meet the primary (health) standard, with the exact attainment date varying based on the ozone level in the area. The Company continues to evaluate what impact these final and proposed NAAQS could have on its operations. If the Company is required to install additional equipment to control emissions at its facilities, the NAAQS, individually or in the aggregate, could have a material impact on its operations and financial results.

The following table summarizes the percentage contribution of nuclear fuel, natural gas coal and purchased power to the total kWhkilowatt-hour ("kWh") energy mix of the Company. Energy generated by Company-owned solar photovoltaic panels and wind turbines accounted for less than 1% of the total kWh energy mix of the Company.

The nuclear fuel cycle for Palo Verde consists of the following stages: the mining and milling of uranium ore to produce uranium concentrates, the conversion of the uranium concentrates to uranium hexafluoride ("conversion services"), the enrichment of uranium hexafluoride ("enrichment services"), the fabrication of fuel assemblies ("fabrication services"), the utilization of the fuel assemblies in the reactors, and the storage and disposal of the spent fuel. 

Pursuant to the ANPP Participation Agreement, the Company owns an undivided interest in nuclear fuel purchased in connection with Palo Verde. The Palo Verde Participants are continually identifying their future nuclear fuel resource needs and negotiating arrangements to fill those needs. The Palo Verde Participants have contracted for 100% of Palo Verde's requirements for uranium concentrates through 2025 and 15%30% of its requirements through 2028. The participants have contracted for 100% of Palo Verde's requirementrequirements for conversion services through 2025 and 40% of its requirements through 2028.2030. The participants have also contracted for 100% of Palo Verde's requirementrequirements for enrichment services through 2021, and 90% of its requirementrequirements for 2022, and 80% for 2023 through 2026 and all of Palo Verde's requirementrequirements for fuel assembly fabrication services through 2027.

The Company manages its natural gas requirements through a combination of a long-term (greater than a year) supply contract, several medium-term (greater than a month but less than one year) supply contracts and spot or short-term (daily to a month) market purchases. The long-term supply contract provides for firm deliveries of gas at market-based index prices. Medium-term and spot agreements are either fixed priced and/or index priced depending on the market. Through March 2018, theThe Company’s natural gas requirements at Newman, Rio Grande and MPS were met with short-term medium-term and long-termmedium-term natural gas purchases from various suppliers; thereafter, there were only short-term and medium term natural gas purchases,suppliers and this practice is expected to continue in 2019.2020. Interstate gas is delivered under a base firm transportation contract. The Company has expanded its firm interstate transportation contract to include MPS. The Company anticipates it will continue to purchase natural gas at spot market prices on a monthly basis for a portion of the fuel needs for Newman, Rio Grande and MPS. The Company will continue to evaluate the availability of short-term natural gas supplies versus medium and long-term supplies to maintain a reliable and economical supply for its local generating stations.

To supplement its own generation and operating reserve requirements, and to meet its Renewable Portfolio Standard ("RPS") requirements, the Company engages in power purchase arrangements that may vary in duration and amount based on an evaluation of the Company’s resource needs, the economics of the transactions and specific RPS requirements.

The Company has a firm 100 MW Power Purchase and Sale Agreement ("Power Purchase and Sale Agreement") with Freeport-McMoranFreeport-McMoRan Copper and Gold Energy Services LLC ("Freeport"), pursuant to which Freeport will deliverdelivers energy to the Company from the Luna Energy Facility (a natural gas-fired combined cycle generation facility located in Luna County, New Mexico) and the Company will deliverdelivers a like amount of energy at Greenlee, Arizona. The Company may purchase up to the contracted MW amount at a specified price at times when energy is not exchanged under the Power Purchase and Sale Agreement. The Power Purchase and Sale Agreement was approved by the Federal Energy Regulatory Commission ("FERC") and will continue through an initial term ending December 31, 2021, with subsequent rollovers until terminated. Upon mutual agreement, the Power Purchase and Sale Agreement allows the parties to increase the amount of energy that is purchased and sold thereunder. The parties have agreed to increase the amount up to 125 MW through December 2021.

Furthermore, the Company has a 20-year power purchase agreement with Macho Springs Solar, LLC to purchase the entire generation output delivered from the 50 MW Macho Springs solar photovoltaic project located in Luna County, New Mexico, which began commercial operation in May 2014. Finally, the Company has a 30-year power purchase agreement with Newman Solar LLC to purchase the total output, which is approximately 10 MW, from a solar photovoltaic generation plant on land subleased from the Company in proximity to Newman. This solar project began commercial operation in December 2014.

Other purchases of shorter duration were made during 20182019 to supplement the Company's generation resources during planned and unplanned outages, for economic reasons and to supply off-system sales.

