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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 Securities Exchange Act of 1934 (Amendment No. )
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o | Preliminary Proxy Statement | |
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o | Soliciting Material under §240.14a-12 |
Pinnacle West Capital Corporation | ||||
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
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Donald E. Brandt Chairman of the Board, President and Chief Executive Officer |
Dear Fellow Shareholder:To Our Shareholders:
On behalf of our Board of Directors, management and employees, I invite you to participate in our 20172018 Annual Meeting of Shareholders.
The meeting will be held at10:30 a.m. (MST),Wednesday, May 17, 2017. This year's Annual Meeting will be a completely virtual meeting of shareholders, which will be conducted via live webcast. You will be able to attend the Annual Meeting online by visiting www.virtualshareholdermeeting.com/PNW. You also will be able to vote your shares electronically during the Annual Meeting (other than shares held through our 401(k) Plan, which must be voted prior to the meeting).
We are looking forward to using the virtual Annual Meeting technology. For those of you who have been able to join us at the past several physical meetings, you would have seen our shareholder attendance dwindling. Holding a virtual meeting will make the Annual Meeting available to all of our shareholders from any location. A virtual meeting is also environmentally friendly and sustainable over the long-term.16, 2018. Details regarding how to attend the meeting online and the business to be conducted at the Annual Meeting are in the accompanying Notice of Annual Meeting and Proxy Statement.
Pinnacle West hadachieved another successful year of outstanding performance as we continued to focus on delivering on our commitments to the customers who depend on us, the communities we serve, our dedicated team members, and the shareholders who trust us with their investment. Operational performance at our primary subsidiary, Arizona Public Service Company ("APS"), an electric utility that serves approximately 1.2 million customers throughout Arizona and operates the largest nuclear power plant in 2016. Examplesthe United States, was strong in 2017. Included in the Proxy Statement Summary you will see a number of our successes include:shareholder value creation and operational accomplishments. It is an impressive list, and one that I and the senior management team are proud to share with you. Here are just a few of those achievements:
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• Our total shareholder return (stock price appreciation/depreciation plus dividends) ("TSR") for 2017 was • Our share price reached a new all-time closing high, and hit new 52-week • Pinnacle West increased its dividend for the 6th straight year, by 6% in 2017; • We continued to focus on hiring diverse candidates as well as hiring from our veteran community, and at the end of 2017 over 44% of our workforce was diverse and more than 20% of our team members were veterans; • We achieved top-quartile distribution reliability and had our best summer reliability in five years; and •
| Additional highlighted accomplishments of our Company's |
At this year's Annual Meeting, as explained in the attached Proxy Statement, we are asking you to: (1) elect eleven Board of Director nominees; (2) consider and vote FOR an advisory resolution to approve executive compensation; (3) consider and vote, on an advisory basis, on how frequently the Company should obtain future advisory votes on executive compensation; (4) re-approve the material terms of the performance goals under, and an amendment to, the 2012 Long-Term Incentive Plan; and (5) ratify the appointment of our independent public accounting firm for 2017.
Last, but not least, your voteIn addition to delivering exceptional financial performance, we continue to focus on our sustainability efforts, fostering diversity and supporting our communities. Our usage of reclaimed water is importanta prime example of a sustainable balance and exemplifies our focus on the water-energy nexus. Thanks in large part to us. Whetherthe Palo Verde Generating Station, reclaimed water accounted for 72% of the water used in our generating facilities in 2017.
Our Executive Diversity Council worked diligently in 2017 to continue improving our workforce diversity. Over 48% of candidates hired in 2017 were ethnically or notgender diverse. As a Company we are committed to diversity, respect and inclusion as core to our culture and essential to our success.
In 2017 we remained steadfast in our commitment to our communities. We contributed more than $9.8 million to our Arizona communities, with more than $1.4 million invested in science, technology, engineering and mathematics ("STEM") education. Our men and women pledged more than $2.4 million through our Company-sponsored charitable giving program, through which the Company provides a 50% match. This year our team members donated nearly 110,000 volunteer hours to a diverse and wide-range of organizations, including Habitat For Humanity, Treasures for Teachers, Phoenix Children's Hospital and St. Mary's Food Bank Alliance. These are only a few examples of how our men and women continuously demonstrate a commitment to excellence by living the values core to our culture. In addition, APS continued to partner with the Arizona Diamondbacks Foundation to build youth baseball fields in deserving neighborhoods. In 2017 we built our 35th field. We are proud to support efforts that unite our communities and help them thrive.
As you planknow, in 2016 the Board of Directors adopted a Director Retirement Policy to participate inprovide for an orderly transition of our Board members. This year the first retirement under that policy will take place. Roy Herberger will retire from the Board effective at the Annual Meeting on the meeting day, we encourage youMeeting. Over my years at Pinnacle West, I always valued Roy's counsel, wisdom and guidance. On behalf of all of us, I extend our appreciation and thanks to vote promptly. You may vote over the Internet; by telephone; by completing, signing, datingRoy for his many years of contributions and returningdedicated service to our Company and to our shareholders.
I am both privileged and proud to lead Pinnacle West. Our men and women are working to shape a proxy card or voting instruction form; or by voting during the meeting.better, sustainable future for our customers and our communities, and in that process, they are also building a more valuable company for our shareholders.
Thank you for the confidence you place in Pinnacle West through your investment.
Sincerely,
Kathryn L. Munro Lead Director |
To Our Shareholders:Dear Fellow Shareholders,
On behalf of the Board, I would like to thank you for your Board of Directors,investment in Pinnacle West. As we approach our 2018 Annual Meeting, I welcomewould like to take this opportunity to communicateprovide you with an update on how your Board is approaching and addressing key areas of shareholder interest, particularly with respect to our shareholders. In stewarding your Company,governance and compensation practices.
Driving Shareholder Value Creation and Promoting a Sustainable Energy Future
As directors of Arizona's largest and longest-serving electric company, we continually seekview operational excellence as paramount to achievelong-term value creation for our shareholders, and our long-term strategy reflects this focus. Our management team continues to drive outstanding operational execution while growing our business and leveraging technology to promote a long-term sustainable performance and create shareholder value by focusing on implementing effective business strategies, prudent risk management, and sound corporate governance practices.
Don Brandt becameenergy future. These efforts have resulted in strong returns for our Chairman of the Board and Chief Executive Officer in April 2009. He brought to the Company a focus on returning to our core business of operating and investing in a vertically integrated utility. He has built a strong leadership team and our Company's performance under Don's and his team's leadership continues to be impressive. Here are several examples of our improved performance:
APS's Credit Rating.Board-Driven Shareholder Engagement Standard and Poor's senior unsecured credit rating for APS was upgraded three levels since 2009 improving from BBB– to the current A–.
I would now like to take this opportunity to highlight some areas of interest to our shareholders with respect to issues more specific to the Board and our shareholders:
Shareholder-Informed Compensation Program Changes
As a Board, we are committed to an executive compensation program that establishes strong pay for performance alignment and supports our ability to attract and retain a talented and proven leadership team. We have adopted proxy access inseek to design compensation programs that support our Bylaws. We know that manylong-term goals, reward achievement of long-term performance and align with the interests and feedback of our shareholders are in favor of some form of proxy access and weshareholders. To this end, our compensation programs have responded accordingly. We took a very measured and thoughtful approach in developing a proxy access Bylaw that we believe serves the needs ofevolved with our shareholders while balancing the potential for injury to the effectiveness of the Board and by extension, the Company's operational performance and long-term growth. The proxy access Bylaw generally permits a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company's outstanding common stock continuously for at least three years, to nominate and include in the Company's proxy materials director nominees constituting up to 25% of the Board.
I appreciateincluding several changes made in 2016. Following shareholder discussions in 2017, we have made further changes to our program that we believe will create even greater alignment between our executives and the opportunityperformance of our Company, and changes to provide you with an updateour program and encourage you to readdisclosures that reflect the feedback we have received from our shareholders. These changes are detailed in the Compensation Discussion and Analysis of this Proxy Statement and include:
These structural and disclosure enhancements are directly in response to feedback we received from our shareholders.
Thoughtful and Systematic Management Succession Planning Process
As you would expect for a company with a highly skilled and long-tenured management team, the Board is very engaged in succession planning to ensure we are building a sustainable leadership pipeline. CEO and senior leadership succession planning continues to be a focus for the Board, and we have been executing on a very deliberate succession and development plan. Our current management team, under the leadership of Don Brandt, has delivered very strong performance and the Board and its Committees are actively involved in our succession plans for our top talent to ensure we are providing development opportunities that will allow for smooth leadership transitions in the future.
Robust Board Refreshment and Succession Planning Practices
The Board has established strong practices to support regular Board evaluation and refreshment. In 2016, the Board adopted a Director Retirement Policy to facilitate an orderly transition of Board members and implemented a five-year plan to refresh the Board and its leadership. This five-year plan encompasses the following:
This process helps guide the Board in its recruitment efforts.
On behalf of the Board, I want to thank our shareholders for more information. Thank youtheir time and feedback. I am pleased to provide this additional window into the Board's activities in 2017 and express our commitment to running our business for the long-term value creation for our shareholders. We appreciate your investment in Pinnacle West Capital Corporation and your continued support.support at our 2018 Annual Meeting.
Sincerely,
Notice of the Annual Meeting of Shareholders |
March 31, 201729, 2018
The 20172018 Annual Meeting of Shareholders (the "Annual Meeting") of Pinnacle West Capital Corporation ("Pinnacle West", "PNW", or the "Company") will be held at 10:30 a.m., Mountain Standard Time, on Wednesday, May 17, 2017.16, 2018. The Annual Meeting may be accessed online at www.virtualshareholdermeeting.com/PNW. The purposes of the Annual Meeting are:
All shareholders of record at the close of business on March 9, 20172018 are entitled to notice of and to vote at the Annual Meeting. 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
Executive Offices Address:
PINNACLE WEST CAPITAL CORPORATION
Post Office Box 53999
Phoenix, Arizona 85072-3999
Table of Contents |
20172018 Proxy Statement | i
ii | 2017 Proxy Statement
REPORT OF THE AUDIT COMMITTEE | ||
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HELPFUL RESOURCES | ||
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2017 Proxy Statement |ii iii| 2018 Proxy Statement
Proxy Statement Summary |
This summary highlights our 2016 performance, our new and continuing corporate governance and executive compensation highlights, and certain information contained elsewhere in this Proxy Statement. As it is only a summary, please read the complete Proxy Statement and 20162017 Annual Report before you vote. The Proxy Statement and form of proxy are first being made available to shareholders on or about March 31, 2017.29, 2018.
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Our Company continued its strong performance in 2016 as evidenced by the following:
Who We Are |
Shareholder Value:Strategic Framework
For example, employees are an element of our Core and one of our greatest assets. The Core helps us focus on keeping them safe, fostering a healthy and balanced environment, supporting their development through training and mentoring and encouraging engagement. This culture not only benefits each individual employee, it also positions our Company for long-term sustainable success. Proxy Statement Summary Strategic Priorities TheCore continues Building on that foundation, the APS Strategic Business Plan is anchored by 2017 Highlights and Achievements Shareholder Value Our Financial andTheCore is our strategic framework. It sets forth the basis from which we operate by defining our vision, mission, critical areas of focus, and values. The framework affirms our corporate values of safety, integrity and trust, respect and inclusion, and accountability. This is the foundation from which our long term strategy is built. 20172018 Proxy Statement | 1
oOur stockits competitiveto serve as the foundation for all strategic and business initiatives. In turn, our performance as shownmetrics reinforce our highest priorities, including operational excellence, financial strength and leveraging economic growth, in a tangible, measurable way, and allow us to monitor and enhance our progress.comparingfour themes that align with industry trends shaping our stock's performance to companies infuture and the Edison Electric Institute Index (U.S. shareholder-owned electric utilities) and in the Standard and Poor's 500 Index:way we do business:
Operating HighlightsOperating Performance:Consumer EngagementoArizona Public Service Company ("APS") operates Palo Verde Nuclear Generating Station ("Palo Verde"), — Deliver value-added programs and services that derive from consumer insights and strengthen our brand for the largest nuclear generating station in the United States. In 2016:•Palo Verde produced approximately 80% of Arizona's carbon-free energy;futurePalo Verde generated 32.2 million megawatt-hours of electricity, marking the third consecutive year the plant has produced more than 32 million megawatt-hours,Flexible Resources — Develop new initiatives and it remains the only U.S. generating station to produce more than 30 million megawatt-hours in a year, a feat the plant has achieved each of the past eight years; andbusinesses that leverage our core capabilitiesPalo Verde achieved an annual capacity factor of 93.2%;EmployeesoAPS completed — Adopt sustainable programs to invest in our people today and in the 40 megawatt Red Rock Solar Plant — APS's largest utility-scale solar plant;futureo•APS developedInnovation — Integrate new technologies to enhance performance, reliability and the first microgrid for the U.S. Navy, providing 25 megawattsoverall experience of standby power;
our customers and employeesodiverse supplier program continues to be successful, with our 2016 spend exceeding $350 million. We were recognized as the Corporation of the Year at the 2016 Women's Business Enterprise Council — West Annual Strategic Opportunity Conference;management team has delivered superior performance:
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ü | PNWincreased its dividend for the 6th consecutive year, by 6%; | |
ü | Maintainedstrong credit ratings from all three rating agencies; | |
ü | APS spent$363 million with diverse suppliers; | |
ü | APS continued successful operation of the Palo Verde Generating Station, a nuclear energy facility that is the largestclean-air generator in the United States; and | |
ü | Achievedtop quartile distribution reliability metrics for 2017, and had the best summer reliability in 5 years. | |
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Proxy Statement Summary |
Achievements
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ü | Received theDistributech Renewable Integration Project of the Year award for the Solar Partner Program; | |
ü | Obtained "Leadership" rating from CDP for climate change and water management – one of only two U.S. utilities that earned the highest rating in both categories; | |
ü | Recognized as theCorporate Advocate of the Year by the National Center for American Indian Enterprise Development; and | |
ü | Recognized as aBest Corporation for Veteran's Business Enterprises by the National Veteran-Owned Business Association. | |
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APS gas and oil generation plants achievedCommunity Engagement
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ü | Contributed more than$9.8 million to our Arizona communities, with more than $1.4 million invested in STEM education; | |
ü | Employees pledged more than$2.4 million through our Company-sponsored charitable giving program, through which the Company provides a 50% match; | |
ü | Built our 35th baseball field in one of our Arizona neighborhoods together with the Arizona Diamondbacks Foundation; and | |
ü | Employees donated nearly110,000 volunteer hours to community organizations. | |
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Sustainability
Our commitment to create a startup reliability of 99.3%.
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Carbon Management | • 50% of our diverse energy mix iscarbon-free • Plan toreduce carbon intensity by 23% over the next 15 years • MSCI Environmental Sustainability and GovernanceA rating (as of 10/27/17) | |||
| Energy Innovation | • More than 1,300 MW of installed solar capacity • Plan to add over500 MW of energy storage in the next 15 years | ||
| Safety & Security | • 70% reduction in Occupational Safety and Health Administration ("OSHA") recordable injuries over the past 10 years • Remain top decile for safety performance in the U.S. electric utilities industry | ||
| Water Resources | • 14% reduction in groundwater use since 2014 • 20 billion gallons of water recycled each year to cool Palo Verde Generating Station | ||
| People | • Averageemployee tenure of 13 years due to strong talent strategy • More than 20% of our employees areveterans • Palo Verde hosted a nuclearWomen in Leadership forum | ||
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To learn more about our sustainability efforts, please see our Corporate Responsibility Report located on our website (www.pinnaclewest.com).
20172018 Proxy Statement | �� 3
Proxy Statement Summary |
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Our Board's performance andBoard remains committed to maintaining strong corporate governance remain strong.practices. Our new and continuing highlightspractices include:
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4 | 2017 Proxy Statement
executives. Our executive compensation philosophy incorporates the following core principles and objectives:
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ü | Independent Lead Director role with clearly defined and robust responsibilities; | |||
ü | Ten of our eleven current directors are independent and the members of all of the Board Committees are independent; | |||
ü | Annual | |||
ü | Robust board and management succession planning; | |||
ü | No poison pill plan or similar anti-takeover provision in place; | |||
ü | No supermajority provisions in our Articles of Incorporation or Bylaws; | |||
ü | Each of our directorsattended at least 90% of the | |||
ü | Our directors and officers are prohibited from pledging or hedging our stock. | |||
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We have an established shareholder engagement program to maintain a dialogue with our shareholders throughout the year, which was further augmented during 2017 in response to what our Board considered a disappointing level of shareholder support for our annual advisory vote on compensation. 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. In 2017, we contacted the holders of approximately 50% of the shares outstanding and met with the holders of approximately 40% of the shares outstanding. Our Lead Director and member of the Human Resources Committee, Kathryn Munro, participated in a number of the shareholder discussions providing shareholders with direct access to the Board.
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 by:
A detailed discussion of this outreach and the Board's response can be found on pages 23-24 and 48-49 of this Proxy Statement.
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Proxy Statement Summary |
Director Nominees, Their Skills and Experience |
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Proxy Statement Summary |
Board Diversity | Directors' Key Skills and Experience Matrix | |
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Succession Planning |
Director succession is overseen by the Corporate Governance 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. Since 2014 three new members have joined the Board. The Board adopted a Director Retirement Policy in 2016, which is described on page 22 of this Proxy Statement, to better facilitate board refreshment and transition. |
Given our need for specialized experience, we also 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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Proxy Statement Summary |
Executive Compensation Program Highlights |
Our director nominees are: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.
Our incentive program structure and metrics aredesigned to drive sustained value creation for shareholders, with incentive compensation tied to the Company's TSR, earnings, and the achievement of measurable and sustainable business and individual goals. See the CD&A on page 44 for further details.
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| Pay Element | | | Measurement Period | | | Performance Link | | ||||||||
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| Base Salary | | | Cash | | | | | | |||||||
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| Annual | | | Cash | | | 1 year | | | Earnings CEO: 62.5% NEOs(1): 50.0% | | |||||
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| Incentives | | | | | | | Business Unit Performance CEO: 37.5% NEOs(1): 50.0% | | |||||||
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| | | | Performance | | | | | Relative TSR 50% | | ||||||
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| Long-Term Incentives | | | Shares 60%(2) | | | 3 years | | | Relative Operational Performance 50% | | |||||
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| | | | Restricted Stock Units 40%(2) | | | Vest ratably over 4 years | | | Stock Price | | |||||
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2017 CEO Total Compensation 88% at risk | | 2017 Average for Other NEOs' Total Compensation 67% at risk |
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20172018 Proxy Statement | 7
Proxy Statement — General Information |
Time, Date and Place |
The Company's 20172018 Annual Meeting of Shareholders ("Annual Meeting") will be held at 10:30 a.m., Mountain Standard Time, on Wednesday, May 17, 2017.16, 2018. The Annual Meeting will not be held at a physical location, but will instead be held virtually, where shareholders will participate by accessing a website using the Internet. The Annual Meeting will be accessed atwww.virtualshareholdermeeting.com/PNW.PNW. To participate in the Annual Meeting, you will need the 16-digit control number included on the proxy card, the Internet Notice or the voting instruction form. Online check-in will begin at 10:15 a.m. Mountain Standard Time, and you should allow ample time for the online check-in proceedings. We will have technicians standing by ready to assist you with any technical difficulties you may have accessing the virtual meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call: 855-449-0991. An audio broadcast of the Annual Meeting will be available by telephone toll-free at 877-328-2502 (domestic) or 412-317-5419 (international). Upon dialing in, you will need to provide your 16-digit control number.
We continue to believe that the virtual-only format, which we used for the first time last year, is in the best interests of our shareholders, given the time and expense of an in-person meeting compared to the shareholder participation at those meetings. The number of non-employee shareholders actually attending our Annual Meetings of Shareholders has significantly dwindled. For the past five in-person meetings, only about 30 shareholders attended each of the meetings. The meetings, on average, lasted less than 45 minutes, including the formal business portion of the meeting, the remarks by the CEO, a video highlighting the Company's performance, and the question and answer period. A virtual meeting allows all of our shareholders, regardless of location, the ability to participate in the Annual Meeting.
Our virtual meeting will be governed by our Rules of Conduct, which we use for both in-person and virtual meetings. Shareholders at the virtual-only meeting will have the same rights as at an in-person meeting, including the rights to vote and ask questions through the virtual meeting platform.
Notice of Internet Availability |
Unless you elected to receive printed copies of the proxy materials in prior years, you will receive a Notice of Internet Availability of Proxy Materials by mail, or if the shareholderyou so elected, by electronic mail (the "Internet Notice"). The Internet Notice will tell you how to access and review the proxy materials. If you received an Internet Notice by mail and would like to receive a printed copy of the proxy materials, you should follow the instructions included on the Internet Notice.
The Internet Notice is first being sent to shareholders on or about March 31, 2017.29, 2018. The Proxy Statement and the form of proxy relating to the Annual Meeting are first being made available to shareholders on or about March 31, 2017.29, 2018.
8 | 2018 Proxy Statement
Proxy Statement — General Information |
Record Date; Shareholders Entitled to Vote |
All shareholders at the close of business on March 9, 20172018 (the "Record Date") are entitled to vote at the meeting. Each holder of outstanding Company common stock is entitled to one vote per share held as of the record date on all matters on which shareholders are entitled to vote, except for the election of directors, in which case "cumulative" voting applies (see "Vote Required — Election of directors"). At the close of business on the Record Date, there were 111,555,682111,928,566 shares of common stock outstanding.
Voting |
Vote prior to the Annual Meeting by Internet. The website address for Internet voting is on the proxy card, the Internet Notice and the voting instruction form. Internet voting is available 24 hours a day. | ||
Vote prior to the Annual Meeting by telephone. The toll-free number for telephone voting is on the proxy card, the Internet Notice and the voting instruction form. Telephone voting is available 24 hours a day. |
8 | 2017 Proxy Statement
Vote prior to the Annual Meeting by scanning the QR code. The QR code is on the proxy card, the Internet Notice and the voting instruction form, and is available 24 hours a day. | ||
Vote prior to the Annual Meeting by mail. You may vote by mail by promptly marking, signing, dating, and mailing your proxy card or voting instruction form (a postage-paid envelope is provided for mailing in the United States). | ||
Vote during the Annual Meeting over the Internet. To participate in the Annual Meeting, you will need the 16-digit control number included on the proxy card, the Internet Notice or the voting instruction form. Shares held in your name or shares for which you are the beneficial owner but not the shareholder of record may be voted electronically during the formal business portion of the Annual Meeting. Shares held in the Pinnacle West 401(k) Plan cannot be voted during the Annual Meeting. If you hold shares in the Pinnacle West 401(k) Plan, you will need to submit your vote to the plan trustee by May |
You may change your vote by: re-voting by telephone; re-voting by Internet; or re-voting during the formal business portion of the Annual Meeting. For shares held in your name you may change your vote by re-submitting a signed proxy card. In addition, for shares held in your name, you may also revoke a previously submitted proxy card by filing with our Corporate Secretary a written notice of revocation. For shares for which you are the beneficial owner but not the shareholder of record, you may change your vote by re-submitting a signed voting instruction form to your broker. In addition, for shares for which you are the beneficial owner but not the shareholder of record, you should contact your broker if you would like to revoke your vote.
Your vote is confidential. Only the following persons have access to your vote: election inspectors; individuals who help with the processing and counting of votes; and persons who
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Proxy Statement — General Information |
need access for legal reasons. All votes will be counted by an independent inspector of elections appointed for the Annual Meeting.
Quorum |
The presence, in person or by proxy, of a majority of the outstanding shares of our common stock is necessary to constitute a quorum at the Annual Meeting. In counting the votes to determine whether a quorum exists, shares that are entitled to vote but are not voted at the direction of the beneficial owner (called abstentions) and votes withheld by brokers in the absence of instructions from beneficial owners (called broker non-votes) will be counted for purposes of determining whether there is a quorum. Shares owned by the Company are not considered outstanding or present at the meeting.
Vote Required |
Election of directors. Individuals receiving the highest number of votes will be elected. The number of votes that a shareholder may, but is not required to, cast is calculated by multiplying the number of shares of common stock owned by the shareholder, as of the Record Date, by the number of directors to be elected. Any shareholder may cumulate his or her votes by
2017 Proxy Statement | 9
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casting them for any one nominee or by distributing them among two or more nominees. Abstentions will not be counted toward a nominee's total and will have no effect on the election of directors. You may not cumulate your votes against a nominee. If you hold shares in your own name and would like to exercise your cumulative voting rights, you must do so by mail. If you hold shares beneficially through a broker, trustee or other nominee and wish to cumulate votes, you should follow the instructions on the voting instruction form.
Under the rules of the New York Stock Exchange ("NYSE"), your broker is not able to vote on your behalf in any director election unless you give your broker specific voting instructions. We encourage you to provide instructions so that your shares will be counted in the election of directors.
Say-on-Pay and the frequency of the Say-on-Pay vote. The votes cast "for" must exceed the votes cast "against" to approve the advisory resolution on the compensation disclosed in this Proxy Statement of our Named Executive OfficersNEOs identified on page 44 — the Say-on-Paysay-on-pay vote. This resolution is not intended to address any specific item of compensation, but rather the overall compensation of the Named Executive OfficersNEOs and the compensation philosophy, policies and procedures described in this Proxy Statement. The frequency option — one year, two years, or three years — that receives the greatest number of votes cast on this proposal will be the frequency option approved by the shareholders. Because your votes on both Say-on-Pay and the frequency of the Say-on-Pay vote areis advisory, theyit will not be binding on the Board or the Company. However, theThe Board will review the voting results and take them into consideration when making future decisions regarding executive compensation and the frequency of the Say-on-Pay vote.compensation. Abstentions and broker non-votes will have no effect on the outcome of these proposals.
Re-approval of the material terms of the performance goals under the 2012 Plan and approval ofthis proposal. We will hold an amendment to placeadvisory vote on say-on-pay on an annual upper dollar limitbasis until we next hold an advisory vote of shareholders on the valuefrequency of awards to individual, non-employee directors. Re-approval of the material terms of the performance goals under, and approval of an amendment to, the 2012 Plan requires thesuch votes cast "for" to exceed the votes cast "against" this proposal. For purposes of these approvals, abstentions have the effect of a vote against the proposal, and broker non-votes are not considered to be votes cast.as required by law.
Ratification of the appointment of the independent accountants. The votes cast "for" must exceed the votes cast "against" to ratify the appointment of the independent accountants for the year ending December 31, 2017.2018. Abstentions and broker non-votes will have no effect on the outcome of this proposal.
Board Recommendations |
The Board recommends a vote:
10 | 20172018 Proxy Statement
Proxy Statement — General Information |
The Board is not aware of any other matters that will be brought before the shareholders for a vote. If any other matters properly come before the meeting, the proxy holders will vote on those matters in accordance with the recommendations of the Board or, if no recommendations are given, in accordance with their own judgment.
Delivery of Annual Reports and Proxy Statements to a Shared Address and Obtaining a Copy |
If you and one or more shareholders share the same address, it is possible that only one Internet Notice, Annual Report or Proxy Statement was delivered to your address. Registered shareholders at the same address who wish to receive separate copies of the Internet Notice, the Annual Report or Proxy Statement may:
The Company will promptly deliver to you the information requested. Registered shareholders who share the same address but wish to receive one Internet Notice, Annual Report or Proxy Statement may contact the Company through the same methods listed above. Shareholders who own Company stock through a broker and who wish to receive single or separate copies of the Internet Notice, Annual Report or Proxy Statement should contact their broker.
You may access our Annual Report and Proxy Statement via the Internet. Copies of the Annual Report and Proxy Statement are available on the Company's website (www.pinnaclewest.com) and will be provided to any shareholder promptly upon request. Shareholders may request copies from Shareholder Services at the telephone number or addresses set forth above, or as described on the Internet Notice.
Shareholder Proposals or Director Nominations for the |
Shareholder Proposals. To be included in the proxy materials for the 20182019 Annual Meeting of Shareholders (the "2018"2019 Annual Meeting"), any shareholder proposal intended to be presented must be received by our Corporate Secretary no later than December 1, 2017November 29, 2018 at the following address:
Corporate Secretary
Pinnacle West Capital Corporation
400 North Fifth Street, Mail Station 8602
Phoenix, Arizona 85004
A shareholder who intends to present a proposal at the 2019 Annual Meeting, but does not wish it to be included in the 2019 proxy materials, must submit the proposal no earlier than January 16, 2019 and no later than the close of business on February 15, 2019.
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Proxy Statement — General Information |
A shareholder who intends to present a proposal at the 2018 Annual Meeting, but does not wish it to be included in the 2018 proxy materials, must submit the proposal no earlier than January 17, 2018 and no later than the close of business on February 16, 2018.
Shareholder Nominations. Shareholder nominations for a director to the Board must be received by the Corporate Secretary at the address set forth above by November 17, 201716, 2018 ("Shareholder Nomination").
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 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 11 directors, the maximum number of proxy access candidates we would be required to include in our proxy materials is two.
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 1, 2017October 30, 2018 nor later than the close of business on December 1, 2017.November 29, 2018. 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 Securities and Exchange Commission ("SEC") and the applicable sections of our Bylaws relating to qualifications of nominees and nominating shareholders and disclosure requirements.
Proxy Solicitation |
The Board is soliciting the enclosed proxy. The Company may solicit shareholders over the Internet, by telephone or by mail. The Company has retained D.F. King & Co., Inc. to assist in the distribution of proxy solicitation materials and the solicitation of proxies for $11,000, plus customary expenses. The costs of the solicitation will be paid by the Company. Proxies may also be solicited in person, by telephone or electronically by Company personnel who will not receive additional compensation for such solicitation. As required, the Company will reimburse brokerage houses and others for their out-of-pocket expenses in forwarding documents to beneficial owners of our stock.
12 | 20172018 Proxy Statement
Information About Our Board and Corporate Governance |
Board Meetings and Attendance |
In | In |
Board Committees |
The Board has the following standing committees: Audit; Corporate Governance; 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.
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All of our committees are comprised of independent directors who meet the independence requirements of the NYSENew York Stock Exchange ("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:
AUDIT COMMITTEE | ||||
Number of Meetings in 2017: 6 | ||||
RESPONSIBILITIES: | COMMITTEE MEMBERS: | |||
The Audit Committee: • 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; | • Bruce J. Nordstrom, Chair • Denis A. Cortese • Richard P. Fox • Dale E. Klein • Humberto S. Lopez • David P. Wagener "The audit function is critical -Bruce Nordstrom | |||
• 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 periodically reviews the principal risks related to the Company's financial statements, audit functions and other major financial risk exposures; • Reviews management's monitoring of the Company's compliance with the Company's Code of Ethics and Business Practices. | ||||
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, 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. | ||||
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CORPORATE GOVERNANCE COMMITTEE | ||||
Number of Meetings in 2017: 5 | ||||
RESPONSIBILITIES: | COMMITTEE MEMBERS: | |||
The Corporate Governance Committee: • 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 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; | • Kathryn L. Munro, Chair • Michael L. Gallagher • Roy A. Herberger, Jr. • Bruce J. Nordstrom "The Corporate Governance -Kathy Munro | |||
• 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 the principal risks relating to the Company's corporate governance policies and practices; • Oversees the Board and committee self-assessments on at least an annual basis; • 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. | ||||
The Corporate Governance Committee periodically reviews and recommends to the Board amendments to the Corporate Governance Guidelines and the Political Participation Policy. The Corporate Governance | ||||
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FINANCE COMMITTEE | ||||
Number of Meetings in 2017: 4 | ||||
RESPONSIBILITIES: | COMMITTEE MEMBERS: | |||
The Finance Committee: • 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, 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; | • Humberto S. Lopez, Chair • Richard P. Fox • Kathryn L. Munro • Paula J. Sims • David P. Wagener "The Finance Committee -Bert Lopez | |||
• 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; • Periodically reviews the principal risks relating to the Company's policies and practices concerning budgeting, financing and credit exposures. | ||||
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HUMAN RESOURCES COMMITTEE | ||||
Number of Meetings in 2017: 7 | ||||
RESPONSIBILITIES: | COMMITTEE MEMBERS: | |||
The Human Resources Committee: • 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; • 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; | • Roy A. Herberger, Jr., Chair • Denis A. Cortese • Richard P. Fox • Humberto S. Lopez • Kathryn L. Munro "The members of the Human -Roy Herberger | |||
• Reviews the number, type, and design of the Company's pension, health, welfare and benefit plans; and • Periodically reviews the principal risks relating to the Company's compensation and human resources 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 | ||||
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NUCLEAR AND OPERATING COMMITTEE | ||||
Number of Meetings in 2017: 4 | ||||
RESPONSIBILITIES: | COMMITTEE MEMBERS: | |||
The Nuclear and Operating Committee: • Receives regular reports from management and monitors the overall performance of Palo Verde; • 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 the principal risks related to the Company's nuclear, fossil generation, transmission and distribution, and EH&S operations; | • Michael L. Gallagher, Chair • Denis A. Cortese • Dale E. Klein • Bruce J. Nordstrom • Paula J. Sims • David P. Wagener "In managing the oversight of -Mike Gallagher | |||
• Receives reports on the Company's sustainability initiatives and strategy; • 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 (the "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. | ||||
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The Board's Leadership Structure |
Lead Director. Kathryn L. Munro serves as the Company's Lead Director and chairs the Corporate Governance Committee. The Lead Director performs the following duties and responsibilities as set forth in our Corporate Governance Guidelines:
These duties and responsibilities do not, however, fully capture Ms. Munro's active role in serving as our Lead Director. For example, Ms. Munro regularly speakshas regular discussions with the CEO, other members of the senior management team and members of the Board in 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.
Chairman and CEO Positions. The Chairman is Donald E. Brandt, the Company's President and CEO. The independent directors believe that Mr. Brandt, as an experienced leader with extensive knowledge of the Company and our industry, serves as a highly effective conduit between the Board and management and that Mr. Brandt provides the vision and leadership to execute on the Company's strategy and create shareholder value. The Board believes that separating the roles of the CEO and Chairman and appointing an independent Board Chairman at this time would simply create an additional level of unneeded hierarchy that would only duplicate the activities already being vigorously carried out by our Lead Director.
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Succession Planning and Board Evaluations |
Management Succession. Our Board places a high priority on senior management development and succession planning. While the Corporate Governance Committee has principal responsibility for overseeing CEO and other senior management succession planning, the full Board is actively involved in reviewing our senior management succession plans that will allow for smooth and thoughtful leadership transitions in the future.
Executive succession planning and senior management development were specific areas of focus for the Corporate Governance Committee in 2017. The Corporate Governance Committee engaged in thorough and thoughtful discussions regarding the development and evaluation of current and potential senior leaders, as well as the development of executive succession plans, including succession plans for our CEO position.
Board Succession. Our Board has developed a robust process to refresh the Board and its leadership significantly over the next several years and beyond. The process 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 process 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 5 of this Proxy Statement. 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 Evaluations. The Corporate Governance Committee has established a thorough evaluation process wherein each Director completes a Board evaluation as well as an individual self-evaluation annually. The Board evaluation allows each Director the opportunity to examine and evaluate the Board's composition and effectiveness, competency, accountability, deliberations and administration, and each committee, as well as the opportunity to identify any skills, experience or expertise the Director believes should be represented, or more fully represented, on the Board. The individual self-evaluation asks each Director to evaluate different areas of their performance as a Director, including independence, expertise, judgment and skills. The Board assessment results are reviewed both on a one-year standalone basis and on a three-year basis in order to identify any year-over-year trends. The assessment results are initially reviewed by the Lead Director. The Lead Director then has a formal annual call with each 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. The results of the evaluations and calls are presented to the Corporate Governance Committee and full Board each February. 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.
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Information About Our Board and Corporate Governance |
The Board's Role in Risk Oversight |
Top risks discussed by the Board and its committees in | 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. The Board focuses on fostering a culture of risk awareness and risk-adjusted decision-making and ensuring that an appropriate "tone at the top" is established. The Board regularly discusses and updates a listing of areas of risk and a suggested allocation of responsibilities for such risks among the Board and the Board committees. The charter for each of our committees requires each committee to periodically review risks in their respective areas. Each committee: • Receives periodic presentations from management about its assigned risk areas; • Receives information about the effectiveness of the risk identification and mitigation measures being employed; and • Discusses their risk reviews with the Board at least annually. |
Consistent with the requirements of the NYSE's corporate governance standards, the Audit Committee periodically reviews the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures. The Audit Committee also reviews the comprehensiveness of the Board's risk oversight activities and the Company's risk assessment process, and plays a coordinating role designed to ensure that no gaps exist in the coverage by the Board committees of risk areas.
The Executive Risk Committee is comprised of senior level officers of the Company and is chaired by the Chief Financial Officer. Among other responsibilities, this Committee is responsible for ensuring that the Board receives timely information concerning the Company's material risks and risk management processes. The Executive Risk Committee provides the Board with a list of the Company's top risks on an annual basis. The internal enterprise risk management group reports to the Vice President, Controller and Chief Accounting Officer, who reports to the Executive Vice President and Chief Financial Officer. The internal risk management group is responsible for (1) implementing a consistent risk management framework and reporting process across APS,the Company, and (2) ensuring that the Executive Risk Committee is informed of those processes and regularly apprised of existing material risks and the emergence of additional material risks.
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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 Committee. The Corporate Governance 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 Committee and to offer his or her resignation for consideration to the Corporate Governance Committee. The Corporate Governance Committee will recommend to the Board the action, if any, to be taken with respect to the tendered resignation.
Director Retirement Policy |
Under the Company's Corporate Governance Guidelines, an individual shall not be 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. This policy shall 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.
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Shareholder Engagement and Communications with the Board |
Our Goal.What our shareholders think is important to us. We seek to maintain a transparent and productive dialogue with our shareholders by:
Our Plan. To accomplish this goal, we have a long-standing investor outreachan established shareholder engagement program conducted throughout the yeardesigned to maintain a dialogue with currentour shareholders, which was further augmented during 2017 in response to what the Board considered a disappointing level of shareholder support for our annual advisory vote on compensation. Each year we strive to respond to shareholder questions in a timely manner, conduct extensive proactive outreach to investors, and potential shareholders.evaluate the information we provide to investors in an effort to continuously improve our engagement. In 2017, we contacted the holders of approximately 50% of the shares outstanding and met with the holders of approximately 40% of the shares outstanding. Our activeLead Director and member of the Human Resources Committee, Kathryn Munro, participated in a number of the shareholder engagement program includes a focus on ensuring that we understanddiscussions providing shareholders with direct access to the governance priorities ofBoard.
Our Results. We listened to our shareholders. Discussion topics include governance best practices,After considering their feedback, the Board makeup, compensation policiesin late 2017 and sustainability. Feedbackearly 2018 made several changes in response:
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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 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.
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Codes of Ethics and APS Core Strategic Framework |
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 Financial Officer, Chief Accounting Officer, Controller, Treasurer, General Counsel, the President and Chief Operating Officer of APS, 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(www.pinnaclewest.com)).
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Core. The Company and APS have adopted Core, which is a strategic framework that sets forth the foundation from which we operate. It defines our vision, mission, critical areas of focus, and values. APS's vision is to create a sustainable energy future for Arizona. APS's mission is to safely and efficiently deliver reliable energy to meet the changing needs of our customers. The critical areas of focus are employees, operational excellence, security, environment, customer value, community, and shareholder value. The framework affirms our corporate values of safety, integrity and trust, respect and inclusion, and accountability. Here is our Core:
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Director Qualifications and Selection of Nominees for the Board |
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. In determining whether an individual should be considered for Board membership, the Corporate Governance Committee considers the following core characteristics:
Their decision-making process should include a willingness to thoroughly discuss issues, ask questions, express reservations and voice dissent.
