APS 2015 Annual Report Download - page 100

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation of utility property, plant and equipment is computed on a straight-line, remaining-life basis. Depreciation expense
was $430 million in 2015, $396 million in 2014, and $400 million in 2013. For the years 2013 through 2015, the depreciation rates
ranged from a low of 0.30% to a high of 12.37%. The weighted-average depreciation rate was 2.74% in 2015, 2.77% in 2014, and
3.00% in 2013.
Allowance for Funds Used During Construction
AFUDC represents the approximate net composite interest cost of borrowed funds and an allowed return on the equity funds
used for construction of regulated utility plant. Both the debt and equity components of AFUDC are non-cash amounts within the
Consolidated Statements of Income. Plant construction costs, including AFUDC, are recovered in authorized rates through depreciation
when completed projects are placed into commercial operation.
AFUDC was calculated by using a composite rate of 8.02% for 2015, 8.47% for 2014, and 8.56% for 2013. APS compounds
AFUDC semi-annually and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
Materials and Supplies
APS values materials, supplies and fossil fuel inventory using a weighted-average cost method. APS materials, supplies and
fossil fuel inventories are carried at the lower of weighted-average cost or market, unless evidence indicates that the weighted-average
cost (even if in excess of market) will be recovered.
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. Due to the short-term nature of net accounts
receivable, accounts payable, and short-term borrowings, the carrying values of these instruments approximate fair value. Fair value
measurements may also be applied on a nonrecurring basis to other assets and liabilities in certain circumstances such as impairments.
We also disclose fair value information for our long-term debt, which is carried at amortized cost (see Note 6).
Fair value is the price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market which we can access for the asset or liability in an orderly transaction between willing market participants on the
measurement date. Inputs to fair value may include observable and unobservable data. We maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
We determine fair market value using observable inputs such as actively-quoted prices for identical instruments when available.
When actively quoted prices are not available for the identical instruments, we use other observable inputs, such as prices for similar
instruments, other corroborative market information, or prices provided by other external sources. For options, long-term contracts and
other contracts for which observable price data are not available, we use models and other valuation methods, which may incorporate
unobservable inputs to determine fair market value.
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.
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