APS 2013 Annual Report Download - page 95

Table of Contents
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The use of models and other valuation methods to determine fair market value often requires subjective and complex judgment. Actual results could
differ from the results estimated through application of these methods.
See Note 14 for additional information about fair value measurements.
Derivative Accounting
We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emission
allowances and in interest rates. We manage risks associated with market volatility by utilizing various physical and financial instruments including futures,
forwards, options and swaps. As part of our overall risk management program, we may use derivative instruments to hedge purchases and sales of electricity
and fuels. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. We also enter into derivative
instruments for economic hedging purposes. Contracts that have the same terms (quantities, delivery points and delivery periods) and for which power does
not flow are netted, which reduces both revenues and fuel and purchased power expenses in our Consolidated Statements of Income, but does not impact our
financial condition, net income or cash flows.
We account for our derivative contracts in accordance with derivatives and hedging guidance, which requires all derivatives not qualifying for a
scope exception to be measured at fair value on the balance sheet as either assets or liabilities. Transactions with counterparties that have master netting
arrangements are reported net on the balance sheet. See Note 17 for additional information about our derivative instruments.
Loss Contingencies and Environmental Liabilities
Pinnacle West and APS are involved in certain legal and environmental matters that arise in the normal course of business. Contingent losses and
environmental liabilities are recorded when it is determined that it is probable that a loss has occurred and the amount of the loss can be reasonably estimated.
When a range of the probable loss exists and no amount within the range is a better estimate than any other amount, Pinnacle West and APS record a loss
contingency at the minimum amount in the range. Unless otherwise required by GAAP, legal fees are expensed as incurred.
Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan for the employees of Pinnacle West and its subsidiaries. We
also sponsor an other postretirement benefit plan for the employees of Pinnacle West and our subsidiaries that provides medical and life insurance benefits to
retired employees. Pension and other postretirement benefit expense are determined by actuarial valuations, based on assumptions that are evaluated annually.
See Note 8 for additional information on pension and other postretirement benefits.
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