In addition, the Corporate Governance Committee considers the following qualities, among others: knowledge, including regulatory and political knowledge, and nuclear expertise at the strategic level; understanding of the Company's business environment; and the potential contribution of each candidate to the diversity of backgrounds, experience and competencies which the Board desires to have represented, including large organizational leadership, public company experience and risk oversight skills. The Corporate Governance Committee considers diversity in its selection of nominees utilizing a broad meaning to include not only factors such as race and gender, but also background, experience, skills, accomplishments, financial expertise, professional interests, and professional interests.the potential contribution of each candidate to the diversity of backgrounds, experience and competencies which the Board desires to have represented. The Corporate Governance Committee considers the following qualities as well:
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States. As we plan for our future, Palo Verde plays a large role in shaping the Company's business strategy and the future of our generation mix.
Selection of Nominees for the Board. The Corporate Governance Committee uses a variety of methods to identify and evaluate nominees for a director position. The Corporate Governance Committee regularly assesses the appropriate size of the Board, whether any vacancies on the Board are expected due to retirement or otherwise, and whether the Board reflects the appropriate balance of knowledge, skills, expertise, and diversity required for the Board as a whole. In the event that vacancies are anticipated, or otherwise arise, the Corporate Governance Committee may consider various potential candidates. Candidates may be considered at any point during the year and come to the attention of the Corporate Governance Committee through current Board members, professional search firms or shareholders. The Corporate Governance Committee evaluates all nominees from these sources against the same criteria.
Other than Ms. Sims, all directors were elected at the 2016 Annual Meeting of Shareholders. In recruiting Ms. Sims, the Corporate Governance 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 tests were then interviewed by members of the Corporate Governance Committee and by Mr. Brandt. The Corporate Governance Committee recommended Ms. Sims for Board membership, and Ms. Sims was added to the Board in October 2016.
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Proposal 1 — Election of Directors |
The eleventen nominees for election as directors are set forth below. All nominees will be elected for a one-year term that will expire at the 20182019 Annual Meeting. The directors' ages are as of February 24, 2017.21, 2018. All of our directors also serve as directors of APS for no additional compensation. Individuals receiving the highest number of votes will be elected.
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Donald E. Brandt | | BACKGROUND |
Age Director since 2009 Chairman of the Board, President and CEO Mr. Brandt not only serves as our Chairman of the Board, President and CEO, he has been recognized as a leader in the industry, currently serving as Chairman of Nuclear Energy Institute ("NEI") •
• CEO/senior leadership experience • Complex operations experience • Extensive knowledge of the •
• Nuclear experience • Utility industry experience | | Mr. Brandt has been Chairman of the Board and CEO of the Company since April 2009 and President of the Company since March 2008. He has been President of APS since May 2013, Chairman of the Board of APS since April 2009, and CEO of APS since March 2008. Mr. Brandt also served as President of APS from December 2006 to January 2009. Mr. Brandt has served as an officer of the Company in the following additional capacities: March 2008 to April 2009 as Chief Operating Officer; September 2003 to March 2008 as Executive Vice President; December 2002 to September 2003 as Senior Vice President; and December 2002 to March 2008 as Chief Financial Officer. QUALIFICATIONS As Chairman of the Board, President and CEO of the Company and APS, |
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Denis A. Cortese, M.D. | | BACKGROUND |
Age Director since 2010 Committees • Audit • Human Resources • Nuclear and Operating INDEPENDENT DIRECTOR Dr. Cortese, former President and CEO of Mayo Clinic, a worldwide leader in medical care with operations located throughout the United States, brings the following key attributes to the Company: • Complex operations experience •
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• Financial literacy/accounting • Government/public policy/regulatory • Human resources management/compensation • Risk oversight and management | | Dr. Cortese is the 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. He has held these positions since February 2010. Dr. Cortese has been Emeritus President and Chief Executive Officer of the Mayo Clinic (medical clinic and hospital services) since November 2009, and was President and Chief Executive Officer of the Mayo Clinic from March 2003 until his retirement in November 2009. Dr. Cortese is also 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 |
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Proposal 1 — Election of Directors |
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Richard P. Fox | | BACKGROUND |
Age Director since 2014 Committees • Audit • Finance • Human Resources INDEPENDENT DIRECTOR As a former Managing Partner of Ernst • Audit expertise • Business strategy • Customer perspectives • Financial • Human resources management/compensation • Public board service • Risk oversight and management | | Mr. Fox has served as a consultant and independent board member since 2001 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 QUALIFICATIONS As a former Managing Partner of Ernst |
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Michael L. Gallagher | | BACKGROUND |
Age Director since 1999 Committees • Nuclear and Operating (Chair) • Corporate Governance INDEPENDENT DIRECTOR As a founding member of Gallagher & Kennedy, Mr. Gallagher built a successful law practice in Arizona. In his role as Chair of the Nuclear and Operating Committee, Mr. Gallagher has devoted significant time in becoming familiar with the Company's generation, transmission and distribution operations. Mr. Gallagher has represented the Company before the NRC and has participated on the Company's behalf in meetings of the World Organization of Nuclear Operators. Mr. Gallagher brings the following key attributes to the Company: •
•
•
• Extensive knowledge of the Company's business environment • Finance/capital allocation • Human resources management/compensation • Risk oversight and management | | Mr. Gallagher is Chairman Emeritus of Gallagher & Kennedy P.A. ("Gallagher & Kennedy") in Phoenix, Arizona (an QUALIFICATIONS Mr. Gallagher has represented a broad and diverse spectrum of corporate clients. Mr. Gallagher provides guidance and judgment gained through advising senior management and boards of directors on the varied issues regularly considered by the Board. His knowledge and experience from participating on the boards of other publicly-traded and private companies provides valuable perspective to the Company with regard to business strategy, finance/capital allocation, human resources management and |
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20172018 Proxy Statement | 2931
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Dale E. Klein, Ph.D. | | BACKGROUND |
Age Director since 2010 Committees • Audit • Nuclear and Operating INDEPENDENT DIRECTOR 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: •
•
•
• Government/public policy/regulatory • Human resources management/compensation • Nuclear experience • Utility industry experience | | Dr. Klein served as Chairman of the 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 |
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3032 | 20172018 Proxy Statement
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Humberto S. Lopez | | BACKGROUND |
Age Director since 1995 Committees • Finance (Chair) • Audit • Human Resources INDEPENDENT DIRECTOR Mr. Lopez is an accomplished real estate developer throughout Arizona and brings the following key attributes to the Company: •
• Extensive knowledge of the Company's business • Finance/capital allocation • Financial •
• Investment experience • Risk oversight and management | | Mr. Lopez is Chairman of the Board of HSL Properties, Inc. (real estate development and investment), in Tucson, Arizona. He has held this position since January 2016. Mr. Lopez was President of HSL Properties, Inc. from 1975 to January 2016. QUALIFICATIONS In addition to management and business knowledge, Mr. Lopez brings extensive investment and real estate development expertise to the Company. His understanding of real estate and associated markets has proven to be a valuable asset to the Company due to the importance of those markets in Arizona. Mr. Lopez is also extensively familiar with the Company's business environment, including our customers' perspective and the State's historic economic cycles, which |
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2018 Proxy Statement | 33
Proposal 1 — Election of Directors |
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Kathryn L. Munro | | BACKGROUND |
Age Director since 2000 Lead Director Committees • Corporate Governance (Chair) • Finance • Human Resources INDEPENDENT DIRECTOR 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: •
•
• Extensive knowledge of the Company's business environment • Human resources management/compensation • Investment experience • Public board service • Risk oversight and management | | Ms. Munro is a principal of BridgeWest, LLC (an investment company). She has held this position since July 2003. Ms. Munro was Chairman of BridgeWest, LLC from February 1999 until July 2003. From 1996 to 1998, Ms. Munro served as Chief Executive Officer of Bank of America's ("BofA") Southwest Banking Group and was President of BofA Arizona from 1994 to 1996. Prior to that, Ms. Munro held a variety of senior positions during her 20-year career with BofA. Ms. Munro is also Ms. Munro is the Company's Lead Director. 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, |
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2017 Proxy Statement |34 31| 2018 Proxy Statement
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Bruce J. Nordstrom | | BACKGROUND |
Age Director since 2000 Committees • Audit (Chair) • Corporate Governance • Nuclear and Operating INDEPENDENT DIRECTOR As the President of Nordstrom and Associates and a practicing CPA, Mr. Nordstrom brings the following key attributes to the Company: • Audit expertise • Corporate governance • Customer perspectives • Extensive knowledge of the Company's business environment • Financial • Human resources management/compensation • Risk oversight and management | | Mr. Nordstrom is President of and a certified public accountant at the firm of Nordstrom & Associates, P.C., in Flagstaff, Arizona. He has held this position since 1988. QUALIFICATIONS As the president of an accounting firm, Mr. Nordstrom has an extensive accounting, auditing and financial skill |
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2018 Proxy Statement | 35
Proposal 1 — Election of Directors |
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Paula J. Sims | | BACKGROUND |
Age Director since 2016 Committees • Finance • Nuclear and Operating INDEPENDENT DIRECTOR 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: •
•
•
• Government/public policy/regulatory • Nuclear experience • Risk oversight and management • Utility industry experience | | Ms. Sims is a Professor of Practice and Executive Coach at the University of North Carolina Kenan-Flagler Business School. She has held this position since May 2012. Ms. Sims was Senior Vice President of Corporate Development and Improvement at Progress Energy Inc. from July 2010 to June 2012 and Senior Vice President of Power Operations of Progress Energy from July 2007 to July 2010. QUALIFICATIONS Ms. Sims worked directly in the utility industry for more than 13 years. She brings extensive leadership experience to the Company in business 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 |
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David P. Wagener | | BACKGROUND |
Age Director since 2014 Committees • Audit • Finance • Nuclear and Operating INDEPENDENT DIRECTOR 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: •
•
• Financial literacy/accounting • Investment experience •
• Risk oversight and management • Utility industry experience | | Mr. Wagener is the Managing Partner of Wagener Capital Management, an investment and advisory firm serving utility and private equity companies. He has held this position since June 1995. Mr. Wagener previously held executive positions at Salomon Brothers and Goldman, Sachs & Co. QUALIFICATIONS Mr. Wagener brings to the Board over |
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTEFOR THE
ELECTION OF THE NOMINATED SLATE OF DIRECTORS
Current Director Not Standing for Reelection. Dr. Roy A. Herberger, Jr. will retire from the Board effective at the Annual Meeting. The Board recognizes Dr. Herberger's distinguished service over the years and thanks Dr. Herberger for his tireless labor, devotion and service to the Company.
20172018 Proxy Statement | 3337
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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).
Ten of our eleven directors are independent. | Based on the Board's review, the Board has determined that one of the Company's directors is not independent and that all of the other directors are independent. The independent directors are Messrs. Fox, Gallagher, Lopez, Nordstrom, and Wagener, Drs. Cortese, Herberger and Klein, and Mses. Munro and Sims. Mr. Brandt is not independent under the NYSE rules or the Director Independence Standards because of his employment with the Company. 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. | |
Dr. Cortese is independent under the tests imposed by the NYSE rules and our Director Independence Standards. | Dr. Cortese is an employee of Arizona State University ("ASU") in his capacity as the 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. ASU is considered a part of the reporting entity for the State of Arizona (the "State") for financial reporting purposes and, as such, the State is the entity considered in applying the independence tests. In considering the independence of Dr. Cortese, the Board considered the fact that transactions between the State and the Company and its affiliates consist of providing 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 Board determined that these matters do not impact Dr. Cortese's independence, since amounts paid to or received from the State are less than the dollar thresholds set forth in the NYSE rules and the Director Independence Standards. In addition, Dr. Cortese did not and does not benefit, financially, directly or indirectly, from ASU's business relationships with the Company, most of which consist of receiving electric service at regulated rates. |
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Mr. Fox is independent under the tests imposed by the NYSE rules and our Director Independence Standards. | Mr. Fox serves as a director of Univar, Inc. APS purchases chemicals that are used in the operation and maintenance of our power plants, primarily in controlling our water chemistry, from Univar. However, since: (a) the amounts paid to Univar were less than the dollar thresholds set forth in the NYSE rules and our Director Independence Standards and were less than one percent of the Company's and Univar's revenues for fiscal year | |
Mr. Gallagher is Chairman Emeritus of the law firm of Gallagher and Kennedy, P.A. The law firm did not provide any services to the Company or APS in 2017 and services that were provided to the Company and APS in 2016 and 2015 were less than the dollar thresholds set forth in the NYSE rules and the Director Independence Standards and were less than one percent of the Company's and Gallagher and Kennedy's revenues for fiscal years 2016 and 2015, respectively. 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 Arizona Corporation Commission (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 non-profit organization, the Board determined that these payments did not impact the independence of any director.
20172018 Proxy Statement | 3539
Stock Matters |
Ownership of Pinnacle West Stock |
The following table shows the amount of Pinnacle West common stock owned by the Company's directors, the Named Executive Officers,NEOs, our directors and executive officers as a group, and those persons who beneficially own more than 5% of the Company's common stock. Unless otherwise indicated, each shareholder listed below has sole voting and investment power with respect to the shares beneficially owned.
The address of each of the listed shareholders not otherwise set forth below is P.O. Box 53999, Mail Station 8602, Phoenix, Arizona 85072-3999. Unless otherwise indicated, all information is as of March 9, 2017,2018, the Record Date for the Annual Meeting.
NAME | | NUMBER OF SHARES BENEFICIALLY OWNED(1) (#) | | PERCENT OF CLASS (%) | | NUMBER OF SHARES BENEFICIALLY OWNED(1) (#) | | PERCENT OF CLASS (%) | ||||||
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Directors: | | | | | | | | | ||||||
Donald E. Brandt | | | 234,853 | | | * | | | 105,291 | | | * | ||
Denis A. Cortese, M.D. | | | 14,001 | | | * | | | 13,968 | | | * | ||
Richard P. Fox | | | 5,665 | | | * | | | 6,522 | | | * | ||
Michael L. Gallagher | | | 26,512 | | | * | | | 20,475 | | | * | ||
Roy A. Herberger, Jr., Ph.D. | | | 35,014 | | | * | | | 36,859 | | | * | ||
Dale E. Klein, Ph.D. | | | 13,560 | | | * | | | 15,545 | | | * | ||
Humberto S. Lopez | | | 60,887 | | | * | | | 55,904 | | | * | ||
Kathryn L. Munro | | | 36,039 | | | * | | | 27,776 | | | * | ||
Bruce J. Nordstrom | | | 33,499 | | | * | | | 34,810 | | | * | ||
Paula J. Sims | | | 1,105 | | | * | | | 2,416 | | | * | ||
David P. Wagener | | | 7,638 | | | * | | | 9,221 | | | * | ||
Other Named Executive Officers: | | | | | ||||||||||
Other NEOs: | | | | | ||||||||||
Robert S. Bement | | | 18,226 | | | * | ||||||||
Randall K. Edington | | | 53,351 | | | * | | | 37,630 | | | * | ||
David P. Falck | | | 55,057 | | | * | | | 52,739 | | | * | ||
James R. Hatfield | | | 58,407 | | | * | | | 41,710 | | | * | ||
Mark A. Schiavoni | | | 47,727 | | | * | | | 42,888 | | | * | ||
All Directors and Executive Officers as a Group (22 Persons): | | | 777,403 | | | * | ||||||||
All Directors and Executive Officers as a Group (23 Persons): | | | 596,829 | | | * | ||||||||
5% Beneficial Owners:(2) | | | | | | | | | ||||||
BlackRock, Inc. and certain related entities(3) | | | 10,917,427 | | | 9.80 | | | 11,354,305 | | | 10.20% | ||
State Street Corporation and certain related entities(4) | | | 6,096,873 | | | 5.48 | | | 5,825,397 | | | 5.21% | ||
The Vanguard Group Inc.(5) | | | 10,878,937 | | | 9.77 | | | 12,139,068 | | | 10.86% | ||
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3640 | 20172018 Proxy Statement
stock; as follows: Mr. Brandt — 27,402;28,268; Mr. EdingtonBement — 15,222;7,858; Mr. Falck — 7,617;7,858; Mr. Hatfield — 7,617;7,858; Mr. Schiavoni — 7,617;7,858; Mr. Fox — 772;1,474; Mr. Gallagher — 6,713;7,688; Dr. Klein — 13,460;15,445; Dr. Herberger — 4,865;4,958; and Ms. Munro — 10,996.12,145. The following shares are held jointly: Dr. Klein — 100; and Mr. Nordstrom — 31,999.33,310. The following shares are held in joint trusts: Dr. Cortese — 14,001;13,968; Mr. Edington — 28,382;37,630; Mr. Gallagher — 19,799;12,787; Mr. Hatfield — 40,790;33,852; Dr. Herberger — 20,121;15,848; Mr. Lopez — 60,887;55,904; Ms. Munro — 23,449;13,986; and Mr. Wagener — 7,638.
Section 16(a) Beneficial Ownership Reporting Compliance |
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors and executive officers, and persons who own more than 10% of the Company's common stock, to file reports of ownership and changes of ownership with the SEC. Based solely on the Company's review of these reports, the Company believes that its directors, executive officers, and greater than 10% beneficial owners complied with their respective Section 16(a) reporting requirements for fiscal year 20162017 on a timely basis.
20172018 Proxy Statement | 3741
Related Party Transactions |
The Corporate Governance Committee is responsible for reviewing and approving all transactions with any related party, which consists of any of our directors, director nominees, executive officers, shareholders owning more than 5% of the Company's common stock and, with respect to each of them, their immediate family members and certain entities in which they are an officer or a shareholder, partner, member or other participant who, directly or indirectly, has a substantial ownership interest in or otherwise substantially controls or shares control of such entity (a "Related Party"). This obligation is set forth in writing in our Statement of Policy Regarding Related Party Transactions (the "Policy").
To identify Related Party Transactions, as defined in the Policy, each year the Company requires our directors and officers to complete director and officer questionnaires identifying any transactions with the Company in which a Related Party has an interest. We review Related Party Transactions due to the potential for a conflict of interest. A conflict of interest occurs when an individual's private interest interferes, or appears to interfere, in any way with our interests. The Code of Ethics requires all directors, officers, and employees who may have a potential or apparent conflict of interest to notify the Company's management. In addition, the Policy specifically provides that any Related Party Transaction must be approved or ratified by the Corporate Governance Committee. A "Related Party Transaction" is any transaction or a series of similar transactions in which the Company or any of its subsidiaries is or was a participant, where the amount involved exceeds $120,000 in the aggregate, and in which any Related Party has a direct or indirect material interest, other than:
Based on the Policy, SEC rules, and our review, we had no Related Party Transactions in 2016.2017.
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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 Roy A. Herberger, Jr., Ph.D. | HUMAN RESOURCES COMMITTEE MEMBERS Denis A. Cortese, M.D. Richard P. Fox Humberto S. Lopez Kathryn L. Munro |
20172018 Proxy Statement | 3943
Executive Compensation |
Compensation Discussion and Analysis ("CD&A") |
Named Executive Officers |
Our NEOs for 2017 were:
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Donald E. Brandt Chairman of the Board, President and Chief Executive Officer of PNW and
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James R. Hatfield Executive Vice President and Chief Financial Officer of PNW and | ||||
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Robert S. Bement
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Randall K. Edington Former Executive Vice President and Advisor to the Chief Executive Officer of
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David P. Falck Executive Vice President,
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Mark A. Schiavoni Executive Vice President and Chief Operating Officer of |
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Highlights of our Compensation Program:
At the 2016 Annual Meeting, our shareholders approved the compensation of our Named Executive Officers with an advisory vote of more than 93%, excluding abstentions. The Human Resources Committee (for purposes of this CD&A, the "Committee") was cognizant of this result in its consideration of the key components, design, implementation and amounts of our compensation program. Some highlights of our program are:
40 | 2017 Proxy Statement
Overview of 2016 Company Performance. Pinnacle West is a holding company that derives essentially all of its revenues and earnings from our wholly-owned subsidiary, APS a vertically-integrated electric utility. Pinnacle West's 2016 earnings were $442 million, or $3.95 per share. Additional 2016 accomplishments are discussed in the Proxy Statement Summary under the heading "2016 Performance Highlights."
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.
Role of Executive Officers in Determining Executive Compensation. The Committee makes all compensation decisions relating to our CEO's compensation, makes awards under the 2012 Plan, and determines the awards under the 2016 Incentive Plans, as defined later in this CD&A. 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. 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
2017 Proxy Statement | 41
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the Committee, the CEO or other officers may attend and participate in portions of the Committee's meetings.
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 Frederick W. Cook & Co. to assist the Committee in its evaluation of 2016 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.
Determining The Peer Group. As a regular part of the executive compensation review process, the Committee reviews the peer group annually for its continued appropriateness. As a result of such review, the Committee approved the use of the same peer group that was used in setting 2015 executive compensation. 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 close to the median with respect to revenues (adjusted as explained below). For 2016, the Peer Group consisted of the following predominantly rate-regulated utilities (the "Peer Group"):
In determining both the composition of the Peer Group and the Company's relative position to that group, the number used for APS revenues was adjusted to take revenues attributable to managed assets that APS manages on behalf of itself and other owners, in addition to revenues attributable to assets that APS wholly owns, into account. This adjustment was based on the following:
42 | 2017 Proxy Statement
To reflect this expanded scope of responsibility and risk, APS used a number of $5.2 billion compared to its reported twelve months ending June 30, 2015 revenues of $3.5 billion for determining the Peer Group and its position in the Peer Group. The adjustment placed APS near the median of the Peer Group for revenues. The Committee believes that the senior executives of the Company face challenges in the operation of Palo Verde that require skill sets similar to those of executives at larger Peer Group companies with significant nuclear operations.
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:
From these sources, the Consultant developed a consensus in which the competitive industry comparison for Messrs. Brandt, Hatfield, Falck, and Schiavoni reflects a weighting of one-third proxy statement data, one-third Energy Services Industry Survey, and one-third general industry surveys. Mr. Edington did not have a general industry survey match, so his competitive industry comparison reflects a weighting of one-half proxy statement data and one-half Energy Services Industry Survey. Compensation levels were updated to July 2016 based on projected executive-level market movement from major salary-planning surveys selected by the Consultant.
In providing information to the Committee with respect to setting 2016 compensation, the Consultant reviewed the total compensation of the Named Executive Officers and presented its analysis in October 2015. The Consultant also reviewed the individual elements of compensation, including the type of annual incentives and long-term incentives, and evaluated the competitiveness of the individual elements of compensation of each such officer based on the survey data discussed above.
2017 Proxy Statement | 43
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In its analysis, the Consultant looked at competitive findings for base salary, annual incentive, and long-term equity incentives to the Named Executive Officers as compared to the 25th, 50th and 75th percentile (compensation data was treated at the 25th, 50th or the 75th percentile if it was within +/– 10%). The conclusions of the report as to competitive pay comparisons of the Named Executive Officers for these three compensation elements are as follows:
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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 Named Executive Officers. 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.
In setting Mr. Edington's compensation and entering into his 2012 Supplemental Agreement and 2014 Supplemental Agreement, which are discussed later in the narrative disclosure to the Summary Compensation Table and the Grants of Plan-Based Awards table, the Committee took into account Mr. Edington's critical skills, nuclear expertise, the demand in the competitive marketplace for Chief Nuclear Officers, and his demonstrated performance in significantly improving the operating performance of Palo Verde.
44 | 20172018 Proxy Statement
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 Named Executive Officers. 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. The Committee does allocate between the two forms of equity grants as stated under the heading "Executive Summary" in this CD&A.
Executive |
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 1.2 million customers in 11 of Arizona's 15 counties.
APS is a vertically-integrated, regulated utility company that maintains full operational control of several power plants, including Palo Verde Generating Station, a nuclear power plant and the country's largest power producer of any kind for more than 25 years.
Plants for which APS has full operational control and responsibility include:
Palo Verde is a significant source of our energy supply and while we share ownership of this plant with six other utilities, APS retains full day-to-day operational responsibility. This responsibility includes regulatory responsibility to the NRC. The Company'ssize of Palo Verde and the complexity of running a nuclear plant of this magnitude requires a highly specialized and experienced management team.
Between our CEO and our Executive Vice Presidents, we have more than 200 combined years of experience in the energy industry, including relevant specialized nuclear experience. This highly skilled team has driven strong performance and value creation for our shareholders. 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 program consists of the following components:programs.
In addition, the Company provides pension programs, a deferred compensation program, change of control arrangements and limited perquisites.
20172018 Proxy Statement | 45
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Building Shareholder Value Through Operational Excellence and a Sustainable Energy Future
The chart below indicates how each elementAs Arizona's largest and longest-serving electric company, we're proud of our 2016 executive compensation program was intendedheritage and performance. We also recognize the implications of new technologies and growing customer expectations, which are leading to achievechanges at our compensation objectives of aligning the interests of executivesCompany and shareholders, placingin 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 portion at risk, and attracting and retaining qualified, experienced executives.sustainable energy future:
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| Ensuring a sustainable energy future | ||||||||||||||||
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| • Sustaining our operational excellence • Maintaining our financial strength • Leveraging economic growth | | | • Integrating technology to modernize the grid • Taking steps to address rate design | | ||||||||||||
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2017 Rate Review Order. As an Arizona-based regulated electric utility company, APS periodically submits requests to the ACC for a comprehensive review of our electricity rates. Approval of a rate adjustment enables us to generate revenue with which we fund improvements in our operations and investments that benefit our customers. In June 2016, we initiated our first rate review in five years, and in August 2017, after working with the ACC Staff and key stakeholders, we received approval for our comprehensive rate review. This approval allows for a 3% increase in overall revenues, as well as additional funds for our AZ Sun II rooftop solar program, a refund of surplus of energy efficiency program funds to customers, increased funding for programs assisting limited-income customers, and other key investments in Arizona's energy future. This was an important milestone for us as it allows us to continue making efficient, cost-effective investments while providing safe, reliable service for our customers.
46 | 20172018 Proxy Statement
Compensation DesignTrack Record of Delivering Results
Pay at Risk. The Company believes thatOur management team has maintained a significant portionfocus on our core business of each Named Executive Officer's total compensation opportunity should reflect both upside potentialoperating and downside risk.
The illustrations below show howinvesting in a vertically-integrated electric utility. Under the Company views the allocationleadership of the Named Executive Officers' compensation between guaranteed pay (base salary)senior officer team, since 2009 Palo Verde Generating Station has become one of the top performing nuclear power plants in the U.S., and pay at risk (annual incentive plan, other cash incentives,we have seen strong, sustained gains in shareholder returns and long-term incentives).significant improvements in our credit rating.
2016 CEO Total CompensationPerformance Transformation
2016 Average for Other Named Executive Officers' Total Compensation
During 2017 we continued to Risk-ManagementAssessment. The compensation program is designedApril 30, 2009-December 31, 2017.rewarddeliver strong performance but not encourage unacceptable risk-taking. The Committee evaluates the potential for unacceptable risk-taking in compensation design on an ongoing basis. We believe that the design of our executive compensation program does not unduly incentivize our executives to take actions that may conflict with our risk-based decision-making. Material risk in our compensation design is mitigated in several ways:
20172018 Proxy Statement | 47
Executive Compensation |
Shareholder Engagement and Board Responsiveness
2017 Shareholder Engagement. We have an established shareholder outreach program to maintain a dialogue with our shareholders, and feedback from our shareholders informs our Human Resources Committee's (for purposes of this CD&A, the "Committee") actions. We were disappointed with the level of shareholder support for the 2017 say-on-pay vote, and during the fall following our 2017 Annual Meeting:
2017 Board Responsiveness. As in prior years, the feedback received from shareholders during this outreach was an important input into the Committee's and Board's review process. While many of the investors that we spoke to believed our compensation structure was well-aligned with performance, we received valuable feedback about how we could improve the program and make it more transparent.
Following thoughtful discussion of shareholder feedback and a review of the compensation program, the Committee made several changes that it believes align with feedback received and further support our commitment to pay-for-performance.
48 | 2018 Proxy Statement
Executive Compensation |
2017 Shareholder Feedback and Changes Made in Response
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| Shareholder Feedback Themes | | Human Resources Committee Actions | |||||
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| We can provide better and simpler disclosure | | | • Streamlined our compensation-related disclosure • Provided additional disclosure around our goal setting processes and Committee decisions | | |||
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| Investors are highly focused on the performance-based aspects of our program | | | • Increased the proportion of performance shares in our CEO's and Executive Vice Presidents' 2018 long-term incentive awards from 60% to 70% • Revised 2018 metrics in certain key business units to better align with our priorities and emphasize top quartile performance and/or improve on historical trends • Earnings goals set for 2018 reflect the August 2017 approval of our comprehensive rate review and represent meaningful year-over-year increases • Adopted a formal clawback policy covering short- and long-term incentive awards • Clarified how our performance metrics support and align with our business strategy (pages 54-56) | | |||
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| Questions about retention awards to our CEO | | | • Provided additional disclosure regarding the 2017 CEO Performance-Contingent Award made to our CEO in 2017, including a more detailed discussion of the rationale for the award and the specific goals that must be achieved for payout to occur (page 65) • Provided additional information regarding our succession planning process and how our limited use of performance-contingent awards supports Pinnacle West's continued success (pages 20 and 65) | | |||
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These changes follow several prior changes to our program in recent years as we seek to align our compensation structure with the evolution of our business and the feedback from our shareholders. Recent changes include:
2018 Proxy Statement | 49
Executive Compensation |
2017 Compensation Design
For 2017, the Company's core executive compensation program consisted of the following key components:
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| Pay Element | | Measurement Period | | Performance Link | | Description | |||||||||||||
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| | Base Salary | | | | 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. | | ||||||||||
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| | Annual | | | | | | | | Earnings CEO: 62.5% NEOs: 50.0% | | | Universal measure of business financial performance; encourages achievement of bottom-line earnings growth goals. | | ||||||
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| | Incentives | | | | Cash | | | 1��year | | | Business Unit Performance(1) CEO: 37.5% NEOs: 50.0% | | | Pre-established operational business unit performance goals that include safety, customer satisfaction and operational quality and efficiency metrics. | | ||||
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| | | | | | Performance | | | | | Relative TSR 50% | | | Relative measures incentivize sustained | | |||||
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| | Long-Term Incentives | | | | Shares 60%(2) | | | 3 years | | | Relative Operational Performance(3) 50% | | | shareholder value creation and strong performance on operational benchmarks. | | ||||
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| | | | | | Restricted Stock Units 40%(2) | | | Vest ratably over4 years | | | Stock Price | | | Encourages retention; value dependent upon share price appreciation and four-year vesting to encourage retention. | | ||||
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| | Benefits | | | | We provide benefits, including pension and deferred compensation programs, change of control agreements and limited perquisites, designed to attract and retain our executive talent. | | |||||||||||||
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50 | 2018 Proxy Statement
Executive Compensation |
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.
The charts below illustrate the strong emphasis that we place on performance-based, shareholder-aligned incentive compensation:
2017 CEO Total Compensation 88% at risk | | 2017 Average for Other NEOs' Total Compensation 67% at risk |
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Key 2017 Compensation Decisions
For the year ended December 31, 2017, the Committee approved the following compensation decisions for our NEOs:
Consistent with this methodology, we set the APS 2017 earnings target at $453 million for 2017, essentially flat to 2016 actual earnings of $452 million. Likewise, we set Pinnacle's 2017 target earnings range such that its projected midpoint was $440 million, again essentially flat to Pinnacle's 2016 actual earnings of $442 million. In both cases the earnings goals were set while the decision regarding our comprehensive rate review was still pending. Because we had no visibility to how the rate adjustment would ultimately conclude in mid-2017, the earnings targets excluded any potential impact of a rate adjustment.
Earnings for APS and Pinnacle West for incentive plan purposes were 7% and 8% above the 2017 targets, respectively as shown on pages 57 and 58. The improvement in 2017
2018 Proxy Statement | 51
Executive Compensation |
earnings was driven in part by effective cost controls and higher revenues. To be consistent with the exclusion of rate adjustment revenues in setting the earnings targets, actual results were adjusted to also exclude the impact of 4.5 months' worth of additional revenues from our rate adjustment, which became effective August 19, 2017. Actual results were further adjusted as permitted by the 2017 Incentive Plans to reflect unusual or non-recurring matters, primarily the impact of a reduction in deferred taxes due to the implementation of the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), which became effective December 2017.
As noted above on page 49, our 2018 goals reflect the approval of our 2017 rate adjustment and thus a meaningful year-over-year increase in the target.
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:
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| Compensation Governance | | ||||
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| | | Shareholder feedback informs compensation program design | | | |
| | Substantial proportion of target compensationis at risk (88% for the CEO and 67% for other NEOs) | | |||
| | | Performance shares are 100% tied torelativeperformance (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 with our NEOs | | |||
| | | Anti-hedging and anti-pledging policy | | | |
| | Stock ownership guidelines for all NEOs (all NEOs' actual ownership levels exceed guidelines) | | |||
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52 | 2018 Proxy Statement
Executive Compensation |
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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:
Executive Compensation Components |
Base Salary
Base salaries are set at competitive levels to attract and retain qualified, experienced executives. Salary levels are based on multiple metrics, thereby minimizing the ability of the executiveexperience, performance and responsibilities, and benchmarked to manipulate incentive results;
In addition, the Committee has reviewed the overall compensation program for the Company's employees and has concluded that its program is balanced and does not encourage imprudent risk-taking. Employee compensation generally consists of some or all of the compensation components described in this CD&A. Equity award agreements for our management employees contain a similar prohibition in respect of shares received by them under such awards.
2016 Compensation
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.
In December of 2015,2016, the Committee, based on the considerations set forth above, made the following adjustments to the base salaries of the following Named Executive OfficersNEOs for fiscal year 2016:2017:
NAME | 2015 BASE SALARY ($) | 2016 BASE SALARY ($) | ||
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Mr. Brandt | 1,277,000 | 1,315,000 | ||
Mr. Hatfield | 593,000 | 620,000 | ||
Mr. Falck | 544,000 | 565,000 | ||
Mr. Schiavoni | 640,000 | 680,000 | ||
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| Name | | 2016 Base Salary | | 2017 Base Salary | |||||||
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| | Mr. Brandt | | | | $1,315,000 | | | | $1,355,000 | | |
| Mr. Hatfield | | | $620,000 | | | $640,000 | | ||||
| | Mr. Bement | | | | $575,000 | | | | $600,000 | | |
| Mr. Falck | | | $565,000 | | | $585,000 | | ||||
| | Mr. Schiavoni | | | | $680,000 | | | | $710,000 | | |
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Effective January 1, 2016, Mr. Edington's baseEdington retired on March 22, 2017 and his salary increased from $1,050,000remained at $1,100,000 for 2017.
Annual Cash Incentives
Our annual cash incentives are strongly performance-based and designed to $1,100,000 pursuantboth reward achievement of pre-determined annual performance objectives that are critical to the 2014 Supplemental Agreement. The 2014 Supplemental Agreementour business operations and to attract and retain qualified, experienced executives. Performance for NEOs is definedmeasured based on relevant and objective earnings and business unit metrics.
482018 Proxy Statement | | 2017 Proxy Statement53
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The Committee approved the CEO Incentive Plan Messrs. Hatfield, Falck and Schiavoni participated in December 2015, which covered Mr. Brandt. Also in December 2015, acting on the recommendation of the Committee, the Board approved the APS 20162017 Annual Incentive Award Plan (the "APS Incentive Plan"), which covered and Messrs. Hatfield, Falck,Bement and Schiavoni, andEdington participated in the APS 20162017 Annual Incentive Award Plan for Palo Verde Employees (the "Palo Verde Incentive Plan"), which covered Mr. Edington. .
The APS Incentive Plan and the Palo Verde Incentive Plan are collectively referred to as the "APS Incentive Plans," and the APS Incentive Plans and the CEO Incentive Plan are collectively referred to as the "2016"2017 Incentive Plans". In December 2016, the Committee approved the CEO Incentive Plan and the Board, on the recommendation of the Committee, approved the APS Incentive Plans."
CEO2017 Incentive Plan Award OpportunityOpportunities
The CEO Incentive Plan provided the CEO an incentive opportunity based on specific achievements of both Pinnacle West earnings goals and performance goals across APS's operating business units. The award opportunity
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| NEO | | Threshold (% of Salary) | | Target (% of Salary) | | Maximum (% of Salary) | | 2017 Actual (% of Salary) | | 2017 Actual ($) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Mr. Brandt | | | | 50% | | | | 125%(1) | | | | 200% | | | | 170.8% | | | | $2,314,340 | | |
| Mr. Hatfield | | | 17.5% | | | 70% | | | 140% | | | 105.3% | | | $673,994 | | |||||||
| | Mr. Bement | | | | 18.75% | | | | 75% | | | | 150% | | | | 132.0% | | | | $792,000 | | |
| Mr. Edington | | | 16.25% | | | 65% | | | 130% | | | 25.4% | | | $279,264(2) | | |||||||
| | Mr. Falck | | | | 16.25% | | | | 65% | | | | 130% | | | | 98.5% | | | | $576,155 | | |
| Mr. Schiavoni | | | 18.75% | | | 75% | | | 150% | | | 114.6% | | | $813,633 | | |||||||
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INCENTIVE AWARD COMPONENT | INCENTIVE OPPORTUNITY (% OF BASE SALARY) | % WEIGHTING | ||
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| | | | |
• Achievement of Threshold PNW Earnings | 50% | 25% | ||
• PNW Earnings in Excess of Threshold | Up to 75% | 37.5% | ||
Total Earnings Component Opportunity | Up to 125% | 62.5% | ||
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• Total Business Unit Performance Component Opportunity (consists of performance of the Corporate Resources, Customer Service, Fossil Generation, Palo Verde, and Transmission and Distribution business units under the APS Incentive Plans, each weighted equally) | Up to 75% | 37.5% | ||
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Total 2016 CEO Incentive Award | 200% | 100% | ||
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The— the Committee structured the CEO Incentive Plan so that if Pinnacle West earnings came in at the mid-point between threshold and maximum amounts ($437 million) and each business unit achieved its target performance levels, Mr. Brandt would receive an incentive award equal to 125% of his 20162017 base salary.
Assessing Performance and Payouts
The Board oversees the Company's business strategy. The Company believedmaintains 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 the mid-point number represented a reasonable expectation ofthey 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 for 2016. With respect to theand business unit goals, which tie payouts directly to core measures of business performance component, the CEO Incentive Plan provided detailed metrics against which Mr. Brandt's performance was measured. The CEO Incentive Plan also limited the Committee's abilityand key operational business unit results and ultimately serve to exercise discretion to increase Mr. Brandt's award beyond the parameters described in the table above so that discretion could only be exercised to account for unanticipated events (there were none in 2016) that might arise during the performance period.enhance shareholder value.
2017 Proxy Statement |54 49| 2018 Proxy Statement
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2017 Annual Incentive Plan Component Summary
Earnings Component of the CEO Incentive Plan
Target Setting
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In designing the CEO Incentive Plan,annual cash incentives, the Committee set thesets earnings levels above based on a reasonable range of expectations for the year, while taking into account prior year performance and economic conditions. The CEO Incentive Plan provided that if
Due to the threshold earnings number is not met, no incentive payment will be awarded, regardless of business unit performance.
The earnings componentregulated nature of the CEOutility 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.
2017 Earnings Goals. For fiscal year 2017, the Committee set threshold, target and maximum Pinnacle West and APS earnings goals above prior year goals, however, as discussed previously, target earnings were set relatively flat to achieved earnings for purposes of the 2017 Incentive Plan accounted for 62.5%Plans since at the time 2017 goals were set, the outcome of Mr. Brandt's incentive opportunity. BecauseAPS's rate review was still pending and the timing of the decision and magnitude of impact on Pinnacle West's actualrevenues was as yet undetermined. As a result, fiscal 2017 earnings of $442 million exceededgoals were set based on the threshold specified by the plan, Mr. Brandt achieved the threshold incentive opportunity of 50% of base salary. In calculating the achievementexpectation of earnings in excess of threshold, actual earnings equated to a level of 55%the context of the range between the thresholdbusiness and maximum levels. This 55% achievement applied to his remainingeconomic conditions at that time, and did not take into account any projection of revenue and earnings related opportunity of up to 75% of base salary, resulted in a 41.3%new rate environment.
