SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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Rule 14a-11(c) or Rule 14a-12
PINNACLE WEST CAPITAL CORPORATION
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[LOGO] PINNACLE WEST CAPITAL CORPORATION
PINNACLE WEST CAPITAL CORPORATION
POST OFFICE BOX 52132
PHOENIX, ARIZONA 85072-2132
NOTICE AND PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
WEDNESDAY, MAY 22, 2002
To Our Shareholders:
You are invited to attend the 2002 Annual Meeting of shareholders of
Pinnacle West Capital Corporation to be held at the Herberger Theater Center,
222 E. Monroe, Phoenix, Arizona at 10:30 a.m. on Wednesday, May 22, 2002. 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 five (5) directors;
(2) Approval of the Company's Long-Term Incentive Plan; and
(3) Consideration of a shareholder proposal, if presented at the meeting.
All shareholders of record at the close of business on March 22, 2002 are
entitled to notice of and to vote at the 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,
FAYE WIDENMANN
Vice President and Secretary
Approximate date of mailing to shareholders:
April 8, 2002
================================================================================
We encourage each shareholder to sign and return the enclosed proxy card or to
use telephone or internet voting. Please see our general information section for
information about voting by telephone, internet or mail.
================================================================================
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION............................................................1
What is the purpose of the Annual Meeting?
Will shareholders be asked to vote on any other matters?
Who is entitled to vote?
How do I vote?
Is my vote confidential?
What constitutes a quorum?
What are the Board's recommendations?
What vote is required to approve the items to be voted on?
Who is entitled to attend the Annual Meeting?
Can I change my vote after I submit my proxy?
How much did this proxy solicitation cost?
How many annual reports and proxy statements are delivered to
a shared address?
PROPOSAL 1 - ELECTION OF DIRECTORS.............................................4
NOMINEE FOR ELECTION TO CLASS I DIRECTORS..................................4
NOMINEES FOR ELECTION TO CLASS II DIRECTORS................................5
DIRECTORS CONTINUING IN OFFICE.................................................6
INCUMBENT CLASS I DIRECTORS................................................6
INCUMBENT CLASS III DIRECTORS..............................................7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...............................................................9
THE BOARD AND ITS COMMITTEES..................................................10
DIRECTOR COMPENSATION.........................................................10
STOCK PERFORMANCE COMPARISONS.................................................11
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE
COMPENSATION................................................................12
EXECUTIVE COMPENSATION........................................................15
OPTION GRANTS, EXERCISES AND HOLDINGS.........................................16
EXECUTIVE BENEFIT PLANS.......................................................17
PROPOSAL 2 - APPROVAL OF 2002 LONG-TERM INCENTIVE PLAN........................20
PROPOSAL 3 - SHAREHOLDER PROPOSAL.............................................27
AUDIT COMMITTEE REPORT........................................................30
OTHER MATTERS.................................................................31
Human Resources Committee Interlocks and Insider Participation
Business Relationships
Section 16(a) Beneficial Ownership Reporting Compliance
Independent Public Accountants
Nominations to the Board
Shareholder Proposals for Next Annual Meeting
APPENDIX A - AUDIT COMMITTEE CHARTER..........................................33
APPENDIX B - 2002 LONG-TERM INCENTIVE PLAN....................................36
i
GENERAL INFORMATION
This proxy statement contains information regarding the Company's 2002
Annual Meeting of shareholders to be held at the Herberger Theater Center, 222
E. Monroe, Phoenix, Arizona at 10:30 a.m. on Wednesday, May 22, 2002. The
enclosed proxy is being solicited by the Company's Board of Directors.
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Annual Meeting you will vote on the matters outlined in the notice
of meeting on the cover page of this proxy statement.
WILL SHAREHOLDERS BE ASKED TO VOTE ON ANY OTHER MATTERS?
The Board of Directors 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 committee will vote on those matters in accordance
with its judgment. Shareholders attending the meeting may directly vote on those
matters or they may vote by proxy.
WHO IS ENTITLED TO VOTE?
All shareholders at the close of business on March 22, 2002 (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 below). At close of
business on the record date there were 84,770,703 shares of common stock
outstanding.
HOW DO I VOTE?
You may vote in person or, if you are unable to attend the meeting, you may
vote in one of three ways:
VOTE BY TELEPHONE. The toll-free telephone number for telephone voting is
on your proxy card. Telephone voting is available 24 hours a day; or
VOTE BY INTERNET. The web site address for internet voting is on your proxy
card. Internet voting is available 24 hours a day; or
VOTE BY MAIL. Mark, date, sign and mail promptly the enclosed proxy (a
postage-paid envelope is provided for mailing in the United States).
If you vote by telephone or internet, DO NOT mail your proxy card.
1
IS MY VOTE CONFIDENTIAL?
Yes, your vote is confidential. Only the following persons have access to
your vote:
* election inspectors;
* individuals who help with processing and counting your votes; and
* persons who need access for legal reasons.
WHAT CONSTITUTES A QUORUM?
To carry on the business of the meeting, we must have a quorum. A quorum is
present when a majority of the outstanding shares as of the record date are
represented in person or by proxy. Shares owned by the Company are not
considered to be present at the meeting. Shares that are entitled to vote but
that are not voted at the direction of the beneficial owner (called abstensions)
and votes withheld by brokers in the absence of instructions from beneficial
owners (called broker non-votes) will be counted for the purpose of determining
whether there is a quorum for the transaction of business at the meeting, but
will have no effect on the outcome of Proposals 2 or 3.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions through your proxy vote, the persons
named as proxy holders on the proxy card will vote in accordance with the
recommendations of the Board of Directors. The Board's recommendation is set
forth together with the description of each item in this proxy statement. In
summary, the Board recommends a vote:
* FOR election of the nominated slate of directors (see Proposal 1);
* FOR approval of the Company's 2002 Long-Term Incentive Plan (see
Proposal 2); and
* AGAINST approval of the shareholder proposal (see Proposal 3).
With respect to any other matter that properly comes before the meeting,
the proxy holders will vote as recommended by the Board of Directors or, if no
recommendation is given, in their own discretion.
WHAT VOTE IS REQUIRED TO APPROVE THE ITEMS TO BE VOTED ON?
ELECTION OF DIRECTORS. Individuals receiving the highest number of votes
will be elected. The number of votes which a shareholder may 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 all in person
or by proxy for any one nominee, or by distributing them among two or more
nominees.
OTHER ITEMS. For each other item, the affirmative vote of a majority of the
shares voted on that item will be required for approval. Abstensions and
broker non-votes on a proposal will have no effect on the outcome of the
proposal.
2
WHO IS ENTITLED TO ATTEND THE ANNUAL MEETING?
You may attend the meeting if you were a shareholder as of the record date.
CAN I CHANGE MY VOTE AFTER I SUBMIT MY PROXY?
Even after you have submitted your proxy card or voted by telephone or
online, you may change your vote at any time before the proxy is exercised by
filing with our Secretary either a notice of revocation or a signed proxy card
bearing a later date. The powers of the proxy holders 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.
HOW MUCH DID THIS PROXY SOLICITATION COST?
The Board of Directors is soliciting the enclosed proxy. The Company bears
the cost of the solicitation of proxies. Proxies are primarily sent by mail,
although the Company may solicit consenting shareholders over the internet. The
Company has retained Georgeson Shareholder to assist in the distribution of
proxy solicitation materials and the solicitation of proxies for approximately
$7,500. As required, the Company will reimburse brokerage houses and others for
their out-of-pocket expenses in forwarding documents to beneficial owners of
stock.
HOW MANY ANNUAL REPORTS AND PROXY STATEMENTS ARE DELIVERED TO A SHARED ADDRESS?
If you and one or more shareholders of Company stock share the same
address, it is possible that only one annual report and proxy statement was
delivered to your address. This is known as "householding." Any registered
shareholder who wishes to receive separate copies of an annual report or proxy
at the same address now or in the future may:
* call Shareholder Services at 1-800-457-2983;
* mail a request to receive separate copies to Shareholder Services at
P.O. Box 52133, Phoenix, AZ 85072-2133; or
* e-mail a request to: shareholderdept@pinnaclewest.com.
Shareholders who own Company stock through a broker and who wish to receive
separate copies of an annual report and proxy statement should contact their
broker.
Shareholders currently receiving multiple copies of an annual report and
proxy at a shared address and who wish to receive only a single copy in the
future may direct their request to this same phone number and addresses.
3
PROPOSAL 1 - ELECTION OF DIRECTORS
The Company's Articles of Incorporation provide for the division of the
Board of Directors into three classes of approximately equal size (Class I,
Class II, and Class III). Each class serves for a period of three years,
although occasionally a director may be elected for a shorter term in one class
in order to keep the number of directors in each class approximately equal.
The shareholders will elect one (1) Class I director this year to serve as
a member of the Board until the Annual Meeting of shareholders in 2004 or until
his successor is elected and qualified. The shareholders will also elect four
(4) Class II directors this year to serve as members of the Board until the
Annual Meeting of shareholders in 2005 or until their successors are elected and
qualified. If one or more of the five (5) nominees becomes unavailable to serve
prior to the meeting date, the proxy committee will vote those shares for the
election of such other person(s) as the Board may recommend, unless the Board
reduces the number of directors in the affected class.
The first two tables identify the Class I director nominee and the Class II
nominees, followed by two tables identifying continuing directors. Nominees
furnished the information as of March 22, 2002. The term "APS" refers to Arizona
Public Service Company, and the term "PWE" refers to Pinnacle West Energy
Corporation, the Company's principal subsidiaries.
Each Company director also serves as a director of APS and PWE.
CURRENT NOMINEES
NOMINEE FOR ELECTION TO CLASS I DIRECTORS
(TERM EXPIRING AT 2004 ANNUAL MEETING)
DIRECTOR
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS SINCE
---- --- ------------------------------------ -----
William L. Stewart 58 President of PWE since October 1999 and President, 2001
Generation, of APS since October 1998. Mr. Stewart served as
Executive Vice President of Generation of APS from September
1996 to October 1998, as well as Executive Vice President,
Nuclear, of APS from May 1994 to September 1996.
4
NOMINEES FOR ELECTION TO CLASS II DIRECTORS
(TERM EXPIRING AT 2005 ANNUAL MEETING)
DIRECTOR
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS SINCE
---- --- ------------------------------------ -----
Edward N. Basha, Jr. 64 Chairman of the Board of Bashas' supermarket chain and an 1999
Arizona civic leader dedicated to multiple Arizona community
projects.
Michael L. Gallagher 57 Attorney-at-law and Chairman Emeritus of Gallagher & 1999
Kennedy, PA, Phoenix, Arizona. Mr. Gallagher is also a
director of Omaha-World Herald Company, a member of the
North American Advisory Board of AMEC plc, and a Trustee of
the Peter Kiewit Foundation.
Bruce J. Nordstrom 52 Certified public accountant at the firm of Nordstrom and 2000
Associates, PC, Flagstaff, Arizona, since 1988.
