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Pinnacle West Capital Corp – ‘DEF 14A’ for 5/16/12

On:  Thursday, 3/29/12, at 2:18pm ET   ·   Effective:  3/29/12   ·   For:  5/16/12   ·   Accession #:  1047469-12-3553   ·   File #:  1-08962

Previous ‘DEF 14A’:  ‘DEF 14A’ on 4/6/11 for 5/18/11   ·   Next:  ‘DEF 14A’ on 3/28/13 for 5/15/13   ·   Latest:  ‘DEF 14A’ on 4/4/24 for 12/31/23   ·   4 References:   By:  Pinnacle West Capital Corp. – ‘10-K’ on 2/27/24 for 12/31/23 By:  Pinnacle West Capital Corp. – ‘10-K’ on 2/27/23 for 12/31/22 By:  Pinnacle West Capital Corp. – ‘10-K’ on 2/25/22 for 12/31/21 By:  Pinnacle West Capital Corp. – ‘10-K’ on 2/24/21 for 12/31/20 

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/29/12  Pinnacle West Capital Corp        DEF 14A     5/16/12    1:2.3M                                   Merrill Corp/New/FA

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 1: DEF 14A     Definitive Proxy Solicitation Material              HTML    952K 

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TABLE OF CONTENTS

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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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PINNACLE WEST CAPITAL CORPORATION
Post Office Box 53999
PHOENIX, ARIZONA 85072-3999

NOTICE AND PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, MAY 16, 2012

To our Shareholders:

             Our Board of Directors invites you to the 2012 Annual Meeting of Shareholders of Pinnacle West Capital Corporation (the "Company" or "Pinnacle West"). The meeting will be held at the Heard Museum, 2301 North Central Avenue, Phoenix, Arizona 85004-1323, at 10:30 a.m., Mountain Standard Time, on Wednesday, May 16, 2012. At this meeting, we are asking you to vote on the following proposals in addition to any other business that may properly come before the meeting:

(1)

Election of 10 directors to serve until the 2013 Annual Meeting of Shareholders (Proposal 1);



(2)

Approval of the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan (Proposal 2);



(3)

An advisory resolution to approve executive compensation (Proposal 3); and



(4)

Ratification of the appointment of the Company's independent accountants for the year ending December 31, 2012 (Proposal 4).

             All shareholders of record at the close of business on March 8, 2012 are entitled to notice of and to vote at the meeting. Shareholders may vote their shares: (1) via the Internet; (2) by telephone; (3) by proxy card; or (4) in person at the Annual Meeting. Shares can be voted at the meeting only if the holder is present or represented by proxy.

		By order of the Board of Directors,
		DAVID P. FALCK Executive Vice President, General Counsel and Secretary

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GENERAL INFORMATION

Place, Date and Time

             The Company's 2012 Annual Meeting of Shareholders ("Annual Meeting") will be held at the Heard Museum, 2301 North Central Avenue, Phoenix, Arizona 85004-1323, at 10:30 a.m., Mountain Standard Time, on Wednesday, May 16, 2012.

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 (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 in the Internet Notice.

             The Internet Notice is first being sent to shareholders on or about March 29, 2012. The Proxy Statement and the form of proxy relating to the Annual Meeting are first being made available to shareholders on or about March 29, 2012.

Record Date; Shareholders Entitled to Vote

             All shareholders at the close of business on March 8, 2012 (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 109,365,892 shares of common stock outstanding.

Voting

Vote by Internet. The website address for Internet voting is on the Internet Notice. Internet voting is available 24 hours a day.

Vote by telephone. The toll-free number for telephone voting is on your proxy card. Telephone voting is available 24 hours a day.

Vote by mail. You may vote by mail by promptly marking, signing, dating, and mailing a proxy card (a postage-paid envelope is provided for mailing in the United States).

Vote in person. You may come to and vote at the Annual Meeting. If you hold your shares in street name, you must obtain a proxy, executed in your favor, from the holder of record if you wish to vote these shares at the meeting.

If you vote by telephone or Internet, DO NOT mail a proxy card.

             You may change or revoke your vote at any time before the proxy is exercised by: filing with our Corporate Secretary either a notice of revocation or a signed proxy card bearing a later date; re-voting by telephone; or re-voting by Internet. Your proxy will be suspended with respect to your shares if you attend the meeting in person and so request, although attendance at the meeting will not by itself revoke a previously-granted proxy.

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             Your vote is confidential. Only the following persons have access to your vote: election inspectors; individuals who help with processing and counting of votes; and persons who need access for legal reasons.

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 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 beneficially through a broker, trustee or other nominee and wish to cumulate votes, you should contact your broker, trustee or nominee. If you would like to exercise your cumulative voting rights, you must do so by mail. 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 Company's Board of Directors (the "Board") whether to accept or reject the resignation.

Under the current 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. 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 Officers – the Say-on-Pay vote. This resolution is not intended to address any specific item of compensation, but rather the overall compensation of the Named Executive Officers and the compensation philosophy, policies and procedures described in this Proxy Statement. Because your vote is advisory, it will not be binding on the Board or the Company. However, the Board will review the voting results and take them into consideration when making future decisions regarding executive compensation. Abstentions and broker non-votes will have no effect on the outcome of this proposal. We will hold an advisory vote on Say-on-Pay on an annual basis until we next hold an advisory vote of shareholders on the frequency of such votes as required by law.

Approval of the Pinnacle West Capital Corporation 2012 Long-Term Incentive Plan (the "2012 Plan"). Approval of the 2012 Plan requires the affirmative vote of a majority of the votes cast, provided that the total votes cast with respect to this proposal represent over fifty percent (50%) of the shares of common stock entitled to vote on the proposal. For purposes of approval of this proposal, abstentions have the effect of a vote against the proposal, and broker non-votes are not considered to be votes cast.

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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, 2012. Abstentions and broker non-votes will have no effect on the outcome of this proposal.

The Board recommends a vote:

•

FOR the election of the nominated slate of directors (Proposal 1);

•

FOR the approval of the 2012 Plan (Proposal 2);

•

FOR the approval, on an advisory basis, of the resolution approving the compensation of our Named Executive Officers as disclosed in this Proxy Statement (Proposal 3); and

•

FOR the ratification of the appointment of Deloitte & Touche LLP ("D&T") as the Company's independent accountants for the year ending December 31, 2012 (Proposal 4).

