DEF 14A 1 pnw3796881-def14a.htm DEFINITIVE PROXY STATEMENT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
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Pinnacle West Capital Corporation

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PROXY STATEMENT

 

PINNACLE WEST CAPITAL CORPORATION

 

 

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  IN 2020, ARIZONA PUBLIC SERVICE, PINNACLE WEST’S PRIMARY SUBSIDIARY, INTRODUCED THE PROMISE.
   
  The Promise is our commitment to our customers, community and each other as employees. It explains why we’re here (our purpose), what we’re here to do (vision and mission) and the principles and behaviors that will empower us to achieve our strategic goals.
   
   
   
   
OUR PURPOSE As Arizona stewards, we do what is right for the people and prosperity of our state.
   
   
OUR VISION Create a sustainable energy future for Arizona.
   
   
OUR MISSION Serve our customers with clean, reliable and affordable energy.

 

OUR PRINCIPLES    
     
DESIGN FOR TOMORROW EMPOWER EACH OTHER SUCCEED TOGETHER
     
See the way forward Embrace diverse perspectives Create clarity
     
Innovate with courage Challange respectfully Anchor in safety
     
Value learning Unite as one team Deliver for the community

 

 

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About Pinnacle West

 

Who We Are

 

We are Pinnacle West Capital Corporation (“Pinnacle West,” “PNW” or the “Company”). We are an investor-owned electric utility holding company based in Phoenix, Arizona with consolidated assets of about $20 billion. For over 130 years, Pinnacle West, through our affiliates, has provided energy and energy-related products to people and businesses throughout Arizona. Our success enables us to reinvest in our home state’s growth and give back to our communities, enhancing Arizona’s continued economic and cultural vitality.

 

Pinnacle West derives essentially all of our revenues and earnings from our principal subsidiary, Arizona Public Service Company (“APS”). APS is a wholly owned, vertically integrated electric utility that provides either retail or wholesale electric service to most of the State of Arizona. APS is also the operator and co-owner of the Palo Verde Generating Station – a primary source of electricity for the Southwest and the largest nuclear power plant in the United States.

 

 

  APS is Arizona’s largest and longest-serving electric company that generates safe, affordable and reliable electricity for approximately 1.3 million retail and residential customers in 11 of Arizona’s 15 counties.

 

 

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A Message from Our Chairman, President and CEO

 

“In response to the COVID-19 pandemic, the Company swiftly and immediately mobilized to protect the health and safety of our employees and the general public and to provide continued safe and reliable electric service for our customers.”

 

JEFFREY B. GULDNER

Chairman of the Board, President and Chief Executive Officer

 

To our Shareholders:

 

On behalf of our Board of Directors, management and employees, I invite you to participate in our 2021 Annual Meeting of Shareholders. The meeting will be held at 1:30 p.m. (EDT), Wednesday, May 19, 2021. Details regarding how to attend the meeting and the business to be conducted are in the accompanying Notice of Annual Meeting and Proxy Statement.

 

COVID-19

 

In response to the COVID-19 pandemic, the Company swiftly and immediately mobilized to protect the health and safety of our employees and the general public and to provide continued safe and reliable electric service for our customers. We transitioned as many employees as possible to remote work environments. For employees who needed to be on-site at one of our facilities or working on our transmission and distribution systems, rules for social distancing, mask-wearing and other safety precautions were implemented. Critical generation plant outages, including

at the Palo Verde Generating Station, were re-planned to reduce and streamline work requirements. This initiative reduced the number of individuals required to be on-site and reduced the risk of our employees being exposed to COVID-19.

 

In March 2020, APS suspended customer late fees and disconnections for nonpayment. Given the challenges facing our customers, we distributed $12.4 million in direct bill relief in 2020, including $8.8 million through our Customer Support Fund and $3.6 million to limited-income customers who had fallen behind on their bills. APS will continue to waive late fees for residential and business customers through October 15, 2021 and will continue to provide flexible payment options and additional assistance for those who need help the most.

 

APS provided more than $2.2 million in 2020 to support such COVID relief efforts as homeless prevention, food security, food security emergency services, testing and vaccination, and small business assistance.


 

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A Message from Our Chairman, President and CEO

 

Employees and retirees contributed to the effort by pledging more than $44,000 to the Arizona Food Bank Network to support its efforts to help provide food security to families around Arizona. This amount is being matched by the Company on a dollar-for-dollar basis. Factoring all contributions from the match and additional APS funding in 2020, more than $190,000 was provided to the Arizona Food Bank Network. This amount represents more than 3.6 million meals.

 

The APS Promise

 

In September 2020, we introduced the APS Promise. You can find the APS Promise on the inside front cover of this Proxy Statement. In a nutshell, we consider ourselves Arizona stewards. As such, we do what is right for the people and prosperity of our state, centering our ultimate purpose with employees and those we serve. The APS Promise lets us focus and build on our cultural strengths and reflects several of the messages and concepts my management team continues to emphasize, including:

 

Customer centricity
Growth mindset
Lean and customer affordability initiatives
Speak up, challenge and empower

 

We believe by delivering on the APS Promise, we not only will improve our customers’ experience, but we also will create corresponding shareholder value. For example, we increased the dividend for the ninth year in a row, growing it by 6.1 percent. We once again produced strong financial performance, including net income of $550.6 million or $4.87 per share in 2020, surpassing our 2019 results of $538 million and $4.77 per share.

 

Consistent with the APS Promise, we also have continued on a more positive path forward with the Arizona Corporation

Commission (“ACC”) and other stakeholders, focusing on robust communication and greater collaboration. We believe a positive and collaborative approach will produce positive results that, in turn, will help us deliver consistent shareholder value and meet the needs of our customers and various stakeholders.

 

Board of Directors

 

Our Board of Directors plays a vital role in establishing our corporate strategy. Their varied knowledge, experience and skills bring crucial insights to developing near- and long-term goals and, ultimately, overseeing our progress in building a more sustainable energy future and creating customer and shareholder value. Kathy’s letter will highlight some of the specific actions the Board took in 2020.

 

One of our longtime Directors, Humberto Lopez, will retire from the Board as of the 2021 Annual Meeting. We thank Bert for his many years of service. His deep knowledge of Arizona and valued counsel on important issues facing our Company will be missed.

 

Finally, your vote is important to us. Whether or not you plan to participate in the Annual Meeting, we encourage you to vote promptly. You may vote on the internet; by telephone; or by completing, signing, dating and returning a proxy card or voting instruction form.

 

Thank you for your investment and continued support of Pinnacle West.

 

Sincerely,

 

 

JEFFREY B. GULDNER

Chairman of the Board, President
and Chief Executive Officer


 

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A Message from Our Lead Director

 

“To demonstrate the heightened attention on ESG, the Board changed the name of the Corporate Governance Committee to the Corporate Governance and Public Responsibility Committee.”

 

KATHRYN L. MUNRO

Lead Director

 

Dear Fellow Shareholders,

 

On behalf of the Board, I thank you for your investment in Pinnacle West. As we approach our 2021 Annual Meeting of Shareholders, I take this opportunity to provide you an update on how your Board is approaching and addressing key areas of shareholder value, board refreshment and management succession. I also want to take a few moments to recognize the outstanding work of our employees in 2020 during the COVID-19 pandemic.

 

COVID-19

 

From the earliest stages of the COVID-19 pandemic, the Company took immediate steps to address the health and safety of our employees, customers and communities. Jeff notes some specific actions that were taken in his letter. I want to take this opportunity to thank our employees for rising to the challenges presented by the pandemic;

keeping each other safe; keeping the lights on and the power flowing; caring for our communities; and keeping our shareholders’ investment safe.

 

Humberto Lopez

 

It is with mixed feelings I say good-bye to our trusted advisor and friend, Bert Lopez. Bert has been a phenomenal asset to the Board of Directors and the Company. I will miss his thoughtful counsel. As a Board, we acknowledged a need for orderly refreshment when we adopted, and then amended, our Board Retirement Policy. Consistent with that policy, Bert will retire from the Board at the 2021 Annual Meeting. You can read more about this policy on page 27 of the attached Proxy Statement. I hope you join me in thanking Bert for his tireless service and wishing him well.


 

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A Message from Our Lead Director

 

William Spence

 

I am pleased to welcome Bill Spence to the Board of Directors. One area the Board identified as an opportunity for improvement was having greater CEO representation and experience. Bill brings that expertise to the Board. He was named Chairman, President and CEO of PPL Corporation, an investor-owned electric utility, in 2012, after serving in the roles of CEO, President and Chief Operating Officer during the period from 2006 – 2011. Bill retired as an employee of PPL in June 2020 but continued to serve as Chairman of the Board from June 2020 until his retirement from the Board in March 2021. We found Bill’s skillset particularly attractive at this point in time given we have a new CEO at the helm. Although the Board continues to focus on diverse candidates, Bill brings a skill mix to the Board that outweighed our desire to add another diverse candidate. We’ll continue to look for diverse candidates and require our outside director search firm to make diversity a focal point of all our searches.

 

Board Leadership

 

In 2020, we reorganized members of the Board committees. With the retirement of Mike Gallagher last year, Paula Sims took over the Chair role for our Nuclear and Operating Committee. Paula has been instrumental in focusing the committee on major operational issues, including holding an unscheduled meeting of the committee to do a deep dive into the regulations and requirements governing Palo Verde Generating Station. With Bert Lopez’s retirement on the near horizon, David Wagener took over as Chair of the Finance Committee and has approached the role with enthusiasm as he focuses the committee on major strategic financial matters.

Environmental, Social and Governance (“ESG”)

 

The Board also focused on environmental, social and corporate governance matters. To demonstrate the heightened attention on ESG, the Board changed the name of the Corporate Governance Committee to the Corporate Governance and Public Responsibility Committee and specifically added to the Charter the responsibility to review significant ESG trends that may impact the Company; ensure the oversight of relevant ESG issues by the Board and its committees; and make recommendations to the Board, as appropriate. We also amended the Bylaws to reduce the threshold to call special shareholder meetings from 25% to 15%. We amended the Charter of the Human Resources Committee to include a requirement to periodically review and assess the Company’s strategies and policies related to human capital management, such as diversity, inclusion, pay equity, corporate culture, talent development and retention.

 

Management Succession

 

In late 2019 and early 2020, we transitioned management leadership to Jeff Guldner, who took over as the Company’s Chairman, President and Chief Executive Officer and as APS’s Chairman and Chief Executive Officer. His new executive team includes: Maria Lacal, who took over as Executive Vice President and Chief Nuclear Officer of APS; Daniel Froetscher, who was elevated to President and Chief Operating Officer of APS; and Ted Geisler, who was promoted to Senior Vice President and Chief Financial Officer of PNW and APS. Jeff and his team have started to implement their leadership vision, and we agree with the tone and direction. Taking on new leadership roles can be challenging, and the challenge was heightened with the pandemic. We are proud of the way this team has responded and look forward to watching this team – and the Company – grow.


 

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A Message from Our Lead Director

 

Board Engagement

 

Our independent Board members are expected to be active, engaged and contributing members. Our discussions are focused on oversight of Pinnacle West’s business strategy. We are excited about the announcement of our Clean Energy Commitment and our plan to deliver 100% clean, carbon-free energy to our customers by 2050, with a near-term 2030 target of 65% clean energy, with 45% of our portfolio coming from renewable energy, and the progress we have made on that front in 2020, including adding more than 400 megawatts of clean energy resources, including 200 megawatts of wind power and 75 megawatts of demand response capability.

 

In 2020, we held a combined total of 42 Board and Board committee meetings. Directors have focused on strategy, ESG and our shareholder

engagement program and participated in continuing director education sessions. Although we were forced to hold most of our 2020 meetings virtually, that did not reduce or hinder our level of engagement.

 

On behalf of the Board, I thank our shareholders for their time and feedback. I am pleased to provide this window into the Board’s activities in 2020 and express our commitment to running our business for the long-term value creation for you, our shareholders. We appreciate your support at our 2021 Annual Meeting.

 

Sincerely,

 

 

KATHRYN L. MUNRO

Lead Director


 

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Table of Contents

 

ii   A Message from Our Chairman, President and CEO
iv   A Message from Our Lead Director
1   Notice of the 2021 Annual Meeting of Shareholders
3   Proxy Statement Summary
3   The Value We Create
5   Financial Highlights
7   Customer Highlights
9   Employee Highlights
13   Environmental Highlights
15   Community Highlights
16   Governance Highlights
17   Board Highlights
21   Compensation Highlights
23   Information About Our Board and Corporate Governance
23   Director Nomination Process
26   Board Effectiveness
30   Board and Committee Structure
39   Board Oversight and Engagement
47   Director Nominees for the 2021 Annual Meeting
47   Proposal 1: Election of Directors
49   Director Nominees
56   Director Independence
57   Director Compensation
60   Executive Compensation
60   Proposal 2: Advisory Vote on Executive Compensation
61   Human Resources Committee Report
61   Compensation Discussion and Analysis (“CD&A”)
91   Executive Compensation Tables
111   Pay Ratio
112   Proposal 3: Approval of the Pinnacle West Capital Corporation 2021 Long-Term Incentive Plan
121   Existing Equity Compensation Plans
122   Audit Matters
122   Proposal 4: Ratification of The Appointment of Deloitte & Touche LLP as the Independent Accountant for the Company
122   The Independent Accountant
123   Pre-Approval Policies
124   Audit Fees
124   Report of the Audit Committee
126   Stock Matters
126   Ownership of Pinnacle West Stock
127   Section 16(a) Beneficial Ownership Reporting Compliance
128   General Information
128   Time, Date and Place
129   Notice of Internet Availability
129   Record Date; Shareholders Entitled to Vote
129   Voting
130   Quorum
130   Vote Required
131   Board Recommendations
132   Delivery of Annual Reports and Proxy Statements to a Shared Address and Obtaining a Copy
132   Shareholder Proposals for the 2022 Annual Meeting
133   Proxy Solicitation
134   Other Matters
134   Related Party Transactions
135   Human Resources Committee Interlocks and Insider Participation
136   Helpful Resources
137   Appendix A: 2021 Long-Term Incentive Plan

 

INDEX OF FREQUENTLY REQUESTED INFORMATION
124   Auditor Fees 39   Company Culture 41   ESG Framework 134   Related Party Transactions
126   Beneficial Ownership Table 70   Compensation Consultant 5   Financial Performance 42   Risk Oversight
28   Board Evaluations 23   Corp. Gov. Guidelines 41   Human Capital Management 88   Stock Ownership Guidelines
30   Board Leadership 39   Director Attendance 30   Lead Director Duties 40   Strategy Framework
111   CEO Pay Ratio 56   Director Independence 61   NEOs for 2021 44    Succession Planning
44   CEO Succession 49   Director Biographies 73   Peer Group    
88   Clawback Policies 19   Director Skills Matrix 87   Perks    
42   Code of Ethics 18   Director Tenure            

 

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Notice of the 2021 Annual Meeting of Shareholders

 

 

DATE AND TIME

Wednesday, May 19, 2021 at 1:30 p.m. Eastern Daylight Time

 

LOCATION

Online at www.
virtualshareholder meeting.
com/PNW

 

WHO CAN VOTE

All shareholders of record at the close of business on March 11, 2021 are entitled to notice of and to vote at the Annual Meeting

 

ADVANCE VOTING METHODS

 

INTERNET

www.proxyvote.com

 

TELEPHONE

1-800-690-6903

 

MAIL

Mark, sign, date, and mail your proxy card or voting instruction form (a postage-paid envelope is provided for mailing in the United States)

 

VOTING ITEMS
1. To elect eleven directors to serve until the 2022 Annual Meeting of Shareholders
  FOR each director nominee
2. To hold an advisory vote to approve executive compensation
  FOR
3. Approval of the Pinnacle West Capital Corporation 2021 Long-Term Incentive Plan
  FOR
4. To ratify the appointment of our independent accountant for the year ending December 31, 2021
  FOR
     

 

Your vote is important. Whether you plan to participate in the Annual Meeting or not, please promptly vote by telephone, over the Internet, by proxy card, or by voting instruction form.

 

By order of the Board of Directors,

 

 

DIANE WOOD

Corporate Secretary
April 1, 2021

 

The Proxy Statement and form of proxy are first being made available to shareholders on or about April 1, 2021.

 

 

 

EXECUTIVE OFFICES ADDRESS:

 

PINNACLE WEST CAPITAL CORPORATION Post Office Box 53999 Phoenix, Arizona 85072-3999


 

 

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Notice of the 2021 Annual Meeting of Shareholders

 

 

Proxy Voting Roadmap

 

Proposal 1 - Election of Directors

The Board of Directors and the Corporate Governance and Public Responsibility Committee believe that the eleven nominees possess the skills and experience necessary to serve on the Board and have concluded that each nominee is qualified to serve as director.

 

The Board of Directors unanimously recommends a vote FOR the election of the nominated slate of directors.

To know more about this proposal, see page 47.

 

Proposal 2 - Advisory Vote on Executive Compensation

The Company has designed its executive compensation program to align executives’ interests with those of our shareholders, make executives accountable for business and individual performance by putting pay at risk, and attract, retain and reward the executive talent required to achieve our corporate objectives and to increase long-term shareholder value. We believe that our compensation policies and practices promote a pay at risk philosophy and, as such, are aligned with the interests of our shareholders.

 

The Board of Directors unanimously recommends a vote FOR the approval of the Company’s executive compensation.

To know more about this proposal,  see page 60.

 

Proposal 3 - Approval of the Pinnacle West Capital Corporation 2021 Long-Term Incentive Plan

Long-term equity-based compensation is an important element of our compensation program. We believe that the Pinnacle West Capital Corporation 2021 Long-Term Incentive Plan will allow us to continue to attract, retain, and motivate employees, officers and directors by aligning their interests and efforts with the long-term interests of the Company and our shareholders.

 

The Board of Directors unanimously recommends a vote FOR this proposal.

To know more about this proposal,  see page 112.

 

Proposal 4 – Ratification of The Appointment of Deloitte & Touche LLP (“D&T”) as the Independent Accountant for the Company

The Audit Committee has discussed the qualifications and performance of D&T and believes that the continued retention of D&T to serve as the Company’s independent accountant is in the best interest of the Company and its shareholders.

 

The Board of Directors unanimously recommends a vote FOR ratification of the appointment of Deloitte & Touche LLP as the company’s independent accountant for the year ending December 31, 2021.

To know more about this proposal, see page 122.  

 

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Proxy Statement Summary

 

The Value We Create for Our Stakeholders

 

 

2021 Proxy Statement 4
 

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Proxy Statement Summary

 

Financial Highlights

 

 

Shareholder Value

 

Our management team is committed to increasing shareholder value as one of our top priorities. One area where we underperformed compared to our historical track record was in total shareholder return, which combines stock price appreciation with dividends paid, at -7.7% for the year. Increased regulatory uncertainty prompted by our 2019 rate case filing and other ACC-driven discussions impacted shareholder confidence. We are committed to maintaining robust communication and collaboration with the Arizona Corporation Commission and other stakeholders to find constructive solutions that support our customers while maintaining the financial health of the Company. We anticipate resolution of the 2019 rate case to occur in 2021 providing additional clarity around the regulatory environment in Arizona and allowing for more detailed discussions regarding the execution of our clean energy transition and growth profile. Going forward, we believe we have the right strategy and team in place to meet our near-term goals and deliver long-term shareholder value.

 

 

* Value of $100 invested as of December 31, 2015, with dividends reinvested.

 

 

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Proxy Statement Summary

 

 

2020 Financial and Operating Highlights

 

PNW increased its dividend for the 9th consecutive year, by 6%
   
Maintained strong credit ratings from all three rating agencies
   
In 2020, we met our goal to reduce O&M by $20 million, largely through Lean initiatives and automation
   
In September 2020, APS issued its first-ever green bond, raising almost $400 million to support “green” projects, such as renewables and energy storage, energy efficiency programs, climate change mitigation and clean transportation
   
APS set a new all-time high peak energy demand of 7,660 megawatts, exceeded the prior peak set in 2017 by nearly 300 megawatts, and achieved strong reliability measures
   
Notwithstanding the challenges presented by the COVID-19 pandemic as well as the hottest summer on record, the non-nuclear generation fleet achieved its best reliability performance since 2007, with a summertime equivalent availability factor of 95.3%, ensuring the reliable delivery of electricity to APS customers while neighboring utilities suffered energy emergencies
   
APS continued successful operation of Palo Verde Generating Station (“PVGS”), a nuclear energy facility that is the largest clean-air generator in the United States

 

 

 

 

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Proxy Statement Summary

 

Customer Highlights

 

 

Starting with our new APS Promise, we are Arizona stewards doing what is right for the people and prosperity of our state, creating a sustainable energy future by serving our customers with clean, reliable, and affordable energy. It is our goal to achieve an industry-leading best-in-class customer experience and improve our J.D. Power customer satisfaction ratings to the first quartile nationally. To achieve this goal, in 2020 we adopted a number of changes to improve our customers’ experience:

 

Customer Care Center

 

We transitioned to a 24/7 care center operation to better serve our customers around the clock. We improved our call center performance, answering nearly 75% of more than 1 million telephone calls in 30 seconds or less, made many improvements to our digital experience through our aps.com site, and our overall digital experience continues to improve for our customers.