The Company recently concluded and announced its selection of resources from its 2017 All Source RFP.RFP on December 26, 2018. In addition to conventional natural gas generation, the Company will be initiatinginitiated contract negotiations during 2019 for power purchase agreements from both solar and battery storage resources. Furthermore,On November 18, 2019, the Company will pursue negotiationsfiled for possible additionalregulatory approval with the NMPRC for three power purchase agreements relating to both solar and wind purchase power if there are potential energy cost savings.battery storage resources as a result of the Company's 2017 All Source RFP.

The Company serves HAFB, White Sands and Fort Bliss. These military installations represent approximately 2.6%2.8% of the Company's annual retail revenues.revenues in 2019. In July 2014, the Company signed an agreement with Fort Bliss under which Fort Bliss takes retail electric service from the Company under the applicable Texas tariffs. The Company serves White Sands under the applicable New Mexico tariffs. In August 2016, the Company signed a contract with HAFB under which the Company provides retail electric service and limited wheeling services to HAFB under the applicable New Mexico tariffs. As stated in the contract, HAFB will purchasepurchases the full output of a Company-owned 5 MW5-MW solar facility upon its completed construction, which occurred on October 18, 2018. HAFB's other power requirements are provided under the applicable New Mexico tariffs with limited wheeling services under the contract.

Investors should note that we announce material financial information in our filings with the SEC, press releases and public conference calls. Based on guidance from the SEC, we may also use the Investor Relations section of our website (www.epelectric.com) to communicate with investors about the Company. It is possible that the financial information we post there could be deemed to be material information. The information contained on or accessible from our website is not incorporated by reference into and does not constitute a part of this Annual Report on Form 10-K.        

Like other companies in our industry, our financial results are primarily impacted by weather, the economy of our service territory, market prices for power, fuel prices, and the decisions of regulatory agencies. Our common stock price and creditworthiness willmay be affected by local, regional and national macroeconomic trends, general market conditions and the expectations of the investment community, all of which are largely beyond our control. In addition, the following statements highlight risk factors that may affect our financial condition and results of operations. These are not intended to be an exhaustive discussion of all such risks, and the statements below must be read together with factors discussed elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC.

Our rates are governed by Texas, New Mexico and federal laws and regulations, with our retail rates subject to regulation by incorporated municipalities in Texas, the PUCT, the NMPRC and our wholesale rates subject to regulation by the FERC. There can be no assurance that the laws and regulations or the application thereof in our different jurisdictions will be similar or consistent, which could lead to different treatment of certain matters by our regulators in different jurisdictions. The PUCT Final Order in Docket No. 46831 ("2017 PUCT Final Order") established our current retail base rates in Texas, effective July 18, 2017. In addition, the NMPRC Final Order in Case No. 15-00127-UT ("NMPRC Final Order") established rates in New Mexico that became effective in July 2016.

Our profitability depends on our ability to recover the costs, including a reasonable return on invested capital, of providing electric service to our customers through base rates approved by our regulators. These rates are generally established based on an analysis of the expenses we incur in a historical test year, and as a result, the rates ultimately approved by our regulators may or may not match our expenses at any given time and recovery of expenses may lag behind the occurrence of those expenses. Rates in New Mexico may be established using projected costs and investment for a future test year period in certain instances. While rate regulation is based on the assumption that we will have a reasonable opportunity to recover our costs and earn a reasonable rate of return on our invested capital, there can be no assurance that our future Texas rate cases, New Mexico rate cases or FERC rate cases will result in rates that will allow us to fully recover our costs including a reasonable return on invested capital, or that our regulators will make similar or consistent determinations with respect to our rates, operations or other matters before our regulators. There can be no assurance that regulators will determine that all of our costs are reasonable and have been prudently incurred, including costs associated with future plant retirements. It is also likely that third parties will intervene in any rate cases and challenge whether our costs are reasonable and necessary. If all of our costs are not recovered, or timely recovered, through the retail rates ultimately approved by our regulators, our profitability and cash flow could be adversely affected which, over time, could adversely affect our ability to meet our financial obligations.

We received approval, both from the PUCT and the NMPRC, to construct Units 3 and 4, two 89 MW89-MW simple-cycle aeroderivative combustion turbines at MPS. In 2016, we completed construction of these units, which began commercial operation in May 2016 and September 2016, respectively. The PUCT approved the inclusion of the Texas jurisdictional portion of MPS Units 3 and 4 in base rates in the 2017 PUCT Final Order. However, the New Mexico jurisdiction portion of MPS Units 3 and 4 have not yet been approved by the NMPRC for inclusion in customer base rates. Accordingly, we are exposed to the risk of failing to recover these costs as well as costs associated with the construction of other new units and transmission and distribution assets.

