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•	capital expenditures,

•	earnings,

•	liquidity and capital resources,

•	ratemaking/regulatory/compliance matters,

•	litigation,

•	accounting matters, including accounting for taxes and leases,

•	possible corporate restructurings, acquisitions and dispositions,

•	compliance with debt and other restrictive covenants,

•	interest rates and dividends,

•	environmental matters,

•	nuclear operations,

•	operation of the Company's generating units and its transmission and distribution systems,

•	the availability and costs of new and /or emerging technologies, and

•	the overall economy of the Company's service area.

•	decisions and actions of the Company's regulators and the resulting impact on the Company's operations, cost of capital, sales, and profitability,

•	the Company's ability to fully and timely recover its costs and earn a reasonable rate of return on its invested capital through the rates that it is permitted to charge,

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

•	the ability of the Company's operating partners to maintain plant operations and manage operations and maintenance ("O&M") costs at the Palo Verde Generating Station ("Palo Verde"), including costs to comply with any new or expanded regulatory or environmental requirements,

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

•	the size of the Company's construction program and its ability to complete construction on budget and on time,

•	the receipt of required approvals by regulators and other permits related to the Company’s construction programs,

•	the Company's reliance on significant customers,

•	the credit worthiness of the Company's customers,

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•	unscheduled outages of generating units including outages at Palo Verde,

•	changes in customers' demand for electricity as a result of energy efficiency initiatives and emerging competing services and technologies, including distributed generation and battery storage,

•	individual customer groups, including distributed generation customers, may not pay their full cost of service, and other customers may or may not be required to pay the difference,

•	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 and other post-retirement plan assets,

•	the impact of changing cost escalation and other assumptions on the Company's nuclear decommissioning liability for Palo Verde, as well as actual and assumed investment returns on assets in the Company's Palo Verde nuclear decommissioning trust funds ("NDT"),

•	disruptions in the Company's transmission and distribution systems, and in particular the lines that deliver power from its remote generating facilities,

•	the sufficiency of the Company's insurance coverage, including availability, cost, coverage and terms,

•	electric utility deregulation or re-regulation,

•	regulated and competitive markets,

•	ongoing municipal, state and federal activities,

•	cuts in military spending or prolonged shutdowns of the federal government that reduce demand for the Company's services from military and governmental customers,

•	political, legislative, judicial and regulatory developments,

•	homeland security considerations, including those associated with the United States ("U.S.")/Mexico border region and the energy industry,

•	changes in environmental laws and regulations and the enforcement or interpretation thereof, including those related to air, water or greenhouse gas ("GHG") emissions or other environmental matters,

•	economic, commercial bank, financial and capital market conditions,

•	increases in cost of capital,

•	the impact of changes in interest rates or rates of inflation,

•	actions by credit rating agencies,

•	changes in accounting requirements and other accounting matters,

•	changing weather trends and the impact of severe weather conditions,

•	possible physical or cyber attacks, intrusions or other catastrophic events,

•	the impact of lawsuits filed against the Company,

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

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

•	possible income tax and interest payments as a result of audit adjustments proposed by the U.S. Internal Revenue Service or state taxing authorities,

•	the impact of recent changes to U.S. tax laws,

•	the impact of international trade and tariff negotiations,

•	the impact of U.S. health care reform legislation,

•	the effectiveness of the Company's risk management activities,

•	the Company's ability to successfully renegotiate its collective bargaining agreement,

•	loss of key personnel, the Company's ability to recruit and retain qualified employees and the Company's ability to successfully implement succession planning, and

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•	other circumstances affecting anticipated operations, sales and costs.

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Item 1.	Business

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Palo Verde Operating Licenses. Operation of each of the three Palo Verde Units requires an operating license from the U.S. Nuclear Regulatory Commission ("NRC"). The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987 and issued renewed operating licenses for each of the three units in April 2011, which extended the licenses for Units 1, 2 and 3 to June 2045, April 2046 and November 2047, respectively.