 

 

Customer Advisory Board

 

We convened a customer advisory board and stakeholder committee to serve as a vehicle for gathering valuable qualitative insights, directly from customers and stakeholders, that will keep APS apprised of customer needs, wants, and perspectives. Additionally, the customer advisory board is leveraged to identify and diagnose potential customer pain points and to help shape and co-create customer solutions.

 

 

COVID-19 Pandemic Response

 

As the COVID-19 pandemic created widespread uncertainty, we worked to provide our customers with reliable service and support. Operationally, we maintained reliable service throughout the hottest summer in Arizona history, ensuring our customers were able to meet their changed energy needs caused by the pandemic. To directly assist our customers most impacted by the pandemic, we implemented a variety of programs, including providing $15 million to assist customers and local non-profits and community organizations to help with the impact of the COVID-19 pandemic:

 

Our COVID Customer Support Fund of $12.4 million directly committed to bill assistance programs includes:
   
  One-time credit for customers with a delinquency of two or more months
  Additional credits for limited-income customers
  Programs to assist extra-small and small non-residential customers with a one-time $1,000 credit
  Other targeted programs to assist with other COVID-19 needs in support of utility bill assistance
We have also provided $2.7 million to assist local non-profits and community organizations working to mitigate the impacts of the COVID-19 pandemic
We returned $43 million directly to customers through a bill credit

 

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Proxy Statement Summary

 

 

We voluntarily suspended disconnections of customers for nonpayment beginning March 13, 2020 and waived all late payment fees during this period, extending this suspension of disconnection of customers for nonpayment through December 31, 2020 and a waiver of late payment fees until October 15, 2021

 

We understand that the COVID-19 pandemic has impacted our customers and are committed to keeping our customers, communities and employees safe and keeping the power on.

 

Limited Income Offerings

 

We have assistance programs that provide discounts to qualified limited-income customers as well as programs to help customers to stay on top of their bills:

 

Crisis Bill Assistance. An unplanned major expense or an unexpected reduction in income can put anybody in a temporary financial bind. Qualified customers can receive up to $800 a year to cover current or past-due APS bills through the Crisis Bill Assistance program. We work closely with agency partners to assure that our limited-income customers can participate in programs to assist them in keeping their lights on.
Energy Support. Funded at $28 million in 2020, our Energy Support program gives qualified limited-income customers a 25% discount on their bill each month.
Project Share. Through Project Share, our customers can join us in giving back to our communities by making tax-deductible contributions when they pay their monthly energy bill. In addition, we match employee contributions to Project Share dollar-for-dollar. This limited-income assistance fund is administered by the Salvation Army.

 

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Proxy Statement Summary

 

Employee Highlights

 

 

Our more than 6,000 dedicated employees strengthen our Company with their skills, experience and diverse perspectives. Human capital measures and objectives that the Company focuses on in managing its business include the safety of its employees, diversity and inclusion, succession planning, hiring and retention of talent, compensation and benefits and employee engagement.

 

Focused on Our People

 

The Company seeks to attract the best employees, to retain those employees and to create a safe, inclusive and productive work environment for all employees. We believe the strength of our employees is one of the significant contributors to our Company’s success:

 

Talent Strategy     
 

 

Internship Programs: 56 virtual summer internships in 2020, 52% of whom were diverse
Apprentice Programs: 127 apprentices in the programs, 9 of whom joined in 2020
Incoming Engineer Programs: New Engineers in Operations Program (Fossil); Legacy Engineer Program (Palo Verde); Rotational Engineer Program (Transmission and Distribution)
Strong commitment to our communities: Our Company values and encourages active engagement by our employees in the community, which is attractive to new employees

 

Retention     
 

 

Robust employee engagement, including 10 Employee Network Groups (see page 12)
Average employee tenure of 12 years due to strong talent strategy
Total turnover for 2020 was 7.5% (3.7% of which were related to retirements)
Annual and focused quarterly pulse surveys allow us to gather employee feedback, identify opportunities for improvement and compare our performance to other companies:
  The surveys allow us to track our Employee Experience Index and take meaningful action in response to survey results
  Actions taken in response to the surveys include enterprise-wide initiatives focused on improving communication between employees and management, removing obstacles that prevent job success, providing opportunities for employees to have more access to leadership, and improved meeting efficiency

 

Development and Succession Planning     
 

 

Graduated 137 employees from our leadership academies in 2020
75% of officers, including our CEO, were promoted from leadership positions within the Company(1)
86% of officer positions have “ready-now” replacements identified(2)
81% of director-level positions have “ready-now” replacements identified(2)
100% of leaders completed white belt Lean Sigma Training
   

 

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Proxy Statement Summary

 

 

Our Learning and Development organization was ranked in the Top 100 by Training Magazine
A wide variety of training and development opportunities, including leadership academies, rotational programs, mentoring programs, industry certifications, and loaned executive programs
External executive training programs for officers
   
(1) As of March 11, 2021.
(2) As of March 4, 2021.
   
COVID-19 Response
   

The health, well-being and safety of our employees, customers and communities is one of our top priorities. In March 2020, we began operating under our long-standing crisis and business continuity plans to address COVID-19. We had regular COVID-19 planning sessions to address the safety, operational and business risks associated with the pandemic. Beginning in the middle of March 2020, we took the following actions:

 

Successfully transitioned all of our employees to remote work unless they were essential workers that needed to remain onsite
Offered COVID-19-specific benefits to employees, including COVID-19 Child Care, providing up to two weeks of additional paid-time off to help employees manage unexpected COVID-19-related childcare issues; and Personal Quarantine Time, providing up to two weeks of additional paid-time off to quarantine (if advised by APS Health Services)
Re-planned critical generation plant outages, including at PVGS, to reduce and streamline work requirements
Implemented bifurcated control rooms, thus reducing the number of employees in mission-critical locations
Limited one employee per vehicle for social distancing
Offered virtual options whenever possible

 

Through these efforts, we have been able to maintain the continuity of the essential services that we provide to our customers, while also managing the spread of the virus and promoting the health, physical and mental well-being and safety of our employees, customers and communities.

 

Safety and Security

 

At APS, a commitment to safety and security is fundamental to our business.

 

Top quartile safety record for OSHA recordable injuries compared to peer electric utilities
Serious Injuries and Fatalities (“SIF”) decreased by more than 50% in 2020 vs. 2019

 

 

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Proxy Statement Summary

 

 

Diversity, Equity and Inclusion

 

We succeed together when we empower each other by embracing the diverse perspectives, strengths and insights we each bring to the table. We foster an environment of involvement, respect and connection where the variety of ideas, backgrounds, demographic diversity and perspectives are harnessed to create business value.

 

(1) As of December 31, 2020.
(2) As of March 11, 2021.

 

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Proxy Statement Summary

 

 

Employee Network Groups

 

To encourage employees to challenge themselves, develop additional skills and advance within their chosen fields, the Company supports 10 employee networks that enable employees to connect with one another and promote career development:

 

  The African American Network for Diversity and Inclusion’s mission is to create a collaborative and highly engaged network of African-American employees that promote the interests of AANDI, its strategic initiatives and the values of APS.
  The Lesbian, Gay, Bisexual & Transgender Alliance’s mission is to build a community at APS to further support diversity and provide opportunities for members to achieve their professional and personal best through culture, communications, commerce and careers.
  The Veteran Engagement, Transition & Retention Network’s mission is to develop opportunities benefiting our honored Arizona veterans. We strive to promote their service to our country, leadership skills, and the achievements of veterans in the organization.
  Women in Search of Excellence’s mission is to build a community at APS to further develop women as they achieve their personal and professional excellence.
    Palo Verde Young Generation in Nuclear’s mission is to unite young professionals for the purpose of strengthening its community by focusing on the success of nuclear technology.
    Palo Verde Women in Nuclear’s mission is to promote an environment in which all employees are able to succeed while working to encourage public awareness about nuclear energy.
  The Native American Network Organization’s mission is to attract and develop Native American talent by providing professional development opportunities, assisting in recruiting and retention, and encouraging community development.
  Next Gen’s mission is to unite professionals new to the utility industry by providing professional development opportunities, enhance recruitment and retention, and organize community outreach programs.
  The Hispanic Organization for Leadership and Advancement promotes a culture of inclusiveness and community stewardship across APS, as well as develops high-performing leaders in pursuit of operational excellence and continuous self-improvement.
    Links’ mission is to connect experienced employees with opportunities for development, networking, and engagement.

 

 

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Environmental Highlights

 

 

Through our Clean Energy Commitment we are dedicated to providing clean, reliable and affordable electricity in order to achieve a sustainable future for our Company and our customers.

 

       
Recognition  
For the second year in a row Pinnacle West was named to the Climate Change and Water Security “A Lists” by global environmental non-profit CDP, the only U.S. electric utility and 1 of 16 North American companies in all industry categories to score a double “A”  
Pinnacle West maintained Environmental, Sustainability and Governance “A” rating from Morgan Stanley Capital International (“MSCI”) (as of April 14, 2020)  
       

 

Energy Innovation Our 10 grid-
scale
solar
plants are
powered by
more than
1 million solar
panels
APS is in the midst of one of the greatest periods of change in our Company’s 130-plus year history.
1,956 MW of renewable capacity today
Plan to add at least 950 MW of clean energy technologies, including solar and storage, by 2025

 

Reducing Water Consumption
Operating in the water-constrained Southwest desert, APS is challenged to maximize our use of water resources.
14% reduction(1) in groundwater use in 2020
69% of water consumed by APS power plants came from treated effluent water

 

Projected Conservation of Non-Renewable Water Supplies  
   
2025   2035  
61% 75% 82% 96%
groundwater reduction(1)   use of treated effluent water    groundwater reduction(1)   use of treated effluent water   

 

(1) Based on 2014 usage baseline.

 

 

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APS Clean Energy Commitment

 

Our Commitment: 100% Clean Energy by 2050

We’ve set a bold, three-part goal to provide a clean energy future for our customers:

 

A 2050 goal to provide 100% clean, carbon-free electricity
A 2030 target of achieving a resource mix that is 65% clean energy, with 45% of the generation portfolio coming from renewable energy
A commitment to end APS’s use of coal-fired generation by 2031

 

A Clean Economic Future

Our clean energy plan will be guided by sound science and focused on achieving environmental and economic gains—all while maintaining affordable, reliable service for our customers
Collaboration with customers, regulators and other stakeholders is key to our plan’s ultimate success. We look forward to working alongside those who believe in this vision to move forward together to keep Arizona clean, beautiful and thriving

 

Pathways to 100% Clean  

POLICY DECISIONS

Support policy decisions that leverage market-based technology and innovation to attract investment in Arizona

ELECTRIFICATION

Electrification will drive a cleaner environment and more energy- efficient operations throughout the economy

EXISTING POWER
SOURCES

Near-term use of natural gas until technological advances are available to maintain reliable service at reasonable prices

MODERNIZATION OF THE ELECTRIC GRID

Continue to advance infrastructure that is responsive and resilient while providing customers more choice and control

EVOLVING MARKET-BASED SOLUTIONS

Participation in the Energy Imbalance Market provides access to clean energy resources while saving customers money

ENERGY STORAGE SOLUTIONS

Storage creates opportunity to take advantage of midday solar generation and better respond to peak demand

Clean Energy Pathway

 

 

 

     
NEXT STEPS IN ACTION Steady progress in our first year
Secured more than 400 MW of clean energy resources
  •    Including 200 MW of wind
  •    Includes 75 MW of demand response capability
Issued requests for proposals to procure between 1 and 1.4 GW of clean energy and storage
aps.com/cleanenergy

 


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Community Highlights

 

 

Our multifaceted approach to community engagement is grounded in our commitment to community development. We not only invest in the communities where we do business but also focus on building meaningful relationships, which help us manage our social, economic and environmental impact.

 

We use a variety of communications channels to develop dialogue in our communities, such as open houses, community summits, business forums and other special events. These enable us to gather feedback from participants, inform them about issues that affect their communities and APS, and identify issues and opportunities for action. We also develop strategic partnerships in areas such as diversity, inclusion and workforce development to advance social and economic goals.

 

Coal Communities Transition

The transition away from coal-fired power plants toward a clean energy future will pose unique economic challenges for the communities around these plants. We worked collaboratively with community leaders and stakeholders to propose a comprehensive Coal Communities Transition plan. The proposed framework provides substantial financial and economic development support to build new economic opportunities and addresses a transition strategy for plant employees. We are committed to continuing our long-running partnership with the Navajo Nation in other areas as well, including expanding electrification and developing tribal renewable projects. Our proposed plan supports the Navajo Nation, where the Four Corners Power Plant is located, the communities surrounding the Cholla Power Plant and the Hopi Tribe, which is impacted by closure of the Navajo Generating Station. Our Coal Communities Transition plan is currently pending ACC approval.

 

Community Engagement

At APS, we initiate and maintain relationships with stakeholders to understand our communities’ needs and identify opportunities to build healthy, sustainable communities. Our community engagement teams collaborate with representatives from a wide range of community and government entities – including state, county, municipal and tribal governments; military bases; school districts; nonprofits; business organizations; and public interest groups. The relationships are one important way we collect, record and address feedback so that we work together to address concerns. In addition, the ACC has a grievance process for our customers.

 

Philanthropy and Volunteerism

We are actively involved in the communities we serve. We partner with nonprofit organizations and community groups across the state to build a stronger, healthier Arizona. Our efforts include financial support, board service and volunteer assistance.

 

We donated more than $11.1 million to worthwhile causes in 2020, including $2.7 million to support COVID relief. This includes our corporate giving program, which funds organizations that contribute to the vitality of Arizona, with a focus on arts and culture, civic and economic development, education and employment, and human services.

 

Giving back to our communities is an integral part of the APS culture, and our employees donate their time and talents to a wide range of charitable organizations and civic initiatives. In 2020, our employees volunteered an estimated 82,000 hours of time, both in-person and virtually, to causes important to them.

 

Our employees sit on the boards of more than 300 Arizona community organizations, nonprofit organizations, and industry groups. Employee engagement of this kind not only assists those nonprofits but also produces valuable human-capital development, as volunteerism increases loyalty, performance and job satisfaction while providing employees with professional development opportunities.

 

Other accomplishments for 2020 include:

 

Employees pledged $2.2 million to the 2020 Community Service Fund campaign (United Way).
For the third consecutive year, we supported Arizona teachers through our Supply My Class awards program, in which 500 Arizona K-12 teachers received $500 each to purchase much-needed classroom supplies.
We launched our Supply My School awards program through the APS Foundation, in which 45 Arizona K-12 public schools were awarded $5,000 to spend on their most pressing needs.

 

 

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Governance Highlights

 

 

Our strong corporate governance practices demonstrate the Board’s commitment to enabling an effective structure to support the successful execution of our strategic priorities.

 

Board Independence   Board Oversight   Shareholder Rights

•    Independent Lead Director role with clearly defined and robust responsibilities

•    Ten of our eleven director nominees are independent and the members of all of the Board committees are independent

 

 

•    Reorganized Board committees in 2020, with new Chairs of the Finance and Nuclear and Operating Committees

 

•    Newly defined oversight of environmental, social, and governance practices by the Corporate Governance and Public Responsibility Committee

•    Robust management succession planning

•    Board oversight of strategy and risk

 

Board Performance

 

•    Annual Board, committee and individual Director evaluations and discussions with the Lead Director

•    Director skills and experience necessary to provide oversight of our strategy and operations

•    Robust Board refreshment, with director retirement policy

 

•    Reduced threshold to call a special meeting to 15%

•    Annual elections of all Directors with cumulative voting

•    No poison pill plan or similar anti-takeover provision in place

•    No supermajority provisions in our Articles of Incorporation or Bylaws

•    Proxy access rights allowing up to 20 shareholders owning 3% of our outstanding stock for at least 3 years to nominate up to 25% of the Board

 

 

  Compensation Governance    
       
Shareholder feedback informs compensation program design  

 

While we have historically had strong support for our program, after a disappointing say-on-pay vote result in 2017, significant changes were made in direct response to our shareholder outreach and feedback provided to the Board, resulting in strong support for our compensation program since 2017.

Substantial proportion of target compensation is at risk (80% for the CEO and 69% for other NEOs)  
Performance shares are 100% tied to relative performance (50% on relative TSR and 50% on relative operational metrics) and require 90th percentile performance for maximum payouts  
No excise tax gross-up provisions in new or materially amended Change of Control Agreements (defined below) with our NEOs  
Anti-hedging policy for all Directors, officers and all employees and anti-pledging policy for all Directors and officers  
Stock ownership guidelines for all NEOs (all NEOs are in compliance with the stock ownership guidelines)  
Clawback policy for our current or former executive officers covering short- and long-term incentive awards  

 

 

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Board Highlights

 

 

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DIRECTORS’ KEY SKILLS AND EXPERIENCE

 

                       
DIVERSITY                                            
Gender or Ethnicity                                        
FINANCE & ACCOUNTING                                            
Audit Expertise                                        
Finance/Capital Allocation                                      
Financial Literacy and Accounting                            
Investment Experience                                        
BUSINESS OPERATIONS AND STRATEGY                                            
Business Strategy                                  
Complex Operations Experience                                  
Corporate Governance                                    
Customer Perspectives                                  
Extensive Knowledge of Company’s Business Environment                                        
LARGE ORGANIZATIONAL LEADERSHIP                                            
CEO/Senior Leadership                                  
Public Board Service                                  
Human Capital Management                                  
THE COMPANY’S INDUSTRY                                            
Nuclear Experience                                        
Utility Industry Experience                                    
PUBLIC POLICY AND REGULATORY COMPLIANCE                                            
Government/Public Policy/Regulatory                                
RISK OVERSIGHT AND RISK MANAGEMENT                                            
Risk Oversight and Risk Management                        

  Board Leadership

 

 

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New Skills Added to the Board

 

Since the adoption of our Director Retirement Policy in 2016, we have added four independent Directors, bringing integral skills to the Board through utility industry experience, executive level operations experience, and finance, audit and accounting experience, including:

       
Audit Expertise Financial Literacy and Accounting
Business Strategy Government, Public Policy and Regulatory
CEO/Senior Leadership Experience Human Capital Management
Complex Operations Experience Nuclear Experience
Corporate Governance Public Board Service
Customer Perspectives Risk Oversight and Risk Management
Finance/Capital Allocation Utility Industry Experience

 

 

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Compensation Highlights

 

 

Our compensation program is designed to be transparent with a clear emphasis on putting pay at risk and retaining key executives. Our executive compensation philosophy centers on the core objectives of maintaining alignment with shareholder interests and retaining key management.

 

Pay at Risk

 

The Company believes that a significant portion of each NEO’s total compensation opportunity should reflect both upside potential and downside risk. We place a strong emphasis on performance-based, shareholder-aligned incentive compensation.

 

For 2020, the Company’s core executive compensation program for our NEOs consisted of the following key components(1):

 

    Pay Element   Measurement Period   Performance Link   Description
  Cash   Salary is based on experience, performance and responsibilities and is benchmarked to a peer group and market survey data to align with competitive levels.
             
Cash   1 year   Earnings
CEO: 50.0%
Other NEOs: 50.0%
  Universal measure of business financial performance; encourages achievement of bottom-line earnings growth goals.
Business Unit Performance 50.0%   Pre-established operational business unit performance goals that include safety, customer satisfaction and operational quality and efficiency metrics.
Performance Shares
70%
  3 years   Relative TSR
50%
  Relative measures incentivize sustained shareholder value creation and strong performance on operational benchmarks.
Relative Operational Performance
50%
 
Restricted Stock Units
30%
  Vest ratably over
4 years
  Stock Price   Encourages retention; value dependent upon share price appreciation and four-year vesting to encourage retention.
We provide benefits, including pension and deferred compensation programs, change of control agreements and limited perquisites, that are designed to attract and retain our executive talent.

 

(1) For additional details on our executive compensation program for our NEOs, see page 66.