William J. Post 51 Chairman of the Board of the Company since February 2001 and 1997
CEO of the Company since February 1999. Mr. Post has served
as an officer of the Company since 1995 in the following
additional capacities: from August 1999 to February 2001 as
President; from February 1997 to February 1999 as President;
and from June 1995 to February 1997 as Executive Vice
President. Mr. Post is also CEO and Chairman of APS, and has
held various officer positions at APS since 1982. He is also
a director of Blue Cross-Blue Shield of Arizona, Nuclear
Electric Insurance, Ltd. (NEIL), and Phelps Dodge
Corporation.
5
DIRECTORS CONTINUING IN OFFICE
INCUMBENT CLASS I DIRECTORS
(TERM EXPIRING AT 2004 ANNUAL MEETING)
DIRECTOR
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS SINCE
---- --- ------------------------------------ -----
Roy A. Herberger, Jr. 59 President of Thunderbird, The American Graduate School of 1992
International Management, since 1989. Mr. Herberger is also
a director of Syntellect.
Humberto S. Lopez 56 President of HSL Properties (real estate development and 1995
investment), Tucson, Arizona. Mr. Lopez is also a director
of Bank of Tucson, Sun Community Bancorp, Nevada Community
Bancorp, Paragon Vision LLC, and TransAmerica Holdings LLC.
Robert G. Matlock 68 Independent management consultant since 1984 to various 2000
governmental agencies involved in developing nuclear energy
resources and to utilities operating nuclear facilities.
Kathryn L. Munro 53 Chairman of BridgeWest LLC (investment company) since 2000
February 1999. From 1996 to 1998, Ms. Munro served as CEO of
Bank of America's Southwest Banking Group, and was President
of Bank of America Arizona from 1994 to 1996. Ms. Munro is
also a director of FLOW International Corporation and Sun
Community Bancorp.
6
INCUMBENT CLASS III DIRECTORS
(TERM EXPIRING AT 2003 ANNUAL MEETING)
DIRECTOR
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS SINCE
---- --- ------------------------------------ -----
Jack E. Davis 55 President of the Company since February 2001. Mr. Davis 2001
served as Executive Vice President and Chief Operating
Officer of the Company from April 2000 to February 2001. He
has served in various APS positions as follows: currently
(since October 1998) President, Energy Delivery and Sales;
Executive Vice President of Commercial Operations from
September 1996 to October 1998; and Vice President,
Generation and Transmission from June 1993 to September
1996.
Pamela Grant 63 Civic leader and from July 1989 through January 1995 was 1985
President of TableScapes, Inc. (party supply rentals). Ms.
Grant was President and CEO of Goldwaters Department Stores
(general mercantile), a division of May Department Stores,
from January 1987 to April 1988. From November 1978 to
January 1987, she was President, Chairman and CEO of
Goldwaters Department Stores, a division of Associated Dry
Goods.
Martha O. Hesse 59 President of Hesse Gas Company. In 1990, Ms. Hesse served as 1991
Senior Vice President of First Chicago Corporation
(financial services); and from 1986 to 1989, she was
Chairman of the Federal Energy Regulatory Commission. She is
also a director of AMEC plc, Laidlaw Inc., Mutual Trust Life
Insurance Company, and Terra Industries.
7
DIRECTOR
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS SINCE
---- --- ------------------------------------ -----
William S. Jamieson, Jr. 58 President of the Institute for Servant Leadership of 1991
Asheville, North Carolina since January 1999. Prior to that,
Mr. Jamieson was Vice President of the Institute of Servant
Leadership and an Adjunct Member of the Bishop's staff of
the Episcopal Diocese of Arizona. Formerly, he was also the
Archdeacon of the Episcopal Diocese of Arizona.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF THE
NOMINATED SLATE OF DIRECTORS.
8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table details the beneficial ownership of our directors,
nominees, named officers, executive officers and those persons who beneficially
own 5% or more of our common stock as of March 22, 2002. The table reports
beneficial ownership in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934. Under these rules, beneficial ownership includes any shares as to
which the individual has the sole or shared voting or investment power and also
any shares which the individual has the right to acquire as of May 21, 2002 (60
days after March 22, 2002) through the exercise of any stock option, warrant, or
other right. Unless otherwise indicated, each shareholder listed below has sole
voting and investment power with respect to the shares beneficially owned. The
address of listed shareholders is P.O. Box 52132, Phoenix, Arizona 85072-2132.
SHARES PERCENT OF
DIRECTORS AND NOMINEES BENEFICIALLY OWNED CLASS (1)
---------------------- ------------------ ---------
DIRECTORS AND NOMINEES
Edward N. Basha, Jr. (2) 4,835
Jack E. Davis (2) 91,148
Michael L. Gallagher (2) 4,340
Pamela Grant 24,848
Roy A. Herberger, Jr. (2) 9,560
Martha O. Hesse 22,172
William S. Jamieson, Jr 6,890
Humberto S. Lopez (2) 21,919
Robert G. Matlock (2) 4,689
Kathryn L. Munro 2,968
Bruce J. Nordstrom 5,375
William J. Post 242,749
William L. Stewart (2) 87,868
OTHER OFFICERS NAMED ON PAGE 15
Armando B. Flores (2) 37,604
James M. Levine 64,036
ALL DIRECTORS, NOMINEES, NAMED OFFICERS,
AND EXECUTIVE OFFICERS AS A GROUP
(28 PERSONS) (2) 935,016 1.1%
5% BENEFICIAL OWNERS (3)
Wellington Management Company LLP 10,582,331 12.5%
75 State Street, Boston, MA 02109
J.P. Morgan Chase & Company 7,167,241 8.4%
270 Park Ave., New York, NY 10017
----------
(1) Except as otherwise noted, common stock beneficially owned does not exceed
one percent (1%) of the outstanding common stock.
(2) Number of shares beneficially owned in table includes shares held in joint
tenancy with spouses and/or family trusts.
(3) Wellington Management Company's Schedule 13G filing, dated February 14,
2002, reports beneficial ownership of 10,582,331 shares with shared voting
power as to 4,363,092 shares and shared dispositive power as to 10,582,331
shares. J.P. Morgan Chase & Company's Schedule 13G filing, dated February
13, 2002, reports beneficial ownership of 7,167,241 shares with sole voting
power as to 5,541,541 shares, shared voting power as to 77,072 shares, sole
dispositive power as to 6,908,857 shares, and shared dispositive power as
to 252,584 shares. The Company makes no representations as to the accuracy
or completeness of such information and believes these filings represent
share ownership as of December 31, 2001.
9
THE BOARD AND ITS COMMITTEES
The full Board of Directors met 11 times during 2001. Each director
attended at least 75% of the meetings of the full Board and any committees on
which he or she served. The Board has an Audit Committee and a Human Resources
Committee.
AUDIT COMMITTEE
The function of the Audit Committee, which held 3 meetings in 2001, is to
assist the Board in overseeing the Company's financial reporting process,
including the quality and integrity of the Company's financial reports and
system of internal controls. The written charter for the Audit Committee is
attached to this proxy statement as Appendix A beginning on page 33. Members of
the Audit Committee are independent as defined in Section 303.01 of the NYSE
Company Manual.
Members of the Audit Committee are: Martha O. Hesse (Chairman), Edward N.
Basha, Jr., Humberto S. Lopez, Pamela Grant, and Bruce J. Nordstrom.
HUMAN RESOURCES COMMITTEE
The functions of the Human Resources Committee, which held 6 meetings in
2001, are to:
* make recommendations to the full Board with respect to prospective
Board members and officers and with respect to executive salaries,
bonuses, and benefits;
* make stock-based incentive compensation grants (a subset of the Human
Resources Committee performs this function); and
* review the Company's policies in the foregoing areas.
Members of the Human Resources Committee are: Pamela Grant (Chairman), Roy
A. Herberger, Jr., William S. Jamieson, Jr., Michael L. Gallagher, and Robert G.
Matlock.
DIRECTOR COMPENSATION
Only non-employee (outside) directors are compensated for Board service.
Company directors also serve as directors of the APS and PWE Boards for no
additional compensation. Directors receive $24,000 in annual retainer fees and
they are eligible for grants of stock and non-qualified options under a
non-employee director equity plan. Under the plan, a director receives 900
shares of stock each year. On or before December 31 of a director's first year
on the Board, the director must own or acquire at least 900 shares of common
stock as a condition to receiving the 900-share grant. This ownership
requirement increases by 900 shares annually until it reaches 4,500 shares.
Grants of non-qualified options to directors are discretionary. To date, no such
grants have been made under the plan.
Directors are paid $900 for each Board meeting attended and $700 for each
committee meeting attended.
10
STOCK PERFORMANCE COMPARISONS
The following graph shows a comparison of cumulative total returns for
Pinnacle West Capital Corporation stock, the Standard & Poor's 500 Stock Index,
and the Edison Electric Institute Index of Investor-Owned Electrics. The graph
assumes that $100 was invested on the last trading day in 1996 in Company stock
and in the market represented by each of the two indices, and that any dividends
were reinvested.
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
PNW 100 138 142 106 172 156
S&P 500 100 133 171 207 188 166
EEI ELEC. 100 127 145 118 175 159
[GRAPH]
11
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
THE COMMITTEE'S RESPONSIBILITIES
The Pinnacle West Human Resources Committee is responsible for compensation
matters regarding executive officers. Only outside directors serve on the
Committee. The Committee oversees compensation for all Company, APS and PWE
officers.
COMPENSATION PHILOSOPHY
The Committee's overall compensation philosophy is to attract, retain, and
reward key leaders critical to the Company's success; reinforce the Company's
objectives through the use of performance-based compensation; and promote
executive officer long-term Pinnacle West stock ownership, consistent with the
interests of the Company's shareholders. The Committee believes that the
Company's compensation practices must be competitive within a broad industry
group as the utility industry continues to move toward greater levels of
competition and demands similar to general industry. The Committee annually
reviews the goals and performance of all elected officers to ensure market
equity in compensation practices and integrity in conforming to approved plans
and policies.
ANNUAL COMPENSATION - 2001
To determine executive compensation for 2001, the Committee aligned
executive compensation with the compensation practices of a blend of utilities
and other companies in general industry. In late 2000, the Committee met with an
outside consultant and reviewed reports regarding the Company's compensation
practices for executive officers. The consultant provided the Committee with
compensation information for the electric utility and general industry groups,
adjusted for size. The Committee formulated its views about the
responsibilities, skills, expertise, and performance of all executive officers,
with input from Mr. Post as to performances other than his own, and applied
these views in conjunction with the information provided by the consultant.
Based on the foregoing information, the Committee considered a combination
of compensation arrangements. The Committee then adopted two primary
compensation strategies for 2001 to promote the Committee's compensation
philosophy. One was annual total cash compensation, consisting of salary and
incentive pay. Incentive pay is awarded only when certain Company and business
unit objectives and individual performance objectives are met. The second type
was long-term equity compensation. This consisted of stock options and
restricted stock awards. The value of these awards depends upon Company
performance as reflected in future stock values.