The August 2017 approval of our comprehensive rate review is reflected in earnings goals set for 2018. Given the increase in revenues enabled by the rate adjustment, 2018 earnings goals represent meaningful year-over-year increases in the earnings metrics in our annual incentive award for earnings achieved in excess of the threshold level. Combined, this resulted in a 2016 earnings component award of 91.3% of Mr. Brandt's base salary, out of a maximum opportunity of 125% of base salary.plans.
50 | 2017 Proxy Statement
Business Unit Component of the CEO Incentive Plan
Target Setting
The business unit performancemetrics component opportunity of the CEO Incentive Plan accounted for 37.5%our annual plan ensures that our compensation program appropriately focuses our employees on core measures of Mr. Brandt's incentive opportunity. This component was based on the achievementoverall Company health and performance. Our use of specific performance goals established for the Corporate Resources, Customer Service, Fossil Generation, Palo Verde, and Transmission and Distribution business units, each weighted equally. The details about these performance metrics are set forth in the Business Unit Components of the APS Incentive Plans section on page 53 of this Proxy Statement. The incorporation of the business unit performance metrics into the CEO Incentive Plan was designed to tie Mr. Brandt'sin our NEOs' incentive to the overall operational performance of the business units, and not to emphasize any one unit's performance over the others. The performance of the business units in 2016 against these metrics was as follows:
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Under the terms of the CEO Incentive Plan, the business unit performance results were averaged, converted to a percentage of the maximum achievement opportunity and then applied to the CEO's maximum performance-related incentive opportunity for this component. This resulted in a component award of 54% of Mr. Brandt's base salary, out of a maximum opportunity of 75% of base salary. Based on the sum of the 91.3% achievement of the earnings component and the 54% achievement of the business unit performance component, Mr. Brandt's total incentive award equaled 145.3% of base salary, resulting in an award of $1,910,695.
The Committee determined Mr. Brandt's incentive award exclusively on the metrics set forth in the CEO Incentive Plan, and did not exercise any discretion to make adjustments to the award based on unanticipated events.plans promotes our
20172018 Proxy Statement | 5155
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continued success as a safe, sustainable, and overall well-run vertically-integrated and regulated electric utility.
APS Incentive Plans Award Opportunity
Determination Process.
The award opportunity under the 2016 Incentive Plans for Messrs. Hatfield, Edington, Falck, and Schiavoni was as follows:
NAME | | EARNINGS (% OF BASE SALARY) | | BUSINESS UNIT PERFORMANCE (% OF BASE SALARY) | | TOTAL INCENTIVE OPPORTUNITY (% OF BASE SALARY) | | |||
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| | | | | | | | |||
Mr. Hatfield: | | APS Earnings | | Corporate Resources Business Unit (Finance/Accounting, Human Resources and Information Technology) | | | | | ||
Threshold | | — | | 17.5% | | | 17.5 | % | | |
Target | | 35.0% | | 35.0% | | | 70.0 | % | | |
Maximum | | 70.0% | | 70.0% | | | 140.0 | % | | |
Mr. Edington: | | APS Earnings | | Palo Verde Business Unit | | | | | ||
Threshold | | — | | 16.25% | | | 16.25 | % | | |
Target | | 32.5% | | 32.5% | | | 65.0 | % | | |
Maximum | | 65.0% | | 65.0% | | | 130.0 | % | | |
Mr. Falck: | | APS Earnings | | Corporate Resources Business Unit (Legal) | | | | | | |
Threshold | | — | | 16.25% | | | 16.25 | % | | |
Target | | 32.5% | | 32.5% | | | 65.0 | % | | |
Maximum | | 65.0% | | 65.0% | | | 130.0 | % | | |
Mr. Schiavoni: | | APS Earnings | | Corporate Resources (Resource Management, Supply Chain, and Sustainability), Customer Service, Fossil Generation, and Transmission and Distribution Business Units (1/4 each) | | | | | ||
Threshold | | — | | 18.75% | | | 18.75 | % | | |
Target | | 37.5% | | 37.5% | | | 75.0 | % | | |
Maximum | | 75.0% | | 75.0% | | | 150.0 | % | | |
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In addition to the specific business unit performance measures described below, the APS Incentive Plans allowed the Committee to make adjustments for individual performance (the Committee did not make any such adjustments for the Named Executive Officers in 2016). The Committee could also exercise discretion under the APS Incentive Plans due to unanticipated events that might arise during the performance period.
Earnings Components of the APS Incentive Plans
In designing the APS Incentive Plans, the Committee set the earnings levels above based on a reasonable range of expectations for the year, while taking into account prior year performance
52 | 2017 Proxy Statement
and economic conditions. The APS Incentive Plan provided that if the threshold earnings number is not met, no incentive payment will be awarded, regardlessdetermination of business unit performance.metrics and targets is a year-long, multi-step process guided by our strategic priorities. The Palo Verde Incentive Plan provided that ifBoard oversees the threshold earnings number is not met,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. Individual business unit targets are developed using a variety of methods depending on the APS portionmetric under consideration, including internal trends, external considerations, opportunities to improve performance, and use of the incentive payment would not be awarded.
In considering the 2016 awards under the APS Incentive Plans, the Committee adjusted the APS earnings numberindustry benchmark data. Targets are intended to reflect certain costs that supported APS's positions on a solar net metering ballot initiative in Arizona and political participation costs that were incurred primarily for the benefit of APS and its customers but booked at Pinnacle West (no adjustments were made to the Pinnacle West earnings number). The net effect of these adjustments was to reduce APS earnings from $462 million to $452 million for purposes of the 2016 awards. Under the APS Incentive Plans, the calculated incentive award was proportional to the actual earnings achieved in excess of thresholdincentivize performance level. APS's earnings of $452 million exceeded both the threshold and target earnings levels.
Business Unit Components under the APS Incentive Plans
while still being attainable. The business unit performance measures were tied to operational excellence, shareholder value, environmental stewardship,metrics and targets are then shared and discussed with the Committee and the Board before final metrics tied to customers, communities and our employees. Individualtargets are approved by the Committee and the Board.
Under the business unit measures that could be directly correlated to earnings were set at levels that, if achieved at target, would contribute to earnings being achieved at target. However, somecomponents of the measures, like safety and customer satisfaction, were not directly correlated to earnings, and were instead set with reference to prior year performance and a reasonable range of expectations of performance of comparable companies in our industry. The following tables disclose2017 Incentive Plans, the performance targets, actual results, and the percentage of target performance achieved for the Corporate Resources, Customer Service, Fossil Generation, Palo Verde, and Transmission and Distribution business units. Performance of the applicable functional operational units of the Corporate Resources business unit was responsible for 50% of the overall 2016 incentive target opportunity for Messrs. Hatfield and Falck, performance of the Palo Verde business unit was responsible for 50% of the overall 2016 incentive target opportunity for Mr. Edington, and the performance of the applicable functional operational units of the Corporate Resources, Customer Service, Fossil Generation, and Transmission and Distribution business units were each weighted equally and, together comprised 50% of the overall 2016 incentive target opportunity for Mr. Schiavoni.
Business Unit Metrics Calculations. The range of potential achievement for each business unit metric was zero to 200% of the target level. The percentages attributable to weighting in the tables below reflect the weight of each measure as a percentage of the applicable Named Executive Officer's 2016 incentive target opportunity. The percentage of target performance achieved reflects the comparison of our actual achievement of a particular measure for 2016 to the target established for that measure. In addition to a target level, some of the performance measures also provided for a threshold level (equal to 50% of target) and a maximum level (equal to 200% of target). 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.
2017 Business Unit Goals.The Palo Verde2017 Incentive Plan provided that Palo Verde's overallPlans measured NEOs on pre-established business unit performance was requiredin up to achieve at least 100% of the target level for 2016 before Mr. Edington could receive
2017 Proxy Statement | 53
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any payout under the APS earnings portion. The overall Palo Verde business unit performance for 2016 was 190% of target, so this hurdle requirement was met.
Mr. Hatfield's business unit performance metrics (50% of the overall opportunity) were as follows:
CORPORATE RESOURCES PERFORMANCE MEASURES AND WEIGHTING | MEASURE | TARGET | ACTUAL RESULTS | % OF TARGET PERFORMANCE ACHIEVED | ||||
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Finance/ Accounting Measures — 16.67%: | ||||||||
Employees — 2.50% | Total Corporate Resources OSHA Recordable Incidents (2.50%) | 3 | 3 | 100% | ||||
Operational Excellence — 10.0% | Average of All Four Business Unit Results (10.0%)(1) | 100% | 147% | 147% | ||||
Shareholder Value — 4.17% | Total Corporate Resources Operating and Maintenance Budget (4.17%) | Budget | 0.2% Under Budget | 110% | ||||
Finance/Accounting Results | 131% | |||||||
Human Resources Performance Measures — 16.67%: | ||||||||
Employees — 2.50% | Total Corporate Resources OSHA Recordable Incidents (2.50%) | 3 | 3 | 100% | ||||
Operational Excellence — 10.0% | Average of All Four Business Unit Results (10.0%)(1) | 100% | 147% | 147% | ||||
Shareholder Value — 4.17% | Total Corporate Resources Operating and Maintenance Budget (4.17%) | Budget | 0.2% Under Budget | 110% | ||||
Human Resources Results | 131% | |||||||
Information Technology Performance Measures — 16.67%: | ||||||||
Employees — 2.50% | Total Corporate Resources OSHA Recordable Incidents (2.50%) | 3 | 3 | 100% | ||||
Operational Excellence — 11.67% | Capital Project Execution (1.67%) | 90% | 100% | 200% | ||||
Average of All Four Business Unit Results (10.0%)(1) | 100% | 147% | 147% | |||||
Shareholder Value — 2.50% | Total Corporate Resources Operating and Maintenance Budget (2.50%) | Budget | 0.2% Under Budget | 110% | ||||
Information Technology Results | 140% | |||||||
Overall Hatfield Incentive Result | 134% | |||||||
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The CEO was evaluated against metrics within each of these five categories to tie the Corporate Resources areas overseen by Mr. HatfieldCEO's incentive to overall operational performance of the Company, and reflected as suchnot to emphasize any one unit's performance over the others. Other NEOs were evaluated based on performance in the table above. The weight of this metricbusiness units that correlate to their responsibilities.
See "Business Unit Components Under the 2017 Incentive Plans" on page 59 for Mr. Hatfield emphasizesadditional details regarding the goal of the various Corporate Resources areasmetrics, targets and 2017 achievement levels for each business unit. As discussed above, we have revised our 2018 metrics in supporting the Company'scertain key business units.
5456 | 20172018 Proxy Statement
historical trends, with year-over-year backtesting conducted to ensure that we are maintaining or increasing the rigor of our goals.
2017 Annual Cash Incentive Outcomes
CEO Incentive Plan
Earnings Component. For Mr. Falck'sBrandt, the earnings portion of the annual cash incentive was determined based on PNW earnings. The component was weighted at 62.5% of the award, with 25% of the award (50% of base salary) earned based on achievement of threshold performance. The CEO Incentive Plan provided that if the threshold earnings number is not met, no incentive payment will be awarded, regardless of business unit performance metrics (50%performance.
Under the terms of the overall opportunity) were as follows:CEO Incentive Plan, earnings calculations are made excluding the impact of rate adjustments related to actions of the ACC within the plan year, and the Committee evaluates the impacts of unusual or non-recurring adjustments on actual earnings and may make adjustments to reflect such impacts. As such, the Committee adjusted the Pinnacle West earnings number to exclude primarily the impacts of the rate adjustment and the impact of the 2017 Tax Act. The net effect of these adjustments was to reduce Pinnacle West earnings from $488.5 million to $475.4 million.
CORPORATE RESOURCES PERFORMANCE MEASURES AND WEIGHTING | MEASURE | TARGET | ACTUAL RESULTS | % OF TARGET PERFORMANCE ACHIEVED | ||||
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Employees — 7.50% | Total Corporate Resources OSHA Recordable Incidents (7.50%) | 3 | 3 | 100% | ||||
Operational Excellence — 30.00% | Average of all Business Units Results (30.00%) | 100% | 147% | 147% | ||||
Shareholder Value — 12.50% | Total Corporate Resources Operating and Maintenance Budget (12.50%) | Budget | 0.2% Under Budget | 110% | ||||
Overall Falck Incentive Result | 131% | |||||||
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| Metric | | Threshold | | Midpoint | | Maximum | | 2017 Actual | |||||||||||
| PNW Earnings | | | $390 | | | $440(1) | | | $490 | | | $475.4 | | ||||||
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Business Unit Component. As noted above, Mr. Brandt was evaluated against metrics within each of the five business unit areas to tie his incentive to overall operational performance. The business unit component of the CEO Incentive Plan was weighted at 37.5% of the award.
See "Business Unit Components Under the 2017 Incentive Plans" for detailed goals and achievement levels for each business unit.
2017 CEO Incentive Plan Results
The metrics, weightings, and results for Mr. Brandt under the 2017 CEO Incentive Plan are outlined below:
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 37.5% Business Unit Performance | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NEO | | 62.5% PNW Earnings | | Corporate Resources | | Customer Service | | Fossil Generation | | Palo Verde | | Transmission / Distribution | | 2017 Total | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Mr. Brandt | | | | 171%(1) | | | | 142%(2) | | | | 94% | | | | 160% | | | | 190% | | | | 174% | | | | 152% | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighting | | | (62.5%) | | | (7.5%) | | | (7.5%) | | | (7.5%) | | | (7.5%) | | | (7.5%) | | | (37.5%) | | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
20172018 Proxy Statement | 5557
Executive Compensation |
Mr. Brandt's incentive award was determined exclusively based on the metrics set forth in the CEO Incentive Plan. Other than the earnings adjustments previously discussed that were contemplated by the terms of the CEO Incentive Plan, the Committee did not exercise any discretion to make adjustments to the award based on unanticipated events.
APS Incentive Plans
Earnings Component. For all NEOs other than the CEO, the earnings portion of the annual cash incentive was weighted at 50% of the award and determined based on APS earnings. The APS Incentive Plan provided 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 provided that if the threshold earnings number is not met, the APS 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 2017 before Messrs. Edington and Bement could receive any payout under the APS earnings portion.
Under the terms of the APS 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 APS earnings number to exclude primarily the impacts of the rate adjustment and the impact of the 2017 Tax Act. The net effect of these adjustments was to reduce APS earnings from $504.3 million to $483.8 million.
| | | | | | | | | | | | | | | | | | | | |
| | Performance (in millions) | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Metric | | Threshold | | Target | | Maximum | | 2017 Actual | | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| APS Earnings | $403 | $453 | $503 | $483.8 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Business Unit Component. As indicated above, NEOs other than the CEO are evaluated based on performance in the business units that correlate to their responsibilities. The business unit component for each NEO other than the CEO was weighted at 50%, with multiple business unit results averaged for applicable NEOs. The APS Incentive Plans allow the Committee to make adjustments for individual performance, and the Committee may exercise discretion under the APS Incentive Plans due to unanticipated events that might arise during the performance period. The Committee did not make any such adjustments for the NEOs in 2017.
See "Business Unit Components Under the 2017 Incentive Plans" for detailed goals and achievement levels for each business unit.
58 | 2018 Proxy Statement
Executive Compensation |
2017 APS Incentive Plan Results
The metrics, weightings, and results for Messrs. Hatfield, Falck, and Schiavoni under the APS Incentive Plan, and Messrs. Bement and Edington under the Palo Verde Incentive Plan, are outlined below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 50% APS | | 50% Business Unit Performance | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NEO | | Earnings | | Corporate | | Customer | | Fossil | | Palo | | Transmission / | | 2017 | | ||||||||||||||||
| | | | | Resources | | Service | | Generation | | Verde | | Distribution | | Total | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Hatfield | | 162% | | 139%(1) | | | | | | | | | | 139% | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighting | (50.0%) | (50.0%) | (50.0%) | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Bement | | 162% | | | | | | | | 190% | | | | 190% | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighting | (50.0%) | (50.0%) | (50.0%) | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Edington(2) | | 162% | | | | | | | | 190% | | | | 190% | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighting | (50.0%) | (50.0%) | (50.0%) | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Falck | | 162% | | 141%(3) | | | | | | | | | | 141% | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighting | (50.0%) | (50.0%) | (50.0%) | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mr. Schiavoni | | 162% | | 146%(4) | | 94% | | 160% | | | | 174% | | 144% | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighting | (50.0%) | (12.5%) | (12.5%) | (12.5%) | (12.5%) | (50.0%) | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Business Unit Components under the 2017 Incentive Plans
The following table summarizes the metrics used for each business unit, in addition to individual weightings, targets, and 2017 results. The percentage of target performance achieved reflects the comparison of our actual achievement of a particular measure for 2017 to the target established for that measure.
| | | | | | | | | | | | | | | | | | | | |
Business Unit Measures and Weighting | | Measure | | Target | | Actual Results | | % of Target Performance Achieved | | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Corporate Resources | | | ||||||||||||||||||
| (Communications; Finance/Accounting; Human Resources; Legal; Public Policy; Supply Chain) | 141% | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Employees (15%) | OSHA Recordables(1) (15%) | 2 | 5 | 0% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Operational Excellence (60%) | Average of All Business Unit Results(2) (60%) | 100% | 154.6% | 155% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Shareholder Value (25%) | Total Corporate Resources O&M Budget (25%) | Budget | 1.9% Under Budget | 193% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Corporate Resources (Information Technology) | 135% | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Employees (15%) | OSHA Recordables(1) (15%) | 2 | 5 | 0% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Operational Excellence (70%) | Average of All Business Unit Results(2) (60%) | 100% | 154.6% | 155% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Capital Project Execution (10%) | 90% | 91.43% | 129% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Shareholder Value (15%) | Total Corporate Resources O&M Budget (15%) | Budget | 1.9% Under Budget | 193% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
2018 Proxy Statement | 59
|
Mr. Edington's business unit performance metrics (50% of the overall opportunity) were as follows:
PALO VERDE PERFORMANCE MEASURES AND WEIGHTING | MEASURE | TARGET | ACTUAL RESULTS | % OF TARGET PERFORMANCE ACHIEVED | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | ||||||||||||||||||||
Employees — 11.25% | Reactivity Management (2.00%) | 95 | 97 | 200% | ||||||||||||||||||||||||
Site Safety (2.50%) | 10 G/W; No Red | 12 G/W | 200% | |||||||||||||||||||||||||
| INPO Recordable Rate (2.50%) | £ 0.110 | 0.05 | 200% | | | | | | | | | | | | | | | | | | | | |||||
Collective Radiation Exposure (1.75%) | 70 | 64.4 | 200% | Business Unit Measures and Weighting | | Measure | | Target | | Actual Results | | % of Target Performance Achieved | | |||||||||||||||
| Voluntary Protection Permit (2.50%) | STAR 3-Year Frequency | Star 5-Year Frequency | 200% | | | | | | | | | | | | | | | | | | | | | ||||
Operational Excellence — 15.00% | Site Capacity Factor (10.00%) | 91.5% | 93.2% | 200% | ||||||||||||||||||||||||
| Spring Outage (2.50%) | £ 31 Days | 36 Days | 0% | Corporate Resources (Resource Management) | 155% | | |||||||||||||||||||||
Fall Outage (2.50%) | £ 31 Days | 29 Days | 200% | |||||||||||||||||||||||||
Performance Improvement — 13.75% | Equipment Reliability Index (2.50%) | 93 | 98 | 200% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Corrective Action Performance Scorecard (2.50%) | 12 G/W; No Red | 14 G/W | 200% | Employees (15%) | OSHA Recordables(1) (15%) | 2 | 5 | 0% | ||||||||||||||||||||
| Site Clock Resets (Less Safety) (2.50%) | 1 | 0 | 200% | | | | | | | | | | | | | | | | | | | ||||||
Site Operational Focus Indicator (3.75%) | 14 | 16 | 200% | ERMG Violations (20%) | 5 | 4 | 150% | |||||||||||||||||||||
| Continuous Improvement Process (2.50%) | 500 | 922 | 200% | | | | | | | | | | | | | | | | | | | ||||||
Shareholder Value — 10.00% | Operating and Maintenance Budget (7.50%) | £ Budget and 10 Months Forecast Cash Flow Performance ±5% | $8.7M Under Budget and Cash Flow at Maximum Performance | 200% | ||||||||||||||||||||||||
Operational Excellence (60%) | Passing EIM T-55 Hourly Balancing Test (20%) | 90% | 94.2% | 184% | ||||||||||||||||||||||||
| Capital Budget (2.50%) | £ Budget and 6 Months Forecast Cashflow Performance ±10% | $1.1M Under Budget and Cash Flow at Maximum Performance | 200% | | | | | | | | | | | | | | | | | | |||||||
Overall Edington Incentive Result | 190% | |||||||||||||||||||||||||||
Transmission Unreserved Use (20%) | $150K | $65.0 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Shareholder Value (25%) | Total Corporate Resources O&M Budget (25%) | Budget | 1.9% Under Budget | 193% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
| Corporate Resources (Sustainability) | 142% | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Employees (15%) | OSHA Recordables(1) (15%) | 2 | 5 | 0% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Operational Excellence (70%) | Average of All Business Unit Results(2) (60%) | 100% | 154.6% | 155% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Capital Project Execution (10%) | 90% | 96.77% | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||
Shareholder Value (15%) | Total Corporate Resources O&M Budget (15%) | Budget | 1.9% Under Budget | 193% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
| Palo Verde(3)(4) | 190% | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Reactivity Management (4%) | 95 | 97.4 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Employees (22.5%) | Site Safety Index(5) (5%) | 5 G/W; No Red | 6 of 6 G | 200% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
INPO Recordable Rate (5%) | £ 0.110 | 0.256 | 0% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Collective Radiation Exposure (3.5%) | 70 | 55.02 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Accreditation (5%) | Split Vote | Unanimous | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Site Capacity Factor (20%) | 92% | 93.8 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Operational Excellence (30%) | Spring Outage Days (5%) | £ 31 | 30D 23H | 200% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Fall Outage Days (5%) | £ 31 | 30D 18H | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Equipment Reliability Index (5%) | 93 | 98 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Corrective Action Performance Scorecard (CAP)(5) (5%) | 4 G/W; No Red | 5 G/W | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Performance Improvement (27.5%) | Site Clock Resets (Less Safety) (5%) | 1 | 0 | 200% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Site Operational Focus Indicator(5) (of 8) (7.5%) | 7 G/W; No Red | 8 of 8 G/W | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Continuous Improvement Process (5%) | 800 | 1,018 | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Shareholder Value (20%) | O&M Budget (15%) | ³ $1.25M Under Budget & 10 Months Forecast Cashflow Performance ±5% | $6.2M Under & 12 months | 200% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Capital Budget (5%) | £ Budget & 10 Months Forecast Cashflow Performance ±10% | $8.5M Under & 12 months | 200% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
| Customer Service | 94% | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
Employees (15%) | OSHA Recordable Incidents (15%) | 1 | 3 | 0% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Self-Service Transactions per Customer (20%) | 8.53 | 8.66 | 165% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Operational Excellence (45%) | Average Speed to Answer (in seconds) (10%) | 157 | 234 | 0% | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||
Percentage of Billing To-Dos Completed by Day 3 (15%) | 93.71% | 64.95% | 0% | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
5660 | 20172018 Proxy Statement
Mr. Schiavoni's
| | | | | | | | | | | | | | | | | | | | |
Business Unit Measures and Weighting | | Measure | | Target | | Actual Results | | % of Target Performance Achieved | | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Customer Value (15%) | Customer Outcome Satisfaction – CCT (15%) | 85% | 82.6% | 76% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Shareholder Value (25%) | Customer Service O&M Budget (25%) | Budget | 2.6% Under Budget | 200% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Fossil Generation | 160% | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Employees (15%) | OSHA Recordable Incidents (15%) | 6 | 4 | 200% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Fleet Summertime Equivalent Availability Factor(6) (20%) | 91.8% | 87.44% | 0% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Operational Excellence (70%) | G&O Start-up Reliability (20%) | 98.0% | 99.05% | 200% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Capital Project Execution (20%) | 95% | 98.44% | 200% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Fossil EH&S Repeat Deficiencies (10%) | 16 | 7 | 200% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Shareholder Value (15%) | Net Operating Expense (15%) | Budget | 2.4% Under Budget | 200% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| Transmission & Distribution | 174% | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
OSHA Recordable Incidents (15%) | 18 | 15 | 175% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Employees (30%) | Human Performance Event Clock Resets (15%) | 34 | 31 | 160% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
System Average Interruption Duration Index ("SAIDI") (15%) | 82 | 74.53 | 200% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Operational Excellence (50%) | System Average Interruption Frequency Index ("SAIFI") – Clear Weather (15%) | 0.61 | 0.54 | 200% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Capital Project Execution (20%) | 95% | 97.5% | 183% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Shareholder Value (20%) | Transmission & Distribution O&M Budget (20%) | Budget | 0.7% Under Budget | 135% | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Long-Term Incentives
PERFORMANCE MEASURES AND WEIGHTING | MEASURE | TARGET | ACTUAL RESULTS | % OF TARGET PERFORMANCE ACHIEVED | ||||
---|---|---|---|---|---|---|---|---|
| | | | | | | | |
Corporate Resources Business Unit — 12.50%: | ||||||||
Business Area Performance — 12.50% | Supply Chain (4.17%) | 100% | 130.6% | 131% | ||||
| Sustainability (4.17%) | 100% | 139.55% | 140% | ||||
Resource Management (4.16%) | 100% | 139.6% | 140% | |||||
COO Corporate Resources Business Unit Results | 137% | |||||||
Transmission and Distribution Business Unit — 12.50%: | ||||||||
Employees — 2.50% | OSHA Recordable Incidents (1.25%) | 18 | 19 | 92% | ||||
Human Performance Event Clock Resets (1.25%) | 29 | 37 | 0% | |||||
Operational Excellence — 6.25% | System Average Interruption Duration Index (SAIDI) — All Weather (1.25%) | 81 | 80 | 117% | ||||
System Average Interruption Frequency Index (SAIFI) — All Weather (1.88%) | 79% | 84% | 58% | |||||
| QA/QC Inspections (1.25%) | 88% | 94% | 200% | ||||
Capital Project Execution (1.87%) | 90% | 97% | 200% | |||||
Customers & Communities — 1.88% | JD Power & Associates Power Quality & Reliability (1.88%) | Rank 9 | Rank 9 | 100% | ||||
Shareholder Value — 1.87% | Transmission and Distribution Operating and Maintenance Budget (1.87%) | Budget | 2.0% Under Budget | 199% | ||||
COO Transmission and Distribution Business Unit Results | 124% | |||||||
Customer Service Business Unit — 12.50%: | ||||||||
Employees — 1.88% | OSHA Recordable Incidents (1.88%) | 1 | 2 | 50% | ||||
Operational Excellence — 3.74% | Service Level Without Interactive Voice Response (1.87%) | 80% | 80% | 100% | ||||
| Self-Service Transactions Per Customer (1.87%) | 6.93 | 7.36 | 200% | ||||
Environmental Stewardship — 1.25% | Percent of Customers with Paperless Billing (1.25%) | 31% | 30.86% | 83% | ||||
Customers and Communities — 2.50% | Customer Outcome Satisfaction Survey (1.25%) | 89% | 87% | 50% | ||||
JD Power Residential IOU Survey (1.25%) | Rank 10 | Rank 14 | 50% | |||||
Shareholder Value — 3.13% | Customer Service Operating and Maintenance Budget (3.13%) | Budget | 3.9% Under Budget | 200% | ||||
COO Customer Service Business Unit Results | 121% | |||||||
| | | | | | | | |
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. Beginning with the 2016 awards, our annual long-term equity awards have been granted 60% to performance-based measures and 40% to time-based vesting. For 2018, we have increased the grant allocation to 70% performance-based measures and 30% time-based vesting for our CEO and our Executive Vice Presidents.
20172018 Proxy Statement | 57
|
PERFORMANCE MEASURES AND WEIGHTING | MEASURE | TARGET | ACTUAL RESULTS | % OF TARGET PERFORMANCE ACHIEVED | ||||
---|---|---|---|---|---|---|---|---|
| | | | | | | | |
Fossil Generation Business Unit — 12.50%: | ||||||||
Employees — 1.88% | OHSA Recordable Incidents (1.88%) | 6 | 7 | 75% | ||||
Operational Excellence — 8.75% | Fleet Summertime Equivalent Availability Factor (2.50%) | 93.7% | 91.8% | 53% | ||||
G&O Start-up Reliability (2.50%) | 98% | 99% | 200% | |||||
| Capital Project Execution (2.50%) | 90% | 96% | 200% | ||||
Fossil EH&S Repeat Deficiencies (1.25%) | 18 | 12 | 200% | |||||
Shareholder Value — 1.87% | Net Operating Expense (1.87%) | Budget | 7.3% Under Budget | 200% | ||||
COO Fossil Generation Business Unit Results | 152% | |||||||
Overall Schiavoni Incentive Result | 133% | |||||||
| | | | | | | | |
The following chart summarizes the target and maximum award opportunities and the actual amount awarded to Messrs. Hatfield, Edington, Falck and Schiavoni under the APS Incentive Plans:
NAME | | TARGET AWARD OPPORTUNITY ($) | | MAXIMUM AWARD OPPORTUNITY ($) | | ACTUAL AWARD AMOUNT ($) | | ACTUAL AMOUNT AS A PERCENT OF TARGET (%) | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | ||||||||||
Mr. Hatfield | | | 434,000 | | | | 868,000 | | | 530,695 | | | 122 | % | | ||||
Mr. Edington | | | 715,000 | | | | 1,430,000 | | | 1,076,075 | | | 151 | % | | ||||
Mr. Falck | | | 367,250 | | | | 734,500 | | | 443,565 | | | 121 | % | | ||||
Mr. Schiavoni | | | 510,000 | | | | 1,020,000 | | | 623,169 | | | 122 | % | | ||||
| | | | | | | | | |
Under the APS Incentive Plans, the earnings achievement combined with the applicable business unit performance results resulted in the indicated incentive awards, without further adjustment for individual performance, for Messrs. Hatfield, Edington, Falck, Hatfield and Schiavoni.
APS adopted the 2016 Palo Verde Specific Compensation Opportunity, which provided Mr. Edington the opportunity to receive an amount of up to $125,000 upon the achievement of the following Palo Verde operational and performance targets: the achievement of a site capacity factor greater than 92%; no substantive cross-cutting issues existing by the end of 2016; no "greater-than-green" NRC colored findings by the end of 2016; and no decline in key regulatory and oversight evaluations and assessments by the end of 2016. All of the metrics were achieved and, as such, Mr. Edington received the full award of $125,000.
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2017 Long-Term IncentivesEquity Incentive Component Summary
The Company currently uses two types of equity grants: performance shares and RSUs. In 2016, awards consisted of 60% performance shares and 40% RSUs to focus the equity awards on the achievement of specific multi-year performance goals. The 2016 grants to the Named Executive Officers were as follows:
NAME | | PERFORMANCE SHARES (#) | | RSUs (#) | | TOTAL SHARES (#) | | GRANT DATE VALUE ($) | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | ||||||||
Mr. Brandt | | | 39,258 | | | 26,172 | | | 65,430 | | | 4,373,276 | | ||||
Mr. Hatfield | | | 7,584 | | | 5,056 | | | 12,640 | | | 844,845 | | ||||
Mr. Edington | | | 5,354 | | | 3,572 | | | 8,926 | | | 596,606 | | ||||
Mr. Falck | | | 6,692 | | | 4,464 | | | 11,156 | | | 745,657 | | ||||
Mr. Schiavoni | | | 9,816 | | | 6,544 | | | 16,360 | | | 1,093,486 | | ||||
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Vehicle | | | | % of Target Equity Pay Mix | | | | Measurement Period | | | | Performance Link | | | |
| | | | | | | | | | | | | | | | |
| |
| | | | | | | | Relative TSR (50%) | | |||||
| | | | | | | | | | | | | | | | |
| | Shares | | | | 60%(1) | | | 3 years | | | Relative Operational Performance (50%) | | |||
| | | | | | | | | | | | | | | | |
| RSUs | | | | 40%(1) | | | Vest ratably | | | Stock Price | | ||||
| | | | | | | | | | | | | | | | |
To determine the amount of performance share and RSU awards, 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 in light of 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 for 2016, then allocated 60% of the 2017 awards 60% to performance shares and 40% of theto RSUs.
The 2017 awards to RSUs.the NEOs were as follows:
| | | | | | | | | | | | | | | | |
| | Name | | | Performance Shares – 60% (#) | | | RSUs – 40% (#) | | | Grant Date Value ($)(1) | | ||||
| | Mr. Brandt | | | | 33,096 | | | | 22,064 | | | | $4,400,113 | | |
| | Mr. Hatfield | | | 6,770 | | | 4,516 | | | $900,284 | | ||||
| | Mr. Bement | | | | 4,514 | | | | 3,012 | | | | $600,349 | | |
| | Mr. Edington | | | 3,010 | | | 2,008 | | | $400,286 | | ||||
| | Mr. Falck | | | | 5,642 | | | | 3,764 | | | | $750,316 | | |
| | Mr. Schiavoni | | | 8,274 | | | 5,516 | | | $1,100,028 | | ||||
| | | | | | | | | | | | | | | | |
62Performance Shares. | 2018 Proxy Statement
Executive Compensation |
Performance Shares
We granted performance shares to our Named Executive OfficersNEOs in February 20162017 for a three-year performance period (the "2016"2017 Performance Shares")., with two distinct elements — relative TSR and relative operational performance against five metrics.
The following graph illustrates how the 2016 Performance Shares work:
Metrics Relative TSR Measures the Company's TSR performance against: S&P 1500 Super Composite Electric Utility Index Relative Operational Performance Measures the Company's average percentile ranking in: -Customer reliability -Customer-to-employee improvement ratio -OSHA all-incident injury rate -Nuclear generation capacity factors -Coal generation capacity factors The Committee grants each award recipient a specified number of performance shares, which is considered the "Base Grant." Under each of the two performance elements, up to 100% of the Base Grant may be earned based on performance. The maximum award opportunity is 200% of the Base TSR.TSR is the measure of a company's stock price appreciation plus The Company's "Average Performance" with respect to the metrics listed below will be the average of the Company's percentile ranking for each of these metrics during each of the Weighting Rationale &
Performance Link
50%
Links pay to key measure generating shareholder value relative to others in the industry
50%
Metrics are direct indicators of operational performance and provide a clear barometer of performance versus external benchmarks Grant. The 2016 Performance Shares have two distinct elements — TSR and six operational performance metrics. The TSR metric provides a well-understood linkage to overall shareholder return. The operational performance metrics provide a clear lineGrant, which reflects the sum of sight to factors in the utility industry that drive management performance to increase earnings. We believe that the combination of these two elements in the same equity award provides a mix of motivationsmaximum opportunities for performance that is superior to utilizing all of one element oragainst the other.two elements:2017 Proxy Statement | 59EXECUTIVE COMPENSATIONIF THE COMPANY'S TSR OVER THEPERFORMANCE PERIOD AS COMPAREDTO THE TSR OF THE COMPANIES IN THES&P 1500 SUPER COMPOSITE ELECTRICUTILITY INDEX (THE "INDEX") IS:THE NUMBER OFPERFORMANCE SHARES WILL BE: 90th Percentile or Greater100% of the Base Grant75th Percentile75% of the Base Grant50th Percentile50% of the Base Grant25th Percentile25% of the Base GrantLess than 25th PercentileNone any dividends paid during the three-year performance period. We believe using TSR strengthens the link between officer performance and shareholder return. Additionally, TSR is the most prevalent long-term incentive metric used among the Peer Group. We anticipate that the common stock payout, if any, related to this element will be made in February 2019.2020.
Operational Performance.Performance Metrics are 50% of the Base GrantIF THE COMPANY'S AVERAGEPERFORMANCE WITH RESPECT TOTHE PERFORMANCE METRICS IS:THE NUMBER OFPERFORMANCE SHARES WILL BE: 90th Percentile or Greater100% of the Base Grant75th Percentile75% of the Base Grant 50th Percentile50% of the Base Grant25th Percentile25% of the Base Grant Less than 25th PercentileNone three-yearsthree years of the performance period:
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60 | 2017 Proxy Statement
For 2017 performance share awards, we determined not to use the J.D. Power Residential National Large Segment Survey benchmark as we had for prior awards. APS is undergoing an extensive technology upgrade to our customer service platform. This undertaking is focused on providing flexibility and scalability to respond to industry and customer demands. We believe that the J.D. Power benchmark is not an appropriate indicator of operational performance during this enterprise-wide project.
The metrics selected are direct indicators of key business performance success. The metrics can be readily benchmarked and will provide a clear barometer of top-tier performance excellence. We believe a focus on these performance metrics over a three-year period aligns long-term compensation with key operational goals, thereby enhancing overall Company performance. We anticipate that the common stock payout, if any, related to this performance element will be made in October 2019.2020.
The recipient must remain employed with the Company throughout the performance period, unless the recipient meets any of the exceptions described under "Potential Payments upon Termination or Change of Control." The 2016 Performance Shares also contain confidentiality protections that apply during employment and survive termination, and non-competition and employee solicitation restrictions that survive for a period of one year following termination of employment.
A recipient of performance shares will receive additional shares of common stock equal to the amount of dividends that the recipient would have received had the recipient directly owned the shares from the date of grant to the date of payment, plus interest on such dividends at the rate of 5% per annum, compounded quarterly, divided by the fair market value of one share of stock on the date of the stock payout. This common stock is paid out when and only if the related common stock payout is made. The 20162017 Performance Shares are not included in calculating pension benefits.
The 20162017 Performance Shares are included in the Summary Compensation Table in the column under "Stock Awards" and in the Grants of Plan-Based Awards table.
Payouts of 2014 Plan Awards. In 2013,2014, the Committee granted performance shares to the Named Executive Officers,NEOs, based on the same performance metrics as the 2016 grant.relative TSR and relative operational performance. For the three-year period ended December 31, 2015,2016, our TSR percentile was 42.884.2% compared to the Index. For the same period, our Average Performance percentile with respect to the performance metrics was 76.873.5% compared to the companies included in the performance metrics. The actual payout to each Named Executive OfficerNEO is identified in the Option Exercises and Stock Vested table.
RSUs.RSUs
We granted RSUs to our Named Executive OfficersNEOs in February 2016.2017. RSUs are incentive awards that vest in equal 25% installments over four-yearsfour years if the award recipient remains employed by the Company or one of its subsidiaries unless the recipient meets any of the exceptions described under "Potential Payments upon Termination or Change of Control."
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Each RSU represents the fair market value of one share of our common stock on the applicable vesting date, and the value rises and falls with the Company's stock price. Since a portion of multiple RSU awards may vest each February, the Committee selected February 20 as the vesting date for all RSUs as an administrative convenience. The following graph illustrates how the 2016 RSUs work:
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The 20162017 RSUs are payable at the election of the participant made shortly after the date of the initial grant, either 100% in stock, or 50% in cash and 50% in stock, or 100% in cash, and will vest each February 20 in an amount equal to the number of RSUs vesting on such date multiplied by the closing price of a share of our common stock on that date.