 

 

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Information About Our Board and Corporate Governance

 

Director Nomination Process

 

Director Qualifications

 

The Bylaws and the Corporate Governance Guidelines contain Board membership criteria that apply to nominees recommended for a position on the Board. Under the Bylaws, a director must be a shareholder of the Company. The Corporate Governance and Public Responsibility Committee is responsible for identifying and recommending to the Board individuals qualified to become Directors. The Board believes that its membership should be composed of a combination of knowledge, skills, and experience in the areas discussed below.

 

SKILLS AND EXPERIENCE POSSESSED BY OUR BOARD AS A GROUP

 

FINANCE AND ACCOUNTING

As a publicly traded company subject to the rules of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange (“NYSE”), and because we operate in a complex financial environment and are regulated by multiple regulators, we require strong financial, accounting and capital allocation skills and experience.

 

 

BUSINESS OPERATIONS AND STRATEGY

As a large organization with complex operations, our Board must have a comprehensive combination of skills and experience in business operations and strategy in order to guide the development of our near- and long-term operational and strategic goals, which requires knowledge about the Company, our business environment and our customers’ perspectives.

 

 

LARGE ORGANIZATIONAL LEADERSHIP

Leadership experience in a large organization, at both the management and director level, provides directors with the ability to effectively oversee management in setting, implementing and evaluating the Company’s strategic objectives as well as providing invaluable experience in developing, implementing and maintaining the policies and practices for managing an effective workforce.

 

 

THE COMPANY’S INDUSTRY

Possessing an understanding of both the utility industry and the nuclear industry is important to understanding the challenges we face as we develop and implement our business strategy.

 

 

PUBLIC POLICY AND REGULATORY COMPLIANCE

Operating in the heavily regulated utility industry, we are directly affected by public policy and the actions of various federal, state and local governmental agencies

 

 

RISK OVERSIGHT AND RISK MANAGEMENT

Operations in our industry require the development of policies and procedures that allow for the oversight of and effectively manage risk

 

 

 

 

 

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Information About Our Board and Corporate Governance

 

The Board believes that diversity, utilizing a broad meaning that includes race, gender, background, ethnicity, accomplishments, and other traits, is an important consideration in selecting candidates. We require our outside director search firm to make diversity a focal point of any of our searches, with an emphasis on women candidates. Additionally, each Director should possess the following core characteristics:

 

High Standards We look for individuals that set high standards and expectations for themselves and others and the accomplishment of those standards and expectations.
Informed Judgment Directors should be thoughtful in their deliberations. We look for individuals who demonstrate intelligence, wisdom and thoughtfulness in decision-making. Their decision-making process should include a willingness to thoroughly discuss issues, ask questions, express reservations and voice dissent.
Integrity and Accountability Directors should act with integrity. We look for individuals who have integrity and strength of character in their personal and professional dealings. Our Directors should be prepared to be, and are, held accountable for their decisions.
Time and Effort Directors should spend the necessary time to properly discharge their responsibilities as directors, including reviewing written materials provided to the Board or committee in advance of Board or committee meetings. Directors are expected to be present at all Board meetings, the Annual Meeting of Shareholders, and meetings of committees on which they serve. We also expect our Directors to make themselves accessible to management upon request.
Other Commitments We expect our Directors to monitor their other commitments to ensure that these other commitments do not impact their service to our Company. Directors may not serve on more than three other boards of public companies in addition to the Pinnacle West Board without the prior approval of the Corporate Governance and Public Responsibility Committee. A director may not serve as a member of the Audit Committee if he or she serves on the audit committees of more than three public companies (including the Company) unless the Board determines that such simultaneous service would not impair the ability of such member to effectively serve on the Company’s Audit Committee.
Stock Ownership We expect our Directors to have investments in the Company’s stock that align with our shareholders. Our Directors are expected to comply with our Director Stock Ownership Policy.

 

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Selection of Nominees for the Board

 

The Corporate Governance and Public Responsibility Committee uses a variety of methods to identify and evaluate nominees for a director position:

 

Board Size:     The Corporate Governance and Public Responsibility Committee regularly assesses the appropriate size of the Board, including whether any vacancies on the Board are expected due to retirement or otherwise.
       
Board Knowledge, Skills, Expertise and Diversity:     The Corporate Governance and Public Responsibility Committee considers whether the Board reflects the appropriate balance of knowledge, skills, expertise, and diversity required for the Board as a whole.
       
Sourcing Candidates:     Candidates may be considered at any point during the year and come to the attention of the Corporate Governance and Public Responsibility Committee through current Board members, professional search firms or shareholders. The Corporate Governance and Public Responsibility Committee evaluates all nominees from these sources against the same criteria.

 

Other than Mr. Spence, all Directors were elected at the 2020 Annual Meeting of Shareholders. In recruiting Mr. Spence, the Corporate Governance and Public Responsibility Committee retained the search firm of Spencer Stuart to help identify director prospects, perform candidate outreach, assist in reference and background checks, and provide related services. Candidates who passed the initial screening were then interviewed by members of the Corporate Governance and Public Responsibility Committee, Mr. Guldner and Ms. Munro, followed by the full Board. The Corporate Governance and Public Responsibility Committee recommended Mr. Spence for Board membership, and he was added to the Board in February 2021.

 

Shareholder Recommendation of Board Candidates for the 2022 Annual Meeting

 

Shareholder nominations for a director to the Board must be received by the Corporate Secretary at the address set forth below by November 19, 2021 (“Shareholder Nomination”):

 

Corporate Secretary
Pinnacle West Capital Corporation
400 North Fifth Street, Mail Station 8602
Phoenix, Arizona 85004

 

Proxy Access

 

In February 2017, our Board amended the Bylaws to provide, among other things, that under certain circumstances a shareholder or group of shareholders may include director candidates that they have nominated in our annual meeting proxy statement — “proxy access”. Under these provisions, a shareholder or group of up to 20 shareholders seeking to include director nominees

 

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in our annual meeting proxy statement must own 3% or more of our outstanding common stock continuously for at least the previous three years. Generally, the number of qualifying shareholder-nominated candidates the Company will include in its annual meeting proxy materials will be limited to the greater of 25% of the Board or two candidates. Based on the current Board size of 12 directors, the maximum number of proxy access candidates we would be required to include in our proxy materials is three.

 

Nominees submitted under the proxy access provisions that are later withdrawn or are included in the proxy materials as Board-nominated candidates will be counted in determining whether the 25% maximum has been reached. If the number of shareholder-nominated candidates exceeds 25%, each nominating shareholder or group of shareholders may select one nominee for inclusion in our proxy materials until the maximum number is met. The order of selection would be determined by the amount (largest to smallest) of shares of our common stock held by each nominating shareholder or group of shareholders. Requests to include shareholder-nominated candidates under proxy access must be received by our Corporate Secretary at the address set forth above not earlier than the close of business on November 2, 2021 nor later than the close of business on December 2, 2021. The number of qualifying shareholder-nominated candidates the Company will include in its proxy materials under proxy access will be reduced on a one-for-one basis in the event the Company receives a Shareholder Nomination, but at least one qualifying shareholder-nominated proxy access nominee will be included in the proxy materials.

 

In all cases, shareholders and nominees must also comply with the applicable rules of the SEC and the applicable sections of our Bylaws relating to qualifications of nominees and nominating shareholders and disclosure requirements.

 

Board Effectiveness

 

Board Refreshment Planning

 

Our Board has developed a robust plan to refresh the Board and its leadership significantly over the next several years. The plan is designed to continue to provide for a well-qualified, diverse and highly independent Board, with the requisite experience and skills to provide effective oversight. This plan includes the identification of the current key skills and experience possessed by our members. A matrix of current key skills and experience possessed by our Board is on page 19. The identification of these skills and experiences, combined with a comprehensive Board evaluation process, provide visibility into the skills and experience leaving our Board in the future and allows for the identification of additional skills, experience or expertise needed to facilitate the Company’s long-term strategy. This information is taken into account when identifying director nominees during the recruitment process.

 

Board refreshment is overseen by the Corporate Governance and Public Responsibility Committee, which regularly assesses whether the composition of the Board reflects the knowledge, skills, expertise, and diversity appropriate to serve the needs of the Company.

 

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Director Retirement Policy

 

Under the Company’s Corporate Governance Guidelines, an individual was not eligible to be nominated for election or re-election as a member of the Board of the Company or APS if, at the time of the nomination, the individual has attained the age of 75 years. In February 2020, we reevaluated our Director Retirement Policy. The policy as drafted could result in long tenure solely by virtue of the person’s age when he or she joined the Board. As such, we amended the policy to add a 12-year term limit in addition to an age limit. The new policy provides that a non-employee Director will not be eligible to be nominated for election or re-election as a member of the Board if, as of the commencement of the term for which they are nominated, such Director will have (i) completed 12 years of service from the date of first election to the Board or (ii) attained 75 years of age. We also added a provision that will allow the Board, if it determines that it is in the best interest of the Company to do so, to extend such term limit to up to 15 years for a particular nominee, so long as the average tenure of the overall Board is less than 10 years. We believe this combination of both a term and age limit creates the most robust and effective policy.

 

We were also concerned about the rate of retirements under the age-only policy in light of the Company having a newly appointed CEO. Under the age-only policy, we would have experienced multiple years with more than one member scheduled to retire. We believe that it is in the best interests of the Company to better stagger these retirements while Jeff gets more experience in the CEO role. As such, we created a transition period that slowed the immediate turn-over rate, but provided a bridge to the final policy. Through and until the 2024 Annual Meeting of Shareholders, a non-employee Director shall be eligible for nomination for election or re-election as a member of the Board unless, as of the commencement of the term for which they are nominated, such Director will have completed 12 years of service from the date first elected to the Board and the individual has attained 75 years of age. During the transition period and under the final policy, the policies will apply regardless of the source of the nomination or whether the nomination was made at a meeting of the Board of Directors, at an Annual Meeting or otherwise.

 

Directors added or retired since the adoption of our Director Retirement Policy:

 

30% of our Board has been refreshed

2016 Paula J. Sims added

 

2018Roy A. Herberger, Jr. retired

 

2018James E. Trevathan, Jr. added

 

2020Glynis A. Bryan added

 

2020Michael L. Gallagher retired

 

2021William H. Spence added

 

May 2021Humberto S. Lopez
scheduled retirement

 

Since the adoption of our Director Retirement Policy, four independent Directors have been added and three members of the Board will have retired as of May 19, 2021. Under our current policy, over 50% of our current Board will retire by the 2026 Annual Meeting of Shareholders.

 

Average tenure decreased by 33% since 2016

 

Our average tenure decreased from 12.2 years as of May 2016 to 8.1 years as of May 2021.

 

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Board Evaluations

 

OUR BOARD EVALUATION PROCESS

 

1 Board Evaluation Topics covered include, among others:
 

Each Director completes a comprehensive evaluation of Board and committee performance

 

Reviewed on a one-year stand-alone basis and three-year basis to identify year-over-year trends

 

    Board composition and effectiveness

 

    Competency and accountability

 

    Deliberations and administration

 

    Committee effectiveness

 

    Specific skills, experience and expertise recommended by Directors to be added or enhanced

 

     
2 Director Self-Evaluation Topics covered include, among others:
  Each Director evaluates different areas of his or her performance as a Director

    Independence

 

    Knowledge and expertise

 

    Judgment and skills

 

    Participation and contribution to collective decision-making

 

     
3 One-on-One Discussions Topics covered include, among others:
 

Conducted by Lead Director, who initially reviews the assessment results, in a formal annual call

 

The Lead Director is prepared to have hard conversations, if necessary, to keep the Board, and each individual Director, functioning at a high level

 

   The Board, its functions and membership

 

    Board and committee structure

 

    Processes for effective communication and feedback

 

    Director’s plan with respect to continuing Board service

 

    Any other topic the individual Director desires to discuss

 

     
4 Evaluation Results The results of the evaluations and calls are presented to the Corporate Governance and Public Responsibility Committee and full Board each February
     
5 Feedback Incorporated Based on the evaluation results, changes in practices or procedures are considered and implemented as needed

 

Each year, the Corporate Governance and Public Responsibility Committee reviews the Board and Director Self-Evaluations as well as the evaluation process to determine whether any changes to the evaluations or the process is necessary. This annual review is also shared with, and recommendations are solicited from, the full Board. This process provides the Board the ability to assess the overall functioning of the Board as a whole, and identify any skills, experience or expertise needed to continue to provide effective oversight of the Company’s long-term strategy. This process also allows the Board to identify any areas of concern, both with respect to the Board overall and with respect to individual performance. As performance issues are identified, they are addressed by the Lead Director and the Chairman as needed.

 

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Director Onboarding

 

Upon election to the Board, all new Directors attend a Director orientation program tailored to each Director based on their past individual experience. After Ms. Bryan was elected to the Board, she received detailed information and materials about our Company, business and operations. She attended a virtual orientation that took place over several days and included meetings with management from multiple business units, and presentations on topics of significance to the Company and our industry. A similar orientation is planned for Mr. Spence.

 

Director Education

 

Directors are provided with continuing education opportunities both within the Company and externally. In addition to the Company-hosted educational opportunities provided, Directors are invited to attend Palo Verde Off-Site Safety Review Committee meetings that typically occur three times per year (all virtual in 2020) and Directors are encouraged to attend a variety of industry and public board-related symposia and conferences throughout the year, many of which were virtual in 2020. Additionally, Directors are permitted to participate in other educational opportunities relevant to the Company and submit such record of attendance for credit in our program.

 

Director Resignation Policies

 

 

 

We employ a plurality voting standard with a director resignation policy because we believe a majority voting policy is inconsistent with cumulative voting, which is mandated by the Arizona Constitution.

 

 

With respect to the election of directors, the Company’s Bylaws provide that in an uncontested election, a director nominee who receives a greater number of votes cast “withheld” for his or her election than “for” such election will promptly tender his or her resignation to the Corporate Governance and Public Responsibility Committee. The Corporate Governance and Public Responsibility Committee is required to evaluate the resignation, taking into account the best interests of the Company and its shareholders, and will recommend to the Board whether to accept or reject the resignation.

 

Under the Company’s Corporate Governance Guidelines, upon a substantial change in a director’s primary business position from the position the director held when originally elected to the Board, a director is required to apprise the Corporate Governance and Public Responsibility Committee and to offer his or her resignation for consideration to the Corporate Governance and Public Responsibility Committee. The Corporate Governance and Public Responsibility Committee will recommend to the Board the action, if any, to be taken with respect to the tendered resignation.

 

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Board and Committee Structure

 

The Board’s Leadership Structure

 

Lead Director

 

Kathryn L. Munro serves as the Company’s Lead Director and chairs the Corporate Governance and Public Responsibility Committee. The Lead Director performs the following duties and responsibilities as set forth in our Corporate Governance Guidelines:

 

Serves as a liaison between the Chairman of the Board (the “Chairman”) and the independent Directors;

 

Advises the Chairman as to an appropriate schedule of Board meetings, reviews and provides the Chairman with input regarding agendas for the Board meetings and, as appropriate or as requested, reviews and provides the Chairman with input regarding information sent to the Board;

 

Presides at all meetings at which the Chairman is not present, including executive sessions of the independent Directors (which are regularly scheduled as part of each Board meeting) and calls meetings of the independent Directors when necessary and appropriate;

 

Oversees the Board and Board committee self-assessment process;

 

Is available for appropriate consultation and direct communication with the Company’s shareholders and other interested parties; and

 

Performs such other duties as the Board may from time to time delegate.

 

These duties and responsibilities do not, however, fully capture Ms. Munro’s active role in serving as our Lead Director. For example, Ms. Munro has regular discussions with the CEO, other members of the senior management team and members of the Board between Board meetings on a variety of topics, and she serves as a liaison between the CEO and the independent Directors. Ms. Munro focuses the Board on key issues facing our Company and on topics of interest to the Board. She takes the lead on director recruitment and has a formal annual call with each non-employee Director to discuss the Board, its functions, its membership, the individual’s plan with respect to his or her continuing Board service, and any other topic the individual desires to discuss with our Lead Director. Her leadership fosters a Board culture of open discussion and deliberation to support sound decision-making. She also encourages communication between management and the Board to facilitate productive working relationships.

 

As a former chief executive with significant Board and Chair/Lead Director experience, Ms. Munro has the competency and capability to fulfill the duties of Lead Director. As Lead Director, Ms. Munro is poised to guide the Board during these transformative times of both Board refreshment as well as CEO and other management succession.

 

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Chairman and CEO Positions

 

Upon promoting Jeff Guldner to the position of CEO, the Board also chose to elect him as Chairman of the Board. The Board believes that the Company is in a better position to implement its near- and long- term strategies if the Chairman is also the person directly responsible for the operations executing those strategies. The Board further believes that separating the roles of the CEO and Chairman and appointing an independent Board Chairman at this time would create an additional level of unneeded hierarchy that would only duplicate the activities already being vigorously carried out by our Lead Director.

 

The independent Directors believe that Mr. Guldner, with his extensive knowledge of the challenges facing the Company and our industry and his open leadership style, will be a highly effective conduit between the Board and management and that Mr. Guldner provides the vision and leadership to execute on the Company’s strategy and create shareholder value without the need for an independent chair. The Board also convenes regularly scheduled executive sessions of the independent directors in order to ensure the independent directors can speak candidly and openly without the presence of management.

 

Board Committees

 

The Board has the following standing committees: Audit; Corporate Governance and Public Responsibility; Finance; Human Resources; and Nuclear and Operating. All of the charters of the Board’s committees are publicly available on the Company’s website (www.pinnaclewest.com). All of our committees conduct a formal review of their charters every other year and as often as any committee member deems necessary. In the years in which a formal review is not conducted, the Board has tasked management with reviewing the charters and recommending any changes management deems necessary or reflective of good corporate governance. The charters are also changed as needed to comply with any corresponding changes to any applicable rule or regulation.

 

All of our committees are comprised of independent Directors who meet the independence requirements of the NYSE rules, SEC rules, and the Company’s Director Independence Standards, including any specific committee independence requirements. The duties and responsibilities of our committees are as follows:

 

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AUDIT COMMITTEE

 

“The Audit Committee’s oversight of the Company’s audit function is critical and the Audit Committee members are committed to working with management to ensure effective risk and financial management.”

 

-Bruce Nordstrom

 

2020 MEETINGS: 6

 

 

COMMITTEE MEMBERS:

 

Bruce J. Nordstrom, Chair

Glynis A. Bryan
Denis A. Cortese
Richard P. Fox
Dale E. Klein
Humberto S. Lopez

 

 

KEY MEMBER SKILLS

 

 

 

RESPONSIBILITIES:

 

    Oversees the integrity of the Company’s financial statements and internal controls;

 

    Appoints the independent accountants and is responsible for their qualifications, independence, performance (including resolution of disagreements between the independent accountants and management regarding financial reporting), and compensation;

 

    Participates in the selection of the independent accountants’ new lead engagement partner each time a mandatory rotation occurs;

 

    Monitors the Company’s compliance with legal and regulatory requirements;

 

    Sets policies for hiring employees or former employees of the independent accountants;

 

    Reviews the annual audited financial statements or quarterly financial statements, as applicable, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein;

 

    Discusses with management and the independent accountants significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements;

 

    Reviews the Company’s draft earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;

 

    Discusses guidelines and policies to govern the process by which risk assessment and risk management is undertaken across the Company and discusses the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, and periodically reviews principal risks related to the Company’s financial statements, audit functions, or other matters addressed by the Audit Committee; and

 

    Reviews management’s monitoring of the Company’s compliance with the Company’s Code of Ethics and Business Practices.

 

 

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The Board has determined that each member of the Audit Committee meets the NYSE experience requirements and that Mr. Nordstrom, the Chair of the Audit Committee, Ms. Bryan and Mr. Fox are “audit committee financial experts” under applicable SEC rules. None of the members of our Audit Committee, other than Mr. Fox, currently serve on more than three public company audit committees. Mr. Fox currently serves on the audit committees of four public companies, including Pinnacle West. Our Board has discussed with Mr. Fox the time and effort required to be devoted by Mr. Fox to his service on these committees and has affirmatively determined that such services do not impair Mr. Fox’s ability to serve as an effective member of our Audit Committee.

 

Recent Activities and Key Focus Areas

 

Actively reviewed with management emerging risks in the electric utility sector.

 

Actively engaged with management in reviewing the annual audited financial statements and quarterly financial statements provided to shareholders.

 

Approved amendments to the Audit Services Department’s Charter strengthening the Audit Services Department’s functions.

 

 

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CORPORATE GOVERNANCE AND PUBLIC RESPONSIBILITY COMMITTEE

 

“In 2020 we added oversight of ESG matters firmly within the responsibility of the Corporate Governance and Public Responsibility Committee, ensuring that all matters of ESG significance are appropriately evaluated by the Board or relevant committee.”

