APS 2012 Annual Report Download - page 158

PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
133
Investments Held in our Nuclear Decommissioning Trust
The nuclear decommissioning trust invests in fixed income securities and equity securities.
Equity securities are held indirectly through commingled funds. The commingled funds are valued
based on the concept of NAV, which is a value primarily derived from the quoted active market prices
of the underlying equity securities. We may transact in these commingled funds on a semi-monthly
basis at the NAV, and accordingly classify these investments as Level 2. The commingled funds, which
are similar to mutual funds, are maintained by a bank and hold investments in accordance with the
stated objective of tracking the performance of the S&P 500 index. Because the commingled fund
shares are offered to a limited group of investors, they are not considered to be traded in an active
market.
Cash equivalents reported within Level 2 represent investments held in a short-term investment
commingled fund, valued using NAV, which invests in U.S. government fixed income securities. We
may transact in this commingled fund on a daily basis at the NAV.
Fixed income securities issued by the U.S. Treasury held directly by the nuclear
decommissioning trust are valued using quoted active market prices and are classified as Level 1. Fixed
income securities issued by corporations, municipalities, and other agencies including mortgage-backed
instruments are valued using quoted inactive market prices, quoted active market prices for similar
securities, or by utilizing calculations which incorporate observable inputs such as yield curves and
spreads relative to such yield curves. These instruments are classified as Level 2. Whenever possible
multiple market quotes are obtained which enables a cross-check validation. A primary price source is
identified based on asset type, class, or issue of securities.
Our trustee provides valuation of our nuclear decommissioning trust assets by using pricing
services that utilize the valuation methodologies described to determine fair market value. We have
internal control procedures designed to ensure this information is consistent with fair value accounting
guidance. These procedures include assessing valuations using an independent pricing source, verifying
that pricing can be supported by actual recent market transactions, assessing hierarchy classifications,
comparing investment returns with benchmarks, and obtaining and reviewing independent audit reports
on the trustee’s internal operating controls and valuation processes. See Note 22 for additional
discussion about our nuclear decommissioning trust.
Fair Value Tables
The following table presents the fair value at December 31, 2012 of our assets and liabilities that
are measured at fair value on a recurring basis (dollars in millions):