•

Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, through the term of their respective operating licenses. In 2017, the Palo Verde Participants approved the 2016 Palo Verde decommissioning study ("2016 Study"), which estimated that the Company must fund approximately $432.8 million (stated in 2016 dollars) to cover its share of decommissioning costs. At December 31, 2018, the Company's decommissioning trust fund had a balance of $276.9 million. Although the 2016 Study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not increase in the future or that regulatory requirements will not change.

•

Spent Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987, the U.S. Department of Energy ("DOE") is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive waste generated by all domestic power reactors by 1998. The DOE's obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste ("Standard Contract") with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. On December 19, 2012, APS, acting on behalf of itself and the Palo Verde Participants, filed a second breach of contract lawsuit against the DOE. This lawsuit sought to recover damages incurred due to the DOE’s failure to accept Palo Verde’s spent nuclear fuel for the period beginning January 1, 2007 through June 30, 2011. Pursuant to the terms of the August 18, 2014 settlement agreement, and as amended with the DOE, APS files annual claims for the period July 1 of the then-previous year to June 30 of the then-current year on behalf of itself and those utilities that share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde based upon the ANPP Participation Agreement dated August 23, 1973. The settlement agreement, as amended, provides APS with a method for submitting claims and receiving recovery for costs incurred through December 31, 2016, which has been extended to December 31, 2019. The Company's share of costs recovered in 2018, 2017, and 2016, respectively are presented below (in thousands):

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DOE’s Construction Authorization Application for Yucca Mountain. The DOE had planned to meet its disposal obligations by designing, licensing, constructing and operating a permanent geologic repository in Yucca Mountain, Nevada. In March 2010, the DOE filed a motion to dismiss with prejudice its Yucca Mountain construction authorization application that was pending before the NRC. Several interested parties have intervened in the NRC proceeding. Additionally, a number of interested parties have filed a variety of lawsuits in different jurisdictions around the country challenging the DOE's authority to withdraw the Yucca Mountain construction authorization application and NRC’s cessation of its review of the Yucca Mountain construction authorization application. The cases have been consolidated into one matter at the U.S. Court of Appeals for the

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Waste Confidence and Continued Storage. On June 8, 2012, the D.C. Circuit issued its decision on a challenge by several states and environmental groups of the NRC’s rulemaking regarding temporary storage and permanent disposal of high level nuclear waste and spent nuclear fuel. The petitioners challenged the NRC’s 2010 update to the agency’s Waste Confidence Decision and temporary storage rule ("Waste Confidence Decision").

•

The One-Mill Fee. In 2011, the National Association of Regulatory Utility Commissioners and the Nuclear Energy Institute challenged the DOE’s 2010 determination of the adequacy of the one tenth of a cent per kilowatt-hour ("kWh") fee ("one-mill fee") paid by the nation’s commercial nuclear power plant owners pursuant to their individual obligations under the Standard Contract. This fee was recovered by the Company through applicable

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NRC Oversight of the Nuclear Energy Industry in the Wake of the Earthquake and Tsunami in Japan. The NRC regulates the operation of all commercial nuclear power reactors in the U.S., 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. Following the March 11, 2011 earthquake and tsunami in Japan, the NRC established a task force to conduct a systematic and methodical review of NRC processes and regulations to determine whether the agency should make additional improvements to its regulatory system. On March 12, 2012, the NRC issued the first regulatory requirements based on the recommendations of the NRC's Near Term Task Force. With respect to Palo Verde, the NRC issued two orders requiring safety enhancements regarding: (1) mitigation strategies to respond to extreme natural events resulting in the loss of power at plants and (2) enhancement of spent fuel pool instrumentation.

•

Liability and Insurance Matters. The Palo Verde Participants have insurance for public liability resulting from nuclear energy hazards, covered by primary liability insurance provided by commercial insurance carriers and an industry-wide retrospective assessment program. If a loss at a nuclear power plant covered by the programs exceeds the accumulated funds in the primary level of protection, the Company could be assessed retrospective premium adjustments on a per incident basis up to $62.1 million, with an annual payment limitation of approximately $9.7 million. The Palo Verde Participants also maintain $2.8 billion of "all risk" nuclear property insurance. The insurance provides coverage for property damage and decontamination at Palo Verde. For covered incidents involving property damage not accompanied by a release of radioactive material, the policy's coverage limit is $2.3 billion. In addition, the Company has secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen outage at Palo Verde.

