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RETENTION AGREEMENT

This RETENTION AGREEMENT ("Agreement") is entered into by and between Arizona Public Service Company ("APS") and Maria Lacal ("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.    Retention Bonus Payments.

1.1    Bonus. APS shall pay Employee a retention bonus of $100,000 ("Payment"), payable on January 1, 2012 ("Payment Date"), provided that Employee demonstrates sustained competent performance of her assigned job responsibilities, does not voluntarily terminate employment, and is not terminated for cause on or prior to Payment Date.

    The Payment shall not be included in Employee's compensation for pension purposes, nor is it deferrable under the Pinnacle West Company Corporation Deferred Compensation Plan. The Payment shall be subject to applicable withholdings including federal, state and local taxes.

1.2    Death or Disability. In the event of Employee's death or  disability after the Effective Date, but prior to the Payment Date, so long as Employee was employed by APS through the date of death or disability, the Payment shall be paid in its entirety on the Payment Date.

1.3    Reimbursement. If Employee terminates employment, or is terminated by APS for cause, between the Payment Date and January 1, 2014, the Employee will repay APS the entire Payment, including any amounts paid by APS in connection with applicable tax withholding.

2.    Deferred Compensation Arrangement.

2.1    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.

2.2    Credits.  APS shall credit an amount equal to Two Hundred Thousand Dollars ($200,000.00) to the Account effective on or about December 17, 2008, and an amount equal to Forty Thousand Dollars ($40,000.00) to the Account effective January 1, 2010 and each of the next four January 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 her assigned job responsibilities.

2.3    Distribution. Subject to the applicable terms and conditions of this Agreement and provided the Employee remains actively employed with APS through the date she attains age 55, 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 her Account as of the date of her 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.

2.4    Termination, Death or Disability.

(a) If Employee is terminated for cause, or Employee voluntarily terminates before she attains age 55, Employee shall forfeit all amounts credited to her 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 she attains age 55, the Employee will be entitled to a lump sum payment in an amount equal to the Company Credits credited to her 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"), (i) in the event the Employee has not yet attained age 55 on the date of such disability, 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 at age 55 in an amount equal to the Company Credits credited to her Account at the time of distribution or (ii) in the event the Employee is age 55 or older on the date of such disability, the Employee shall be entitled to a lump sum payment in an amount equal to the Company Credits credited to her Account at the time of distribution, payable within 30 days after the date of disability.
(c) In the event that the Employee dies before she 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.

                                /s/Maria Lacal                12/9/08        
                                Employee Signature            DateDocument

FIRST AMENDMENT
TO THE
RETENTION AGREEMENT FOR MARIA LACAL

Arizona Public Service Company ("APS") previously entered into the  Retention Agreement dated December 19, 2008 (the "Agreement") with Maria Lacal ("Employee"). By execution of this instrument, APS now desires to amend the Agreement as set forth below.
1.This First Amendment shall be effective as of the date on which it is executed.

2.This First Amendment amends the provisions of the Agreement noted below.

This First Amendment also supersedes the other provisions of the Agreement to the extent those provisions are inconsistent with the provisions and intent of this First Amendment.
3.Section 2.2 (Deferred Compensation Arrangement - Credits) of the Agreement is hereby amended and restated in its entirety to read as follows:
2.2 Credits. APS shall credit an amount equal to Two Hundred Thousand Dollars ($200,000) to the Account effective on or about December 17, 2008 and an amount equal to Forty Thousand Dollars ($40,000) to the Account effective January 1, 2010 (each, a "Company Credit"). APS shall allocate an additional Company Credit of Fifty Thousand Dollars ($50,000) to the Account effective January 1 of each of the  next  four  years  thereafter (commencing January 1, 2011), provided that the Employee remains  employed with APS on each such crediting date and demonstrates sustained competent performance of her assigned job responsibilities.
4.The Agreement is hereby amended by the addition of the following new Section 9

(Compliant Operation and Interpretation with Code Section 409A) to the end thereof:

9. Compliant Operation and Interpretation with  Code Section 409A. This Agreement is intended to comply  with  Code Section 409A and shall be administered in compliance with Section 409A or  an  exception thereto. Each provision of the Agreement shall be interpreted, to the  extent possible, to comply with Code Section 409A or an exception thereto. Employee remains solely responsible for any adverse tax consequences imposed upon her by Section 409A.
5.Except as otherwise amended by this First Amendment, the Agreement shall continue in full force and effect.

