Stock-Based Compensation

12 Months Ended

Dec. 31, 2011

Stock-Based Compensation

Stock-Based Compensation

16.Stock-Based Compensation

Pinnacle West grants long-term incentive awards under the 2007 long-term incentive plan (“2007 Plan”) in the form of Stock Grants, Restricted Stock Units, Restricted Stock and Performance Shares and may grant incentive and stock options, stock appreciation rights, dividend equivalents and stock.  The 2007 Plan, effective May 23, 2007, provides a maximum of 8 million common shares to be available for grant to eligible employees and members of the Board of Directors.

Restricted Stock Unit Awards and Stock Grants

Stock grants issued to non-officer members of the Board of Directors in 2009 under the 2007 Plan were paid in fully transferable shares of stock.  The 2011 and 2010 grants issued under the 2007 Plan provided Directors the option to elect to receive a stock grant, or to defer receipt until a later date and receive restricted stock units in lieu of the stock grant.  Directors who elect to defer may elect to receive payment in either (1) stock, or (2) 50% in cash and 50% in stock.  The Director may elect to receive payments either (1) as of the last business day of the month following the month in which the Director separates from services 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 deferred restricted stock units accrue dividend rights equal to the amount of dividends the Director would have received if the Director had directly owned one share of common stock for each restricted stock unit held plus interest compounded quarterly.  The dividends and interest are paid, based on the Director’s election, in either (1) stock, or (2) 50% stock and 50% cash.

Restricted stock units have been granted to officers and key employees under the 2007 Plan in each year since 2007.  From 2007 through 2009, officers and key employees elected to receive payment in either cash or in fully transferable shares of stock, in exchange for each restricted stock unit on pre-established valuation dates.  For 2010 and 2011, participants elected to receive payment in either stock, or 50% cash and 50% stock.

Restricted stock unit awards vest and settle over a four-year period.  In addition, officers and key employees accrue dividend rights on the vested restricted stock units, equal to the amount of dividends that they would have received had they directly owned stock equal to the number of vested restricted stock units from the date of grant to the date of payment plus interest compounded quarterly.  The dividends and interest for the 2007 through 2009 awards are paid in cash.  The dividends and interest for the 2010 and 2011 awards are paid in the same form as the restricted stock unit payment election.    Restricted stock unit awards are accounted for as a liability award, with compensation cost initially calculated on the date of grant using Pinnacle West’s closing stock price, and remeasured at each balance sheet date.  Compensation expense for retirement eligible participants is recognized immediately.

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

The following table is a summary of granted restricted stock units and stock grants and the weighted average fair value for the years ended 2011, 2010 and 2009:

	2011		2010		2009
Units granted	292,242		202,341		261,006
Grant date fair value (a)	$	41.98	$	37.47	$	30.25

(a) weighted average fair value

The following table is a summary of the status of restricted stock units and stock grants, as of December 31, 2011 and changes during the year.  This table represents only the stock portion of restricted stock units, per the election on payment discussed in the paragraph above:

Nonvested shares	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2011	223,681	$	35.69
Granted	293,242	41.98
Vested	98,362	37.84
Forfeited	2,330	37.93
Nonvested at December 31, 2011	416,231	39.61

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

Year	2011		2010		2009
2007 Grant	$	1.0	$	0.9	$	0.8
2008 Grant	1.6		1.5		1.3
2009 Grant	1.5		1.4		—
2010 Grant	0.6		—		—

Performance Share Awards

Performance share awards have been granted to officers and key employees under the 2007 Plan since 2008.  Performance share awards contain two performance elements criteria that affect the number of shares received after the end of a three-year performance period if performance criteria conditions are met.

The 2009 performance share grant criteria is based 50% upon the percentile ranking of Pinnacle West’s earnings per share growth rate at the end of the three-year period as compared with the earnings per share growth of relevant companies in a specified utilities index, and the other 50% based upon six non-financial separate performance metrics.  The exact number of shares issued will vary from 0% to 150% of the target award.  Shares received include dividend rights paid in cash equal to the amount of dividends that they would have received had they directly owned stock equal to the number of vested performance shares from the date of grant to the date of payment plus interest compounded quarterly.