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(1)	Runs from Tucson Electric Power Company's ("TEP") Springerville Generating Plant near Springerville, Arizona, to the Company's Diablo Substation near Sunland Park, New Mexico.

(2)	Runs from Public Service Company of New Mexico's ("PNM") West Mesa Substation near Albuquerque, New Mexico, to the Company's Arroyo Substation near Las Cruces, New Mexico.

(3)	Runs from TEP's Greenlee Substation near Duncan, Arizona to Newman.

(4)	Runs from the Company's and PNM's high voltage direct current terminal at the Eddy County Substation near Artesia, New Mexico to the AMRAD Substation near Oro Grande, New Mexico.

(5)	Represents two 45-mile, 500 kV lines running from Palo Verde to the Westwing Substation located northwest of Phoenix near Peoria, Arizona.

(6)	Runs from Palo Verde to the Jojoba Substation near Gila Bend, Arizona, then to the Kyrene Substation near Tempe, Arizona.

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(1)	Does not include acquisition costs for nuclear fuel. See "Energy Sources – Nuclear Fuel."

(2)	Estimated production costs consist of:

a.	$185 million for new generating capacity, including:

i.	$143 million of construction costs from 2019 through 2023 for a 226 MW combustion turbine generating unit at Newman with an anticipated operational date in 2023 as a result of the 2017 All Source RFP.

ii.	$42 million of initial construction costs from 2019 through 2023 for a 320 MW combined cycle generating unit to be completed in 2027.

b.	$265 million of other generation costs, including $185 million for Palo Verde.

(3)	Estimated distribution costs include:

a.

$85 million of initial project costs for Advanced Metering Infrastructure ("AMI"), including deployment of the back-office systems and meters. Legislative proposals regarding the clarification of the regulatory process to implement AMI are anticipated during the Texas legislative session that convened in January 2019. With legislative clarification, the Company would then have the opportunity to request regulatory approval for the deployment of AMI.

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(1)	The number of retail customers presented is based on the number of service locations.

(2)	Includes spot sales and net losses of 77,000 kilowatts ("kW"), 47,000 kW and 135,000 kW for 2018, 2017 and 2016, respectively.

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Item 1A.	Risk Factors

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•	operator error or failure of equipment or processes, including failure to follow appropriate safety protocols;

•	the handling of hazardous equipment or materials that could result in serious personal injury, loss of life and environmental and property damage;

•	operating limitations that may be imposed by environmental or other regulatory requirements;

•	labor disputes;

•	information technology or financial system failures, including those due to the implementation and integration of new technology, that impair our information technology infrastructure, reporting systems or disrupt normal business operations;

•	information technology failure that affects our ability to access customer information or causes us to lose confidential or proprietary data that materially and adversely affects our reputation or exposes us to legal claims; and

•	catastrophic events such as fires, earthquakes, explosions, leaks, floods, droughts, natural disasters, terrorism, pandemic health events or other similar occurrences, which may require participation in mutual assistance efforts by us or other utilities to assist in power restoration efforts.

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•	provisions relating to the classification, nomination and removal of our directors;

•	provisions regulating the ability of our shareholders to bring matters for action at annual meetings of our shareholders;

•	provisions limiting the ability to call special meetings of the shareholders to the Chairman of the Board, our President and Chief Executive Officer, our Secretary, the majority of the Board of Directors or the holders of at least 25% of the outstanding shares of our capital stock entitled to vote at such meeting;

•	provisions restricting our ability to engage in a wide range of “Business Combination” transactions with an “Interested Shareholder” (generally, any person who owns 15% or more of our outstanding voting power) or any affiliate or associate of an Interested Shareholder, unless specific conditions are met; and

•	the authorization given to our Board of Directors or any duly designated committee to issue and set the terms of preferred stock.