 

-Kathy Munro

 

2020 MEETINGS: 6

 

 

COMMITTEE MEMBERS:

 

Kathryn L. Munro, Chair

Richard P. Fox
Bruce J. Nordstrom
Paula J. Sims
David P. Wagener

 

 

KEY MEMBER SKILLS

 

 

RESPONSIBILITIES:

 

•    Reviews and assesses the Corporate Governance Guidelines;

 

    Develops and recommends to the Board criteria for selecting new directors;

 

    Identifies and evaluates individuals qualified to become members of the Board, consistent with the criteria for selecting new directors;

 

    Recommends director nominees to the Board;

 

    Recommends to the Board who should serve on each of the Board’s committees;

 

    Reviews significant ESG trends that may impact the Company, ensuring the oversight of relevant ESG issues by the Board and its committees, and makes recommendations to the Board as appropriate;

 

    Reviews the Company’s public and social responsibility policies, strategy, and practices and periodically review them with the Board;

 

    Reviews the results of the Annual Meeting shareholder votes;

 

    Reviews and makes recommendations to the Board regarding the selection of the CEO and CEO and senior management succession planning;

 

    Reviews the Company’s Code of Ethics and Business Practices for compliance with applicable law;

 

    Recommends a process for responding to communications to the Board by shareholders and other interested parties;

 

    Reviews the independence of members of the Board and approves or ratifies certain types of related-party transactions;

 

    Reviews and makes recommendations to the Board regarding shareholder proposals requested for inclusion in the Company’s proxy materials;

 

    Reviews and makes recommendations regarding proxy material disclosures related to the Company’s corporate governance policies and practices;

 

    Periodically reviews principal risks relating to the Company’s corporate governance policies and practices or other matters addressed by the Corporate Governance and Public Responsibility Committee;

 

    Oversees the Board and committee self-assessments on at least an annual basis; and

 

    Reviews and assesses the Company’s Political Participation Policy, and then reviews the Company’s policies and practices with respect to governmental affairs strategy and political activities in accordance with the Company’s Political Participation Policy.

 

 

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The Corporate Governance and Public Responsibility Committee periodically reviews and recommends to the Board amendments to the Corporate Governance Guidelines and the Political Participation Policy. The Corporate Governance Guidelines and the Political Participation Policy are available on the Company’s website (www.pinnaclewest.com).

 

Recent Activities and Key Focus Areas

 

Amended the Committee charter to add “Public Responsibility” to the Committee’s name and include direct oversight of ESG matters and public and social responsibility policies, strategy and practices.

 

Recommended the Board amend the Bylaws to reduced stock ownership threshold to call a special meeting to 15%.

 

Recommended the Board amend the Director Retirement Policy to add a 12-year term limit in addition to a 75-year age limit.

 

Recommended William H. Spence for election to the Board in February 2021.

 

 

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FINANCE COMMITTEE

 

“The Finance Committee is focused on the long-term financial health of the Company by providing oversight of the Company’s financial performance, financing and capital strategy, and dividend policies and actions.”

 

-David Wagener

 

2020 MEETINGS: 7

 

 

COMMITTEE MEMBERS:

 

David P. Wagener, Chair

Humberto S. Lopez
Kathryn L. Munro
Bruce J. Nordstrom
Paula J. Sims
William H. Spence
James E. Trevathan, Jr.

 

 

KEY MEMBER SKILLS

 

 

RESPONSIBILITIES:

 

    Reviews the historical and projected financial performance of the Company and its subsidiaries;

 

    Reviews the Company’s financial condition, including sources of liquidity, cash flows and levels of indebtedness;

 

    Reviews and recommends approval of corporate short-term investment and borrowing policies;

 

    Reviews the Company’s financing plan and recommends to the Board approval of the issuance of long-term debt, capital and/or financing leases or other arrangements incorporating the effective intent or purpose of providing any form of financing, common equity and preferred securities, and the establishment of credit facilities;

 

    Reviews the Company’s use of guarantees and other forms of credit support;

 

    Reviews and monitors the Company’s dividend policies and proposed dividend actions;

 

    Establishes and selects the members of the Company’s Investment Management Committee to oversee the investment programs of the Company’s trusts and benefit plans;

 

    Reviews and discusses with management the Company’s process for allocating and managing capital;

 

    Reviews and recommends approval of the Company’s annual capital budget;

 

    Reviews the Company’s annual operations and maintenance budget and monitors throughout the year how the Company’s actual spend tracks to the budget;

 

    Reviews the Company’s insurance programs; and

 

    Periodically reviews principal risks relating to the Company’s policies and practices concerning budgeting, financing credit exposures, or other matters addressed by the Finance Committee.

 

RECENT ACTIVITIES AND KEY FOCUS AREAS

 

    Reviewed and recommended Board approval of the 2021 capital budget of $1.5B with an increased focus on capital spend in order to support our Clean Energy Commitment.

 

    Reviewed and recommended Board approval of the issuance of APS’s first green bond.

 

    Recommended the Board increase the dividend and declare the payment of the dividend quarterly.

 

 

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HUMAN RESOURCES COMMITTEE

 

“In June we amended the Committee charter to provide more defined oversight of the Company’s human capital management program, which was front-and-center in 2020 as we implemented our pandemic response plan and focused on the safety and well-being of our employees.”

 

-Rick Fox

 

2020 MEETINGS: 7

 

 

COMMITTEE MEMBERS:

 

Richard P. Fox, Chair

Denis A. Cortese
Humberto S. Lopez
Kathryn L. Munro
William H. Spence
James E. Trevathan, Jr.

 

 

KEY MEMBER SKILLS

 

 

RESPONSIBILITIES:

 

    Reviews management’s programs for the attraction, retention, succession, motivation and development of the Company’s human resources needed to achieve corporate objectives;

 

    Establishes the Company’s executive compensation philosophy;

 

    Reviews and assesses the Company’s strategies and policies related to human capital management, including those with respect to matters such as diversity, inclusion, pay equity, corporate culture, talent development and retention;

 

    Recommends to the Board persons for election as officers;

 

    Annually reviews the goals and performance of the officers of the Company and APS;

 

    Approves corporate goals and objectives relevant to the compensation of the CEO, assesses the CEO’s performance in light of these goals and objectives, and sets the CEO’s compensation based on this assessment;

 

    Makes recommendations to the Board with respect to non-CEO executive compensation and director compensation;

 

    Acts as the “Committee” under the Company’s long-term incentive plans;

 

    Reviews and discusses with management the Compensation Discussion and Analysis on executive compensation set forth in our proxy statements;

 

    Reviews the number, type, and design of the Company’s pension, health, welfare and benefit plans;

 

    Periodically reviews principal risks relating to the Company’s compensation and human resources policies and practices or other matters addressed by the Human Resources Committee; and

 

    Periodically reviews the Company’s compensation policies and practices applicable to executive and non-executive employees to identify and assess potential material risks arising from the policies and practices.

 

    Under the Human Resources Committee’s charter, the Human Resources Committee may delegate authority to subcommittees, but did not do so in 2019. Additional information on the processes and procedures of the Human Resources Committee is provided under the heading “Compensation Discussion and Analysis (“CD&A”)”.

 

 

RECENT ACTIVITIES AND KEY FOCUS AREAS

 

    Recommended the election by the Board of three external candidates for officer positions: Vice President and Treasurer of Pinnacle West and APS, Vice President of Customer Experience of APS, and Vice President of Supply Chain of APS.

 

    Recommended additional succession planning appointments, including the election of Maria L. Lacal as Chief Nuclear Officer of APS, Daniel T. Froetscher as President and Chief Operating Officer of APS, and Theodore N. Geisler as the new Chief Financial Officer of the Company and APS.

 

    Amended the Human Resources Committee charter to add oversight of the Company’s human capital management practices and policies.

 

 

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NUCLEAR AND OPERATING COMMITTEE

 

“As a Committee, we are focused on providing thoughtful operational oversight and guidance and working with management to ensure that we have a comprehensive understanding of the significant issues facing the Company’s variety of operations.”

 

-Paula Sims

 

2020 MEETINGS: 5

 

 

COMMITTEE MEMBERS:

 

Paula J. Sims, Chair

Glynis A. Bryan
Denis A. Cortese
Dale E. Klein
William H. Spence
James E. Trevathan, Jr.
David P. Wagener

 

 

KEY MEMBER SKILLS

 

 

RESPONSIBILITIES:

 

    Receives regular reports from management and monitors the overall performance of Palo Verde Generating Station;

 

    Reviews the results of major Palo Verde inspections and evaluations by external oversight groups, such as the Institute of Nuclear Power Operations (“INPO”) and the Nuclear Regulatory Commission (“NRC”);

 

    Monitors overall performance of the principal non-nuclear business functions of the Company and APS, including fossil energy generation, energy transmission and delivery, customer service, fuel supply and transportation, safety, legal compliance, and any significant incidents or events;

 

    Reviews regular reports from management concerning the environmental, health and safety (“EH&S”) policies and practices of the Company, and monitors compliance by the Company with such policies and applicable laws and regulations;

 

    Reviews APS’s planning for generation resources additions and significant expansions of its bulk transmission system;

 

    Periodically reviews principal risks related to the Company’s nuclear, fossil generation, transmission and distribution, EH&S operations, or other matters addressed by the Nuclear and Operating Committee;

 

    Receives reports on the Company’s sustainability initiatives and strategy; and

 

    Provides oversight of security policies, programs and controls for protection of cyber and physical assets.

 

    In addition, the Nuclear and Operating Committee receives regular reports from the Off–Site Safety Review Committee (“OSRC”). The OSRC provides independent assessments of the safe and reliable operations of Palo Verde. The OSRC is comprised of non-employee individuals with senior management experience in the nuclear industry and the Palo Verde Director of Nuclear Assurance.

 

RECENT ACTIVITIES AND KEY FOCUS AREAS

 

    Adopted Company-wide Cybersecurity Scorecard, which is reviewed by the Nuclear and Operating Committee regularly.

 

    Held a special meeting to obtain better understanding and clarity of the multiple sets of performance metrics for Palo Verde Generating Station.

 

    Adopted non-nuclear Operations Dashboard, providing details on operational performance and metrics, which is provided to the Nuclear and Operating Committee regularly.

 

    In 2020, each member of the Nuclear and Operating Committee virtually attended at least one meeting of the Palo Verde Off-site Safety Review Committee.

 

 

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Board Meetings and Attendance

 

In 2020, our Board held nine meetings and each of our Directors attended 100% of the Board meetings and any meetings of Board committees on which he or she served. Each Director is expected to participate in the Annual Meeting. All Board members attended the 2020 Annual Meeting.  

 

 

Board Oversight and Engagement

 

Company Culture

 

In 2020, the Company launched the APS Promise anchoring our commitment to our customers, community, and each other. The Promise explains why we’re here (our purpose), what we’re here to do (our vision and mission) and the principles and behaviors that will empower us to achieve our strategic goals. It represents the opportunity to build on our cultural strengths and develop new behaviors that will enable our future success.

 

APS PROMISE

 

 

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Strategic Framework

 

Anchored by the APS Promise, in January 2021, we introduced our ten-year strategic plan. The plan identifies five long-term strategic issues that are priority focus areas for the business to address over the next ten years. Our strategic plan keeps our eye on the future even as we navigate the dynamic present:

 

  Focus on customer experience and community stewardship
Critical to our success is our ability to deliver value to our customers and build quality relationships with our stakeholders. We have an opportunity to improve the customer experience and strengthen our community stewardship by increasing our customer focus, investing in the community in new ways and building on our emerging ESG objectives.
  Support an evolving workforce
As our industry experiences social and economic change, employees continue to be the key differentiators of our success. We must plan and prepare to employ the workforce of the future in order to achieve long-term success. The creation of the APS Promise and a focus on cultural principles will allow us to drive innovation and create a sense of belonging for our employees.
  Decarbonize and manage generation resources
National sentiment toward environmental and climate issues increasingly challenges our use of fossil resources and accelerates the transition to renewable and clean energy sources. APS must thoughtfully navigate these transitions to optimize our existing generation fleet, integrate customer-sited resources and strategically invest in the clean energy fleet needed to meet our Clean Energy Commitment.
  Achieve a constructive regulatory environment
As a regulated utility, our business outcomes are shaped by regulatory outcomes at the federal, state and local level. This requires us to work from a strong foundation of trust and accountability, and to focus our engagements with the customer top of mind. We must continue to build from a long history of productive relationships and engagement to achieve our long-term objectives.
  Ensure long-term financial health
We must keep rates affordable while meeting investor growth expectations and reliability goals. Investments that encourage an economically vital Arizona support our financial health and provide opportunities for new and diversified revenue streams, which will prove essential to our long-term success.

 

Our Board reviews the development of the strategic business plan and oversees the implementation of that strategy, receiving regular reports from management on progress and any changes throughout the year. The Board, through the Human Resources Committee, is also involved in setting the annual performance metrics, which are aligned with the strategic plan and designed to incentivize achievement of the strategic goals.

 

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Environmental, Social and Governance

 

While ESG matters have long been a focus of the Board and its committees, in 2020 the Corporate Governance and Public Responsibility Committee amended its charter to focus ESG oversight within the responsibilities of a single committee. As part of the amendment to its charter, the committee added “Public Responsibility” to the committee’s name and included direct oversight of ESG matters and public and social responsibility policies, strategy and practices.

 

In addition to the defined oversight by the Corporate Governance and Public Responsibility Committee, the full Board also dedicates a significant amount of time to ESG matters. As an electric utility, environmental matters are at the forefront of our discussions on operations, strategy and risk. The Nuclear and Operating Committee has primary responsibility over environmental and sustainability matters, though the Board also receives reports on matters of environmental importance. Another key focus of the Board is the adoption and maintenance of good governance practices, which is a primary responsibility of the Corporate Governance and Public Responsibility Committee. Our social impact, within the Company and in our community and with our customers, has also been a key focus of the Board, with certain aspects being overseen by the Corporate Governance and Public Responsibility and Human Resources Committees.

 

In 2020, the Company established the ESG Executive Council. Chaired by the Vice President of Sustainability of APS and sponsored by the Senior Vice President of Public Policy of APS, the Council guides the Company’s development of a common, cross-functional ESG vision, ensuring alignment and integration with the corporate strategic framework. The Council also has oversight of ESG reporting and implementation and is responsible for measuring and reporting on the actions taken to reach our Clean Energy Commitment.

 

Human Capital Management

 

Also in 2020, the Human Resources Committee amended its charter to include oversight of the Company’s strategies and policies related to human capital management, including those with respect to matters such as diversity, inclusion, pay equity, corporate culture, talent development and retention. The Human Resources Committee is also tasked with oversight of the Company’s workforce, including establishing the Company’s executive compensation philosophy and reviewing the Company’s plans and programs for the attraction, retention, succession, motivation, and development of the human resources needed to achieve corporate objectives. The Human Resources Committee also reviews the Company’s pension, health, welfare and benefit plans and is responsible for the oversight of risks relating to or arising out of the Company’s compensation and human resources policies and practices. The full Board also receives reports on issues relating to human capital. The Board generally has multiple opportunities each year to interact directly with employees, including during our annual Board meeting at the Palo Verde Generating Station, during an annual dinner with high-potential employees, and at employee-driven presentations to the Board. While many of these opportunities were not available in 2020 due to the COVID-19 pandemic, the Board is committed to resuming them once it is safe to do so.

 

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Codes of Ethics

 

To ensure the highest levels of business ethics, the Board has adopted the Code of Ethics and Business Practices, which applies to all employees, officers and directors, and the Code of Ethics for Financial Executives, both of which are described below:

 

Code of Ethics and Business Practices (“Code of Ethics”)

 

Employees, directors and officers receive access to and training on the Code of Ethics when they join the Company or APS, as well as annual updates. The Code of Ethics helps ensure that employees, directors and officers of the Company and APS act with integrity and avoid any real or perceived violation of the Company’s policies and applicable laws and regulations. The Company provides annual online training and examination covering the principles in the Code of Ethics. This training includes extensive discussion of the Company’s values, an explanation of Company ethical standards, application of ethical standards in typical workplace scenarios, information on reporting concerns, assessment questions to measure understanding, and an agreement to abide by the Code of Ethics. All employees of the Company and APS and all of our Directors complete the training.

 

Code of Ethics for Financial Executives

 

The Company has adopted a Code of Ethics for Financial Executives, which is designed to promote honest and ethical conduct and compliance with applicable laws and regulations, particularly as related to the maintenance of financial records, the preparation of financial statements, and proper public disclosure. “Financial Executive” means the Company’s CEO; Chief Administrative Officer; Chief Financial Officer; Chief Accounting Officer; Controller; Treasurer; Vice President, Financial Planning; and General Counsel; and the APS President and Chief Operating Officer; and other persons designated from time to time as a Financial Executive subject to the Code of Ethics for Financial Executives by the Chair of the Audit Committee.

 

Both codes are available on the Company’s website (www.pinnaclewest.com).

 

The Board’s Role in Risk Oversight

 

  Top risks discussed by the Board and its committees in 2020 included aging infrastructure, cybersecurity and data privacy, disruptive technologies, employee and public safety, catastrophic fire event, Arizona utility regulation, the changing nuclear landscape, and stakeholder expectations. The Board believes it is important to look at the list fresh each year as part of a diligent risk review.

 

Responsibilities

 

Responsibility for the management of the Company’s risks rests with the Company’s senior management team. The Board’s oversight of the Company’s risk management function is designed to provide assurance that the Company’s risk management processes are well adapted to and consistent with the Company’s business and strategy and are functioning as intended.

 

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Highlights of Certain Risks

 

Two risks monitored by the Board and its committees in 2020 were as follows:

 

Employee and Public Safety

 

Driven in part by the hazardous nature of electricity generation, transmission and distribution operations, the Company appropriately prioritizes the well-being and safety of its employees and the public. Recent safety events including the COVID-19 pandemic, the implementation of the voluntary disconnect policy, the McMicken storage facility fire, and the downtown Phoenix vault fire are challenging the Company to go beyond safety protocols and training to create a company culture that improves employee and public safety and operational effectiveness. Mitigation activities include:

 

Pandemic protocols and programs;
Safety Forward: systemic approach to prediction, prevention and impact mitigation;
Implementation of a Significant Injury or Fatality metric;
Use of learning teams for events;

 

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Focus on human performance as well as human and organization performance tools;
Event management system;
Health and safety protocols and procedures;
Remote vehicle analytics;
Public Safety outreach and intervention; and
Contractor safety program.

 

Responsibility for oversight of employee and public safety risk was allocated to the Human Resources Committee.

 

Disruptive Technologies

 

The confluence of emerging renewable energy technologies, including distributed energy resources, combined with the falling cost of battery storage, and more empowered consumers is shifting how stakeholders use electricity. These disruptive technologies and trends will ultimately influence changes in customer consumption patterns, and could ultimately drive disintermediation and/or otherwise impact the Company’s customer revenues. Main components of the mitigation strategy include:

 

APS.com and Customer Mobile App upgrade;
Solar Communities Program;
Take Charge AZ electric vehicle program;
Municipal Clean memoranda of understanding;
Special Green Tariffs;
State-wide Transportation Electrification Plan; and
Development of grid-scale storage.

 

Responsibility for oversight of disruptive technologies risk was allocated to the Audit Committee.

 

Management Succession

 

Executive succession planning and senior management development were specific areas of focus for the Corporate Governance and Public Responsibility and Human Resources Committees over the last several years. Our deliberate and thoughtful succession plan was implemented in 2019 and 2020, resulting in the election of Jeffrey B. Guldner as Chairman of the Board, President and CEO of the Company and Chairman of the Board and CEO of APS. The Board also elected Daniel T. Froetscher as President and Chief Operating Officer of APS, Maria L. Lacal as Executive Vice President and Chief Nuclear Officer, PVGS of APS, and Theodore N. Geisler as Senior Vice President and Chief Financial Officer of the Company and APS. The implementation of this succession plan is the result of the Corporate Governance and Public Responsibility and Human Resources Committees engaging with management in thorough analysis and thoughtful discussions, including the development and evaluation of current and potential senior leaders. In addition to this internal succession plan, three external candidates were elected as Officers in 2020: Andrew D. Cooper as Vice President and Treasurer of the Company and APS, Juli West as Vice President of Supply Chain of APS, and Monica Whiting as Vice President of Customer Experience of APS.  

Given our need for specialized experience, we maintain strong management succession planning practices and are focused on developing and retaining talent within our Company. Our Board’s focus on attracting, developing and retaining highly skilled and experienced executives is a core consideration in structuring our executive compensation programs.

