APS 2013 Annual Report Download - page 141

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Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of the related contracts. Conversely, if the price of the underlying commodity decreases, the net fair value of the related contracts would likely
decrease.
Our option contracts classified as Level 3 primarily relate to purchase heat rate options. The significant unobservable inputs for these instruments
include electricity prices, gas prices and volatilities. If electricity prices and electricity price volatilities increase, we would expect the fair value of these options
to increase, and if these valuation inputs decrease, we would expect the fair value of these options to decrease. If natural gas prices and natural gas price
volatilities increase, we would expect the fair value of these options to decrease, and if these inputs decrease, we would expect the fair value of the options to
increase. The commodity prices and volatilities do not always move in corresponding directions. The options’ fair values are impacted by the net changes of
these various inputs.
Other unobservable valuation inputs include credit and liquidity reserves which do not have a material impact on our valuations; however,
significant changes in these inputs could also result in higher or lower fair value measurements.
The following tables provide information regarding our significant unobservable inputs used to value our risk management derivative Level 3
instruments at December 31, 2013 and December 31, 2012:
December 31, 2013
Fair Value (millions) Valuation Significant Weighted-
Commodity Contracts Assets Liabilities Technique Unobservable Input Range Average
Electricity:
Forward Contracts (a) $40 $66 Discounted
cash flows
Electricity forward price
(per MWh) $24.89 - $65.04 $41.09
Option Contracts (b) —19
Option model
Electricity forward price
(per MWh) $39.91 - $85.41 $ 58.70
Natural gas forward
price (per MMbtu) $3.57 - $3.80 $3.71
Electricity price
volatilities 35% - 94% 59%
Natural gas price
volatilities 22% - 36% 27%
Natural Gas:
Forward Contracts (a)
1 5
Discounted
cash flows
Natural gas forward
price (per MMbtu) $3.47 - $4.31 $3.87
Total $41 $ 90
(a) Includes swaps and physical and financial contracts.
(b) Electricity and natural gas price volatilities are estimated based on historical forward price movements due to lack of market quotes for
implied volatilities.
137