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Item 1B.	Unresolved Staff Comments

Item 2.	Properties

Item 3.	Legal Proceedings

Item 4.	Mine Safety Disclosures

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Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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Item 6.	Selected Financial Data

(a)

Effective January 1, 2018, the Company implemented Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities. As required by the new standard, changes in the fair values of the Company's equity investments are recognized in earnings, whereas prior to 2018, such changes were recognized in accumulated other comprehensive income ("AOCI").

(b)	The Company implemented ASU 2017-07, Compensation - Retirement Benefits (Topic 715), in the first quarter of 2018, and as required by the standard, reclassified certain amounts in the financial statements for 2017 and 2016.

(c)	The Company implemented ASU 2016-15, Statement of Cash Flows (Topic 230) in the first quarter of 2018, and as required by the standard, reclassified certain amounts in the financial statements for 2017 and 2016.

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Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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(a)

Investment and interest income, NDT decreased in 2018, primarily due to net realized and unrealized losses on securities held in the NDT. Beginning on January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments, and began recording unrealized gains and losses on equity securities held in the NDT directly in earnings. Refer to "Impact of New Accounting Standards and Use of Non-GAAP Financial Measures" for further details.

(b)	Investment and interest income, NDT increased in 2017 and decreased in 2016, primarily due to changes in realized gains on securities sold from the NDT. Sales of such securities are primarily the result of the Company's efforts to re-balance and further diversify the NDT investments.

(c)	Depreciation and amortization increased primarily due to increases in plant.

(d)	Depreciation and amortization increased primarily due to increases in plant, including MPS Units 3 and 4, which were placed in service in 2016. These increases were partially offset by the sale of the Company's interest in Four Corners in July 2016.

(e)

Depreciation and amortization decreased primarily due to (i) a reduction of approximately $10.9 million resulting from changes in depreciation rates approved in the PUCT Final Order in Docket No. 44941 ("2016 PUCT Final Order") and the NMPRC Final Order and (ii) the sale of the Company's interest in Four Corners in 2016. These decreases were partially offset by an increase in plant, primarily due to MPS Units 1 and 2 and the Eastside Operations Center ("EOC") each being placed in service in March 2015, and MPS Units 3 and 4 being placed in service in May 2016 and September 2016, respectively.

(f)	Palo Verde performance rewards, associated with the 2013 to 2015 performance periods, net of disallowed fuel and purchased power costs related to the resolution for the Texas fuel reconciliation proceeding designated as PUCT Docket No. 46308 for the period from April 2013 through March 2016, were recorded in June 2017, with no comparable amounts in 2018 or 2016.

(g)	O&M expenses at our fossil-fuel generating plants increased primarily due to outage costs at Rio Grande Unit 8 in 2018.

(h)	Interest on long-term debt (net of capitalized interest) and other increased, primarily due to the $125.0 million aggregate principal amount of 4.22% Senior Notes issued in June 2018 and due in August 2028, partially offset by the redemption of $33.3 million of 2012 Series A 1.875% Pollution Control Bonds ("PCBs") in 2017.

(i)	Interest on long-term debt (net of capitalized interest) and other increased, primarily due to the $150.0 million principal amount of senior notes issued in March 2016 and an increase in short term borrowings for working capital purposes in 2017.

(j)	Interest on long-term debt (net of capitalized interest) and other increased, primarily due to the $150.0 million principal amount of senior notes issued in March 2016.

(k)	Retail non-fuel base revenues decreased primarily due to refunds of approximately $28.2 million for the reduction in the federal corporate income tax rate due to the TCJA, partially offset by a $7.7 million base rate increase compared to 2017

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(l)

Retail non-fuel base revenues increased primarily due to the non-fuel base rate increase approved in the 2017 PUCT Final Order. 2017 included approximately $8.8 million of retail non-fuel base revenues for the period from July 18, 2017 through December 31, 2017, which was recognized when the 2017 PUCT Final Order was approved in December 2017. Excluding the $8.8 million 2017 PUCT Final Order impact, retail non-fuel base revenues increased $4.5 million, or 0.7%, in 2017 compared to 2016.

