APS 2013 Annual Report Download - page 152

Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk and Credit Related Contingent Features
We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management contracts with many
counterparties, including two counterparties for which our exposure represents approximately 92% of Pinnacle West’s $41 million of risk management assets
as of December 31, 2013. This exposure relates to long-term traditional wholesale contracts with counterparties that have high credit quality. Our risk
management process assesses and monitors the financial exposure of all counterparties. Despite the fact that the great 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, 2013
(dollars in millions):
December 31,
2013
Aggregate Fair Value of Derivative Instruments in a Net Liability Position $123
Cash Collateral Posted 19
Additional Cash Collateral in the Event Credit-Risk Related Contingent Features were Fully Triggered
(a) 66
(a) This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the
derivative details 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 $180 million if our debt credit ratings were to fall below investment grade.
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