The RSUs accrue dividend rights on the vested RSUs, equal to the amount of dividends that the participant would have received had the participant directly owned stock equal to the number of vested RSUs from the date of grant to the date of payment, plus interest at the rate of 5% per annum, compounded quarterly, with such amount paid either 100% in stock, or 50% in cash and 50% in stock. The RSUs are not includedstock, or 100% in cash based on the calculation of pension benefits. The RSUs contain confidentiality protections that apply during employment and survive termination, and non-competition and employee solicitation restrictions that survive for a period of one year following termination of employment.participant's election as discussed above.
The 20162017 RSUs are included in the Summary Compensation Table in the column under "Stock Awards" and in the Grants of Plan-Based Awards table. RSUs granted in previous years that vested in 20162017 are identified in the Option Exercises and Stock Vested table.
Supplemental Awards
Retention Grant for Mr. Brandt.2017 CEO Performance-Contingent Award. In December 2012,As previously disclosed in advance of our 2017 Annual Meeting, in March 2017, the Committee madegranted the CEO a special performance-linked retention granttwo-year, performance-based cash award. This award is designed to incent Mr. Brandt, a retirement eligible CEO, to remain in his current role while further emphasizing the Board's succession planning priorities. Given the specialized skill sets required of RSUsthe senior management team in our industry and our Company, a major priority of the CEO is to ensure that the Company's existing succession strategy and workforce development pipeline is sufficiently robust and continues to be effective. The Committee believed that this award was critical to retaining a retirement-eligible CEO for what was perceived to be a multiple-year succession planning period.
The award is comprised of two tranches that are performance-conditioned on specific return on equity, earnings, and succession planning goals, with a maximum potential payout to Mr. Brandt (the "CEO Retention Grant"). This grant recognized his important contributions asof $4 million:
Structure and Performance Criteria of 2017 CEO Performance-Contingent Award
| | | | | | | | | | | | | | | | |
| | Hurdle | | | Tranche 1 | | | Tranche 2 | | | Performance Link | | ||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | No portion of award payable if | | | ||
| Minimum 8.00% ROE condition (2017) | | | | 2017 earnings threshold(1) (2017 calendar year) | | | 2018 earnings threshold(1) (2018 calendar year) | | | neither earnings thresholds are met | | | |||
| | | | | | | | | | | | If only one earnings threshold is met, 50% of the award may be earned subject to additional adjustments based on succession planning & development performance | | | ||
| | | | | | | | | | | | | | | | |
| No portion of award payable if ROE condition not met | | | | Succession planning and development — year 1 milestones | | | | Succession planning and development goals | | | | Full award subject to goals being satisfied | | | |
| | | | | | | | | | | | | | | | |
The performance criteria linked to the number of shares to be received by Mr. Brandt under the CEO Retention Grant were the following:
On February 21, 2017, the Committee determined that the Company's average return on equity under the CEO Retention Grant was 9.6%, which exceeded the Target ROE by 85 basis points and therefore, Mr. Brandt was entitled to receive the Target Grant. In assessing whether Mr. Brandt should receive any shares under the Discretionary Grant, the Committee reviewed
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The payment date of the 2017 CEO Performance-Contingent Award is February 28, 2019 (the "Award Payment Date"), provided that Mr. Brandt's overall leadership duringBrandt is still employed by Pinnacle West on that date. In the Performance Period, with particular referenceevent of death or disability, retirement or termination of employment, Mr. Brandt may be entitled to receive all or a portion of the following:2017 CEO Performance-Contingent Award earlier than the Award Payment Date depending on the circumstances and subject to performance goal achievements, as follows:
Based on the successful achievementBoard without Cause:
The Discretionary Grant and the accrued notional dividends on the Discretionary Grant as of December 31, 2016 that were earned by Mr. Brandt are included in the Summary Compensation Table in the column under "Stock Awards" and in the Grants of Plan-Based Awards table. The Target Grant, Discretionary Grant and the accrued notional dividends as of December 31, 2016 are reported in the Option Exercises and Stock Vested Table. The Target Grant was previously reported in the Summary Compensation Table, Grants of Plan-Based Awards Table and the Outstanding Equity Awards at Fiscal Year-End Table and described in the CD&A of the 2013 Proxy Statement.
Pension Programs. The Named Executive OfficersNEOs participate in the Pinnacle West Capital Corporation Retirement Plan (the "Retirement Plan") and the Supplemental Excess Benefit Retirement Plan (the "Supplemental Plan"). We describe these plans in more detail under "Discussion of Pension Benefits." The Company believes that the pension programs are important recruitment and retention tools.
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Deferred Compensation Program. The Company offers to its executive officers the ability, if the officer so chooses, to participate in a deferred compensation program. We describe our deferred compensation program in more detail under "Discussion of Nonqualified Deferred Compensation." We offer our deferred compensation program because the Committee believes that it is standard market practice to permit officers to defer some portion of their cash compensation. However, we generally consider the value in the deferred compensation plan to be the participant's own money and do not give this amount significant weight in making compensation decisions. Discretionary credits under the deferred compensation plan for Messrs. FalckBement and EdingtonFalck are discussed under the heading "Discussion of Nonqualified
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Deferred Compensation" and for Mr. Edington, under the narrative disclosure to the Summary Compensation Table and Grants of Plan-Based Awards table.
Change of Control Agreements. The Company maintains Key Executive Employment and Severance Agreements (the "Change of Control Agreements") for our officers, including the Named Executive Officers.NEOs. Similar to our deferred compensation programs, Change of Control Agreements do not have a significant impact on compensation design. However, in setting annual incentives, we do consider that the change of control payment, if triggered, would be based on the average of the incentives for the prior four years. We discuss our Change of Control Agreements in more detail under "Potential Payments upon Termination or Change of Control." Our Change of Control Agreements are "double trigger" agreements that provide severance benefits if, during a specified period following a change of control, the Company terminates an employee without "cause" or the employee terminates employment "for good reason." We believe that the possibility of strategic transactions or unsolicited offers creates job uncertainty for executives, and that the Change of Control Agreements are effective tools to provide incentives for executives to stay with the Company in light of these uncertainties. In addition, we believe that if the agreements are appropriately structured, they do not deter takeovers or disadvantage shareholders. Each agreement is terminable on notice given six months prior to each anniversary of the agreement.
In May 2009, in connection with a review of its executive compensation practices, the Company determined that, on a going-forward basis, it would no longer provide excise tax gross-up payments in new and materially amended Change of Control Agreements with its Named Executive Officers.NEOs. In unusual circumstances where the Company believes that accommodations have to be made to recruit a new executive to the Company, limited reimbursement for taxes payable on change of control payments may be included in executives' contracts, but even in those circumstances, the excise tax gross-ups will be limited to payments triggered by both a change of control and termination of employment and will be subject to a three-year sunset provision.
In addition to the Change of Control Agreements described above, under the terms of our 2012 Long-Term Incentive Plan, as amended (the "2012 Plan") awards are accelerated upon a change of control only if the Board chooses not to exercise its override authority. In exercising its override authority, the Board must conclude, in good faith, that participants' awards shall remain outstanding, be assumed, or be exchanged for new awards pursuant to a change of control, and that there will be no material impairment to either the value of the awards or the opportunity for future appreciation in respect of the awards.
Perquisites. We have had a long-standing practice of providing only limited perquisites to our executive officers. We describe our perquisites paid to each of the Named Executive OfficersNEOs in footnote 4 to the Summary Compensation Table.
Taxation Considerations Regarding Executive Compensation2018 Proxy Statement | 67
Pursuant
Executive Compensation |
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 Section 162(m)specified labor markets, the mix of compensation components, performance requirements, the Code, publicly-traded corporations generally are not permittedportion of pay at risk and tied to deduct, for federal income tax purposes, annualperformance, and individual performance evaluations. From December through February, the Committee considers and approves executive officer compensation, in excess of $1 million paidincluding salary and cash and non-cash incentives. The Committee makes all compensation decisions relating to any of certain top executives, except toour CEO's compensation, makes awards under the extent the compensation qualifies as "performance-based" under rules set forth in the Code. The Company does not use the deduction as a justification for awarding compensation below $1 million. To the extent2012 Plan, and determines the awards do exceed $1 million, the Company believes that it is in the shareholders' best interests to not only consider what components qualify for the deduction, but also preserve flexibility in designing a compensation program. For example, the RSUs described above (other than a portion of the CEO Retention Grant) do not qualify as performance-based compensation under the applicable tax provisions.2017 Incentive Plans. The Committee recommends other executive officer compensation decisions, which are approved by the Board for Pinnacle West officers and the Board may weighof Directors of APS for APS officers.
Role of Executive Officers in Determining Executive Compensation. Management works with the taxCommittee in establishing the agenda for Committee meetings and accounting consequencesin preparing meeting information. Management conducts evaluations and provides information on the performance of the totalexecutive 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.
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 Frederick W. Cook & Co. to assist the Committee in its evaluation of 2017 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 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 components of compensation when setting total compensationexecutives and determiningtheir responsibilities, skills, expertise, value added, as well as the individual elements of an officer's compensation package. However, the Committee and the Board do not routinely applycompetitive marketplace for executive talent.
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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:
From these sources, the Consultant developed a consensus in which the competitive industry comparison for Messrs. Brandt, Hatfield, Falck, and Schiavoni reflects a weighting of one third peer group proxy statement data, one third Energy Services Industry Survey, and one third general industry surveys. Messrs. Bement and Edington did not have a general industry survey match, so the competitive industry comparison for Mr. Bement's position reflects a 100% weighting of Energy Services Industry Survey data for Top Nuclear Executives and the competitive industry comparison for Mr. Edington's position reflects a 100% weighting of peer group proxy statement data. Compensation levels were updated to July 2017 based on projected executive level market movement from major salary planning surveys selected by the Consultant.
In providing information to the Committee with respect to setting 2017 compensation, the Consultant reviewed the total compensation of the NEOs and presented its analysis in October 2016. The Consultant also reviewed the individual elements of compensation, including the type of annual incentives and long-term incentives, and evaluated the competitiveness of the individual elements of compensation of each such officer based on the survey data discussed above.
In its analysis, the Consultant looked at competitive findings for base salary, annual incentive, long-term equity incentives and target total direct compensation for the NEOs as compared with the 25th, 50th and 75th percentile (compensation data was considered at the 25th, 50th or
2018 Proxy Statement | 69
Executive Compensation |
the 75th percentile if it was within +/– 10%). The conclusions of the report as to competitive pay comparisons of the NEOs for these three compensation elements are as follows:
| | | | | | | | | | | | | | | | |
| Name | | Target Annual Cash (Salary + Target Annual Incentives) | | Long-Term Incentives(1) | | Target Total Direct Compensation(1) | | ||||||||
| Mr. Brandt | | 75th percentile | | 50th percentile | | 50th percentile | | ||||||||
Mr. Hatfield | 50th percentile | 25th percentile | 25th percentile | |||||||||||||
| Mr. Bement | | 75th percentile | | <25th percentile | | 50th percentile | | ||||||||
Mr. Edington | 75th percentile | <25th percentile | 50th-75th percentile | |||||||||||||
| Mr. Falck | | 75th percentile | | 50th percentile | | 50th percentile | | ||||||||
Mr. Schiavoni | 50th percentile | 50th percentile | 50th percentile | |||||||||||||
| | | | | | | | | | | | | | | | |
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.
Determining the Peer Group. The Peer Group 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:
70 | 2018 Proxy Statement
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 tax-deductibility rulescomposition of the Peer Group, we adjust our revenues to limit what they determine otherwisereflect our control and responsibility for Palo Verde Generating Station, Four Corners Generating Station and Cholla Power Plant. The number used for APS revenues is adjusted to be necessarytake into account the revenues that are attributable to co-owned assets over which APS maintains full operational control and appropriatelegal compliance responsibility. This adjustment resulted in a number of $5.2 billion compared to its reported twelve months ended June 30, 2016 revenues of $3.5 billion.
Within the range of potential peers based on adjusted revenues, the Peer Group below is then determined based on additional factors including:
As a result of such review, the Committee approved the use of the same peer group that was used in setting 2016 executive compensation. 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 close to the median with respect to revenues (adjusted as explained above).
As outlined previously, peer proxy data is only one third of the compensation awards.information that is referenced for our NEOs (except for Messrs. Bement and Edington, where peer proxy statement data is weighted at 0% and 100%, respectively). For 2017, the Peer Group consisted of the following predominantly rate-regulated utilities (the "Peer Group"):
| | | | | | |
Alliant Energy Corporation | Ameren Corporation | Consolidated Edison, Inc. | DTE Energy Company | |||
Edison International | Eversource Energy (formerly known as Northeast Utilities) | Hawaiian Electric Industries, Inc. | NiSource Inc. | |||
OGE Energy Corp. | PPL Corporation | SCANA Corporation | The Southern Company | |||
TECO Energy, Inc. (acquired by Emera, Inc. in July 2016) | WEC Energy Group, Inc. | Xcel Energy, Inc. | ||||
| | | | | | |
2018 Proxy Statement | 71
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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.
Other Considerations |
Stock Ownership and Retention Guidelines/Prohibition on Hedging and PledgingGuidelines
We believe that linking a significant portion of an officer's current and potential future net worth to the Company's success, as reflected in our stock price, helps to ensure that officers have a stake similar to that of our shareholders. Stock ownership guidelines also encourage the long-term management of the Company for the benefit of the shareholders.
The Company's Guidelines are based on the officer's position and his or her base salary. The ownership requirements are shown below in respect of the indicated officer position:
| | | | | | | | |
| Officer | | Multiple of Base Salary(1) | |||||
| Chief Executive Officer | | 5 times Base Salary | | ||||
APS President and all Executive and Senior Vice Presidents | 2 times Base Salary | |||||||
| All other Vice Presidents and Officers | | 1 times Base Salary | | ||||
| | | | | | | | |
The types of ownership arrangements counted toward the Guidelines are: common stock, whether held individually, jointly, or in trust with or for the benefit of an immediate family member; shares issued upon the vesting of RSUs or the payout of performance shares; and unvested RSUs to the extent they will result in the issuance of common stock to the officer.
Officers may not sell or otherwise transfer ("Dispose") any shares of Company stock received by them pursuant to any of the Company's compensation or benefit programs (net of shares sold or surrendered to meet tax withholding or exercise requirements) until his or her ownership requirement has been met. Thereafter, the officer may Dispose of any sharesMr. Edington retired in March 2017 and is no longer subject to the extent such transaction would not causeGuidelines. All of the officer's share ownershipother NEOs are in compliance with the Guidelines.
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The following graphs illustrate how our NEOs' holdings compare to fall below his or her applicable requirement. The retention requirement applies both duringthe Guidelines:
Prohibition on Hedging and after the Phase-in Period. In addition, officersPledging
Officers may not pledge, margin, hypothecate, hedge, or otherwise grant an economic interest in any shares of Company stock whether or not his or her ownership requirement has been met. This restriction extends to the purchase or creation of any short sales, zero-cost collars, forward sales contracts, puts, calls, options or other derivative securities in respect of any shares of Company stock. If the officer does not attain compliance with his or her ownership requirement by the end of the Phase-in Period, any subsequent grants of equity compensation to such officer will be payable solely in shares of stock until the ownership requirement is met. Under the Guidelines, the CEO may grant exceptions for hardship and other special circumstances.
Clawback Policy
Pinnacle West has adopted a clawback policy that applies to specified current or former executive officers, including our NEOs (an "Executive"). Under the policy, in the event of any material restatement of the consolidated financial statements of the Company and its subsidiaries within three years of the first public release or filing with the SEC, the Committee may, within 12 months after the material restatement, require forfeiture and/or return to the Company of all or a portion of the compensation vested, awarded or received under any bonus award, short-term incentive award, equity award (including any award of restricted stock, performance shares, phantom stock, deferred stock units or restricted stock units) or other award during the period subject to restatement and the 12-month period following the first public issuance or filing with the SEC of the financial statements that were restated, by any Executive that the Committee determines has personally engaged in intentional misconduct that caused or partially caused the need for such restatement. Any forfeiture and/or return of compensation by an Executive under the policy will be limited to the portion that the Executive would not have received if the consolidated financial statements had been reported properly at the time of first public release or filing with the SEC. By accepting any award as to which this policy applies, each Executive agrees to forfeit and/or return compensation to the Company as provided by the policy. The policy does not limit the ability of the Company to pursue forfeiture or reclaim payments under other legal rights.
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AllTaxation Considerations Regarding Executive Compensation
Pursuant to Section 162(m) of the Named Executive OfficersInternal Revenue Code (the "Code"), for federal income tax purposes, publicly-traded corporations generally are not permitted to deduct annual compensation in complianceexcess of $1 million paid to any of certain top executives. The Committee and the Board may weigh the tax consequences of the total compensation program when setting the total compensation package for an officer. However, the Committee and the Board do not routinely apply the tax-deductibility rules to limit what they determine otherwise to be necessary and appropriate compensation awards or as a justification for awarding compensation below $1 million.
As a result of changes made by the 2017 Tax Act, certain "performance-based" compensation, which was excludible from the scope of 162(m) under prior law, must now be included in determining the $1 million limitation unless it qualifies under a transition rule applicable to certain compensation arrangements in place as of November 2, 2017. The Company believes that performance-based awards granted to our executive officers, and in place as of November 2, 2017, will continue to be deductible under this transition rule. However, because of current ambiguities regarding the scope of this transition rule, no assurance can be given that compensation intended to satisfy the requirements for this transition rule will in fact be deductible. Further, the Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with the Guidelines. The following graphs illustrate how our Named Executive Officers' holdings compare to the Guidelines:Company's business needs.
6674 | 20172018 Proxy Statement
Summary Compensation Table |
The following table provides information concerning the total compensation earned or paid to the Company's Named Executive Officers:NEOs:
NAME AND PRINCIPAL POSITION | YEAR | SALARY ($) | BONUS ($) | STOCK AWARDS ($)(1) | NON-EQUITY INCENTIVE PLAN COMPENSATION ($)(2) | CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)(3) | ALL OTHER COMPENSATION ($)(4) | TOTAL ($) | YEAR | SALARY ($) | BONUS ($) | STOCK AWARDS ($)(1) | NON-EQUITY INCENTIVE PLAN COMPENSATION ($)(2) | CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)(3) | ALL OTHER COMPENSATION ($)(4) | TOTAL ($) | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Donald E. Brandt, | 2016 | 1,315,000 | 0 | 5,908,828 | 1,910,695 | 2,199,029 | 25,675 | 11,359,227 | 2017 | 1,355,000 | 0 | 4,374,133 | 2,314,340 | 2,462,556 | 27,410 | 10,533,439 | ||||||||||||||||
Chairman of the Board, | 2015 | 1,277,000 | 0 | 4,400,029 | 2,066,186 | 1,567,172 | 27,183 | 9,337,570 | 2016 | 1,315,000 | 0 | 5,908,828 | 1,910,695 | 2,199,029 | 25,675 | 11,359,227 | ||||||||||||||||
President and CEO of | 2014 | 1,240,000 | 0 | 4,199,976 | 1,852,560 | 2,009,011 | 26,729 | 9,328,276 | 2015 | 1,277,000 | 0 | 4,400,029 | 2,066,186 | 1,567,172 | 27,183 | 9,337,570 | ||||||||||||||||
the Company and APS | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
James R. Hatfield, | 2016 | 620,000 | 0 | 844,845 | 530,695 | 546,693 | 25,901 | 2,568,134 | 2017 | 640,000 | 0 | 894,969 | 673,994 | 599,183 | 28,177 | 2,836,323 | ||||||||||||||||
Executive Vice | 2015 | 593,000 | 0 | 750,144 | 548,572 | 458,772 | 30,492 | 2,380,980 | 2016 | 620,000 | 0 | 844,845 | 530,695 | 546,693 | 25,901 | 2,568,134 | ||||||||||||||||
President and Chief Financial Officer of the Company and APS | 2014 | 570,000 | 0 | 750,320 | 502,603 | 465,143 | 24,050 | 2,312,116 | 2015 | 593,000 | 0 | 750,144 | 548,572 | 458,772 | 30,492 | 2,380,980 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Randall K. Edington, | 2016 | 1,100,000 | 0 | 596,606 | 1,202,275 | 3,560,478 | 821,925 | 7,281,284 | ||||||||||||||||||||||||
Robert S. Bement, | 2017 | 600,000 | 0 | 596,805 | 793,800 | 662,448 | 35,108 | 2,688,161 | ||||||||||||||||||||||||
Executive Vice | ||||||||||||||||||||||||||||||||
President and Chief Nuclear Officer of APS | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Randall K. Edington,(5) | 2017 | 244,110 | 0 | 397,923 | 279,464 | 2,590,863 | 1,076,323 | 4,588,683 | ||||||||||||||||||||||||
Executive Vice | 2015 | 1,050,000 | 0 | 600,063 | 1,228,738 | 1,164,712 | 28,593 | 4,072,106 | 2016 | 1,100,000 | 0 | 596,606 | 1,202,275 | 3,560,478 | 821,925 | 7,281,284 | ||||||||||||||||
President and Advisor | 2014 | 960,511 | 0 | 500,031 | 1,050,775 | 2,130,198 | 1,072,586 | 5,714,101 | 2015 | 1,050,000 | 0 | 600,063 | 1,228,738 | 1,164,712 | 28,593 | 4,072,106 | ||||||||||||||||
to the Chief Executive Officer of APS | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
David P. Falck, | 2016 | 565,000 | 0 | 745,657 | 443,565 | 395,787 | 129,674 | 2,279,683 | 2017 | 585,000 | 0 | 745,887 | 576,155 | 494,307 | 35,690 | 2,437,039 | ||||||||||||||||
Executive Vice | 2015 | 544,000 | 0 | 750,144 | 478,437 | 368,182 | 25,675 | 2,166,438 | 2016 | 565,000 | 0 | 745,657 | 443,565 | 395,787 | 129,674 | 2,279,683 | ||||||||||||||||
President and General Counsel of the Company and APS | 2014 | 522,000 | 0 | 750,320 | 423,697 | 419,745 | 278,991 | 2,394,753 | ||||||||||||||||||||||||
President, Law, PNW | 2015 | 544,000 | 0 | 750,144 | 478,437 | 368,182 | 25,675 | 2,166,438 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mark A. Schiavoni, | 2016 | 680,000 | 0 | 1,093,486 | 623,169 | 491,023 | 23,850 | 2,911,528 | 2017 | 710,000 | 0 | 1,093,532 | 813,633 | 628,701 | 25,663 | 3,271,529 | ||||||||||||||||
Executive Vice President | 2015 | 640,000 | 0 | 1,000,148 | 668,416 | 432,764 | 25,675 | 2,767,003 | 2016 | 680,000 | 0 | 1,093,486 | 623,169 | 491,023 | 23,850 | 2,911,528 | ||||||||||||||||
and Chief Operating | 2014 | 563,958 | 0 | 750,320 | 558,031 | 424,749 | 27,419 | 2,324,477 | 2015 | 640,000 | 0 | 1,000,148 | 668,416 | 432,764 | 25,675 | 2,767,003 | ||||||||||||||||
Officer of APS | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NAME | | RSUs ($) | | PERFORMANCE SHARES ($) | | ||||
---|---|---|---|---|---|---|---|---|---|
| | | | | | ||||
Mr. Brandt | | 1,760,045 | | | 2,614,088 | | | ||
Mr. Hatfield | | 360,241 | | | 534,728 | | | ||
Mr. Bement | | 240,267 | | | 356,538 | | | ||
Mr. Edington | | 160,178 | | | 237,745 | | | ||
Mr. Falck | | 300,254 | | | 445,633 | | | ||
Mr. Schiavoni | | 440,011 | | | 653,521 | | | ||
| | | | | |
NAME | | RSUs ($) | | PERFORMANCE SHARES ($) | | CEO RETENTION GRANT ($) | | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | |||||||
Mr. Brandt | | 1,760,067 | | | 2,613,209 | | | | 1,535,552 | | | |||
Mr. Hatfield | | 340,016 | | | 504,829 | | | | 0 | | | |||
Mr. Edington | | 240,217 | | | 356,389 | | | | 0 | | | |||
Mr. Falck | | 300,204 | | | 445,453 | | | | 0 | | | |||
Mr. Schiavoni | | 440,084 | | | 653,402 | | | | 0 | | | |||
| | | | | | | |
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$713,077; Mr. Brandt are discussed in the CD&A under the heading "Long-Term Incentives." The amount in the column associated with the CEO Retention Grant reflects the Discretionary GrantEdington — $475,490; Mr. Falck — $891,266; and the accrued notional dividends on the Discretionary Grant as of December 31, 2016 that were earned by Mr. Brandt. The Discretionary Grant and the accrued notional dividends on the Discretionary Grant are also reported in the Grants of Plan-Based Awards Table, and the Target Grant, Discretionary Grant and the accrued notional dividends as of December 31, 2016 are reported in the Option Exercises and Stock Vested Table. The Target Grant was previously reported in the Summary Compensation Table, Grants of Plan-Based Awards Table and the Outstanding Equity Awards at Fiscal Year-End Table and described in the CD&A of the 2013 Proxy Statement.Schiavoni — $1,307,044. There were no forfeitures in 2016.
Mr. Brandt: | |||||
• Company's contribution under the 401(k) plan | | ||||
• Perquisites and personal benefits consisting of a car allowance, executive physical and financial planning | |||||
Mr. Hatfield: | |||||
• Company's contribution under the 401(k) plan | | ||||
• Perquisites and personal benefits consisting of a car allowance, executive physical and financial planning | |||||
Mr. Bement: | |||||
• Company's contribution under the 401(k) plan | | 12,150 | |||
• Perquisites and personal benefits consisting of a car allowance, executive physical and financial planning | 22,958 | ||||
Mr. Edington: | |||||
• Company's contribution under the 401(k) plan | | ||||
• Perquisites and personal benefits consisting of a car allowance, executive physical and financial planning | |||||
• Vested 2014 Edington DCP Discretionary Credits discussed in the narrative disclosure to the Summary Compensation Table and Grants of Plan-Based Awards table | | ||||
• Pursuant to a 2012 agreement discussed below, this amount reflects recovery of original purchase price of Arizona home ($295,000) plus associated tax liability ($256,299). No other current NEOs are eligible for similar benefits. | 551,299 | ||||
Mr. Falck: | |||||
• Company's contribution under the 401(k) plan | | ||||
• Perquisites and personal benefits consisting of a car allowance, executive physical and financial planning | |||||
| |||||
Mr. Schiavoni: | |||||
• Company's contribution under the 401(k) plan | | ||||
• Perquisites and personal benefits consisting of a car allowance and executive physical |
6876 | 20172018 Proxy Statement
Grants of Plan-Based Awards |
NAME | | GRANT DATE(1) | | ESTIMATED POSSIBLE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS(2) | | ESTIMATED FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN AWARDS | | ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK OR UNITS (#) | | GRANT DATE FAIR VALUE OF STOCK AND OPTION AWARDS(3) ($) | | GRANT DATE(1) | | ESTIMATED POSSIBLE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS(2) | | ESTIMATED FUTURE PAYOUTS UNDER EQUITY INCENTIVE PLAN AWARDS | | ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK OR UNITS (#) | | GRANT DATE FAIR VALUE OF STOCK AND OPTION AWARDS(3) ($) | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
| | THRESHOLD ($) | | TARGET ($) | | MAXIMUM ($) | | THRESHOLD (#) | | TARGET (#) | | MAXIMUM (#) | | | | | THRESHOLD ($) | | TARGET ($) | | MAXIMUM ($) | | THRESHOLD (#) | | TARGET (#) | | MAXIMUM (#) | | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Donald E. Brandt | | | | | 657,500 | | | 2,066,186 | | 2,630,000 | | | | | | | | | | | | | | | 677,500 | | | 1,910,695 | | 2,710,000 | | | | | | | | | | | ||
| | 02/16/2016(4) | | | | | | | | | | 19,630 | | 39,258 | | 78,516 | | | | 2,613,209 | | 02/21/2017(4) | | | | | | | | | | 16,548 | | 33,096 | | 66,192 | | | | 2,614,088 | ||
| | (PS) | | | | | | | | | | | | | | | | | | | | (PS) | | | | | | | | | | | | | | | | | | | ||
| | 02/16/2016(5) | | | | | | | | | | | | | | | | 26,172 | | 1,760,067 | | 02/21/2017(5) | | | | | | | | | | | | | | | | 22,064 | | 1,760,045 | ||
| | (RSU) | | | | | | | | | | | | | | | | | | | | (RSU) | | | | | | | | | | | | | | | | | | | ||
| | 12/31/2016(6) | | | | | | | | | | | | | | | | 19,679 | | 1,535,552 | | 03/29/2017(6) | | | | | | 4,000,000 | | | | | | | | | | | | | ||
| | (RSU) | | | | | | | | | | | | | | | | | | | | (Performance- Contingent Award) | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
James R. Hatfield | | | | 2,170 | | | 434,000 | | 868,000 | | | | | | | | | 2,240 | | | 448,000 | | 896,000 | | | | | | ||||||||||||||
| 02/16/2016(4) | | | | | | | 3,792 | | 7,584 | | 15,168 | | | 504,829 | | 02/21/2017(4) | | | | | | | 3,385 | | 6,770 | | 13,540 | | | 534,728 | |||||||||||
| (PS) | | | | | | | | | | | | (PS) | | | | | | | | | | | |||||||||||||||||||
| 02/16/2016(5) | | | | | | | | | | 5,056 | | 340,016 | | 02/21/2017(5) | | | | | | | | | | 4,516 | | 360,241 | |||||||||||||||
| (RSU) | | | | | | | | | | | | (RSU) | | | | | | | | | | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Randall K. Edington | | | | | 3,575 | | | 715,000 | | 1,430,000 | | | | | | | | | | | ||||||||||||||||||||||
Robert S. Bement | | | | | 2,250 | | | 450,000 | | 900,000 | | | | | | | | | | | ||||||||||||||||||||||
| | 02/16/2016(4) | | | | | | | | | | 2,678 | | 5,354 | | 10,708 | | | | 356,389 | | 02/21/2017(4) | | | | | | | | | | 2,257 | | 4,514 | | 9,028 | | | | 356,538 | ||
| | (PS) | | | | | | | | | | | | | | | | | | | | (PS) | | | | | | | | | | | | | | | | | | | ||
| | 02/16/2016(5) | | | | | | | | | | | | | | | | 3,572 | | 240,217 | | 02/21/2017(5) | | | | | | | | | | | | | | | | 3,012 | | 240,267 | ||
| | (RSU) | | | | | | | | | | | | | | | | | | | | (RSU) | | | | | | | | | | | | | | | | | | | ||
| | | | | 1 | (7) | | 125,000(7) | | 125,000(7) | | | | | | | | | | | | | | | | | | 1,000(7) | | | | | | | | | | | | | ||
| | | | | | | | 1,200(8) | | | | | | | | | | | | | | | | | | | | 1,000(7) | | | | | | | | | | | | | ||
| | | | | | | | 1,200(8) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
David P. Falck | | | | 1,836 | | | 367,250 | | 734,500 | | | | | | ||||||||||||||||||||||||||||
Randall K. Edington | | | | 793 | | | 158,672 | | 317,343 | | | | | | ||||||||||||||||||||||||||||
| 02/16/2016(4) | | | | | | | 3,346 | | 6,692 | | 13,384 | | | 445,453 | | 02/21/2017(4) | | | | | | | 1,505 | | 3,010 | | 6,020 | | | 237,745 | |||||||||||
| (PS) | | | | | | | | | | | | (PS) | | | | | | | | | | | |||||||||||||||||||
| 02/16/2016(5) | | | | | | | | | | 4,464 | | 300,204 | | 02/21/2017(5) | | | | | | | | | | 2,008 | | 160,178 | |||||||||||||||
| (RSU) | | | | | | | | | | | | (RSU) | | | | | 1,000(7) | | | | | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Mark A. Schiavoni | | | | | 2,550 | | | 510,000 | | 1,020,000 | | | | | | | | | | | ||||||||||||||||||||||
David P. Falck | | | | | 1,901 | | | 380,250 | | 760,500 | | | | | | | | | | | ||||||||||||||||||||||
| | 02/16/2016(4) | | | | | | | | | | 4,908 | | 9,816 | | 19,632 | | | | 653,402 | | 02/21/2017(4) | | | | | | | | | | 2,821 | | 5,642 | | 11,284 | | | | 445,633 | ||
| | (PS) | | | | | | | | | | | | | | | | | | | | (PS) | | | | | | | | | | | | | | | | | | | ||
| | 02/16/2016(5) | | | | | | | | | | | | | | | | 6,544 | | 440,084 | | 02/21/2017(5) | | | | | | | | | | | | | | | | 3,764 | | 300,254 | ||
| | (RSU) | | | | | | | | | | | | | | | | | | | | (RSU) | | | | | | | | | | | | | | | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Mark A. Schiavoni | | | | 2,663 | | | 532,500 | | 1,065,000 | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | 02/21/2017(4) | | | | | | | 4,137 | | 8,274 | | 16,548 | | | 653,521 | |||||||||||||||
| (PS) | | | | | | | | | | | |||||||||||||||||||||||||||||||
| 02/21/2017(5) | | | | | | | | | | 5,516 | | 440,011 | |||||||||||||||||||||||||||||
| (RSU) | | | | | | | | | | | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | |
2018 Proxy Statement | 77
Executive Compensation |
performance metrics achieving 1% and no achievement of the APS earnings goals under the Palo Verde Plan. The CEO Incentive Plan does not specify a target opportunity. We calculated a representative target amount for Mr. Brandt by using the final results of the earnings and business unit components from 20152016 (each of which were factors in Mr. Brandt's 20152016 incentive award) to compute a hypothetical payout under the current 20162017 CEO Incentive Plan. That hypothetical payout is used as a representative target
2017 Proxy Statement | 69
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amount. See "2016"Executive Compensation Components — Annual Cash Incentives" in the CD&A for additional information about the 20162017 Incentive Plans.
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table |
See the CD&A for further information regarding the terms of awards reported in the Summary Compensation Table and the Grants of Plan-Based Awards table, and for discussions regarding the formulas or criteria to be applied in determining the amounts payable, vesting schedules, and the treatment of dividends.
The Company does not have formal employment agreements with its Named Executive Officers;NEOs; however, we typically enter into offer letters with new executive officers. Deferred compensation credits granted
Mr. Edington joined APS as Chief Nuclear Officer ("CNO") in December 2006, relocating to Mr. Falck are discussed underArizona from Arkansas. He served as CNO through October 2016. At the heading "Discussion of Nonqualified Deferred Compensation."
APS andtime Mr. Edington joined APS, although the Palo Verde Generating Station was being operated safely, performance problems had been identified by the Company, and then later by the NRC, that needed to be corrected. Mr. Edington and his management team not only corrected those performance problems but led the plant to become one of the strongest performing plants in the United States.
Mr. Edington and APS executed an offer letter dated December 20, 2006. Mr. Edington retired from APS on March 22, 2017.2006, and entered into three supplemental agreements, one in 2008 (the "2008 Agreement"), one in 2012 (the "2012 Supplemental Agreement") and one in 2014 (the "2014 Supplemental Agreement"). The remaining portions of these agreements that letterwere still in effect are lifetime medical coverage forat the time of Mr. Edington and his spouse and aEdington's retirement were:
7078 | 20172018 Proxy Statement
2008 Agreement (defined below). Mr. Edington's offer letter also provides that he will participate in specific Palo Verde annual incentive opportunities. The specific incentive opportunity for 2016 is set forth in the CD&A under "2016 Compensation — Annual Cash Incentives."
On July 18, 2008, APS and Mr. Edington entered into a letter agreement. In December 2008, APS and Mr. Edington entered into a supplemental agreement further defining Mr. Edington's pension benefits and the lifetime medical coverage as set forth in the December 20, 2006 offer letter and formally memorializing certain provisions of the July 18, 2008 letter agreement (the "2008 Agreement"). The provisions of the 2008 Agreement still in effect are (i) the supplementalvested pension benefit and (ii) lifetime medical coverage for Mr. Edington and his spouse.
In June 2012, the Committee approved a supplemental agreement foris payable to Mr. Edington in order to incentivizetwo forms: one-half in a lump sum at the retentiontime of his critical skillsretirement; and nuclear expertise (the "2012 Supplemental Agreement"). The provisions of the 2012 Supplemental Agreement that are stillsecond half over time in effect are the following:a 100% joint and survivor annuity.
In October 2014, the Committee approved a supplemental agreement for Mr. Edington that provides for additional compensation terms supplemental to those set forth in the 2012 Supplemental Agreement to incentivize the retention of his critical skills and nuclear expertise (the "2014 Supplemental Agreement"). The provisions of the 2014 Supplemental Agreement that are still in effect are the following:
2017 Proxy Statement | 71
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consisting of $500,000 as of September 30, 2014. These discretionary credits will vest2014, which vested September 30, 2017 because a requirement that certain key performance metrics for Palo Verde did not decline during the period September 30, 2014 to the date 180 days after Mr. Edington's retirement from APS in March 2017 provided that Palo Verde's key regulatory and oversight evaluations and assessments have not declined during the period beginning September 30, 2014 and ending as of the date 180 days after Mr. Edington's retirement. These credits will be payable over a 10-year period following his retirement from APS in March 2017was met (collectively, the "2014 Edington DCP Discretionary Credits" and together with the 2012 Edington DCP Discretionary Credits, the "Edington DCP Discretionary Credits");
APS pays 29.1% of Mr. Edington's compensation expense. The balance is reimbursed to APS by the other owners of Palo Verde.