(m)	Retail non-fuel base revenues increased primarily due to the recognition of $40.9 million related to the 2016 PUCT Final Order.

(n)	Taxes other than income taxes increased primarily due to increased property valuations in Texas as a result of MPS Units 3 and 4 being placed in service in 2016 and increased revenue related taxes in Texas.

(o)	Taxes other than income taxes increased primarily due to increased property tax rates and valuations in Texas as a result of MPS Units 1 and 2 and the EOC being placed in service during the first quarter of 2015 and increased billed revenues for Texas revenue related taxes. These increases were partially offset by decreased property taxes in Arizona due to lower property values.

(p)	The effective tax rate, other decreased primarily due to the TCJA that reduced the federal corporate income tax rate from 35% to 21%, excluding the tax impact of other items in the table above partially offset by a reduction in state tax reserves in 2017 due to the favorable settlement of Texas state income tax audits.

(q)	The effective tax rate, other decreased primarily due to favorable settlements of state income tax audits in Texas and Arizona.

(r)	The effective tax rate, other increased primarily due to the change to normalize state income taxes in accordance with the 2016 PUCT Final Order and the NMPRC Final Order.

(s)	Palo Verde O&M expenses decreased primarily due to lower incentives and administrative and general ("A&G") benefits in 2018 compared to 2017.

(t)	Palo Verde O&M expenses increased primarily due to higher A&G expenses.

(u)	AFUDC decreased due to lower balances of construction work in progress ("CWIP"), primarily due to MPS Units 3 and 4 being placed in service in May and September 2016, respectively, and a reduction in the AFUDC rate effective January 2017.

(v)	AFUDC decreased due to lower balances of CWIP, primarily due to the MPS units and the EOC being placed in service in 2015 and 2016, and a reduction in the AFUDC rate effective January 2016 as a result of the 2016 PUCT Final Order.

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(1)	2018 includes $7.7 million of additional revenues compared to 2017 resulting from the 2017 PUCT Final Order, which increased base rates effective July 18, 2017.

(2)	2018 includes a $28.2 million base rate decrease related to the reduction in the federal statutory income tax rate enacted under the TCJA.

(3)	Includes the portion of DOE refunds related to spent fuel storage of $1.1 million and $1.4 million in 2018 and 2017, respectively, that were credited to customers through the applicable fuel adjustment clauses.

(4)	2017 includes $5.0 million related to the Palo Verde performance rewards, net.

(5)	Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $8.1 million and $9.8 million in 2018 and 2017, respectively.

(6)	Includes retained margins of $2.1 million and $1.7 million in 2018 and 2017, respectively.

(7)	Represents revenues with no related kWh sales.

(8)	The Company implemented ASU 2014-09, Revenue from Contracts with Customers, in the first quarter of 2018, and following the adoption of the standard, revenues related to reimbursed costs of energy efficiency programs approved by the Company's regulators are reported in operating revenues from customers. Related expenses are reported in O&M expenses.

(9)	Includes energy efficiency bonuses of $1.3 million and $1.5 million in 2018 and 2017, respectively.

(10)	The number of retail customers presented is based on the number of service locations.

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(1)	2017 includes $8.8 million of relate back revenues in Texas from July 18, 2017 through December 31, 2017, which was recorded in the fourth quarter of 2017 related to the 2017 PUCT Final Order.

(2)	Includes the portion of DOE refunds related to spent fuel storage of $1.4 million and $1.6 million in 2017 and 2016, respectively, that were credited to customers through the applicable fuel adjustment clauses.

(3)	Historically, fuel and purchased power costs in the New Mexico jurisdiction were recorded through base rates and a FPPCAC that accounts for the changes in the costs of fuel relative to the amount included in base rates. Effective July 1, 2016, with the implementation of the NMPRC Final Order, these costs are no longer recovered through base rates but are recovered through the FPPCAC.

(4)	2017 includes $5.0 million related to the Palo Verde performance rewards, net.

(5)	Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $9.8 million and $8.7 million in 2017 and 2016, respectively.

(6)	Includes retained margins of $1.7 million and $1.1 million in 2017 and 2016, respectively.

