Stock-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

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 2021 Long-Term Incentive Plan (“2021 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 2021 Plan authorizes up to 1.3 million common shares to be available for grant. As of December 31, 2022, 0.9 million common shares were available for issuance under the 2021 Plan. During 2022, 2021, and 2020, the Company granted awards in the form of restricted stock units, stock units, stock grants, and performance shares. Awards granted from 2012 to May 2021 were issued under the 2012 Long-Term Incentive Plan (“2012 Plan”), and awards granted from 2007 to 2011 were issued under the 2007 Long-Term Incentive Plan (“2007 Plan”). No new awards may be granted under the 2012 or 2007 Plans.

Stock-Based Compensation Expense and Activity

Compensation cost included in net income for stock-based compensation plans was $16 million in 2022, $18 million in 2021, and $18 million in 2020. The compensation cost capitalized is immaterial for all years. Income tax benefits related to stock-based compensation arrangements were $2 million in 2022, $3 million in 2021, and $4 million in 2020.

As of December 31, 2022, there were approximately $20 million of unrecognized compensation costs related to nonvested stock-based compensation arrangements. We expect to recognize these costs over a weighted-average period of two years.

The total fair value of shares vested was $25 million in 2022, $22 million in 2021 and $22 million in 2020.

The following table is a summary of awards granted and the weighted-average grant date fair value for each of the last three years:


	Restricted Stock Units, Stock Grants, and Stock Units (a)						Performance Shares (b)
	2022		2021		2020		2022		2021		2020
Units granted	174,791		152,345		118,403		208,736		161,840		122,830
Weighted-average grant date fair value	$	69.66	$	76.72	$	71.70	$	77.63	$	82.42	$	104.74

(a)Units granted includes awards that will be cash settled of 0 in 2022, 51,074 in 2021, and 45,646 in 2020. See below for additional information on restricted stock unit grants.

(b)Reflects the target payout level.

The following table shows the change of nonvested awards:


	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 December 31, 2021	253,156		$	79.37	280,682	$	92.16
Granted	174,791		69.66		208,736	77.63
Vested	(101,216)		84.52		(136,034)	103.30
Forfeited (c)	(9,144)		76.56		(22,690)	78.29
Nonvested at December 31, 2022	317,587	(a)	73.91		330,694	78.91
Vested Awards Outstanding at December 31, 2022	78,912				136,034

(a)Includes 69,413 of awards that will be cash settled.

(b)The nonvested performance shares are reflected at target payout level.

(c)We account for forfeitures as they occur.

Share-based liabilities paid relating to restricted stock units were $3 million, $4 million, and $6 million in 2022, 2021 and 2020, respectively. This includes cash used to settle restricted stock units of $3 million, $3 million, and $4 million in 2022, 2021 and 2020, respectively. Restricted stock units that are cash settled are classified as liability awards. All performance shares are classified as equity awards.

Restricted Stock Units, Stock Grants, and Stock Units

Restricted stock units are granted to officers and key employees and 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.

Beginning in 2022, restricted stock unit awards are issued in stock. Awards include a dividend equivalent feature that allows each award to accrue dividends and treat them as reinvested, from the date of grant until the applicable vesting date. If the award is forfeited the employee is not entitled to the accrued reinvested dividends on those shares. Awards granted to retirement-eligible employees will vest on a pro-rata basis upon the employee’s retirement.

Prior to 2022, awardees typically elected to receive payment in either 100% stock, 100% cash, or 50% in cash and 50% in stock. Awards included a dividend equivalent feature that accrued dividend rights from the date of grant until the applicable vesting date, plus interest compounded quarterly. If the award was forfeited the employee was not entitled to the accrued dividends on those shares. Awards granted to retirement-eligible employees typically vested upon the employee’s retirement.

Compensation cost for restricted stock unit awards is based on the fair value of the award, with the fair value being the market price of our stock on the measurement date. Restricted stock unit awards that will be settled in cash 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.

Restricted stock unit awards that will be settled in shares are accounted for as equity awards, with compensation cost calculated using the Company’s closing stock price on the date of grant. Compensation cost is recognized over the requisite service period based on the fair value of the award.

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, 100% cash, or 50% in cash and 50% in stock. The stock units include a dividend equivalent feature that accrues dividend rights from the date of grant to the date of payment, plus interest compounded quarterly.

Performance Share Awards

Performance share awards are granted to officers and key employees. The awards contain separate performance metric criteria that affect the number of shares that may be received if, after the end of a 3-year performance period, the performance criteria are met.

Beginning in 2022, performance share awards contain three separate, unrelated performance criteria. The first performance criteria is based upon Pinnacle West’s total shareholder return (“TSR”) in relation to the TSR of other companies in a specified utility index (i.e., the TSR component). The second performance criteria is based upon Pinnacle West’s earnings per share (“EPS”) performance relative to an approved target (i.e., the EPS component). The third performance criteria is based upon APS’s clean MW installed of renewable or other carbon free resources compared to the approved target (i.e., the Clean component). The exact number of shares issued is calculated separately for each performance component and can vary from 0% to 200% of the target award for each separate performance criteria. Shares received include a dividend equivalent feature that treats accrued dividends as reinvested, from the date of grant until the date of payment, equal to the number of vested performance shares. If the award is forfeited or if the performance criteria are not achieved, the employee is not entitled to the dividends on those shares. Awards granted to retirement-eligible employees will vest on a pro-rata basis upon the employee’s retirement.

Prior to 2022, performance share awards had two performance criteria. The first performance criteria was based upon non-financial performance metrics (i.e., the Metric component). The second performance criteria was based upon Pinnacle West’s TSR in relation to the TSR of other companies in a specified utility index (i.e., the TSR component). The exact number of shares issued will vary from 0% to 200% of the target award. Shares received included a dividend equivalent feature that allows accrued dividend rights from the date of grant until the date of payment, plus interest compounded quarterly, equal to the number of vested performance shares. If the award was forfeited, the employee was not entitled to the accrued dividends on those shares. Awards granted to retirement-eligible employees typically vested upon the employee’s retirement.

Performance share awards are accounted for as equity awards, with compensation cost based on the fair value of the award on the grant date. Compensation cost relating to the EPS, Clean and Metric component of the respective awards is based on the Company’s closing stock price on the date of grant, with compensation cost recognized over the requisite service period based on the number of shares expected to vest. Management evaluates the probability of meeting the EPS, Clean and Metric component at each balance sheet date. If the EPS, Clean and Metric component criteria are not ultimately achieved, no

compensation cost is recognized relating to the EPS, Clean and Metric component, and any previously recognized compensation cost is reversed. Compensation cost relating to the TSR component of the respective awards is determined using a Monte Carlo simulation valuation model, with compensation cost recognized ratably over the requisite service period, regardless of the number of shares that actually vest.