APS 2015 Annual Report Download - page 101

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 13 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 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 16 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 Postretirement 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 its 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 7 for additional information on pension and other
postretirement benefits.
Nuclear Fuel
APS amortizes nuclear fuel by using the unit-of-production method. The unit-of-production method is based on actual physical
usage. APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel. APS then
multiplies that rate by the number of thermal units produced within the current period. This calculation determines the current period
nuclear fuel expense.
APS also charges nuclear fuel expense for the interim storage and permanent disposal of spent nuclear fuel. The DOE is
responsible for the permanent disposal of spent nuclear fuel and charged APS $0.001 per kWh of nuclear generation through May
2014, at which point the DOE suspended the fee. In accordance with a settlement agreement with the DOE in August 2014, we will
now accrue a receivable for incurred claims and
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