Stock-Based Compensation

Pinnacle West grants long-term incentive awards under the 2012 Long-Term Incentive Plan (“2012 Plan”) in the form of Stock Grants, Restricted Stock Units, Stock Units and Performance Shares and may grant restricted stock, dividend equivalents, performance share units, performance cash, incentive and non-qualified stock options, and stock appreciation rights. The 2012 Plan, effective May 16, 2012, provides 4,595,500 common shares to be available for grant to eligible employees and members of the Board of Directors. Awards made since 2012 were issued under the 2012 Plan, and prior awards from 2007 to 2011 were issued under the 2007 Long-Term Incentive Plan (“2007 Plan”).

Restricted Stock Unit Awards, Stock Unit Awards and Stock Grants

Stock grants issued to non-officer members of the Board of Directors in 2014, 2013 and 2012 provided the members of the Board of Directors the option to elect to receive a stock grant, or to defer receipt until a later date and receive restricted stock units in 2012 and stock units in 2013 and 2014 in lieu of the stock grant. The members of the Board of Directors who elect to defer may elect to receive payment in either stock, or 50% in cash and 50% in stock. The members of the Board of Directors may elect to receive payments either as of the last business day of the month following the month in which they separate from service on the Board of Directors, or as of a specified date, which must be after December 31 of the year in which the grant was received. The deferred restricted stock units and stock units accrue dividend rights, equal to the amount of dividends the Directors would have received had they directly owned stock equal to the number of vested restricted stock units or stock units from the date of grant to the date of payment plus interest compounded quarterly. The dividends and interest are paid, based on the Director’s election, in either stock, or 50% in cash and 50% in stock.

Restricted stock units have been granted to officers and key employees in each year since 2008. From 2008 through 2009, officers and key employees elected to receive payment in either cash or in fully transferable shares of stock, in exchange for each restricted stock unit on pre-established valuation dates. From 2010 through 2014, officers and key employees elected to receive payment in either stock, or 50% in cash and 50% in stock.

Restricted stock unit awards vest and settle over a 4-year period. In addition, officers and key employees accrue dividend rights on vested restricted stock units, equal to the amount of dividends that they would have received had they directly owned stock, equal to the number of vested restricted stock units from the date of grant to the date of payment plus interest compounded quarterly. The dividends and interest for the 2008 and 2009 awards were paid in cash. The dividends and interest for the 2010 through 2014 awards are paid in the same form as the restricted stock unit payment election. Restricted stock unit awards are accounted for as a liability award, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date. Compensation expense for retirement eligible participants is recognized immediately.

In December 2012, the Company granted a retention award of 50,617 restricted stock units to the Chairman of the Board, President, and Chief Executive Officer of Pinnacle West. The award will vest and will be paid in shares of common stock on December 31, 2016, provided that he remains employed with the Company until the vesting date. The award will accrue notional dividends equal to the amount of dividends that would have been received if the Chairman of the Board, President and Chief Executive Officer had directly owned one share of Pinnacle West common stock for each restricted stock unit held from the grant date to each dividend payment date. The award can be increased up to an additional 33,745 restricted stock units payable in stock if certain performance requirements are met.

A grant of restricted stock unit awards was made to officers of the company on February 15, 2011, payable solely in shares of common stock upon the officer’s retirement or other separation of employment. This award vested 50% on February 15, 2013 and 25% on February 15, 2014. The remaining award will vest 25% on February 15, 2015, provided that the officer remains employed on such date. The officers will also accrue notional dividends equal to the amount of dividends that they would have received if they had directly owned one share of Pinnacle West common stock for each restricted stock unit held from the grant date to each dividend payment date. Each additional restricted stock unit will proportionally vest on the same remaining vesting schedule that applies to the original restricted stock unit.

The following table is a summary of granted restricted stock units, stock units and stock grants and the weighted-average fair value for the 3 years ended 2014, 2013 and 2012:



	2014		2013		2012
Units granted	130,273		129,620		202,278
Grant date fair value (a)	$	54.91	$	55.21	$	49.31


(a)	Weighted-average grant date fair value.

The following table is a summary of the status of restricted stock units, stock units and stock grants, as of December 31, 2014 and changes during the year. This table represents only the stock portion of restricted stock units and stock units, per the election on payment discussed in the paragraph above:



Nonvested shares	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2014	397,976		$	47.74
Granted	130,273		54.91
Vested	(161,283	)	45.55
Forfeited	(13,067	)	51.53
Nonvested at December 31, 2014	353,899		51.23

The amount of cash required to settle the payments on restricted stock units is (dollars in millions):



Year	2014		2013		2012
2008 Grant	$	—	$	—	$	1.9
2009 Grant	—		3.0		1.7
2010 Grant	2.3		2.3		0.6
2011 Grant	2.4		2.5		0.7
2012 Grant	2.1		2.2		—
2013 Grant	2.1		—		—

Performance Share Awards

Performance share awards have been granted to officers and key employees under the 2012 Plan since 2012 and under the 2007 Plan from 2009 to 2011. Performance share awards contain two performance element criteria that affect the number of shares received after the end of a three-year performance period if performance criteria conditions are met.

The 2014, 2013 and 2012 performance share grant criteria is based 50% upon the percentile ranking of Pinnacle West’s total shareholder return at the end of the three-year performance period, as compared with the total shareholder return of all relevant companies in a specified utility index and the other 50% is based upon six non-financial separate performance metrics. The exact number of shares issued will vary from 0% to 200% of the target award. Shares received include dividend rights paid in stock equal to the amount of dividends that they would have received had they directly owned stock, equal to the number of vested performance shares from the date of grant to the date of payment plus interest compounded quarterly.

Performance share awards are accounted for as liability awards, with compensation cost initially calculated on the date of grant using the Company’s closing stock price, and remeasured at each balance sheet date. Compensation expense for retirement eligible participants is recognized immediately. Management also evaluates the probability of meeting the performance criteria at each balance sheet date. If performance criteria are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.

The following table is a summary of the performance shares granted and the weighted-average fair value for the three years ended 2014, 2013 and 2012:



	2014		2013		2012
Units granted (a)	166,244		176,332		185,878
Grant date fair value (b)	$	54.86	$	55.45	$	47.40

(a) Reflects the target payout level.

(b) Weighted-average grant date fair value.

The following table is a summary of the status of performance shares as of December 31, 2014 and changes during the year:



Nonvested shares (a)	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2014	344,396		$	51.13
Granted	166,244		54.86
Increase in performance factor	86,558		47.40
Vested	(258,224	)	47.40
Forfeited	(14,744	)	53.30
Nonvested at December 31, 2014	324,230		54.92


(a)	Nonvested shares are reflected at target payout level. The increase or decrease in the number of shares from the target level to the estimated actual payout level is included in the increase for performance factor amounts in the year the award vests.

Stock Options

The Company has not granted stock options since 2004 and has no stock options outstanding.

As of December 31, 2014, there was $15 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 2 years. The total fair value of shares vested during 2014, 2013 and 2012 was $20 million, $20 million and $19 million, respectively.

The compensation cost that has been charged against Pinnacle West’s income for share-based compensation plans was $33 million in 2014, $25 million in 2013, and $32 million in 2012. The compensation cost that Pinnacle West has capitalized is immaterial for all years. Pinnacle West’s total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $13 million in 2014, $10 million in 2013, and $13 million in 2012. APS’s share of compensation cost that has been charged against income was $33 million in 2014, $25 million in 2013, and $32 million in 2012.

Pinnacle West’s current policy is to issue new shares to satisfy share requirements for stock compensation plans, and it does not expect to repurchase any shares except to satisfy tax withholding obligations upon the vesting of restricted stock units and performance shares.