The 2011 and 2010 performance share grant criteria is based 50% upon the percentile ranking of Pinnacle West’s total shareholder return at the end of the three-year performance period as compared with the total shareholder return of all relevant companies in a specified utilities index and the other 50% based upon six non-financial separate performance metrics.  The exact number of shares issued will vary from 0% to 200% of the target award.  Shares received include dividend rights paid in stock equal to the amount of dividends that they would have received had they directly owned stock equal to the number of vested performance shares from the date of grant to the date of payment plus interest compounded quarterly.

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

The following table is a summary of the performance shares granted and the weighted average fair value for the years ended 2011, 2010 and 2009:

	2011		2010		2009
Units granted	175,072		178,722		240,624
Grant date fair value (a)	$	41.71	$	37.57	$	30.19

(a)weighted average grant date fair value

The following table is a summary of the status of performance shares, as of December 31, 2011 and changes during the year:

Nonvested shares	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2011	395,312	$	33.44
Granted	175,072	41.71
Vested	218,310	30.14
Forfeited	4,128	36.09
Nonvested at December 31, 2011	347,946	39.64

Retention Units

The retention unit awards have fully vested and settled on January 4, 2010; for any employee that was eligible to retire before that date, the employee’s retention units vested by retirement date and the compensation expense was recognized by retirement eligibility.  Retention unit awards were granted to key employees in 2006 and 2007.  Each retention unit award represented the right to receive a cash payment equal to the fair market value of one share of Pinnacle West’s common stock, determined on pre-established valuation dates.  Each retention unit award vested and settled in equal annual installments over a four-year period.  In addition, the employee received a cash payment equal to the amount of dividends that the employee would have received if the employee had owned the stock from the date of grant to the date of payment plus interest.  As this award was accounted for as a liability award, compensation costs, initially measured based on Pinnacle West’s stock price on the grant date, were remeasured at each balance sheet date, using Pinnacle West’s closing stock price.

The amount of cash to settle the payment on the first business day of 2010 was $1.3 million, and 2009 was $1.1 million.

Incentive Shares

On January 21, 2009, the Human Resources Committee approved under the 2007 Plan payment of 2008 incentive awards to officers in the form of a Pinnacle West common stock grant.  A total of 138,756 shares were issued for this stock grant with a grant date fair value of $32.58 per share.  The stock grant was included in stock compensation expense in 2008.

Stock Options

Pinnacle West has not granted stock options since 2004.  Currently outstanding stock option grant terms cannot be longer than 10 years and options cannot be repriced during their terms.

The following table summarizes the option activity under prior equity incentive plans for the year ended December 31, 2011:

Options	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Months)	Aggregate Intrinsic Value (dollars in thousands)
Outstanding atJanuary 1, 2011	82,224	$	39.37
Exercised	44,766	40.70
Forfeited or expired	14,500	42.55
Outstanding atDecember 31, 2011	22,958	34.75		11	$	308
Exercisable atDecember 31, 2011	22,958	34.75		11	$	308

Cash received from options exercised under our share-based payment arrangements was $1.8 million for 2011, $4.6 million for 2010, and $3 million for 2009.  The tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements were immaterial for all years.

The intrinsic value of options exercised was immaterial for all years.

As of December 31, 2011, there was $20.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.2 years.  The total fair value of shares vested during 2011 was $14.4 million, 2010 was $11 million, and 2009 was $10 million.

The compensation cost that has been charged against Pinnacle West’s income for share-based compensation plans was $23 million in 2011, $15 million in 2010, and $5 million in 2009.  The compensation cost that Pinnacle West has capitalized is immaterial for all years.  Pinnacle West’s total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $9 million in 2011, $6 million in 2010, and $2 million in 2009.  APS’s share of compensation cost that has been charged against income was $22 million in 2011, $15 million in 2010, and $4 million in 2009.

Pinnacle West’s current policy is to issue new shares to satisfy share requirements for stock compensation plans and it does not expect to repurchase any shares except to satisfy tax withholding obligations upon the vesting of restricted stock during 2011.