APS 2012 Annual Report Download - page 96

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accrual accounting (for derivative instruments designated as normal) or fair value (mark-to-market)
accounting. Mark-to-market accounting requires that changes in the fair value of derivative instruments
are recognized in current earnings unless certain hedge criteria are met. Effective June 1, 2012, APS
discontinued cash flow hedging for the significant majority of derivative contracts. APS now defers
100% of changes in fair value on these contracts for future rate treatment in accordance with the PSA
(see Note 3).
See “Market Risks – Commodity Price Risk” below for quantitative analysis. See “Fair Value
Measurements” below for additional information on valuation. See Note 1 for discussion on accounting
policies and Note 18 for a further discussion on derivative accounting.
Fair Value Measurements
We account for derivative instruments, investments held in our nuclear decommissioning trust,
certain cash equivalents and plan assets held in our retirement and other benefit plans at fair value on a
recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. We use inputs,
or assumptions that market participants would use, to determine fair market value. The significance of a
particular input determines how the instrument is classified in a fair value hierarchy. We utilize
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs. The determination of fair value sometimes requires subjective and complex judgment. Our
assessment of the inputs and the significance of a particular input to fair value measurement may affect
the valuation of the instruments and their placement within a fair value hierarchy. Actual results could
differ from our estimates of fair value. See Note 1 for discussion on accounting policies and Note 14
for further fair value measurement discussion.
OTHER ACCOUNTING MATTERS
See Note 2 for discussion regarding amended accounting guidance adopted during 2012 relating
to fair value measurements and disclosures, and the presentation of comprehensive income.
MARKET AND CREDIT RISKS
Market Risks
Our operations include managing market risks related to changes in interest rates, commodity
prices and investments held by our nuclear decommissioning trust fund and benefit plan assets.
Interest Rate and Equity Risk
We have exposure to changing interest rates. Changing interest rates will affect interest paid on
variable-rate debt and the market value of fixed income securities held by our nuclear decommissioning
trust fund (see Note 14 and Note 22) and benefit plan assets. The nuclear decommissioning trust fund
and benefit plan assets also have risks associated with the changing market value of its equity and other
non-fixed income investments. Nuclear decommissioning and benefit plan costs are recovered in
regulated electricity prices.