(7)	Represents revenues with no related kWh sales.

(8)	Includes an energy efficiency bonuses of $1.5 million and $0.5 million in 2017 and 2016, respectively.

(9)	The number of retail customers presented is based on the number of service locations.

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(1)

We have five outstanding issuances of senior notes. In May 2005, we issued $400.0 million aggregate principal amount of 6% Senior Notes due May 15, 2035. In June 2008, we issued $150.0 million aggregate principal amount of 7.5% Senior Notes due March 15, 2038. In December 2012, we issued $150.0 million aggregate principal amount of 3.3% Senior Notes due December 15, 2022. In December 2014, we issued $150.0 million aggregate principal amount of 5.0% Senior Notes due December 1, 2044. In March 2016, we issued an additional $150.0 million aggregate principal amount of 5.0% Senior Notes due December 1, 2044, for a total principal amount outstanding of 5.0% Senior Notes due December 1, 2044 of $300.0 million. In June 2018, we issued in a private placement offering $125.0 million aggregate principal amount of 4.22% Senior Notes due August 15, 2028.

(2)

We have three series of PCBs outstanding, two of which mature in 2040, and one of which matures in 2042. The 7.25% 2009 Series A and the 7.25% 2009 Series B PCBs with an aggregate principal amount, together, of $100.6 million have optional redemptions beginning in February 2019 and April 2019, respectively, at which time we expect to redeem, refinance or replace these bonds. On February 1, 2019, we purchased in lieu of redemption all of the 7.25% 2009 Series A with a principal amount of $63.5 million utilizing funds borrowed under the RCF. We are currently holding the bonds and may remarket them or replace them with debt instruments of equivalent value at a future date depending on our financing needs and market conditions.

(3)

In 2010, we and RGRT entered into a note purchase agreement pursuant to which the RGRT issued and sold $45.0 million aggregate principal amount of 5.04% RGRT Senior Notes, Series C, due August 15, 2020. In June 2018, we and RGRT entered into a note purchase agreement pursuant to which the RGRT issued and sold $65.0 million aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025.

(4)	This reflects obligations outstanding under the $350.0 million RCF. At December 31, 2018, $23.0 million was borrowed for working capital and general corporate purposes and $26.2 million was borrowed by RGRT for nuclear fuel. This balance includes interest based on actual interest rates at the end of 2018 and assumes this amount will be outstanding for the entire year of 2019.

(5)	Amount is based on the minimum volumes per the contract and market and/or contract price at the end of 2018. Gas obligation includes a gas storage contract and a gas transportation contract.

(6)	Some of the nuclear fuel contracts are based on a fixed price, adjusted for a market index. The index used here is the index at the end of 2018.

(7)

This obligation is based on our expected contributions and includes our minimum contractual funding requirements for the non-qualified retirement income plan and the other post-retirement benefits for 2019. We have no minimum cash contractual funding requirement related to our retirement income plan or other post-retirement benefits for 2019. However, we are subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974. We also may decide to fund at higher levels and expect to contribute $9.9 million to our retirement plans in 2019. Minimum

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(8)	This obligation is based on the decommissioning funding allowed in PUCT Docket No. 46831, effective July 18, 2017. We have no minimum funding obligation in the New Mexico jurisdiction effective July 1, 2016 with NMPRC Case No. 15-00127-UT. It is possible that our funding requirements could change based on the amounts allowed in future rate filings.

(9)	We lease land in El Paso, Texas, adjacent to Newman under a lease that expires in June 2033, subject to a renewal option of 25 years. We also have several other leases for office, parking facilities and equipment that expire within the next five years.

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Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

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•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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(a)

This item relates to (i) the regulatory treatment of the equity portion of AFUDC which is recovered in rate base by an offset with the related accumulated deferred income tax liability, and (ii) excess deferred state income taxes which are recovered through amortization to tax expense in cost of service. The amortization period for the excess deferred state income taxes is 15 years as established in the 2016 PUCT Final Order and the NMPRC Final Order.