722018 Proxy Statement | | 2017 Proxy Statement79
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Outstanding Equity Awards at Fiscal Year-End |
STOCK AWARDS | STOCK AWARDS | |||||||||||||||
| | | | | | | | | | | | | | | | |
NAME | NUMBER OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED (#) | MARKET VALUE OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED ($)(1) | EQUITY INCENTIVE PLAN AWARDS: NUMBER OF UNEARNED SHARES, UNITS OR OTHER RIGHTS THAT HAVE NOT VESTED (#) | EQUITY INCENTIVE PLAN AWARDS: MARKET OR PAYOUT VALUE OF UNEARNED SHARES, UNITS OR OTHER RIGHTS THAT HAVE NOT VESTED ($)(1) | NUMBER OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED (#) | MARKET VALUE OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED ($)(1) | EQUITY INCENTIVE PLAN AWARDS: NUMBER OF UNEARNED SHARES, UNITS OR OTHER RIGHTS THAT HAVE NOT VESTED (#) | EQUITY INCENTIVE PLAN AWARDS: MARKET OR PAYOUT VALUE OF UNEARNED SHARES, UNITS OR OTHER RIGHTS THAT HAVE NOT VESTED ($)(1) | ||||||||
| | | | | | | | | | | | | | | | |
Donald E. Brandt | 26,497(2) (RSUs) | 2,067,561 | 80,468(6) (PS at maximum) | 6,278,918 | 22,064(2) (RSUs) | 1,879,412 | 33,889(7) (PS at target) | 2,886,665 | ||||||||
| 23,520(3) (RSUs) | 1,835,266 | 78,821(7) (PS at maximum) | 6,150,403 | 20,177(3) (RSUs) | 1,718,677 | 82,904(8) (PS at maximum) | 7,061,763 | ||||||||
| 18,018(4) (RSUs) | 1,405,945 | 91,931(8) (PS at maximum) | 7,173,376 | 15,907(4) (RSUs) | 1,354,958 | 81,038(9) (PS at maximum) | 6,902,817 | ||||||||
| 8,696(5) (RSUs) | 678,549 | | | 9,132(5) (RSUs) | 777,864 | | | ||||||||
| | | | | | | | | | | | | | | | |
James R. Hatfield | 5,119(2) (RSUs) | 399,436 | 15,545(6) (PS at maximum) | 1,212,976 | 4,570(2) (RSUs) | 389,273 | 6,932(7) (PS at target) | 590,468 | ||||||||
4,010(3) (RSUs) | 312,900 | 13,437(7) (PS at maximum) | 1,048,489 | 3,898(3) (RSUs) | 332,032 | 16,016(8) (PS at maximum) | 1,364,243 | |||||||||
3,361(4) (RSUs) | 262,258 | 16,417(8) (PS at maximum) | 1,281,018 | 2,712(4) (RSUs) | 231,009 | 13,815(9) (PS at maximum) | 1,176,762 | |||||||||
1,611(5) (RSUs) | 125,706 | 1,724(5) (RSUs) | 146,850 | |||||||||||||
| | | | | | | | | | | | | | | | |
Randall K. Edington | 3,616(2) (RSUs) | 282,156 | 10,974(6) (PS at maximum) | 856,301 | ||||||||||||
Robert S. Bement | 3,012(2) (RSUs) | 256,562 | 4,622(7) (PS at target) | 393,702 | ||||||||||||
| 3,207(3) (RSUs) | 250,243 | 10,750(7) (PS at maximum) | 838,823 | 1,835(3) (RSUs) | 156,305 | 7,539(8) (PS at maximum) | 642,172 | ||||||||
| 2,146(4) (RSUs) | 167,453 | 10,943(8) (PS at maximum) | 853,882 | 1,265(4) (RSUs) | 107,753 | 6,449(9) (PS at maximum) | 549,326 | ||||||||
| 1,152(5) (RSUs) | 89,891 | | | 653(5) (RSUs) | 55,623 | | | ||||||||
| | | | | | | | | | | | | | | | |
Randall K. Edington | 0(6) | 0 | (6) | 3,082(7) (PS at target) | 262,525 | |||||||||||
11,306(8) (PS at maximum) | 963,045 | |||||||||||||||
11,052(9) (PS at maximum) | 941,410 | |||||||||||||||
| | | | | | | | | ||||||||
David P. Falck | 4,519(2) (RSUs) | 352,618 | 13,717(6) (PS at maximum) | 1,070,338 | 3,809(2) (RSUs) | 324,451 | 5,777(7) (PS at target) | 492,085 | ||||||||
| 3,442(3) (RSUs) | 293,190 | 14,132(8) (PS at maximum) | 1,203,764 | ||||||||||||
| 2,712(4) (RSUs) | 231,009 | 13,815(9) (PS at maximum) | 1,176,762 | ||||||||||||
| 1,632(5) (RSUs) | 139,014 | | | ||||||||||||
| | | | | | | | | ||||||||
Mark A. Schiavoni | 5,516(2) (RSUs) | 469,853 | 8,472(7) (PS at target) | 721,645 | ||||||||||||
4,010(3) (RSUs) | 312,900 | 13,437(7) (PS at maximum) | 1,048,489 | 5,182(3) (RSUs) | 441,402 | 20,729(8) (PS at maximum) | 1,765,696 | |||||||||
3,221(4) (RSUs) | 251,334 | 16,417(8) (PS at maximum) | 1,281,018 | 3,768(4) (RSUs) | 320,959 | 18,419(9) (PS at maximum) | 1,568,931 | |||||||||
1,521(5) (RSUs) | 118,684 | 1,724(5) (RSUs) | 146,850 | |||||||||||||
| | | | | | | | | | | | | | | | |
Mark A. Schiavoni | 6,686(2) (RSUs) | 521,708 | 20,120(6) (PS at maximum) | 1,569,964 | ||||||||||||
| 5,498(3) (RSUs) | 429,009 | 17,915(7) (PS at maximum) | 1,397,907 | ||||||||||||
| 3,361(4) (RSUs) | 262,258 | 16,417(8) (PS at maximum) | 1,281,018 | ||||||||||||
| 1,611(5) (RSUs) | 125,706 | | | ||||||||||||
| | | | | | | | |
2017 Proxy Statement |80 73| 2018 Proxy Statement
|
Mr. Hatfield — 5,056;4,516; Mr. EdingtonBement — 3,572;3,012; Mr. Falck — 4,464;3,764; and Mr. Schiavoni — 6,544;5,516; and (ii) accrued dividend rights (and interest thereon) that will be paid in stock to the extent the underlying RSU's actually vest, as follows: Mr. Hatfield — 54 and Mr. Falck — 45.
| NAME | | UNITS AT TARGET (#) | | PAYOUT VALUE ($) | | ||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | ||||
| Donald E. Brandt | | | 40,234 | | | 3,139,459 | | ||
| James R. Hatfield | | | 7,773 | | | 606,528 | | ||
| Randall K. Edington | | | 5,487 | | | 428,151 | | ||
| David P. Falck | | | 6,858 | | | 535,130 | | ||
| Mark A. Schiavoni | | | 10,060 | | | 784,981 | | ||
| | | | | | |
| NAME | | UNITS AT TARGET (#) | | PAYOUT VALUE ($) | | NAME | | UNITS AT TARGET (#) | | PAYOUT VALUE ($) | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | ||||||||
| Donald E. Brandt | | | 39,410 | | | 3,075,162 | | Donald E. Brandt | | | 41,452 | | | 3,530,881 | | ||||
| James R. Hatfield | | | 6,719 | | | 524,284 | | James R. Hatfield | | | 8,008 | | | 682,121 | | ||||
| Randall K. Edington | | | 5,375 | | | 419,411 | | Robert S. Bement | | | 3,769 | | | 321,044 | | ||||
| David P. Falck | | | 6,719 | | | 524,284 | | Randall K. Edington | | | 5,653 | | | 481,523 | | ||||
| Mark A. Schiavoni | | | 8,957 | | | 698,915 | | David P. Falck | | | 7,066 | | | 601,882 | | ||||
| | | | | | | Mark A. Schiavoni | | | 10,365 | | | 882,891 | | ||||||
| | | | | | |
74 | 2017 Proxy Statement
The 20152016 performance shares have a performance period beginning on January 1, 20152016 and ending on December 31, 2017;2018; however, the payout, if any, will not be determined until February 20182019 for the portion tied to TSR and October 20182019 for the portion tied to the six operational performance metrics. These are the dates the Company anticipates that we will have the information necessary to determine whether, and to what extent, these metrics have been met.
2018 Proxy Statement | 81
Executive Compensation |
Mr. Schiavoni — 1,373.1,487. If the 20142015 performance share grant pays at the target (100% of Base Grant) level, including dividends and interest thereon payable in stock, the amounts would be as follows:
| NAME | | UNITS AT TARGET (#) | | PAYOUT VALUE ($) | | NAME | | UNITS AT TARGET (#) | | PAYOUT VALUE ($) | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | ||||||||
| Donald E. Brandt | | | 45,966 | | | 3,586,727 | | Donald E. Brandt | | | 40,519 | | | 3,451,409 | | ||||
| James R. Hatfield | | | 8,208 | | | 640,471 | | James R. Hatfield | | | 6,908 | | | 588,423 | | ||||
| Randall K. Edington | | | 5,472 | | | 426,980 | | Robert S. Bement | | | 3,224 | | | 274,621 | | ||||
| David P. Falck | | | 8,208 | | | 640,471 | | Randall K. Edington | | | 5,526 | | | 470,704 | | ||||
| Mark A. Schiavoni | | | 8,208 | | | 640,471 | | David P. Falck | | | 6,908 | | | 588,423 | | ||||
| | | | | | | Mark A. Schiavoni | | | 9,209 | | | 784,423 | | ||||||
| | | | | | |
Option Exercises and Stock Vested |
| | STOCK AWARDS | | | | | STOCK AWARDS | | | |||||||||||||
| | | | | | | | | | | ||||||||||||
NAME | | NUMBER OF SHARES ACQUIRED ON VESTING (#)(1) | | VALUE REALIZED ON VESTING ($)(2) | | | NUMBER OF SHARES ACQUIRED ON VESTING (#)(1) | | VALUE REALIZED ON VESTING ($)(2) | | ||||||||||||
| | | | | | | | | | | ||||||||||||
Donald E. Brandt | | | 187,853 | | | 14,003,035 | | | | | 109,970 | | | 9,020,587 | | | ||||||
| | | | | | | | | | | ||||||||||||
James R. Hatfield | | | 15,643 | | | 1,106,511 | | | | | 19,757 | | | 1,620,485 | | | ||||||
| | | | | | | | | | | ||||||||||||
Robert S. Bement | | | 8,200 | | | 672,897 | | | ||||||||||||||
| | | | | | |||||||||||||||||
Randall K. Edington | | | 11,890 | | | 840,653 | | | | | 21,493 | | | 1,774,574 | | | ||||||
| | | | | | | | | | | ||||||||||||
David P. Falck | | | 15,930 | | | 1,126,101 | | | | | 19,435 | | | 1,595,145 | | | ||||||
| | | | | | | | | | | ||||||||||||
Mark A. Schiavoni | | | 15,694 | | | 1,109,993 | | | | | 20,640 | | | 1,689,979 | | | ||||||
| | | | | | | | | | |
2017 Proxy Statement |82 75| 2018 Proxy Statement
|
earned on RSUs granted in February 20132011 and released in part on February 19, 2016 as follows: Mr. Brandt — 449; Mr. Hatfield — 157; Mr. Edington — 112; Mr. Falck — 78; and Mr. Schiavoni — 78; (iv) RSUs that were granted to all of the Named Executive Officers in February 2012 that vested and were released in part on February 19, 2016 as follows: Mr. Brandt — 8,546; Mr. Hatfield — 1,188; Mr. Edington — 1,188; Mr. Falck — 1,662; and Mr. Schiavoni — 950; dividend rights (and interest thereon) payable in stock earned on RSUs granted in February 2012 and released on February 19, 2016 as follows: Mr. Brandt — 627; Mr. Hatfield — 174; Mr. Edington — 174; Mr. Falck — 122; and Mr. Schiavoni — 70; (v) additional RSUs resulting from notional dividends on the Supplemental RSUs that were granted to all Named Executive Officers in February 2011,further described below (the "Supplemental RSUs"), that vested, but were not released, on the following dates in 2016:2017:
| NAME | | MARCH 1 | | JUNE 1 | | SEPTEMBER 1 | | DECEMBER 1 | | NAME | | MARCH 1 | | JUNE 1 | | SEPTEMBER 1 | | DECEMBER 1 | | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| Donald E. Brandt | | | 241 | | | 223 | | | 224 | | | 241 | | | Donald E. Brandt | | | 216 | | | 201 | | | 201 | | | 212 | | | ||||||||||||||
| James R. Hatfield | | | 68 | | | 61 | | | 63 | | | 68 | | | James R. Hatfield | | | 60 | | | 56 | | | 56 | | | 60 | | | ||||||||||||||
| Randall K. Edington | | | 135 | | | 124 | | | 124 | | | 135 | | | Robert S. Bement | | | 60 | | | 56 | | | 56 | | | 60 | | | ||||||||||||||
| David P. Falck | | | 68 | | | 61 | | | 63 | | | 68 | | | Randall K. Edington | | | 120 | | | — | | | — | | | — | | | ||||||||||||||
| Mark A. Schiavoni | | | 68 | | | 61 | | | 63 | | | 68 | | | David P. Falck | | | 60 | | | 56 | | | 56 | | | 60 | | | ||||||||||||||
| | | | | | | | | | | Mark A. Schiavoni | | | 60 | | | 56 | | | 56 | | | 60 | | | |||||||||||||||||||
| | | | | | | | | | |
(The Supplemental RSUs vested 50% on February 15, 2013, 25% on February 14, 2014, and 25% on February 13, 2015. The Supplemental RSUs are not released to the recipient until the recipient's retirement, death, disability or separation of employment from the Company. Mr. Edington's vested Supplemental RSUs were released in March 2017 when he retired); (vii) performance shares that were granted to all of the Named Executive OfficersNEOs in February 2013,2014, which were based on a performance period of January 1, 20132014 to December 31, 2015,2016, and which were released in 20162017 when the Company had the information needed to determine whether, and to what extent, the applicable performance criteria were met, as follows: performance shares related to TSR were released on February 16, 201621, 2017 as follows: Mr. Brandt — 17,125;38,036; Mr. Hatfield — 2,997;6,792; Mr. Bement — 2,718; Mr. Edington — 2,140;4,527; Mr. Falck — 2,997;6,792; and Mr. Schiavoni — 2,997;6,792; dividend rights (and interest thereon) payable in stock on the performance shares released on February 16, 201621, 2017 as follows: Mr. Brandt — 1,905;3,738; Mr. Hatfield — 333;668; Mr. Bement — 267; Mr. Edington — 238;445; Mr. Falck — 333;668; and Mr. Schiavoni — 333;668; and performance shares related to the six operational performance metrics were released on October 19, 201617, 2017 as follows: Mr. Brandt — 31,250;30,959; Mr. Hatfield — 5,470;5,528; Mr. Bement — 2,212; Mr. Edington — 3,906;3,685; Mr. Falck — 5,470;5,528; and Mr. Schiavoni — 5,470;5,528; and dividend rights (and interest thereon) payable in stock on the performance shares released on October 19, 201617, 2017 as follows: Mr. Brandt — 3,752;3,327; Mr. Hatfield — 657;594; Mr. Bement — 238; Mr. Edington — 469;396; Mr. Falck — 657;594; and Mr. Schiavoni — 657;594; and (vii) the Target Grant — 67,489, Discretionary Grant — 16,873 and accrued notional dividends on the Target Grant and Discretionary Grant2012 special performance-linked retention grant of RSUs granted to Mr. Brandt (the "2012 Brandt RSU Award") — 14,034 as781 in respect of December 31, 2016 under the CEO Retention Grant. This amount wasFebruary 1, 2017 record date that were paid in Februaryon March 1, 2017.
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|
Pension Benefits |
The Pension Benefits table below includes estimates of the potential future pension benefits for each Named Executive OfficerNEO based on the actuarial assumptions used for financial reporting purposes, such as the life expectancy of each Named Executive OfficerNEO and his spouse and "discount rates."
NAME | | PLAN NAME | | NUMBER OF YEARS CREDITED SERVICE (#) | | PRESENT VALUE OF ACCUMULATED BENEFITS ($)(1) | | PAYMENTS DURING LAST FISCAL YEAR ($) | | | PLAN NAME | | NUMBER OF YEARS CREDITED SERVICE (#) | | PRESENT VALUE OF ACCUMULATED BENEFITS ($)(1) | | PAYMENTS DURING LAST FISCAL YEAR ($) | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Donald E. Brandt(2) | | Retirement Plan | | | 14 | | | 424,887 | | | 0 | | | | Retirement Plan | | | 15 | | | 474,551 | | | 0 | | | ||||||||||
| | Supplemental Plan | | | 14 | | | 11,224,359 | | | 0 | | | | Supplemental Plan | | | 15 | | | 13,546,465 | | | 0 | | | ||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
James R. Hatfield(3) | | Retirement Plan | | | 9 | | | 173,639 | | | 0 | | | | Retirement Plan | | | 10 | | | 202,464 | | | 0 | | | ||||||||||
| Supplemental Plan | | | 9 | | | 2,694,208 | | | 0 | | | | Supplemental Plan | | | 10 | | | 3,256,497 | | | 0 | | | |||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Randall K. Edington(4) | | Retirement Plan | | | 10 | | | 217,639 | | | 0 | | | |||||||||||||||||||||||
Robert S. Bement(4) | | Retirement Plan | | | 11 | | | 234,206 | | | 0 | | | |||||||||||||||||||||||
| | Supplemental Plan | | | 10 | | | 5,110,110 | | | 0 | | | | Supplemental Plan | | | 11 | | | 2,517,943 | | | 0 | | | ||||||||||
| | Employment Agreements | | | N/A | | | 13,173,819 | | | 0 | | | | | | | | | | | | ||||||||||||||
| | | | | | | | | | |||||||||||||||||||||||||||
David P. Falck(5) | | Retirement Plan | | | 8 | | | 162,076 | | | 0 | | | |||||||||||||||||||||||
Randall K. Edington(5) | | Retirement Plan | | | 10 | | | 0 | | | 249,490 | (8) | | |||||||||||||||||||||||
| Supplemental Plan | | | 10 | | | 2,864,789 | | | 2,904,156 | (8) | | ||||||||||||||||||||||||
| Supplemental Plan | | | 8 | | | 1,998,265 | | | 0 | | | | Employment Agreements | | | N/A | | | 6,688,835 | | | 8,017,441 | (8) | | |||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Mark A. Schiavoni(6) | | Retirement Plan | | | 8 | | | 159,056 | | | 0 | | | |||||||||||||||||||||||
David P. Falck(6) | | Retirement Plan | | | 9 | | | 194,941 | | | 0 | | | |||||||||||||||||||||||
| | Supplemental Plan | | | 8 | | | 2,079,830 | | | 0 | | | | Supplemental Plan | | | 9 | | | 2,431,914 | | | 0 | | | ||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Mark A. Schiavoni(7) | | Retirement Plan | | | 9 | | | 192,388 | | | 0 | | | |||||||||||||||||||||||
| Supplemental Plan | | | 9 | | | 2,651,678 | | | 0 | | | ||||||||||||||||||||||||
| | | | | | | | | |
84 | 2018 Proxy Statement
Executive Compensation |
Discussion of Pension Benefits |
Retirement Plan and Supplemental Plan. The Company's Retirement Plan is a tax-qualified, non-contributory retirement plan for salaried and hourly employees. The Supplemental Plan provides retirement benefits for key salaried employees, in addition to those provided under the Retirement Plan. The Supplemental Plan pays only the difference between the total benefit payable under the Supplemental Plan and the benefit payable under the Retirement Plan. As a
2017 Proxy Statement | 77
|
result, an executive who participates in the Supplemental Plan does not receive duplicative benefits.
Prior to April 1, 2003, benefits under the Retirement Plan and the Supplemental Plan (the "Traditional Formula Benefit") accrued in accordance with a traditional retirement plan formula based on average annual compensation and years of service (the "Traditional Formula"). Effective April 1, 2003, the Company changed the benefit accrual formula for both the Retirement Plan and the Supplemental Plan (the "Account Balance Benefit") to a retirement account balance formula (the "Account Balance Formula"). As part of the modification, all then current participants were able to elect to either (1) continue to earn benefits calculated under the Traditional Formula, or (2) earn benefits calculated (a) under the Traditional Formula for service through March 31, 2003, and (b) under the Account Balance Formula for service after that date. Mr. Brandt's benefits are calculated under the combined Traditional Formula/Account Balance Formula. Messrs. Hatfield's, Bement's, Edington's, Falck's and Schiavoni's benefits are calculated under the Account Balance Formula. Mr. Edington's benefits under the Supplemental Plan are calculated in accordance with his employment agreements with the Company, which are described in the narrative disclosure accompanying the Summary Compensation Table and the Grants of Plan-Based Awards table.
Under the Traditional Formula of the Supplemental Plan, a participant's monthly benefit for life beginning at normal retirement age (age 65 or age 60 with 20 years of service) is equal to the following:
A participant's Traditional Formula Benefit under the Retirement Plan is a monthly benefit for life beginning at normal retirement age and is equal to the participant's average monthly compensation multiplied by 1.65% for the first 33 years of service, plus 1% of average monthly compensation for each year of service credited in excess of 33 years. A participant's Traditional Formula Benefit begins when the participant reaches age 65 with 5 years of service or age 60 with 33 years of service. The maximum Traditional Formula Benefit a participant may receive under both the Retirement Plan and the Supplemental Plan is a monthly benefit of 60% of the participant's average monthly compensation.
Under both the Supplemental Plan and the Retirement Plan, a participant may elect to begin receiving the Traditional Formula Benefit after attaining early retirement age, which is defined as age 55 with 10 years of service. The Traditional Formula Benefit of an individual who makes this election is reduced to reflect the early commencement of benefits. Under the Supplemental Plan, the reduction equals 3% per year for each year for which the individual receives benefits prior to normal retirement and under the Retirement Plan, if the individual has more than 20 years of service, the reduction equals 3% per year for each year for which the individual
782018 Proxy Statement | | 2017 Proxy Statement85
|
20 years of service, the reduction equals 3% per year for each year for which the individual receives benefits prior to normal retirement, and if the individual has less than 20 years of service, the benefit is actuarially reduced for each year for which the individual receives benefits prior to normal retirement. Messrs. Brandt, Hatfield and EdingtonBement currently qualify for early retirement, but not normal retirement, under the Retirement Plan and the Supplemental Plan. Messrs. Hatfield,Mr. Falck currently qualifies for normal retirement under the Retirement Plan and the Supplemental Plan. Mr. Schiavoni dodoes not currently qualify for early or normal retirement under either the Supplemental Plan or the Retirement Plan.
Under the Account Balance Formula, a notional account is established for each eligible participant and benefits are generally payable at termination of employment. The Company credits monthly amounts to a participant's account.
Under the Supplemental Plan, Company credits are based on the following formula:
AGE AT END OF PLAN YEAR | | PERCENT OF MONTHLY COMPENSATION CONTRIBUTION RATE (%) | | |||
---|---|---|---|---|---|---|
| | | | |||
Less than 35 | | | 12 | | | |
35-39 | | | 14 | | | |
40-44 | | | 16 | | | |
45-49 | | | 20 | | | |
50-54 | | | 24 | | | |
55 and over | | | 28 | | | |
| | | |
Company credits under the Supplemental Plan stop at the end of the year in which a participant attains 25 years of service (the "25-Year Cap").
Under the Retirement Plan, Company credits are based on the following formula:
AGE PLUS WHOLE YEARS OF SERVICE AT END OF PLAN YEAR | | PERCENT OF MONTHLY COMPENSATION CONTRIBUTION RATE (%) | | |||
---|---|---|---|---|---|---|
| | | | |||
Less than 40 | | | 4 | | | |
40-49 | | | 5 | | | |
50-59 | | | 6 | | | |
60-69 | | | 7 | | | |
70-79 | | | 9 | | | |
80 and over | | | 11 | | | |
| | | |
In addition, participants in the Retirement Plan on December 31, 2002 are eligible for up to 10 years of transition credits based on age and years of service (with the maximum transition credit being equal to 2.75% of average monthly compensation).
For purposes of calculating the Traditional Formula Benefit and the Account Balance Benefit under the Retirement Plan, compensation consists solely of base salary up to $265,000,$270,000, including any employee contributions under the Company's 401(k) plan, flexible benefits plan and qualified transportation arrangement under Section 132(f) of the Code. Amounts voluntarily deferred under other deferred compensation plans, bonuses and incentive pay are not taken
2017 Proxy Statement |86 79| 2018 Proxy Statement
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deferred under other deferred compensation plans, bonuses, incentive pay and long-term equity awards are not taken into account under the Retirement Plan. The Supplemental Plan takes these amounts into account (with certain exceptions) plus base salary beyond the $265,000$270,000 limit. In addition, retention units (as described above in the Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table) are included in compensation under the Supplemental Plan.
For purposes of the Traditional Formula under the Retirement Plan, the average monthly compensation is the average of the highest 36 consecutive months of compensation in the final 10 years of employment; under the Supplemental Plan, the average monthly compensation is the average of the highest 36 consecutive months of compensation during employment. For purposes of the Account Balance Formula, contributions are based on the participant's then current monthly compensation calculated as described above.
A participant's years of service begin accruing on the date of employment. However, benefits do not vest until the completion of three-years of service. Under both the Retirement Plan and the Supplemental Plan, benefits are generally payable, as the participant elects, in the form of a level annuity, with or without survivorship, or a lump sum. However, Traditional Formula Benefits generally are not available as a lump sum, but are paid in the form of an annuity. Optional benefit forms are of relatively equal actuarial value under the Retirement Plan. Under the Supplemental Plan, the 50% joint and survivor benefit form is fully subsidized, and the other benefit forms are partially subsidized. The Supplemental Plan offers an optional five-year certain form of payment (payable in 60 monthly installments).
Effective January 1, 2011, the Supplemental Plan was amended to reduce the Company credits for individuals who became participants on or after January 1, 2011 to the levels listed in the following table:
AGE AT END OF PLAN YEAR | | PERCENT OF MONTHLY COMPENSATION CONTRIBUTION RATE (%) | | |||
---|---|---|---|---|---|---|
| | | | |||
Less than 35 | | | 8 | | | |
35-39 | | | 9 | | | |
40-44 | | | 10 | | | |
45-49 | | | 12 | | | |
50-54 | | | 15 | | | |
55 and over | | | 18 | | | |
| | | |
In addition, individuals who became participants in the Supplemental Plan on or after January 1, 2011 are no longer entitled to receive a fully subsidized 50% joint and survivor annuity form of benefit, but the 25-Year Cap has been eliminated. Prior to the amendment, participants who were promoted to officer status were entitled to retroactive treatment as an officer for their entire period of employment. This feature has been eliminated for individuals promoted to officer status on or after January 1, 2011.
80 | 2017 Proxy Statement
Pursuant to Mr. Edington'sThe 2008 Agreement, the 2012 Supplemental Agreement as of December 31, 2013, the supplemental pension benefit amount calculated in accordance with the 2008 Agreement increased by an amount equal to 5% of the benefit that would have otherwise been payable and as of December 31, 2014, the supplemental pension benefit amount increased by an amount equal to 10% (inclusive of the preceding 5% increase) of the benefit that would have otherwise been payable. Pursuant to the 2014 Supplemental Agreement as of June 30, 2016,resulted in a total pension benefit (including the benefit due under the Company's qualified plan and non-qualified plan) equal to 69.3% applied to Mr. Edington's existing supplemental pension benefit set forthfinal average wage to determine his lifetime benefit. These agreements are discussed in the 2008 Agreement as increased bynarrative disclosure accompanying the 2012 Supplemental Agreement, increased by an amount equal to 5%Summary Compensation Table and the Grants of the benefit that would have otherwise been payable.Plan-Based Awards table.
Benefits under the Retirement Plan are paid from a tax-exempt trust. Benefits under the Supplemental Plan are paid from the general assets of the Company.
2018 Proxy Statement | 87
Executive Compensation |
Nonqualified Deferred Compensation |
NAME | | EXECUTIVE CONTRIBUTIONS IN LAST FISCAL YEAR ($)(1) | | REGISTRANT CONTRIBUTIONS IN LAST FISCAL YEAR ($) | | AGGREGATE EARNINGS IN LAST FISCAL YEAR ($)(2) | | AGGREGATE WITHDRAWALS/ DISTRIBUTIONS ($) | | AGGREGATE BALANCE AT LAST FISCAL YEAR END ($)(3) | | | EXECUTIVE CONTRIBUTIONS IN LAST FISCAL YEAR ($)(1) | | REGISTRANT CONTRIBUTIONS IN LAST FISCAL YEAR ($) | | AGGREGATE EARNINGS IN LAST FISCAL YEAR ($)(2) | | AGGREGATE WITHDRAWALS/ DISTRIBUTIONS ($) | | AGGREGATE BALANCE AT LAST FISCAL YEAR END ($)(3) | | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
Donald E. Brandt: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
DCP & 2005 Plan | | | 131,510 | | | 0 | | | 126,255 | | | 0 | | | 1,820,468 | | | | | 326,416 | | | 0 | | | 158,628 | | | 0 | | | 2,305,512 | | | ||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,121,324 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,386,403 | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
James R. Hatfield: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
2005 Plan | | | 30,984 | | | 0 | | | 11,149 | | | 0 | | | 170,757 | | | | | 31,962 | | | 0 | | | 14,475 | | | 0 | | | 217,194 | | | ||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 589,673 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 663,467 | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
Robert S. Bement: | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||
2005 Plan | | | 140,622 | | | 0 | | | 119,353 | | | 0 | | | 1,682,375 | | | |||||||||||||||||||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 663,467 | | | |||||||||||||||||||||||||||||||||||
Bement DCP Discretionary | | | 0 | | | 75,000 | | | 81,623 | | | 0 | | | 1,133,799 | | | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||||||||||||||||||||||||
Randall K. Edington: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
2005 Plan | | | 550,391 | | | 0 | | | 294,224 | | | 0 | | | 4,274,367 | | | | | 269,019 | | | 0 | | | 327,022 | | | 1,393,638 | | | 3,476,770 | | | ||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,178,409 | | | | | 0 | | | 0 | | | 0 | | | 1,322,031 | | | 0 | | | ||||||||||||||||||
Edington DCP Discretionary | | | 0 | | | 300,000 | | | 209,592 | | | 0 | | | 2,909,419 | | | |||||||||||||||||||||||||||||||||||
Edington DCP Discretionary | | | 0 | | | 0 | | | 219,589 | | | 398,065 | | | 2,730,943 | | | |||||||||||||||||||||||||||||||||||
RSUs(7) | | | 0 | | | 0 | | | 0 | | | 0 | | | 677,812 | | | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
David P. Falck: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 589,673 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 663,467 | | | ||||||||||||||||||
Falck DCP Discretionary Credits(6) | | | 0 | | | 0 | | | 43,506 | | | 0 | | | 603,917 | | | |||||||||||||||||||||||||||||||||||
Falck DCP Discretionary Credits(8) | | | 0 | | | 0 | | | 46,877 | | | 0 | | | 650,794 | | | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
Mark A. Schiavoni: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
2005 Plan | | | 0 | | | 0 | | | 32,134 | | | 0 | | | 446,101 | | | | | 93,475 | | | 0 | | | 40,572 | | | 0 | | | 580,148 | | | ||||||||||||||||||
Supplemental RSUs(4) | | | 0 | | | 0 | | | 0 | | | 0 | | | 589,673 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 663,467 | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
2017 Proxy Statement |88 81| 2018 Proxy Statement
|
| | SUPPLEMENTAL RSUs | | NOTIONAL SUPPLEMENTAL RSUs | | | SUPPLEMENTAL RSUs | | NOTIONAL SUPPLEMENTAL RSUs | | | | |||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2013 | | 2014 | | 2015 | | 2013 | | 2014 | | 2015 | | 2016 | | | 2013 | | 2014 | | 2015 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Donald E. Brandt | | 10,790 | | 5,395 | | 5,395 | | 1,339 | | 1,412 | | 1,926 | | | 929 | | | | 10,790 | | 5,395 | | 5,395 | | 1,339 | | 1,412 | | 1,926 | | 929 | | | 830 | | | |||||||||||||||
James R. Hatfield | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | | 260 | | | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | 260 | | | 232 | | | |||||||||||||||
Robert S. Bement | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | 260 | | | 232 | | | ||||||||||||||||||||||||||||||||
Randall K. Edington | | 5,994 | | 5,994 | | 0 | | 745 | | 1,290 | | 561 | | | 518 | | | | 5,994 | | 5,994 | | 0 | | 745 | | 1,290 | | 561 | | 518 | | | 120 | | | |||||||||||||||
David P. Falck | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | | 260 | | | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | 260 | | | 232 | | | |||||||||||||||
Mark A. Schiavoni | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | | 260 | | | | 2,998 | | 1,499 | | 1,499 | | 372 | | 393 | | 536 | | 260 | | | 232 | | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pursuant to the 2014 Supplemental Agreement, the Company granted the 2014 Edington DCP Discretionary Credits to Mr. Edington. The $800,000$500,000 of the 2014 Edington DCP Discretionary Credits that vested on June 30, 2016180 days after Mr. Edington's retirement from APS in March 2017 have been included in the Summary Compensation Table since the performance condition was met. The remaining unvested $500,000 of the 2014 Edington DCP Discretionary Credits will be included in the Summary Compensation Table when the performance condition is met. The terms of the 2014 Edington DCP Discretionary Credits are also discussed in the narrative disclosure accompanying the Summary Compensation Table and Grants of Plan-Based Awards table.
Discussion of Nonqualified Deferred Compensation |
DCP and 2005 Plan. Effective January 1, 1992, the Company established The Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company, and El Dorado Investment Company Deferred Compensation Plan (the "DCP"). Under the DCP, a participant who is an employee is allowed to defer up to 50% of annual base salary and up to 100% of year-end bonus, which would include awards under regular annual incentive plans, but not special incentive payments. A participant who is a member of the Board is allowed to defer up to 100% of the annual cash fees payable to the participant. Amounts deferred by participants are credited with interest at various rates in substantially the same manner as interest is credited pursuant to the 2005 Plan, as described below. Distributions may be made (1) within 60 days after the fifth year an amount was deferred, (2) on account of an unforeseen emergency, (3) on account of retirement after attaining age 65 with five years of service or after attaining age 55 with 10 years of service ("Retirement Benefit"), (4) on account of termination prior to retirement ("Termination Benefit"), (5) on account of disability, or (6) on account of death before termination of employment.
The Retirement Benefit and Termination Benefit are payable in a lump sum or in 5, 10, or 15 equal annual installments, as elected by the participant. Other benefits are generally paid in a lump sum. The method of crediting interest on lump sum and installment payments under the DCP is substantially the same as the method used in the 2005 Plan, as described below.
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On December 15, 2004, the Board authorized the adoption of a new nonqualified deferred compensation plan for post-2004 deferrals (the "2005 Plan"). No future deferrals will be permitted under the DCP. The 2005 Plan, effective as of January 1, 2005, is based in large part on the DCP as described above. The 2005 Plan was adopted to comply with the requirements of Section 409A of the Code.
82 | 2017 Proxy Statement
Under the 2005 Plan, a participant who is an employee is allowed to defer up to 50% of the participant's base salary and up to 100% of the participant's bonus, including regular awards under annual incentive plans, but not special awards. A participant who is a member of the Board is allowed to defer up to 100% of the annual cash fees payable to the participant. Amounts deferred by participants are credited with interest at various rates, as described below. Deferral elections of base salary and director's fees must be made prior to the calendar year in which such base salary or director's fees will be paid. A deferral election with respect to a bonus must be made before the first day of the calendar year in which the bonus is earned. When making a deferral election, a participant also makes an election regarding the time and form of the participant's distributions from the 2005 Plan. Distributions from the 2005 Plan must be made in accordance with Section 409A of the Code. Distributions may be made (1) in January of the fifth year following the year in which an amount was deferred, (2) on account of an unforeseeable financial emergency, (3) either (i) termination of employment or (ii) the later of termination of employment or attainment of age 55, or (4) on account of death before termination of employment.
In the event of termination of employment, attainment of age 55 or death, the benefit is payable in a lump sum or in 5, 10 or 15 equal annual installments, as elected by the participant. Benefits in the other circumstances are generally paid in a lump sum.
The 2005 Plan provides for a single rate of interest that will be determined by the plan committee, but which rate shall in no event be less than the rate of interest equal to the 10-year U.S. Treasury Note rate as published on the last business day of the first week of October preceding a plan year. The plan committee set the rate at 7.5% for 2016.2017.
Effective January 1, 2009, the Company amended the 2005 Plan to permit the Company, in its discretion, to award discretionary credits to participants. Discretionary credits generally will be paid at the time and in the form provided in the written award agreement.
The Company agreed in Mr. Falck's offer letter to make a $350,000 discretionary credit award to Mr. Falck in 2009, pursuant to the 2005 Plan (the "Falck DCP Discretionary Credits"). The first $250,000 vested on July 29, 2014 and the remaining $100,000 vested on July 29, 2016. The discretionary credit award earns interest in accordance with the 2005 Plan.
The Company agreed in Mr. Edington's 2012 Supplemental Agreement to the 2012 Edington DCP Discretionary Credits. All of the 2012 Edington DCP Discretionary Credits vested on December 31, 2014. The Company also agreed in Mr. Edington's 2014 Supplemental Agreement to the 2014 Edington DCP Discretionary Credits. Eight hundred thousand dollars of the 2014 Edington DCP Discretionary Credits vested on June 30, 2016. The remaining unvested $500,000 of the 2014 Edington DCP Discretionary Credits vest and become payable if the Company terminates Mr. Edington's employment without cause, or in the event of his death or disability. These awards are also described in the narrative disclosure accompanying the Summary Compensation Table and the Grants of Plan-Based Awards table.
The Company made a discretionary credit award to Mr. Bement in 2008 pursuant to the 2005 Plan consisting of $350,000 as of December 17, 2008, $70,000 as of January 1, 2010 and an additional $70,000 on January 1 of each of the next four years thereafter (the "2008 Bement DCP Discretionary Credits"). The 2008 Bement DCP Discretionary Credits earn interest in accordance with the 2005 Plan. The 2008 Bement DCP Discretionary Credits vested on December 31, 2014 and will be payable to Mr. Bement following his termination from the Company in such form as elected by Mr. Bement.
90 | 2018 Proxy Statement
Executive Compensation |
Additionally, the Company made a discretionary credit award to Mr. Bement in 2014 pursuant to the 2005 Plan consisting of $75,000 as of January 1, 2015 and an additional $75,000 on January 1 of each of the next four years thereafter (the "2014 Bement DCP Discretionary Credits" and together with the 2008 Bement DCP Discretionary Credits, the "Bement DCP Discretionary Credits"). The 2014 Bement DCP Discretionary Credits earn interest in accordance with the 2005 Plan. The full amount of the 2014 Bement DCP Discretionary Credits vest and become payable if, prior to December 31, 2018, the Company terminates Mr. Bement's employment without cause, or in the event of his death or disability. If Mr. Bement terminates employment, for any reason other than those discussed above, prior to December 31, 2018, he forfeits the 2014 Bement DCP Discretionary Credits.
Participation in both the DCP and the 2005 Plan is limited to officers, the Company's senior management group and directors of the Company and participating affiliates. The Company's obligations under the DCP and the 2005 Plan are unfunded (except in the limited change of control circumstance discussed below) and unsecured.
2017 Proxy Statement | 83
|
Potential Payments upon Termination or Change of Control |
This section describes the potential payments that each of the Named Executive OfficersNEOs could receive following termination of employment, including through death, disability, retirement, resignation, involuntary termination (with or without cause) or a change of control of the Company (each, a "Termination Event"). We describe plans, agreements, or arrangements under which each Named Executive OfficerNEO could receive payments following a Termination Event, excluding those that do not discriminate in favor of our executive officers and that are available generally to all salaried employees and awards that are already vested ("Termination Plans"). The description of payments to the Named Executive OfficersNEOs under the various Termination Event scenarios described in this section are not intended to affect the Company's obligations to the Named Executive Officers.NEOs. Those obligations are subject to, and qualified by, the contracts or arrangements giving rise to such obligations. Unless we note otherwise, the discussion below assumes that any Termination Event took place on December 31, 20162017 for each Named Executive Officer.NEO.
The Company does not have a severance plan that covers the Named Executive Officers.NEOs. We also do not have traditional severance agreements or arrangements with our Named Executive Officers.NEOs. We do have Change of Control Agreements, which are discussed below.
In addition to the termination payments set forth below, the Named Executive OfficersNEOs would also receive a full distribution under the 2005 Plan (except in the case of the unvested 2014 Edington DCP Discretionary Credits, which are discussed separately below) and pension benefits. Amounts payable to Messrs. Brandt, Hatfield, Bement, Edington, Falck and Schiavoni under the 2005 Plan are set forth in the Nonqualified Deferred Compensation table, which also shows which part of the payment is interest paid by the Company and which part is the executive's contribution.
With respect to pension benefits, the amounts that each of the Named Executive OfficersNEOs would receive under the Supplemental Plan in the event of a Termination Event are set forth in the Pension Benefits table; however, assuming that the Named Executive OfficerNEO (excluding Mr. Edington who retired in March 2017) had died on December 31, 2016,2017, the amounts payable under the Supplemental Plan, (and in the case of Mr. Edington, under the Supplemental Plan and his employment agreements), would have been as follows: Mr. Brandt — $9,908,187;$11,379,622; Mr. Hatfield — $2,240,074;$2,662,223; Mr. EdingtonBement — $17,216,390;$2,056,350; Mr. Falck — $1,898,446;$2,258,009; and Mr. Schiavoni — $1,930,108.$2,379,438. These amounts are based on the following assumptions: (1) the Traditional Formula Benefit is paid in the form of a monthly annuity to the Named Executive Officer'sNEO's spouse for life following his death and benefit payments commence immediately;immediately and (2) the Account Balance Benefit is paid in the form of an
2018 Proxy Statement | 91
Executive Compensation |
immediate lump sum to his spouse; and (3) in the case of Mr. Edington, 50% of the benefit is paid as an annuity and 50% of the benefit is paid as a lump sum to his spouse as provided in his employment agreements.spouse. Messrs. Brandt, Hatfield and EdingtonBement would have received $12,016,201$13,988,527, $3,256,497 and $18,283,929$2,517,943, respectively, in the event of a Termination Event other than death due to their qualification for early retirement on December 31, 2016,2017, and these amountamounts are based on the assumption that the benefit would be payable as a monthly annuity beginning on January 1, 2017.2018.
The unvested 2014 EdingtonBement DCP Discretionary Credits would trigger a payment in connection with certain Termination Events, which are identified below. The agreements areagreement is discussed in
84 | 2017 Proxy Statement
the narrative disclosure accompanying the Summary Compensation Table and the Grants of Plan-Based Awards table and in the Discussion of Nonqualified Deferred Compensation.
With respect to the performance share awards, the recipient must remain employed with the Company throughout the performance period, unless the recipient meets any of the following exceptions, which would trigger a payment in connection with those certain Termination Events. In the case of the recipient's retirement while qualifying for Early Retirement or Normal Retirement (the "Retirement Qualified Employee") under the Retirement Plan, the employee is deemed to have been employed through the end of the performance period (with payout based on actual performance results). In the case of the recipient's retirement after reaching age 60 with five years of service, but not otherwise qualifying for Early Retirement or Normal Retirement under the Retirement Plan (a "Late Career Employee"), any performance share payout will vest pro-rata based on the number of days the recipient was employed during the performance period compared to the total number of days in the period. In the event the recipient is terminated for cause (regardless of the recipient's retirement date), the recipient shall not be deemed to have been employed through the end of the performance period and will forfeit the right to receive any payout. In the event of the death or disability of a Retirement Qualified Employee or a Late Career Employee, the employee is deemed to have been employed through the end of the performance period (with payout based on actual performance results). In the event the recipient's employment is terminated without cause during the performance period, the CEO in his discretion and with the Committee's approval may determine if, to what extent, and when, any unvested portion of the grant may vest. The 2017 Performance Shares contain confidentiality protections that apply during employment and survive termination, and non-competition and employee solicitation restrictions that survive for a period of one year following termination of employment.
With respect to RSUs, the recipient must remain employed with the Company through the applicable vesting date, unless the recipient meets any of the following exceptions, which would trigger a payment in connection with those certain Termination Events. If a Retirement Qualified Employee retires, the RSUs will fully vest and will be payable on the dates and in the percentages specified in the vesting schedule. If a Retirement Qualified Employee or a Late Career Employee dies or becomes disabled before the end of the vesting period, any outstanding RSUs will fully vest and will be payable no later than March 15 of the year following the year in which the event occurs. If a Late Career Employee retires, the recipient will receive a pro-rata payout of the portion that would have released on the next vesting date based on the number of days the recipient was employed from the last vesting date. In the event a recipient is terminated for cause, any award the recipient would otherwise be entitled to receive following the date of termination is forfeited. In the event a recipient is terminated without cause, the CEO in his discretion and with the Committee's approval may determine if, and to what extent, any unvested portion of the grant will vest. The RSUs contain confidentiality protections that apply during employment and survive termination, and non-competition and employee solicitation restrictions that survive for a period of one year following termination of employment.
92 | 2018 Proxy Statement
Executive Compensation |
As described in the next paragraph, if a recipient's rights are adequately protected, a change of control will not result in any acceleration of a recipient's performance shares or RSUs. However, if a change of control occurs and the conditions of the following paragraph are not met, immediately prior to the change of control, the RSUs and performance shares will convert to either cash or stock, at the election of the recipient, and shall immediately vest. In converting the performance shares, the recipient will receive the number of shares of stock or the cash equivalent that would have been earned at the target level of performance, unless the Committee determines that a higher level of attained performance is reasonably ascertainable as of a specified date prior to the closing of the change of control transaction. The dividend equivalent awards will be paid in cash or stock as determined in accordance with the applicable award agreement.
2017 Proxy Statement | 85
|
Prior to a change of control, the Board may determine that no change of control shall be deemed to have occurred or that some or all of the enhancements to the rights of the recipient shall not apply to specified awards. The Board may exercise such override authority only if, before or immediately upon the occurrence of the specified event that would otherwise constitute a change of control, the Board reasonably concludes in good faith, that: (1) recipients holding awards affected by action of the Board override shall be protected by legally binding obligations of the Company or the surviving entity or the parent thereof because such awards (A) shall remain outstanding following consummation of all transactions involved in or contemplated by such change of control, (B) shall be assumed and adjusted by the surviving entity resulting from such transactions or the parent thereof, or (C) shall be exchanged for new awards issued by the surviving entity resulting from such transaction or the parent thereof; and (2) changes in the terms of the award resulting from such transactions will not materially impair the value of the awards to the participants or their opportunity for future appreciation in respect of such awards.
The Company has entered into identical Change of Control Agreements with each of its executive officers, including each of the Named Executive Officers.NEOs. The Company believes that these agreements provide stability for its key management in the event the Company experiences a change of control. The agreements contain a "double-trigger" that provides for certain payments if, during the two-year period following a change of control of the Company (the "first trigger"), the Company terminates the officer's employment for any reason other than death, disability or cause or the executive terminates his or her own employment following a significant and detrimental change in the executive's employment (the "second trigger"). In case of an officer's retirement, death or disability, no payments are made under the officer's Change of Control Agreement, except for the payment of accrued benefits; however, if the officer dies following the officer's receipt of a second trigger termination notice, the officer's estate will receive the change of control payments the officer would have received if the officer had survived. Pursuant to the Change of Control Agreement, each of the Named Executive OfficersNEOs is obligated to hold in confidence any and all information in his possession as a result of his employment, during and after the Named Executive Officer'sNEO's employment with the Company is terminated.
The termination payment, if required, is an amount equal to 2.99 times the sum of the executive's annual salary at the time of the change of control plus the annual bonus (including incentive plan payments), as determined by an average over the last four-years preceding termination. In addition, the executive is entitled to continued medical, dental, and group life insurance benefits at a shared cost until the end of the second year following the calendar year of termination. Outplacement services are also provided. The executive officer may also be entitled to the acceleration of benefits as set forth in the 2012 Plan, the 2007 Long-Term Incentive Plan, or any related award agreement. If the limitations described in Section 280G of
2018 Proxy Statement | 93
Executive Compensation |
the Code are exceeded, the Company will not be able to deduct a portion of its payments. In addition, if these limitations are exceeded, Section 4999 of the Code imposes an excise tax on all or part of the total payments. In certain of the agreements, an additional gross-up payment equal to the excise tax (plus any penalties and interest) imposed on or with respect to the total payments is provided.
In May 2009, the Company determined that, on a going-forward basis, it would no longer provide excise tax gross-up payments in new and materially amended agreements with its Named Executive Officers.NEOs. In unusual circumstances where the Company believes that accommodations have to be made to recruit a new executive to the Company, limited
86 | 2017 Proxy Statement
reimbursement for taxes payable may be included in an executive's contract; but even in those circumstances, the excise tax gross-ups will be subject to a three-year sunset provision.
A change of control under the Change of Control Agreement includes: (1) an unrelated third-party's acquisition of 20% or more of the Company's or APS's voting stock; (2) a merger or consolidation where either the Company or APS combines with any other corporation such that the Company's or APS's outstanding voting stock immediately prior to merger or consolidation represents less than 60% of the voting stock of the Company or APS immediately after the merger or consolidation, but excluding a merger or consolidation effected to implement a recapitalization in which no unrelated third-party acquires more than 20% of the voting stock of the Company or APS; (3) a sale, transfer, or other disposition of all or substantially all of the assets of the Company or APS to an unrelated third-party; or (4) the case where the composition of either the Board of the Company or of APS changes such that the members of the Board of the Company (the "Company Incumbent Board") or of APS (the "APS Incumbent Board"), as of July 31, 2007 (and with respect to Messrs. Hatfield, Falck, and Schiavoni as of July 31, 2008) no longer comprises at least two-thirds of the Company's or APS's Board of Directors. For purposes of this later provision, a person elected to either Board is treated as a member of the Company Incumbent Board or APS Incumbent Board if his or her nomination or election by shareholders was approved by a two-thirds vote of the members then comprising the Company Incumbent Board or APS Incumbent Board, and it does not include anyone who became a director in an actual or threatened election contest relating to the election of directors.
Each of the agreements terminates on December 31st of each year upon six months advance notice by the Company to the executive officer; if the six months advance notice is not given, the agreements will continue for successive one-year periods until the notice is given. The Company is required to deposit into a trust sufficient funds to pay obligations under the DCP, 2005 Plan and the Supplemental Plan in the case of an actual or potential change of control.
The following tables quantify the amounts that would have been payable to each Named Executive OfficerNEO if the indicated Termination Event had taken place on December 31, 2016.2017, and with respect to Mr. Edington, the table reflects amounts resulting from his retirement in March 2017. In the tables:
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2018 Proxy Statement
Executive Compensation |
2017 Proxy Statement | 87
|
Bement DCP Discretionary Credits vestvests and become payable if the Company terminates Mr. Edington'sBement's employment without cause.
Subject to the foregoing, the following tables describe the amounts that would have been payable to each Named Executive OfficerNEO if a Termination Event had taken place on December 31, 2016:2017:
Donald E. Brandt:
COMPONENT OF PAY | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Performance Shares | | | 9,801,345 | (1) | | | 6,663,305 | | | 6,663,305 | | | 0 | | | | | 9,868,897 | (1) | | | 6,855,299 | | | 6,855,299 | | | 0 | | | ||||||||||||
RSUs | | | 6,165,757 | (1) | | | 6,165,757 | | | 6,425,942 | | | 0 | | | | | 5,923,602 | (1) | | | 5,923,602 | | | 6,160,522 | | | 0 | | | ||||||||||||
2017 CEO Performance-Contingent Award | | | 4,000,000 | (1) | | | 4,000,000 | (2) | | | 0 | (2) | | | 2,000,000 | (2) | | |||||||||||||||||||||||||
Severance Benefits | | | 9,619,220 | | | 0 | | | 0 | | | 0 | | | | | 9,824,718 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | 34,739 | | | 0 | | | 0 | | | 0 | | | | | 34,444 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Outplacement Services | | | 10,000 | | | 0 | | | 0 | | | 0 | | | | | 10,000 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
TOTAL: | | | 25,631,061 | | | 12,829,062 | | | 13,089,247 | | | 0 | | | | | 29,661,661 | | | 16,778,901 | | | 13,015,821 | | | 2,000,000 | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
2018 Proxy Statement | 95
Executive Compensation |
James R. Hatfield:
COMPONENT OF PAY | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | ||||||||||||
Performance Shares | | | 1,860,975 | (1) | | | 1,360,045 | | | | 1,360,045 | | | | 0 | | | ||||
RSUs | | | 1,122,554 | (1) | | | 1,122,554 | | | | 1,168,751 | | | | 0 | | | ||||
Severance Benefits | | | 3,459,042 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | 38,380 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Outplacement Services | | | 10,000 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Excise Tax Gross-Up | | | 2,219,089 | | | | 0 | | | | 0 | | | | 0 | | | ||||
TOTAL: | | | 8,710,040 | | | | 2,482,599 | | | | 2,528,796 | | | | 0 | | | ||||
| | | | | | | | | |
James R. Hatfield:Robert S. Bement:
COMPONENT OF PAY | | | | | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | ALL OTHER TERMINATION EVENTS ($) | | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Performance Shares | | | | | | | | | 1,771,247 | (1) | | | 0 | | | | | 989,441 | (1) | | | 766,140 | | | 766,140 | | | 0 | | | ||||||||||||
RSUs | | | | | | | 1,113,999 | (1) | | | 0 | | | | | 594,308 | (1) | | | 594,308 | | | 620,660 | | | 0 | | | ||||||||||||||
Severance Benefits | | | | | | | | | 3,296,102 | | | 0 | | | | | 3,020,242 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | | | | | 41,921 | | | 0 | | | | | 38,156 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||||
Outplacement Services | | | | | | | | | 10,000 | | | 0 | | | | | 10,000 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Bement DCP Discretionary Credits | | | 0 | | | 93,172 | | | 0 | | | 93,172 | | | ||||||||||||||||||||||||||||
Excise Tax Gross-Up | | | | | | | 2,190,087 | | | 0 | | | | | 1,831,273 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||||
TOTAL: | | | | | | | | | 8,423,356 | | | 0 | | | | | 6,483,420 | | | 1,453,620 | | | 1,386,800 | | | 93,172 | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
8896 | 20172018 Proxy Statement
Randall K. Edington:
COMPONENT OF PAY | | RETIREMENT ($) | | |||
---|---|---|---|---|---|---|
| | | | |||
Performance Shares | | | 792,253 | | | |
RSUs | | | 677,812 | | | |
Severance Benefits | | | 0 | | | |
Present Value of Medical, Dental, and Life Insurance Benefits | | | 0 | | | |
Retiree Medical Benefits | | | 0 | | | |
Outplacement Services | | | 0 | | | |
Edington DCP Discretionary Credits | | | 0 | | | |
TOTAL: | | | 1,470,065 | | | |
| | | |
David P. Falck:
COMPONENT OF PAY | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Performance Shares | | | 1,274,591 | (1) | | 908,751 | | | | | 908,751 | | | 0 | | | | | 1,682,365 | (1) | | | 1,168,605 | | | 600,623 | | | 0 | | | |||||||||||
RSUs | | | 807,586 | (1) | | 807,586 | | | | 842,344 | | | 0 | | | | | 1,017,031 | (1) | | | 1,017,031 | | | 390,411 | | | 0 | | | ||||||||||||
Severance Benefits | | | 5,758,903 | | | 0 | | | | | 0 | | | 0 | | | | | 3,094,469 | | | 0 | | | 0 | | | 0 | | | ||||||||||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | 30,442 | | | 0 | | | | 0 | | | 0 | | | | | 27,175 | | | 0 | | | 0 | | | 0 | | | |||||||||||||
Retiree Medical Benefits | | | 45,790 | | | 37,410 | | (Death) | | | 0 | | | 71,442 | | | ||||||||||||||||||||||||||
Outplacement Services | | | 10,000 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||||||||||||||||
TOTAL: | | | 5,831,040 | | | 2,185,636 | | | 991,034 | | | 0 | | | ||||||||||||||||||||||||||||
| | | | | | 71,442 | | (Disability) | | | | | | | | | | | | | | | | | | |||||||||||||||||
Outplacement Services | | | 10,000 | | | 0 | | | | 0 | | | 0 | | | |||||||||||||||||||||||||||
Edington DCP Discretionary Credits | | | 0 | | | 588,354 | | | | | 0 | | | 588,354 | | | ||||||||||||||||||||||||||
TOTAL: | | | 7,927,312 | | | 2,342,101 | | (Death) | | | 1,751,095 | | | 659,796 | | | ||||||||||||||||||||||||||
| | | | 2,376,133 | | (Disability) | | | | | | | ||||||||||||||||||||||||||||||
| | | | | | | | | | | |
20172018 Proxy Statement | 8997
|
David P. Falck:Mark A. Schiavoni:
COMPONENT OF PAY | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Performance Shares | | | 1,699,914 | (1) | | | 1,135,895 | | | 563,109 | | | 0 | | | | | 2,388,969 | (1) | | | 1,713,967 | | | 881,141 | | | 0 | | | ||||||||||||
RSUs | | | 1,066,657 | (1) | | | 1,066,657 | | | 396,940 | | | 0 | | | | | 1,390,390 | (1) | | | 1,390,390 | | | 499,026 | | | 0 | | | ||||||||||||
Severance Benefits | | | 2,967,847 | | | 0 | | | 0 | | | 0 | | | | | 3,839,037 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | 27,227 | | | 0 | | | 0 | | | 0 | | | | | 36,922 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Outplacement Services | | | 10,000 | | | 0 | | | 0 | | | 0 | | | | | 10,000 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||
Excise Tax Gross-Up | | | 2,848,361 | | | 0 | | | 0 | | | 0 | | | ||||||||||||||||||||||||||||
TOTAL: | | | 5,771,645 | | | 2,202,552 | | | 960,049 | | | 0 | | | | | 10,513,679 | | | 3,104,357 | | | 1,380,167 | | | 0 | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
COMPONENT OF PAY | | QUALIFYING TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE OF CONTROL ($) | | DEATH OR DISABILITY ($) | | RETIREMENT ($) | | ALL OTHER TERMINATION EVENTS ($) | | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | ||||||||||||
Performance Shares | | | 2,124,437 | (1) | | | 1,592,363 | | | | 776,971 | | | | 0 | | | ||||
RSUs | | | 1,340,240 | (1) | | | 1,340,240 | | | | 464,692 | | | | 0 | | | ||||
Severance Benefits | | | 3,522,106 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Present Value of Medical, Dental, and Life Insurance Benefits | | | 36,276 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Outplacement Services | | | 10,000 | | | | 0 | | | | 0 | | | | 0 | | | ||||
Excise Tax Gross-Up | | | 2,689,168 | | | | 0 | | | | 0 | | | | 0 | | | ||||
TOTAL: | | | 9,722,227 | | | | 2,932,603 | | | | 1,241,663 | | | | 0 | | | ||||
| | | | | | | | | |
Pay Ratio |
As required by Item 402(u) of Regulation S-K, we are providing the annual disclosure of the ratio of the median employee's annual total compensation to the total annual compensation of Mr. Brandt, our CEO. For 2017 the median of the annual total compensation of all employees of our Company (other than our CEO) was $128,140 and the annual total compensation of our CEO, as reported in the Summary Compensation Table in this Proxy Statement, was $10,533,439. Based on this information and using the required calculation methodology defined in Item 402(u) of Regulation S-K, for 2017, the ratio of the annual total compensation of our CEO to our median employee's annual total compensation was 82 to 1.
To identify the median employee from our employee population, as well as to determine the annual total compensation of our median employee and our CEO, we took the following steps:
9098 | 20172018 Proxy Statement
|
Securities AuthorizedOnce we identified our median employee, we combined all of the elements of such employee's compensation for Issuance Under Equity Compensation2017 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $128,140. The difference between such employee's salary, wages, overtime and premium pay, and an estimated cash incentive assuming a target payout under the APS Incentive Plan and the employee's annual total compensation includes the amount the Company contributed under the 401(k) plan for the employee, the actual amount paid under the APS Incentive Plans
The following table sets forth information as of and the estimated aggregate change in the actuarial present value from December 31, 2016 withto December 31, 2017 of the employee's accumulated benefits payable under all defined pension plans.
Equity2017 Summary Compensation Plan Information
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted-average exercise price of outstanding options, warrants and rights (2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (3) | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | |||||||||
Equity compensation plans approved by security holders | | | 1,570,485 | | | | — | | | | 2,469,157 | | | |||
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | |||
| | | | | | | | |||||||||
Total | | | 1,570,485 | | | | — | | | | 2,469,157 | | | |||
| | | | | | | |
Equity Compensation Plans Approved By Security Holders
Amounts in column (a) in the table above include shares subject to awards outstanding under two equity compensation plans that were previously approved by our shareholders: (a) the 2007 Plan, which was approved by our shareholders at our 2007 Annual Meeting of Shareholders and under which no new stock awards may be granted; and (b) the 2012 Plan, which was approved by our shareholders at our 2012 Annual Meeting of Shareholders (the "2012 Annual
2017 Proxy Statement | 91
|
Meeting"). See Note 15 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K for additional information regarding these plans.
Equity Compensation Plans Not Approved by Security Holders
The Company does not have any equity compensation plans under which shares can be issued that have not been approved by the shareholders.
Human Resources Committee Interlocks and Insider Participation |
The members of the Human Resources Committee in 20162017 were Ms. Munro, Drs. Cortese and Herberger and Messrs. Fox and Lopez. None of the members of the Human Resources Committee is or has been an officer or employee of the Company or any of its subsidiaries and no executive officer of the Company served on the compensation committee or board of any company that employed, or had as an officer, any member of the Human Resources Committee or the Board.
922018 Proxy Statement | | 2017 Proxy Statement99
Directors' Compensation |
Compensation of the directors for 20162017 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 ($) | | TOTAL ($) | | | FEES EARNED OR PAID IN CASH ($) | | STOCK AWARDS ($)(1) | | CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)(2) | | ALL OTHER COMPENSATION ($) | | TOTAL ($) | | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Donald E. Brandt(3) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Denis A. Cortese, M.D. | | | 98,333 | | | 106,762 | | | 0 | | | 0 | | | 205,095 | | | | 100,000 | | | 110,255 | | | 0 | | | 0 | | | 210,255 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Richard P. Fox | | | 98,333 | | | 106,762 | | | 1552 | | | 0 | | | 206,647 | | | | 100,000 | | | 110,255 | | | 5,455 | | | 0 | | | 215,710 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Michael L. Gallagher | | | 110,833 | | | 106,762 | | | 83,845 | | | 0 | | | 301,440 | | | | 112,500 | | | 110,255 | | | 97,384 | | | 0 | | | 320,139 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Roy A. Herberger, Jr., Ph.D. | | | 110,833 | | | 106,762 | | | 39,927 | | | 0 | | | 257,522 | | | | 112,500 | | | 110,255 | | | 47,626 | | | 0 | | | 270,381 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Dale E. Klein, Ph.D. | | | 98,333 | | | 106,762 | | | 0 | | | 0 | | | 205,095 | | | | 100,000 | | | 110,255 | | | 0 | | | 0 | | | 210,255 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Humberto S. Lopez | | | 110,833 | | | 106,762 | | | 95,187 | | | 0 | | | 312,782 | | | | 112,500 | | | 110,255 | | | 112,137 | | | 0 | | | 334,892 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Kathryn L. Munro | | | 121,667 | | | 106,762 | | | 17,337 | | | 0 | | | 245,766 | | | | 125,000 | | | 110,255 | | | 19,667 | | | 0 | | | 254,922 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Bruce J. Nordstrom | | | 110,833 | | | 106,762 | | | 44,722 | | | 0 | | | 262,317 | | | | 112,500 | | | 110,255 | | | 54,134 | | | 0 | | | 276,889 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Paula J. Sims | | | 16,667 | | | 75,164 | | | 0 | | | 0 | | | 91,831 | | | | 100,000 | | | 110,255 | | | 0 | | | 0 | | | 210,255 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
David P. Wagener | | | 98,333 | | | 106,762 | | | 0 | | | 0 | | | 205,095 | | | | 100,000 | | | 110,255 | | | 0 | | | 0 | | | 210,255 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
2017 Proxy Statement |100 93| 2018 Proxy Statement
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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 | 100,000 | |
Audit Committee, Human Resources Committee, Finance Committee, and Nuclear and Operating Committee Chairs Annual Retainers | 12,500 | |
Lead Director Annual Retainer (Lead Director serves as Chair of Corporate Governance Committee for no additional compensation) | 25,000 | |
Annual Equity Grant | Shares with a value of approximately $110,000 on the grant date | |
| | |
If the shareholders approve Proposal 4 — Re-Approval of the Material Terms of the Performance Goals under, and an Approval of an Amendment to, the 2012 Long-Term Incentive Plan, the value of future awards to the non-employee directors may not exceed $500,000 per fiscal year per individual.
Directors had an option to either receive the stock grant on May 18, 201617, 2017 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 or (2) 50% in stock and 50% in cash. The directors also elected whether to receive these payments either (1) as of the last business day of the month following the month in which the director separates from service on the Board, or (2) 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 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 our current Peer Groupa peer group is generally performed every two years, and a study was last performed in December 2015,2017 using the peer group that we used in setting 2018 executive compensation, at which time the Board approved increasing the value of the annual retainer from $95,000$100,000 to $100,000,$105,000, the annual equity grant from $100,000$110,000 to $110,000,$120,000, the committee chair retainers from $12,500 to $15,000 including instituting a committee chair retainer for the chair of the Corporate Governance Committee, and the Lead Director annual retainer from $20,000$25,000 to $25,000.$30,000. These changes wentwill go into effect in May 2016.2018. The Consultant reviewed the study, validated the methodology, and concluded that the new amounts were within the competitive range.
942018 Proxy Statement | | 2017 Proxy Statement101
|
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 January 2010, the Board adopted a revised stock ownership policy for non-management directors. Each director is required to hold or control Company common stock, RSUs, or SUs with a value of at least three times the annual cash retainer fee paid to directors. Directors will have until the later of January 2013 or three-years following the date they become a director to reach the required ownership level. A director may not pledge, margin, hypothecate, hedge, or otherwise grant an economic interest in any shares of Company stock while serving as a director whether or not his or her ownership requirement is met. This restriction shall extend to the purchase or creation of any short sales, zero-cost collars, forward sales contracts, puts, calls, options or other derivative securities in respect of any shares of Company stock. The Corporate Governance Committee may grant exceptions to this policy for hardship or other special circumstances.
All of the directors are in compliance with the Director Stock Ownership Policy.
2017 Proxy Statement |102 95| 2018 Proxy Statement
Proposal 2 — Advisory Vote on Executive Compensation |
Section 14A of the Exchange Act requires U.S. public corporations to provide for an advisory (non-binding) vote on executive compensation ("Say-on-Pay").
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:
The Board strongly 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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTEFOR THE APPROVAL OF THE COMPANY'S EXECUTIVE COMPENSATION
962018 Proxy Statement | | 2017 Proxy Statement103
Section 14A of the Exchange Act requires U.S. public corporations to provide for an advisory (non-binding) vote on the frequency of holding advisory Say-on-Pay votes every six years. As such, the Company is presenting this proposal, which gives you as a shareholder the opportunity to express your view on whether Say-on-Pay votes should occur every one, two or three years. You have the option to vote for any one of the three options, or to abstain from the matter.
As discussed above, 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 executive talent required to achieve our corporate objectives and to increase long-term shareholder value.
Starting with our annual meeting held in 2011, we have held annual Say-on-Pay advisory votes. The Board of Directors has determined that continuing the annual advisory Say-on-Pay vote is the best approach for the Company because:
Similar to the Say-on-Pay vote, 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 will consider the outcome of the vote in determining how often we will hold a Say-on-Pay vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDSA VOTERATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT ACCOUNTANTS FOR A ONE-YEAR ADVISORY VOTE ON SAY-ON-PAY
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We are asking our shareholders for (a) re-approval of the material terms of the performance goals under the 2012 Plan in order to satisfy the shareholder approval requirements of Section 162(m) of the Code ("Section 162(m)") and (b) approval of the First Amendment to the 2012 Plan (the "First Amendment"), which limits the value of awards that may be granted to non-employee Board members of the Company.
For purposes of this proposal, the term "Amended 2012 Plan" refers to the 2012 Plan as amended by the First Amendment, which is attached as Appendix A. If approved by our shareholders, the First Amendment would be effective as of May 17, 2017.
SHAREHOLDERS ARENOT BEING ASKED TO:
Section 162(m) Provisions
The 2012 Plan allows the Human Resources Committee (for purposes of this Proposal 4, the "Committee") to grant awards that are intended to qualify for the "performance-based compensation" exception to the $1,000,000 limitation on the deduction of compensation imposed by Section 162(m). In order to continue to grant awards that are intended to qualify for the performance-based compensation exception, the material terms of the performance goals under the 2012 Plan must be disclosed to, and approved by, our shareholders every five years. For this purpose, the material terms of the performance goals include the class of person eligible to receive awards under the 2012 Plan, the performance criteria on which the 162(m) performance goals are based, and the maximum performance-based award payable to any one participant under the 2012 Plan. These material terms of the performance goals are described below under "Eligibility," "Limitation on Awards to Participants," and "Performance-Based Awards."
Our shareholders last approved the material terms of the performance goals under the 2012 Plan at our 2012 Annual Meeting. Accordingly, in order to allow the Committee to continue to grant awards that are intended to qualify for the "performance-based compensation" exception
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to the limitation on the deduction of compensation imposed by Section 162(m), our Board is asking our shareholders to re-approve the material terms of the performance goals under the Amended 2012 Plan.
Limit on the Value of Awards Granted to Non-Employee Board Members of the Company
The 2012 Plan provides our Committee with the discretion to grant awards to Board members of the Company. The 2012 Plan does not currently impose any special limit on the value of awards that may be granted to non-employee Board members other than the limits that are generally applicable to awards (these general limits are described below under "Limitation on Awards to Participants"). In February 2017, our Board approved the First Amendment, which imposes a limit on the value of awards that may be granted to any one non-employee Board member in any one calendar year (based on the grant date value of such awards), plus the aggregate amount of all cash fees earned and paid or payable to any one non-employee Board member for the same year, in a total amount of $500,000. By this proposal, our Board is asking our shareholders to approve the First Amendment to impose a special limit on the value of awards that may be granted to non-employee Board members of the Company.
Effect of Shareholder Approval
If this proposal is approved, (a) the material terms of the performance goals under the Amended 2012 Plan will be re-approved, which will allow the Committee to continue to grant performance-based awards intended to qualify for the "performance-based compensation" exception to the limitation on the deduction of compensation imposed by Section 162(m) and (b) the Amended 2012 Plan will impose a limit on the value of awards that may be granted to individual non-employee Board members of the Company per calendar year (based on the grant date value of the awards), plus the aggregate amount of all cash fees earned and paid or payable to an individual non-employee Board member for the same year, in a total amount of $500,000. If this proposal is not approved, (a) the material terms of the performance goals under the Amended 2012 Plan will remain as they exist in the 2012 Plan today but some of the compensation paid to the Company's most highly-compensated executives may not be deductible under Section 162(m), resulting in additional costs to the Company, and (b) an individual limit will not be imposed on annual grants to non-employee Board members of the Company.
Summary Description of the Amended 2012 Plan
Set forth below is a summary of the material features of the Amended 2012 Plan. The summary is qualified in its entirety by the full text of the First Amendment and the Amended 2012 Plan, which is attached to this Proxy Statement as Appendix B and is marked to show the changes to be made pursuant to the First Amendment. Other than the proposed $500,000 limit on grants and cash fees to non-employee Board members of the Company, the terms of the Amended 2012 Plan are identical to the terms of the 2012 Plan that were approved by our shareholders at the 2012 Annual Meeting.
Administration. The Amended 2012 Plan will be administered by the Committee. The Committee shall consist of at least two directors each of whom qualifies as a "non-employee director" as defined in Rule 16b-3(b)(3) of the Exchange Act, and an "outside director" under Section 162(m) of the Code. The Committee's powers are described in Section 3.3 of the Amended 2012 Plan and include, but are not limited to, determining eligibility to receive an
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award, determining the amount and types of awards that may be granted to a participant, and determining all other terms and conditions that apply to awards.
Eligibility. Persons eligible to participate in the Amended 2012 Plan include all employees, officers and Board members of the Company and its affiliates. In addition, on a case-by-case basis, the Committee may grant awards to consultants and advisors to the Company and its affiliates subject to terms and conditions determined by the Committee. Awards may also be made to prospective members of the Board, employees, officers, consultants or advisors. Such awards must specifically provide that no portion of the award will vest, become exercisable or be issued prior to the date on which the individual becomes employed or begins providing services to the Company or its subsidiaries.
Shares Available Under the Amended 2012 Plan. The original aggregate number of shares of stock reserved and available for issuance pursuant to the 2012 Plan was 4,595,500 shares of the Company's common stock (subject to reduction by one share for each share that was subject to any award granted under any prior plan in the period beginning on January 1, 2012 and ending on the date the shareholders approved the 2012 Plan). Shareholders are not being asked to approve any additional shares for issuance under the Amended 2012 Plan. The amount of stock reserved for issuance pursuant to the Amended 2012 Plan is subject to proportionate adjustment by the Committee in the event of any issuance of rights or warrants to purchase securities, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to the shares of stock, or any similar corporate transaction or event in respect of the stock.
For purposes of calculating the number of shares of stock available for awards under the Amended 2012 Plan, the following share counting rules shall apply:
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The Committee may adopt such other reasonable rules and procedures as it deems to be appropriate for purposes of determining the number of shares of stock that are available for awards under the Amended 2012 Plan.
Limitation on Awards to Participants. No more than 500,000 shares of stock may be subject to stock option or SAR awards granted to any one participant during any one calendar year. The maximum number of shares of stock that may be issued as incentive stock options under the Amended 2012 Plan is 1,000,000. The maximum performance-based award (other than a performance cash award) payable to any one participant pursuant to the Amended 2012 Plan during a 12-month performance period is 500,000 shares of stock or the cash equivalent. The maximum performance cash award payable to any one participant pursuant to the Amended 2012 Plan for any 12-month performance period is $10,000,000. If a performance period is less than or exceeds 12 months, the limitations described in the two preceding sentences will be reduced or increased proportionately, as the case may be. In addition, if this proposal is approved, the Amended 2012 Plan would impose a limit on the value of grants (based on the grant date value of the awards) to any individual non-employee Board member of the Company, plus the aggregate amount of all cash fees earned and paid or payable to any one non-employee Board member for the same year, in a total amount of $500,000 per calendar year . As of March 9, 2016, the stock's closing price on the New York Stock Exchange was $80.87 per share.
Awards. Each of the following types of awards may be granted pursuant to the Amended 2012 Plan:
Restricted Stock. A restricted stock award gives the participant the right to receive a specified number of shares of stock at a purchase price determined by the Committee (including and typically zero). Restricted stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose. Except as otherwise provided by the Committee, during the restriction period, participants holding shares of restricted stock may not exercise voting rights with respect to such shares. These restrictions may lapse separately or in combination at such times, in such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the award or thereafter. As a general rule, if a participant terminates employment when the stock is subject to restrictions, the participant forfeits the unvested restricted stock. The Committee may, in its discretion, waive the restrictions in whole or in part in the event of a termination of employment.
Restricted Stock Units. A restricted stock unit award gives the participant the right to receive stock, or a cash payment equal to the fair market value of the stock (determined as of a specified date), subject to any vesting or other restrictions the Committee deems appropriate. The restrictions will lapse in accordance with a schedule or other conditions as determined by the Committee. As a general rule, if a participant terminates employment when the restricted stock units are subject to restrictions, the participant forfeits the unvested restricted stock units. The Committee may, in its discretion, waive the restrictions in whole or in part.
Stock Grant Awards. A stock grant award gives the participant the right to receive, or the right to purchase at a predetermined price, shares of stock free from vesting restrictions. The purchase price, if any, for a stock grant award shall be payable in cash or other form of consideration acceptable to the Committee. A stock grant award may be granted or sold as consideration for past services, other consideration or in lieu of cash compensation due to any participant.
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Stock Unit Awards. A stock unit award gives the participant the right to receive a designated number of shares of stock, or a cash payment equal to the fair market value (determined as of a specified date) of a designated number of shares of stock, in the future free of any vesting restrictions. A stock unit award may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to any participant.
Dividend Equivalent Awards. A dividend equivalent award gives the participant the right to receive a credit when a dividend is declared on the Company's stock. Dividend equivalents are credited as of dividend payment dates during the period between the date of grant and the date the award is exercised, vests or expires. In no event may a dividend equivalent award made with respect to a restricted stock unit award that vests based on the achievement of performance goals, or with respect to a performance share unit or performance share award, be paid unless and until such award vests or is earned by satisfaction of the applicable performance goals. A dividend equivalent award shall initially be expressed in terms of cash or shares of stock, depending on the way in which the dividends to which it relates are declared. The Committee will specify when the dividend equivalents will be converted to cash or stock, the formula for conversion and any restrictions or limitations on the conversion. Dividend equivalents will not be granted with respect to options or SARs.
Performance Share Awards. A performance share award gives the participant the right to receive a specified number of shares of stock if one or more performance goals specified by the Committee are satisfied. Performance may be measured on a specific date or dates or over any period or periods as determined by the Committee.
Performance Share Units. A performance share unit award gives the participant the right to receive a specified number of shares of stock or cash in an amount equal to the fair market value of the stock (determined as of a specified date) if one or more performance goals specified by the Committee are satisfied. Performance may be measured on a specified date or dates or over any period or periods as determined by the Committee.
Performance Cash. A performance cash award gives the participant the right to receive a cash payment if certain performance goals as specified by the Committee are satisfied. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee.
Stock Options. An option entitles the participant to purchase shares of stock in the future at a specified price. The Committee may grant both incentive stock options and nonqualified stock options under the Amended 2012 Plan. Incentive stock options will only be granted to participants who are employees. The exercise price of all stock options granted under the Amended 2012 Plan will be at least 100% of the fair market value of the stock on the date that the option is granted. Stock options may be exercised as determined by the Committee provided that the term of any option granted under the Amended 2012 Plan shall not exceed ten years from the date of grant. The exercise price for any option shall be paid in cash or shares of stock held longer than six months, however, the Committee may prescribe other methods by which the exercise price of an option may be paid and the methods by which shares of stock may be delivered to participants; however, the exercise price may not be paid with a promissory note. The Committee may not reprice options previously granted under the Amended 2012 Plan.
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Stock Appreciation Rights. A SAR entitles the participant to share in the appreciation on one share of stock. Appreciation is calculated as the excess of (i) the fair market value on the date of exercise over (ii) the base value of the SAR as determined by the Committee, which shall not be less than the fair market value on the date of grant (or such higher amount determined by the Committee). Unless otherwise provided by the Committee, SARs shall vest and become exercisable in three equal installments on the first, second and third anniversaries of the date of grant, expire on the earlier of a participant's termination of employment or the tenth anniversary of the date of grant and payment for SARs shall be made in stock. The Committee will determine the terms and conditions of any SAR at the time of the grant. A SAR may not be amended, modified or repriced to reduce the exercise price after the date of grant.
Performance-Based Awards. When the Committee grants restricted stock, restricted stock units, stock grants, stock units, dividend equivalent awards, performance shares, performance share units, and performance cash awards, it may designate the awards as "performance-based awards." Performance-based awards are subject to the provisions of Article 13 of the Amended 2012 Plan, which are intended to qualify the awards for the "performance-based compensation" exception to the limitations on the deduction of compensation imposed by Section 162(m). Section 162(m) only applies to "covered employees," as defined in Section 162(m). Therefore, only covered employees will receive awards that will be classified as performance-based awards. If the Committee designates a particular award as a performance-based award, the Committee will administer the award in a manner that will allow the award to qualify for the "performance-based compensation" exception to Section 162(m). Nevertheless, the requirements of this exception are complex and in some respects vague and difficult to apply. Consequently, we cannot guarantee that compensation that is intended to qualify for the "performance-based compensation" exception under Section 162(m) will in fact so qualify.
A covered employee is only entitled to receive payment for a performance-based award for a given performance period to the extent that pre-established performance goals set by the Committee for the performance period are satisfied. The Committee will establish the performance goals for a particular performance period in writing no later than ninety days after the commencement of the performance period for a given award, provided that the outcome is substantially uncertain at the time the Committee establishes the performance goal. In no event will the Committee establish a performance goal for a given award after 25% of the performance period for such award has elapsed.
The pre-established performance goals must be based on one or more of the following performance criteria: EBITDA; EBIT; costs; operating income; net income; cash flow; operating cash flow; net cash flow; fuel cost per million BTU; costs per kilowatt hour; retained earnings; budget achievement; return on equity; return on assets; return on capital employed; return on invested capital; cash available to the Company from an affiliate or affiliates; expense spending; O&M expense; O&M or capital per kilowatt hour; gross margin; net margin; market capitalization; customer satisfaction; revenues; financial return ratios; market share; shareholder return and/or value (including but not limited to total shareholder return); operating profits (including earnings before or after income taxes, depreciation and amortization); net profits; earnings per share; earnings per share growth; profit returns and margins; stock price; working capital; business trends; production cost; project milestones; capacity utilization; quality; economic value added; plant and equipment performance; operating efficiency; diversity; debt; dividends; bond ratings; corporate governance; and health and safety (including environmental health and safety). Any of the performance criteria may be measured either in absolute terms or
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as compared to any incremental increase or as compared to results of a peer group, indices, or any other basket of companies. The Committee shall, within the time periods prescribed by Section 162(m), define in an objective fashion the manner of calculating the performance criteria it selects to use for a particular performance period for a particular participant.
With respect to any performance-based award granted to a covered employee, the Committee has the discretion to select the length of the performance period (which may be one or more periods of time of varying and overlapping durations, over which the attainment of one or more performance goals will be measured), the type of performance-based award to be issued, the kind and/or level of performance goal or goals and whether the performance goal or goals apply to the Company, an affiliate or any division or business unit of any of them, or to the individual participant or any group of participants. The Committee also has the discretion to evaluate the achievement of the performance goals in a manner that includes or excludes certain events that may occur during the performance period, as described in Section 13.5 of the Amended 2012 Plan. The Committee has the sole discretion to decrease the amount of compensation payable pursuant to any performance-based award, but the Committee may not increase the compensation payable pursuant to any performance-based award. The Committee must certify in writing prior to the payment of any performance-based award that the performance goals and any other material terms and conditions precedent to such payment have been satisfied.
Prohibition on Repricing. The Amended 2012 Plan includes provisions that prohibit the Committee from directly or indirectly repricing previously granted options or SARs (reduction in option exercise price or SAR grant price, surrender in exchange for cash or another award under the Amended 2012 Plan, or surrender or exchange for another option or SAR with a lower exercise or grant price) without shareholder approval.
Non-Transferability. As a general rule, awards granted pursuant to the Amended 2012 Plan may not be transferred by a participant, except by will or by the laws of descent or distribution. The Committee, in its discretion, may permit the transfer of any award to a family member or family trust.
Clawback of Awards. The award agreement for any award granted pursuant to the Amended 2012 Plan will provide for the recapture or clawback of all or any portion of the award to comply with applicable law in effect on the date of the award agreement, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Committee also may include other clawback provisions in the award agreement as it determines to be appropriate. By accepting an award, each participant in the Amended 2012 Plan agrees to be bound by, and comply with, the terms of any such recapture or clawback provisions and with any Company request or demand for recapture or clawback.
Change of Control. Unless the Committee, with the approval of the Board, provides otherwise in an award agreement, if a change of control occurs, immediately prior to the change of control:
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Notwithstanding the foregoing change of control provisions, prior to a change of control, the Board may determine that no change of control shall be deemed to have occurred or that some or all of the enhancements to the rights of participants described above shall not apply to specified awards. The Board may exercise such override authority only if, before or immediately upon the occurrence of the specified event that would otherwise constitute a change of control, the Board, as constituted prior to the change of control, reasonably concludes, in good faith, that: (i) participants holding awards affected by action of the Board override shall be protected by legally binding obligations of the Company or the surviving entity or the parent thereof because such awards (A) shall remain outstanding following consummation of all transactions involved in or contemplated by such change of control or (B) shall be assumed and adjusted by the surviving entity resulting from such transactions or the parent thereof, or (C) shall be exchanged for new awards issued by the surviving entity resulting from such transaction or the parent thereof; and (ii) changes in the terms of the award resulting from such transactions will
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not materially impair the value of the awards to the participants or their opportunity for future appreciation in respect of such awards. The Board may exercise such override authority with respect to an award which the Company concludes is subject to (and not excepted from) the requirements of Section 409A of the Code only in a manner and to the extent permissible under Section 409A.
Amendment and Termination. The Committee, with the Board's approval, may terminate, amend, or modify the Amended 2012 Plan at any time, except where shareholder approval for an amendment is required by applicable law, regulation or stock exchange rule. Except as provided in the next sentence, no amendment, modification, or termination of the Amended 2012 Plan or any award agreement shall in any material manner adversely affect any award previously granted under the Amended 2012 Plan without the consent of the participant. The participant's consent is unnecessary if, among other things, the change is required to cause the benefits under the Amended 2012 Plan to (a) qualify as performance-based compensation within the meaning of Section 162(m) of the Code and applicable regulations or other interpretive authority or (b) comply with the provisions of Section 409A of the Code.
The Amended 2012 Plan will terminate on January 18, 2022. In no event may an award be granted under the Amended 2012 Plan on or after January 18, 2022. Awards outstanding on January 18, 2022 will remain in effect according to the terms of the award agreement and the Amended 2012 Plan.
Tax Withholding. The Company will have the power to withhold, or require a participant to remit to the Company, an amount sufficient to satisfy federal, state, and local withholding tax requirements on any award under the Amended 2012 Plan.
Federal Income Tax Consequences
This is a brief summary of the principal federal income tax consequences of certain transactions under the Amended 2012 Plan based on federal income tax laws in effect on January 1, 2017. This summary is not intended to be exhaustive and does not describe state, local and foreign income taxes which may also be applicable.
As a general rule, with the exception of a stock grant, a participant will not recognize taxable income with respect to any award at the time of grant. A participant will recognize ordinary taxable income on a stock grant award at the time of grant.
Upon exercise of a nonqualified stock option, the lapse of restrictions on restricted stock, or upon the payment of SARs, restricted stock units, stock grants, stock units, performance shares, performance share units, performance cash, or dividend equivalents, the participant will recognize ordinary taxable income in an amount equal to the difference between the amount paid for the award, if any, and the fair market value of the stock or amount received on the date of exercise, lapse of restriction, or payment. The Company will be entitled to a concurrent deduction equal to the ordinary income recognized by the participant.
A participant who is granted an incentive stock option will not recognize taxable income at the time of exercise. However, the excess of the stock's fair market value over the option price could be subject to the alternative minimum tax in the year of exercise (assuming the stock received is not subject to a risk of forfeiture and is not transferable). If stock acquired upon exercise of an incentive stock option is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the sales price and the exercise price) upon disposition of the stock will be treated as
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a long-term capital gain or loss, and the Company will not be entitled to any deduction. If the holding period requirements are not met, the incentive stock option will not meet the requirements for this favored tax treatment and the tax consequences described for nonqualified stock options will apply.
Section 409A of the Code, among other things, expanded the definition of deferred compensation arrangements to include, for example, below market option and SAR grants, restricted stock units, performance shares, performance share units, performance cash, dividend equivalents (in some circumstances) and stock unit awards. If awards that are subject to Section 409A of the Code fail to comply with Section 409A, a participant must include in ordinary income all deferred compensation conferred by the award, pay interest from the date of the deferral and pay an additional 20% tax. The Company intends (but does not and cannot guarantee) that awards granted under the Amended 2012 Plan will comply with the requirements of Section 409A or an exception thereto and intends to administer and interpret the Amended 2012 Plan in such a manner. The Patient Protection and Affordable Care Act introduced a new net investment income tax that could impact the taxation of awards granted under the Amended 2012 Plan. Effective January 1, 2013, dividends paid to and capital gains recognized by individuals with incomes over certain threshold amounts may be subject to an additional 3.8% tax on net investment income.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL TO (A) RE-APPROVE THE MATERIAL TERMS OF THE PERFORMANCE GOALS UNDER THE AMENDED 2012 PLAN IN ORDER TO SATISFY THE SHAREHOLDER APPROVAL REQUIREMENTS OF SECTION 162(m) OF THE CODE AND (B) APPROVE THE FIRST AMENDMENT IMPOSING A LIMIT ON THE VALUE OF AWARDS THAT MAY BE GRANTED TO NON-EMPLOYEE BOARD MEMBERS OF THE COMPANY UNDER THE AMENDED 2012 PLAN
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The Audit Committee has appointed D&T as the Company's independent accountants for the year ending December 31, 20172018 and, as a matter of good corporate governance, has directed management to submit such appointment for ratification by the shareholders at the Annual Meeting. In the event the shareholders fail to ratify the appointment, the Audit Committee may reconsider this appointment. Even if the appointment is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent accounting firm at any time during the year if the Audit Committee determines that such a change would be in the Company's and the shareholders' best interests.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTEFOR RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP
AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDING DECEMBER 31, 20172018
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Accounting and Auditing Matters |
The Independent Accountants |
The Audit Committee evaluates the selection of the independent accountants each year, and has appointed D&T, independent accountants, to examine the Company's financial statements for the year ending December 31, 2017,2018, and, pursuant to Proposal 5,3, has requested shareholder ratification of this appointment. 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 accountants is in the best interest of the Company and its shareholders.
In making the determination to retain D&T for 2017,2018, the Audit Committee considered:considered, among other things:
D&T Servedserved as the Company's independent accountants for the year ended December 31, 2016.2017. Representatives of that firm are expected to participate in the Annual Meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.
Benefits of a Long-Tenured Independent Accountant |
D&T has served as the independent accountant for Pinnacle West since its inception in 1985, and APS since 1932. The Committee carefully considered the tenure of D&T as our
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Accounting and Auditing Matters |
independent accountants in making its decision to select D&T as the independent accountant for 2018, including the following benefits that come with long-tenure:
Accountant's Independence Controls |
In further making its selection of D&T as the independent accountant for 2018, the Committee took into account the following controls over D&T:
Pre-Approval Policies |
As part of its oversight responsibility with respect to the independent accountants and in order to assure that the services provided by the independent accountants do not impair the independent accountants' independence, the Audit Committee has established pre-approval policies with respect to work performed by D&T for the Company. Under that policy, the Audit Committee pre-approves each audit service and non-audit service to be provided by D&T. The
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Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve audit and non-audit services to be performed by D&T if the services are not expected to cost more than $50,000. Each audit and non-audit service presented to the Chair for pre-approval must be described in sufficient detail so that the Chair knows precisely what services the Chair is being asked to pre-approve so that he can make a well-reasoned assessment of the impact of the service on the independent accountants' independence. The Chair must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. All of the services performed by D&T in 20162017 for the Company were pre-approved by either the Audit Committee or the Chair of the Audit Committee consistent with the pre-approval policy.
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Accounting and Auditing Matters |
Audit Fees |
The following fees were paid to D&T for the last two fiscal years:
TYPE OF SERVICE | 2015 ($) | 2016 ($) | 2016 ($) | 2017 ($) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | |
Audit Fees(1) | | 2,454,372 | | 2,687,407 | | 2,687,407 | | 2,813,182 | ||||||
Audit-Related Fees(2) | 291,689 | 351,121 | 351,121 | 366,083 | ||||||||||
Tax Fees | | 0 | | 0 | | 0 | | 0 | ||||||
All Other Fees | 10,000 | 0 | 0 | 0 | ||||||||||
| | | | | | | | | | | | | | |
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Report of the Audit Committee |
The Audit Committee is comprised solely of independent directors. Each member meets the NYSE financial literacy requirements, and Messrs. Fox and Nordstrom are "audit committee financial experts" under the SEC rules.
In accordance with its written charter adopted by the Board, the primary function of the Audit Committee is to assist Board oversight of: (a) the integrity of the Company's financial statements; (b) the independent accountants' qualifications and independence; (c) the performance of the Company's internal audit function and independent accountants; and (d) compliance by the Company with legal and regulatory requirements.
The Audit Committee reports as follows:
AUDIT COMMITTEE CHAIR Bruce J. Nordstrom | AUDIT COMMITTEE MEMBERS Denis A. Cortese, M.D. Richard P. Fox Dale E. Klein, Ph.D. Humberto S. Lopez David P. Wagener |
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FIRST AMENDMENT TO THEPINNACLE WEST CAPITAL CORPORATION2012 LONG-TERM INCENTIVE PLAN
Pinnacle West Capital Corporation, an Arizona corporation (the "Company"), previously established,The information contained in these documents and the shareholders previously approved, the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan (the "Plan"). By adoption of this First Amendment, the Company desires to amend the Plan as set forth below.
1. This First Amendment shall be effective as of the date on which it is approvedwebsites are not incorporated by the Company's shareholders at the Company's 2017 Annual Meeting.
2. Article 4 Plan (Shares Subject to the Plan) is hereby amended by adding the following new Section to the end thereof to read as follows:
4.7MAXIMUM AWARD PAYABLE TO NON-EMPLOYEE DIRECTORS. Notwithstanding any other provision in the Plan to the contrary, the aggregate grant date fair value (computed as of the Date of Grant in accordance with applicable financial accounting rules) of all Awards granted to any non-employee member of the Board during any single calendar year, plus the aggregate amount of all cash fees earned and paid or payable to such director for services rendered for the same year, shall not exceed $500,000.
3. This First Amendment amends only the provisions of the Plan referred to above, and those provisions not amended by this First Amendment shall continue in full force and effect. Notwithstanding the foregoing, this First Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions and the intent of this First Amendment.reference.
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PINNACLE WEST CAPITAL CORPORATION2012 LONG-TERM INCENTIVE PLAN(AS AMENDED BY THE FIRST AMENDMENT)
EFFECTIVE DATE: January 18, 2012APPROVED BY SHAREHOLDERS: May 16, 2012TERMINATION DATE: January 18, 2022
ARTICLE 1ESTABLISHMENT; PURPOSE; GLOSSARY
1.1ESTABLISHMENT; IMPACT ON PRIOR PLANS. Pinnacle West Capital Corporation, an Arizona corporation (the "Company") hereby establishes the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan (the "Plan"). Effective on its approval by the shareholders of the Company, the Plan will supersede and replace the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (the "2007 Plan") and all other Prior Plans. No awards will be made pursuant to any of the Prior Plans after the approval of this Plan by the shareholders, but the Prior Plans shall remain in effect until all awards granted under such Prior Plans have been exercised, forfeited or canceled or have otherwise expired or terminated in accordance with the terms of such awards.
1.2PURPOSE. The purpose of the Plan is to permit the Committee to grant Awards, thereby giving the Participants a stake in the growth and prosperity of the Company and encouraging the continuance of their service with or to the Company or its Affiliates. The Awards that may be granted pursuant to the Plan are Restricted Stock, Restricted Stock Units, Performance Share Units, Performance Shares, Performance Cash, Stock Grants, Stock Units, Dividend Equivalents, Options and Stock Appreciation Rights.
1.3GLOSSARY. Defined terms used in this Plan are set forth in the attached Glossary, which is incorporated into and made part of this Plan.
ARTICLE 2EFFECTIVE DATE; EXPIRATION DATE
2.1EFFECTIVE DATE. The Plan is effective as of the date it is approved by the Board (the "Effective Date"), but is subject to approval by the Company's shareholders at its 2012 Annual Meeting. Any Awards granted prior to shareholder approval shall be expressly conditioned upon shareholder approval.
2.2EXPIRATION DATE. The Plan will expire on, and no Award may be granted under the Plan after, the tenth anniversary of the Effective Date. Any Awards that are outstanding on the tenth anniversary of the Effective Date shall remain in force according to the terms of the Plan and the Award Agreement.
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3.1.COMMITTEE. The Plan shall be administeredThis Proxy Statement contains forward-looking statements based on current expectations. These forward-looking statements are often identified by the Human Resources Committee of the Board. The Committee shall consist of at least two individuals, each of whom qualifieswords such as (a) a "non-employee director" as defined in Rule 16b-3(b)(3) of the General Rules"estimate," "predict," "may," "believe," "plan," "expect," "require," "intend," "assume" and Regulations of the Exchange Act, and (b) an "outside director" as defined in Section 162(m) of the Code and the regulations issued thereunder.
3.2.ACTION BY THE COMMITTEE.similar words. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by all of the members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee.
3.3.AUTHORITY OF COMMITTEE. The Committee has the power and authority to take the following actions:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards and the times when Awards are to be granted to each Participant;
(c) Determine the number of Awardsfactors could cause future results to be granteddiffer materially from historical results, or from outcomes currently expected or sought by us. A discussion of some of these risks and the number of shares of Stockuncertainties is contained in our Annual Report on Form 10-K and is available on our website at pinnaclewest.com, which you should review carefully before placing any reliance on our forward-looking statements or disclosures. We assume no obligation to which an Award will relate;
(d) Determine the terms and conditions ofupdate any Award, including, but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of restrictions or limitations, and accelerations or waivers thereof, based in each case on such considerations as the Committee determines; provided, however, thatforward-looking statements, even if our internal estimates change, except as provided inSection 15.1 the Committee shall not have the authority to accelerate the vesting or waive the forfeiture restrictions of any Performance-Based Awards;
(e) Determine whether, to what extent, and in what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or whether an Award may be canceled, forfeited, exchanged or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;
(i) Subject to the provisions ofSection 3.3(d),Section 15.1,Section 16.2 andSection 16.3, amend or modify any outstanding Award to the extent the terms of such Award are within the power and authority of the Committee as provided under the Plan;
(j) Interpret the terms of, and determine any matter arising pursuant to, the Plan or any Award Agreement; and
(k) Make all other decisions or determinations that may be required pursuant to the Plan or an Award Agreement as the Committee deems necessary or advisable to administer the Plan.by applicable law.
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Any action authorized to be taken by the Committee pursuant to the Plan may be taken or not taken by the Committee in the exercise of its discretion as long as such action or decision not to act is not inconsistent with a provision of this Plan.
3.4.DECISIONS BINDING. The Committee's interpretation of the Plan or any Award Agreement and all decisions and determinations by the Committee with respect to the Plan and any Award are final, binding, and conclusive on all parties. All authority of the Board and the Committee with respect to Awards issued pursuant to this Plan, including the authority to amend outstanding Awards, shall continue after the term of this Plan so long as any Award remains outstanding.
3.5.DELEGATION. As permitted by law and the rules of the New York Stock Exchange or any other established securities market on which the Stock is traded, the Committee may delegate any authority granted to it pursuant to this Plan; provided, however, that the Committee may not delegate to the Company's executive officers the power and authority to make, cancel, or suspend Awards to executive officers or members of the Board.
ARTICLE 4SHARES SUBJECT TO THE PLAN
4.1NUMBER OF SHARES. Subject to the possible increases provided bySection 4.2 with respect to shares of Stock that become available under the Prior Plans and adjustments as provided inSection 4.4, the aggregate number of shares of Stock reserved and available for grant (or to be used to determine the value of an Award payable in cash) pursuant to the Plan shall be 4,595,500. The number of shares authorized for issuance shall be reduced by one share for each share that is subject to any award granted under any Prior Plan in the period beginning on January 1, 2012 and ending on the date the shareholders approve the Plan.
4.2SHARE COUNTING. For purposes of determining the number of shares of Stock available for Award under the Plan from time-to-time:
(a) In the event any Award granted under this Plan, or any award outstanding under any Prior Plan on or after December 31, 2011, shall be forfeited, terminate or be canceled or expire, the number of shares of Stock subject to such Award or Prior Plan award, to the extent of any such forfeiture, termination, cancellation or expiration, shall thereafter be available for grant under the Plan.
(b) If shares of Stock are not delivered in connection with any Award because the Award is settled in cash, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan and will again be available for grant.
(c) The exercise of a stock-settled SAR or broker-assisted "cashless" exercise of an Option (or a portion thereof) will reduce the number of shares of Stock available for issuance by the entire number of shares of Stock subject to that SAR or Option (or applicable portion thereof), even though a smaller number of shares of Stock will be issued upon such an exercise.
(d) Dividend Equivalent Awards paid in Stock shall be counted against the shares available for issuance under the Plan by the number of shares of Stock used to satisfy such Dividend Equivalent Award.
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(e) Shares of Stock tendered to pay the exercise price of an Option or tendered, withheld or otherwise relinquished by the Participant to satisfy a tax withholding obligation arising in connection with any Award will not become available for grant under the Plan. Moreover, shares of Stock purchased on the open market with cash proceeds generated by the exercise of an Option will not increase or replenish the number of shares available for grant.
(f) If the provisions of thisSection 4.2 are inconsistent with the requirements of any regulations promulgated by the Internal Revenue Service pursuant to Section 422 of the Code, the provisions of such regulations shall control over the provisions of thisSection 4.2, but only as thisSection 4.2 applies to Incentive Stock Options.
(g) The Committee may adopt such other reasonable rules and procedures as it deems to be appropriate for purposes of determining the number of shares of Stock that are available for grant pursuant toSection 4.1.
4.3STOCK DISTRIBUTED. Any shares of Stock delivered pursuant to an Award may consist, in whole or in part, of authorized but unissued Stock or treasury Stock or Stock purchased on the open market.
4.4ADJUSTMENTS. In the event of any issuance of rights or warrants to purchase securities, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to the shares of Stock, or any similar corporate transaction or event in respect of the Stock, then the Committee shall, in the manner and to the extent that it deems appropriate and equitable to the Participants and not inconsistent with the terms of this Plan, cause a proportionate adjustment to be made in (i) the maximum numbers of shares of Stock provided inSection 4.1, (ii) the maximum numbers of shares of Stock set forth inSections 11.1, 11.2, 12.1 and 13.9 and any other similar numeric limit expressed in the Plan, (iii) the number of shares of Stock, units, or other rights subject to the then-outstanding Awards, (iv) the price, if applicable, for each share of Stock or unit or other right subject to then outstanding Awards without change in the aggregate purchase price or value as to which such Awards remain exercisable or subject to restrictions, (v) the performance targets or goals appropriate to any outstanding Awards (subject to such limitations as appropriate for Performance-Based Awards), or (vi) any other terms of an Award that are affected by the event. Moreover, in the event of any such transaction or occurrence, the Committee may provide in substitution for any or all outstanding Awards such alternative consideration (including cash) as it, in good faith, may determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards so replaced. The foregoing provisions of thisSection 4.4 also apply to any merger, consolidation, liquidation, spin-off or split-off of the Company or any Affiliate, but only to the extent that the application of the provisions of thisSection 4.4 are consistent with the provisions ofArticle 15 if such transaction constitutes a Change of Control. Any adjustments made pursuant to thisSection 4.4 shall be made in a manner consistent with the requirements of Section 409A of the Code and, in the case of Incentive Stock Options, any such adjustments shall be made in a manner consistent with the requirements of Section 424(a) of the Code.
4.5NO OTHER RIGHTS. Except as expressly provided inArticle 9 orArticle 15, no Participant shall have any rights by reason of any merger, consolidation, liquidation, issuance of rights or warrants to purchase securities, recapitalization, reclassification, stock dividend, spin-off, split-off, stock split, reverse stock split or other distribution with respect to the shares
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of Stock, or any similar corporate transaction or event in respect of the Stock. Except as expressly provided inArticle 15, no issuance by the Company of shares of Stock of any class, or securities convertible into shares of Stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to an Award or the exercise price of any Award.
4.6REPLACEMENT AWARDS. In the event of any corporate transaction in which the Company or an Affiliate acquires a corporate entity which, at the time of such transaction, maintains an equity compensation plan pursuant to which awards of stock options, stock appreciation rights, restricted stock, performance shares, performance share units, stock grants, stock units, dividend equivalents, restricted stock units or any other form of equity based compensation are then outstanding (the "acquired plan"), the Committee may make Awards to assume, substitute or convert such outstanding awards in such manner as may be determined to be appropriate and equitable by the Committee; provided, however, that the number of shares of Stock subject to any Award shall always be a whole number by rounding any fractional share to the nearest whole share. Options or SARs issued pursuant to thisSection 4.6 shall not be subject to the requirement that the exercise price of such Award not be less than the Fair Market Value of Stock on the date the Award is granted. Shares used in connection with an Award granted in substitution for an award outstanding under an acquired plan under thisSection 4.6 shall not be counted against the number of shares of Stock reserved under this Plan underSection 4.1. Any shares of Stock authorized and available for issuance under the acquired plan shall, subject to adjustment as described inSection 4.4, be available for use in making Awards under this Plan with respect to persons eligible under such acquired plan, by virtue of the Company's assumption of such acquired plan, consistent with Rule 303A(8) of the New York Stock Exchange Listed Company Manual, as such Rule may be amended or replaced from time to time.
4.7MAXIMUM AWARD PAYABLE TO NON-EMPLOYEE DIRECTORS.Notwithstanding any other provision in the Plan to the contrary, the aggregate grant date fair value (computed as of the Date of Grant in accordance with applicable financial accounting rules) of all Awards granted to any non-employee member of the Board during any single calendar year, plus the aggregate amount of all cash fees earned and paid or payable to such director for services rendered for the same year, shall not exceed $500,000.
ARTICLE 5ELIGIBILITY AND PARTICIPATION
5.1ELIGIBILITY. Persons eligible to participate in this Plan include members of the Board and employees and officers of the Company; members of the board of directors (or other governing board), officers and employees of any Affiliate; and members of the board of directors (or other governing board), officers and employees of any entity of which the Company or an Affiliate, directly or indirectly, owns 20% or more of the voting or economic interest. The Committee may determine on a case-by-case basis to make Awards under the Plan to consultants and advisers to the Company or any Affiliate on such terms as it may determine, consistent with the provisions of the Plan. Prospective Participants to whom Awards are granted in connection with written offers of an employment or service agreement with the Company or an Affiliate also may be granted Awards. The provisions of any Award granted to a prospective Participant must specifically provide that no portion of the Award will vest, become
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exercisable or be issued prior to the date on which such individual becomes employed by or begins providing services to the Company or any Affiliate.
5.2ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible Participants those to whom Awards shall be granted and shall determine the nature and amount of each Award. No individual shall have any right to be selected to receive an Award, or having been so selected, to be selected to receive a future Award, except as otherwise provided by an agreement, the relevant provisions of which have been approved by the Committee.
ARTICLE 6GENERAL RULES APPLICABLE TO ALL AWARDS
6.1AWARD AGREEMENTS. All Awards shall be evidenced by an Award Agreement. The Award Agreement shall include such terms and provisions as the Committee determines to be appropriate. The terms of the Award Agreement may vary depending on the type of Award, the employee or classification of the employee to whom the Award is made and such other factors as the Committee determines to be appropriate.
6.2STAND-ALONE AND TANDEM AWARDS. Awards granted pursuant to the Plan may be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan or any Prior Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
6.3TERM OF AWARD. The term of each Award shall be for the period determined by the Committee, provided that in no event shall the term of any Option or Stock Appreciation Right exceed a period of ten years from the Date of Grant.
6.4TERMINATION OF SERVICE. Subject to the provisions of this Plan, the Committee shall determine and set forth in the applicable Award Agreement the extent to which a Participant shall have the right to retain and/or exercise an Award following Termination of Employment (or Termination of Service in the case of a member of the Board). Such provisions need not be uniform among all types of Awards and may reflect distinctions based on the reasons for such terminations, including but not limited to, death, Disability, a Change of Control, a termination for cause or reasons relating to the breach or threatened breach of restrictive covenants.
6.5FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan, the Award Agreement and any applicable law, payments or transfers to be made by the Company or an Affiliate on the grant, exercise or settlement of an Award may be made in such forms as the Committee determines at or after the time of grant, including, without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by the Committee.
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ARTICLE 7RESTRICTED STOCK AND RESTRICTED STOCK UNIT AWARDS
7.1GRANT OF RESTRICTED STOCK.
(a)Issuance and Restrictions. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to receive dividends or vote the Restricted Stock). These restrictions may lapse separately or in combination at such times, in such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. Except as otherwise provided in the Award Agreement, Participants holding shares of Restricted Stock may not exercise voting rights with respect to the shares of Restricted Stock during the restriction period.
(b)Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon a Termination of Employment (or Termination of Service in the case of a member of the Board) during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited; provided, however, that the Committee may provide in any Restricted Stock Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of a Termination of Employment (or Termination of Service in the case of a member of the Board) resulting from specified causes. The Committee also may waive in whole or in part any other restrictions or forfeiture conditions relating to a Restricted Stock Award.
(c)Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, the certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may retain physical possession of the certificate until such time as all applicable restrictions lapse.
7.2RESTRICTED STOCK UNIT AWARDS. Restricted Stock Unit Awards will grant the Participant the right to receive a specified number of shares of Stock, or a cash payment equal to the Fair Market Value (determined as of a specified date) of a specified number of shares of Stock, subject to any vesting or other restrictions deemed appropriate by the Committee. These restrictions may lapse separately or in combination at such times, in such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon a Termination of Employment (or Termination of Service in the case of a member of the Board) during the applicable restriction period, Restricted Stock Units that are at that time subject to restrictions shall be forfeited; provided, however, that the Committee may provide in any Restricted Stock Unit Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock Units will be waived in whole or in part in the event of a Termination of Employment (or Termination of Service in the case of a member of the Board) resulting from specified causes. The Committee also may waive in whole or in part any other restrictions or forfeiture conditions relating to a Restricted Stock Unit Award. Payment for Restricted Stock Units shall be made in the manner and at the time designated by the Committee in the Award Agreement. In the Award Agreement, the Committee may provide that payment will be made in cash or Stock, or in a combination thereof.
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ARTICLE 8STOCK GRANT AND STOCK UNIT AWARDS
8.1STOCK GRANT AWARDS. A Stock Grant Award grants the Participant the right to receive (or purchase at such price as determined by the Committee) a designated number of shares of Stock free of any vesting restrictions. The purchase price, if any, for a Stock Grant Award shall be payable in cash or other form of consideration acceptable to the Committee. A Stock Grant Award may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such Participant.
8.2STOCK UNIT AWARDS. A Stock Unit Award grants the Participant the right to receive a designated number of shares of Stock, or a cash payment equal to the Fair Market Value (determined as of a specified date) of a designated number of shares of Stock, in the future free of any vesting restrictions. A Stock Unit Award may be granted as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such Participant.
ARTICLE 9DIVIDEND EQUIVALENT AWARDS
9.1DIVIDEND EQUIVALENT AWARDS. A Dividend Equivalent Award will grant the Participant the right to receive a payment based on the dividends declared on the shares of Stock that are subject to any Restricted Stock Unit, Stock Unit, Performance Share Unit or Performance Share Award, to be credited as of dividend payment dates during the period between the Date of Grant and the date the Award is exercised, vests or expires, as determined by the Committee. In no event may a Dividend Equivalent Award made with respect to a Restricted Stock Unit Award that vests based on the achievement of Performance Goals, or with respect to a Performance Share Unit or Performance Share Award, be paid unless and until such Award vests or is earned by satisfaction of the applicable Performance Goals. A Dividend Equivalent Award shall initially be expressed in terms of cash or shares of Stock, depending on the way in which the dividends to which it relates are declared. Such Award shall be converted to cash or additional shares of Stock, as the case may be, by such formula and at such time and subject to such limitations as may be determined by the Committee. A Dividend Equivalent Award may not be made in connection with any Option or SAR. A Dividend Equivalent may be paid with interest if so provided in an Award Agreement.
ARTICLE 10PERFORMANCE SHARES; PERFORMANCE SHARE UNITS; AND PERFORMANCE CASH AWARDS
10.1PERFORMANCE SHARE AWARDS. A Performance Share Award grants the Participant the right to receive a specified number of shares of Stock depending on the satisfaction of any one or more Performance Goals. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee. Subject toArticle 15, payment for vested Performance Shares shall be made in Stock.
10.2PERFORMANCE SHARE UNIT AWARDS. A Performance Share Unit Award grants the Participant the right to receive a specified number of shares of Stock or a cash payment equal to the Fair Market Value (determined as of a specified date) of a specified
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number of shares of Stock depending on the satisfaction of any one or more Performance Goals. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee. Payment for Performance Share Unit Awards shall be made in Stock or cash, or in a combination thereof, as specified in the Award Agreement.
10.3PERFORMANCE CASH AWARDS. A Performance Cash Award grants the Participant the right to receive an amount of cash depending on the satisfaction of any one or more Performance Goals. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee.
10.4PERFORMANCE CRITERIA. The Performance Criteria applicable to any Performance Share, Performance Share Unit or Performance Cash Award shall be based on the Performance Criteria selected by the Committee and designated in the Award Agreement. The Performance Criteria applicable to any Performance Share, Performance Share Unit or Performance Cash Award granted to a Covered Employee that is designated as, or deemed to be, a Performance-Based Award pursuant toSection 13.1 shall be limited to the Performance Criteria specifically listed in the Glossary, as adjusted in accordance withSection 13.5, if applicable. The Performance Criteria applicable to any other Performance Share, Performance Share Unit or Performance Cash Award shall include the Performance Criteria specifically listed in the Glossary and such other criteria or factors as may be determined by the Committee and specified in the Award Agreement.
11.1GENERAL. Option Awards are subject to the following terms and conditions:
(a)Exercise Price. The exercise price per share of Stock pursuant to an Option shall be equal to the Fair Market Value of one share of Stock as of the Date of Grant unless the Committee sets a higher exercise price in the Award Agreement.
(b)Time and Conditions of Exercise. Unless the Committee specifies otherwise in the Award Agreement, the Option shall become exercisable in three equal annual installments on the first, second and third anniversaries of the Date of Grant and shall expire on the earlier of the Participant's Termination of Employment (or Termination of Service in the case of a member of the Board) or the tenth anniversary of the Date of Grant. The Committee also may prescribe performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised.
(c)Payment. The exercise price for any Option shall be paid in cash or shares of Stock held for longer than six months (through actual tender or by attestation). In the Award Agreement, the Committee also may prescribe other methods by which the exercise price of an Option may be paid and the form of payment (except payment may not be made in the form of a promissory note) including, without limitation, any net-issuance arrangement or other property acceptable to the Committee (including broker-assisted "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants.
(d)Repricing of Options. Notwithstanding any other provision in the Plan to the contrary, without approval of the Company's shareholders, an Option may not be amended, modified or repriced to reduce the exercise price after the Date of Grant. In addition, an Option
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may not be surrendered in consideration of or exchanged for cash, other Awards or a new Option having an exercise price below the exercise price of the Option being surrendered or exchanged, except in connection with a Change of Control or as otherwise provided inSection 4.4 with respect to an adjustment in capitalization.
(e)Limitation on Number of Shares Subject to Awards. Subject to the adjustment provided inSection 4.4, the maximum number of shares (counted as described inSections 4.1 and 4.2 above) of Stock with respect to one or more Option Awards that may be granted to any one Participant during any calendar year shall be 500,000.
11.2INCENTIVE STOCK OPTIONS. Incentive Stock Options, which are Options intended to meet the requirements of Section 422 of the Code, shall be granted only to Participants who are employees. The terms of any Incentive Stock Options granted pursuant to the Plan must comply with the requirements ofSection 11.1 and the following additional provisions:
(a)Exercise. In no event may any Incentive Stock Option be exercisable for more than ten years from the Date of Grant.
(b)Lapse of Option. An Incentive Stock Option shall lapse in the following circumstances:
(1) The Incentive Stock Option shall lapse ten years from the Date of Grant, unless an earlier time is specified in the Award Agreement;
(2) The Incentive Stock Option shall lapse upon a Termination of Employment for any reason other than the Participant's death or Disability, unless otherwise provided in the Award Agreement; and
(3) If the Participant incurs a Termination of Employment on account of death or Disability before the Option lapses pursuant to paragraph (1) or (2) above, the Incentive Stock Option shall lapse on the earlier of (i) the scheduled expiration date of the Option, or (ii) 12 months after the date of the Participant's Termination of Employment on account of death or Disability. Upon the Participant's death or Disability, any Incentive Stock Options exercisable at the Participant's death or Disability may be exercised by the Participant's legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant's last will and testament in the case of death, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option pursuant to the applicable laws of descent and distribution.
(c)Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any one calendar year may not exceed $100,000 or such other limitation as may then be imposed by Section 422(d) of the Code or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.
(d)Ten Percent Owners. An Incentive Stock Option may be granted to any employee who, at the Date of Grant, owns stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company only if such Option is granted
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at a price that is not less than 110% of Fair Market Value on the Date of Grant and the Option is exercisable for no more than five years from the Date of Grant.
(e)Right to Exercise. Except as provided inSection 11.2(b)(3), during a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant.
(f)Limitations on Number of Shares Subject to Awards. The maximum number of shares that may be issued under the Plan as Incentive Stock Options is 1,000,000.
ARTICLE 12STOCK APPRECIATION RIGHTS
12.1GENERAL. SAR Awards are subject to the following terms and conditions:
(a)Time and Conditions of Exercise. Unless the Committee specifies otherwise in the Award Agreement, the SAR shall become exercisable in three equal annual installments on the first, second and third anniversaries of the Date of Grant and shall expire on the earlier of the Participant's Termination of Employment (or Termination of Service in the case of a member of the Board) or the tenth anniversary of the Date of Grant. The Committee also may prescribe performance or other conditions, if any, that must be satisfied before all or part of an SAR may be exercised.
(b)Payment of SAR Amount. Upon exercise of the SAR, the Participant shall be entitled to receive payment of an amount determined by multiplying (a) the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise over the Fair Market Value (or such higher amount determined by the Committee at the Date of Grant) of a share of Stock on the Date of Grant by (b) the number of shares with respect to which the SAR is exercised. Unless the Committee provides otherwise in the Award Agreement, payment for the SAR shall be made in shares of Stock having a Fair Market Value as of the date of exercise equal to the amount of the payment due. The Committee may provide in the Award Agreement that payment for the SARs will be made in cash within 30 days following the date of exercise.
(c)Repricing of SARs. Notwithstanding any other provision in the Plan to the contrary, without approval of the Company's shareholders, a SAR may not be amended, modified or repriced to reduce the exercise price after the Date of Grant. In addition, a SAR may not be surrendered in consideration of or exchanged for cash, other Awards or a new SAR having an exercise price below the exercise price of the SAR being surrendered or exchanged, except in connection with a Change of Control or as otherwise provided inSection 4.4 with respect to an adjustment in capitalization.
(d)Limitations on Number of Shares Subject to Awards. Subject to the adjustment provided inSection 4.4, the maximum number of shares (counted as described inSections 4.1 and 4.2 above) of Stock with respect to one or more Stock Appreciation Rights Awards that may be granted to any one Participant during any calendar year shall be 500,000.
ARTICLE 13PERFORMANCE-BASED AWARDS
13.1PURPOSE. Section 162(m) of the Code limits the amount of the Company's deductions for compensation payable to Covered Employees to a specified amount per year. "Performance-based compensation" that meets the requirements set forth in Section 162(m) and the applicable regulations is not subject to this limitation. The purpose of thisArticle 13 is
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to enable the Committee to qualify some or all of the Awards granted pursuant toArticles 7, 8, 9 and 10 as "performance-based compensation" pursuant to Section 162(m) of the Code.
If the Committee decides that a particular Award to a Covered Employee should qualify as "performance-based compensation," the Committee will provide in the Award Agreement or otherwise that the Award is intended to be a Performance-Based Award.
13.2APPLICABILITY. ThisArticle 13 shall apply only to Performance-Based Awards. If thisArticle 13 applies, its provisions control over any contrary provision contained in any other section of this Plan or any Award Agreement. The provisions of thisArticle 13 and any Award Agreement for a Performance-Based Award shall be interpreted in a manner consistent with the requirements of Section 162(m) and the applicable regulations. If any provision of this Plan or any Award Agreement for a Performance-Based Award does not comply with or is inconsistent with the requirements of Section 162(m) or the applicable regulations, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.
13.3DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE-BASED AWARDS. With regard to a particular Performance Period, the Committee may select the length of such Performance Period, the type of Performance-Based Awards to be issued, the kind and/or level of the Performance Goal or Goals, and whether the Performance Goal or Goals is or are to apply to the Company, an Affiliate or any division or business unit thereof or the Participant or any group of Participants. Depending on the Performance Criteria used to establish the Performance Goals, the Performance Goals may be stated in terms of absolute levels or relative to another company or to an index or indices.