We announced the results of the 2017 All Source RFP on December 26, 2018, that includesinclude a diverse generation mix. The selected proposals are subject to the execution of contracts following negotiations with the winning bidders, obtaining the applicable environmental and construction related permits and obtaining necessary approvals by the PUCT and the NMPRC. In relation to the 2017 All Source RFP, the Company filed for regulatory approval with the NMPRC for three Long-Term Purchased Power Agreements relating to (i) a 100-MW solar plant to be constructed in Santa Teresa, New Mexico; (ii) a 100-MW solar plant combined with 50-MW of battery energy storage to be constructed in Otero County, New Mexico; and (iii) a 50-MW battery energy storage facility to be constructed in Canutillo, Texas. Additionally, the Company has filed a certificate of convenience and necessity with both the PUCT and the NMPRC to own and operate a new approximately 228-MW natural gas-fired unit to be constructed at the Company’s existing Newman Power Station. The Company cannot predict the outcome of these filings at this time.

In addition, for all resource additions, if the contracts, permits, approvals or the construction of the new unit is not completed on time, we may be required to purchase power or operate less efficient generating units to meet customer requirements. Any replacement purchased power or fuel costs will be subject to regulatory review by the PUCT and the NMPRC. We face financial

As Palo Verde is a nuclear electric generating facility, it is subject to environmental, health and financial risks, such as the ability to obtain adequate supplies of nuclear fuel and water; the ability to dispose of spent nuclear fuel; increases in decommissioning costs due to inflation and regulatory changes,changes; the ability to maintain adequate trust fund reserves for decommissioning; potential liabilities arising out of the operation of these facilities; the costs of securing the facilities against possible terrorist attacks; cyber attacks,cyber-attacks, or other causes;causes and unscheduled outages due to equipment and other problems. If a nuclear incident were to occur at Palo Verde, it could materially and adversely affect our results of operations and financial condition. A major incident at a nuclear facility anywhere in the world could cause regulatory bodies to limit or prohibit the operation or licensing of any domestic nuclear unit and to promulgate new regulations that could require significant capital expenditures and/or increase operating costs.

New technologies may emerge that could be superior to, or may not be compatible with, some of our existing technologies, and may require us to make significant expenditures to remain competitive. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes in a cost-effective manner and to offer, on a timely basis, services that meet customer demands and evolving industry standards.

Additionally, the electric utility industry is undergoing other technological advances such as the expanded cost effectivecost-effective utilization of energy efficiency measures, energy storage and distributed generation, including solar rooftop projects. Customers’ increased use of energy efficiency measures, energy storage and distributed generation could result in lower demand. Reduced demand due to energy efficiency measures, energy storage and the use of distributed generation, to the extent not substantially offset through ratemaking mechanisms, could have a material adverse impact on our financial condition, results of operations and cash flows.

For the past several years, inflation has been relatively low and, therefore has had little impact on our results of operations and financial condition. However, should we experience increases in costs due to inflationary impacts, any delays in requesting and receiving compensatory increases in our base rates could have a material adverse impact on our financial condition, results of operations and cash flows.

We are a fully vertically integrated electric utility company whose only business is the generation, transmission and distribution of electricity to customers in an area of approximately 10,000 square miles in west Texas and southern New Mexico. Approximately 87%86% of revenues are directly related to the retail sales of electric power to approximately 425,000432,800 residential, commercial and public authority customers. As such, risks uniquely associated with the utility industry such as changes in utility legislation and regulations, weather patterns in the region and economic conditions will have a greater effect on our overall operating results than otherwise if our operations were more diversified into other lines of business and in a broader geographical area.

Our workforce is aging and many employees have retired in the last few years or are or will become eligible to retire within the next few years.  Although we have undertaken efforts to recruit and train new field service personnel, we may be faced with a shortage of experienced and qualified personnel.  Our costs, including costs to replace employees, benefit (including healthcare) costs, retirement costs, productivity costs and safety costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor may adversely affect the ability to manage and operate our business. If we are unable to successfully attract and retain an appropriately qualified workforce, our results of operations could be negatively affected.

A substantial number of our employees are covered by a collective bargaining agreement that is scheduled to expirewas renewed for four years in SeptemberOctober 2019.  Labor disruptions could occur depending on the outcome of negotiations to renew the terms of this agreement with the union or if a tentative new agreement is not ratified by its members.  In addition, some of our non-represented employees could join this union in the future. Labor disruptions, strikes or significant negotiated wage and benefit increases, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our business, results of operations and/orand cash flows.

