APS 2015 Annual Report Download - page 147
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Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our option contracts classified as Level 3 primarily relate to purchase heat rate options. The significant unobservable inputs at
December 31, 2015 for these instruments include electricity prices, and volatilities. The significant unobservable inputs at December
31, 2014 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, 2015 and December 31, 2014:
December 31, 2015
Fair Value (thousands)
Valuation Technique
Significant
Unobservable Input
Range
Weighted-AverageCommodity Contracts Assets
Liabilities
Electricity:
Forward Contracts (a) $ 24,543
$ 54,679
Discounted cash
flows
Electricity forward
price (per MWh)
$15.92 - $40.73
$ 26.86
Option Contracts (b) —
5,628
Option model
Electricity forward
price (per MWh)
$23.87 - $44.13
$ 33.91
Electricity price
volatilities
40% - 59%
52%
Natural gas price
volatilities
32% - 40%
35%
Natural Gas:
Forward Contracts (a) 5,821
3,036
Discounted cash
flows
Natural gas forward
price (per MMBtu)
$2.18 - $3.14
$ 2.61
Total $ 30,364
$ 63,343
(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.
142