APS 2011 Annual Report Download - page 172

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
147
majority of trading counterparties’ debt is rated as investment grade by the credit rating agencies,
there is still a possibility that one or more of these companies could default, resulting in a material
impact on consolidated earnings for a given period. Counterparties in the portfolio consist
principally of financial institutions, major energy companies, municipalities and local distribution
companies. We maintain credit policies that we believe minimize overall credit risk to within
acceptable limits. Determination of the credit quality of our counterparties is based upon a number
of factors, including credit ratings and our evaluation of their financial condition. To manage credit
risk, we employ collateral requirements and standardized agreements that allow for the netting of
positive and negative exposures associated with a single counterparty. Valuation adjustments are
established representing our estimated credit losses on our overall exposure to counterparties.
Certain of our derivative instrument contracts contain credit-risk-related contingent features
including, among other things, investment grade credit rating provisions, credit-related cross default
provisions, and adequate assurance provisions. Adequate assurance provisions allow a counterparty
with reasonable grounds for uncertainty to demand additional collateral based on subjective events
and/or conditions. For those derivative instruments in a net liability position, with investment grade
credit contingencies, the counterparties could demand additional collateral if our debt credit rating
were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for
Moody’s).
The following table provides information about our derivative instruments that have credit-
risk-related contingent features at December 31, 2011 (dollars in millions):
December 31,
2011
Aggregate Fair Value of Derivative Instruments in a
Liability Position $ 330
Cash Collateral Posted 147
Additional Cash Collateral in the Event Credit-Risk
Related Contingent Features were Fully Triggered (a) 151
(a) This amount is after counterparty netting and includes those contracts which
qualify for scope exceptions, which are excluded from the derivative details in the
footnote above.
We also have energy related non-derivative instrument contracts with investment grade
credit-related contingent features which could also require us to post additional collateral of
approximately $194 million if our debt credit ratings were to fall below investment grade.
19. Other Income and Other Expense
The following table provides detail of other income and other expense for 2011, 2010 and
2009 (dollars in thousands):