             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.

Attendance at the Annual Meeting

             In order to attend the Annual Meeting, you will need to present a valid picture identification, such as a driver's license or passport, and either:

•

the Internet Notice or the top portion of your proxy card if you are a shareholder of record (each Internet Notice or proxy card admits two people); or

•

a copy of a brokerage statement showing ownership of our stock if you hold your shares in street name (each brokerage statement admits two people).

Delivery of Annual Reports and Proxy Statements to a Shared Address; Obtaining a Copy of the Annual Report

             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:

•

call the Company's Shareholder Services at 1-602-250-5511;

•

mail a request to Shareholder Services at P.O. Box 53999, Mail Station 8602, Phoenix, AZ 85072-3999; or

•

e-mail a request to: shareholderdept@pinnaclewest.com.

The Company will promptly deliver to you the information requested. Shareholders who own Company stock through a broker and who wish to receive separate copies of the Internet Notice, Annual Report or Proxy Statement should contact their broker.

             You can 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 in the Internet Notice.

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Shareholder Proposals or Director Nominations for the 2013 Annual Meeting

             To be included in the proxy materials for the 2013 Annual Meeting of Shareholders (the "2013 Annual Meeting"), any shareholder proposal intended to be presented at that meeting must be received by our Corporate Secretary no later than November 29, 2012 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 2013 Annual Meeting, but does not wish it to be included in the 2013 proxy materials, must submit the proposal no earlier than January 16, 2013 and no later than the close of business on February 15, 2013. Nominations for the Board must be received by November 16, 2012. In all cases, shareholders must also comply with the applicable rules of the Securities and Exchange Commission ("SEC") and our Bylaws.

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 $9,000, plus customary expenses. The costs of the solicitation will be paid by the Company. As required, the Company will reimburse brokerage houses and others for their out-of-pocket expenses in forwarding documents to beneficial owners of stock.

INFORMATION ABOUT OUR BOARD AND CORPORATE GOVERNANCE

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 at www.pinnaclewest.com.

             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 11 independent directors in 2011 were Messrs. Basha, Gallagher, Lopez, Nordstrom, and Parker, Drs. Cortese, Herberger and Klein, and Mses. Clark-Johnson, Grant and Munro. Mr. Brandt is not independent under the NYSE rules or the Director Independence Standards because of his employment with the Company. Mr. Parker resigned from his position as a director in February 2012. Ms. Grant will retire from the Board at the Annual Meeting.

             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.

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             In considering the independence of Mr. Gallagher, the Board considered that the law firm of Gallagher & Kennedy, P.A. ("Gallagher & Kennedy"), where Mr. Gallagher is Chairman Emeritus, provided legal services to the Company in 2011 and is expected to provide legal services to the Company in 2012. However, since: (a) the amounts paid to Gallagher & Kennedy 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 & Kennedy's revenues for fiscal year 2011; (b) Mr. Gallagher does not furnish legal services to the Company; and (c) he has advised the Company that he receives no compensation or benefits from Gallagher & Kennedy as a result of the firm providing legal services to the Company, the Board determined that Mr. Gallagher was independent.

             Mr. Parker is Chairman and Chief Executive Officer of US Airways Group, Inc. and US Airways, Inc. (collectively "US Airways"), a commercial airline headquartered in Phoenix, Arizona, where the Company is also headquartered. In considering the independence of Mr. Parker, the Board considered that directors and employees of the Company and its subsidiaries purchase air travel from time to time for business purposes from US Airways. The Board determined that these matters did not impact Mr. Parker's independence because they were ordinary course, arms-length transactions that were not material to either the Company or US Airways. In addition, the amounts paid to US Airways 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 US Airways' revenues for fiscal year 2011.

             Ms. Clark-Johnson is an employee of Arizona State University ("ASU") in her capacity as the Executive Director of the Morrison Institute for Public Policy. Dr. Cortese is also an employee of 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 Ms. Clark-Johnson and Dr. Cortese, the Board considered the fact that transactions between the State and the Company and its affiliates consist of providing electric service, utility-related construction, building leases, and the payment of various State fees, taxes, memberships and licenses. The Board determined that these matters do not impact Ms. Clark-Johnson's or 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, neither of these directors benefits financially, directly or indirectly, from ASU's business relationships with the Company, most of which consist of receiving electric service at regulated rates.

             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 Arizona Public Service Company's ("APS") service territory and purchased 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 ("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.

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Board Meetings and Attendance

             In 2011, our Board held eight meetings and none of our directors attended fewer than 75% of the Board meetings and any meetings of committees on which he or she served. Each director is expected to be present at the Annual Meeting. All of the Board members attended the 2011 Annual Meeting.

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 are comprised of independent directors who meet the independence requirements of the NYSE rules, SEC rules, and the Director Independence Standards.

Audit Committee

             The Audit Committee held seven meetings in 2011. Among other things, the Audit Committee:

•

oversees the integrity of the Company's financial statements;

•

appoints the independent accountants and is responsible for their qualifications, independence, performance, and compensation;

•

reviews the performance of the Company's internal audit function; and

•

monitors the Company's compliance with legal and regulatory requirements that may have a material impact on the Company's financial statements.

             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, is an "audit committee financial expert" under applicable SEC rules.

Corporate Governance Committee

             The Corporate Governance Committee held six meetings in 2011. Among other things, the Corporate Governance Committee:

•

reviews and assesses the Corporate Governance Guidelines;

•

develops and recommends to the full 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; and

•

reviews the results of the annual meeting shareholder votes.

The Corporate Governance Guidelines are available on the Company's website (www.pinnaclewest.com).

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Finance Committee

             The Finance Committee held four meetings in 2011. Among other things, the Finance Committee:

•

reviews the Company's historical and projected financial performance and the Company's financing plan and recommends approval of credit facilities and the issuance of long-term debt and common equity;

•

reviews and recommends approval of the Company's annual capital budget and reviews the annual operations and maintenance budget;

•

reviews and recommends approval of short-term investments and borrowing policies; and

•

reviews and recommends to the Board the Company's dividend actions.

Human Resources Committee

             The Human Resources Committee held five meetings in 2011. Among other things, the Human Resources Committee:

•

reviews management's programs for the attraction, retention, and development of the Company's human resources;

•

recommends persons for election as officers to the full Board;

•

annually reviews the goals and performance of our officers;

•

approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer ("CEO"), assesses the CEO's performance in light of these goals and objectives, and sets the CEO's compensation level based on this assessment;

•

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

•

acts as the "committee" under our long-term incentive plans.

             Under the Human Resources Committee's charter, the Human Resources Committee may delegate authority to subcommittees, but did not do so in 2011. Additional information on the processes and procedures of the Human Resources Committee is provided under the "Compensation Discussion and Analysis."

Nuclear and Operating Committee

             The Nuclear and Operating Committee held four meetings in 2011. Among other things, the Nuclear and Operating Committee:

•

receives regular reports from management and monitors the overall performance of the Palo Verde Nuclear Generating Station ("Palo Verde");

•

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

•

reviews and monitors the power plant operations, energy delivery and customer service functions of the Company; and

•

reviews and monitors the Company's compliance with environmental, health and safety policies.

             In addition, the Nuclear and Operating Committee receives regular reports from the Offsite Safety Review Committee (the "OSRC"). The OSRC provides independent assessments of the safe and reliable operations of Palo Verde. Pursuant to Palo Verde's operating licenses, the OSRC focuses its

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assessment on operations, engineering, maintenance, safety, security and other support functions. The OSRC is comprised entirely of non-employee individuals with senior management experience in the nuclear industry and it meets periodically throughout the year.

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 functions:

•

serves as a liaison between the Chairman of the Board (the "Chairman") and the independent directors;

•

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

•

presides at all meetings at which the Chairman is not present, including executive sessions of the independent directors, which executive sessions are regularly scheduled as part of each Board meeting;

•

calls meetings of the independent directors when necessary and appropriate;

•

oversees the Board and Board committee self-assessment process;

•

is available for consultation and direct communication with the Company's shareholders and other interested parties; and

•

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

             Chairman and CEO Positions.    The Chairman is Donald E. Brandt, the Company's CEO. The Board believes that combining the roles of the CEO and Chairman enhances the Board's ability to communicate clearly and effectively with management, and that an independent Board Chairman would create an additional level of hierarchy that would only duplicate the activities already being vigorously carried out by its Lead Director.

The Board's Role in Risk Oversight

             The ultimate 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 allocates responsibility for them among 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;

•

assesses the effectiveness of the risk identification and mitigation measures being employed; and

•

discusses their assessments and recommendations with the full 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 process and plays a coordinating role designed to ensure that no gaps exist in the coverage by the Board committees of risk areas. In recommending the

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composition of the Board's committees and the selection of committee Chairs, the Corporate Governance Committee takes into account the effective functioning of the risk oversight role of each Board committee and the risk areas assigned to it.

             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 internal enterprise risk management group reports to the Vice President, Strategic Initiatives and Risk, who reports to the Chief Financial Officer of APS. The internal risk management group is responsible for (1) implementing a consistent risk management framework and reporting process across APS, and (2) ensuring that the Executive Risk Committee is informed of those processes and regularly apprised of material existing risks and the emergence of additional material risks.

Director Qualification; Selection of Nominees for the Board

             Director Qualifications.    The Corporate Governance Guidelines contain Board membership criteria that apply to nominees recommended by the Corporate Governance Committee for a position on the Board. Under these criteria, 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 qualities, among others: integrity; strong business judgment and understanding of corporate governance; knowledge, including regulatory and political knowledge, and nuclear expertise at the strategic level; judgment; understanding of the Company's business environment; 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; and technology and science experience to address the future of smart grids, communication technologies, control systems and renewable energy. The Board also considers an individual's accomplishments, skills, professional interests, personal qualities and other traits desirable in achieving an appropriate group of qualified individuals. The Board periodically reviews and revises these criteria.

             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 against the same criteria, regardless of the source of the nomination. Any shareholder nominations proposed for consideration by the Corporate Governance Committee should include the nominee's name and qualifications for Board membership and should be addressed to:

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

             Any shareholder who wishes to submit a nomination for a director to the Board must deliver that nomination to our Corporate Secretary by November 16, 2012 and comply with the information requirements in the Company's Bylaws.

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Director Resignation Due to Substantial Change in Their Primary Business Position

             Under the Company's Corporate Governance Guidelines, upon a substantial change in a director's primary business position, 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.

Communication 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, indicating who should receive the communication, for example, the Lead Director or the independent directors. The Corporate Secretary will transmit communications not otherwise specifically addressed and that raise substantial issues to the Lead Director and to the Chair of the Board Committee most closely associated with the matter. The Corporate Secretary has discretion to exclude communications that are commercial advertisements or other forms of solicitations, individual service or billing complaints and complaints related to individual employment-related actions.

Codes of Ethics and Strategic Framework

             In order 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 (the "Code of Ethics").    Employees and directors receive a copy of the Code of Ethics when they join the Company and are provided updates periodically. The Code of Ethics helps ensure that the employees, officers and directors of the Company and its subsidiaries act with integrity and avoid any real or perceived violation of the Company's ethics policy, laws, or regulations.

             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, rules, 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 this policy by the Chair of the Audit Committee.

             The Company provides periodic 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, assessment questions to help measure understanding, and an electronic sign-off. All of the employees of the Company and APS, and all of our directors, complete the training.

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

             The Company's Strategic Framework (the "Strategic Framework").    APS has adopted a strategic framework that defines its vision, mission, 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 generate and deliver reliable electric power and related services to its customers. The areas of focus are employees,

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operational excellence, environmental stewardship, customers and communities, and shareholder value. The framework affirms our corporate values of safety, integrity and trust, respect, and accountability. Here is our Strategic Framework:

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PROPOSAL 1 – ELECTION OF DIRECTORS

             The 10 nominees for election as directors are set forth below, where we provide a description of their occupation, business background and other directorships as well as a discussion of the specific skills that the Board believes qualifies each of our nominees to serve as a director. All nominees will be elected for a one-year term that will expire at the 2013 Annual Meeting.¹

             Edward N. Basha, Jr., age 74, has been a director since 1999. Mr. Basha is a director and Chairman Emeritus of the board of Bashas' supermarket chain. He has been a director of Bashas' since 1968 and he served as Chairman of the board of Bashas' from 1968 to 2011. Mr. Basha was Chief Executive Officer of Bashas' from 1968 until September 2010. On July 12, 2009, Bashas' filed voluntary Chapter 11 petitions in the United States Bankruptcy Court, District of Arizona. A reorganization plan for Bashas' was confirmed in August 2010. Mr. Basha serves on the Company's Human Resources and Nuclear and Operating Committees.

             Mr. Basha is an Arizona native and prominent business, civic and political leader involved in multiple Arizona community projects. His family-owned business is comprised of grocery and specialty stores in Arizona, California and New Mexico. In addition to his executive experience, Mr. Basha brings a strong marketing background to the Board.

             Donald E. Brandt, age 57, has been a director since 2009. Mr. Brandt is Chairman of the Board, President and Chief Executive Officer of the Company. He has been Chairman of the Board and CEO since April 2009 and President since March 2008. Mr. Brandt is Chairman of the Board and Chief Executive Officer of APS. He has been Chairman of the Board since April 2009 and CEO since March 2008. Mr. Brandt 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 as Chief Financial Officer from December 2002 to March 2008.

             As Chairman of the Board, President and CEO of the Company and as Chairman of the Board and CEO of APS, and with nearly three decades of experience in the utility industry, Mr. Brandt has a broad understanding of the factors affecting the Company's business. Mr. Brandt currently serves on the boards of the Institute of Nuclear Power Operations ("INPO"), the Nuclear Energy Institute ("NEI"), the Edison Electric Institute ("EEI"), and Nuclear Electric Insurance Limited ("NEIL"), all major industry organizations that provide insights into operational, financial and policy matters of great importance to the Company.

             Susan Clark-Johnson, age 65, has been a director since 2008. Ms. Clark-Johnson is Executive Director of the Morrison Institute for Public Policy, ASU. She has held this position since May 2009. Ms. Clark-Johnson was President, Gannett Newspaper Division, Gannett Co., Inc. (newspaper publishing), from September 2005 until her retirement in May 2008. Ms. Clark-Johnson was Chairman and Chief Executive Officer of Phoenix Newspapers, Inc., from August 2000 to September 2005. Ms. Clark-Johnson is also a director of Chyron Corporation. Ms. Clark-Johnson serves on the Company's Nuclear and Operating and Corporate Governance Committees.

             Ms. Clark-Johnson brings a breadth of operational and managerial experience from running a major division of a Fortune 500 company. Also, as the former Publisher of the Arizona Republic newspaper, Ms. Clark-Johnson has a keen understanding of Arizona's political, economic and cultural spheres.

 C:     

¹ Directors' ages are as of February 24, 2012. All of our directors also serve as directors of APS.

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             Denis A. Cortese, M.D., age 67, has been a director since 2010. 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, Mayo Clinic (medical clinic and hospital services) since November 2009 and was President and Chief Executive Officer of Mayo Clinic from March 2003 until his retirement in November 2009. Dr. Cortese is also a director of Cerner Corporation. Dr. Cortese serves on the Company's Audit and Nuclear and Operating Committees.

             As former President and Chief Executive Officer of the Mayo Clinic, Dr. Cortese has extensive experience in leading complex organizations with multiple constituencies and has led an organization that delivers strong and efficient customer service, which parallels the Company's strategies. Further, his background in public policy development, science and technology brings valuable perspectives to issues in the areas that face the Company.

             Michael L. Gallagher, age 67, has been a director since 1999. Mr. Gallagher is Chairman Emeritus of Gallagher & Kennedy, Phoenix, Arizona (Arizona-based law firm). He has held this position since 2001. Mr. Gallagher served as President of Gallagher & Kennedy from 1978 through 2000. Mr. Gallagher is a director of AMERCO, the parent company of U-Haul International Inc., and serves on its Independent Governance Committee. He is also a trustee of the Peter Kiewit Foundation. Mr. Gallagher chairs the Company's Nuclear and Operating Committee and serves on the Corporate Governance Committee.

             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 and his experience in corporate governance matters makes him a good fit for our Corporate Governance Committee.

             Roy A. Herberger, Jr., Ph.D., age 69, has been a director since 1992. Dr. Herberger is President Emeritus of Thunderbird School of Global Management (graduate management school). He has held this position since November 2004. Dr. Herberger was President of Thunderbird from 1989 until August 2004. Dr. Herberger is also a director of the Apollo Group. Within the past five years, he was also a director of MedAire, Inc. and ECO₂ Plastics, Inc. Dr. Herberger chairs the Company's Human Resources Committee and serves on the Corporate Governance and Finance Committees.

             Dr. Herberger has both management experience and a strong understanding of business and economic trends. He also has extensive corporate board service, which aids his contributions to the Company's Board. Dr. Herberger's service as the Lead Director and Chair of the Compensation Committee of the Apollo Group, a Fortune 500 company, and his service as a Trustee for the Mayo Clinic, contribute to the strength of the Company's governance and human resources processes.

             Dale E. Klein, Ph.D., age 64, has been a director since 2010. Dr. Klein served as Chairman of the U.S. Nuclear Regulatory Commission from July 2006 to May 2009, and thereafter as a Commissioner until March 2010. He was Assistant to the Secretary of Defense for Nuclear, Chemical and Biological Defense Programs from November 2001 to July 2006. Dr. Klein is a Professor of Mechanical Engineering and Associate Director of the Energy Institute at the University of Texas at Austin and has held these positions from April 2010 to present. Dr. Klein is also Associate Vice Chancellor for Research at the University of Texas System and he has held this position from January 2011 to present. He is also a director of Southern Company. He serves on the Company's Audit and Nuclear and Operating Committees.

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             Dr. Klein brings expertise in all aspects of nuclear energy regulation, operation, technology and safety. His wide national and international experience in all aspects of nuclear energy and government brings value to the Board, not only from the perspective of our operations at Palo Verde but also as we look at new opportunities in our evolving utility business.

             Humberto S. Lopez, age 66, has been a director since 1995. Mr. Lopez is President of HSL Properties, Inc. (real estate development and investment), Tucson, Arizona. He has held this position since 1975. Mr. Lopez serves on the Company's Audit and Human Resources Committees.

             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 a valuable asset to the Company because of the importance of those markets in Arizona. Mr. Lopez also is familiar with the State's historic economic cycles, which helps the Company plan for future growth and energy needs.

             Kathryn L. Munro, age 63, has been a director since 2000. Ms. Munro is a principal of BridgeWest, LLC (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 a director of Knight Transportation, Inc. Within the past five years, Ms. Munro was a director of FLOW International Corporation. Ms. Munro is the Company's Lead Director and, as such, she chairs the Corporate Governance Committee. She also serves on the Human Resources and Finance Committees.

             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 acumen and financial knowledge to the Company. Her experience with the cycles in Arizona's economy assists a growing infrastructure company like Pinnacle West in accessing capital and meeting its financing needs. Ms. Munro is also an experienced director, currently serving on the boards of Knight Transportation and Premera Blue Cross.

             Bruce J. Nordstrom, age 62, has been a director since 2000. Mr. Nordstrom is President of and a certified public accountant at the firm of Nordstrom & Associates, P.C., Flagstaff, Arizona. He has held this position since 1988. Mr. Nordstrom chairs the Company's Audit Committee and serves on the Corporate Governance and Finance Committees.

             As the president of a Flagstaff, Arizona-based accounting firm, Mr. Nordstrom has an extensive accounting, auditing and financial skill set. Additionally, he provides familiarity with principles of risk management and oversight and the perspectives of customers in the Northern Arizona service territory of APS.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR ELECTION OF THE NOMINATED SLATE OF DIRECTORS

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SHARES OF PINNACLE WEST STOCK OWNED BY MANAGEMENT
AND LARGE SHAREHOLDERS

             The following table shows the amount of Pinnacle West common stock owned by the Company's directors, Messrs. Brandt, Edington, Falck, Hatfield and Robinson (the "Named Executive Officers"), 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 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 8, 2012, the record date for the Annual Meeting.

¹ Shares listed do not include performance share grants or restricted stock unit grants. The following shares are held jointly: Directors: Dr. Herberger – 23,402; Dr. Klein – 100; and all Directors and Executive Officers as a group: 37,798. The following shares are held in joint trusts: Directors: Dr. Cortese – 5,691; Mr. Gallagher – 20,614; Mr. Lopez – 49,066; and Ms. Munro – 19,337; Officers: Mr. Hatfield – 24,882; and Mr. Edington – 15,874;

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and all Directors and Executive Officers as a Group: 135,464. Mr. Basha has donated 18,268 of his shares to a charitable foundation and 260 of his shares are held in a custodial account; however, he has shared voting rights with respect to all such shares.

² The Company makes no representations as to the accuracy or completeness of the information in the filings reported in footnotes 3-6.

³ BlackRock, Inc. Schedule 13G/A filing, dated January 20, 2012, a parent holding company and certain affiliates, reports beneficial ownership of 8,643,941 shares, with sole voting and dispositive power.

⁴ Franklin Resources, Inc., Charles B. Johnson, Rupert H. Johnson, Jr., and Franklin Advisers, Inc. Schedule 13G filing, dated February 2012, reports beneficial ownership collectively of 7,382,700 shares, with sole voting power as to 7,280,000 shares and sole dispositive power as to 7,380,000 shares in Franklin Advisers, Inc., and sole voting power and sole dispositive power as to 2,700 shares in Fiduciary Trust Company International.

⁵ State Street Corporation Schedule 13G filing, dated February 9, 2012, a parent holding company and certain affiliates, reports beneficial ownership of 8,139,580 shares, with shared voting and dispositive power. The Company maintains normal commercial relationships with State Street Corporation and its subsidiaries. The Company does not consider these relationships to be material.

⁶ The Vanguard Group Inc. Schedule 13G, dated February 6, 2012, reports beneficial ownership of 6,195,460 shares with sole voting and shared dispositive power as to 150,912 shares, and sole dispositive power as to 6,044,548 shares and Vanguard Fiduciary Trust Company as beneficial owner of 150,912 shares.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

             Section 16(a) of the Securities Exchange Act of 1934, as amended, 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 2011 on a timely basis.

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

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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:

•

transactions in which rates or charges are fixed in conformity with law or governmental authority (such as APS rates approved by the ACC);

•

transactions in which the rates or charges are determined by competitive bid; or

•

the payment of compensation by the Company to the executive officers, directors, or nominees for directors.

             Based on the Policy, SEC rules and our review, we had no Related Party Transactions in 2011.

REPORT OF THE HUMAN RESOURCES COMMITTEE

             The Human Resources Committee submitted the following report:

             The Human Resources Committee is composed of five 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.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis ("CD&A")

Executive Summary

             Our compensation program is designed to be straightforward with an emphasis on rewarding performance. Our compensation objectives are to construct a program that aligns compensation with:

•

shareholder interests by tying compensation to shareholder returns;

•

business performance by tying compensation to specified business metrics;

•

individual performance by taking into account individual contributions in compensation decisions; and

•

retention of key individuals, which includes offering a program that is competitive.

             At the 2011 Annual Meeting of Shareholders, our shareholders overwhelmingly approved the compensation of our executive officers. As a result, while the Human Resources Committee (for purposes of this CD&A, the "Committee") reviewed and discussed developments in executive compensation practices, we made only modest modifications to our compensation program in 2011. The key elements of our program are:

•

Base salary – Messrs. Brandt, Hatfield, Falck and Robinson received a base salary increase in January 2011, but their base salaries remained at or near the median of our Comparator Group, which is defined later in this CD&A.

•

Annual cash incentive – the cash incentive is 100% performance-based and is tied to earnings, business unit performance and individual performance. Our incentive plans are structured so that we do not provide payment for poor performance. Earnings and all overall business unit performance metrics were achieved in 2011 in a range of 109% to 151% of the target for the metrics.

•

Three-year long-term equity grants of performance shares – payout of the performance shares is tied 50% to the Company's total shareholder return ("TSR") (stock price appreciation plus any dividends paid during the actual period) and 50% to six operational performance metrics.

•

Four-year equity grants of restricted stock units ("RSUs") – these vest in annual, equal increments over four years to encourage retention, and the value of the awards rise and fall with the Company's stock price. In February 2012, the Committee changed the allocation between future grants of performance shares and RSUs from 50%/50% to 55%/45% in order to further focus equity awards on the achievement of performance metrics.

•

Benefits – we offer benefits such as pension programs, deferred compensation programs, change of control agreements and limited perquisites in order to remain competitive and retain the talented executives that have made our Company successful.

•

Ownership guidelines – we require our Named Executive Officers to build and maintain a significant and continuing equity interest in the Company under our Stock Ownership Guidelines. In February 2012, the Committee increased the ownership requirement for the CEO to four times his base salary.

             During 2011, the Company granted a one-time Supplemental RSU (which is discussed later in this CD&A) to reward prior performance and encourage retention. As a result, largely due to the issuance of the Supplemental RSUs, the Company believes that the Summary Compensation Table does not reflect the 2011 compensation awarded to the Named Executive Officers as considered by the Committee in setting compensation and measuring performance. As such, the Company has included this Alternate 2011 Compensation Table, which differs from the Summary Compensation Table because

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it: (i) excludes the "Bonus" column since no amounts are shown in that column for 2011; (ii) excludes the full grant date fair value of the Supplemental RSUs that were granted to the Named Executive Officers in 2011 because the grants were primarily given in recognition of outstanding performance in 2010 and years preceding 2010; and (iii) excludes the "Change in Pension Value and Nonqualified Deferred Compensation Earnings" and "All Other Compensation" columns, as the Committee did not directly consider these post-retirement benefits and de minimis perquisites in setting salary, annual cash incentives and equity awards for the Named Executive Officers for 2011.

Alternate 2011 Compensation Table

             As discussed in the next section, we had a highly successful year in 2011, which had an effect on 2011 compensation due to our compensation program's pay-for-performance orientation.

Overview of 2011 Company Performance

             Pinnacle West is a holding company that derives substantially all of its revenues and earnings from APS, our vertically-integrated electric utility. Our 2011 accomplishments included:

•

The Company's share price increased 16.2%.

•

TSR increased $976 million in 2011 and $2.7 billion over the last three years.

•

TSR was 21.8%, 45.6% and 77.3% for 2011, 2010, and 2009, respectively. For the 2009-2011 period, the Company ranked 13^th of 55 companies in the Edison Electric Institute utility index and sixth best within the Company's Comparator Group.

•

The Company achieved its safest year on record, placing us in the first quartile within the industry.

•

The NRC extended Palo Verde's operating licenses for 20 additional years.

•

We achieved our highest-ever ranking in the J.D. Power Index, a national customer satisfaction ranking. Our ranking improved by eight points from 2010. Nationally, APS ranked fourth among 55 large investor-owned utilities.

•

We achieved a customer reliability metric of 0.79 outages per customer compared to the industry median of 1.12 and the industry first quartile of 0.90.

•

APS entered into a settlement agreement of its pending retail rate case (the settlement agreement is still subject to the approval of the ACC).

•

We sold APS Energy Services Company, Inc., our competitive energy services subsidiary, in August 2011 for an after-tax gain of $10 million, effectively continuing our wind-down strategy for the Company's non-regulated businesses.

•

APS ranked 15^th highest overall in Corporate Responsibility Magazine's "100 Best Corporate Citizens" and received the top utility ranking.

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Compensation Objectives

             The fundamental objectives of the Company's executive compensation strategy are:

•

Alignment with Shareholder Interests. A significant portion of compensation should be tied to the Company's stock performance through performance-based or other stock incentives so that executives' interests are tied to the success of the Company and aligned with those of our shareholders.

•

Business Performance Accountability. Compensation should be tied to the Company's performance in several key areas, including furthering our Strategic Framework, so that executives are focused on specific strategic and operating objectives and are held accountable through their compensation for the performance of the Company.

•

Individual Performance Accountability. Compensation should be tied to an individual's performance so that individual contributions to the Company's performance are tangibly recognized.

•

Retention. Compensation should be designed to promote retention of key employees.

•

Competitiveness. The compensation program should be designed to attract leaders critical to the Company's success by providing total compensation levels and programs that are competitive.

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 elements of compensation, the degree and type of performance focus, and a consideration of individual officer evaluations. From December through February, the Committee then makes adjustments to 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 2007 Long-Term Incentive Plan (the "2007 Plan"), will make awards under the 2012 Plan if that plan is approved by the shareholders, and determines the awards under the 2011 Incentive Plans, as defined later in this CD&A. The Committee recommends other executive officer compensation decisions, which are approved by the Board. Management works with the Committee in establishing the agenda for Committee meetings and in preparing meeting information. Management conducts evaluations and provides information on the performance of the executive officers for the Committee's consideration and provides such other information as the Committee may request. Management also assists the Committee in recommending salary levels; annual incentive plan structure and design, including earnings and business unit performance targets or other goals; long-term incentive plan structure and design, including award levels; and the type, structure, and amount of other awards. The executive officers are available to the Committee's compensation consultant to provide information as requested by the consultant. At the request of the Chair of the Committee, the CEO or other officers may attend and participate in portions of the Committee's meetings.

             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 2011 compensation for our executive officers (the "Consultant"). 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. The Consultant does not provide any

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other services to the Company or any of its subsidiaries and, therefore, is independent from the Company.

             Consultant's Report and Comparator Group.    The Consultant reviewed our executive compensation practices and considered the extent to which these practices support our executive compensation strategy. As part of this study, the Consultant performed competitive pay comparisons for our executive officers based on:

•

compensation information as disclosed in 2010 SEC filings for the Comparator Group;

•

general industry data based on surveys published by Hewitt Associates, Inc. (averaging data for companies in the $2.5 – $5 billion revenue bracket and the $5 – $10 billion revenue bracket) and Towers, Perrin, Forster & Crosby, Inc. ("Towers Perrin") (averaging data for companies in the $3 – $6 billion revenue bracket and the $6 – $10 billion revenue bracket); and

•

industry-specific survey data from the Towers Perrin Energy Services Industry Survey (reflecting the average between companies in the $3 – $6 billion revenue bracket and companies with revenues greater than $6 billion).

             From these sources, the Consultant developed a competitive consensus in which the data for Messrs. Brandt, Hatfield, Falck and Robinson reflect one-third proxy statement data, one-third Energy Services Industry Survey, and one-third general industry surveys. For Mr. Edington there was not a general industry survey match, so the data reflect one-half proxy statement data and one-half Energy Services Industry Survey. Compensation levels were updated to July 2011 using a 3% annual growth factor that the Consultant indicated reflected projected executive-level market movement from major salary-planning surveys selected by the Consultant.

             As part of the executive compensation review for 2011, the Committee reviewed the Comparator Group for its continued appropriateness. As a result of such review, the Committee approved the use of the same Comparator Group that was used in setting 2010 executive compensation. The Comparator Group is broadly similar to the Company with respect to industry, complexity, business lines and size, and positions the Company close to the median with respect to revenues. The 2011 Comparator Group consisted of the following companies (the "Comparator Group"):

Comparator Group

             In determining both the composition of the Comparator Group and the Company's relative position to that group, APS revenues were adjusted to take revenues attributable to managed assets, in addition to owned assets, into account. This adjustment was based on the following factors:

•

Palo Verde is the United States' largest nuclear generating facility, with a net generation rating of approximately 4,003 megawatts. APS owns 29.1% of Units 1 and 3 and owns or leases 29.1% of Unit 2; however, APS is responsible for the successful operation of 100% of the facility.

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•

Four Corners is a 5-unit coal-fired plant located in New Mexico, with a net generation rating of approximately 2,100 megawatts. APS owns Units 1, 2 and 3 and 15% of Units 4 and 5. However, similar to Palo Verde, APS is responsible for the successful operation of 100% of the facility.

•

While APS contracts with the other owners for reimbursement of costs attributable to them, APS is subject to additional business risks as the operator of 100% of the Palo Verde and the Four Corners plants.

             As a result, for purposes of its relative position in the Comparator Group, APS adjusted revenues from $3.3 billion to $5.2 billion. The adjustment places APS in the median of the Comparator Group for revenue. APS is also below the median for market capitalization and at approximately the median of the Comparator Group measured by number of employees, which further reinforced the Committee's conclusion that the Comparator Group was the appropriate group for benchmarking pay levels. The Committee believes that the senior executives of the Company face challenges in the operation of Palo Verde which require skill sets similar to those that executives at a number of the Comparator Group companies with nuclear operations also have, which reinforces the appropriateness of the inclusion of these companies for benchmarking purposes.

             In providing information to the Committee with respect to setting 2011 compensation, the Consultant reviewed the total compensation of the Named Executive Officers and the individual elements of that compensation, including the type of annual incentives and long-term incentives, and evaluated the competitiveness of the total compensation and individual elements of compensation of each such officer based on the survey data discussed above.

             In its analysis, presented in October 2010, the Consultant looked at competitive findings for base salary, base incentive, and long-term equity incentives to the Named Executive Officers as compared to the 25^th, 50^th and 75^th percentile (base salary data was treated at the 50^th or the 75^th percentile if it was within +/- 10%). The conclusions of the report as to the comparative positions of the compensation of the Named Executive Officers are as follows:

¹ Actual annual incentive earned for performance in 2009.
² Messrs. Edington's and Falck's amounts include the annualized value of special deferred compensation awards of $1,000,000 and $50,000, respectively.
³ Mr. Edington's base salary was increased in June 2008 to $800,000 and has not been adjusted since then. The Consultant noted that factors supporting the appropriateness of Mr. Edington's compensation package are his critical skills, nuclear expertise, demand in the competitive market, and demonstrated performance to date by returning Palo Verde to an improved operational level. The Company pays 29.1% of Mr. Edington's compensation expense. The balance is paid by the other owners of Palo Verde.

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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 how the Consultant's recommendations regarding particular elements of compensation may differ from management's recommendations. The Committee also focuses on the individual executives and their individual responsibilities, skills, expertise, value added through performance, and other external factors, and applies these views in conjunction with the information provided by the Consultant. The performance of each officer is formally reviewed each year by management and shared with the Committee. Individual performance evaluations consider individual goals and include a discussion of the officer's strengths and overall value to the Company. CEO performance is separately reviewed by the Committee.

             The Committee also considers written commitments in determining or recommending executive pay. For example, under the offer letters pursuant to which Messrs. Edington, Hatfield, and Falck were hired, each was entitled to a fixed starting salary and other specified benefits that are described in more detail below in the narrative disclosure accompanying the Summary Compensation Table and the 2011 Grants of Plan-Based Awards table. The Committee approved the terms of these offer letters after considering the entire compensation package in the context of the desirability of hiring these officers.

             Company, business unit, and individual officer performance, as well as compensation competitiveness, are the primary factors 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 in the "Executive Summary."

             As noted above, at our 2011 Annual Meeting, the shareholders cast an advisory vote on our executive compensation. The vote was not binding upon the Company, our directors or the Committee. Of the votes cast, 95% were "FOR" the compensation of the executives as disclosed in our 2011 Proxy Statement, excluding abstentions. The Committee was cognizant of this result in its consideration of the key components, design, implementation and amounts of our compensation program.

Compensation Design

             Performance-Based Compensation.    The Company believes that a significant portion of each Named Executive Officer's total compensation opportunity should be performance-based, reflecting both upside potential and downside risk. The illustrations that follow show the allocation of the Named Executive Officers' compensation between nonperformance-based (base salary) and performance-based (annual and other cash incentives, performance shares, and RSUs, excluding the Supplemental RSUs) components.

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2011 CEO Total Compensation

2011 Average for Other NEO Total Compensation

             Risk-Taking.    The compensation program is designed to reward 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:

•

earnings goals and award opportunities in our annual cash incentive programs are at levels intended to be attainable without the need to take inappropriate risks;

•

our long-term incentives consist of time-based RSUs that vest over a multi-year period and performance shares that are earned at the end of a three-year period, both of which provide upside potential and downside risk; moreover, the use of RSUs in our long-term incentive program mitigates the likelihood of risk-taking because RSUs, as opposed to stock options, for example, retain some value even in a depressed market;

•

payouts are capped under the annual and long-term incentive plans;

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more than one performance metric is used in our long-term performance share awards and the award opportunities under our annual incentive program are based on multiple considerations, thereby minimizing the ability of the executive to manipulate results;

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the stock components inherent in our long-term incentive program, combined with our stock ownership guidelines and retention requirements, align the interests of our executives with a goal of long-term appreciation of shareholder value;

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•

compensation is generally targeted to the median of Comparator Group, thereby avoiding unusually high pay opportunities relative to Company peers; and

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our program is consistent throughout the Company so that no one area or group is incentivized in a manner that would encourage risk-taking.

             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.

             Executive Compensation Components

             The Company's executive compensation program consists of the following components:

             In addition, the Company provides pension programs, a deferred compensation program, change of control arrangements and limited perquisites.

             The chart below indicates how each element of our 2011 executive compensation program was intended to achieve our stated compensation objectives of aligning the interests of executives and

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shareholders, paying for business and individual performance, and attracting and retaining qualified, experienced executives.

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Base Salary

             The Committee reviews competitive salary information and individual salaries for executive officers on an annual basis. The Named Executive Officers do not have a contractual right to receive a fixed base salary, except that a starting annual base salary was often specified when the officer was hired. 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. The Company sets the amount of base salary toward the median of the Comparator Group, except in the case of Mr. Edington, whose current salary was set in 2008.

             In January 2011, the Committee, based on the considerations set forth above, made the following adjustments to the base salaries of the following Named Executive Officers for fiscal year 2011:

             These adjustments resulted in these four Named Executive Officers being at or near the median of the Comparator Group.

Annual Incentives

             We have used annual cash incentive programs for all our employees for a number of years. The performance criteria that underlie the annual incentive programs generally focus on the Strategic Framework and the following objectives (the "General Performance Objectives"):

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shareholder value creation;

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customer service;

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financial strength;

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operating performance;

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safety; and

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an assessment of individual performance.

             We use the annual incentive programs to further the Strategic Framework and achieve the General Performance Objectives.

             In order to promote specific goals for 2011, the Committee approved the Pinnacle West 2011 Annual Incentive Award Plan (the "CEO Incentive Plan") in December 2010, which covers Mr. Brandt. Also in December 2010, acting on the recommendation of the Committee, the Board approved the APS 2011 Annual Incentive Award Plan (the "APS Incentive Plan"), which covers Messrs. Hatfield, Falck, and Robinson, and the 2011 APS Palo Verde Employee Incentive Plan (the "Palo Verde Incentive Plan"), which covers 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 "2011 Incentive Plans."

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             The award opportunity under the 2011 Incentive Plans for each of the Named Executive Officers was as follows (the percentages shown are of base salary):

Award Opportunity

             The 2011 Incentive Plans also allow the Committee to consider the General Performance Objectives and individual performance.

             In respect of the earnings measures, the calculated incentive award is proportional to the actual earnings achieved and begins when earnings exceed any indicated threshold performance level. In designing the 2011 Incentive Plans, the Committee set the target earnings level based on a reasonable range of expectations for the year, while taking into account prior year performance and current economic conditions.

             Individual business unit goals 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, some of the metrics, like safety and customer satisfaction, are not directly correlated to earnings, and are instead set with reference to prior year performance and a reasonable range of expectations of performance of comparable companies in our industry.

             The business unit performance measures are tied to the components of our Strategic Framework.
The following table details the business unit performance measures under the 2011 Incentive Plans, as correlated to the Strategic Framework, and compares the targets to actual results. For Fossil Generation and Palo Verde, minimum performance targets were required to be met before any award could be made and these performance targets were met.

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Performance Measures: Targets and Results

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             The following chart summarizes the target and maximum award opportunities and the actual amount awarded to each of the Named Executive Officers:

Summary of 2011 Awards

             Mr. Brandt.    Under the CEO Incentive Plan, the 2011 target earnings level of $327 million was exceeded as Pinnacle West's 2011 earnings were $340.7 million. That result equates to 36% of the earnings range between target and maximum and a total achievement level of 136% of target. Based upon earnings only, Mr. Brandt's potential award was $1,483,760. As permitted by the CEO Incentive Plan, the Committee further took into account the Company's strong showing in the General Performance Objectives in determining Mr. Brandt's total award, including the significant increase in TSR and stock price, the improvement in the Company's credit ratings and the strengthened financial condition of the Company. As a result of these factors, the Committee awarded Mr. Brandt $1,636,500, the maximum award.

             Other Named Executive Officers.    Under the APS Incentive Plans, the 2011 target earnings level of $333 million was exceeded as APS earnings were $336.2 million. That result equates to 9% of the earnings range between target and maximum and a total achievement of 109% of target. This earnings achievement combined with the applicable business unit performance results set forth above resulted in the indicated incentive awards, without further adjustment, for Messrs. Edington, Falck and Hatfield. As permitted by the APS Incentive Plan, Mr. Robinson's calculated award based on earnings ($602,528) was adjusted by the Committee in light of the Company's consistent performance in excess of target across the range of plan indicators as well as the General Performance Objectives. As a result, the Committee awarded Mr. Robinson $647,820 under the APS Incentive Plan (compared to a maximum award potential of $915,000).

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             In December 2010, the Board approved a separate award opportunity for Mr. Edington, as provided in his offer letter, of up to $125,000 for the achievement of various Palo Verde operational targets during 2011. We describe this award in more detail in the narrative disclosure accompanying the Summary Compensation Table and the 2011 Grants of Plan-Based Awards table. In January 2012, Mr. Brandt determined that the performance metrics were met and approved an award amount of $125,000 under this opportunity for Mr. Edington.

Long-Term Incentives

             The Company currently uses two types of equity grants: performance shares and RSUs. In 2011, awards consisted of 50% of each type of grant. The regular 2011 grants to the Named Executive Officers that were part of the Committee's 2011 compensation decisions were as follows: