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Derivative Accounting
 12 Months Ended
Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Accounting Derivative Accounting
 
Derivative financial instruments are used to manage exposure to commodity price and transportation costs of electricity, natural gas, emissions allowances, and interest rates.  Risks associated with market volatility are managed by utilizing various physical and financial derivative 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 natural gas.  Derivative instruments that meet certain hedge accounting criteria may be designated as cash flow hedges and are used to limit our exposure to cash flow variability on forecasted transactions.  The changes in market value of such instruments have a high correlation to price changes in the hedged transactions.  Derivative instruments are also entered into for economic hedging purposes.  While economic hedges may mitigate exposure to fluctuations in commodity prices, these instruments have not been designated as accounting hedges.  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 costs in our Consolidated Statements of Income, but does not impact our financial condition, net income, or cash flows.
  
Our derivative instruments, excluding those qualifying for a scope exception, are recorded on the balance sheet as an asset or liability and are measured at fair value.  See Note 12 for a discussion of fair value measurements.  Derivative instruments may qualify for the normal purchases and normal sales scope exception if they require physical delivery, and the quantities represent those transacted in the normal course of business.  Derivative instruments qualifying for the normal purchases and sales scope exception are accounted for under the accrual method of accounting and excluded from our derivative instrument discussion and disclosures below.

Energy Derivatives

For its regulated operations, APS defers for future rate treatment 100% of the unrealized gains and losses on energy derivatives pursuant to the PSA mechanism that would otherwise be recognized in income.  Realized gains and losses on energy derivatives are deferred in accordance with the PSA to the extent the amounts are above or below the Base Fuel Rate. See Note 3.  Gains and losses from energy derivatives in the following tables represent the amounts reflected in income before the effect of PSA deferrals.

The following table shows the outstanding gross notional volume of energy derivatives, which represent both purchases and sales (does not reflect net position):
 
Quantity
CommodityUnit of MeasureDecember 31, 2022December 31, 2021
PowerGWh1,197 — 
GasBillion cubic feet149 155 
 
Gains and Losses from Energy Derivative Instruments
 
The following table provides information about APS’s gains and losses from energy derivative instruments in designated cash flow accounting hedging relationships (dollars in thousands):
Financial Statement Year Ended
December 31,
Commodity ContractsLocation202220212020
Loss Reclassified from Accumulated OCI into Income (Effective Portion Realized) (a)Fuel and purchased power (b)$— $— $(763)
(a)During the years ended December 31, 2022, 2021, and 2020, we had no gains or losses reclassified from accumulated OCI to earnings related to discontinued cash flow hedges.
(b)Amounts are before the effect of PSA deferrals.

During the next twelve months, we estimate that no amounts will be reclassified from accumulated OCI into income. For APS, the delivery period for all energy derivative instruments in designated cash flow accounting hedging relationships have lapsed.

The following table provides information about gains and losses from energy derivative instruments not designated as accounting hedging instruments (dollars in thousands):

Financial Statement Year Ended
December 31,
Commodity ContractsLocation202220212020
Net Gain (Loss) Recognized in IncomeFuel and purchased power (a)$307,287 $216,847 $(3,178)
(a)Amounts are before the effect of PSA deferrals.

Energy Derivative Instruments in the Consolidated Balance Sheets

Our energy derivative transactions are typically executed under standardized or customized agreements, which include collateral requirements and, in the event of a default, would allow for the netting of positive and negative exposures associated with a single counterparty.  Agreements that allow for the offsetting of positive and negative exposures associated with a single counterparty are considered master netting arrangements.  Transactions with counterparties that have master netting arrangements are offset and reported net on the Consolidated Balance Sheets.  Transactions that do not allow for offsetting of positive and negative positions are reported gross on the Consolidated Balance Sheets.

We do not offset a counterparty’s current energy derivative contracts with the counterparty’s non-current energy derivative contracts, although our master netting arrangements would allow current and non-current positions to be offset in the event of a default.  These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, trade receivables and trade payables arising from settled positions, and other forms of non-cash collateral (such as letters of credit).  These types of transactions are excluded from the offsetting tables presented below.
The following tables provide information about the fair value of APS's risk management activities reported on a gross basis and the impacts of offsetting.  These amounts relate to commodity contracts and are located in the assets and liabilities from risk management activities lines of APS's Consolidated Balance Sheets.