(b)	This item is recovered as a component of the weighted cost of debt and amortized over the life of the related debt issuance.

(c)	This item relates to coal reclamation costs associated with Four Corners. The Texas portion was approved for recovery in PUCT Docket No. 46308 and will be recovered over seven years through June 2023. The New Mexico amortization period will be established in the next general rate case.

(d)	This item relates to the decommissioning of Four Corners. The Texas portion was approved for recovery in PUCT Docket No. 46308 and will be recovered over seven years through July 2024. The New Mexico amortization period will be established in the next general rate case.

(e)	This item is recovered through fuel recovery mechanisms established by tariffs.

(f)	The 2017 PUCT Final Order approved a new recovery period for these costs, beginning January 10, 2018.

(g)	This item relates to the recovery of revenues through two separate surcharges; one for the 2015 Texas Retail Rate Case relate back revenues beginning October 1, 2016, and ending September 30, 2017, and a second surcharge for the 2017 Texas Retail

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(h)	This item relates to renewable energy credits and procurement plan costs, of which a component has been approved for recovery in the NMPRC Final Order. The remaining balance will be requested for recovery in the next general rate case.

(i)	The amortization period for this item is based upon the U.S. Nuclear Regulatory Commission ("NRC") license life for each unit at Palo Verde.

(j)	This item primarily relates to the reduction in the federal corporate income tax rate from 35% to 21% as enacted by the TCJA. The amortization period for the recovery on this item will be addressed in the next base rate filings in all jurisdictions. See Part II, Item 8, Financial Statements and Supplementary Data, Note K of Notes to Financial Statements for further discussion.

(k)	The amortization period is based upon the life of the associated assets.

(l)	This item is recovered or credited through a recovery factor that is set annually.

(m)	This item represents the net over-recovery of fuel and purchased power expense which is refunded to customers through fuel rates.

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(a)	Represents repurchased shares and cost since inception of the stock repurchase program in 1999.

(b)	Shares repurchased does not include 86,735 treasury shares related to employee compensation arrangements that were not part of the Company's repurchase program.

(c)	Beginning in 2015, shares of the Company's common stock issued for employee benefit and stock incentive plans have been issued from the shares repurchased and held in treasury stock. The Company has issued 345,352 treasury shares since 2015 including 96,783 shares during 2018.

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(a)	Certain performance shares were excluded from the computation of diluted earnings per share as no payouts would have been required based upon performance at the end of each corresponding period.

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(1)	Pollution Control Bonds

(2)	Senior Notes

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(3)	RGRT Senior Notes

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(4)	Revolving Credit Facility

(1)	The 7.25% 2009 Series A and the 7.25% 2009 Series B PCBs with an aggregate principal amount, together, of $100.6 million have optional redemptions beginning in February 2019 and April 2019, respectively, at which time the Company expects to repay, remarket or replace these bonds.

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Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Prices of securities held in the mutual funds and underlying portfolios of the Retirement Plan are primarily obtained from independent pricing services. These prices are based on observable market data. The Common Collective Trusts are valued using the Net Asset Value ("NAV") provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets. The NAV used for determining the fair value of the investments in the Common Collective Trusts have readily determinable fair values. Accordingly, such fund values are categorized as Level 1.

•	Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. The fair value of these investments 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.

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(a)	The Common Collective Trusts are invested in equity and fixed income securities, or a combination thereof. The investment objective of each fund is to produce returns in excess of, or commensurate with, its predefined index.

(b)

This investment is a commercial real estate partnership that purchases land, develops limited infrastructure and sells it for commercial development. The Company was restricted from selling its partnership interest during the life of the partnership, which spanned 7 years. Return on investment is realized as land is sold. The fair value of the limited partnership interest in real estate is based on the NAV of the partnership which reflects the appraised value of the land. The partnership term expired on June 30, 2016. Upon expiration, dissolution of the partnership commenced and, as a result, the general partner of the partnership is attempting to sell the remaining inventory as soon as possible at the highest pricing possible.