The base salaries, incentive pay and long term compensation provided in
2001 in accordance with the compensation incentives formulated in late 2000 is
set forth on the following page.
12
BASE SALARIES
Overall, the base salaries paid to the Company's executive officers during
2001 were competitive with the median salaries in both the utility industry and
a blend of utility and general industry.
INCENTIVE PAY
For 2001, the cash bonuses paid to all executives were based on weighted
performance objectives the Committee established at the beginning of the year.
These were based primarily on 2001 earnings and corporate and business unit
strategic goals.
The Committee assessed the attainment levels of the several objectives in
early 2002 and factored these assessments into a formula that included
predetermined opportunity percentages based upon each executive's salary. Except
for Mr. Post, who is discussed separately below, the Committee approved 2001
incentive payments near the maximum levels due to Company performance.
LONG-TERM COMPENSATION
The Committee believes that management's performance is ultimately judged
by the delivery of returns to shareholders in the form of share price
appreciation and dividends over time. To achieve this, the Committee intends
that grants of stock options and restricted stock serve as significant pieces of
the total compensation package for officers and key management employees of the
Company and its subsidiaries.
The Committee believes that senior management of the Company and its
subsidiaries should have a significant, ongoing personal investment in the
Company. To that end, restricted stock grants, besides being compensatory in
nature, have been used to encourage the attainment and retention of targeted
levels of individual stock ownership by conditioning their vesting upon
ownership of certain numbers of shares for predetermined periods of time.
A selected committee currently consisting of Ms. Grant and Messrs.
Herberger and Jamieson administers the Company's stock-based compensation plans.
This committee determines the size of awards in part by assessing competitive
grant practices for comparable positions and allocating equity awards based on
the executive's contributions to the organization. Value to the executive is
determined through the stock option component only when the Company's stock
price appreciates above the price at grant. The total value of restricted stock
grants is based on the value of the stock at the end of the vesting period.
CEO COMPENSATION
In 2001, Mr. Post's salary as Chairman of the Board and Chief Executive
Officer of the Company and as Chairman of the Board and Chief Executive Officer
of APS remained at $600,000. This was not increased from November 2000.
Consistent with the Committee's compensation philosophy discussed above, the
Committee emphasizes reward-for-performance through incentive pay, stock options
and restricted stock grants to Mr. Post. The Committee awarded Mr. Post the
incentive compensation reflected as a 2001 Bonus in the Summary Compensation
Table on page 15 in recognition of his
13
exceptional performance in 2001. Approximately sixty percent of this incentive
compensation award was based on the attainment of the performance objectives
discussed under "Incentive Pay" above. The balance of the incentive compensation
award reflected the Committee's expanded evaluation of Mr. Post's contribution
to the Company's overall performance and success during 2001.
During 2001 Mr. Post was also granted the restricted stock awards and stock
options reflected in the Summary Compensation Table on page 15. These awards are
intended to meet the Committee objectives described under "Long-Term
Compensation" above.
ONGOING COMMITTEE ACTIVITIES IN 2001
In 2001, the Committee retained an outside consultant to evaluate
thoroughly the Company's historical and prospective executive compensation
policies to assist in determining appropriate executive compensation practices
for 2002 and beyond. This comprehensive review led to the formulation of a
focused strategy for maximizing shareholder value in an evolving electric
utility industry. As part of this strategy, the Board of Directors agreed with
the Committee's recommendation to adopt the 2002 Long-Term Incentive Plan. As
discussed in detail on pages 20 - 26, the Board is requesting shareholder
approval of this plan. If approved by the shareholders, the 2002 Long-Term
Incentive Plan will replace the Company's existing stock incentive plan. This
Plan will give the Committee greater flexibility in structuring executive
compensation packages that focus primarily on longer-term performance
objectives.
The Committee will continue to review, monitor, and evaluate the Company's
executive compensation programs. The Committee will, as appropriate, monitor
compensation to assure that it effectively supports Company strategy, is
competitive in the marketplace to attract, retain, and motivate superior
performance, and appropriately rewards creation of value for the Company's
shareholders.
TAX CONSIDERATIONS
Publicly-traded corporations generally are not permitted to deduct, for
federal income tax purposes, annual compensation in excess of $1 million paid to
any of certain top executives, except to the extent the compensation qualifies
as "performance-based." While the Committee strongly believes in rewarding
performance through the bonus and equity participation programs, certain
features of these programs do not fit the law's definition of
"performance-based," and therefore limited amounts of compensation may not be
deductible.
COMMITTEE CHAIRMAN COMMITTEE MEMBERS
Pamela Grant Michael L. Gallagher
Roy A. Herberger, Jr.
William S. Jamieson, Jr.
Robert G. Matlock
14
EXECUTIVE COMPENSATION
The following tables on compensation and stock options relate to the five
most highly compensated executive officers of the Company for services rendered
in all capacities to the Company and its subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------------
------------------------- RESTRICTED
STOCK ALL OTHER
NAME AND POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS COMPENSATION (2)
----------------- ---- ------ ----- --------- ------- ----------------
WILLIAM J. POST 2001 $600,000 $900,000 $548,730 65,000 $34,004
CHAIRMAN OF THE BOARD AND CEO 2000 $519,000 $540,000 $572,390 65,000 $21,107
1999 $502,500 $418,455 $259,921 107,500 $26,693
WILLIAM L. STEWART 2001 $464,000 $390,521(3) $306,022 26,250 $32,499
PRESIDENT, PWE AND GENERATION 2000 $464,000 $526,812 $319,218 26,250 $27,747
OF APS 1999 $464,000 $290,073 $190,609 17,500 $38,088
JACK E. DAVIS 2001 $432,817 $337,503 $306,022 26,250 $28,966
PRESIDENT 2000 $396,253 $268,231 $319,218 46,250 $17,000
1999 $310,000 $160,394 $190,609 17,500 $21,046
JAMES M. LEVINE 2001 $328,338 $267,944(3) $109,746 13,000 $42,339
EXECUTIVE VICE PRESIDENT, 2000 $320,004 $178,924 $114,478 13,000 $24,143
GENERATION OF APS 1999 $267,501 $217,002 $ 69,312 10,000 $28,948
COO OF PWE
ARMANDO B. FLORES 2001 $234,170 $124,254 $ 97,083 11,500 $19,220
EXECUTIVE VICE PRESIDENT, 2000 $230,004 $111,828 $101,269 11,500 $14,436
CORPORATE BUSINESS SERVICES 1999 $206,668 $116,014 $ 60,648 8,750 $16,723
----------
(1) The value of the restricted stock is based on the closing price of the
Company's common stock on the date the restricted stock was granted. Except
as described for Messrs. Davis and Stewart in the following sentence, the
restrictions lapse on restricted stock awards upon (i) the passage of three
years from the date of grant or upon retirement after the age of 60 and
(ii) the holding of certain numbers of unrestricted shares for certain
periods of time, as determined at the time of grant. During 2001, Messrs.
Davis and Stewart each received 2,000 shares of restricted stock that
vested upon the date of grant. Any dividends paid on restricted stock will
be held by the Company until the restrictions lapse. The number and value
(at market) of aggregate restricted shareholdings as of the end of 2001
were: Mr. Post - 33,500 shares, $1,401,975; Mr. Stewart - 16,000 shares,
$669,600; Mr. Davis - 14,000 shares, $585,900; Mr. Levine - 7,200 shares,
$301,320; and Mr. Flores - 6,350 shares, $265,747.
(2) The amounts in this column for 2001 consist of Company matching
contributions to the Company's employees' savings plan: Mr. Post - $5,100,
Mr. Davis - $5,100, Mr. Levine - $4,760, and Mr. Flores - $5,058; the
above-market portion of interest accrued under a deferred compensation
plan: Mr. Post - $22,409, Mr. Stewart - $10,527, Mr. Davis - $23,866, Mr.
Levine - $35,492, and Mr. Flores - $10,474; life insurance premiums (and
gross-up on the premium for Mr. Stewart) paid by the Company for: Mr. Post
- $6,495, Mr. Stewart - $21,972, Mr. Levine - $2,087, and Mr. Flores -
$3,688.
(3) This amount includes incentive payments totaling $87,500 based upon Palo
Verde Nuclear Generating Station's maintenance of specified federal and
nuclear oversight program ratings.
15
OPTION GRANTS, EXERCISES AND HOLDINGS
The following tables provide information relating to option grants,
exercises and holdings for each of the executive officers named in the summary
compensation table.
OPTION GRANTS IN 2001
PERCENTAGE OF TOTAL
OPTIONS GRANTED OPTIONS GRANTED TO GRANT DATE
IN 2001 ALL EMPLOYEES IN EXERCISE PRICE PRESENT
NAME (SHARES)(1) 2001 (PER SHARE) EXPIRATION DATE VALUE(2)
---- ----------- ---- ----------- --------------- --------
William J. Post 65,000 14.63% $42.55 11/13/2011 $574,801
William L. Stewart 26,250 5.91% $42.55 11/13/2011 $232,131
Jack E. Davis 26,250 5.91% $42.55 11/13/2011 $232,131
James M. Levine 13,000 2.93% $42.55 11/13/2011 $114,960
Armando B. Flores 11,500 2.59% $42.55 11/13/2011 $101,696
----------
(1) Options vest annually in installments of 33% per year beginning on the
first anniversary of the date of grant. All options not already exercisable
will become exercisable if an individual retires on or after the age of 60
or in the discretion of the plan committee under certain circumstances. No
SARs have been granted.
(2) The Black-Scholes option-pricing model was chosen to estimate the present
value. The basic assumptions used in the model were expected volatility of
27.66%; risk-free rate of return of 4.08%; dividend yield of 3.70%; and
time to exercise of five years.
OPTION EXERCISES IN 2001 AND YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(2)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
William J. Post 0 -- 162,167 162,833 $1,048,685 $ 125,622
William L. Stewart 5,834 $ 88,842 37,083 49,583 $ 60,861 $ 41,961
Jack E. Davis 12,501 $236,160 41,583 62,916 $ 70,311 $ 237,823
James M. Levine 0 -- 34,001 24,999 $ 208,431 $ 23,977
Armando B. Flores 4,917 $ 84,339 17,750 22,083 $ 32,727 $ 20,984
----------
(1) Value of options exercised is the market value of the shares on the
exercise date minus the exercise price.
(2) The value of unexercised options equals the market value of Company common
stock on December 31, 2001 ($41.85 per share) minus the exercise price of
options.
16
EXECUTIVE BENEFIT PLANS
EMPLOYEES' RETIREMENT PLAN AND SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN.
The following table illustrates the annual benefits, calculated on a
straight-life annuity basis, that would be provided under the Company Employees'
Retirement Plan and the Supplemental Excess Benefit Retirement Plan to the
Company's officers retiring at age 65 or later at the indicated compensation and
years of service levels.
