Exhibit












RETENTION AGREEMENT


This RETENTION AGREEMENT (“Agreement”) is entered into by and between Arizona Public Service Company (“APS”) and Robert Bement (“Employee”) (collectively the “Parties”).   APS highly values and desires to continue to employ  Employee, and Employee desires to continue to be employed by APS.


In  consideration  of  the  mutual  agreements  contained  in  this  Agreement,  the Parties agree effective December 19, 2008 (“Effective Date”) as follows:


1.     Deferred Compensation Arrangement.


1.1      Plan.    Beginning on or about December 17, 2008, APS shall establish a deferred compensation arrangement pursuant to the terms of this Section on behalf of the Employee (“Deferred Compensation Arrangement”).  A bookkeeping entry (“Account”) shall be utilized as a means for the measurement and determination of amounts, if any, to be paid to the Employee in accordance with the Deferred Compensation Arrangement.


1.2      Credits.    APS  shall  credit  an  amount equal  to Three Hundred Thousand Dollars ($300,000.00) to the Account effective on or about December 17, 2008, and an amount equal to Seventy Thousand Dollars ($70,000.00) to the Account effective January 1, 2010 and each of the next four 1anuary 1 thereafter (each, a “Company Credit”), provided that the  Employee  remains  employed  with  APS  on  each  such  crediting  date  and  demonstrates sustained competent performance of his assigned job responsibilities.


1.3      Distribution.  Subject to the applicable terms and conditions of this Agreement  and   provided  the   Employee   remains   actively   employed   with  APS  through December 31, 2014, the Employee shall be entitled to a payment of benefits under the Deferred Compensation Arrangement in an amount equal to the Company Credits credited to his Account as of the date of his termination.   By no later than December 31, 2008, the Employee must submit an election form as required by APS, to receive such distribution in the form of either a lump sum or an annuity.  If Employee is entitled to payment, it will begin, or in the case of a lump sum will be made, upon the Employee's termination of employment.  If no timely election is made, payment shall be made in a lump sum. Any election made as to time and form of payment shall be irrevocable.   Any payment made shall be subject to applicable withholdings including federal, state and local taxes.


1.4     Termination, Death or Disability.


(a)       If   Employee   is   terminated   for   cause,   or   Employee voluntarily terminates before December 31, 2014, Employee shall forfeit all amounts credited to his Account and no benefits shall be payable under the Deferred Compensation Arrangement.  If Employee’s employment with APS is involuntarily terminated without cause by APS before December 31, 2014, the Employee will be entitled to a lump sum payment in an amount equal to the Company Credits credited to his Account 









at the time of termination.  Payment will be made at the  time of  the  termination,  or if  applicable, at  the  time specified  in  Section  8  of  this Agreement.
(b)       In the event that the Employee is determined to be disabled under the Pinnacle West Capital Corporation Long-Term Disability Plan before the Employee terminates  employment  and  such  disability  meets the  definition  of “disabled” for purposes  of Section  409A of the Internal  Revenue  Code (“Code  Section  409A”),  and (i)  if such disability occurs on or before December 31, 2014, the Account will not be credited with Company Credits, beginning  as of the date  of such disability, and the Employee shall be entitled  to a lump sum payment  on  December  31, 2014  in  an amount  equal  to  the Company  Credits  credited  to his Account  at the time of distribution  or (ii) if such disability  occurs after December  31, 2014, the Employee  shall be entitled  to a lump sum payment  in an amount  equal to the Company  Credits credited  to  his  Account  at the time  of distribution,  payable  within  30 days  after  the  date  of disability.


(c)       In the event that the Employee dies before he terminates employment  or after the  commencement of payments to him under the Deferred  Compensation Arrangement,  but before  all such  benefits  have  been paid  in full,  any balance  credited  to the Account  that has not been paid under  the Account  as determined  on the date of death shall  be paid to the Employee's beneficiary  in a lump sum within sixty (60) days after the date of death. The  Employee's beneficiary  for  purposes   of  the  Deferred  Compensation  Arrangement  shall mean the person(s)  or trust(s) specified  by the Employee  as the Employee's beneficiary,  in the form and manner required by APS and on file with APS.  In the event no beneficiary is named at the time of death, any benefits shall be paid to the Employee's estate.


3.     Confidentiality.


Employee shall hold the existence and terms of this Agreement in confidence. Employee shall  not  publicly   or  privately   discuss  or  disclose  the  nature  or  content  of  this Agreement.  However, Employee may disclose the terms of this Agreement if required by federal or state law, and Employee may disclose the terms of this Agreement to Employee's accountant, attorney,   consultant   and spouse.   In addition, the Parties may disclose   this Agreement as necessary to enforce its provisions.


4.     Reporting to Federal and State Agencies.


Nothing  in this  Agreement  shall  be  construed  to  prohibit  the  Employee  from reporting or disclosing any suspected  instance of illegal activity of any nature, any nuclear safety concerns, any workplace  safety concerns,  or any public safety concerns to the NRC, the United States Department of Labor (“DOL”), or any other federal, state, or local government agency or court.  This  Agreement  shall  not  be  construed  to  prohibit  the  Employee   from  providing information  to  the  NRC,  DOL,  EEOC,  United  States  Securities  and  Exchange  Commission, OSHA,  or  Arizona  Division  of  Occupational Safety  and  Health,  or  testifying  in any  civil  or criminal proceedings, even if such information  or testimony being provided  relates to the claims or matters  covered  by this Agreement.  This Agreement shall not be construed  as a waiver  or 









withdrawal of any safety concerns which the Employee has or may have reported to the NRC or DOL, or  withdrawal  of  any participation by the  Employee  in any NRC  proceedings.  In this regard,  the Parties  to this  Agreement  understand  that  this Agreement  shall  be interpreted  in a manner  consistent  with  10  CPR  §  50.7(f).    Notwithstanding anything  to the  contrary  in this paragraph,  the Employee hereby waives and releases any right to receive any relief as a result of the  Employee's  participation in  any  investigation  or  proceeding   of  the  NRC,  DOL,  or  any federal, state, or local government agency or court.


5.     Law.  The provisions of this Agreement shall be construed and interpreted according to the laws of the State of Arizona to the extent not preempted by Federal law.


6.     Severability.     The   invalidity   or   unenforceability    of   any   particular provision of this Agreement shall not affect any other provision hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.


7.    Agreement.    This Agreement  constitutes  the entire  Agreement  between the  Parties  and  supersedes  all  other  negotiations  and  agreements  with  respect  to the  subject matter of this Agreement.


8.    Time  of  Payment.  For  the  period  during  which  the  Employee  is  a specified  employee,  as determined  in accordance  with Code Section 409A, any payments  made under the  Deferred  Compensation  Arrangement  on account  of the  Employee's termination  of employment   that  would  otherwise   be  paid  during  a  six  month  period   beginning   on  the Employee's termination  of employment  shall not be paid at such time and shall instead be paid, in the case of a lump sum payment, or begin, in the case of an annuity, on the first day of the seventh month following the Employee's  termination of employment.   Any annuity installments that would have been paid during such six month period, but for this Section  8, shall be paid in a lump-sum  on  the  first  day  of  the  seventh  month  following  the  Employee's termination  of employment.


	
		
	ARIZONA PUBLIC SERVICE COMPANY
	EMPLOYEE

	 
	 

	By:   /s/ Randall K. Edington
	By:   /s/ Robert Bement

	   Executive Vice President Nuclear &
	   Robert Bement

	   Chief Nuclear Officer
	   

	 
	 

	Date:   12/22/08
	Date:   12/19/2008