APS 2013 Annual Report Download - page 136

Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Level 2 — Utilizes quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived
valuations whose inputs are observable (such as yield curves). This category includes non-exchange traded contracts such as forwards, options,
swaps and certain investments in fixed income securities. This category also includes investments in common and collective trusts and commingled
funds that are redeemable and valued based on NAV.
Level 3 — Valuation models with significant unobservable inputs that are supported by little or no market activity. Instruments in this category
include long-dated derivative transactions where valuations are unobservable due to the length of the transaction, options, and transactions in
locations where observable market data does not exist. The valuation models we employ utilize spot prices, forward prices, historical market data
and other factors to forecast future prices.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, a
valuation may be classified in Level 3 even though the valuation may include significant inputs that are readily observable. We maximize the use of
observable inputs and minimize the use of unobservable inputs. We rely primarily on the market approach of using prices and other market information for
identical and/or comparable assets and liabilities. If market data is not readily available, inputs may reflect our own assumptions about the inputs market
participants would use. Our assessment of the inputs and the significance of a particular input to the fair value measurement requires judgment and may
affect the valuation of fair value assets and liabilities as well as their placement within the fair value hierarchy levels. We assess whether a market is active by
obtaining observable broker quotes, reviewing actual market activity, and assessing the volume of transactions. We consider broker quotes observable inputs
when the quote is binding on the broker, we can validate the quote with market activity, or we can determine that the inputs the broker used to arrive at the
quoted price are observable.
Recurring Fair Value Measurements
We apply recurring fair value measurements to certain cash equivalents, derivative instruments, investments held in our nuclear decommissioning
trust and plan assets held in our retirement and other benefit plans. See Note 8 for the fair value discussion of plan assets held in our retirement and other
benefit plans.
Cash Equivalents
Cash equivalents represent short-term investments with original maturities of three months or less in exchange traded money market funds that are
valued using quoted prices in active markets.
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