13.4ESTABLISHMENT OF PERFORMANCE GOALS. A Performance-Based Award shall provide for payment only upon the attainment of one or more pre-established, objective Performance Goals. The Performance Goals, and the process by which they are established, shall satisfy all of the requirements of Section 162(m) and the applicable regulations. By way of illustration, but not limitation, the following requirements must be satisfied:
(a) The Performance Goals shall be based solely on the Performance Criteria specifically identified in the Glossary;
(b) The Performance Goals shall be considered to be pre-established only if the Performance Goals are established by the Committee in writing not later than ninety (90) days after the commencement of the Performance Period for such Award; provided that (i) the outcome must be substantially uncertain at the time the Committee establishes the Performance Goals, and (ii) in no event may the Committee establish the Performance Goals for any Performance-Based Award after 25% of the Performance Period for such Award has elapsed;
(c) A Performance Goal will be considered to be objective only if a third party having knowledge of the relevant facts could determine whether the Performance Goal has been met;
(d) The Performance Goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the Covered Employee if the Goal is attained. For this purpose, the formula will be considered to be objective only if a third party having knowledge of the relevant performance results could calculate the amount to be paid to the Covered Employee; and
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(e) The objective formula or standard must preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the Performance Goal.
13.5PERFORMANCE EVALUATION; ADJUSTMENT OF GOALS. At the time that a Performance-Based Award is first issued, the Committee, in the Award Agreement or in another written document, shall specify whether performance will be evaluated including or excluding the effect of any of the following events that occur during the Performance Period, as the Committee deems appropriate:
(a) Decisions entered or settlements reached in litigation or regulatory proceedings;
(b) The write down or sale of assets;
(c) The impact of discontinued operations or any reorganization, liquidation or restructuring;
(d) The impact of changes in tax laws, accounting principles, regulatory actions or other laws affecting reported results;
(e) Extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual or quarterly reports filed with the Securities and Exchange Commission in respect of the applicable year;
(f) The impact of any mergers, acquisitions, spin-offs or other divestitures; and
(g) Foreign exchange gains and losses.
The inclusion or exclusion of these items shall be expressed in a form that satisfies the requirements of Section 162(m) and the applicable regulations. The Committee also may, within the time prescribed by Section 162(m) and the applicable regulations, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.
13.6ADJUSTMENT OF PERFORMANCE-BASED AWARDS. The Committee may adjust the determinations of the degree of attainment (taking into account any adjustments required pursuant toSection 13.5) of the pre-established Performance Goals. Notwithstanding any provision herein to the contrary, the Committee may not make any adjustment or take any other action with respect to any Performance-Based Award that will increase the amount payable under any such Award. The Committee shall retain the power to adjust Performance-Based Awards downward or to otherwise reduce the amount payable with respect to any Performance-Based Award.
13.7CONTINUED EMPLOYMENT REQUIRED. Unless otherwise provided in the relevant Award Agreement, a Participant must be an employee of the Company or an Affiliate on the day a Performance-Based Award for such Performance Period is paid to the Participant.
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13.8CERTIFICATION BY COMMITTEE. The payment for a Performance-Based Award shall not occur until the Committee certifies, in writing, that the pre-established Performance Goals and any other material terms and conditions precedent to such payment have been satisfied. Committee certification is not required for compensation that is attributable solely to the increase in the value of the Company's Stock.
13.9MAXIMUM AWARD PAYABLE. The maximum Performance-Based Award (other than a Performance Cash Award) payable to any one Participant pursuant to the Plan for any Performance Period is 500,000 shares of Stock or the equivalent cash value. The maximum Performance Cash Award payable to any one Participant for any Performance Period is $10,000,000. If the Performance Period is less than or exceeds 12 months, the dollar and share limits expressed in the preceding sentences shall be reduced or increased proportionately, as the case may be. For example, if the Performance Period is three years, the limit shall be increased by multiplying it by three.
13.10MISCELLANEOUS. The designation of a Covered Employee as a Participant for any Performance Period shall not in any manner entitle the Participant to receive a Performance-Based Award for such Performance Period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant for any subsequent Performance Period.
ARTICLE 14OTHER PROVISIONS APPLICABLE TO ALL AWARDS
14.1LIMITATION ON AWARDS WITH RAPID OR NO VESTING. No more than five percent in the aggregate of the shares of Stock available for grant or reference purposes pursuant toSection 4.1 may be subject to the following types of Awards:
(a) Stock Grants or Stock Units other than those awarded to members of the Board or members of the board of directors of APS pursuant to regular retainer arrangements;
(b) Options that become fully vested prior to the third anniversary of the Date of Grant;
(c) SARs that becomes fully vested prior to the third anniversary of the Date of Grant;
(d) Restricted Stock or Restricted Stock Units with respect to which the restrictions lapse solely based on the passage of time and which vest in less than three years;
(e) Restricted Stock or Restricted Stock Units with respect to which the restrictions lapse based on the satisfaction of Performance Goals and that fully vest before the expiration of the one-year period following the Date of Grant; and
(f) Performance Shares or Performance Share Units that fully vest before the expiration of the one-year period following the Date of Grant.
An Award will not be included in the aggregate Awards subject to the requirements of this Section solely because the Award Agreement provides for the immediate vesting of the Award upon a Participant's death or Disability or upon the occurrence of a Change of Control. In addition, replacement Awards granted pursuant toSection 4.6 shall be disregarded in calculating compliance with the limitations of this Section. In addition, an Award will not be included in the aggregate Awards subject to the requirements of this Section solely because the
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Award Agreement provides that an incremental portion of the Award may become vested proportionally during the vesting periods described above. For example, an Option or SAR that becomes vested in equal monthly, quarterly or annual increments over a period of three years will not be subject to the limitations of this Section.
14.2LIMITS ON TRANSFER.
(a)General. Except as provided inSection 14.2(b) orSection 14.3, no right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to, or in favor of, any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or an Affiliate. Except as provided inSection 14.2(b) orSection 14.3, and except as otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participant other than by will or the laws of descent and distribution or pursuant to a domestic relations order (that would otherwise qualify as a qualified domestic relations order as defined in the Code or Title I of ERISA but for the fact that the order pertains to an Award) in favor of a spouse or, if applicable, until the expiration of any period during which any restrictions are applicable or any Performance Period as determined by the Committee.
(b)Transfers to Family Members. The Committee shall have the authority to adopt a policy that is applicable to existing Awards, new Awards, or both, which permits a Participant to transfer Awards during his or her lifetime to any Family Member. In the event an Award is transferred as permitted by such policy, such transferred Award may not be subsequently transferred by the transferee (other than another transfer meeting the conditions set forth in the policy) except by will or the laws of descent and distribution. A transferred Award shall continue to be governed by and subject to the terms and limitations of the Plan and relevant Award Agreement, and the transferee shall be entitled to the same rights as the Participant, as if the transfer had not taken place.
14.3BENEFICIARIES. NotwithstandingSection 14.2, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death, and, in accordance withSection 11.2(b)(3), upon the Participant's Disability. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married and resides in a community property state, a designation of a person other than the Participant's spouse as his beneficiary with respect to more than 50% of the Participant's interest in the Award shall not be effective without the prior written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is provided to the Company.
14.4STOCK CERTIFICATES. Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing shares of Stock pursuant to the exercise of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of
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any exchange or quotation system on which the shares of Stock are listed, quoted or traded. All Stock certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with Federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Board may require that a Participant make such reasonable covenants, agreements, and representations, as the Board deems advisable in order to comply with any such laws, regulations, or requirements.
14.5DEFERRAL PURSUANT TO DEFERRED COMPENSATION PLAN. The Award Agreement for any Award other than an Option or Restricted Stock Award may allow the Participant to defer receipt of any compensation attributable to the Award pursuant to the terms and provisions of the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates or any successor or other nonqualified deferred compensation plan. Any such Award Agreement shall comply with the requirements of Section 409A of the Code.
14.6CLAWBACK. Notwithstanding any provision of the Plan to the contrary, in an Award Agreement, the Committee shall include provisions calling for the recapture or clawback of all or any portion of an Award to the extent necessary to comply with applicable law in effect on the date of the Award Agreement, including, but not limited to, the final rules issued by the Securities and Exchange Commission and the New York Stock Exchange pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Committee also may include other clawback provisions in the Award Agreement as it determines to be appropriate. By accepting an Award, each Participant agrees to be bound by, and comply with, the terms of any such recapture or clawback provisions and with any Company request or demand for recapture or clawback.
15.1GENERAL RULE. Unless the Committee with the approval of the Board provides otherwise in an Award Agreement, if a Change of Control occurs, immediately prior to the Change of Control:
(a) Any and all Options and SARs granted hereunder shall become exercisable immediately before the closing of the transaction that will result in the Change of Control and all necessary steps shall be taken to allow the Participants to immediately exercise such Options or SARs so that any Stock issued upon such exercise shall be able to participate in the transaction that results in the Change of Control. If pursuant to the terms of the Award Agreement, an SAR is to be paid in cash, the SAR will be deemed to be exercised on the closing of the transaction that results in the Change of Control. The cash payment then will be made within ten days following the closing of the transaction that results in the Change of Control.
(b) Any time based or other restrictions imposed on Restricted Stock or Restricted Stock Units shall lapse. All Restricted Stock Units and Stock Units shall become immediately payable and shall be paid in Stock or cash, in accordance with the terms of the
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applicable Award Agreement. All necessary steps shall be taken to allow any Stock issued in payment for the Restricted Stock Units or Stock Units (and any shares of Restricted Stock that become unrestricted) to participate in the transaction that results in the Change of Control. If pursuant to the terms of the Award Agreement, a Restricted Stock Unit is to be paid in cash, the Restricted Stock Unit will be settled as of the closing of the transaction that results in the Change of Control and the cash payment then will be made within ten days following the closing of the transaction that results in the Change of Control.
(c) Any Awards of Performance Shares or Performance Share Units that are payable in Stock shall be converted to Stock Grants, which shall be immediately vested. All Stock payable in connection with the Stock Grant shall be issued immediately before the closing of the transaction that will result in the Change of Control and all necessary steps shall be taken to allow any Stock so issued to participate in the transaction that result in the Change of Control. In converting Performance Shares or Performance Share Units to a Stock Grant, the Participants shall receive the number of shares of Stock that would have been earned at the target level of performance; provided, however, that if, in the judgment of the Committee, the level of performance as of the last day of the month that is at least 30 days prior to the closing of the transaction that results in the Change of Control is reasonably ascertainable and such performance exceeds the target level of performance, the Participants shall receive the number of shares of Stock that would have been earned at such attained level of performance rather than the target level of performance. Whether the attained level of performance exceeds the target level will be determined on a goal-by-goal basis. For example, if four equally weighted goals are established in connection with a particular Award, and the attained level of performance exceeds the target level for one of such goals, 25% of the Award will be earned at the attained level and the remaining 75% will be earned at the target level.
(d) Any Awards of Performance Share Units that are payable in cash shall become immediately vested. The Participants then shall receive a cash payment equal to the Fair Market Value of the specified number of shares of Stock payable pursuant to the Award at the target level of performance; provided, however, that if, in the judgment of the Committee, the level of performance as of the last day of the month that is at least 30 days prior to the closing of the transaction that results in the Change of Control is reasonably ascertainable and such performance exceeds the target level of performance, such attained level of performance shall be used. Whether the attained level of performance exceeds the target level will be determined on a goal-by-goal basis as further described inSection 15.1(c). The cash payment then will be made within ten days following the closing of the transaction that results in the Change of Control.
(e) Performance Cash Awards shall be deemed to be satisfied and earned at the target level of performance; provided, however, that if, in the judgment of the Committee, the level of performance as of the last day of the month that is at least 30 days prior to the closing of the transaction that results in the Change of Control is reasonably ascertainable and such level and such performance exceeds the target level of performance, such attained level of performance shall be used. Whether the attained level of performance exceeds the target level will be determined on a goal-by-goal basis as further described inSection 15.1(c). Performance Cash Awards then shall be paid within ten days following the closing of the transaction that results in the Change of Control.
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(f) Any Dividend Equivalent Awards shall be paid in cash or Stock as determined in accordance with the applicable Award Agreement. All Stock payable in connection with the Dividend Equivalent shall be issued immediately before the closing of the transaction that will result in the Change of Control and all necessary steps shall be taken to allow any Stock so issued to participate in the transaction that result in the Change of Control. Any cash payment shall be made within ten days following the closing of the transaction that results in the Change of Control.
(g) With respect to an Award that the Company concludes is subject to Section 409A of the Code, a Change of Control may not result in the acceleration of the timing of any payment unless the transaction that results in the Change of Control also constitutes a "change of control event" as such term is used in Treasury Regulation Section 1.409A-3(i)(5). Such transaction shall be considered to be a Change of Control for all other purposes of such an Award, however, unless prohibited by regulations issued pursuant to Section 409A. For example, such transaction will result in the lapse of any time based or other restrictions on a Restricted Stock or Restricted Stock Unit Award. If due to the above provisions the payment of an Award may not be accelerated, the Board, prior to the Change of Control, shall take such action as it in good faith determines to be necessary to assure that there will be no material impairment to either the value of the Award to the Participant or the Participant's opportunity for future appreciation in respect of such Award.
15.2BOARD OVERRIDE. Notwithstanding the foregoing provisions ofSection 15.1, the Board, prior to a Change of Control, may determine that no Change of Control shall be deemed to have occurred or that some or all of the enhancements to the rights of Participants under all or a portion of the outstanding Awards upon a Change of Control, as provided underSection 15.1 or the Award Agreement, shall not apply to specified Awards. The Board may exercise such override authority only if, before or immediately upon the occurrence of the specified event that would otherwise constitute a Change of Control, the Board, as constituted prior to the Change of Control, reasonably concludes, in good faith, that: (i) Participants holding Awards affected by action of the Board under thisSection 15.2 shall be protected by legally binding obligations of the Company or the surviving entity or the parent thereof because such Awards (A) shall remain outstanding following consummation of all transactions involved in or contemplated by such Change of Control or (B) shall be assumed and adjusted by the surviving entity resulting from such transactions or the parent thereof, or (C) shall be exchanged for new awards issued by the surviving entity resulting from such transaction or the parent thereof; and (ii) changes in the terms of the Award resulting from such transactions will not materially impair the value of the Awards to the Participants or their opportunity for future appreciation in respect of such Awards. The Board may exercise such override authority with respect to an Award which the Company concludes is subject to (and not excepted from) the requirements of Section 409A of the Code only in a manner and to the extent permissible under Section 409A.
15.3PARTICIPANT CONSENT NOT REQUIRED. Nothing in thisArticle 15 or any other provision of this Plan is intended to provide any Participant with any right to consent to or object to any transaction that might result in a Change of Control and each provision of this Plan shall be interpreted in a manner consistent with this intent. Similarly, nothing in thisArticle 15 or any other provision of this Plan is intended to provide any Participant with any right to consent to or object to any action taken by the Board pursuant toSection 15.2.
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ARTICLE 16AMENDMENT, MODIFICATION, AND TERMINATION
16.1AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however, that any such action of the Committee shall be subject to the approval of the shareholders to the extent necessary to comply with any applicable law, regulation, or rule of the stock exchange on which the shares of Stock are listed, quoted or traded. Except as provided inSection 4.4, neither the Board nor the Committee may, without the approval of shareholders, (i) increase the number of shares available for grant under the Plan, (ii) permit the Committee to grant Options with an exercise price that is below Fair Market Value on the Date of Grant, (iii) permit the Committee to extend the exercise period for an Option beyond ten years from the Date of Grant, (iv) amendSection 11.1(d) to permit the Committee to reprice previously granted Options, or (v) amendSection 12.1(c) to permit the Committee to reprice previously granted SARs.
16.2AWARDS PREVIOUSLY GRANTED. Except as provided in the next sentence, no termination, amendment, or modification of the Plan or any Award Agreement shall adversely affect in any material way the rights of the holder under any Award previously granted pursuant to the Plan without the prior written consent of the holder of the Award. The consent of the holder of an Award is not needed if the change (i) is required by law or regulation, (ii) does not adversely affect in any material way the rights of the holder, or (iii) is required to cause the benefits under the Plan to qualify as performance-based compensation within the meaning of Section 162(m) of the Code or to comply with the provisions of Section 409A of the Code and applicable regulations or other interpretive authority. Additional rules relating to amendments to the Plan or any Award Agreement to assure compliance with Section 409A of the Code are set forth inSection 17.15.
16.3PERFORMANCE-BASED AWARDS. Except as provided inSection 15.1, the Committee shall not have the authority to amend an Award Agreement to accelerate the vesting or waive the forfeiture restrictions of any Performance-Based Awards. In addition, the Committee shall not take any other action that would cause a Performance-Based Award to fail to satisfy the requirements of the performance-based compensation exception to the deduction limitations imposed by Section 162(m) of the Code unless the Committee concludes that the deduction limitations will not become applicable or that the amendment is appropriate despite the deduction limitations imposed by Section 162(m) of the Code.
17.1NO RIGHTS TO AWARDS. No Participant, employee, or other person shall have any claim to be granted any Award, and neither the Company nor the Committee is obligated to treat Participants, employees, and other persons uniformly.
17.2NO SHAREHOLDERS RIGHTS. No Award gives the Participant any of the rights of a shareholder of the Company unless and until unrestricted shares of Stock are issued to the Participant or the restrictions on any shares previously issued lapse, except as specifically otherwise provided in the Plan or the Award Agreement.
17.3WITHHOLDING. The Company or any Affiliate shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount
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sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. With the Committee's consent as expressed in an Award Agreement or in any policy adopted by the Committee, the Company may permit the Participant to satisfy a tax withholding requirement by (a) directing the Company to withhold shares of Stock to which the Participant is entitled pursuant to the Award in an amount necessary to satisfy the Company's applicable federal, state, local or foreign income and employment tax withholding obligations with respect to such Participant, (b) tendering previously-owned shares of Stock held by the Participant for six months or longer to satisfy the Company's applicable federal, state, local, or foreign income and employment tax withholding obligations with respect to the Participant, (c) a broker-assisted "cashless" transaction, or (d) personal check or other cash equivalent acceptable to the Company.
17.4NO RIGHT TO CONTINUED EMPLOYMENT OR SERVICE. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant's employment or services at any time, nor confer upon any Participant any right to continue in the employ or service of the Company or any Affiliate.
17.5UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate. Neither the Participant nor any other persons shall have any interest in any fund or in any specific asset or assets of the Company or any other entity by reason of any Award, except to the extent provided hereunder.
17.6RELATIONSHIP TO OTHER BENEFITS. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Affiliate, except as otherwise provided in such plan.
17.7EXPENSES. The expenses of administering the Plan shall be borne by the Company.
17.8TITLES AND HEADINGS. The titles and headings of the sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
17.9FRACTIONAL SHARES. No fractional shares of Stock shall be issued pursuant to the Plan. Unless the Committee specifies otherwise in the Award Agreement or pursuant to any policy adopted by the Committee, cash will be given in lieu of fractional Shares.
17.10SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant date, obligated to file reports pursuant to Section 16 of the Exchange Act, transactions pursuant to this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors pursuant to the Exchange Act. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on the exercise of any Award as may be required to satisfy the requirements of Rule 16b-3 or its successors pursuant to the Securities Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee.
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17.11GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register pursuant to the Securities Act of 1933, as amended, any of the shares of Stock paid pursuant to the Plan. If the shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Act of 1933, as amended, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. The Committee shall impose such restrictions on any Award as it may deem advisable, including without limitation, restrictions under applicable federal securities law, under the requirements of the New York Stock Exchange or any other exchange or automated quotation system upon which the Stock is then listed, quoted or traded and under any blue sky or state securities laws applicable to such Award.
17.12GOVERNING LAW. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the jurisdiction of incorporation of the Company.
17.13SUCCESSORS. All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect merger, consolidation, purchase of all or substantially all of the business and/or assets of the Company or otherwise.
17.14SURVIVAL OF PROVISIONS. The rights, remedies, agreements, obligations and covenants contained in or made pursuant to this Plan, any Award Agreements and any notices or agreements made in connection with this Plan shall survive the execution and delivery of such notices and agreements and the delivery and receipt of such shares of Stock.
17.15COMPLIANCE WITH SECTION 409A.
(a)General Compliance. Some of the types of Awards that may be granted pursuant to the Plan (including, but not necessarily limited to, Restricted Stock Unit Awards, Performance Share Awards, Performance Share Unit Awards, Performance Cash Awards and Stock Unit Awards) may be considered to be "non-qualified deferred compensation" subject to the requirements of Section 409A of the Code. If an Award is subject to the requirements of Section 409A of the Code, the Company intends (but cannot and does not guarantee) that the Award Agreement and this Plan comply fully with and meet all of the requirements of Section 409A of the Code or an exception thereto and the Award Agreement shall include such provisions, in addition to the provisions of this Plan, as may be necessary to assure compliance with Section 409A of the Code or an exception thereto. An Award subject to Section 409A of the Code also shall be administered in good faith compliance with the provisions of Section 409A of the Code as well as applicable guidance issued by the Internal Revenue Service and the Department of Treasury. To the extent necessary to comply with Section 409A of the Code, any Award that is subject to Section 409A of the Code may be modified, replaced or terminated by the Committee. Notwithstanding any provision of this Plan or any Award Agreement to the contrary, in the event that the Committee determines that any Award is or may become subject to Section 409A of the Code, the Company may adopt such amendments to the Plan and the related Award Agreements, without the consent of the Participant, or adopt other policies and procedures (including amendments, policies and procedures with retroactive effective dates), or take any other action that the Committee determines to be necessary or
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appropriate to either comply with Section 409A of the Code or to exclude or exempt the Plan or any Award from the requirements of Section 409A of the Code.
(b)Delay for Specified Employees. If, at the time of a Participant's Separation from Service, the Company has any Stock which is publicly traded on an established securities market or otherwise, and if the Participant is considered to be a Specified Employee, to the extent any payment for any Award is subject to the requirements of Section 409A of the Code and is payable upon the Participant's Separation from Service, such payment shall not commence prior to the first business day following the date which is six months after the Participant's Separation from Service (or if earlier than the end of the six-month period, the date of the Participant's death). Any amounts that would have been distributed during such six-month period will be distributed on the day following the expiration of the six-month period.
(c)Prohibition on Acceleration or Deferral. Under no circumstances may the time or schedule of any payment for any Award that is subject to the requirements of Section 409A of the Code be accelerated or subject to further deferral except as otherwise permitted or required pursuant to regulations and other guidance issued pursuant to Section 409A of the Code. If the Company fails to make any payment pursuant to the payment provisions applicable to an Award that is subject to Section 409A of the Code, either intentionally or unintentionally, within the time period specified in such provisions, but the payment is made within the same calendar year, such payment will be treated as made within the specified time period. In addition, in the event of a dispute with respect to any payment, such payment may be delayed in accordance with the regulations and other guidance issued pursuant to Section 409A of the Code.
(a) "2007 Plan" means the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan.
(b) "Affiliate" means any subsidiary or parent of the Company that is: (i) a member of a "controlled group of corporations" (within the meaning of Section 414(b) of the Code as modified by Section 415(h) of the Code) that includes the Company as a member of the group; or (ii) a member of a group of trades or businesses under common control (within the meaning of Section 414(c) of the Code as modified by Section 415(h) of the Code) that includes the Company as a member of the group. In applying Section 1563(a)(1), (2) and (3) of the Code for purposes of determining the members of a controlled group of corporations under Section 414(b) of the Code, the language "at least 50%" shall be used instead of "at least 80%" each place it appears in Section 1563(a)(1), (2) and (3) and in applying Treasury Regulation Section 1.414(c)-2 for purposes of determining the members of a group of trades or businesses (whether or not incorporated) that are under common control for purposes of Section 414(c) of the Code, the language "at least 50%" shall be used instead of "at least 80%" each place it appears in Treasury Regulation Section 1.414(c)-2. For purposes of determining whether an event constitutes a Change of Control as defined below, "Affiliate" status shall be determined on the day immediately preceding the date of the transaction or event.
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(c) "APS" shall mean Arizona Public Service Company, an Affiliate of the Company and (except for purposes of determining whether a Change of Control has occurred) any successor corporation.
(d) "Award" means any Restricted Stock, Restricted Stock Unit, Performance Share, Performance Share Unit, Performance Cash, Stock Grant, Stock Unit, Dividend Equivalent, Option or Stock Appreciation Right granted to a Participant under the Plan.
(e) "Award Agreement" means any written agreement, contract, or other instrument or document, including an electronic agreement or document, evidencing an Award.
(f) "Beneficial Owner" shall have the same meaning as given to that term in Rule 13d-3 of the General Rules and Regulations of the Exchange Act, provided that any pledgee of the voting securities of the Company or APS shall not be deemed to be the Beneficial Owner thereof prior to its disposition of, or acquisition of voting rights with respect to, such securities.
(g) "Board" means the Board of Directors of the Company.
(h) "Change of Control" means and shall be deemed to have occurred as of the date of the occurrence of any of the following events:
(1) Any person, other than an Affiliate, through a transaction or series of transactions, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or APS representing 20% or more of the combined voting power of the then outstanding securities of the Company or APS, as the case may be; provided, however, that, for purposes of this clause (1), any acquisition directly from the Company of (A) securities of the Company or (B) securities of APS representing 40% or less of the voting power of the then outstanding securities of APS, shall not constitute a Change of Control;
(2) The closing of a merger or consolidation of (A) the Company with any other corporation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an Affiliate, less than 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) APS with any other corporation which would result in the voting securities of APS outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an Affiliate, less than 60% of the combined voting power of the securities of APS or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; provided that, for purposes of this subparagraph (2), a merger or consolidation effected to implement a recapitalization of the Company or of APS (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or of APS representing 20% or more of the combined voting power of the then outstanding securities of the Company or of APS (excluding any securities acquired by that person directly from the Company or an Affiliate) shall not result in a Change of Control;
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(3) The sale, transfer or other disposition of all or substantially all of the assets of either the Company or APS to a person other than the Company or an Affiliate; or
(4) Individuals who, as of July 31, 2008, constitute the board of directors of the Company (the "Company Incumbent Board") or of APS (the "APS Incumbent Board") cease for any reason to constitute at least two-thirds of the members of the Company or APS board of directors, as the case may be; provided, however, that for purposes of this subparagraph (4), (A)(1) any person becoming a member of the Company board of directors after July 31, 2008 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the members then comprising the Company Incumbent Board will be considered as though such person were a member of the Company Incumbent Board and (2) the Company Incumbent Board shall not include a director whose initial assumption of office as a director was in connection with an actual or threatened election contest relating to the election of directors, and (B)(1) any person becoming a member of the APS board of directors after July 31, 2008 whose election, or nomination for election by APS' shareholder(s), was approved by a vote of at least two-thirds of the members then comprising the APS Incumbent Board or by the Company, as a majority shareholder of APS, considered as though such person were a member of the APS Incumbent Board and (2) the APS Incumbent Board shall not include a director whose initial assumption of office as a director was in connection with an actual or threatened election contest relating to the election of directors.
Notwithstanding the foregoing, a Change of Control will not be deemed to have occurred until (i) any required regulatory approval has been obtained, and (ii) the transaction that would otherwise be considered a Change of Control closes.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
(j) "Committee" means the committee of the Board designated to administer the Plan pursuant toSection 3.1.
(k) "Company" means Pinnacle West Capital Corporation, an Arizona corporation and (except for purposes of determining whether a Change of Control has occurred) any successor corporation.
(l) "Covered Employee" means an employee who is, or could be, a "covered employee" within the meaning of Section 162(m) of the Code.
(m) "Date of Grant" means, as determined by the Committee, the latest to occur of (i) the date as of which the Committee approves an Award, (ii) the date on which an Award to a prospective employee, officer, or non-employee member of the Board first becomes effective, or (iii) such other date as may be specified by the Committee in the Award Agreement.
(n) "Disability" means "disability" as that term is defined in Section 22(e)(3) of the Code unless a different definition is provided in the Award Agreement.
(o) "Dividend Equivalent" means a right granted to a Participant pursuant toArticle 9.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(q) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
(r) "Fair Market Value" means the closing price for the Stock as reported on the New York Stock Exchange (or on any national securities exchange on which the Stock is then listed)
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for that date or, if no such prices are reported for that date, the closing price on the next preceding date for which such prices were reported.
(s) "Family Member" means a Participant's spouse and any parent, stepparent, grandparent, child, stepchild, or grandchild, including adoptive relationships or a trust or any other entity in which these persons (or the Participant) have more than 50% of the beneficial interest.
(t) "Incentive Stock Option" means an Option granted pursuant to and in compliance withSection 11.2.
(u) "Non-Qualified Stock Option" means an Option granted pursuant toSection 11.1 that is not intended to be an Incentive Stock Option.
(v) "Option" means a right granted to a Participant pursuant toArticle 11. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
(w) "Participant" means a person who has been granted an Award.
(x) "Performance-Based Award" means an Award intended to satisfy the requirements of the performance-based compensation exception to the limitations imposed by Section 162(m) of the Code on the tax deductibility of compensation payable to Covered Employees.
(y) "Performance Cash" means a right granted to a Participant pursuant toSection 10.3.
(z) "Performance Criteria" means the criteria, or any combination of the criteria, that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals for Performance-Based Awards are limited to the following: EBITDA; EBIT; costs; operating income; net income; cash flow; operating cash flow; net cash flow; fuel cost per million BTU; costs per kilowatt hour; retained earnings; budget achievement; return on equity; return on assets; return on capital employed; return on invested capital; cash available to the Company from an Affiliate or Affiliates; expense spending; O&M expense; O&M or capital per kilowatt hour; gross margin; net margin; market capitalization; customer satisfaction; revenues; financial return ratios; market share; shareholder return and/or value (including but not limited to total shareholder return); operating profits (including earnings before or after income taxes, depreciation and amortization); net profits; earnings per share; earnings per share growth; profit returns and margins; stock price; working capital; business trends; production cost; project milestones; capacity utilization; quality; economic value added; plant and equipment performance; operating efficiency; diversity; debt; dividends; bond ratings; corporate governance; and health and safety (including environmental health and safety). The Performance Criteria that will be used to establish performance goals with respect to any Award other than a Performance-Based Award that is subject toArticle 13 will include the above-listed Performance Criteria and such other criteria as may be set forth in the applicable Award Agreement. Any of the Performance Criteria may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group, indices, or any other basket of companies. Financial Performance Criteria may, but need not, be calculated in accordance with generally accepted accounting principles ("GAAP") or any successor method to GAAP, including International Financial Reporting Standards. The Committee shall, within the time prescribed by Section 162(m) of the Code, define in an
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objective fashion the manner of calculating the Performance Criteria it selects to use for a particular Performance Period for a particular Participant.
(aa) "Performance Goals" means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, plant, or an individual. The Performance Goals may be stated in terms of absolute levels or relative to another company or companies or to an index or indices.
(bb) "Performance Period" means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's right to, and the payment of, an Award.
(cc) "Performance Share" means a right granted to a Participant pursuant toSection 10.1.
(dd) "Performance Share Unit" means a right granted to a Participant pursuant toSection 10.2.
(ee) "Plan" means this Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan, as it may be amended from time to time.
(ff) "Prior Plans" means the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan, the 2007 Plan and any other similar plan adopted by the Company at any time in the past, which has not yet lapsed or expired.
(gg) "Restricted Stock" means Stock granted to a Participant pursuant toSection 7.1.
(hh) "Restricted Stock Unit" means a right granted to a Participant pursuant toSection 7.2.
(ii) "Separation from Service" is a term that applies only in the context of an Award that the Company concludes is subject to Section 409A of the Code. In that limited context, the term "Separation from Service" means either: (i) the termination of a Participant's employment with the Company and all Affiliates due to death, retirement or other reasons; or (ii) a permanent reduction in the level of bona fide services the Participant provides to the Company and all Affiliates to an amount that is less than 50% of the average level of bona fide services the Participant provided to the Company and all Affiliates in the immediately preceding 36 months, with the level of bona fide service calculated in accordance with Treasury Regulation Section 1.409A-1(h)(1)(ii).
Solely for purposes of determining whether a Participant has a "Separation from Service," a Participant's employment relationship is treated as continuing while the Participant is on military leave, medical or sick leave, or other bona fide leave of absence (if the period of such leave does not exceed six months, or if longer, so long as the Participant's right to reemployment with the Company or an Affiliate is provided either by statute or contract). If the Participant's period of leave exceeds six months and the Participant's right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first day immediately following the expiration of such six-month period. Whether a Termination of Employment has occurred will be determined based on all of the facts
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and circumstances and in accordance with regulations issued by the United States Treasury Department pursuant to Section 409A of the Code.
In the case of a non-employee member of the Board, Separation from Service means that such member has ceased to be a member of the Board. Whether an independent contractor consultant has incurred a Separation from Service will be determined in accordance with Treasury Regulation Section 1.409A-1(h).
(jj) "Specified Employee" means an employee who, as of the date of his or her Separation from Service, is (i) an officer of the Company or any Affiliate having an annual compensation greater than $160,000, (ii) a five-percent owner of the Company or any Affiliate, or (iii) a one-percent owner of the Company or any Affiliate having an annual compensation from the Company and all of Affiliates of more than $150,000. The dollar limitations set forth above shall be adjusted to reflect cost of living increases in accordance with Section 416(i)(1)(A) of the Code. An employee will be treated as a Specified Employee for a particular calendar year if the employee meets any of the above requirements (applied in accordance with regulations issued pursuant to Section 416 of the Code and disregarding Section 416(i)(5)) at any time during the 12-month period ending on December 31 of the prior calendar year. Whether an employee is a Specified Employee will be determined exclusively in accordance with regulations issued pursuant to Section 409A of the Code and the minutes of the October 17, 2007 meeting of the Board, as such minutes may be amended, replaced or superseded from time to time.
(kk) "Stock" means the common stock of the Company or any security that may be substituted for Stock or into which Stock may be changed pursuant toArticle 4.
(ll) "Stock Appreciation Right" or "SAR" means a right granted to a Participant pursuant toArticle 12.
(mm) "Stock Grant Award" means the grant of Stock to a Participant pursuant toSection 8.1.
(nn) "Stock Unit" means a right granted to a Participant pursuant toSection 8.2.
(oo) "Termination of Employment" or "Termination of Service" means the cessation of performance of services for the Company. For this purpose, transfer of a Participant among the Company and any Affiliate, or transfer from a position as a member of the Board to Employee, shall not be considered a Termination of Service or a Termination of Employment with the Company. In the context of an Award that is subject to the requirements of Section 409A of the Code, the terms "Termination of Service" and "Termination of Employment" mean a Separation from Service.
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VIEW MATERIALS & VOTE SCAN TO PINNACLE WEST CAPITAL CORPORATION ATTN: JACQUE PATTERSON 400 NORTH FIFTH STREET, STA 8602 PHOENIX, AZ 85004 VOTE BY INTERNET Before The Meeting - Go to www.proxyvote.com or scan the QR Barcode above Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. During The Meeting - Go to www.virtualshareholdermeeting.com/PNW You may attend the Meeting via the Internet and vote during the Meeting. Have the information that is printed in the box marked by the arrow available and follow the instructions. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: E18004-P85518E36330-P01184-Z71649 KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. PINNACLE WEST CAPITAL CORPORATION The Board of Directors recommends you vote FOR the following: For All Withhold All For All ExceptAllAllExcept To withhold authority to vote for any individual nominee(s), mark “For"For All Except”Except" and write the number(s) of the nominee(s) on the line below. ! ! ! 1. Election of Directors Nominees: 01) 02) 03) 04) 05) 06) Donald E. Brandt Denis A. Cortese, M.D. Richard P. Fox Michael L. Gallagher R.A. Herberger, Jr., Ph.D. Dale E. Klein, Ph.D. 06) 07) 08) 09) 10) 11) Humberto S. Lopez Kathryn L. Munro Bruce J. Nordstrom Paula J. Sims David P. Wagener The Board of Directors recommends you vote FOR proposal 2: For Against Abstain The Board of Directors recommends you vote FOR proposal 4:2: ! For ! Against Abstain ! ! ! ! ! ! 4. Vote on re-approval of the material terms of the performance goals under, and approval of an amendment to, the 2012 Long-Term Incentive Plan.Abstain 2. Advisory vote to approve executive compensation as disclosed in the 20172018 Proxy Statement. The Board of Directors recommends you vote 1 Year FOR 1 YEAR on the following proposal: 2 Years 3 Years Abstain The Board of Directors recommends you vote FOR proposal 5: For Against Abstain3: ! ! ! ! ! ! ! 3. Advisory vote on the frequency of the advisory vote on executive compensation. 5. Ratify the appointment of the independent accountants for the year ending December 31, 2017.2018. ! For address changes and/or comments, please check this box and write them on the back where indicated. Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized officer. Signature (Joint Owners) Date Signature [PLEASE SIGN WITHIN BOX] Date V.1.1Signature (Joint Owners) Date
Dear Shareholders, The 20172018 Annual Meeting of Shareholders of Pinnacle West Capital Corporation will be held on May 17, 2017,16, 2018, at 10:30 a.m., Mountain Standard Time. Shareholders may participate in the Annual Meeting by logging into the following web site www.virtualshareholdermeeting.com/PNW. At the meeting, shareholders will be asked to: (i) elect eleven (11)ten (10) directors to serve on the Board until the 20182019 Annual Meeting; (ii) vote on an advisory resolution to approve executive compensation as disclosed in the 20172018 Proxy Statement; (iii) vote on an advisory resolution on the frequency of future advisory votes on executive compensation; (iv) vote on re-approving of the material terms of the performance goals under, and approving of an amendment to, the 2012 Long-Term Incentive Plan; and (v)(iii) ratify the appointment of the independent accountants for the year ending December 31, 2017.2018. Your vote is important and you may vote this proxy in one of three ways - by Internet, by telephone, or by mail. The reverse side of this letter provides voting information for all three methods. Sincerely, Diane Wood Corporate Secretary IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. E18005-P85518 P_R_O X_Y_— Pi_n_n_a_c_le W_e_s_t_C_a_p_it_a_l_C_o_r_p_o_ra_t_io_nE36331-P01184-Z71649 P_R_O_X_Y — P_in_n_a_cl_e_W_e_s_t_C_a_p_it_al_C_o_r_p_o_ra_t_io_n Notice of the 20172018 Annual Meeting of Shareholders Proxy Solicited on behalf of the Board of Directors for the Annual Meeting on May 17, 201716, 2018 The undersigned hereby appoints Donald E. Brandt and David P. Falck,Jeffrey B. Guldner, individually and together, as proxies for the undersigned, each with full power of substitution, to attend the Annual Meeting of Shareholders of Pinnacle West Capital Corporation (the "Company") to be held on May 17, 201716, 2018 at ten-thirty a.m. (10:30 a.m.), Mountain Standard Time, and at any adjournment or postponement thereof, and to vote as specified in this proxy all the shares of stock of the Company which the undersigned would be entitled to vote if personally present. The proxies of the undersigned may vote according to their discretion on any other matter that may properly come before the meeting. If the undersigned has voting rights with respect to shares of Company common stock under the Pinnacle West Capital Corporation Savings Plan (the "Plan"), then the undersigned hereby directs the trustee of the Plan to vote the shares equal to the number of share equivalents allocated to the undersigned's account under the Plan on all matters properly coming before the Annual Meeting, and at any adjournment or postponement thereof, in accordance with the instructions given herein. Shares under the Plan for which instructions are not received by midnight on May 14, 2017,13, 2018, will be voted by the trustee in accordance with the plan and trust documents. This proxy will be considered to be confidential voting instructions to the Plan trustee and to any entity acting as tabulating agent for the Plan trustee. ALL SHARES OF COMMON STOCK REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THOSE SHARES WILL BE VOTED FOR THE NOMINEES LISTED IN PROPOSAL 1 FOR PROPOSAL 2, FOR 1 YEAR FOR PROPOSAL 3, AND FOR PROPOSALS 42 AND 5.3. In their discretion, the proxies are authorized to vote on such other matters as may properly come before the meeting or any adjournment or postponement thereof. (If you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.) (Items to be voted appear on reverse side.) V.1.1Address Changes/Comments: