Stock-Based Compensation

Pinnacle West has incentive compensation plans under which stock-based compensation is granted to officers, key-employees, and non-officer members of the Board of Directors. Awards granted under the 2012 Long-Term Incentive Plan (“2012 Plan”) may be in the form of stock grants, restricted stock units, stock units, performance shares, restricted stock, dividend equivalents, performance share units, performance cash, incentive and non-qualified stock options, and stock appreciation rights. The 2012 Plan authorizes up to 4.6 million common shares to be available for grant. As of December 31, 2015, 2.8 million common shares were available for issuance under the 2012 Plan. During 2015, 2014, and 2013, the Company has granted awards in the form of restricted stock units, stock units, stock grants, and performance shares. The Company has not granted stock options since 2004 and has no stock options outstanding. Awards granted from 2007 to 2011 were issued under the 2007 Long-Term Incentive Plan (“2007 Plan”), and no new awards may be granted under the 2007 Plan.

Stock-Based Compensation Expense and Activity

Compensation cost included in net income for stock-based compensation plans was $19 million in 2015, $33 million in 2014, and $25 million in 2013. The compensation cost capitalized is immaterial for all years. Income tax benefits related to stock-based compensation arrangements were $7 million in 2015, $13 million in 2014, and $10 million in 2013.

As of December 31, 2015, there were approximately $14 million of unrecognized compensation costs related to nonvested stock-based compensation arrangements. These costs are expected to be recognized over a weighted-average period of 2 years. The total fair value of shares vested was $21 million in 2015, $20 million in 2014 and $20 million in 2013.

The following table is a summary of awards granted and the weighted-average fair value for the three years ended 2015, 2014 and 2013.



	Restricted Stock Units, Stock Grants, and Stock Units (a)						Performance Shares (b)
	2015		2014		2013		2015		2014		2013
Units granted	152,651		179,291		182,240		151,430		166,244		176,332
Weighted-average grant date fair value	$	64.12	$	54.89	$	55.14	$	64.97	$	54.86	$	55.45


(a)	Units granted includes awards that will be cash settled of 45,104 in 2015, 49,018 in 2014, and 52,620 in 2013.


(b)	Reflects the target payout level.

The following table is a summary of the status of non-vested awards as of December 31, 2015 and changes during the year.



	Restricted Stock Units, Stock Grants, and Stock Units					Performance Shares
	Shares			Weighted-Average Grant Date Fair Value		Shares (b)		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2015	480,933		(a)	$	51.27	324,230		$	54.92
Granted	152,651			64.12		151,430		64.97
Change in performance factor	—			—		40,496		54.98
Vested	(198,424	)		49.20		(202,480	)	54.98
Forfeited	(6,873	)		56.78		(7,844	)	57.89
Nonvested at December 31, 2015	428,287			56.69		305,832		59.78
Vested Awards Outstanding at December 31, 2015	106,712					202,480


(a)	Includes 127,634 of awards that will be cash settled and 353,299 of awards that will be settled in shares.


(b)	Nonvested performance 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.

Share-based liabilities paid relating to restricted stock unit awards was $10 million, $9 million and $10 million in 2015, 2014 and 2013, respectively. This includes cash used to settle restricted stock units of $3 million, $3 million and $4 million in 2015, 2014 and 2013, respectively. Share-based liabilities paid relating to performance share awards was $16 million, $12 million and $15 million in 2015, 2014 and 2013, respectively.

Restricted Stock Units, Stock Grants, and Stock Units

Restricted stock units have been granted to officers and key employees. Restricted stock units typically vest and settle in equal annual installments over a 4-year period after the grant date. Vesting is typically dependent upon continuous service during the vesting period; however, awards granted to retirement-eligible employees will vest upon the employee's retirement. Awardees elect to receive payment in either 100% stock, or 50% in cash and 50% in stock. Restricted stock unit awards typically include a dividend equivalent feature. This feature allows each award to accrue dividend rights, 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. If the award is forfeited the employee is not entitled to the dividends on those shares.

In December 2012, a retention award of 50,617 restricted stock units was granted to the Chairman of the Board, President, and Chief Executive Officer of Pinnacle West. This 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 can be increased up to an additional 33,745 restricted stock units payable in stock if certain performance requirements are met.

Restricted stock unit 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.

Stock grants are issued to non-officer members of the Board of Directors. They may elect to receive the stock grant, or to defer receipt until a later date and receive stock units in lieu of the stock grant. The members of the Board of Directors who elect to defer may elect to receive payment in either 100% stock, or 50% in cash and 50% in stock. The 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.

Performance Share Awards

Performance share awards have been granted to officers and key employees. 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 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. If the award is forfeited or if the performance criteria are not achieved the employee is not entitled to the dividends on those shares.

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. Management 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.