We depend on our senior management and other key personnel. Our success depends on our ability to attract and retain key personnel. The inability to recruit and retain or effectively transition key personnel or the unexpected loss of key personnel may adversely affect our operations. In addition, because of the reliance on our management team, our future success depends in part on our ability to identify and develop talent to succeed senior management. Any such occurrences could negatively impact our financial condition and results of operations.

Effective internal controls are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If our efforts to maintain an effective system of internal controls are not successful, we are unable to maintain adequate controls over our financial reporting and processes in the future or we are unable to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, our operating results could be harmed, or we may fail to meet

We currently have general liability and property insurance in place to cover certain of our facilities in amounts that we consider appropriate. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of our facilities may not be sufficient to restore the loss or damage without negative impact on our results of operations, financial condition and cash flows.

From time to time in the normal course of business, we are subject to various lawsuits, audits, regulatory proceedings, disputes and claims that could result in adverse judgments or settlements, fines, penalties, injunctions or other adverse consequences. These matters are subject to a number of uncertainties, and management is often unable to predict the outcome of such matters; resulting liabilities could exceed amounts currently reserved or insured against with respect to such matter. The legal costs and final resolution of matters in which we are involved could have a reputational impact and/orand a short- or long-term negative effect on our results of operations, financial condition and/orand cash flows. Similarly, the terms of resolution could require us to change our operational practices and procedures, which could also have a material adverse effect on our results of operations, financial condition and/orand cash flows.

Amounts drawn under our current debt agreements, including the RCF, may bear interest at rates based on the LIBOR. On July 27, 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR as a benchmark by the end of our outstanding voting power) or any affiliate or associate2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The RCF provides for a mechanism to amend the RCF to reflect the establishment of an Interested Shareholder, unless specific conditionsalternative rate of interest

The conditions to the Merger may not be satisfied and the Merger Agreement could be terminated. In addition, satisfying the conditions to the Merger may take longer than the Company requiresand Parent expect. The occurrence of any of these events individually or in combination could negatively affect the trading price of the Company’s common stock and the Company’s future business and financial results and subject the Company to the following:

Uncertainty about the impact of the Merger, including on employees and customers, may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate personnel, and could cause customers, suppliers and others that deal with the Company to seek to change existing business relationships with the Company. If employees depart, the Company’s business could be harmed. In addition, the Merger Agreement restricts the Company, without the consent of Parent, from taking specified actions until the CityMerger is completed or the Merger Agreement is terminated. These restrictions may prevent the Company from pursuing otherwise attractive business opportunities and making other changes to the Company’s business.

Following the announcement of the NMPRC, PUCTMerger Agreement, three purported Company shareholders filed lawsuits under the federal securities laws, two in the U.S. District Court for the Southern District of New York and FERC would likely be requiredone in any transaction involving a changethe U.S. District Court for the District of control.

In general, by law and regulation, our actual fuel and purchased power expenses are recovered from our customers. In times of rising fuel prices, we experience a lag in recovery of higher fuel costs. These costs are subject to reconciliation by the PUCT on a periodic basis every one to three years. The NMPRC, in its discretion, may order that a prudence review be conducted to assure that fuel and purchased power costs recovered from customers are prudently incurred. Prior to the completion of a reconciliation proceeding or audit by the PUCT or the NMPRC, we record fuel transactions such that fuel revenues, including fuel costs recovered through the FPPCAC in New Mexico, equal fuel expense. In the event that a disallowance of fuel cost recovery occurs during a reconciliation proceeding or an audit, the amounts recorded for fuel and purchased power expenses could differ from the amounts we are allowed to collect from our customers, and we could incur a loss to the extent of the disallowance.

On September 27, 2016,2019, the Company filed an application with the PUCT, designated as PUCT Docket No. 46308,50058, to reconcile $436.6$363.0 million of Texas fuel and purchased power expenses incurred during the period of April 1, 20132016 through March

The Company recovers fuel and purchased power costs from the Rio Grande Electric Cooperative ("RGEC") pursuant to an ongoing contract with a two-year notice to terminate provision. The contract includes a fuel adjustment clause designed to recover all eligible fuel and purchased power costs allocable to the RGEC and is updated on an annual basis. This update is reviewed and

Pursuant to the ANPP Participation Agreement, the rules and regulations of the NRC and federal law, we must fund our share of the estimated costs to decommission Palo Verde Units 1, 2, 3 and associated common areas. The determination of the estimated liability is based on site-specific estimates, which are updated every three years and involve numerous judgments and assumptions, including estimates of future decommissioning costs at current price levels, escalation rates and discount rates. The Palo Verde ARO is approximately $98.8$107.7 million and represents approximately 98% of our total ARO balance of $101.1$110.1 million as of December 31, 2018.2019. A 10% increase in the estimates of future Palo Verde decommissioning costs at current price levels would have increased the ARO liability by approximately $10.9$11.9 million at December 31, 2018.2019. See Part II, Item 8, Financial Statements and Supplementary Data, Note F of Notes to Financial Statements for further discussion.

We are required to fund estimated nuclear decommissioning costs over the life of the generating facilities through the use of external trust funds pursuant to rules of the NRC, PUCT and the ANPP Participation Agreement. Historically, in Texas and New Mexico, we have been permitted to collect the funding requirements for our NDT as part of our rates, except for a portion of Palo Verde Unit 3 and a portion of Common Facilities, which is deregulatedare not in rate base in the New Mexico jurisdiction. While we periodically attempt to seek to recover the costs of decommissioning obligations through our rates, we are not able to conclude, given the currently available evidence, that it is probable these costs will continue to be collected over the period until decommissioning begins in 2044. We are ultimately responsible for these costs, and our future actions combined with future decisions from regulators will determine how successful we are in this effort.

The funding amounts are based on assumptions about future investment returns and future decommissioning cost escalations. If the rates of return earned by the trusts fail to meet expectations or if estimated costs to decommission the nuclear plant increase beyond our expectations, we would be required to increase our funding to the NDT.

The NDT consists of marketable equity securities and fixed income instruments and are carried at fair value. We face interest rate risk on the fixed income instruments, which consist primarilyvalue of municipal, federal and corporate bonds and which were valued at $134.2 million as of December 31, 2018. A hypothetical 10% increase in interest rates would have reduced the fair values of these funds by $1.7approximately $324.3 million at December 31, 2018. The NDT also includes marketable equity securities of approximately $135.9 million at December 31, 2018.2019. A hypothetical 10% decrease in equity prices would have reduced the fair values of these funds by $13.6$32.4 million at December 31, 2018.2019. Declines in market prices could require that additional amounts be contributed to our NDT to maintain minimum funding requirements.

We do not anticipate expending monies held in the NDT before 2044 or a later period when decommissioning of Palo Verde begins.

We maintain a qualified noncontributory defined benefit pension plan, which covers substantially all of our employees, and two non-funded nonqualified supplement plans that provide benefits in excess of amounts permitted under the provisions of the tax law for certain participants in the qualified plan. We also sponsor a plan that provides other post-retirement benefits, such as health and life insurance benefits to retired employees. Our net obligations under these various benefit plans at December 31, 20182019 totaled $114.0$121.9 million and are recorded as liabilities on our balance sheet. The net periodic benefit costs for these plans totaled $2.2$0.3 million for the twelve months ended December 31, 2018.2019.

Our pension and other post-retirement benefit liabilities and the related net periodic benefit costs are calculated on the basis of a number of actuarial assumptions regarding discount rates, expected return on plan assets, rate of compensation increase, life expectancy of retirees and health care cost inflation. For 2018,2019, the discount rates used to measure our year end liabilities are based on a segmented spot rate yield curve that matches projected future payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. As of December 31, 2018,2019, the corresponding weighted-average discount rates range from 4.11%2.87% to 4.45%3.41% depending upon the benefit plan.

Our overall expected long-term rate of return on assets for the pension trust fund is 7.5% as of January 1, 2019,2020, which is both a pre-tax and after-tax rate as pension funds are generally not subject to income tax. Our overall expected long-term rate of return on assets for the other post-retirement benefits trust, on an after-tax basis, is 6.00% as of January 1, 2019. Both expected long-term rates of return are based on the after-tax weighted average of the expected returns on investments.2020. The expected returns on investments in the pension trust and the other post-retirement benefits trust are based upon the target asset allocations for the two trusts.

Our accrued post-retirement benefit liability and the service and interest components of the related net periodic benefit costs are calculated using an actuarial assumption regarding health care cost inflation. For measurement purposes, a 6.0%5.75%, 7.0%6.75%, 4.5% and 8.5%7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 20192020 for pre-65 medical, pre-65 drug, post-65 medical and post-65 drug, respectively. The health care cost trend rates are assumed to decline steadily to an ultimate rate of 4.5% by 2025 for pre-65 medical and by 2026 for pre-65 and post-65 drug. Post-65 medical trend is assumed to be 4.5% for all years into the future. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan.

The following table reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 20182019 reported pension liability and our 20182019 reported pension expense (in thousands):

The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 20182019 other post-retirement benefit obligation and our 20182019 reported other post-retirement benefit expense (in thousands):