IN WITNESS WHEREOF, APS and Employee have caused this First Amendment to be executed as of the date set forth below.
ARIZONA  PUBLIC SERVICE COMPANY

By:  /s/ George M. Kasper            
Date:  5/23/2011                
    

EMPLOYEE

/s/ Maria Lacal            

May 24, 2011            
DateDocument

MEDICAL RETENTION AGREEMENT

This Medical Retention Agreement (the "Agreement") is entered into by and between Arizona Public Service Company ("APS") and Maria Lacal ("Employee").

1.Purpose. The purpose of this Agreement is to award a retention incentive that will be used to obtain medical insurance of the Employee's choice subject to the terms and conditions set forth below.

2.Retention Incentive.

(a)If Employee remains employed by APS through April 30, 2017, then APS shall be obligated to pay to Employee the amount of $260,000 (the "Retention Incentive").

(b)If Employee's employment with APS is involuntarily terminated by APS for Cause, the Retention Incentive will be forfeited. For purposes of this Agreement, the term "Cause" means any act or omission by Employee which could result in disciplinary action by APS against Employee in accordance with the personnel policies and procedures of APS. The determination of whether "Cause" exists shall be made by APS, in its sole and absolute discretion, in accordance with its personnel policies and procedures.

3.Payment of Retention Incentive. Employee's Retention Incentive will be paid to Employee in a single lump sum payment within 30 days following Employee's Separation from Service unless Employee is a Specified Employee on the date of her Separation from Service. If the Employee is a "Specified Employee" on the date of her Separation from Service, the Retention Incentive shall be paid in a single lump sum cash payment within 30 days following the first day of the seventh month following Employee's Separation from Service. For purposes of this Agreement, the term "Specified Employee" shall have the meaning ascribed to it in the Pinnacle West Capital Corporation Board of Director Minutes dated October 17, 2007.

4.Continued Health Benefit. Effective upon Employee's Separation from Service for reasons other than Cause, Employee and APS will enter into a "Settlement Agreement" pursuant to Section 3.2(d) of the Pinnacle West Capital Corporation Group Medical Plan (the "Group Medical Plan"). The Settlement Agreement shall entitle Employee to purchase continued health insurance coverage (the "Continuation Coverage") under the Group Medical Plan on the following terms and conditions:

(a)The Continuation Coverage may be continued for Employee and Employee's "Eligible Dependents," determined as of the day of Employee's Separation from Service and in accordance with the definition of "Eligible Dependents" set forth in the Group Medical Plan. The Continuation Coverage for Employee or Employee's spouse shall end on the date on which Employee or Employee's spouse, as the case may be, becomes eligible to elect to receive Medicare coverage. The Continuation Coverage for any Eligible Dependent other than Employee's spouse shall end on the date as of which the dependent is no longer an "Eligible Dependent" as determined in accordance with the Group Medical Plan.

(b)    In order to receive the Continuation Coverage, Employee (or Employee's Eligible Dependents following Employee's death) must pay the full premium (Employer and participant portions) for the Continuation Coverage.

(c)    In order to receive the Continuation Coverage, Employee must elect it on or before the last day of her employment. If Employee does not elect to receive the Continuation Coverage on or before the last day of her employment, she will no longer be eligible to receive it at any time in the future. If Employee elects Continuation Coverage and later chooses to discontinue her participation or the participation by any of her dependents, neither Employee nor her dependents shall be eligible for Continuation Coverage at any time in the future.

(d)    The Continuation Coverage will be  subject  to  the  prov1s10ns  of Article Four of the Medical Plan, which provides the rules for coordination of benefits. The provisions of this paragraph supersede any contrary provisions in Article Four of the Group Medical Plan as it applies to Employee and Employee's Eligible Dependents.

(e)    Employee and Employee's Eligible Dependents shall not be entitled to any benefits other than those provided from time to time under the Group Medical Plan to "Pre-age 65 Retirees" and their eligible dependents. For this purpose, a "Pre-age 65 Retiree" is a retired former employee of APS who is not yet eligible for Medicare coverage and who is then covered by the Group Medical Plan. The Continuation Coverage of Employee and Employee's Eligible Dependents under the Group Medical Plan will be subject to all of the terms and provisions of the Group Medical Plan, as it may be amended from time to time.

(f)    Pursuant to the Patient Protection and Affordable Care Act and the Health Care & Education Affordability Reconciliation Act (collectively, the "Health Care Reform Act"), penalties may be imposed upon an employer that provides discriminatory health care benefits. If APS concludes, in the exercise of its discretion and based  upon the advice of legal or other counsel, that the Continuation Coverage provided to Employee pursuant to this Section will subject APS to any fines, taxes, or penalties pursuant to the Health Care Reform Act or any other applicable state or federal law, rules or regulations, APS reserves the right to immediately discontinue the Continuation Coverage and the payment or provision of any benefits that result in the imposition of such fines, taxes, or penalties. In such event, APS shall have no obligation to replace the benefit or compensate Employee for lost coverage.

(g)    Employee acknowledges that APS has reserved the right to amend or terminate the Group Medical Plan both before and after Employee's Separation from Service. Any such amendments will apply to Employee and Employee's Eligible Dependents and the Continuation Coverage to which Employee and Employee's Eligible Dependents are entitled. If APS amends or terminates the Group Medical Plan or the retiree medical coverage provided pursuant to the Group Medical Plan, the Continuation Coverage available to Employee and Employee's Eligible Dependents will be amended or terminated as well.
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(h)    Any reference in this Agreement to any particular provision of the Group Medical Plan will be deemed to also refer to the corresponding provision of any amended, restated or any replacement plan.

5.    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, APS and Employee may disclose this Agreement as necessary to enforce its provisions.

6.    Reporting to Federal and State Agencies. Nothing in this Agreement shall be construed to prohibit 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 Nuclear Regulatory Commission ("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 Employee from providing information to the NRC, DOL, Equal Employment Opportunity Commission, United States Securities and Exchange Commission, Occupational Safety and Health Administration, 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 Employee has or may have reported to the NRC or DOL, or withdrawal of any participation by 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 CFR § 50.7(f). Notwithstanding anything to the contrary in this paragraph, 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.

7.    Law. The prov1s1ons 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.

8.    Severability. If any provision of this Agreement is held to be invalid, the remaining provisions shall remain in full force and effect.

9.    Entire Agreement. APS and Employee acknowledge and agree that this Agreement constitute the entire agreement between APS and Employee with respect to the subject matter hereof.

10.    Amendments. This Agreement may not be modified, altered or changed except by a written agreement signed by APS and Employee.

11.    Withholding. The Retention Incentive, if any, is subject to reduction in order to comply with applicable federal, state and local tax withholding requirements and shall be reflected on Employee's Form W-2 for the year in which it is paid.

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12.    Section 409A Compliance. Certain payments and benefits provided by this Agreement may be subject to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code").

(a)    Separation from Service. Notwithstanding anything in this Agreement to the contrary, no payment shall be made pursuant to Section 2 prior to Employee's Separation from Service. For purposes of this Agreement, the term "Separation from Service" shall have the meaning ascribed to it in Treasury Regulation Section 1.409A l(h).

(b)    No Elections; No Acceleration. Employee may not elect to receive cash or any other allowance in lieu of any benefits provided by this Agreement. Employee does not have any right to make any election regarding the time or form of any payment due under this Agreement. Under no circumstances may the time or schedule of any payment made or benefit provided pursuant to this Agreement be accelerated or subject to a further deferral except as otherwise permitted or required pursuant to the regulations and other guidance issued pursuant to Section 409A.

(c)    Compliant Operation. This Agreement shall be operated in compliance with Section 409A or an exception thereto and each provision of this Agreement shall be interpreted, to the extent possible, to comply with Section 409A or qualify for an exception thereto. Nevertheless, APS cannot, and does not, guarantee any particular tax effect or treatment of the amounts due under this Agreement. Except for APS' responsibility to withhold applicable income and employment taxes from compensation paid or provided to Employee, APS will not be responsible for the payment of any applicable taxes on compensation paid or provided to Employee.

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IN WITNESS WHEREOF, APS and Employee have executed this Agreement on the dates set forth below.

ARIZONA PUBLIC SERVICE COMPANY

By :  /s/ Donald E. Brandt        
Donald E. Brandt
Chairman and Chief Executive Officer

Date:  September 15, 2014                 

EMPLOYEE

/s/ Maria Lacal                        

Date:  October 31, 2014                    
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