 

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Our Board places a high priority on senior management development and succession planning. While the Corporate Governance and Public Responsibility Committee has principal responsibility for overseeing CEO and other senior management succession planning, the Human Resources Committee and full Board are actively involved in reviewing our senior management succession plans, which are designed to provide for smooth and thoughtful leadership transitions in the future.

 

Employee, Officer and Director Hedging

 

Directors, officers, and employees of the Company may not engage in any speculative trading, hedging, or derivative security transaction (including the purchase of any financial instrument such as a prepaid variable forward contract, equity swap, collar, short-sales, or exchange fund) that involves or references Company securities, whether granted to the employee or Director as part of the compensation program or otherwise held by the employee or Director. In addition, Directors and officers may not pledge, margin or otherwise grant an economic interest in any shares of Company stock.

 

Shareholder Engagement

 

We have an established shareholder engagement program to maintain a dialogue with our shareholders throughout the year. Each year we strive to respond to shareholder questions in a timely manner, conduct extensive proactive outreach to investors, and evaluate the information we provide to investors in an effort to continuously improve our engagement.

 

Shareholder Outreach Board Access
  In 2020, we contacted the holders of approximately 50% of the shares outstanding. Our Board is focused on shareholder feedback. Our Lead Director and other members of the Board, depending on the topic to be discussed, have participated in shareholder discussions, providing shareholders with direct access to the Board.
 
Matters Discussed in our Fall 2020 Outreach

  Our strategy

  Our performance

  Our Clean Energy Commitment

  Board refreshment

  Our people

  Executive compensation

  Customer experience

  Diversity, equity and inclusion

We Listen to our Shareholders
What our shareholders think is important to us and we want to ensure we have the opportunity to engage directly with our shareholders. We seek to maintain a transparent and productive dialogue with our shareholders. Each year we take feedback from our shareholders, ESG rating agencies and organizations, and other stakeholders to ensure our strategy and focus align with the interests of our shareholders and community.
 
Board Responsiveness
In response to feedback we’ve received, we improved shareholder rights by decreasing the number of shares required to call a special meeting of shareholders from 25% to 15%, refined our executive compensation program to further align pay-for-performance – as detailed in the CD&A – and we announced our bold aspiration to serve customers with 100% clean, carbon-free energy by 2050. In addition, we set an interim target to achieve 65% clean, carbon-free energy and 45% renewables by 2030.

 

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Information About Our Board and Corporate Governance

 

 

Communicating with the Board

 

Shareholders and other parties interested in communicating with the Board, the independent Directors or with the Lead Director may do so by writing to the Corporate Secretary, Pinnacle West Capital Corporation, 400 North Fifth Street, Mail Station 8602, Phoenix, Arizona 85004. The Corporate Secretary will transmit such communications, as appropriate, depending on the facts and circumstances outlined in the communications. In that regard, the Corporate Secretary has discretion to exclude communications that are unrelated to the duties and responsibilities of the Board, such as commercial advertisements or other forms of solicitations, service or billing matters and complaints related to individual employment-related actions.

 

2021 Proxy Statement 46
 

Table of Contents

Director Nominees for the 2021 Annual Meeting

 

Proposal 1: Election of Directors

 

The Board of Directors unanimously recommends a vote FOR the election of the nominated slate of directors

 

The eleven nominees for election as directors are set forth below. All nominees will be elected for a one-year term that will expire at the 2022 Annual Meeting. The Directors’ ages are as of February 24, 2020. All of our Directors also serve as Directors of APS for no additional compensation.

 

DIRECTORS’ KEY SKILLS AND EXPERIENCE

 

                           
DIVERSITY                                                
Gender or Ethnicity                                          
FINANCE & ACCOUNTING                                                
Audit Expertise                                          
Finance/Capital Allocation                                        
Financial Literacy and Accounting                                
Investment Experience                                          
BUSINESS OPERATIONS AND STRATEGY                                                
Business Strategy                                    
Complex Operations Experience                                      
Corporate Governance                                      
Customer Perspectives                                    
Extensive Knowledge of Company’s Business Environment                                        

 

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Director Nominees for the 2021 Annual Meeting

 

                       
LARGE ORGANIZATIONAL LEADERSHIP                                            
CEO/Senior Leadership                              
Public Board Service                                
Human Capital Management                              
THE COMPANY’S INDUSTRY                                            
Nuclear Experience                                        
Utility Industry Experience                                  
PUBLIC POLICY AND REGULATORY COMPLIANCE                                            
Government/Public Policy/Regulatory                            
RISK OVERSIGHT AND RISK MANAGEMENT                                            
Risk Oversight and Risk Management                        

 

  Board Leadership

 

2021 Proxy Statement 48
 

Table of Contents

Director Nominees for the 2021 Annual Meeting

 

Director Nominees

 

Glynis A. Bryan      
     

Independent Director

 

Age: 62

Director since: 2020

 

 

 

Committees

 

  Audit

  Nuclear and Operating

       
 

BACKGROUND

 

  Since 2007: Chief Financial Officer, Insight Enterprises, Inc. (computer hardware, software, and technology solutions)

 

  Ms. Bryan is also a director of Pentair plc

 

QUALIFICATIONS

 

As a Chief Financial Officer for more than 20 years, Ms. Bryan brings to the Board broad functional experience in financial planning and analysis, treasury, capital markets and managing financial risk. In addition to her executive leadership experience, she also has more than 15 years of public company board experience, serving on the Board of Pentair plc where she serves as the Chair of the Audit and Finance Committee and previously served as the Chair of the Governance Committee. Ms. Bryan also brings added diversity to the Board as a woman of color.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As a long-tenured CFO and member of a public board of a large, multinational corporation, Ms. Bryan brings the following key attributes to the Company:

 

  Audit Expertise

 

  CEO/Senior Leadership

 

  Corporate Governance

 

  Finance/Capital Allocation

 

  Financial Literacy/Accounting

 

  Public Board Service

 

  Government/Public Policy/Regulatory

 

  Risk Oversight and Risk Management

 

Denis A. Cortese, M.D.        
       

Independent Director

 

Age: 76

Director since: 2010

 

 

 

Committees

 

•  Audit

 

•  Human Resources

•  Nuclear and Operating

 

       
 

BACKGROUND

 

•  Since February 2010: Director of the ASU Health Care Delivery and Policy Program and a Foundation Professor in the Department of Biomedical Informatics, Ira A. Fulton School of Engineering and in the School of Health Management and Policy, W.P. Carey School of Business

 

•  Since November 2009: Emeritus President and Chief Executive Officer of the Mayo Clinic (medical clinic and hospital services)

 

•  From March 2003 until retirement in November 2009: President and Chief Executive Officer of the Mayo Clinic

 

•  Within the last five years Dr. Cortese served as a director of Cerner Corporation

 

QUALIFICATIONS

 

As former President and Chief Executive Officer of the Mayo Clinic, a multi-state, complex hospital and medical care system, Dr. Cortese gained extensive experience in human capital management, risk oversight and risk management, customer perspectives, and leading complex organizations with multiple constituencies. He led an organization that delivers strong and efficient customer service, which parallels the Company’s strategies. Through his service at Mayo and as a director of a public company, he developed experience in finance, capital allocation, accounting, and regulation, and his background in public policy development, science and technology brings valuable perspective to issues that face the Company.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As former President and CEO of Mayo Clinic, a worldwide leader in medical care with operations located throughout the United States, Dr. Cortese brings the following key attributes to the Company:

 

•  Complex Operations Experience

 

•  Customer Perspectives

 

•  Finance/Capital Allocation

 

•  Financial Literacy/Accounting

 

•  Government/Public Policy/Regulatory

 

•  Human Capital Management

 

•  Public Board Service

 

•  Risk Oversight and Risk Management

 

 

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Director Nominees for the 2021 Annual Meeting

 

Richard P. Fox        
       

Independent Director

 

Age: 73

Director since: 2014

 

 

 

Committees

 

•  Audit

 

•  Corporate Governance and Public Responsibility

 

 

 

  

•  Human Resources
(Chair)

 

       
 

BACKGROUND

 

•  Since 2001: Consultant and independent board member for companies in various industries

 

•  Mr. Fox previously held executive, operational and financial positions at CyberSafe Corporation (“CyberSafe”), Wall Data, Incorporated (“Wall Data”) and PACCAR Inc., and is a former Managing Partner of Ernst & Young’s Seattle office

 

•  Mr. Fox is also a director of LiveRamp Holdings, Inc. (successor to Acxiom Corporation), FrontDoor, Inc., and Univar Solutions, Inc.

 

•  Within the past five years, Mr. Fox has served as a director of ServiceMaster Global Holdings, FLOW International Corporation, and Pendrell Corporation

 

QUALIFICATIONS

 

As a former Managing Partner of Ernst & Young and as former Chief Financial Officer of Wall Data and President and Chief Operating Officer of CyberSafe, Mr. Fox has a deep understanding of auditing, financial and accounting matters. Mr. Fox has also served on the boards of several companies throughout his career, including seven public companies, giving him extensive insights into corporate governance, human capital management and compensation, investment opportunities, risk oversight and risk management, and the customer perspective. His extensive board experience, including service on various audit, governance, and finance committees, including chairmanships, adds to the Board’s depth and capabilities.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As a former Managing Partner of Ernst & Young, one of the “Big Four” auditing firms with multinational operations, Mr. Fox brings the following key attributes to the Company:

 

•  Audit Expertise

 

•  Corporate Governance

 

•  Customer Perspectives

 

•  Financial Literacy/Accounting

 

•  Human Capital Management

 

•  Investment Experience

 

•  Public Board Service

 

•  Risk Oversight and Risk Management

 

 

2021 Proxy Statement 50
   

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Director Nominees for the 2021 Annual Meeting

 

Jeffrey B. Guldner    
   

Chairman of the Board, President and CEO of the Company and
Chairman of the Board and CEO of APS

 

Age: 55

Director since: 2019

 

       
 

BACKGROUND

 

•  Since November 2019: Chairman of the Board, President and CEO of the Company and Chairman of the Board and CEO of APS

 

•  From December 2018 to January 2020: President of APS

 

•  From May 2017 to November 2019: Executive Vice President, Public Policy of the Company

 

•  From May 2017 to December 2018: Executive Vice President, Public Policy of APS

 

•  From May 2017 to August 2018: General Counsel of the Company and APS

 

•  From 2014 to May 2017: Senior Vice President, Public Policy of APS

 

QUALIFICATIONS

 

Mr. Guldner joined the Company in 2004 and has held a number of leadership and executive positions responsible for several different areas of importance to the health and success of the Company, including public policy, legal, rates and regulation, government affairs and customer service. As EVP, Public Policy and President of APS, he has been instrumental in setting the Company’s short- and long-term strategy. Prior to joining APS, Mr. Guldner was a partner in the Phoenix office of Snell & Wilmer LLP, where he practiced public utility, telecommunications and energy law. Before practicing law, Mr. Guldner served as a surface warfare officer in the United States Navy and was an assistant professor of naval history at the University of Washington.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

Mr. Guldner has comprehensive experience within the Company in many different areas of importance to the overall health of the Company, including the development of strategy with respect to rates and regulation as well as our clean energy vision. Mr. Guldner brings the following key attributes to the Company:

 

•  Business Strategy

 

•  CEO/Senior Leadership

 

•  Customer Perspective

 

•  Extensive Knowledge of Company’s Business Environment

 

•  Government/Public Policy/

 

•  Regulatory

 

•  Human Capital Management

 

•  Risk Oversight and Risk Management

 

•  Utility Industry Experience

 

 

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Director Nominees for the 2021 Annual Meeting

 

Dale E. Klein, Ph.D.          
     

Independent Director

 

Age: 73

Director since: 2010

 

 

 

 

Committees

 

•  Audit

 

•  Nuclear and Operating

 

       
 

BACKGROUND

 

•  Since January 2011: Associate Vice Chancellor for Research at The University of Texas System

 

•  From July 2006 to May 2009: Chairman of the Nuclear Regulatory Commission (“NRC”), and thereafter continued as a Commissioner until March 2010

 

•  From November 2001 to July 2006: Assistant to the Secretary of Defense for Nuclear, Chemical and Biological Defense Program

 

•  Since September 1977: Professor of Mechanical Engineering at the University of Texas at Austin

 

•  Dr. Klein is also a director of Southern Company

 

QUALIFICATIONS

 

The NRC oversees nuclear power plant operations in the United States. As the former Chairman of the NRC, Dr. Klein brings expertise in all aspects of nuclear energy regulation, operation, technology and safety. His broad national and international experience in all aspects of the nuclear utility industry, nuclear energy, government and regulation brings value to the Board, particularly from the perspective of our operations at Palo Verde Generating Station and business environment. His service with the NRC, including his tenure as Chairman, gives him senior leadership experience in operating large, complex organizations, financial literacy and human capital management and compensation experience.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As former Chairman of the NRC, the entity that formulates policies and regulations governing nuclear reactor and materials safety, issues orders to licensees, and adjudicates legal matters brought before it, Dr. Klein brings the following key attributes to the Company:

 

•  CEO/Senior Leadership

 

•  Complex Operations Experience

 

•  Extensive Knowledge of Company’s Business Environment

 

•  Financial Literacy/Accounting

 

•  Government/Public Policy/Regulatory

 

•  Human Capital Management

 

•  Nuclear Experience

 

•  Utility Industry Experience

 

 

2021 Proxy Statement 52
   

Table of Contents

Director Nominees for the 2021 Annual Meeting

 

Kathryn L. Munro        
       

Independent Director

 

Age: 72

Director since: 2000
Lead Director

 

 

 

Committees

 

•  Corporate Governance and Public Responsibility (Chair)

 

•  Finance

 

 

 

 

 

•  Human Resources

 

       
 

BACKGROUND

 

•  Since July 2003: Principal of BridgeWest, LLC (an investment company)

 

•  From February 1999 until July 2003: Chairman of BridgeWest, LLC

 

•  From 1996 to 2000: Chief Executive Officer of Bank of America’s (“BofA”) Southwest Banking Group

 

•  From 1994 to 1996: President of BofA Arizona. Prior to that, Ms. Munro held a variety of senior positions during her 20-year career with BofA

 

•  Ms. Munro is also Chairman of the Board of Premera Blue Cross and Lead Director of Knight-Swift Transportation Holdings, Inc. (“Knight-Swift”)

 

QUALIFICATIONS

 

As principal of an investment company, and as former Chief Executive Officer of BofA’s Southwest Banking Group and President of BofA Arizona, Ms. Munro brings business and investment acumen, financial and capital allocation experience, and leadership skills to the Company. Her extensive knowledge of the Company’s business environment includes experience with the cycles in Arizona’s economy, which assists a growing infrastructure company like Pinnacle West in accessing capital and meeting its financing needs. Ms. Munro is an experienced director, currently serving on the boards of Knight-Swift and Premera Blue Cross, providing her experience in human capital management and compensation, corporate governance, and risk oversight and risk management.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As a former CEO of BofA’s Southwest Banking Group, Ms. Munro brings a wealth of experience to the Company, including the following key attributes:

 

•  CEO/Senior Leadership

 

•  Corporate Governance

 

•  Extensive Knowledge of Company’s Business Environment

 

•  Finance/Capital Allocation

 

•  Human Capital Management

 

•  Investment Experience

 

•  Public Board Service

 

•  Risk Oversight and Risk Management

 

 

Bruce J. Nordstrom        
       

Independent Director

 

Age: 71

Director since: 2000

 

 

Committees

 

•  Audit (Chair)

 

•  Corporate Governance and Public Responsibility

 

 

 

 

•  Finance

 

       
 

BACKGROUND

 

•  Since January 2021: Of Counsel to and a certified public accountant at the firm of, Nordstrom & Associates, P.C., in Flagstaff, Arizona

 

•  June 2019 to December 2020: Vice President of and a certified public accountant at Nordstrom & Associates, P.C.

 

•  From 1988 to June 2019: President of and a certified public accountant at Nordstrom & Associates, P.C.

 

QUALIFICATIONS

 

As the former president of and current Of Counsel to an accounting firm, Mr. Nordstrom has gained an extensive accounting, auditing and financial skill set, as well as experience in strategy development and the principles of risk oversight and risk management. His tenure with the Company in addition to operating an Arizona-based business has provided him with extensive knowledge of the Company’s business environment. Furthermore, as an individual who built an accounting firm in Flagstaff, Arizona, Mr. Nordstrom has obtained experience in human capital management and compensation and corporate governance as well as a familiarity with the perspectives of customers in the Northern Arizona service territory of APS.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As the former President of Nordstrom & Associates, P.C. and a practicing CPA, Mr. Nordstrom brings the following key attributes to the Company:

 

•  Audit Expertise

 

•  Business Strategy

 

•  Corporate Governance

 

•  Customer Perspectives

 

•  Extensive Knowledge of Company’s Business Environment

 

•  Financial Literacy/Accounting

 

•  Human Capital Management

 

•  Risk Oversight and Risk Management

 

 

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Director Nominees for the 2021 Annual Meeting

 

Paula J. Sims        
       

Independent Director

 

Age: 59

Director since: 2016

 

 

Committees

 

•  Corporate Governance and Public Responsibility

 

•  Finance

 

 

 

 

•  Nuclear and Operating
(Chair)

 

       
 

BACKGROUND

 

•  Since May 2012: Professor of Practice and Executive Coach at the University of North Carolina Kenan-Flagler Business School

 

•  From July 2010 to June 2012: Senior Vice President of Corporate Development and Improvement at Progress Energy Inc.

 

•  From July 2007 to July 2010: Senior Vice President of Power Operations of Progress Energy

 

QUALIFICATIONS

 

Ms. Sims worked directly in the utility industry for more than 13 years. She brings extensive leadership experience to the Company in business and finance strategy, electric utility operations, nuclear strategy, and operating in a regulated environment. In her prior roles at Progress Energy, Ms. Sims was responsible for complex business operations and strategy, including new generation, supply chain and information technology, as well as overall process and efficiency improvements. Her experience gives her extensive insight into the operational, financial, regulatory, and risk-related matters that are of ever-increasing significance to the Company.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

Ms. Sims brings hands-on experience in electric utility operations, including generation, renewable energy, energy efficiency, fuels and energy trading, and customer service, as well as an understanding of the role of management and executive oversight, and brings the following key attributes to the Company:

 

•  Business Strategy

 

•  CEO/Senior Leadership

 

•  Complex Operations Experience

 

•  Financial Literacy/Accounting

 

•  Government/Public Policy/Regulatory

 

•  Nuclear Experience

 

•  Risk Oversight and Risk Management

 

•  Utility Industry Experience

 

 

William H. Spence        
       

Independent Director

 

Age: 65

Director since: 2021

 

 

Committees

 

•  Finance

 

•  Human Resources

 

 

 

 

•  Nuclear and Operating

 

       
 

BACKGROUND

 

•  Since March 2021: Former Chairman of the Board of PPL Corporation, an investor-owned electric utility

 

•  From June 2020 to March 2021: Chairman of the Board of PPL Corporation

 

•  From March 2012 to June 2020: Chairman of the Board, President and Chief Executive Officer of PPL Corporation

 

•  Mr. Spence is also a director of the Williams Companies, Inc.

 

QUALIFICATIONS

 

As the former Chief Executive of an investor-owned electric utility company, Mr. Spence brings a broad range of operating experience in the energy industry. He has extensive experience in strategy development and risk management and has a comprehensive understanding of the issues facing an electric utility, including regulatory strategy and customer service. He also brings significant public board experience both from his role as Chairman of PPL Corporation and from his service as a director of the Williams Companies, Inc.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As a former CEO of an electric utility, Mr. Spence bring the following skills to the Board:

 

•  Business Strategy

 

•  CEO/Senior Leadership

 

•  Complex Operations Experience

 

•  Customer Perspectives

 

•  Government/Public Policy/Regulatory

 

•  Public Board Service

 

•  Risk Oversight and Risk Management

 

•  Utility Industry Experience

 

 

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Director Nominees for the 2021 Annual Meeting

 

James E. Trevathan, Jr.        
       

Independent Director

 

Age: 67

Director since: 2018

 

 

 

Committees

 

•  Finance

 

•  Human Resources

 

 

 

 

•  Nuclear and Operating

 

       
 

BACKGROUND

 

•  From July 2012 to December 2018: Executive Vice President and Chief Operating Officer of Waste Management, Inc. (“Waste Management”) (waste disposal and recycling solutions)

 

•  From June 2011 to July 2012: Executive Vice President of Growth, Innovation and Field Support of Waste Management

 

•  From July 2007 to June 2011: Senior Vice President, Southern Group of Waste Management

 

QUALIFICATIONS

 

Mr. Trevathan brings to the Board more than 35 years of complex operational experience, serving 15 years in an executive capacity, with a focus on safety, environmental issues, customer service, disruptive technology, risk oversight and risk management, and community and regulatory affairs. Through his experience at Waste Management, Mr. Trevathan has gained significant experience in the oversight and management of risk, human capital management, business strategy development as well as literacy in finance and accounting.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

From his more than 35 years of operational and executive experience at Waste Management, Mr. Trevathan brings the following key attributes to the Company:

 

•  Business Strategy

 

•  CEO/Senior Leadership

 

•  Complex Operations Experience

 

•  Customer Perspectives

 

•  Financial Literacy/Accounting

 

•  Government/Public Policy/Regulatory

 

•  Human Capital Management

 

•  Risk Oversight and Risk Management

 

 

David P. Wagener        
       

Independent Director

 

Age: 66

Director since: 2014

 

 

Committees

 

•  Corporate Governance and Public Responsibility

 

•  Finance (Chair)

 

 

 

 

•  Nuclear and Operating

 

       
 

BACKGROUND

 

•  Since June 1995: Managing Partner of Wagener Capital Management (investment and advisory firm serving utility and private equity companies)

 

•  Mr. Wagener previously held executive positions at Salomon Brothers and Goldman, Sachs & Co.

 

QUALIFICATIONS

 

Mr. Wagener brings to the Board over 35 years of experience in the power/energy industry, project finance and investment banking experience, and knowledge of utility regulation. Through his financial experience and service on boards of public companies he has developed key experience in corporate governance, capital allocation, accounting, and risk oversight and risk management. His participation brings value to the Company and the Board as we address structural and business strategy challenges facing the utility industry.

 

 

NOMINEE SKILLS AND EXPERIENCE

 

As the Managing Partner of Wagener Capital Management, Mr. Wagener is experienced at analyzing business strategies, and brings the following key attributes to the Company:

 

•  Business Strategy

 

•  Corporate Governance

 

•  Finance/Capital Allocation

 

•  Financial Literacy/Accounting

 

•  Investment Experience

 

•  Public Board Service

 

•  Risk Oversight and Risk Management

 

•  Utility Industry Experience

 

 

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Director Nominees for the 2021 Annual Meeting

 

CURRENT DIRECTORS NOT STANDING FOR REELECTION

 

Mr. Humberto S. Lopez, Chairman of the Board of HSL Properties, Inc., will retire from the Board effective at the Annual Meeting. The Board recognizes Mr. Lopez for his distinguished service throughout the years and thanks him for his tireless labor, devotion and service to the Company.

 

Director Independence

 

NYSE rules require companies whose securities are traded on the NYSE to have a majority of independent directors. These rules describe certain relationships that prevent a director from being independent and require a company’s board of directors to make director independence determinations in all other circumstances. The Company’s Board has also adopted Director Independence Standards to assist the Board in making independence determinations. These Director Independence Standards are available on the Company’s website (www.pinnaclewest.com).

 

In accordance with the NYSE rules and the Director Independence Standards, the Board undertakes an annual review to determine which of its directors are independent. The review generally takes place in the first quarter of each year; however, directors are required to notify the Company of any changes that occur throughout the year that may impact their independence.

 

Based on the Board’s review, the Board has determined that all of the Company’s Directors and Director nominees are independent, except Mr. Guldner due to his employment with the Company. Mr. Gallagher was independent while he was a member of the Board.  

 

The Company has purchase, sale and other transactions and relationships in the normal course of business with companies with which certain Company directors are associated but which the Board determined are not material to our Company, the directors or the companies with which the directors are associated. These transactions were reviewed and considered by the Board in determining the independence of Company Directors. In particular, the Board took into account the following transactions during fiscal year 2020:

 

Ms. Bryan is an executive officer of Insight Enterprises, Inc. (“Insight”), which provides computer hardware and software products and IT services to APS. The amounts paid to Insight represent less than 1% of the Company’s and Insight’s total annual revenues;
Dr. Cortese is an employee of Arizona State University, which is considered a part of the reporting entity for the State of Arizona (the “State”) for financial reporting purposes. During fiscal year 2020, various transactions occurred between the State and the Company and its affiliates, such as the provision of electric service, the payment of various State fees, taxes, memberships, licenses, sponsorships and donations, and the payment by each party of utility-related costs. The amounts paid to and received from the State represent less than 2% of the State’s total annual revenues; and
Mr. Fox serves as a director of Univar Solutions, Inc. (“Univar”), from which APS purchases chemicals that are used in the operation and maintenance of our power plants. The amounts paid to Univar represent less than 1% of the Company’s and Univar’s total annual revenues.

 

The Board believes that all of the transactions and relationships during fiscal year 2020 described above were on arm’s-length terms that were reasonable and competitive and that the Directors did not participate in or receive any direct personal benefit from these transactions.

 

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Table of Contents

Director Nominees for the 2021 Annual Meeting

 

In addition, with respect to all of the Directors, the Board considered that many of the Directors and/or businesses of which they are officers, Directors, shareholders, or employees are located in APS’s service territory and purchase electricity from APS at regulated rates in the normal course of business. The Board considered these relationships in determining the Directors’ independence, but, because the rates and charges for electricity provided by APS are fixed by the ACC, and the Directors satisfied the other independence criteria specified in the NYSE rules and the Director Independence Standards, the Board determined that these relationships did not impact the independence of any Director. The Board also considered contributions to charitable and non-profit organizations where a Director also serves as a director of such charity or organization. However, since no Director is also an executive officer of such charitable or nonprofit organization, the Board determined that these payments did not impact the independence of any Director.

 

Director Compensation

 

Compensation of the directors for 2020 was as follows:

 

Name  Fees Earned or
Paid in Cash
($)
  Stock
Awards
($)(1)
  Change in Pension Value
and Nonqualified Deferred
Compensation Earnings
($)(2)
  All Other
Compensation
($)
  Total
($)
Glynis A. Bryan(3)  90,819  160,246  0  0  251,065
Denis A. Cortese, M.D.  105,000  120,289  0  0  225,289
Richard P. Fox  120,000  120,289  33,792  0  274,081
Michael L. Gallagher(4)  50,000  0  178,384  0  228,384
Jeffrey B. Guldner(5)  0  0  0  0  0
Dale E. Klein, Ph.D.  105,000  120,289  0  0  225,289
Humberto S. Lopez  111,250  120,289  254,665  0  486,204
Kathryn L. Munro  150,000  120,289  40,591  0  310,880
Bruce J. Nordstrom  120,000  120,289  131,582  0  371,871
Paula J. Sims  115,000  120,289  7,060  0  242,349
James E. Trevathan, Jr.  105,000  120,289  9,565  0  234,854
David P. Wagener  115,000  120,289  0  0  235,289

 

(1) In accordance with FASB ASC Topic 718, this amount reflects the aggregate grant date fair value of the stock awards. On May 20, 2020, all of the Directors at that time received a grant of either common stock or stock units (“SUs”), based on an election previously delivered to the Company. All Directors who received the grant on May 20, 2020 received common stock except for Messrs. Fox, Trevathan and Dr. Klein, and Mses. Bryan and Munro, who each received SUs. Under the terms of the SUs, Mr. Trevathan and Dr. Klein will receive 100% of the SUs in stock and the remaining Directors who received SUs will receive 50% of the SUs in cash and 50% of the SUs in common stock, in all cases on the last business day of the month following the month in which they separate from service on the Board. The number of shares of common stock or SUs granted was 1,653, and the grant date fair value of each share of common stock or SU was $72.77, which was the closing stock price on May 20, 2020. In addition, on March 2, 2020, Ms. Bryan received a pro-rata grant of common stock based on her service on the Board from February 2020 to May 2020 in the amount of 421 shares; and the shares have a grant date fair value of $94.91. As of December 31, 2020, the following Directors had the following outstanding RSU or SU awards: Ms. Bryan – 1,653; Mr. Fox — 7,290; Dr. Klein — 17,759; Ms. Munro — 15,714; Ms. Sims — 2,817; and Mr. Trevathan – 2,916.
(2) The Company does not have a pension plan for Directors. The amount in this column consists solely of the above-market portion of annual interest accrued under a deferred compensation plan pursuant to which Directors may defer all or a portion of their Board fees. See the discussion of the rates of interest applicable to the deferred compensation program under “Discussion of Nonqualified Deferred Compensation”.
(3) Ms. Bryan joined the Board of Directors on February 19, 2020.
(4) Mr. Gallagher retired from the Board of Directors on May 20, 2020.
(5) Mr. Guldner is an NEO and his compensation is set forth in the Summary Compensation Table. Only non-management directors are compensated for Board service.

 

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Director Nominees for the 2021 Annual Meeting

 

Discussion of Directors’ Compensation

 

The Human Resources Committee makes recommendations to the Board for compensation, equity participation, and other benefits for Directors. The director compensation program consists of the following components:

 

Compensation Component  Amount
($)
Annual Retainer  105,000
Audit Committee, Corporate Governance and Public Responsibility Committee,  15,000
Human Resources Committee, Finance Committee,   
and Nuclear and Operating Committee Chairs Annual Retainers   
Lead Director Annual Retainer  30,000
Annual Equity Grant  Shares with a value of approximately
$120,000 on the grant date

 

Directors had an option to either receive the stock grant on May 15, 2020 or defer the receipt until a later date. A director who elected to defer his or her receipt of stock received SUs in lieu of the stock grant. Those directors who elected to receive SUs were able to elect to receive payment for the SUs in either: (1) stock; (2) 50% in stock and 50% in cash; or (3) cash. The directors also elected whether to receive these payments either as of the last business day of the month following the month in which the director separates from service on the Board, or as of a date specified by the director, which date must be after December 31 of the year in which the grant was received. The SUs accrue dividend rights equal to the amount of dividends the director would have received if the director had directly owned one share of our common stock for each SU held, plus interest at the rate of 5% per annum, compounded quarterly. The manner of payment for the dividends and interest will be based on the director’s election for payment of the SUs.

 

Directors of Pinnacle West also serve on the APS Board of Directors for no additional compensation. The Company reimburses Board members for expenses associated with Board meetings and director education programs.

 

The 2012 Long-Term Incentive Plan, as amended (the “2012 Plan”), was amended in 2017 to add an overall limit to non-employee directors’ compensation. The value of equity grants (based on the grant date value) plus the aggregate amount of cash fees earned or paid is limited to $500,000 per calendar year.

 

A comparison against the compensation programs of a peer group is generally performed every two years, and a study was performed and reviewed by the Human Resources Committee in December 2019 using the peer group that we used in setting 2020 executive compensation. At that time the Human Resources Committee and Board deferred deciding on any changes to the compensation for the Board to a later date to allow for further deliberation. In December of 2020 the Human Resources Committee and the Board revisited considering adjustments to the compensation program, and requested that the Consultant, as defined in the Compensation Discussion and Analysis, update the prior study. As part of the update, the study used the following peer group that was used in setting 2021 executive compensation: Alliant Energy Corporation; Ameren Corporation; CMS Energy Corporation; DTE Energy Company; Edison International; Evergy, Inc.; Eversource Energy; Hawaiian Electric Industries, Inc.; Nisource Inc.; OGE Energy Corporation; PNM Resources, Inc.; PPL Corporation; The Southern Company; WEC Energy Group, Inc.; and Xcel Energy. In December of 2020, the Human Resources Committee

 

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recommended to the Board, and the Board approved, increasing the value of the annual retainer from $105,000 to $110,000, the annual equity grant from $120,000 to $140,000, and the committee chair retainers from $15,000 to $20,000. These changes will go into effect in May 2021. The Consultant concluded that the new amounts were within the competitive range.

 

Director Stock Ownership Policy

 

The Company believes that directors should have a meaningful financial stake in the Company to align their personal financial interests with those of the Company’s shareholders.

 

In December 2019, the Board amended the Company’s stock ownership policy for non-management directors to increase the holding requirement. Each director is required to hold or control Company common stock, RSUs, or SUs with a value of at least five times the annual cash retainer fee paid to directors. Directors will have three years from the date of the adoption of the amendment to meet the new requirement; newly elected directors will have six years following the date they become a director to reach the required ownership level. The Corporate Governance and Public Responsibility Committee may grant exceptions to this policy for hardship or other special circumstances. Directors may not engage in any speculative trading, hedging, or derivative security transaction (including any financial instrument such as a prepaid variable forward contract, equity swap, collar, short-sales, or exchange fund) that involves or references Company securities. In addition, Directors may not pledge, margin or otherwise grant an economic interest in any shares of Company stock.

 

All of the Directors are in compliance with the Director Stock Ownership Policy.

 

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Proposal 2: Advisory Vote on Executive Compensation

 

The Board of Directors unanimously recommends a vote FOR the approval of the Company’s executive compensation

 

Section 14A of the Exchange Act requires U.S. public corporations to provide for an advisory (non-binding) vote on executive compensation. As discussed in more detail in our CD&A and the accompanying tables and narrative, the Company has designed its executive compensation program to align executives’ interests with those of our shareholders, make executives accountable for business and individual performance by putting pay at risk, and attract, retain and reward the executive talent required to achieve our corporate objectives and to increase long-term shareholder value. We believe that our compensation policies and practices promote a pay at risk philosophy and, as such, are aligned with the interests of our shareholders.

 

In deciding how to vote on this say-on-pay proposal, the Board points out the following factors, many of which are more fully discussed in the CD&A:

 

Our Human Resources Committee has designed the compensation packages for our NEOs to depend significantly on putting pay at risk by tying pay to the achievement of goals that the Human Resources Committee believes drive long-term shareholder value;
Our pay practices are designed to encourage management to not take unacceptable risks;
We engage in periodic structural reviews of our compensation programs and policies; and
We believe that the Company’s executive compensation program is well suited to promote the Company’s objectives in both the short- and long-term.

 

The Board endorses the Company’s executive compensation program and recommends that the shareholders vote in favor of the following resolution:

 

RESOLVED, that the compensation paid to the Company’s Named Executive Officers as disclosed in this Proxy Statement in the CD&A, the compensation tables and the narrative discussion, is hereby approved.

 

Because your vote is advisory, it will not be binding upon the Human Resources Committee or the Board. However, we value our shareholders’ opinions, and we will consider the outcome of the vote when determining future executive compensation arrangements.

 

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Human Resources Committee Report

 

The Human Resources Committee* submitted the following report:

 

The Human Resources Committee is composed of non-employee directors, each of whom is independent as defined by NYSE rules and the Company’s Director Independence Standards.

 

In accordance with SEC rules, the Human Resources Committee discussed and reviewed the Compensation Discussion and Analysis with management and, based on those discussions and review, the Human Resources Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

HUMAN RESOURCES COMMITTEE CHAIR HUMAN RESOURCES COMMITTEE MEMBERS
Richard P. Fox Denis A. Cortese, M.D.
Humberto S. Lopez
Kathryn L. Munro
James E. Trevathan, Jr.

 

* Mr. Spence was not a member of the Human Resources Committee when it approved this report and he was not involved in setting executive compensation for 2020.

 

Compensation Discussion and Analysis (“CD&A”)

 

Named Executive Officers

 

Our NEOs for 2020 were:

 

   

Jeffrey B. Guldner

Chairman of the Board, President and Chief Executive Officer of PNW and Chairman of the Board and Chief Executive Officer of APS

 

James R. Hatfield

Executive Vice President and Chief Administrative Officer of PNW and APS(1)

 

Theodore N. Geisler

Senior Vice President and Chief Financial Officer of PNW and APS(2)

         
   

Daniel T. Froetscher

President and Chief Operating Officer of APS

 

Maria L. Lacal

Executive Vice President and Chief Nuclear Officer of Palo Verde Generating Station, APS

 

Robert E. Smith

Senior Vice President and General Counsel of PNW and APS

 

(1) Mr. Hatfield was promoted to the position of Executive Vice President and Chief Administrative Officer of PNW and APS effective January 8, 2020. Mr. Hatfield served as Executive Vice President and Chief Financial Officer of PNW and APS until January 8, 2020.
(2) Mr. Geisler was promoted to the position of Senior Vice President and Chief Financial Officer of PNW and APS effective January 8, 2020.

 

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Pay for Performance Overview

 

Business Overview

 

Pinnacle West is an electric utility holding company based in Phoenix, Arizona, one of the fastest-growing metropolitan areas in the United States. Through our principal subsidiary, APS, we provide retail electricity service to approximately 1.3 million customers in 11 of Arizona’s 15 counties.

 

We have the full range of resources needed to satisfy customers’ expectations, support Arizona’s expanding economy and population, and deliver long-term value to shareholders:

 

   strong, experienced senior leadership;

   talented and resourceful employees who are the Company’s strength;

   a diverse, well-performing energy portfolio that will grow even cleaner with our new clean energy commitment; and

   an established track record of safe, reliable operations.

 

 

Clean energy plays a vital role in meeting our customers’ energy needs, and today 50% of our diverse energy mix comes from clean, carbon-free resources. The Company has been on a trajectory of increasingly clean energy through solar power innovation, major investments in energy storage technology, carbon-free nuclear operations and advances in energy efficiency solutions while also reducing reliance on coal-generation. Now, we are accelerating and solidifying that path with a goal to deliver 100% clean, carbon-free and affordable electricity to customers by 2050. We will rely on intelligent investments in renewable resources, continued modernization of the grid, the nuclear power produced at Palo Verde Generating Station, the nation’s largest carbon-free energy resource, and innovative partnerships to develop clean technologies like green hydrogen to sustain reliability and affordability on the pathway to the 100% goal.

 

While we share ownership of Palo Verde, APS retains full day-to-day operational responsibility, including regulatory responsibility to the NRC. The complexity of running a nuclear plant of Palo Verde’s size requires a highly specialized and experienced management team. Given our need for specialized experience within our organization, we maintain strong succession planning practices and are focused on developing and retaining talent within our Company. Our Board’s focus on attracting, developing and retaining highly skilled and experienced executives is a core consideration in structuring our executive compensation programs.

 

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Building Shareholder Value Through Operational Excellence and a Sustainable Energy Future

 

As Arizona’s largest and longest-serving electric company, we’re proud of our heritage and performance. We also recognize the implications of new technologies and growing customer expectations, which are leading to changes at our Company and in our industry. Our strategy for building long-term value is driven by our core operational excellence and financial strength while also capitalizing on technology advances that promote a sustainable energy future, including our goal for 100% clean, carbon-free and affordable electricity by 2050:

 

EXECUTING ON OUR FINANCIAL AND
OPERATIONAL OBJECTIVES
  ENSURING A SUSTAINABLE
ENERGY FUTURE

   Sustaining our operational excellence

   Maintaining our financial strength

   Leveraging Arizona’s economic growth

 

   Integrating technology to modernize the grid

   Incorporating clean energy resources to meet the needs of customers

 

Delivering Results

 

Our management team has maintained a focus on our core business of operating and investing in a vertically integrated electric utility. Under the leadership of the senior officer team, Palo Verde Generating Station has become one of the top performing nuclear power plants in the U.S. We have, over the long term, provided gains in shareholder returns and maintained high credit ratings.

 

During 2020, our total shareholder value underperformed our historical track record. Increased regulatory uncertainty prompted by our 2019 rate case filing and other ACC-driven discussions impacted shareholder confidence. We are committed to maintaining robust communication and collaboration with the ACC and other stakeholders to find constructive solutions that support our customers while maintaining the financial health of our Company. We anticipate resolution of the 2019 rate case to occur in 2021 providing additional clarity around the regulatory environment in Arizona and allowing for more detailed discussions regarding the execution of our clean energy commitment and growth profile. We believe we have the right strategy and team in place to meet our near-term goals and deliver long-term shareholder value.

 

Due to our total shareholder value underperforming, the portion of performance shares that are based on relative total shareholder return with the performance period beginning January 1, 2017 and ending December 31, 2019 did not payout in February 2020.

 

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Although our total shareholder value underperformed, we achieved the following accomplishments in 2020, among others:

 

   Pinnacle West increased its dividend for the 9th consecutive year, by 6%

   Maintained strong credit ratings from all three rating agencies

   In 2020, we met our goal to reduce O&M by $20 million, largely through Lean initiatives and automation

   In September 2020, APS issued its first-ever green bond, raising almost $400 million to support “green” projects, such as renewables and energy storage, energy efficiency programs, climate change mitigation and clean transportation

 

   Notwithstanding the challenges presented by the COVID-19 pandemic as well as the hottest summer on record, the non-nuclear generation fleet achieved its best reliability performance since 2007, with a summertime equivalent availability factor of 95.3%

   APS continued successful operation of Palo Verde Generating Station, a nuclear energy facility that is the largest clean-air generator in the United States

   APS set a new all-time high peak energy demand of 7,660 megawatts, exceeded the prior peak set in 2017 by nearly 300 megawatts, and achieved strong reliability measures

 

Our Philosophy and Objectives

 

Our executive compensation philosophy incorporates the following core principles and objectives:

 

ALIGNMENT WITH SHAREHOLDER INTERESTS

 

We structure our annual cash and long-term equity incentive compensation to put pay at risk and reward business performance.

 

KEY MANAGEMENT RETENTION

 

We structure our program to provide compensation at levels necessary to attract, engage and retain an experienced management team.

 

Pay at Risk

 

The Company believes that a significant portion of each NEO’s total compensation opportunity should reflect both upside potential and downside risk. We place a strong emphasis on performance-based, shareholder-aligned incentive compensation.

 

CEO AND OTHER NEOs’ TOTAL COMPENSATION

 

 

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Executive Compensation Enhancements

 

We are committed to actively engaging with our shareholders and to make changes to our compensation program to ensure that it represents our strong commitment to our pay-for-performance philosophy. Over the past several years, we have undertaken the following enhancements:

 

Enhanced rigor of performance-based plans
Increased percentage of at-risk compensation
Changes to CEO compensation
Adopted clawback provisions

 

 

Key 2020 Performance Metrics

 

 

2020 Compensation Outcomes

 

The table below illustrates the total direct compensation (in millions) for each of our NEOs in 2020.

 

      Jeffrey B.
Guldner
  James R.
Hatfield
  Theodore N.
Geisler
  Daniel T.
Froetscher
  Maria L.
Lacal
  Robert E.
Smith
 
                 
  Base Salary $1.1   $0.7   $0.4   $0.5   $0.6   $0.6  
  Annual Cash Incentive $1.6   $0.7   $0.3   $0.6   $0.6   $0.5  
  Long-Term Incentive $3.3   $1.2   $0.5   $1.2   $0.7   $0.7  
    Total Direct Compensation $6.0   $2.6   $1.2   $2.3   $1.9   $1.8  

 

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2020 Compensation Plan

 

For 2020, the Company’s core executive compensation program for our NEOs consisted of the following key components:

 

    Pay Element   Measurement Period   Performance Link   Description
  Cash   Salary is based on experience, performance and responsibilities and is benchmarked to a peer group and market survey data to align with competitive levels.
             
Cash   1 year   Earnings
CEO(1): 50.0%
Other NEOs: 50.0%
  Universal measure of business financial performance; encourages achievement of bottom-line earnings growth goals.
Business Unit Performance(2)
50.0%
  Pre-established operational business unit performance goals that include safety, customer satisfaction and operational quality and efficiency metrics.
Performance Shares
70%(3)
  3 years   Relative TSR
50%
  Relative measures incentivize sustained shareholder value creation and strong performance on operational benchmarks.
Relative Operational Performance(4)
50%
 
Restricted Stock Units
30%(3)
  Vest ratably over
4 years
  Stock Price   Encourages retention; value dependent upon share price appreciation and four-year vesting to encourage retention.
We provide benefits, including pension and deferred compensation programs, change of control agreements and limited perquisites, that are designed to attract and retain our executive talent.

 

(1) Mr. Guldner participated in the APS 2020 Annual Incentive Award Plan (the “APS Plan”). However, under the APS Plan Mr. Guldner’s incentive opportunity tied to earnings was based on PNW earnings and not APS earnings. For additional details regarding Mr. Guldner’s incentive award for 2020, please refer to pages 74 and 78.
(2) Based on the following business units, as applicable: Corporate Resources (Bright Canyon; Enterprise Security; External Affairs; Finance and Accounting; Human Resources; Information Technology; Legal; Regulatory; Resource Management; Facilities, Supply Chain and Transportation; and Sustainability), Palo Verde, Customer Service, Fossil Generation, and Transmission and Distribution. For additional details regarding our goal-setting process and the specific business unit goals for 2020, please refer to page 76.
(3) For our 2020 annual long-term equity awards, all of our officers other than our CEO and our Executive Vice Presidents were granted 60% Performance Shares and 40% Restricted Stock Units.
(4) Based on the following benchmarks: Customer reliability, customer-to-employee improvement ratio, Occupational Safety and Health Administration (“OSHA”) all incident injury rate, nuclear capacity factor, and coal capacity factor; all of which are based on comparisons to companies selected by independent, objective data providers. For additional details regarding our goal-setting process and the specific relative long-term operational goals for 2020 performance share awards, please refer to page 85.

 

Key 2020 Compensation Decisions

 

For fiscal year 2020, the Human Resources Committee (for purposes of the CD&A, the “Committee”), or the Board acting on the Committee’s recommendation, approved the following compensation for our NEOs:

 

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2020 Base Salary Adjustments

 

For fiscal year 2020, the Committee did not increase Mr. Guldner’s salary given he received a promotional increase in November of 2019 in recognition of his advancement to Chairman of the Board, President and Chief Executive Officer of PNW and Chairman of the Board and Chief Executive Officer of APS. The Board, acting on the Committee’s recommendation, increased Messrs. Hatfield’s, Froetscher’s and Smith’s base salary between 0% - 2%. In January 2020, in recognition of their promotions to Executive Vice President and Chief Nuclear Officer of Palo Verde Generating Station of APS and Senior Vice President and Chief Financial Officer of PNW and APS, Ms. Lacal and Mr. Geisler received base salary increases of 41.5% and 12.5% respectively. Additionally, in July 2020, Mr. Geisler received a mid-year base salary increase of 11.1% to improve his pay competitiveness.

 

2020 Annual Incentive Award

 

Our 2020 annual incentive performance goals were set within the context of the business and economic circumstances known at that time. As a regulated utility, we are generally unable to adjust our base retail prices outside of a rate case. As such, in years in which we do not expect a retail rate adjustment, changes in our revenues over the previous year would depend largely on factors beyond our control, such as customer growth, weather and customer usage patterns.

 

Consistent with this methodology, we set the APS earnings target at $564 million for 2020, representing an increase versus the 2019 actual incentive earnings of $533.1 million. Likewise, we set Pinnacle West’s 2020 earnings target at $539 million, compared to Pinnacle West’s 2019 actual incentive earnings of $508.4 million. In both cases, the earnings goals were set to reflect modest sales growth and continued focus on effective cost controls.

 

Actual earnings for APS and Pinnacle West for incentive plan purposes were 42% and 54% above the 2020 target payouts, respectively, as shown on pages 65 and 79. The increase in 2020 earnings was driven primarily by weather due to Arizona having its hottest summer on record.

 

The 2020 operational business unit performance goals were evaluated and revised in certain key business areas to better align with our priorities and emphasize top-quartile or above performance. The average of all business unit metric performance for 2020 was 130% of target (see page 81 for a table summarizing 2020 business unit metric performance).

 

2020 Long-Term Incentive Awards

 

Our long-term equity incentive compensation is intended to align the interests of executives and our shareholders and increase the long-term shareholder value while also offering an award opportunity that helps attract and retain qualified, experienced executives. The 2020 long-term incentive grants awarded to Messrs. Guldner, Froetscher, Geisler and Ms. Lacal were increased in recognition of their respective promotions. For all other NEOs, we granted the annual awards consistent with our executive compensation practices and philosophy as described on page 83.

 

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Compensation Governance

 

Our executive compensation program is overseen by the Committee. Through ongoing shareholder engagement and regular assessment of our compensation governance practices, we seek to continue to improve our compensation governance:

 

Compensation Highlights
Shareholder feedback informs compensation program design
Substantial proportion of target compensation is at risk (80% for the CEO and 69% for other NEOs)
Performance shares are 100% tied to relative performance (50% on relative TSR and 50% on relative operational metrics) and require 90th percentile performance for maximum payouts. The portion of performance shares that are based on relative TSR with the performance period beginning January 1, 2017 and ending December 31, 2019 did not pay out in February 2020, which demonstrated performance alignment
No excise tax gross-up provisions in new or materially amended Change of Control Agreements (defined below) with our NEOs
Anti-hedging policy for all Directors, officers and all employees and anti-pledging policy for all Directors and officers
Stock ownership guidelines for all NEOs (all NEOs are in compliance with the stock ownership guidelines)
Clawback policy for our current or former executive officers covering short- and long-term incentive awards

 

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Our Philosophy and Objectives

 

Our compensation program is designed to be transparent with a clear emphasis on putting pay at risk and retaining key executives. Our executive compensation philosophy incorporates the following core principles and objectives:

 

Alignment with Shareholder Interests. We structure our annual cash and long-term equity incentive compensation to put pay at risk and reward business performance. Payouts under these plans are tied predominantly to the Company’s total return to shareholders, earnings, and the achievement of measurable and sustainable business and individual goals, so that executives’ interests are tied to the success of the Company and are aligned with those of our shareholders.
Key Management Retention. We structure our program to provide compensation at levels necessary to attract, engage and retain an experienced management team who have the skill sets and industry experience to succeed in our complex operating and regulatory environment, including operating the Palo Verde Generating Station, and who can provide consistently strong operating and financial results.

 

Setting Executive Compensation

 

The Human Resources Committee

 

The Committee monitors executive officer compensation throughout the year and undertakes a thorough analysis of our executive officer compensation each fall. This review includes consideration of competitive positions relative to specified labor markets, the mix of compensation components, performance requirements, the portion of pay at risk and tied to performance, and individual performance evaluations. From December through February, the Committee considers and approves executive officer compensation, including salary and cash and non-cash incentives. The Committee makes all compensation decisions relating to our CEO’s compensation, makes awards under the 2012 Plan, and determines the awards under the 2020 Incentive Plans (defined below). The Committee recommends other executive officer compensation decisions, which are approved by the Board for Pinnacle West officers and the Board of Directors of APS for APS officers.

 

Role of Executive Officers in Determining Executive Compensation

 

Management works with the Committee in establishing the agenda for Committee meetings and in preparing meeting information. Management conducts evaluations and provides information on the performance of the executive officers for the Committee’s consideration and provides such other information as the Committee may request. Management also assists the Committee in recommending: salary levels; annual incentive plan structure and design, including earnings and business unit performance targets or other goals; long-term incentive plan structure and design, including award levels; and the type, structure, and amount of other awards. The executive officers are available to the Committee’s compensation consultant to provide information as requested by the consultant. At the request of the Chair of the Committee, the CEO or other officers may attend and participate in portions of the Committee’s meetings.

 

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Role of Compensation Consultants

 

The Committee’s charter gives the Committee the sole authority to retain and terminate any consulting firm used by the Committee in evaluating non-employee director and officer compensation. The Committee engaged Frederic W. Cook & Co. to assist the Committee in its evaluation of 2020 compensation for our executive officers (the “Consultant”). The Consultant does not provide any other services to the Company or its affiliates. The Committee has assessed the independence of the Consultant and has concluded that the Consultant is an independent consultant to the Committee as determined under the NYSE rules. The Committee instructed the Consultant to prepare a competitive analysis of the compensation of the executive officers of the Company and of APS, and to make recommendations for changes to the existing compensation program, if warranted.

 

Pay Comparisons

 

In evaluating compensation for the NEOs, the Committee takes into account the analysis provided by the Consultant and its recommendations regarding the competitiveness and structure of compensation. The Committee considers the competitive market data presented by the Consultant as an important reference point to assure the Committee of the reasonableness of compensation levels and programs provided to executive management; however, actual compensation levels also take into account the individual executives and their responsibilities, skills, expertise, value added, as well as the competitive marketplace for executive talent.

 

Consultant’s Report

 

The Consultant reviewed our executive compensation practices and considered the extent to which these practices support our executive compensation objectives and philosophy. As part of this study, the Consultant performed competitive pay comparisons for our executive officers based on three data sets:

 

 

(1) Reflects weightings used for Messrs. Guldner, Hatfield (as CFO) and Smith. Weightings for Mr. Froetscher and Ms. Lacal are discussed below. Mr. Geisler was not included in the analysis.

 

From these sources, the Consultant developed a consensus in which the competitive industry comparison for Messrs. Guldner, Hatfield and Smith reflect a weighting of one-third peer group proxy statement data, one-third Energy Services Industry Survey, and one-third general industry surveys. Mr. Froetscher and Ms. Lacal did not have general industry survey matches, so the competitive industry comparisons reflect an average of the peer group proxy statement data and Energy Services Industry Survey data for each position. Mr. Geisler was not included in the analysis. Compensation levels were updated to 2020 based on projected executive level market movement from major salary planning surveys selected by the Consultant.

 

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Executive Compensation

 

In providing information to the Committee with respect to setting 2020 compensation, the Consultant reviewed the total compensation levels of the executive officers and presented its analysis in October 2019. At this time, the Consultant also reviewed the individual elements of compensation, including the design of annual incentives and long-term incentives. Also in September 2019 for Mr. Froetscher and in October 2019 for Mr. Guldner, the Consultant provided additional analysis to support compensation decisions that the Committee made in connection with their promotions to President and Chief Operating Officer of APS and to Chairman of the Board, President, and Chief Executive Officer of PNW and Chairman of the Board and Chief Executive Officer of APS respectively. Ms. Lacal’s promotion to Executive Vice President and Chief Nuclear Officer of Palo Verde Generating Station, APS was supported by the Consultant’s analysis of this role as occupied by her predecessor.

 

In its analysis, the Consultant provided competitive findings for base salary, annual incentive, long-term equity incentives and target total direct compensation for the NEOs relative to the 25th, 50th and 75th percentile (the October 2019 analysis for Mr. Guldner considered the 25th percentile to median). The conclusions of the reports as to competitive pay comparisons of the NEOs for these compensation elements are as follows:

 

Name(1)   Target Annual Cash
(Salary + Target Annual Incentives)
  Long-Term Incentives   Target Total Direct
Compensation
Mr. Guldner   25th-50th percentile   < 25th percentile   25th percentile
Mr. Hatfield(2)   50th percentile   25th percentile   50th percentile
Mr. Froetscher   25th-50th percentile   50th percentile   50th percentile
Ms. Lacal   50th percentile   25th percentile   25th-50th percentile
Mr. Smith   75th percentile   25th percentile   50th percentile

 

(1) Mr. Geisler was not included in the October 2019 Consultant reports.
(2) This information reflects Mr. Hatfield’s position as Executive Vice President and Chief Financial Officer of PNW and APS.

 

Application of the Committee’s Judgment

 

The analysis in the Consultant’s report and its recommendations regarding the competitiveness and structure of compensation are factors that the Committee takes into account in its evaluation of compensation for the NEOs. The Committee considers the competitive market data presented by the Consultant as an important reference point to assure the Committee of the reasonableness of compensation levels and programs provided to executive management; however, actual compensation levels also take into account the individual executives and their responsibilities, skills, expertise, value added, as well as the competitive marketplace for executive talent.

 

Company, business unit, and individual officer performance, as well as compensation competitiveness, are the primary factors in determining the level of total direct compensation for the NEOs. While the Committee considers internal pay equity in making compensation decisions, we do not have a policy requiring any set levels of internal pay differentiation. Finally, the Committee evaluates other factors that it considers relevant, such as the financial condition of the Company and APS. The Company does not have a pre-established policy or target for allocation between cash and non-cash compensation or between short-term and long-term incentive compensation, although the Committee does allocate long-term awards between the two forms of equity grants.

 

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Determining the Peer Group

 

The Peer Group (defined below) used as one input in our pay comparison process is reviewed annually for its continued appropriateness. The Committee takes into consideration the scope and complexity of the Company’s management responsibility and liability needs, including the following factors:

 

Pinnacle West’s operating subsidiary APS operates Palo Verde Generating Station, the largest nuclear power plant in the U.S., which has a $1 billion annual budget, employs one-third of APS employees, and is subject to comprehensive and complex nuclear and environmental regulation;
The management scope of Palo Verde Generating Station operations necessitates that the Company seeks talent from larger utilities, including those with significant nuclear operations and similar regulatory and business challenges; and
APS has full operational control and legal responsibility for Palo Verde Generating Station, Four Corners Generating Station and Cholla Power Plant. This is an important factor because APS does not have 100% ownership of these stations and this operational responsibility would not be accounted for in standard measures of Pinnacle West’s or APS’s size.

 

Given these factors, we make certain adjustments to our size measure to account for our operational responsibilities, rather than solely ownership, to allow for more appropriate comparability of Pinnacle West to potential peer companies. In determining the composition of the Peer Group, we adjust our revenues to reflect our control and responsibility for Palo Verde Generating Station, Four Corners Generating Station and Cholla Power Plant. The amount used for APS revenues is adjusted to take into account the revenues that are attributable to co-owned assets over which APS maintains full operational control and legal compliance responsibility. This adjustment resulted in an amount of $5.3 billion compared to its reported twelve months ended June 30, 2019 revenues of $3.6 billion.

 

Within the range of potential peers based on adjusted revenues, the Peer Group below is then determined based on additional factors including:

 

Scope of management complexity
Nuclear operations
Top industry talent (related to management complexity)
Regulated vs. non-regulated operations
Complexities of a challenging regulatory environment
CEO/senior management leadership

 

As a result of such review, the Committee approved the use of the same peer group that was used in setting 2019 executive compensation except, as a result of acquisition, the replacement of SCANA by Evergy, Inc. The Peer Group is broadly similar to the Company in scope and complexity of operations (taking into account nuclear operations, regulatory profile, and other quantitative and qualitative considerations) and positions the Company at slightly above the 25th percentile with respect to revenues (adjusted as explained above).

 

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As outlined previously, peer proxy data is only one third of the compensation information that is referenced for our NEOs (except for Mr. Froetscher and Ms. Lacal, where peer proxy statement data is weighted at 50%). For setting 2020 compensation, the Peer Group consisted of the following predominantly rate-regulated utilities (the “Peer Group”):

 

Peer Group
Alliant Energy Corporation   Edison International   OGE Energy Corp.
Ameren Corporation   Evergy, Inc.   PPL Corporation
CMS Energy   Eversource Energy   The Southern Company
Consolidated Edison, Inc.   Hawaiian Electric Industries, Inc.   WEC Energy Group, Inc.
DTE Energy Company   NiSource Inc.   Xcel Energy, Inc.

 

Risk Management and Assessment

 

The Committee reviewed a compensation risk assessment conducted independently by the Consultant. The assessment focused on the design and application of the Company’s executive compensation programs and whether such programs encourage excessive risk taking by executive officers. In addition, management advised the Committee that management has reviewed the overall compensation programs for the Company’s employees and has concluded that the programs are balanced and do not encourage imprudent risk-taking. Management advised the Committee that non-executive employee compensation programs generally consist of the compensation components contained in the executive compensation programs. Based on the outcome of the Consultant assessment and the information from management, the Committee believes that the Company’s compensation programs (i) do not motivate our executive officers or our non-executive employees to take excessive risks, (ii) are well designed to encourage behaviors aligned with the long-term interests of stockholders, and (iii) are not reasonably likely to have a material adverse effect on the Company.

 

Executive Compensation Components

 

Base Salary

 

Base salaries are set at competitive levels to attract and retain qualified, experienced executives. Salary levels are based on experience, performance and responsibilities, and benchmarked to the Peer Group and market survey data to align with competitive levels. The Committee reviews competitive salary information and individual salaries for executive officers on an annual basis. In considering individual salaries, the Committee reviews the scope of job responsibilities, individual contributions, business performance, retention concerns, and current compensation compared to market practices. In setting base salaries, the Committee also considers that base salary is used as the basis for calculating annual incentive awards.

 

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In December 2019, the Committee, based on the considerations set forth above, made the following adjustments to the base salaries of the following NEOs for fiscal year 2020:

 

Name   2019 Base
Salary
($)
  2020 Base
Salary
($)
Mr. Guldner(1)   1,100,000   1,100,000
Mr. Hatfield   686,000   700,000
Mr. Geisler(2)   320,000   400,000
Mr. Froetscher   540,000   540,000
Ms. Lacal(3)   410,000   580,000
Mr. Smith   600,000   610,000

 

(1) Mr. Guldner’s salary increased to $1,100,000 effective November 15, 2019 in recognition of his promotion to Chairman of the Board, President, and Chief Executive Officer of PNW and Chairman of the Board and Chief Executive Officer of APS.
(2) Mr. Geisler’s salary increased to $360,000 effective January 1, 2020 in recognition of his promotion to Senior Vice President and Chief Financial Officer of PNW and APS. Effective July 1, 2020, Mr. Geisler received a mid-year increase to $400,000.
(3) Ms. Lacal’s salary increased to $580,000 effective January 21, 2020 in recognition of her promotion to Executive Vice President and Chief Nuclear Officer of Palo Verde Generating Station of APS.

 

Annual Cash Incentives

 

Our annual cash incentives are strongly performance-based and designed to both reward achievement of pre-determined annual performance objectives that are critical to our business operations and to attract and retain qualified, experienced executives. Performance for NEOs is measured based on relevant and objective earnings and business unit metrics.

 

CEO. Mr. Guldner participates in the APS Incentive Plan but the award opportunities are based 50% on the achievement of 2020 Pinnacle West earnings levels and 50% on the achievement of performance goals established for business units of APS in the functional areas of customer service, transmission and distribution, fossil generation, corporate resources and the Palo Verde Generating Station.
Other NEOs. Messrs. Hatfield, Geisler, Froetscher and Smith participated in the APS Incentive Plan and Ms. Lacal participated in the APS 2020 Annual Incentive Award Plan for Palo Verde Employees (the “Palo Verde Incentive Plan”).

 

The APS Incentive Plan and the Palo Verde Incentive Plan are collectively referred to as the “2020 Incentive Plans”. In December 2019, the Committee approved the CEO portion of the APS Annual Incentive Plan and the Board, on the recommendation of the Committee, approved the 2020 Incentive Plans for all other officers.

 

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2020 Incentive Plan Opportunities

 

NEO  Threshold
(% of Salary)
  Target
(% of Salary)
  Maximum
(% of Salary)
  2020 Actual
(% of Salary)
  2020 Actual
($)
Mr. Guldner   27.50   110   220   141.1   1,551,946(1)
Mr. Hatfield   18.75   75   150   99.9   699,090 
Mr. Geisler   15.00   60   120   83.9   318,840 
Mr. Froetscher   22.50   90   180   103.7   559,848(1)
Ms. Lacal   16.25   65   130   98.7   563,394 
Mr. Smith   16.25   65   130   86.7   528,812 

 

(1) The Committee did not award any incentive payout for Messrs. Guldner and Froetscher for the Customer Service business unit under the APS Incentive Plan in connection with APS’s settlement with the Arizona Attorney General related in part to APS’s Customer Education and Outreach Plan (see Note 11 of the Notes to Consolidated Financial Statements in the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional information). The amount in this column reflects a zero payout for this business unit.

 

Assessing Performance and Payouts

 

The Board oversees the Company’s business strategy. The Company maintains a rigorous performance goal-setting process wherein goals are set based on our annual business planning process and reviewed for relevance and appropriate alignment with our business strategy. This goal-setting approach is integrated into our performance tracking and business reporting, providing a clear line of sight across the Company on an ongoing basis.

 

The Committee annually reviews the metrics utilized under the annual cash incentive plans to ensure that they remain relevant, with target performance goals set at levels that are intended to be challenging without incentivizing inappropriate risk taking.

 

Individual awards under our annual cash incentive plans are based on the achievement of relevant and objective earnings and business unit goals, which tie payouts directly to core measures of business performance and key operational business unit results and ultimately serve to enhance shareholder value.

 

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2020 ANNUAL INCENTIVE PLAN COMPONENT SUMMARY

 

 

 

(1) Weightings are shown as a percentage of total incentive opportunity.

 

Earnings Component Target Setting

 

In designing the annual cash incentives, the Committee sets earnings levels based on a reasonable range of expectations for the year, while taking into account prior year performance and economic conditions.

 

Due to the regulated nature of the utility industry, earnings growth is impacted by the base rates approved by regulators. Given that the rates we charge customers are generally fixed for several years, our revenue streams don’t increase in a linear year-over-year fashion. As a result, our annual earnings are impacted by our ability to manage costs associated with our operations and investments while our revenues typically remain relatively flat in years following a rate adjustment. Furthermore, planned outages, weather patterns and varying electricity demand can lead to cyclical earnings fluctuations. These factors are considered in our annual business planning and ultimately reflected in the earnings targets that are approved by the Committee.

 

2020 Earnings Goals

 

For fiscal year 2020, the Committee set threshold, target and maximum Pinnacle West and APS earnings goals to reflect modest sales growth and continued focus on effective cost controls. We set the APS earnings target at $564 million for 2020, an increase from 2019 actual incentive earnings of $533.1 million. Likewise, we set Pinnacle West’s 2020 earnings target at $539 million, compared to Pinnacle West’s 2019 actual incentive earnings of $508.4 million.

 

Business Unit Component Target Setting

 

The business unit metrics component of our annual plan ensures that our compensation program appropriately focuses our employees on core measures of overall Company health and performance. Our use of business unit metrics in our NEOs’ incentive plans promotes our continued success as a safe, sustainable, and overall well-run vertically-integrated and regulated electric utility.

 

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Determination Process

 

The determination of business unit metrics and targets is a year-long, multi-step process guided by our strategic priorities. The Company maintains a rigorous performance goal-setting process wherein goals are set based on our annual business planning process and reviewed for relevance and appropriate alignment with our business strategy, which is overseen by the Board. Individual business unit targets are developed using a variety of methods depending on the metric under consideration, including internal trends, external considerations, opportunities to improve performance, and use of industry benchmark data. Targets are intended to incentivize performance while still being attainable. The business unit metrics and targets are then shared and discussed with the Committee and the Board before final metrics and targets are approved by the Committee and the Board.

 

March-April  April-July  September-October  December
Corporate
Business Priorities
  Identify Areas
of Focus
  Goal-Setting  Committee and
Board Approval of
Metrics/Goals
•  Each year our executive officers and senior management determine the annual strategic plan and critical areas of focus to align with our ongoing strategy  •  Guided by the annual strategic plan and the critical areas of focus, business units identify business unit-level metrics which tier up to support the broader business priorities for the year 

•  Several metrics are set with reference to industry-wide benchmarks where available, and are typically set at the top quartile

•  Non-benchmarked metrics are designed to drive favorable trends based on historical internal data

 

•  The Committee and the Board review and discuss the metrics and targets provided by the business units

•  The Committee and the Board approve final metrics and targets

 

Under the business unit components of the 2020 Incentive Plans, the range of potential achievement for each business unit metric was zero to 200% of the target level. Within that range, a target level of achievement provided for a 100% payout, a threshold level provided for a 50% of target payout and a maximum level provided for a 200% of target payout. Performance below the threshold level resulted in a zero payout. Performance above the maximum level resulted in achievement of 200% of target. If performance fell between threshold and target or between target and maximum, linear interpolation was used to determine the actual percentage of target performance achieved.

 

2020 Business Unit Goals

 

The 2020 Incentive Plans measured NEOs on pre-established business unit performance in up to five key areas: Corporate Resources, Customer Service, Fossil Generation, Palo Verde, and Transmission and Distribution. Within each of these categories are specific metrics designed to incentivize achievements in operational excellence, customer value, safety and employee performance, and cost management, ultimately resulting in shareholder value creation.

 

The CEO was evaluated against metrics within each of these five categories to tie the CEO’s incentive to overall operational performance of the Company, and not to emphasize any one unit’s performance over the others. Other NEOs were evaluated based on performance in the business units that correlate to their responsibilities.

 

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See “Business Unit Components Under the 2020 Incentive Plans” on page 81 for additional details regarding the metrics, targets and achievement levels for each business unit. We revised several of our 2020 metrics to shared enterprise metrics to align with our principles and execution of our mission, continued emphasis on top quartile performance and/or improvement on historical trends and conducting year-over-year back testing to ensure that we are maintaining or increasing the rigor of our goals. The 2020 average of all business unit metrics performance for 2020 was 108% of target excluding adjustments for prudent business decisions related to operations and maintenance expense and unanticipated OSHA recordables for COVID-19 incidents discussed on page 79, compared to 115% of target in 2019. Including adjustments, the 2020 average performance was 130% of target.

 

   Business Unit Performance 
   Corporate
Resources
(%)
   Customer
Service
(%)
   Fossil
Generation
(%)
   Palo
Verde
(%)
   Transmission/
Distribution
(%)
   Average
(%)
 
2020 Results(1)   92    85    129    157    75    108 
2019 Results   121    63    131    161    100    115 

 

(1) These results exclude the adjustments made for prudent business decisions related to operations and maintenance expenses and OSHA recordables for COVID-19 incidents discussed on page 79. The average results including adjustments was 130% of target.

 

2020 Incentive Plans Achievement

 

Earnings Component

 

The earnings portion of the annual cash incentive for Mr. Guldner as CEO was determined based on Pinnacle West earnings weighted at 50% of the award. For all NEOs other than the CEO, the earnings portion of the annual cash incentive was determined based on APS earnings and weighted at 50% of the award. The APS Incentive Plan provides that if the threshold earnings number is not met, no incentive payment will be awarded, regardless of business unit performance.

 

The Palo Verde Incentive Plan provides that if the threshold earnings number is not met, the APS earnings portion of the incentive payment will not be awarded. In addition, under the Palo Verde Incentive Plan, Palo Verde’s overall business unit performance was required to achieve at least 100% of the target level for 2020 before Ms. Lacal could receive any payout under the APS earnings portion.

 

Under the terms of the 2020 Incentive Plans, the Committee may adjust plan targets or incentive results and may make other changes to the plan deemed necessary or appropriate due to unanticipated events that arise during the performance period or unusual or non-recurring adjustments on actual earnings that arise during the performance period, including without limitation, ACC rate-related impacts on earnings. As such, the Committee adjusted the PNW and APS earnings number to exclude an accrual for the Coal Community Transition (the “CCT”) future spend. The CCT plan relates to the closure or future closure of coal-fired generation facilities and provides assistance for a sustainable transition for the Navajo Nation and Hopi Tribe that would be impacted by such closures (see “Coal Communities Transition” on page 15 for additional information on this plan). The Committee felt that it was appropriate to adjust the PNW and APS earnings because the CCT expense was required for purposes of the accounting rules to be accrued in 2020 but it is a future expense. The effect of this adjustment was an increase in PNW earnings from $550.6 million to $569.5 million, and an increase in APS earning from $568.0 million to $587.7 million.

 

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Business Unit Component

 

As indicated above, NEOs are evaluated based on performance in the business units that correlate to their responsibilities. The business unit component for each NEO was weighted at 50%, with multiple business unit results averaged for applicable NEOs. The 2020 Incentive Plans allow the Committee to make adjustments for individual performance, and the Committee may exercise discretion under the 2020 Incentive Plans due to unanticipated events that might arise during the performance period. In 2020, the Committee adjusted two business metrics.

 

Based on current OSHA criteria, the Company is required to report COVID-19 cases as recordable incidents if they appear to be transmitted in the workplace. During 2020, there were a total of 15 COVID-19 incidents that met criteria for recording on OSHA injury/illness logs. COVID-19 illness cases were not considered when 2020 metrics were set. Due to the difficulty of determining probable transmission and the fact that none of the incidents required hospitalization, the incidents were not included in the metric measurement results for the OSHA recordable incident. The OSHA recordable incident metric measurements and weightings are varied across business units and adjustments are shown on pages 81-82.

 

During the fall of 2020, the Company’s management authorized an increase in prudent operations and maintenance (“O&M”) spend to offset/mitigate expense in future years due to the favorable impacts on earnings from Arizona experiencing its hottest summer on record. This prudent financial decision increased O&M expenses for 2020 which negatively impacted the metric performance. The PNW O&M metric measurement is shared with varied weightings across business units. This adjustment for NEOs was capped to result in target achievement of this metric as shown on pages 81-82.

 

See “Business Unit Components Under the 2020 Incentive Plans” on page 81 for detailed goals and achievement levels for each business unit.

 

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2020 APS Incentive Plan Results

 

The metrics, weightings, and results for Messrs. Guldner, Hatfield, Geisler, Froetscher, and Smith under the APS Incentive Plan, and Ms. Lacal under the Palo Verde Incentive Plan, are outlined below:

 

       50% Business Unit Performance 
NEO  50%
Earnings(1)
(%)
   Corporate
Resources
(%)
   Customer
Service
(%)
   Fossil
Generation
(%)
   Palo
Verde
%
   Transmission/
Distribution
(%)
   2020
Total
%
  
Mr. Guldner   154    104(2)    0(3)    152    157    100    103 
Weighting   (50)   (10)   (10)   (10)   (10)   (10)   (50)
Mr. Hatfield   142    125(4)                        125 
Weighting   (50)   (50)                       (50)
Mr. Geisler   142    124(5)                        124 
Weighting   (50)   (50)                       (50)
Mr. Froetscher   142    104(6)    0(3)    152         100    89 
Weighting   (50)   (12.5)   (12.5)   (12.5)        (12.5)   (50)
Ms. Lacal   142                   157         157 
Weighting   (50)                  (50)        (50)
Mr. Smith   142    125(7)                        125 
Weighting   (50)   (50)                       (50)

 

(1) Reflects PNW earnings for Mr. Guldner and APS earnings for all others.
(2) Reflects the average of all Corporate Resources business units.
(3) The Committee did not award any incentive payout for Messrs. Guldner and Froetscher for the Customer Service business unit under the APS Incentive Plan in connection with APS’s settlement with the Arizona Attorney General related in part to APS’s Customer Education and Outreach Plan (see Note 11 of the Notes to Consolidated Financial Statements in the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional information).
(4) Reflects the following Corporate Resources business units and respective weightings: Finance/Accounting weighted at 60% and Information Technology and Strategy each weighted at 20%.
(5) Reflects the average of the following Corporate Resources business units: Finance/Accounting and Information Technology.
(6) Reflects the average of all Corporate Resources business units weighted at 20% plus the Corporate Resources business unit Resource Management weighted at 5%.
(7) Reflects the Legal Corporate Resources business unit.

 

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Business Unit Components Under the 2020 Incentive Plans

 

The following table summarizes the metrics used for each business unit, in addition to individual weightings, targets, and 2020 results. The percentage of target performance achieved reflects the comparison of our actual achievement of a particular measure for 2020 to the target established for that measure.

 

Business Unit Measures
and Weighting
  Measure   Target   Actual
Results
  % of Target
Performance
Achieved
Corporate Resources               125
Employees (15%)   Serious Injury and Fatality (SIF) (10%)   2   4   50
    OSHA Recordable Incidents(1) (Total Company) (5%)   28   25   143
Operational Excellence (60%)   Average of All Operations Groups(2) Results (60%)   100%   146%   146
Shareholder Value (25%)   PNW O&M(3) (25%)   $5M < Budget   $5M Under   100
Corporate Resources (Information Technology)           123
Employees (15%)   Serious Injury and Fatality (SIF) (10%)   2   4   50
    OSHA Recordable Incidents(1) (Total Company) (5%)   28   25   143
Operational Excellence (60%)   Average of All Operations Groups(2) Results (40%)   100%   146%   146
    Mission Critical System Cumulative Availability (10%)   99.985%   99.986%   120
    Capital Project Execution (10%)   97%   95%   75
Shareholder Value (25%)   PNW O&M(3) (15%)   $5M < Budget   $5M Under   100
    PNW Capital (10%)   Budget +/- $5M   $2.7 Over   176
Corporate Resources (Resource Management)           99
Employees (15%)   Serious Injury and Fatality (SIF) (10%)   2   4   50
    OSHA Recordable Incidents(1) (Total Company) (5%)   28   25   143
Operational Excellence (70%)   ERMG Violations (15%)     1   2   50
    Average of All Operations Groups(2) Results (15%)   100%   146%   146
    Passing EIM T-55 Hourly Balancing Test (20%)   96.00%   95.82%   91
    EIM Flex Ramping and Capacity Value (20%)   96.00%   96.38%   119
Shareholder Value (15%)   PNW O&M(3) (15%)   $5M < Budget   $5M Under   100
Customer Service               117
Employees (15%)   Serious Injury and Fatality (SIF) (10%)   2   4   50
    OSHA Recordable Incidents(1) (Total Company) (5%)   28   25   143
Operational Excellence (40%)   Self-Service Transactions per Customer (20%)   9.80   8.53   0
    Customer Call Abandon Rate (20%)   7.00%   4.07%   200

 

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Business Unit Measures
and Weighting
  Measure   Target   Actual
Results
  % of Target
Performance
Achieved
Customer Value (20%)   Customer Outcome Satisfaction – CCT (20%)   84.0%   88.1%   200
Shareholder Value (25%)   PNW O&M(3) (25%)   $5M < Budget   $5M Under   100
Palo Verde(4)               157
Employees (40%)   Reactivity Management (7.5%)   95   97   200
    Site Safety Index (5%)   11   12   200
    OSHA Recordable Incidents(1)(5) (15%)   N/A   4   100
    Operations Accreditation (7.5%)   In-Person Board   Virtual Board   200
    Radiological Safety Focus Index (5%)   93   100   200
Operational Excellence (30%)   Site Capacity Factor (12.5%)   92.5%   91.2%   0
    Summer Reliability Capacity Factor (17.5%)   98.7%   100.0%   200
Performance Improvement (10%)   PI&R Performance Index(6) (5%) Measured 3/31, 6/30, 9/30 and 12/31   6 G/W No Red   6 Green 2 White   138
    Site Operational Focus Indicator, Measured 6/30 and 12/31(6) (2.5%)   7 G/W No Red   7 Green 1 White   200
    Plant Health Committee (PHC) Actions (2.5%)   90   98   200
Shareholder Value (20%)   O&M Budget (15%)   $3M < Budget   $5.3M Under   200
    Capital Budget (5%)   £ Budget   $1.1M Under   200
Fossil Generation               152
Employees (15%)   Serious Injury and Fatality (SIF) (10%)   2   4   50
    OSHA Recordable Incidents(1) (Fossil Generation) (5%)   3   5   50
Operational Excellence (55%)   Fleet Summertime Equivalent Availability Factor (25%)   92.6%   95.3%   200
    G&O Start-Up Reliability (20%)   98.7%   99.5%   200
    Capital Project Execution (10%)   97%   99%   167
Shareholder Value (30%)   PNW O&M(3) (20%)   $5M < Budget   $5M Under   100
    PNW Capital (10%)   Budget +/- $5M   $2.7 Over   176
Transmission & Distribution               100
Employees (20%)   Serious Injury and Fatality (SIF) (15%)   2   4   50
    OSHA Recordable Incidents(1) (T&D) (5%)   18   11   200
Operational Excellence (50%)   System Average Interruption Frequency Index (“SAIFI”) – All Weather (20%)   0.80   0.85   75
    System Average Interruption Duration Index (“SAIDI”) (20%)   78.00   78.58   97
    Capital Project Execution (10%)   97%   97%   100
Shareholder Value (30%)   PNW O&M(3) (20%)   $5M < Budget   $5M Under   100
    PNW Capital (10%)   Budget +/- $5M   $2.7 Over   176

 

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(1) Performance listed under Actual Results column is adjusted to exclude the fifteen COVID-19 recordable incidents: Palo Verde (5); Fossil Generation (3); and Transmission/Distribution (7); see page 79 for additional detail on this adjustment.
(2) Average includes: Transmission/Distribution, Customer Service, Fossil Generation and Palo Verde.
(3) Performance listed under the Actual Results column was adjusted but capped at target achievement; see page 79 for additional detail on this adjustment.
(4) Palo Verde business unit performance goals must achieve at least 100% payout overall before payment of the APS performance component can occur.
(5) Measured quarterly; pays at maximum for each quarter with no recordable incidents.
(6) Performance listed under the Actual Results column reflects 12/31/20 measurement.

 

Long-Term Incentives

 

Our long-term equity incentive compensation is intended to align the interests of executives and our shareholders and increase long-term shareholder value while also offering an award opportunity that helps attract and retain qualified, experienced executives. The Company currently uses two types of equity awards: performance shares and RSUs. For our CEO and Executive Vice Presidents, our annual long-term equity awards were granted 70% to performance-based measures and 30% to time-based vesting and for all other officers, 60% to performance-based measures and 40% to time- based vesting.

 

2020 Long-Term Equity Incentive Component Summary

 

vehicle   % of Target
Equity Pay Mix
  Measurement Period   Performance Link
Performance Shares   70   3 years   Relative TSR (50%)
Relative Operational Performance (50%)
RSUs   30   Vest ratably over 4 years   Stock Price

 

To determine the amount of performance share and RSU awards for the annual grants made in February of each year, the Committee first establishes a target compensation value for each officer that it wants to deliver through long-term equity award opportunities. The Committee considers various factors, including the retention value of the total compensation package, the long-term equity component in light of the competitive environment, and individual performance. The Committee also considers target value taking into consideration the Company’s achievement of earnings targets and overall performance. Once the target value is established, the Committee determines the number of shares subject to the awards by reference to the then-current market value of the Company’s common stock and then allocated the 2020 awards 70% to performance shares and 30% to RSUs for the CEO and Executive Vice Presidents and 60% to performance shares and 40% to RSUs for all other officers.

 

The 2020 awards to the NEOs were as follows:

 

Name  Performance Shares – 70%
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