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Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Prices of securities held in the mutual funds and underlying portfolios of the Other Post-retirement Benefits Plan are primarily obtained from independent pricing services. These prices are based on observable market data. The institutional funds are valued using the NAV provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets. The NAV used for determining the fair value of the investments in the institutional funds have readily determinable fair values. Accordingly, such fund values are categorized as Level 1.

•	Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. The fair value of these investments 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.

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(a)	The institutional funds are invested in equity or fixed income securities, or a combination thereof. The investment objective of each fund is to produce returns in excess of, or commensurate with, its predefined index.

(b)

This investment is a commercial real estate partnership that purchases land, develops limited infrastructure and sells it for commercial development. The OPEB Plan trust was restricted from selling its partnership interest during the life of the partnership, which spanned 7 years. Return of investment is realized as land is sold. The fair value of the limited partnership interest in real estate is based on the NAV of the partnership which reflects the appraised value of the land. The partnership term expired on June 30, 2016. Upon expiration, dissolution of the partnership commenced and, as a result, the general partner of the partnership is attempting to sell the remaining inventory as soon as possible at the highest pricing possible.

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(1)	On June 28, 2018, the Company issued $125 million in aggregate principal amount of 4.22% Senior Notes due August 15, 2028 and guaranteed the issuance by the RGRT of $65 million in aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025. See Part II, Item 8, Financial Statements and Supplementary Data, Note J of Notes to Financial Statements.

(2)

Nuclear fuel financing, as of December 31, 2018 and December 31, 2017, is funded through $110 million and $45 million RGRT Senior Notes and $26.2 million and $88.5 million, respectively under the RCF. As of December 31, 2018, $23 million was outstanding under the RCF for working capital or general corporate purposes. As of December 31, 2017, $85.0 million was outstanding under the RCF for working capital or general corporate purposes. The interest rate on the Company’s borrowings under the RCF is reset throughout the period reflecting current market rates. Consequently, the carrying value approximates fair value.

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(1)	Includes approximately 156 securities.

(2)	Includes approximately 146 securities.

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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 NDT investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market. The Institutional Funds are valued using the NAV provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets. The NAV used for determining the fair value of the Institutional Funds-International Equity investments have readily determinable fair values. Accordingly, such fund values are categorized as Level 1.

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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 NDT investments in 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 analysis. Financial assets utilizing Level 3 inputs are the Company's investment in debt securities.

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(a)	The Company sold its interest in Four Corners in July 2016. The sales proceeds were reduced by the settlement of other obligations between the Company and APS and its affiliate, 4C Acquisition, LLC. See Part II, Item 8, Financial Statements and Supplementary Data, Note F of Notes to Financial Statements.

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(1)	Effective January 1, 2018, the Company implemented ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities. As required by the new standard, changes in the fair values of the Company's equity investments are recognized in earnings, whereas prior to 2018, such changes were recognized in accumulated other comprehensive income.

(2)	Operating revenues are seasonal in nature, with the peak sales periods generally occurring during the summer months. Comparisons among quarters of a year may not represent overall trends and changes in operations.

(3)	The Company implemented ASU 2017-07, Compensation - Retirement Benefits, in the first quarter of 2018, and as required by the standard, reclassified certain amounts in the financial statements for 2017. See Part II, Item 8, Financial Statements and Supplementary Data, Notes B and N of Notes to Financial Statements.

(4)

For financial reporting purposes, the Company deferred any recognition of the Company's request in its 2017 Texas Retail Rate Case until it received the 2017 PUCT Final Order on December 18, 2017. Accordingly, it reported in the fourth quarter of 2017 the cumulative effect of the 2017 PUCT Final Order, which related back to July 18, 2017. See Part II, Item 8, Financial Statements and Supplementary Data, Note D of Notes to Financial Statements.

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Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.	Controls and Procedures

Item 9B.	Other Information

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Item 10.	Directors, Executive Officers of the Registrant and Corporate Governance

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Item 11.	Executive Compensation

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.	Certain Relationships and Related Transactions, and Director Independence

Item 14.	Principal Accounting Fees and Services

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Item 15.	Exhibits and Financial Statement Schedules

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Item 16.	Form 10-K Summary

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