16. Asset Retirement Obligations

APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other generation, transmission and distribution assets. The Palo Verde asset retirement obligation primarily relates to final plant decommissioning. This obligation is based on the NRC’s requirements for disposal of radiated property or plant and agreements APS reached with the ACC for final decommissioning of the plant. During the fourth quarter of 2013, a new decommissioning study with updated cash flow estimates was completed for Palo Verde. During the second quarter of 2014, an update to the 2013 decommissioning study was completed for Palo Verde to incorporate additional fuel related charges. An update was made in the amount of $20 million.

The non-nuclear generation asset retirement obligations primarily relate to requirements for removing portions of those plants at the end of the plant life or lease term. The Four Corners coal-fired power plant asset retirement obligation relates to final plant decommissioning, including ash pond closures. In the fourth quarter of 2012, a new study related to ash pond closure was completed which updated the total costs estimates and related cash flows. In the fourth quarter of 2013, APS finalized the transaction to acquire SCE’s interest in Four Corners. As part of that transaction, APS assumed SCE’s asset retirement obligation. Also, APS retired Four Corners Units 1-3 on December 30, 2013. Decommissioning activities began for Units 1-3 in January 2014. An update was made to the timing of the Units 1-3 decommissioning cash flows to coincide with the expected decommissioning activities. In the first quarter of 2014, the Four Corners Units 1-3 decommissioning study was finalized and approved and an update was made in the amount of $24 million.

Some of APS’s transmission and distribution assets have asset retirement obligations because they are subject to right of way and easement agreements that require final removal. These agreements have a history of uninterrupted renewal that APS expects to continue. As a result, APS cannot reasonably estimate the fair value of the asset retirement obligation related to such distribution and transmission assets.

Additionally, APS has aquifer protection permits for some of its generation sites that require the closure of certain facilities at those sites.

The following schedule shows the change in our asset retirement obligations for the six months ended June 30, 2014 (dollars in millions):

Asset retirement obligations at January 1, 2014	$	347
Changes attributable to:
Accretion expense	11
Settlements	(10		)
Estimated cash flow revisions	44
Asset retirement obligations at June 30, 2014	$	392

Decommissioning activities for Four Corners Units 1-3 began in January 2014; thus, $35.7 million of the total asset retirement obligation of $392 million at June 30, 2014, is classified as a current liability on the balance sheet.

In accordance with regulatory accounting, APS accrues removal costs for its regulated utility assets, even if there is no legal obligation for removal. See detail of regulatory liabilities in Note 3.