YEARS OF SERVICE
AVERAGE ANNUAL -------------------------------------------------------
COMPENSATION (A) 5(B) 10 20 25 OR MORE
---------------- ---------- ---------- ---------- ----------
$ 100,000 $ 15,000 $ 30,000 $ 50,000 $ 60,000
200,000 30,000 60,000 100,000 120,000
300,000 45,000 90,000 150,000 180,000
400,000 60,000 120,000 200,000 240,000
500,000 75,000 150,000 250,000 300,000
600,000 90,000 180,000 300,000 360,000
700,000 105,000 210,000 350,000 420,000
800,000 120,000 240,000 400,000 480,000
900,000 135,000 270,000 450,000 540,000
1,000,000 150,000 300,000 500,000 600,000
1,100,000 165,000 330,000 550,000 660,000
1,200,000 180,000 360,000 600,000 720,000
1,300,000 195,000 390,000 650,000 780,000
1,400,000 210,000 420,000 700,000 840,000
1,500,000 225,000 450,000 750,000 900,000
----------
(a) Compensation under the Employees' Retirement Plan consists solely of base
salary up to $170,000 (as adjusted for cost-of-living), including any
amounts voluntarily deferred under the Company's 401(k) plan and salary
reduction contributions under the Company's flexible benefits plan and its
qualified transportation arrangement under Section 132(f) of the Internal
Revenue Code. The Employees' Retirement Plan does not include amounts
voluntarily deferred under other deferred compensation plans, bonuses or
incentive pay. The Supplemental Excess Benefit Retirement Plan does
include, subject to certain exceptions, these additional components of
compensation plus base salary beyond the $170,000 limit.
(b) Although years of service begin accumulating on the date of employment,
benefits do not vest until the completion of five years of service.
The Company's Supplemental Excess Benefit Retirement Plan provides enhanced
benefits. Benefits payable under this plan that are in excess of the benefits
payable under the Employees' Retirement Plan (as a qualified defined benefit
pension plan, the Employees' Retirement Plan is limited pursuant to the Internal
Revenue Code) are payable from the general assets of the Company. The number of
credited years of service for each of the individuals named on page 15 and their
2001 remuneration covered by the Company's plans and individual employment
agreements are as follows: Mr. Davis - 29 years, $770,319; Mr. Flores - 18
years, $358,424 (see description of
17
Mr. Flores' employment agreement below); Mr. Levine - 12 years, $508,781; Mr.
Post - 29 years, $1,500,000; and Mr. Stewart - 8 years, $767,021 (see
description of Mr. Stewart's employment agreement below). The amounts shown in
the table on the preceding page are not expected to be subject to any reduction
or offset for Social Security benefits or other significant amounts.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Under an employment agreement between Mr. Stewart and APS, Mr. Stewart has
agreed to continue full-time employment with APS through December 31, 2002. Mr.
Stewart receives 2,000 shares of Company stock annually under this employment
agreement. In addition, APS agreed to provide to Mr. Stewart a line of credit up
to $1.2 million, drawable annually in $400,000 increments with interest payable
at 7.5%; deferred payments of $400,000 per year beginning in 2000 and ending in
2002, which are credited with interest payable at 9% and payable in a lump sum
in 2003; and two additional payments of $400,000, one on January 3, 2003, and
the other on January 3, 2004. The agreement further provides that Mr. Stewart's
pension benefit will be 80% of his average monthly wage on the date of his
retirement. If Mr. Stewart terminates employment for any reason, including death
or disability, prior to December 31, 2002, the line of credit, deferred payments
and the two additional payments will be forfeited, and the outstanding amounts
under the line of credit, if any, will be due and payable within 10 days. In
that event, his pension will be calculated by adding a base amount of 20% of his
average monthly wage (as determined by the highest 36 consecutive months) and
10% of his average monthly wage for each year of service up to a maximum of 100%
of his average monthly wage.
In July 1995, APS entered into an agreement with Mr. Flores crediting him
with an additional 8 years of service for purposes of determining the amount of
benefits payable under the Company's Supplemental Excess Benefit Retirement
Plan. The additional years of service may be revoked if Mr. Flores' employment
is terminated for cause, as determined in the sole discretion of the APS Board
of Directors. Mr. Flores' credited years of service disclosed on page 17 include
these 8 additional years.
The Company has entered into identical severance agreements with each of
its executive officers. The Company intends that these agreements provide
stability in its key management in the event the Company experiences a change of
control. The agreements provide for certain payments if, during the two-year
period following a change of control of the Company, the Company involuntarily
terminates the officer's employment or the executive terminates his or her own
employment following a significant and detrimental change in the executive's
employment. The termination payment, if required, is an amount equal to three
times the sum of the executive's annual salary at termination plus an annual
bonus, as determined by an average over the last four years preceding
termination. In addition, the executive is entitled to continued medical, dental
and group life insurance benefits at a shared cost for three years, the
termination is treated as a normal termination under the Company's stock option
and benefit plans, and outplacement services are provided. If Section 4999 of
the Internal Revenue Code imposes an excise tax on all or part of the total
payments, the agreement further provides for an additional gross up payment
equal to the excise tax (plus any penalties and interest) imposed on or with
respect to the total payments. "Change of control" includes: (1) an unrelated
third party's acquisition of 20% or more of the Company's or APS' voting stock;
(2) a merger or consolidation where either the
18
Company or APS combines with any other corporation such that the Company's or
APS' outstanding voting stock immediately prior to merger or consolidation
represents less than 60% of the voting stock of the Company or APS immediately
after the merger or consolidation, but excluding a merger or consolidation
effected to implement a recapitalization in which no unrelated third party
acquires more than 20% of the voting stock of the Company or APS; (3) the
shareholders of either the Company or APS approve a sale, transfer or other
disposition of all or substantially all of the assets of the Company or APS to
an unrelated third party; or (4) the case where the composition of either the
Board of the Company or of APS changes such that the members of the Board of the
Company (the "Company Incumbent Board") or of APS (the "APS Incumbent Board"),
as of July 31, 1999, no longer comprise at least 2/3 of the Company's or APS'
Board of Directors. For purposes of this latter provision, a person elected to
either Board after July 31, 1999, is treated as a member of the Company
Incumbent Board or APS Incumbent Board if his or her nomination or election by
shareholders was approved by a 2/3 vote of the members then comprising the
Company Incumbent Board or APS Incumbent Board, and it does not include anyone
who became a director in an actual or threatened election contest relating to
the election of directors. No severance benefits will be payable to an officer
whose termination is due to retirement, disability, death, voluntary
termination, or for "cause" as defined in the agreements. Each of the agreements
terminates on December 31st of each year upon six months' advance notice by the
Company to the officer; if the six months' advance notice is not given, the
agreements will continue for successive one-year periods until the notice is
given.
Effective January 1, 1992, the Company established a deferred compensation
plan for directors and officers of the Company pursuant to which amounts
deferred are credited with interest at rates determined by the plan committee
appointed by the Board. Effective January 1, 1996, the Company established a
revocable trust to fund the benefits under the deferred compensation plan and
certain other benefits. Upon the occurrence of a "change of control" within the
meaning of the plan and trust, the interest rate under the plan shall be the
enhanced rate established by the plan committee, the trust will become
irrevocable and the Company will be required to fully fund the benefits earned
under the deferred compensation plan within 60 days after the occurrence of that
event. The "change of control," for purposes of the plan and trust, is defined
in the same manner as the "change of control" definition contained in the
severance agreements described above.
19
PROPOSAL 2 - APPROVAL OF 2002 LONG-TERM INCENTIVE PLAN
BACKGROUND
The Company is seeking shareholder approval of a long-term incentive plan
to replace a similar plan adopted by shareholders in 1994. The 1994 Long-Term
Incentive Plan has been effective in attracting top executive talent and
encouraging outstanding performance and shareholder return, but the plan is
running out of approved shares for distribution. Thus, in keeping with the
Company's philosophy to attract, retain and reward qualified individuals
critical to the Company's success, the Board of Directors requests approval of
the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "2002
Plan").
Currently, most of the Company's long-term compensation incentives are
granted under the 1994 Plan. The 1994 Plan allows the Company to grant ownership
status through stock options, restricted stock and other stock-based incentives
to its key employees. If approved by the Company's shareholders, the 2002 Plan
(described below) would replace the 1994 Plan. The Board believes this would be
in the best interest of the Company and its shareholders for the following
reasons:
* The 2002 Plan will support the achievement of the Company's business
objectives by providing stock-based incentives that motivate key leaders to
effectively devise and implement the Company's longer-term objectives and
to clearly link -- more directly -- their compensation to long-term
shareholder value. Like the 1994 Plan, awards under the 2002 Plan will be
designed to retain, reward, and motivate participants to contribute to the
Company's continued success and to encourage their ownership of the
Company's stock.
* The Board's Human Resources Committee recommended the adoption of the 2002
Plan following a comprehensive review of the Company's compensation
practices in the context of an evolving electric utility industry. As a
result, the 2002 Plan gives the Company greater flexibility than the 1994
Plan. For example, the 2002 Plan provides for common stock awards based on
the achievement of stock ownership and performance goals. The 1994 Plan
does not provide for this incentive tool, which promotes stock ownership
and the attainment of Company goals.
* The 2002 Plan is designed so that awards payable to certain Company
executives will be fully tax-deductible for the Company. See "Special
Provisions Applicable to Covered Employees" below. Certain awards payable
under the 1994 Plan do not qualify for this favorable tax treatment.
* As stated above, the 1994 Plan is running out of shares. Approximately
410,000 shares of the Company's stock are available for options, restricted
stock, and other equity-based grants under the 1994 Plan. This represents
less than one-half of one percent (0.5%) of the Company's outstanding
stock.
20
GENERAL
If approved by the Company's shareholders, the 2002 Plan would allow the
following long-term compensation incentives to be granted:
* Performance Shares;
* Stock Ownership Incentive Awards; and
* Non-qualified Stock Options.
The material features of the 2002 Plan are described below. A copy of the
2002 Plan is also attached to this proxy statement as APPENDIX B beginning on
page 36.
ADMINISTRATION
The 2002 Plan is administered by a committee of outside Directors appointed
by the Board. The committee determines the individuals to whom awards are
granted and the number of shares each individual receives. The committee
interprets the 2002 Plan, determines the terms of each award and makes all other
administrative decisions regarding the Plan. The committee may accelerate the
vesting or exercise period of an award.
NUMBER OF SHARES
The Company has reserved, subject to shareholder approval of the 2002 Plan,
6,000,000 shares of common stock for issuance under the 2002 Plan. No more than
1,800,000 of these shares may be issued in relation to Performance Share Awards
and Stock Ownership Incentive Awards. The shares of common stock issued under
the 2002 Plan will include newly-issued shares, treasury shares or shares
purchased on the open market. If any shares of common stock subject to an award
are not issued and cease to be issuable for any reason, the shares will no
longer be charged against the 2002 Plan's maximum share limitation and may be
used for future awards. In the event of certain corporate reorganizations,
recapitalizations or other specified corporate transactions affecting the
Company or its common stock, appropriate adjustments will be made to the 2002
Plan. These adjustments include the number of shares available under the 2002
Plan, the maximum share limitations and the number of shares and prices under
outstanding awards at the time of the event.
If the Company's shareholders approve the 2002 Plan, no further grants will
be made under the 1994 Plan, other than awards for the issuance of up to 20,000
shares of stock under the 1994 Plan to satisfy existing stock-award obligations
to certain executives. The 1994 Plan is currently the only plan under which the
Company may grant stock incentive awards to its employees.
The closing price of the Company's common stock on the New York Stock
Exchange on March 22, 2002 was $43.91 per share.
21
ELIGIBILITY
All employees of the Company, its subsidiaries, and any other entity in
which the Company or its subsidiaries has a significant equity or other
interest, as determined by the committee, are eligible to be granted awards
under the 2002 Plan. The committee has sole discretion to select the 2002 Plan
participants from among eligible employees. It is anticipated that approximately
150 persons will participate in the 2002 Plan in any year. A participant may
receive awards under the 2002 Plan while prior awards held by the participant
are still outstanding.
TYPES OF AWARDS
PERFORMANCE SHARES
Performance Share Awards entitle eligible recipients to receive a specified
number of shares of common stock upon the achievement of pre-established
performance goals set by the committee. Individual performance share grants also
are expected to provide cash payments equal to the dividends, plus interest,
that the award recipient would have received on the common stock issued in
connection with the Performance Share Award if the recipient had owned the
common stock from the date of the Performance Share grant. The maximum number of
shares of common stock that may be issued under Performance Share Awards and
Stock Ownership Incentive Awards may not exceed 1,800,000, or 30 percent of the
shares of common stock available for issuance under the 2002 Plan. The maximum
possible Performance Share grant to any participant in any single calendar year
is 120,000 shares of common stock.
For Performance Share Awards payable to a "covered employee" intended to
qualify as "performance-based compensation," the performance goals will be
objectively measured as described below under the caption, "Special Provisions
Applicable to Covered Employees." Although subject to change, the committee
currently anticipates using the Company's earnings per share growth rate as
compared to the earnings per share growth rate of the S&P Electric Utilities
Index over the applicable performance periods as the performance criteria for
Performance Shares.
STOCK OWNERSHIP INCENTIVE AWARDS
Stock Ownership Incentive Awards entitle eligible recipients to receive a
number of shares of common stock equal to a specified percentage of the number
of shares held by the award recipient during the award period. Stock Ownership
Incentive Awards will be conditioned upon:
* the award recipient attaining a required level of stock ownership,
based upon the recipient's position and salary or as otherwise
determined by the committee; and
* the achievement of performance goals pre-established by the committee.
As noted above, the maximum number of shares of common stock that may be
issued under Stock Ownership Incentive Awards and Performance Share Awards may
not exceed 1,800,000, or 30 percent of the shares of common stock available for
issuance under the 2002 Plan. No more than 15,000 shares of common stock may be
22
issued to any participant in any single calendar year for a Stock Ownership
Incentive Award.
For Stock Ownership Incentive Awards payable to a "covered employee"
intended to qualify as "performance-based compensation," the performance goals
will be objectively measured as described below under the caption, "Special
Provisions Applicable to Covered Employees." Although subject to change, the
committee currently anticipates using the Company's earnings from continuing
operations over the applicable performance periods as the performance criteria
for Stock Ownership Incentive Awards.
STOCK OPTIONS
Stock Options entitle an award recipient to purchase shares of common
stock, subject to vesting and other terms and conditions approved by the
committee. The 2002 Plan authorizes the committee to grant non-qualified Stock
Options. No individual may be granted Stock Options covering more than 600,000
shares in any one year.
The committee currently expects to grant performance-accelerated stock
options to award recipients. Performance-accelerated stock options entitle
eligible employees to purchase shares of common stock at prices specified in the
individual Stock Option grant, subject to special vesting schedules that may be
accelerated upon the achievement of pre-established performance targets
established by the committee. For example, a Stock Option that would ordinarily
fully vest over a three-year period would fully vest over a two-year period if
multiple performance targets were met. Although subject to change, the committee
currently anticipates using the Company's earnings per share growth rate as
compared to the earnings per share growth rate of the S&P Electric Utilities
Index over specified target periods as the performance criteria for accelerating
the vesting periods of performance accelerated stock options.
The option exercise price for any Stock Options granted under the 2002 Plan
may not be less than 100 percent of the fair market value of the common stock at
the time of grant. The option holder must pay the exercise price in cash or, at
the discretion of the committee, in common stock with an equivalent market
value, or in a combination of cash and common stock. No Stock Option may have a
term greater than 10 years, and no Stock Option may be repriced during its term.
SPECIAL PROVISIONS APPLICABLE TO COVERED EMPLOYEES
The 2002 Plan is designed to take into account Section 162(m) of the
Internal Revenue Code of 1986, as amended ("Code"), which generally denies a
corporate tax deduction for annual compensation exceeding $1,000,000 paid to
"covered employees," which consist of the chief executive officer and the four
other most highly compensated officers of a public company. However, certain
types of "performance-based compensation" are exempt from this deduction limit.
In granting awards to covered employees intended to qualify as performance-based
compensation, the committee must use objective performance criteria that take
into account the business or financial goals of the Company. The performance
goals will be based upon one or more of the following: the Company's earnings
per share growth compared to a comparative group of S&P Electric Utilities;
earnings; cash flow; customer satisfaction; revenues; financial return ratios;
market performance; shareholder return and/or value; operating profits
(including earnings before income taxes, depreciation and amortization); net
profits;
23
earnings per share; earnings per share growth; profit returns and margins; stock
price; working capital; business trends; production cost; project milestones;
and plant and equipment performance; as well as one or more of the following
operational measures: safety; environment; and minimizing customer price per
kilowatt hour. Performance criteria may be measured solely on a corporate,
subsidiary or business unit basis, or a combination thereof.
At the time of establishing a performance goal, the committee will
determine how the performance goal will be calculated. In so doing, the
committee may exclude the impact of certain specified events from the
calculation of the performance goal. For example, if the performance goal was
earnings per share, the committee could, at the time this performance goal was
established, specify that earnings per share be calculated without regard to any
subsequent change in accounting standards required by the Financial Accounting
Standards Board.
While the Company believes that compensation payable under the 2002 Plan
will be deductible for federal income tax purposes, under certain circumstances,
compensation may be payable which does not qualify for this exemption and
therefore will be subject to the deduction limit of Section 162(m) of the Code.
By approving the 2002 Plan, the shareholders will be approving, among other
things, the issuance of the Company's common stock and the performance goals,
eligibility requirements and award limits contained in the 2002 Plan.
TERM AND AMENDMENT
The Board of Directors may at any time terminate or modify the 2002 Plan,
except that no amendment may be made without further approval of the
shareholders if the amendment would:
* result in modifications which by law require shareholder approval;
* permit the granting of Stock Options with option exercise prices below fair
market value; or
* increase the number of shares of common stock that may be issued under the
2002 Plan (except for adjustments relating to corporate reorganizations,
recapitalizations or other specified corporate transactions affecting the
Company or the common stock, as described above under the caption, "Number
of Shares").
The 2002 Plan will be subject to shareholder approval again in 2007 if (as
is currently the case) shareholder approval is then required to maintain the
tax-deductible nature of performance-based compensation under the 2002 Plan. The
2002 Plan will terminate on March 19, 2012, subject to earlier termination or
amendment by the Board of Directors. Awards outstanding at the termination of
the 2002 Plan will not be affected by such termination.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of the federal income tax
consequences to participants and the Company relating to awards that may be
granted under the 2002
24
Plan. This discussion is not intended to be a comprehensive discussion of all
tax consequences relating to awards.
PERFORMANCE SHARE AWARDS AND STOCK OWNERSHIP INCENTIVE AWARDS
The recipient of a Performance Share Award or a Stock Ownership Incentive
Award does not recognize income at the time the award is granted. However, at
the time that a stock payment is actually or constructively received by a
recipient pursuant to the terms of the above-mentioned awards, the recipient
will recognize income equal to the fair-market value of the stock actually or
constructively received. The Company will be entitled to deduct as compensation
an amount equal to the income recognized by the recipient, and such deduction
will be claimed in the same year this compensation is included in the
recipient's income.
STOCK OPTIONS
Although an option recipient does not recognize income at the time of the
grant of the option, he or she recognizes ordinary income upon the exercise of a
non-qualified option in an amount equal to the difference between the fair
market value of the stock on the date of exercise of the option and the amount
of cash paid for the stock.
As a result of the option recipient's exercise of a non-qualified stock
option, the Company or one of its subsidiaries will be entitled to deduct as
compensation an amount equal to the amount included in the option recipient's
gross income. The deduction will be taken in the Company's taxable year in which
the option is exercised.
If the optionee exercises an option and surrenders stock already owned by
him or her ("Old Shares"), the following rules apply:
1. To the extent the number of shares acquired ("New Shares") exceeds the
number of Old Shares exchanged, the optionee will recognize ordinary income on
the receipt of such additional shares in an amount equal to the fair market
value of such additional shares less any cash paid for them and the Company or
one of its subsidiaries will be entitled to a deduction in an amount equal to
such income. The basis of such additional shares will be equal to the fair
market value of such shares on the date of exercise, and the holding period for
such additional shares will commence on the date the option is exercised.
2. To the extent the number of New Shares acquired does not exceed the
number of Old Shares exchanged, no gain or loss will be recognized on such
exchange, the basis of the New Shares received will be equal to the basis of the
Old Shares surrendered and the holding period of the New Shares received will
include the holding period of the Old Shares surrendered.
25
NEW PLAN BENEFITS
The Company cannot at this time determine what benefits or amounts, if any,
will be received by or allocated to any persons or group of persons under the
2002 Plan if the shareholders approve the 2002 Plan. Such determinations are
subject to the discretion of the committee.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE 2002
LONG-TERM INCENTIVE PLAN.
26
PROPOSAL 3 - SHAREHOLDER PROPOSAL
THE COMPANY IS NOT RESPONSIBLE FOR THE CONTENT OF THIS SHAREHOLDER PROPOSAL
OR SUPPORTING STATEMENT.
The Company has been advised that the Arizona Safe Energy Coalition (owner of
record of 63.754 shares), c/o Betty Schroeder, 5349 West Bar X Street, Tucson,
Arizona 85713 intends to present the following proposal at the 2002 Annual
Meeting. The proposal and supporting statement are set forth below. The Board of
Directors opposes this proposal for the reasons stated on pages 28 - 29.
WHEREAS:
We believe the economic and environmental interests of stockholders and the
public could be improved by Pinnacle West Capital Corporation and Arizona Public
Service Company (The Company) more aggressively implementing energy efficiency,
renewable energy and end-use planning;
Global warming, acid rain, urban smog, groundwater pollution and nuclear waste
will be reduced by the greater use of energy conservation and renewable energy
sources;
The Kyoto Protocol (reducing greenhouse gases) goals will be more efficiently
met through uses of renewable energy and improved energy efficiency;
Energy efficiency and some renewable energy sources are already competitively
priced, and all are environmentally superior to our present use of coal, oil and
nuclear fuels;
Growing threats of terrorism regarding nuclear power plants and their stores of
on-site irradiated fuel cause great public anxiety, and call for nuclear
generation to be phased out as soon as reasonably possible;
Present generation at Palo Verde Nuclear Generating Station (PVNGS) utilizes
huge quantities of water, both reclaimed sewage (20 billion gallons annually),
and ground water (650 million gallons annually), causing concern that sabotage
or disruption of reclaimed water could imperil the necessary cooling function,
and that ground water aquifers may be lowered or adversely affected over the
long term; and
We believe the Company needs to have an action plan in place for replacement
power when PVNGS must be decommissioned; also the greater use of energy
efficiency and renewable energy sources would be economically advantageous in
avoiding costs of building expensive new generating facilities (that result in
difficult-to-amortize capital costs, especially in this new competitive
climate);
THEREFORE the shareholders request the Board of Directors of Pinnacle West
Capital Corporation and Arizona Public Service Company to prepare a report for
shareholders within 6 months, with in-depth discussion of the Company's efforts
to expand energy conservation, reduce energy waste, utilize more renewable
energy sources, implement least cost energy planning, minimize wasteful uses of
water, reduce radioactive waste, reduce carbon emissions and minimize
environmental damage in all Company operations.
27
SUPPORTING STATEMENT
November 6, 2001, 73% of San Francisco voters approved a proposition to
authorize the city to install solar and wind sources of electricity for city and
county buildings. Pinnacle West should take this challenge for similar
leadership in energy innovation in Arizona.
In our opinion, the Company's annual Environment, Health and Safety report gives
lip service but no substance to some of the subjects requested above. It is
commendable that Pinnacle West is working on a few solar applications as an
alternative to nuclear, coal and oil technologies. Since there is enthusiastic
public support for these safer, cleaner technologies (especially in a state
gifted with superior sources of sun and wind), we urge the Company to explain
how they plan to expand this safe energy approach. No Pinnacle West Annual
Report (through 2000) has even mentioned the Company's interest or plans for
promoting solar or other alternate energy options. Shareholders would welcome a
more aggressive Company policy toward these alternatives.
We invite your vote FOR this proposal.
BOARD OF DIRECTORS' STATEMENT AGAINST SHAREHOLDER PROPOSAL
The Arizona Safe Energy Coalition, the proponent of this proposal,
presented a virtually identical proposal at the Company's 2000 Annual Meeting.
The Board of Directors included a detailed statement in opposition to that
proposal in the 2000 proxy statement. Over 93% of the shareholders voting on
this matter at the 2000 Annual Meeting rejected the proposal.
We actively support environmental planning and stewardship. As a result of
our numerous environmental, conservation and safety efforts, much of the
requested information is readily available in multiple reports and filings at
the Nuclear Regulatory Commission, the Arizona Corporation Commission, and other
agencies. The APS Environment, Health and Safety Annual Report directly
addresses many of the matters referenced in the proposal. Additionally, our
annual reports regularly report on our environmental stewardship and, contrary
to the proponent's assertion, our 1997 annual report specifically discussed our
solar vision and plans.
In addition to the matters raised by the proponent in its 2000 proposal,
the current proposal alludes to potential terrorist threats to nuclear power
plants and a San Francisco energy initiative regarding solar and wind power. On
these items, we add this information:
APS is a co-owner and the operator of the Palo Verde Nuclear Generating
Station. As a specific condition of obtaining and maintaining its operating
license, APS is charged with the highest vigilance for the security and public
health and safety of all citizens and employees. This obligation is subject to
ongoing regulatory review, evaluation and scrutiny. Following the September 2001
terrorist attacks, APS implemented even stricter security measures at Palo
Verde.
28
As a leader in enlisting customers to use solar-generated electricity, APS
continues to expand its Solar Partners Program, which now serves approximately
2,500 customers in Arizona. If a specific solar energy proposal, such as the San
Francisco initiative, is considered and approved by Arizona voters as a wise
choice for Arizona, we stand ready to work with local officials to foster
further development of solar energy with cities and towns.
Because of the largely duplicative nature of the request for a report on
these subjects, the Board believes that this shareholder proposal is not in the
best interests of the Company's shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THIS SHAREHOLDER
PROPOSAL.
29
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors
(the "Board"), the Audit Committee of the Board assists the Board in fulfilling
its responsibility for oversight of the Company's financial reporting process,
including the quality and integrity of the Company's financial reports and
system of internal controls. During the 2001 fiscal year, the Audit Committee
met three (3) times.
In discharging its oversight responsibility as to the audit process, the
committee obtained from Deloitte & Touche LLP, the Company's independent
auditor, a formal written statement describing all relationships between the
auditor and the Company that might bear on the auditor's independence consistent
with Independence Standards Board Standard No. 1, "Independence Discussions with
Audit Committees." The committee discussed with the auditor any relationships
that may impact the auditor's objectivity and independence and satisfied itself
as to the auditor's independence. The committee also discussed the quality and
adequacy of the Company's internal controls with the Company's director of audit
services, management, and the independent auditor.
The committee discussed and reviewed with Deloitte & Touche LLP all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees" and, with and without management present,
discussed and reviewed the results of the independent auditor's examination of
the financial statements. The committee also discussed the results of internal
audit examinations.
The Audit Committee reviewed the audited financial statements of the
Company as of and for the fiscal year ended December 31, 2001, with the
Company's director of audit services, management and the independent auditor.
Management is responsible for the Company's financial reporting process,
including the Company's system of internal controls, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. The independent auditor is responsible for auditing and
rendering an opinion on those financial statements. The committee's
responsibility is to monitor these processes.
Based on the above-mentioned review and discussions with management and the
independent auditor, the committee recommended to the Board that the Company's
audited financial statements be included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001, for filing with the Securities
and Exchange Commission. The Audit Committee also recommended the reappointment
of the independent auditor, and the Board concurred in such recommendation.
COMMITTEE CHAIRMAN COMMITTEE MEMBERS
Martha O. Hesse Edward N. Basha, Jr.
Pamela Grant
Humberto S. Lopez
Bruce J. Nordstrom
30
OTHER MATTERS
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There were no interlocking relationships between the Company and other
entities that might affect the determination of the compensation of the
Company's executive officers. None of the members of the Human Resources
Committee is or has been an employee of the Company. The section entitled
"Business Relationships" below provides information regarding Mr. Gallagher and
Mr. Matlock, each of whom is a member of the Human Resources Committee.
BUSINESS RELATIONSHIPS
Mr. Gallagher is Chairman Emeritus of Gallagher & Kennedy, PA, a law firm
which provided legal services to the Company in 2001 and which will provide such
services in 2002. The Company has a consulting agreement with Robert G. Matlock
& Associates, Inc., of which Mr. Robert G. Matlock is President and Chief
Executive Officer and fifty percent owner. During 2001, the Company paid this
company $20,300 for consulting services and expenses relating to the Company's
nuclear operations.
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 officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
The Company receives and reviews copies of such reports. Based solely on this
review, the Company believes that its directors, officers, and greater than 10%
beneficial owners complied with their respective Section 16(a) 2001 reporting
requirements on a timely basis.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company anticipates that Deloitte & Touche LLP, independent certified
public accountants, will examine the Company's financial statements for the year
ending December 31, 2002. The Company expects that representatives of that firm
will be present at the Annual Meeting. These representatives will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
AUDIT FEES
The aggregate fees billed for Deloitte & Touche LLP services rendered for
the audit of the Company's annual financial statement for 2001 and for review of
financial statements included in Forms 10-Q were $874,322.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Deloitte & Touche LLP rendered no services or bills for financial
information systems design and implementation in 2001.
31
ALL OTHER FEES
The aggregate fees billed for Deloitte & Touche LLP services rendered for
all other services in 2001 were $464,134, including $339,539 for audit-related
services and $124,595 for other services.
NOMINATIONS TO THE BOARD
A shareholder wishing to propose the nomination of an individual for
election to the Company's Board of Directors must submit his or her
recommendation to the Company in writing, and in accordance with the applicable
provisions of the Company's Articles of Incorporation and Bylaws. The Office of
the Secretary must receive such recommendations no later than November 22, 2002.
Copies of the Company's Articles of Incorporation and Bylaws are available upon
written request to the Office of the Secretary. The Company suggests that
proponents submit their proposals to the Office of the Secretary by Certified
Mail -- Return Receipt Requested.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Shareholders who intend to have their proposals considered for inclusion in
the proxy statement and form of proxy relating to the 2003 Annual Meeting of the
Company's shareholders and who wish to present the proposal at that meeting must
submit the proposal in accordance with the applicable rules of the Securities
and Exchange Commission. The Company must receive the proposal at its principal
executive offices on or before December 10, 2002. Shareholders who intend to
present proposals at the 2003 Annual Meeting but do not wish them included in
the proxy statement and form of proxy must submit the proposal by the close of
business on February 21, 2003, but not earlier than January 22, 2003, in
accordance with the applicable provisions of the Company's Bylaws, a copy of
which is available upon written request to the Office of the Secretary. If a
shareholder submits a proposal after the close of business on February 21, 2003,
the Company's proxy holders will be allowed to use their discretionary voting
authority to vote against the proposal when and if the proposal is raised at the
2003 Annual Meeting. The Company suggests that proponents submit their proposals
to the Office of the Secretary by Certified Mail -- Return Receipt Requested.
32
APPENDIX A
AUDIT COMMITTEE CHARTER
I. GENERAL
The Audit Committee is a committee of the Board of Directors of the
Company. Its primary function is to assist the Board of Directors in
overseeing the Company's financial reporting process, including the quality
and integrity of the Company's financial reports and system of internal
controls. The Company's outside auditor is ultimately accountable to the
Board of Directors and the Audit Committee.
II. COMPOSITION
The Audit Committee will consist of three or more directors. No member
of the Audit Committee may have a relationship with the Company that may
interfere with his or her exercise of independence from management and the
Company. Each member must also satisfy any additional "independence"
requirements established by the New York Stock Exchange from time to time.
Each member must be financially literate, as the Company's Board of
Directors interprets such qualification in its business judgment. At least
one member of the Audit Committee must have accounting or related financial
management expertise, as the Company's Board of Directors interprets such
qualification in its business judgment.
III. MEETINGS
The Committee will meet at least three times annually, or more
frequently as circumstances dictate. The Committee may meet for a portion
of each meeting with the Company's management, the director of audit
services, and the outside auditor, either collectively or individually, as
warranted, and a portion of each meeting will be restricted to Committee
members only.
IV. AUDIT COMMITTEE DUTIES AND RESPONSIBILITIES
1. Ensure open communication among the director of audit services, the
outside auditor, management, and the Board of Directors.
2. Evaluate the outside auditor and recommend to the Board of Directors
the selection, and where appropriate, the replacement of the outside
auditor.
3. Ensure that the outside auditor submits on a periodic basis to the
Audit Committee a formal written statement delineating all
relationships between the outside auditor and the Company, and take
appropriate action to satisfy itself of the outside auditor's
independence.
33
4. Review the compensation of the outside auditor.
5. Review and concur in the appointment, replacement or dismissal of the
director of audit services.
6. Maintain an awareness of key financial reporting issues and review
proposed changes in financial reporting principles affecting the
Company.
7. Inquire of management, the director of audit services, and the outside
auditor about the significant risks or exposures to the Company and
assess the steps management has taken to minimize these risks,
including an annual review of the Company's insurance programs.
8. Consider, in consultation with the outside auditor and the director of
audit services, the audit scope and plan of the outside auditor and
the internal auditors.
9. Consider and review with the outside auditor and the director of audit
services individually and collectively:
(a) The adequacy of the Company's internal controls, and
(b) Any related significant findings and recommendations of the
outside auditor and director of audit services, together
with management's responses.
10. Review with management and the outside auditor at the completion of
the annual audit:
(a) The Company's annual financial statements and related
footnotes,
(b) The outside auditor's audit of the financial statements and
its report thereon,
(c) Any serious difficulties or disputes with management
encountered during the course of the audit, and
(d) Other matters related to the conduct of the audit that are
to be communicated to the Committee under generally accepted
auditing standards.
11. Prepare in conjunction with management and legal counsel for inclusion
in the Company's proxy statement any audit committee report required
by Securities and Exchange Commission rules or regulations.
12. Review management's monitoring of the Company's compliance with the
Standards of Conduct policy.
13. Review this Audit Committee Charter at least annually and, if
appropriate, recommend changes to the Board of Directors.
34
While the Audit Committee has the responsibilities and powers set
forth in this Charter, it is not the duty of the Audit Committee to plan or
conduct audits or to determine that the Company's financial statements are
complete and accurate and are in accordance with generally accepted
accounting principles. This is the responsibility of management and the
independent auditor. Nor is it the duty of the Audit Committee to conduct
investigations, to resolve disagreements, if any, between management and
the independent auditor or to assure compliance with laws and regulations
and the Company's Standards of Conduct policy.
This Audit Committee Charter is not intended to change or augment the
obligations of the Company or its directors or management under the federal
securities laws or to create new standards for determining whether
directors or management have fulfilled their duties, including fiduciary
duties, under applicable state law.
Effective as of March 20, 2002.
/s/ WILLIAM J. POST
-----------------------------------
Chairman of the Board of Directors
/s/ MARTHA O. HESSE
-----------------------------------
Director and Chair of the Audit
Committee of the Board of Directors
35
APPENDIX B
2002 LONG-TERM INCENTIVE PLAN
1. OBJECTIVES.
The Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the
"Plan") is designed to attract, motivate and retain selected employees of the
Company. These objectives are accomplished by making long-term incentive awards
under the Plan, thereby providing Participants with a proprietary interest in
the growth and performance of the Company.
2. DEFINITIONS.
(A) "AWARDS" -- The grant of any form of stock option, performance share, or
stock ownership incentive award, whether granted singly, in combination or in
tandem, to a Participant pursuant to such terms, conditions, performance
requirements, limitations and restrictions as the Committee may establish in
order to fulfill the objectives of the Plan.
(B) "AWARD AGREEMENT" -- An agreement between PNW and a Participant that sets
forth the terms, conditions, performance requirements, limitations and
restrictions applicable to an Award.
(C) "BOARD" -- The Board of Directors of Pinnacle West Capital Corporation
("PNW").
(D) "CAPITAL STOCK" OR "STOCK" -- PNW's common stock (no par value).
(E) "CODE" -- The Internal Revenue Code of 1986, as amended from time to time.
(F) "COMMITTEE" -- The committee designated by the Board to administer the Plan
and chosen from those of its members, each of whom qualify as (i) a
"Non-Employee Director" of PNW as defined in Rule 16b-3(b)(3) (or any successor
provision) under the Securities Exchange Act of 1934 and (ii) an "outside
director" under section 162(m) (or any successor provision) of the Code and the
regulations thereunder.
(G) "COMPANY" -- PNW or any of its subsidiaries (including subsidiaries of
subsidiaries) or any other entity in which PNW or any of its subsidiaries has a
significant equity or other interest, as determined by the Committee.
(H) "FAIR MARKET VALUE" -- The closing price of Capital Stock on the New York
Stock Exchange for the date in question, provided that, if no sales of Capital
Stock were made on said exchange on that date, the closing price of Capital
Stock as reported for the most recent preceding day on which sales of Capital
Stock were made on said exchange.
(I) "FISCAL YEAR" -- The fiscal year of PNW, as the same may be changed from
time to time.
(J) "PARTICIPANT" -- An individual to whom an Award has been made under the
Plan. Awards may be made to employees of PNW, or any of its subsidiaries
(including
36
subsidiaries of subsidiaries), or any other entity in which PNW or any of its
subsidiaries has a significant equity or other interest, as determined by the
Committee.
(K) "PERFORMANCE PERIOD" -- A period of one or more consecutive Fiscal Years
over which one or more of the performance criteria listed in Section 5(d) shall
be measured pursuant to the grant of Awards (whether such Awards take the form
of stock options, performance share awards or stock ownership incentive awards).
Performance Periods may overlap one another.
3. CAPITAL STOCK AVAILABLE FOR AWARDS.
Subject to adjustment pursuant to Section 12, the number of shares that may
be issued under the Plan for Awards granted is six million (6,000,000). Shares
of Capital Stock may be made available from the authorized but unissued shares
of PNW, from shares held in PNW's treasury and not reserved for some other
purpose, or from shares purchased on the open market. For purposes of
determining the number of shares of Capital Stock issued under the Plan, no
shares shall be deemed issued until they are actually delivered to a
Participant, or such other person in accordance with Section 9. Shares covered
by Awards that either wholly or in part are not earned, or that expire or are
forfeited, terminated, canceled, or exchanged for other Awards, shall be
available for future issuance under Awards. Further, shares tendered to PNW in
connection with the exercise of stock options, or withheld by PNW for the
payment of tax withholding on any Award, shall also be available for future
issuance under Awards.
4. ADMINISTRATION.
The Plan shall be administered by the Committee, which shall have full
power to select Participants, to interpret the Plan, and to adopt such rules,
regulations and guidelines for carrying out the Plan as it may deem necessary or
proper. A majority of the Committee shall constitute a quorum. The acts of a
majority of the members present at any meeting at which a quorum is present and
acts approved in writing by a majority of the Committee in lieu of a meeting
shall be deemed acts of the Committee. Each member of the Committee is entitled
to rely in good faith upon any report or other information furnished to that
member by any officer or other employee of PNW, any subsidiary, PNW's certified
public accountants, or any executive compensation consultant or other
professional retained by PNW to assist in the administration of the Plan.
5. AWARDS.
The Committee shall determine the type or types of Award(s) to be made to
each Participant and shall set forth in the related Award Agreement the terms,
conditions, performance requirements, limitations and restrictions applicable to
each Award. Awards may be granted singly, in combination or in tandem. Awards
may also be made in combination or in tandem with, in replacement or payment of,
or as alternatives to, grants, rights or compensation earned under any other
plan of the Company, including the plan of any acquired entity.
(A) STOCK OPTION -- A stock option is a grant of a right to purchase a
specified number of shares of Capital Stock the exercise price of which shall be
not less than 100% of Fair Market Value on the date of grant of such right. No
individual may be
37
granted options to purchase more than 600,000 shares during any Fiscal Year. No
stock option shall have a term of more than ten (10) years and no stock option
may be repriced during its term. All stock options shall be non-qualified stock
options.
(B) PERFORMANCE SHARE AWARD -- A performance share award is an Award
denominated in units of stock. The maximum number of shares of Capital Stock
that may be issued under performance share awards and stock ownership incentive
awards shall not exceed 1,800,000. Performance share awards will provide for the
payment of stock if performance goals are achieved over specified Performance
Periods. The maximum possible performance share grant to any single participant
in any Fiscal Year is 120,000 units.
(C) STOCK OWNERSHIP INCENTIVE AWARD -- A stock ownership incentive award is an
award of stock if certain performance goals and stock ownership requirements are
achieved. The maximum possible stock ownership incentive award which may be made
to any single participant in any Fiscal Year is 15,000 shares.
(D) PERFORMANCE CRITERIA UNDER SECTION 162(M) OF THE CODE FOR PERFORMANCE SHARE
AWARDS, AND STOCK OWNERSHIP INCENTIVE AWARDS -- The performance criteria for
performance share awards, and stock ownership incentive awards made to any
"covered employee" (as defined in section 162(m) of the Code), and which are
intended to qualify as "performance-based compensation" (as defined in section
162(m) of the Code), shall consist of objective tests based on one or more of
the following: PNW's earnings per share growth compared to a comparative group
of S&P Electric Utilities; earnings; cash flow; customer satisfaction; revenues;
financial return ratios; market performance; shareholder return and/or value;
operating profits (including earnings before income taxes, depreciation and
amortization); net profits; earnings per share; earnings per share growth;
profit returns and margins; stock price; working capital; business trends;
production cost; project milestones; and plant and equipment performance; as
well as one or more of the following operational measures: safety; environment;
and minimizing customer price per kilowatt hour. Performance criteria may be
measured solely on a corporate, subsidiary or business unit basis, or a
combination thereof. Satisfaction of stock ownership guidelines may also be a
prerequisite to payment.
(E) DETERMINATIONS OF COMMITTEE -- Nothing herein shall preclude the Committee
from making any payments or granting any Awards whether or not such payments or
Awards qualify for tax deductibility under section 162(m) of the Code. No
payments are to be made to a Participant if the applicable performance criteria
are not achieved for a given Performance Period. If the applicable performance
criteria are achieved for a given Performance Period, the Committee has full
discretion to reduce or eliminate the amount otherwise payable for that
Performance Period. Under no circumstances may the Committee use discretion to
increase the amount payable to a Participant under a performance share award, or
a stock ownership incentive award.
6. PAYMENT OF AWARDS.
Payment of Awards shall be made in the form stock and may include such
restrictions as the Committee shall determine. Dividends or dividend equivalent
rights may be extended to and made part of any Award denominated in stock or
units of stock, subject to such terms, conditions and restrictions as the
Committee may establish. At
38
the discretion of the Committee, a Participant may be offered an election to
substitute an Award for another Award or Awards of the same or different type.