As of December 31, 2022:
 (dollars in thousands) 		Gross 
Recognized 
Derivatives
 (a)		Amounts 
Offset
(b)		Net
 Recognized
 Derivatives		Other
 (c)		Amounts 
Reported on 
Balance Sheets
Current assets$103,484 $(15,808)$87,676 $28 $87,704 
Investments and other assets49,777 (5,383)44,394 — 44,394 
Total assets153,261 (21,191)132,070 28 132,098 
Current liabilities(47,670)15,808 (31,862)(5,835)(37,697)
Deferred credits and other(9,223)5,383 (3,840)— (3,840)
Total liabilities(56,893)21,191 (35,702)(5,835)(41,537)
Total$96,368 $— $96,368 $(5,807)$90,561 
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.
(c)Represents cash collateral and cash margin that is not subject to offsetting. Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument.  Includes cash collateral received from counterparties of $5,835 thousand and cash margin provided to counterparties of $28 thousand.
As of December 31, 2021:
 (dollars in thousands) 		Gross
 Recognized
 Derivatives
 (a)		Amounts
Offset 
(b)		Net
 Recognized
 Derivatives		Other
 (c)		Amounts
 Reported on
 Balance Sheets
Current assets$66,777 $(3,346)$63,431 $50 $63,481 
Investments and other assets48,302 (1,394)46,908 — 46,908 
Total assets115,079 (4,740)110,339 50 110,389 
Current liabilities(6,084)3,346 (2,738)(1,635)(4,373)
Deferred credits and other(1,394)1,394 — — — 
Total liabilities(7,478)4,740 (2,738)(1,635)(4,373)
Total$107,601 $— $107,601 $(1,585)$106,016 
(a)All of our gross recognized derivative instruments were subject to master netting arrangements.
(b)No cash collateral has been provided to counterparties, or received from counterparties, that is subject to offsetting.
(c)Represents cash collateral and cash margin that is not subject to offsetting.  Amounts relate to non-derivative instruments, derivatives qualifying for scope exceptions, or collateral and margin posted in excess of the recognized derivative instrument.  Includes cash collateral received from counterparties of $1,635 thousand and cash margin provided to counterparties of $50 thousand.
Interest Rate Derivatives

On October 19, 2022, Bright Canyon Energy entered into an interest rate swap to hedge the variable interest rate exposure relating to the Los Alamitos credit agreement. The transaction qualifies and has been designated as cash flow hedge. The hedge’s gain or loss is reported as a component of other comprehensive income and subsequently will be reclassified into earnings in the periods during which the related interest expense on the debt is incurred. As of December 31, 2022, the interest rate swap has a notional value of $32 million with a maturity in 2041. Relating to this derivative, our Consolidated Balance Sheet as of December 31, 2022 includes approximately $0.9 million reported within the liabilities from risk management activities line within the deferred credits and other section, and $0.1 million reported within the current assets from risk management activities line. For the year ended December 31, 2022, the Consolidated Income Statement includes a pretax loss of approximately $0.8 million recognized in other comprehensive income relating to the interest rate swap. There were no gains or losses reclassified out of accumulated other comprehensive income for the year ended December 31, 2022, and we expect no significant amounts will be reclassified into earnings over the next 12 months.

Credit Risk and Credit Related Contingent Features
 
We are exposed to losses in the event of nonperformance or nonpayment by energy derivative counterparties and have risk management contracts with many energy derivative counterparties. As of December 31, 2022, we have two counterparties for which our exposure represents approximately 21% of Pinnacle West’s $132 million of risk management assets. This exposure relates to master agreements with the counterparties and both are rated as investment grade. Our risk management process assesses and monitors the financial exposure of all counterparties.  Despite the fact that the great majority of our trading counterparties’ debt is rated as investment grade by the credit rating agencies, there is still a possibility that one or more of these counterparties could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities, and local distribution companies.  We maintain credit policies that we believe minimize overall credit risk to within acceptable limits.  Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition.  To manage credit risk, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty.  Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.
 
Certain of our energy derivative instrument contracts contain credit-risk-related contingent features including, among other things, investment grade credit rating provisions, credit-related cross-default provisions, and adequate assurance provisions.  Adequate assurance provisions allow a counterparty with reasonable grounds for uncertainty to demand additional collateral based on subjective events and/or conditions.  For those energy derivative instruments in a net liability position, with investment grade credit contingencies, the counterparties could demand additional collateral if our debt credit rating were to fall below investment grade (below BBB- for Standard & Poor’s or Fitch or Baa3 for Moody’s).
 
The following table provides information about our energy derivative instruments that have credit-risk-related contingent features (dollars in thousands):
 December 31, 2022
Aggregate fair value of derivative instruments in a net liability position$56,893 
Cash collateral posted— 
Additional cash collateral in the event credit-risk related contingent features were fully triggered (a)32,884 
(a)This amount is after counterparty netting and includes those contracts which qualify for scope exceptions, which are excluded from the derivative details above.
 
We also have energy related non-derivative instrument contracts with investment grade credit-related contingent features, which could also require us to post additional collateral of approximately $76 million if our debt credit ratings were to fall below investment grade.