7. STOCK OPTION EXERCISE.
The price at which shares of Capital Stock may be purchased under a stock
option shall be paid in full in cash at the time of the exercise or, if
permitted by the Committee, by means of tendering Capital Stock or surrendering
another Award or any combination thereof. The Committee shall determine
acceptable methods of tendering Capital Stock or other Awards and may impose
such conditions on the use of Capital Stock or other Awards to exercise a stock
option as it deems appropriate. In addition, the optionee may effect a "cashless
exercise" of a stock option in which the option shares are sold through a broker
and a portion of the proceeds to cover the exercise price is paid to PNW, or
otherwise in accordance with the rules and procedures adopted by the Committee.
8. TAX WITHHOLDING.
Prior to the payment or settlement of any Award, the Participant must pay,
or make arrangements acceptable to PNW for the payment of, any and all federal,
state and local tax withholding that in the opinion of PNW is required by law.
PNW shall have the right to deduct applicable taxes from any Award payment and
withhold, at the time of delivery or vesting of shares of stock under the Plan,
an appropriate number of shares for payment of taxes required by law or to take
such other action as may be necessary in the opinion of PNW to satisfy all
obligations for withholding of such taxes.
9. TRANSFERABILITY.
No Award shall be transferable, assignable, payable to, or exercisable by,
anyone other than the Participant to whom it was granted, except (a) by will or
the laws of descent and distribution, or (b) that the Committee (in the form of
an Award Agreement or otherwise) may permit transfers of Awards by gift or
otherwise to a member of a Participant's immediate family and/or trusts whose
beneficiaries are members of the Participant's immediate family, or to such
other persons or entities as may be approved by the Committee.
10. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION OF THE PLAN.
The Board may amend, modify, suspend or terminate the Plan for the purpose
of meeting or addressing any changes in law or other legal requirements or for
any other purpose permitted by law; provided, however, that no such amendment,
modification, suspension or termination of the Plan shall adversely affect in
any material way any Award previously granted under the Plan, without the
written consent of the Participant. Subject to changes in law or other legal
requirements that would permit otherwise, the Plan may not be amended without
the approval of the shareholders of PNW, to (a) increase the aggregate number of
shares of Capital Stock that may be issued under the Plan (except for
adjustments pursuant to Section 12), (b) permit the granting of stock options
with exercise prices lower than those specified in Section 5(a), (c) modify the
Plan's eligibility requirements, or (d) change the performance criteria
applicable to Covered Employees.
39
11. TERMINATION OF EMPLOYMENT.
If the employment of a Participant terminates, the status of the Award
shall be as set forth in the Award Agreement; provided, that if a Participant is
covered by a Key Executive Employment and Severance Agreement ("KEESA") which
entitles the Participant's termination to be treated as a "Normal Termination",
if such termination occurs within two years following a Change of Control (as
defined in such KEESA), the Award Agreement shall give such Participant at least
those rights provided for in such KEESA.
12. ADJUSTMENTS.
In the event of any change in the outstanding Capital Stock of PNW by
reason of a stock split, stock dividend, combination or reclassification of
shares, recapitalization, merger, or similar event, the Committee shall adjust
appropriately: (a) the number of shares of Capital Stock (i) available for
issuance under the Plan, (ii) for which Awards may be granted to an individual
Participant set forth in Section 5, and (iii) covered by outstanding Awards
denominated in stock or units of stock; (b) the exercise and grant prices
related to outstanding Awards; and (c) the appropriate Fair Market Value and
other price determinations for such Awards. In the event of any other change
affecting the Capital Stock or any distribution (other than normal cash
dividends) to holders of Capital Stock, such adjustments shall be made in the
number and kind of shares, and the exercise, grant and conversion prices of the
affected Awards (including adjustments to avoid fractional shares) to give
proper effect to such event as may be deemed equitable by the Committee. In the
event of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Committee shall be authorized to
cause PNW to issue or assume stock options, whether or not in a transaction to
which section 424(a) of the Code applies, by means of substitution of new stock
options for previously issued stock options or an assumption of previously
issued stock options. In such event, the aggregate number of shares of Capital
Stock available for issuance under Awards under Section 3, including the
individual Participant maximums set forth in Section 5, will be adjusted to
reflect such substitution or assumption.
13. MISCELLANEOUS.
(A) Any notice to PNW required by any of the provisions of the Plan shall be
addressed to the senior human resources officer of PNW in writing, and shall
become effective when it is received.
(B) The Plan shall be unfunded and the Company shall not be required to
establish any special account or fund or to otherwise segregate or encumber
assets to ensure payment of any Award.
(C) Nothing contained in the Plan shall prevent the Company from adopting other
or additional compensation arrangements or plans, subject to shareholder
approval if such approval is required, and such arrangements or plans may be
either generally applicable or applicable only in specific cases.
(D) No Participant shall have any claim or right to be granted an Award under
the Plan and nothing contained in the Plan shall be deemed or be construed to
give any
40
Participant the right to be retained in the employ of the Company or to
interfere with the right of the Company to discharge any Participant at any time
without regard to the effect such discharge may have upon the Participant under
the Plan. Except to the extent otherwise provided in any plan or in an Award
Agreement, no Award under the Plan shall be deemed compensation for purposes of
computing benefits or contributions under any other plan of the Company.
(E) The Plan and each Award Agreement shall be governed by the laws of the
State of Arizona, excluding any conflicts or choice of law rule or principle
that might otherwise refer construction or interpretation of the Plan to the
substantive law of another jurisdiction. Unless otherwise provided in the Award
Agreement, recipients of an Award under the Plan are deemed to submit to the
exclusive jurisdiction and venue of the federal or state courts of Arizona,
County of Maricopa, to resolve any and all issues that may arise out of or
relate to the Plan or any related Award Agreement.
(F) The Committee shall have full power and authority to interpret the Plan and
to make any determinations thereunder, and the Committee's determinations shall
be binding and conclusive. Determinations made by the Committee under the Plan
need not be uniform and may be made selectively among individuals, whether or
not such individuals are similarly situated.
(G) If any provision of the Plan is or becomes or is deemed invalid, illegal or
unenforceable in any jurisdiction, or would disqualify the Plan or any Award
under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended or limited in scope to conform to applicable laws
or, in the discretion of the Committee, it shall be stricken and the remainder
of the Plan shall remain in full force and effect.
(H) The Plan, as adopted by the Board on March 20, 2002, is subject to approval
of the stockholders of PNW within 12 months of the date it was adopted. Awards
may be granted prior to such approval, but no such Award may be exercised,
vested or settled prior to such approval, and if such approval is not obtained,
any such Award shall be void ab initio and of no force or effect. If such
approval is obtained, no further awards shall be granted under the Pinnacle West
Capital Corporation 1994 Long-Term Incentive Plan, other than awards providing
for the issuance of up to 20,000 shares of stock to be used under such plan to
satisfy PNW's obligations to make stock awards to certain executives.
(I) Subject to earlier termination pursuant to Section 10, the Plan will
terminate on March 19, 2012. Awards outstanding at the termination of the Plan
will not be affected by such termination.
[LOGO] PINNACLE WEST CAPITAL CORPORATION
41
[LOGO]
PINNACLE WEST
CAPITAL CORPORATION
April 8, 2002
Dear Shareholders,
The 2002 Annual Meeting of Shareholders of Pinnacle West Capital Corporation
will be held at the Herberger Theater Center, 222 East Monroe, Phoenix, Arizona
on May 22, 2002 at 10:30 a.m. Mountain Standard Time. At the meeting,
shareholders will be asked (1) to elect one Class I Director to serve until the
2004 Annual Meeting and four Class II Directors to serve until the 2005 Annual
Meeting, (2) to approve an employee incentive plan, and (3) to vote on a
shareholder proposal.
Your vote is important and you may vote your proxy in one of three ways - by
internet, by telephone, or by mail. The reverse side of this letter provides the
information for all three voting options.
We encourage you to attend the meeting and have provided this map for your
reference.
Sincerely,
Faye Widenmann
Vice President and Secretary
[MAP OF DIRECTIONS TO MEETING]
In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of
1934, the map on this proxy card provides directions to the annual meeting. The
meeting will be held at 222 East Monroe Street which is one block north of Adams
Street and one block south of Van Buren Street, between 2nd Street and 3rd
Street.
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PROXY FORM Pinnacle West Capital Corporation PROXY FORM
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 22, 2002.
The undersigned hereby appoints William J. Post and Faye Widenmann, individually
and together, as proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Shareholders of Pinnacle West
Capital Corporation, to be held May 22, 2002, at ten-thirty a.m., Mountain
Standard Time, and at any adjournment thereof, and to vote as specified in this
Proxy all the shares of stock of the Company which the undersigned would be
entitled to vote if personally present. The proxies of the undersigned may vote
according to their discretion on any other matter that may properly come before
the meeting.
Voting with respect to the election of Directors may be indicated on the reverse
of this card. Nominees for Director are: Class I - William L. Stewart; Class II
- Edward N. Basha, Michael L. Gallagher, Bruce J. Nordstrom, and William J.
Post.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE. IF NO SPECIFICATION IS
MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 AND AGAINST PROPOSAL 3.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2 AND AGAINST PROPOSAL 3.
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FOR WITHHOLD FOR AGAINST ABSTAIN
1. Election of Directors [ ] [ ] 2. Approval of the Company's 2002 [ ] [ ] [ ]
Long-Term Incentive Plan
FOR ALL EXCEPT ____________________________ 3. Approval of a shareholder proposal
Nominees:
Class I Class II
------- --------
01. William L. Stewart 02. Edward N. Basha
03. Michael L. Gallagher
04. Bruce J. Nordstrom -----------------------------------------------------------------------
05. William J. Post Signature Date
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Signature Date
All owners should sign as their name appears at left. Fiduciaries,
trustees, corporate officers should indicate title and authority.
Check if: You consent to viewing the Annual Report and Proxy materials
via the internet instead of receiving them in the mail in the future.
================================================================================
Fold and detach here to mail proxy card
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VOTE BY TELEPHONE OR INTERNET
QUICK EASY IMMEDIATE
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Your telephone or internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.
VOTE BY INTERNET
Go to WWW.VOTEYOURPROXY.COM and follow the instructions. Have your proxy card
available when you access the website. You will be prompted to enter the
following information in the order below on the vote screen. Enter all leading
zeros:
Control Number Company Number Account Number
VOTE BY PHONE
Call toll-free 1-888-393-3175 from a touch-tone telephone. Have your proxy card
available when you call. You will be prompted to enter the following number from
your telephone keypad:
(This information must be a 20 digit continuous string - enter all zeros)
Votes cannot be accepted by phone between the hours of 9:00 pm and 2:30 am
Arizona Time.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the enclosed postage-paid
envelope.
IF YOU VOTE BY INTERNET OR PHONE, DO NOT MAIL YOUR PROXY CARD
THANK YOU FOR VOTING.