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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
(AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
PINNACLE WEST CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------
3) Filing Party:
----------------------------------------------------
4) Date Filed:
------------------------------------------------------
[PINNACLE WEST LOGO]
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 21, 2003
To Our Shareholders:
You are invited to attend the 2003 Annual Meeting of shareholders of
Pinnacle West Capital Corporation to be held at the Herberger Theater Center,
222 East Monroe, Phoenix, Arizona at 10:30 a.m. on Wednesday, May 21, 2003. 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 four (4) directors; and
(2) Consideration of a shareholder proposal, if presented, at the meeting.
All shareholders of record at the close of business on March 21, 2003 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,
NANCY C. LOFTIN
NANCY C. LOFTIN
Vice President, General Counsel and Secretary
Approximate date of mailing to shareholders:
April 9, 2003
================================================================================
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
GENERAL INFORMATION....................................................................................1-3
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
WHO IS ENTITLED TO VOTE?
HOW DO I VOTE?
IS MY VOTE CONFIDENTIAL?
WHAT CONSTITUTES A QUORUM?
WHAT ARE THE BOARD'S RECOMMENDATIONS?
WHAT IS REQUIRED TO APPROVE THE ITEMS TO BE VOTED ON?
WILL SHAREHOLDERS BE ASKED TO VOTE ON ANY OTHER MATTERS?
WHO IS ENTITLED TO ATTEND THE ANNUAL MEETING?
CAN I CHANGE MY VOTE AFTER I SUBMIT MY PROXY?
PROPOSAL 1 - ELECTION OF DIRECTORS.....................................................................3-4
WHO WILL BE ELECTED AT THE ANNUAL MEETING?
WHICH DIRECTORS ALSO SERVE ON THE BOARD OF A SUBSIDIARY?
WHO ARE THE CURRENT NOMINEES?
WHICH DIRECTORS WILL CONTINUE IN OFFICE?...............................................................5-6
HOW MANY SHARES OF PINNACLE WEST STOCK ARE OWNED BY MANAGEMENT AND LARGE SHAREHOLDERS?.................7-8
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..................................................8
THE BOARD AND ITS COMMITTEES..........................................................................9-12
HOW OFTEN DID THE BOARD MEET DURING 2002?
WHAT ARE THE COMMITTEES THE BOARD HAS ESTABLISHED?
WHAT ARE THE RESPONSIBILITIES OF THE AUDIT COMMITTEE?
WHAT ARE THE RESPONSIBILITIES OF THE HUMAN RESOURCES COMMITTEE?
WHAT ARE THE RESPONSIBILITIES OF THE CORPORATE GOVERNANCE COMMITTEE?
WHAT ARE THE RESPONSIBILITIES OF THE FINANCE AND OPERATING COMMITTEE?
WHO IS THE BOARD'S PRESIDING DIRECTOR?
HOW ARE DIRECTORS COMPENSATED?
DO WE HAVE INDEPENDENT DIRECTORS?
IS THERE A MANDATORY RETIREMENT AGE FOR DIRECTORS?
AUDIT MATTERS........................................................................................12-13
REPORT OF THE AUDIT COMMITTEE
WHO ARE THE COMPANY'S INDEPENDENT ACCOUNTANTS AND WILL THEY BE AT THE ANNUAL MEETING?
WHAT FEES WERE PAID TO OUR INDEPENDENT ACCOUNTANTS IN 2002?
PERFORMANCE GRAPH.......................................................................................14
EXECUTIVE COMPENSATION...............................................................................15-26
REPORT OF THE HUMAN RESOURCES COMMITTEE
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
WHAT COMPENSATION WAS PAID TO THE NAMED EXECUTIVE OFFICERS IN 2002?
WHAT OPTIONS WERE GRANTED TO THE NAMED EXECUTIVE OFFICERS IN 2002?
WHAT OPTIONS WERE EXERCISED BY THE NAMED EXECUTIVE OFFICERS IN 2002?
WHAT LONG TERM INCENTIVE PLAN AWARDS WERE GIVEN TO THE NAMED EXECUTIVE OFFICERS IN 2002?
WHAT ARE THE COMPANY'S EXECUTIVE BENEFIT PLANS?
PROPOSAL 2 - SHAREHOLDER PROPOSAL....................................................................26-28
WHAT IS THE SHAREHOLDER'S PROPOSAL?
WHAT IS THE BOARD'S RESPONSE TO THE PROPOSAL?
ADDITIONAL INFORMATION..................................................................................29
HOW DO WE SUBMIT SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING?
HOW MANY ANNUAL REPORTS AND PROXY STATEMENTS ARE DELIVERED TO A SHARED ADDRESS?
HOW MUCH DID THIS PROXY SOLICITATION COST?
APPENDIX A - AUDIT COMMITTEE CHARTER.................................................................30-34
APPENDIX B - CORPORATE GOVERNANCE GUIDELINES.........................................................35-37
APPENDIX C - DIRECTOR INDEPENDENCE STANDARDS.........................................................38-39
GENERAL INFORMATION
This proxy statement contains information regarding the Company's 2003
Annual Meeting of shareholders to be held at the Herberger Theater Center, 222
East Monroe, Phoenix, Arizona at 10:30 a.m. on Wednesday, May 21, 2003. 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.
WHO IS ENTITLED TO VOTE?
All shareholders at the close of business on March 21, 2003 (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 "What is required to
approve the items to be voted on?" on page 2 of this proxy statement). At close
of business on the record date there were 91,257,883 shares of common stock
outstanding.
HOW DO I VOTE?
You may vote in person or by a validly designated proxy, or, if you or your
proxy will not be attending the meeting, you may vote in one of three ways:
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 TELEPHONE. The toll-free number for telephone voting is on your
proxy card. Telephone voting is available 24 hours a day; or
VOTE BY MAIL. Mark, date, sign and mail promptly the enclosed proxy card (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.
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 abstentions)
and votes withheld by brokers in the absence of instructions from beneficial
owners (called broker non-votes)
1
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 Proposal 2.
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 the proxy statement. In
summary, the Board recommends a vote:
* FOR election of the nominated slate of directors (see Proposal 1); and
* AGAINST approval of the shareholder proposal (see Proposal 2).
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, their own discretion.
WHAT 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. Abstentions and broker non-votes will not be counted towards a
nominee's total.
OTHER ITEMS. For each other item, the affirmative vote of a majority of the
shares voted on that item will be required for approval. Abstentions and
broker non-votes on a proposal will have no effect on the outcome of the
proposal.
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 holders will vote on those matters in accordance
with the recommendations of the Board of Directors, or, if no recommendations
are given, in accordance with their own judgment. Shareholders attending the
meeting may directly vote on those matters or they may vote by proxy.
WHO IS ENTITLED TO ATTEND THE ANNUAL MEETING?
You or your validly designated proxy may attend the meeting if you were a
shareholder as of the record date; however, the Board of Directors may limit the
number of proxy representatives if a shareholder sends several representatives
to the meeting.
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
2
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.
PROPOSAL 1 - ELECTION OF DIRECTORS
WHO WILL BE ELECTED AT THE ANNUAL MEETING?
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 four (4) Class III directors this year to serve
as members of the Board until the Annual Meeting of shareholders in 2006 or
until their successors are elected and qualified. If one or more of the four (4)
nominees becomes unavailable to serve prior to the meeting date, the persons
named as proxy holders 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 table identifies the Class III director nominees, followed by two
tables identifying continuing directors. Nominees furnished the information as
of March 21, 2003. The term "APS" refers to Arizona Public Service Company, and
the term "PWEC" refers to Pinnacle West Energy Corporation, the Company's
principal subsidiaries.
WHICH DIRECTORS ALSO SERVE ON THE BOARD OF A SUBSIDIARY?
The following Company directors also serve as directors for the following
Company subsidiaries:
Arizona Public Service Company: Messrs. Basha, Davis, Gallagher, Herberger,
Jamieson, Lopez, Matlock, Nordstrom and Post, and Mmes. Grant, Hesse and Munro
Pinnacle West Energy Corporation: Messrs. Basha, Gallagher, Herberger, Jamieson,
Lopez, Matlock, Nordstrom, Post and Stewart, and Mmes. Grant, Hesse and Munro
SunCor Development Company: Messrs. Gallagher, Lopez and Post and Ms. Grant
El Dorado Investment Company: Messrs. Gallagher, Matlock and Post
NAC Holding Inc./NAC International Inc.: Messrs. Matlock and Post
WHO ARE THE CURRENT NOMINEES?
The nominees for election to Class III directors are set forth on the table
on the following page:
3
NOMINEES FOR ELECTION TO CLASS III DIRECTORS
(TERM EXPIRING AT 2006 ANNUAL MEETING)
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS DIRECTOR SINCE
---- --- ------------------------------------ --------------
Jack E. Davis 56 President of the Company since February 2001. 2001
President and Chief Executive Officer of APS since
September 2002. From October 1998 until September
2002, Mr. Davis served as President, Energy
Delivery and Sales of APS. Mr. Davis 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: 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 64 Civic leader. President of TableScapes, Inc. 1985
(party supply rentals) from July 1989 through
January 1995. 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 60 President of Hesse Gas Company since 1990. In 1991
1990, Ms. Hesse served as 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 Laidlaw Inc., Terra Industries Inc.,
Mutual Trust Life Insurance Company and AMEC plc.
William S. Jamieson, Jr. 59 President of the Institute for Servant Leadership 1991
of 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.
4
WHICH DIRECTORS WILL CONTINUE IN OFFICE?
The incumbent directors are set forth on the tables below and on the following
page:
INCUMBENT CLASS I DIRECTORS
(TERM EXPIRING AT 2004 ANNUAL MEETING)
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS DIRECTOR SINCE
---- --- ------------------------------------ --------------
Roy A. Herberger, Jr. 60 President of Thunderbird, The American Graduate 1992
School of International Management, since 1989.
Mr. Herberger is also a director of Action
Performance Companies, Inc.
Humberto S. Lopez 57 President of HSL Properties (real estate 1995
development and investment), Tucson, Arizona since
1975. Mr. Lopez is also a director of Bank of
Tucson and Capitol Bancorp Ltd.
Robert G. Matlock 69 Independent management consultant since 1984 to 2000
various governmental agencies involved in
developing nuclear energy resources and to
utilities operating nuclear facilities.
Kathryn L. Munro 54 Chairman of BridgeWest LLC (investment company) 2000
since 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 Capitol Bancorp Ltd.
William L. Stewart 59 Mr. Stewart announced his retirement from the 2001
Company effective December 1, 2003. Mr. Stewart
will be transitioning his duties to other officers
in the Company until his retirement. Mr. Stewart
served as Chief Executive Officer of PWEC from
October 2002 until January 2003 and President of
PWEC from October 1999 until January 2003. Mr.
Stewart served as President, Generation, of APS
from October 1998 to October 2002. 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. Mr. Stewart will
remain on the Board of Directors following his
retirement.
5
INCUMBENT CLASS II DIRECTORS
(TERM EXPIRING AT 2005 ANNUAL MEETING)
NAME AGE OCCUPATION, BUSINESS & DIRECTORSHIPS DIRECTOR SINCE
---- --- ------------------------------------ --------------
Edward N. Basha, Jr. 65 Chairman of the Board of Bashas' supermarket chain 1999
since 1968 and an Arizona civic leader dedicated
to multiple Arizona community projects.
Michael L. Gallagher 58 Attorney-at-law and Chairman Emeritus of Gallagher 1999
& Kennedy, PA, Phoenix, Arizona.
Bruce J. Nordstrom 53 Certified public accountant at the firm of 2000
Nordstrom and Associates, PC, Flagstaff, Arizona,
since 1988.
William J. Post 52 Chairman of the Board of the Company since 1997
February 2001 and 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 Chairman of the Board of APS and
PWEC, and has held various officer positions at
APS since 1982. He is also a director of Phelps
Dodge Corporation.
6
HOW MANY SHARES OF PINNACLE WEST STOCK ARE OWNED BY MANAGEMENT AND LARGE
SHAREHOLDERS?
The following table shows the amount of Pinnacle West common stock
owned by our directors, nominees, named executive officers, other executive
officers and those persons who beneficially own 5% or more of our common stock.
Unless otherwise indicated, each shareholder listed below has sole voting and
investment power with respect to the shares beneficially owned.
The address of listed shareholders not otherwise set forth below is
P.O. Box 52132, Phoenix, Arizona 85072-2132. Unless otherwise indicated, all
information is as of March 21, 2003, the record date for the Annual Meeting.
NUMBER OF SHARES SHARES ACQUIRABLE
NAME BENEFICIALLY OWNED (1) WITHIN 60 DAYS (2) PERCENT OF CLASS
- ----------------------------------------------- ---------------------- ------------------ ----------------
DIRECTORS AND NOMINEES:
- -----------------------------------------------
Edward N. Basha, Jr. 5,735 0 *
Jack E. Davis 44,945 65,750 *
Michael L. Gallagher 5,491 0 *
Pamela Grant 15,749 7,000 (3) *
Roy A. Herberger, Jr. 10,460 0 *
Martha O. Hesse 12,858 7,000 (3) *
William S. Jamieson, Jr. 7,790 0 *
Humberto S. Lopez 26,447 0 *
Robert G. Matlock 5,589 0 *
Kathryn L. Munro 4,014 0 *
Bruce J. Nordstrom 6,528 0 *
William J. Post 62,871 246,000 *
William L. Stewart 50,063 60,416 *
OTHER OFFICERS NAMED ON PAGE 20:
- -----------------------------------------------
James M. Levine 33,259 34,001 *
Steven M. Wheeler 6,104 3,834 *
ALL DIRECTORS, NOMINEES, NAMED OFFICERS, AND
EXECUTIVE OFFICERS AS A GROUP (25 PERSONS) (4): 425,235 615,636 1.14%
5% BENEFICIAL OWNERS (5):
- -----------------------------------------------
Wellington Management Company LLP 12,083,861 13.37%
75 State Street
Boston, MA 02109
J.P. Morgan Chase & Co. 8,072,664 8.9%
270 Park Ave.
New York, NY 10017
7
NUMBER OF SHARES SHARES ACQUIRABLE
NAME BENEFICIALLY OWNED (1) WITHIN 60 DAYS (2) PERCENT OF CLASS
- ----------------------------------------------- ---------------------- ------------------ ----------------
5% BENEFICIAL OWNERS (5):
- -----------------------------------------------
Barclays Global Investors, N.A. and 5,491,765 6.07%
Affiliates
45 Freemont Street
San Francisco, CA 94105
- ----------
*Represents less than 1% of the outstanding common stock.
(1) Does not include shares that could be purchased by the exercise of
options available at March 21, 2003 or within 60 days thereafter under
the Company's stock option plans. Those shares are shown in a separate
column on this table.
(2) Reflects the number of shares that could be purchased by the exercise
of options available at March 21, 2003 or within 60 days thereafter
under the Company's stock option plans.
(3) These options were provided to Mmes. Grant and Hesse in lieu of
director's fees under the Director's Stock Option Plan, adopted in
July 1990, which was discontinued in 1994.
(4) Number of shares beneficially owned in table includes shares held in
joint tenancy, joint trust and/or family trusts.
(5) Wellington Management Company, LLP Schedule 13G filing, dated February
14, 2003, reports beneficial ownership of 12,083,861 shares with
shared voting power as to 5,206,622 and shared dispositive power as to
12,083,861 shares. J. P. Morgan Chase & Co. Schedule 13G filing, dated
February 10, 2003, reports beneficial ownership of shares with shared
voting power as to 123,898 shares and shared dispositive power as to
341,425 shares. Barclays Global Investors, N.A. and affiliates 13G
filing, dated February 10, 2003. 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, 2002.
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
("SEC"). 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) 2002
reporting requirements on a timely basis.
8
THE BOARD AND ITS COMMITTEES
HOW OFTEN DID THE BOARD MEET DURING 2002?
The full Board of Directors met twelve (12) times during 2002. Each
director attended at least ninety-five percent of the meetings of the full Board
and any committees on which he or she served.
WHAT ARE THE COMMITTEES THE BOARD HAS ESTABLISHED?
The Board has a standing Audit Committee, Human Resources Committee,
Corporate Governance Committee and Finance and Operating Committee. The Audit
Committee, Human Resources Committee and Corporate Governance Committee are made
up of independent directors (see "Do we have independent directors" below). The
following table sets forth the membership of these committees as of the date of
this proxy statement:
HUMAN CORPORATE FINANCE AND
AUDIT RESOURCES GOVERNANCE OPERATING
DIRECTOR COMMITTEE COMMITTEE COMMITTEE COMMITTEE
- -------- --------- --------- --------- ---------
Edward N. Basha, Jr. * *
Jack E. Davis *
Michael L. Gallagher * **
Pamela Grant * ** *
Roy A. Herberger, Jr. * * **
Martha O. Hesse ** * *
William S. Jamieson, Jr. * *
Humberto S. Lopez * *
Robert G. Matlock * *
Kathryn L. Munro * *
Bruce J. Nordstrom * *
William J. Post *
- ----------
* Member
** Chair
WHAT ARE THE RESPONSIBILITIES OF THE AUDIT COMMITTEE?
The functions of the Audit Committee, which held seven (7) meetings in
2002, are to assist the Board in fulfilling its responsibility for oversight of
(1) the integrity of the financial statements of the Company, (2) the
independent auditor's qualifications and independence, (3) the performance of
the Company's internal audit function and independent auditors, and (4) the
compliance by the Company with legal and regulatory requirements and ethical
standards. The Audit Committee has the sole responsibility for the appointment,
compensation and oversight of the Company's independent auditors. The Board
revised the written charter for the Audit Committee, and the revised charter is
attached to this proxy statement as APPENDIX A. Members of the Audit Committee
are independent as defined in Section 303.01 of the New York Stock Exchange
("NYSE") Listed Company Manual Rules; proposed NYSE Listed Company Manual Rules
(the "NYSE Proposed Rules"), which are discussed below; proposed SEC rules
defining audit committee member independence under Section 301 of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"); and the Company's Director
Independence Standards. The Board has also determined that Ms. Hesse, the Chair
of the Audit Committee, is an "audit committee financial expert" within the
meaning of the SEC rules implementing Section 407 of Sarbanes-Oxley.
9
WHAT ARE THE RESPONSIBILITIES OF THE HUMAN RESOURCES COMMITTEE?
The functions of the Human Resources Committee, which held seven (7)
meetings in 2002, are to review the Company's general compensation strategy;
review and approve policies on compensation, benefits, and perquisites,
including incentive cash-compensation plans, equity participation, or other
forms of executive incentives; review and approve corporate goals and objectives
relevant to the compensation of the Chief Executive Officer (the "CEO"), assess
the CEO's performance in light of these goals and objectives, and set the CEO's
compensation level based on this assessment; recommend persons to the full Board
for election or appointment as officers; and recommend to the full Board the
form and amount of director compensation. Members of the Human Resources
Committee are independent as defined in the NYSE Proposed Rules and the
Company's Director Independence Standards.
WHAT ARE THE RESPONSIBILITIES OF THE CORPORATE GOVERNANCE COMMITTEE?
The Corporate Governance Committee is responsible for developing policies
and practices relating to corporate governance, including the development of the
Company's Corporate Governance Guidelines, which are attached to this proxy
statement as APPENDIX B. Additional functions of the Corporate Governance
Committee include the identification of individuals qualified to become members
of the Board of Directors and to recommend director nominees to the full Board.
Any shareholder wishing to propose a nominee should submit a recommendation in
writing to the Company's Corporate Secretary in accordance with the applicable
provisions of the Company's Articles of Incorporation and Bylaws. The Corporate
Secretary must receive the nomination no later than November 21, 2003. Copies of
the Company's Articles of Incorporation and Bylaws are available upon written
request of the Corporate Secretary.
The Corporate Governance Committee consists of all of the Company's
non-management directors, each of whom is independent under the NYSE Proposed
Rules and the Company's Director Independence Standards. The NYSE Proposed Rules
require that non-management directors meet at regularly scheduled sessions
without management. The Company voluntarily elected to comply with the NYSE
Proposed Rules. The Corporate Governance Committee met once in 2002 without
management present. In addition, non-management members of the Board of
Directors also met two (2) times in 2002.
WHAT ARE THE RESPONSIBILITIES OF THE FINANCE AND OPERATING COMMITTEE?
The responsibilities of the Finance and Operating Committee include
reviewing the Company's historical and projected financial performance and
maintaining an awareness of issues affecting the Company's financial condition;
and reviewing and recommending Board action on Company construction budgets,
financing plans, investment strategies relating to Company benefit plans and
nuclear decommissioning funds. The Finance and Operating Committee held seven
(7) meetings in 2002.
WHO IS THE BOARD'S PRESIDING DIRECTOR?
In September 2002, the Board created a new position of presiding director,
whose responsibility is to preside over the periodic executive sessions of the
Board of Directors in which management directors and other members of management
do not participate. The presiding director also oversees the annual
self-assessment process of the Board of Directors and Board Committees.
10
The non-management members of the Board of Directors have designated Michael L.
Gallagher to serve in this position. Shareholders and other interested parties
interested in communicating directly with the presiding director or with the
non-management directors as a group may do so in writing to Presiding Director,
Pinnacle West Capital Corporation, Station 9068, P.O. Box 53999, Phoenix,
Arizona 85072-3999.
HOW ARE DIRECTORS COMPENSATED?
Only non-employee (outside) directors are compensated for Board service.
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 option grants have been made under the plan.
Directors are paid $900 for each Board meeting attended and $700 for each
committee meeting attended. Company directors who also serve as directors of the
APS and PWEC Boards do so for no additional compensation. Company directors who
serve on the SunCor Board or the El Dorado Board receive $5,000 in annual
retainer fees and $500 for each Board meeting attended. Company directors who
serve on the NAC Board receive $6,000 in annual retainer fees and $500 for each
Board meeting attended. As noted above, Messrs. Gallagher and Lopez and Ms.
Grant serve as directors of SunCor, Messrs. Gallagher and Matlock serve as
directors of El Dorado, and Mr. Matlock serves as a director of NAC. In
addition, one director (currently Mr. Matlock) serves as the Board's liaison to
the APS nuclear oversight group, for which the director receives $5,000 per
quarter in additional director's fees.
DO WE HAVE INDEPENDENT DIRECTORS?
The NYSE has proposed amendments to the NYSE Listed Company Manual Rules,
which if adopted, will require companies listed on the NYSE to have a majority
of independent directors. The NYSE Proposed Rules describe certain relationships
that prevent a director from being independent and require a company's board of
directors to make director independence determinations in all other
circumstances. The Company has voluntarily elected to comply with the NYSE
director independence requirements in advance of the adoption of the NYSE
Proposed Rules. In March 2003, the Company's Board of Directors adopted Director
Independence Standards to assist it in determining each director's independence.
These Director Independence Standards are attached to this proxy statement as
APPENDIX C. The Board recognizes that the final rules ultimately adopted may
require modification to the Director Independence Standards or ratification or
reevaluation of director independence determinations.
In accordance with the NYSE Proposed Rules and the Director Independence
Standards, the Board of Directors has determined that ten (10) of the Company's
thirteen (13) directors are independent. The ten (10) independent directors are
Messrs. Basha, Gallagher, Herberger, Jamieson, Lopez, Matlock and Nordstrom and
Mmes. Grant, Hesse and Munro. Messrs. Davis, Stewart and Post are not
independent because of their employment with the Company.
11
IS THERE A MANDATORY RETIREMENT AGE FOR DIRECTORS?
Yes. Section 3.02 of the Company's Bylaws provides that a person will not
qualify for election as a director, whether initially or on re-election, or by
appointment, if such person's 70th birthday occurs on or has occurred before the
date of such election, re-election or appointment.
AUDIT MATTERS
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors submitted the following audit
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 (1) the integrity of the financial
statements of the Company, (2) the independent auditor's qualifications and
independence, (3) the performance of the Company's internal audit function and
independent auditors, and (4) the compliance by the Company with legal and
regulatory requirements and ethical standards. The Audit Committee has the sole
responsibility for the appointment, compensation and oversight of the Company's
independent auditors. As part of its responsibility regarding the oversight of
the independent auditors, the Audit Committee has a policy of requiring the lead
audit partner to rotate every five years. Consistent with Sarbanes-Oxley, the
Audit Committee reviewed the Company's June 30, 2002 and September 30, 2002 Form
10-Q Reports with management, the Company's independent auditor, and the
Company's internal auditors before such documents were filed with the SEC. As
part of that review, the Audit Committee reviewed the Company's disclosure
controls and procedures and the process by which the Company's chief executive
officer and chief financial officer satisfied their obligations to certify
certain aspects of the Company's SEC filings pursuant to SEC requirements and
Sections 302 and 906 of Sarbanes-Oxley. During the 2002 fiscal year, the Audit
Committee met seven (7) 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 Audit Committee further determined that
the other services provided to the Company for which the auditor received the
fees disclosed on page 13 of this proxy statement were compatible with
maintaining 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 discussed and reviewed the audited financial statements
of the Company as of and for the fiscal year ended December 31, 2002, with the
Company's management,
12
director of audit services 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 aforementioned 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, 2002, for filing with the SEC.
The Audit Committee has approved the retention of Deloitte & Touche LLP to
serve as independent auditor for the Company for 2003.
COMMITTEE CHAIRMAN COMMITTEE MEMBERS
Martha O. Hesse Edward N. Basha, Jr.
Pamela Grant
Humberto S. Lopez
Bruce J. Nordstrom
WHO ARE THE COMPANY'S INDEPENDENT ACCOUNTANTS AND WILL THEY BE AT THE ANNUAL
MEETING?
As noted above, the Audit Committee has approved the retention of Deloitte
& Touche LLP, independent certified public accountants, to examine the Company's
financial statements for the year ending December 31, 2003. 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.
WHAT FEES WERE PAID TO OUR INDEPENDENT ACCOUNTANTS IN 2002?
AUDIT FEES: The aggregate fees billed for Deloitte & Touche LLP services
rendered for the audit of the Company's annual financial statement for 2002 and
for review of financial statements included in Forms 10-Q were $1,029,900.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: Deloitte &
Touche LLP rendered no services or bills for financial information systems and
implementation in 2002.
ALL OTHER FEES: The aggregate fees billed for Deloitte & Touche LLP
services rendered for all services in 2002, other than the audit services
described above, were $994,506. This amount includes $684,865 for audit-related
services and $309,641 for other services.
13
PERFORMANCE GRAPH
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 1997 in Company stock
and in the market represented by each of the two indices, and that any dividends
were reinvested.
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Pinnacle West 100 103 77 124 113 97
S&P 500 Index 100 129 156 141 125 97
EEI Electric Index 100 114 93 137 125 107
[GRAPH]
14
EXECUTIVE COMPENSATION
REPORT OF THE HUMAN RESOURCES COMMITTEE
The Human Resources Committee of the Board of Directors submitted the
following report on executive compensation for the fiscal year ended December
31, 2002:
WHAT ARE THE COMMITTEE'S RESPONSIBILITIES?
The Human Resources Committee of the Board of Directors of Pinnacle West
Capital Corporation is responsible for compensation matters regarding executive
officers. The duties of the Committee include the review of management's plans
and programs for the attraction, retention, succession, motivation and
development of the human resources needed to achieve corporate objectives. The
Committee also reviews and approves policies on compensation, benefits, and
perquisites, including incentive cash-compensation plans, equity participation
or other forms of executive incentives. The Committee annually reviews the goals
and performance of all executive officers of the Company, including a review of
all compensation, benefits, and perquisites for such officers, in order to
ensure that there is equity in the compensation practices and general integrity
in conforming to approved plans and policies.
ARE THE MEMBERS OF THE COMMITTEE INDEPENDENT?
The Board of Directors has determined the members of the Committee are
independent under the NYSE Proposed Rules and the Company's Director
Independence Standards (see APPENDIX C beginning on page 38). To further ensure
the Committee's independence, the Committee has sole authority to retain and
terminate any consulting firm used to assist in the evaluation of director, CEO
or senior executive compensation, including sole authority to approve the
consulting firm's fees and other retention terms.
WHAT ARE THE OBJECTIVES OF THE COMPANY'S COMPENSATION PROGRAM?
The objectives of the Company's executive compensation program are to
encourage outstanding performance and promote shareholder return by:
* aligning the financial interests of the Company's key leaders with
those of the Company's shareholders, on both a short-term and a
long-term basis;
* providing incentives for achieving and exceeding the Company's
short-term and long-term objectives; and
* attracting, retaining and rewarding key leaders critical to the
Company's success by providing competitive total compensation.
WHAT ARE THE COMPONENTS OF THE COMPANY'S COMPENSATION PROGRAM?
In late 2001, the Committee, together with an outside executive
compensation consultant, undertook a comprehensive and in-depth evaluation of
the Company's historical and prospective executive compensation policies. The
consultant provided detailed compensation analyses to the Committee for
determining the competitiveness of the Company's compensation components and
provided guidance to the Committee in establishing an executive compensation
plan. The consultant
15
provided numerous compensation scenarios and plan design alternatives to the
Committee to assist the Committee in determining a comprehensive compensation
strategy. The resulting compensation analysis consisted of a blended market
comprised of 50% weighted for the utility labor market and 50% weighted for the
general industry labor market, adjusted for the Company's size and taking into
account the specific duties assigned to each executive officer.
The Committee formulated its views about the responsibilities, skills,
expertise and performance of all executive officers, with input from Messrs.
Post, Davis and Stewart regarding performances other than their own, and applied
these views in conjunction with information provided by the consultant. The
Company's compensation program consists of three major elements: base salary,
annual incentives and long-term incentives.
BASE SALARY. The Committee reviews competitive salary information and
individual salaries for executive officers on an annual basis. In determining
individual salaries, the Committee considers the scope of job responsibilities,
individual contributions, business performance and current compensation compared
to market practices. Except with respect to Mr. Post, who is discussed
separately below, the base salaries paid to the Company's executive officers
during 2002 overall were competitive with the median salaries in both the
utility industry and the compensation analysis blended market.
ANNUAL INCENTIVES. The Company has used incentive programs for all its
employees for a number of years. For 2002, except with respect to Mr. Post, who
is discussed separately below, the Committee established an incentive payment
program for executive officers based upon Company earnings and business unit
performance objectives. For 2002, the incentive opportunities were designed to
pay out total cash compensation (base salary plus incentive) at or near the
median of the compensation analysis if performance objectives were achieved.
The Committee assessed the attainment levels of the performance objectives
in early 2003. The Committee recommended to the Board, and the Board awarded,
incentive payments to executive officers based primarily on the exceptional
operational performance of the Company's core business units. Examples of
exceptional operational performance in 2002 include the following: APS reduced
its retail rates by 1.5%, resulting in an overall reduction of 14.5% since 1994;
APS was rated as the highest investor owned utility in the West for customer
satisfaction by its residential and mid-sized customers; APS met the demands of
customer growth, which growth was three times the national average; APS had its
best service reliability since 1995, in part by substantially upgrading the APS
transmission and distribution system; the Company added more than 1,100
megawatts of new generating capacity on time and under budget; and the Palo
Verde Nuclear Generating Station achieved a record 30.8 billion kilowatt hours
of output and a 94.4% capacity factor while maintaining an outstanding safety
record. The Committee also took note of the fact that earnings were below the
target primarily due to non-recurring charges, including charges resulting from
the Company's voluntary workforce reduction (which is expected to produce
expense savings of $30 million before taxes in 2003) and the cancellation of
Redhawk Units 3 and 4 (which will substantially improve future year cash flows
and reduce the Company's exposure to risk in the merchant industry sector). The
awards were at or near 25% of the maximum incentive opportunity, and are
reflected in the bonus column of the Summary Compensation Table on page 20.
Messrs. Stewart and Levine also received additional incentive compensation
based upon the achievement of nuclear operational objectives. This compensation
is included in the bonus column of the Summary Compensation Table on page 20.
16
LONG-TERM INCENTIVES. The Committee believes 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, performance shares and stock ownership
incentives, which create a personal investment in the Company, serve as
significant components of the total compensation package for officers and key
management employees of the Company and its subsidiaries.
The Committee believes senior management of the Company and its
subsidiaries should have a significant, ongoing personal investment in the
Company. To that end, awards tied to Company stock, in addition to being
compensatory in nature, are used to encourage targeted levels of individual
stock ownership.
To promote the Company's long-term incentive objectives, the Company sought
and obtained shareholder approval of the Pinnacle West Capital Corporation 2002
Long-Term Incentive Plan (the "2002 Plan") at the 2002 Annual Meeting. Awards
and grants under the 2002 Plan are made at the discretion of the committee
responsible for administering the 2002 Plan. In June 2002, three forms of awards
were granted under the 2002 Plan to executive officers and other key employees.
The types of awards and the terms of the awards under the 2002 grants were as
follows:
* Performance-accelerated stock options. Under these awards, the stock
options vest 33% each year; however, the last two vesting periods of
the normal three-year vesting period will be accelerated by up to one
year if the Company's annual earnings per share growth exceeds that of
the S&P Electric Utilities Index. Value to the executive is determined
through the stock option component only when the Company's stock price
appreciates above the price at the time the option was granted. The
2002 stock options were granted at an exercise price of $38.37 per
share. See the 2002 Option Grants Table on page 21 of this proxy
statement for additional information about the 2002 option grants.
* Performance share awards. Under these awards, each recipient is
entitled to receive shares of common stock at the end of a three-year
period based upon the Company's earnings per share growth rate during
that three-year period compared to the earnings per share growth rate
of all relevant companies in the S&P Electric Utilities Index. For the
performance share awards granted in 2002, the three-year performance
period is from January 1, 2002 to December 31, 2004. The earnings per
share growth rate for the three-year performance period is the
compounded annual-growth rate of a company's earnings per share from
continuing operations, on a fully diluted basis, during the three-year
period. The amount of shares awarded is determined by the Company's
relative percentile ranking in the Index during the three year
performance period. See the 2002 Performance Share Awards table on
page 22 of this proxy statement for additional information regarding
2002 performance share awards.
* Stock ownership awards. Under these awards, each recipient who owned
an amount of stock equal to a specified multiple of base salary, was
entitled to receive up to 4% of the number of shares of common stock
owned by the recipient during 2002 if the Company's 2002 earnings met
a specified threshold. The share ownership requirements for executive
officers are 5 times base salary in the case of the CEO; 3 times base
salary in the case of the presidents of the Company, APS, and PWEC; 2
times base salary in the case of executive vice presidents and senior
vice presidents; and 1.75 times base salary in the case of all other
officers. The 2002 earnings threshold was not met, so no common stock
was granted under the stock ownership awards.
17
A select 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 by allocating equity awards based on the
executive's contributions to the organization.
OTHER PROGRAMS. The Company also provides its officers and key managers
with life and medical insurance; pension, savings and compensation deferral
programs; and other benefits and perquisites that are competitive with market
practices.
HOW IS THE COMPANY'S CEO COMPENSATED?
The Committee reviews and approves corporate goals and objectives relevant
to the CEO's compensation, assesses the CEO's performance in light of these
goals and objectives and sets the CEO's compensation level based on this
assessment. In determining the CEO's compensation, the Committee considers the
Company's performance and relative shareholder return, the value of incentive
awards to chief executive officers at comparable companies, and the awards given
to the CEO in past years. As part of the Committee's strategy in aligning CEO
compensation with Company performance and shareholder return, Mr. Post's total
annual compensation is targeted at the median of the compensation analysis;
however, his base salary is designed to be below the median of the compensation
analysis, with an offsetting higher annual incentive opportunity, so that if
performance objectives are met, Mr. Post's total cash compensation would be
competitive. In 2002, his total annual compensation was below the median.
In December 2002, 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 was increased from $600,000 to $750,000. This was the
first increase in Mr. Post's base salary since November 2000. The Committee
provided this increase to Mr. Post in order to recognize his contributions to
the Company and in order to move his base salary closer to the median of the
compensation analysis. However, consistent with the compensation approach
discussed in the preceding paragraph, his salary still remains below the median
salary level of chief executive officers in the compensation analysis.
For 2002, the Committee established an incentive payment program for Mr.
Post based upon Company earnings and individual performance. The award granted
to Mr. Post under his annual incentive program was $250,000, or approximately
17% of his maximum incentive opportunity. Mr. Post's maximum award opportunity
under this program was 200% of his base salary. During 2002, Mr. Post was also
granted the stock options, performance shares and stock ownership incentives
reflected in the Summary Compensation Table on page 20. These awards are
intended to meet the compensation objectives discussed above.
18
HOW IS THE COMPANY ADDRESSING INTERNAL REVENUE CODE LIMITS ON DEDUCTIBILITY OF
COMPENSATION?
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
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Human Resources Committee is or has been an
employee of the Company. 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. Mr. Gallagher is Chairman
Emeritus of Gallagher & Kennedy, PA, a law firm which provided legal services to
the Company in 2002 and which will provide such services in 2003. APS had 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 2002, the Company paid this company $14,272.00 for consulting
services and expenses relating to the Company's nuclear operations. This
consulting agreement was mutually terminated as of August 27, 2002.
WHAT COMPENSATION WAS PAID TO THE NAMED EXECUTIVE OFFICERS IN 2002?
The table on the following page sets forth information concerning total
compensation paid to the Company's CEO and the four other most highly
compensated executive officers of the Company who served in such capacities as
of December 31, 2002 (the "named executive officers") for services rendered in
all capacities to the Company and its subsidiaries.
19
SUMMARY COMPENSATION TABLE
ALL OTHER
LONG-TERM COMPENSATION COMPEN-
NAME AND POSITION YEAR ANNUAL COMPENSATION AWARDS SATION (2)
- -------------------------------------- ---- ------------------------ ----------------------- ----------
RESTRICTED
STOCK
AWARDS ($)
SALARY ($) BONUS ($) (1) OPTIONS ($)
- -------------------------------------- ---- ---------- --------- ---------- ------- -------
William J. Post 2002 601,250 250,000 0 108,000 56,982
Chairman of the Board and CEO and 2001 600,000 900,000 548,730 65,000 34,004
Chairman of the Board of APS 2000 519,000 540,000 572,390 65,000 21,107
Jack E. Davis 2002 535,094 104,203 76,740 51,500 53,411
President of the Company and 2001 432,817 337,503 306,022 26,250 28,966
President and CEO of APS 2000 396,253 268,231 319,218 46,250 17,000
William L. Stewart 2002 464,925 195,547 76,740 45,500 41,727
Retiring CEO and President of PWEC 2001 464,000 390,521 306,022 26,250 32,499
2000 464,000 526,812 319,218 26,250 27,747
James M. Levine 2002 434,096 170,183 76,740 15,625 80,897
Executive Vice President of APS 2001 328,338 267,944 109,746 13,000 42,339
Generation and CEO of PWEC 2000 320,004 178,924 114,478 13,000 24,143
Steven M. Wheeler (3) 2002 286,934 39,000 0 13,750 9,056
Senior Vice President, Regulation 2001 137,502 243,002 381,483 11,500 1,123
System Planning and Operations of APS
- ----------
(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, Levine, Stewart and Wheeler in the
subsequent sentences, 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 by the Human
Resources Committee at the time of the grant. During 2002, Messrs. Stewart,
Davis and Levine received 2,000 shares of restricted stock that vested upon
the date of grant. During 2001, Mr. Wheeler received 6,000 shares of
restricted stock of which 3,000 shares vested upon his arrival at the
Company and the remaining 3,000 shares vested on the first anniversary of
his date of hire. Any dividends paid on the 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 2002 were:
Mr. Post - 27,350 shares, $932,362; Mr. Stewart - 10,500 shares, $357,945;
Mr. Davis - 10,500 shares, $357,945; Mr. Levine - 5,200 shares, $177,268;
Mr. Wheeler - 2,300 shares, $78,407. In addition, as shown on page 22 of
this proxy statement, in the 2002 Performance Share Awards table, the named
executive officers were granted long-term incentive plan awards. Under the
terms of the grants, whether a common stock payment, if any, is made will
not be determined until after the end of the performance period. However,
in accordance with SEC reporting requirements, the number (based on target)
and value (at market) of the 2002 Performance Share Awards as of the end of
2002 were: Mr. Post - 21,600 shares, $736,344; Mr. Stewart - 9,100 shares,
$310,219; Mr. Davis - 10,300 shares, $351,127; Mr. Levine - 3,125 shares,
$106,531; and Mr. Wheeler - 2,750 shares, $93,748.
(2) The amounts in this column for 2002 consist of Company matching
contributions to the Company's employees' savings plan: Mr. Post - $5,500,
Mr. Davis - $5,500, Mr. Levine - $5,500, and Mr. Wheeler - $2,595; the
above-market portion of interest accrued under a deferred compensation
plan: Mr. Post - $44,987, Mr. Davis - $47,911, Mr. Stewart - $20,103, Mr.
Levine - $73,310, and Mr. Wheeler - $6,461, and life insurance premiums
(and gross-up on the premium for Mr. Stewart) paid by the Company for: Mr.
Post - $6,495, Mr. Stewart - $21,624, and Mr. Levine - $2,087.
(3) Mr. Wheeler joined the Company as an executive officer in June of 2001.
20
WHAT OPTIONS WERE GRANTED TO THE NAMED EXECUTIVE OFFICERS IN 2002?
The following table sets forth information with respect to option grants to
the named executive officers during 2002. In the third quarter of 2002, the
Company changed to the fair value method of accounting for stock-based
compensation, as provided for in SFAS No. 123. The fair value method of
accounting is the preferred method. In accordance with the transition
requirements of SFAS No. 123, the Company applied the fair method prospectively,
beginning with the 2002 stock grants. In prior years, we recognized expense
based on the intrinsic value method allowed in APB No. 25.
OPTION GRANTS DURING 2002
PERFORMANCE PERCENTAGE OF
OPTIONS GRANTED TOTAL OPTIONS
IN 2002 GRANTED TO ALL EXERCISE PRICE GRANT DATE
NAME (SHARES) (1) EMPLOYEES IN 2002 (PER SHARE) EXPIRATION DATE PRESENT VALUE (2)
- ---- ------------ ----------------- ----------- --------------- -----------------
William J. Post 108,000 17.88% $38.37 6/18/2012 $665,194
Jack E. Davis 51,500 8.53% $38.37 6/18/2012 $317,199
William L. Stewart 45,500 7.53% $38.37 6/18/2012 $280,244
James M. Levine 15,625 2.59% $38.37 6/18/2012 $ 96,238
Steven M. Wheeler 13,750 2.28% $38.37 6/18/2012 $ 84,689
- ----------
(1) Performance Options are subject to special vesting schedules that may be
accelerated based upon the achievement of pre-established performance
targets determined by the Committee. Options vest annually in installments
of 33% per year beginning on the first anniversary of the date of grant.
Upon achievement of the annual performance targets, the vesting period will
be accelerated by as much as one year. All options not already exercisable
will become exercisable if an individual retires on or after the age of 60
or, at the Human Resources Committee's discretion, 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
22.59%; risk-free rate of return of 4.17%; dividend yield of 4.17%; and
time to exercise of five years. The actual value to an executive, if any,
will depend on whether the stock price appreciates above the exercise price
at the time the option is exercised. The grant date present value set forth
in the table is provided in accordance with the valuation methodology set
forth in the SEC requirements.
WHAT OPTIONS WERE EXERCISED BY THE NAMED EXECUTIVE OFFICERS IN 2002?
The table set forth on the following page provides information with respect
to options exercised by the named executive officers and year-end values.
21
OPTION EXERCISES IN 2002 AND YEAR-END VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (2)
ACQUIRED ON VALUE ------------------------------- ------------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
William J. Post 0 0 232,000 201,000 $414,630 $0
Jack E. Davis 12,499 191,191 (3) 59,083 84,417 $0 $46,202
William L. Stewart 0 0 60,416 71,750 $0 $0
James M. Levine 12,000 187,920 (3) 34,001 28,624 $0 $0
Steven M. Wheeler 0 0 3,834 21,416 $0 $0
- ----------
(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, 2002 ($34.09 per share) minus the exercise price of
options.
(3) Messrs. Davis and Levine retained all shares received upon the exercise of
options, except for those sold solely for the purpose of meeting option
costs and tax-withholding requirements.
WHAT LONG TERM INCENTIVE PLAN AWARDS WERE GIVEN TO THE NAMED EXECUTIVE OFFICERS
IN 2002?
The following table sets forth information with respect to long-term
incentive awards to the Company's named executive officers during 2002. For
additional information regarding these awards, see "Report of the Human
Resources Committee - Long-Term Incentives" on page 17.
2002 PERFORMANCE SHARE AWARDS
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE BASED PLANS
----------------------------------------------------------
NUMBER PERFORMANCE PERIOD BELOW ABOVE
NAME OF SHARES UNTIL PAYOUT THRESHOLD THRESHOLD TARGET TARGET MAXIMUM
- ---- --------- ------------ --------- --------- ------ ------ -------
William J. Post 21,600 1/1/2002 - 6/16/2005 0 10,800 21,600 32,400 43,200
William L. Stewart(1) 9,100 1/1/2002 - 6/16/2005 0 N/A 9,100 N/A N/A
Jack E. Davis 10,300 1/1/2002 - 6/16/2005 0 5,150 10,300 15,450 20,600
James M. Levine 3,125 1/1/2002 - 6/16/2005 0 1,562 3,125 4,687 6,250
Steven M. Wheeler 2,750 1/1/2002 - 6/16/2005 0 1,375 2,750 4,125 5,500
Except for Mr. Stewart, who is discussed separately below, the performance share
awards in the preceding table are payable at the end of the three-year
performance period. The amount of the payout may increase or decrease based upon
the Company's earnings per share growth rate as compared to the earnings per
share growth rate of the S & P Utilities Index during the performance period.
The amount of the payout will be determined by the percentile relative ranking;
however, in no event will an employee be entitled to receive a number of
performance shares greater than two times the base grant. The Company will
accrue and hold any dividends on the performance shares until the award is
vested and distributed.
(1) Mr. Stewart's award will become payable at the time of his retirement and
is not subject to the same performance criteria as noted above, nor will he
be entitled to receive an amount greater than the initial shares awarded to
him.
22
WHAT ARE THE COMPANY'S EXECUTIVE BENEFIT PLANS?
EMPLOYEES' RETIREMENT PLAN AND SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN
The Company maintains a tax-qualified, non-contributory retirement plan for
salaried employees and a Supplemental Excess Benefit Retirement Plan that
provides additional retirement benefits for key salaried employees. The
following table illustrates the annual benefits 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 (1) 5 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
- ----------
(1) Benefits are calculated on a straight-life annuity basis. Benefits listed
in the Table are not subject to deductions for Social Security or other
offset amounts.
Compensation under the Employees' Retirement Plan consists solely of
average base compensation up to $200,000 (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 $200,000 limit. 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. For purposes of the retirement plans, the average monthly
compensation is the average of the highest 36 consecutive months in the final 10
years of employment.
The number of credited years of service for each of the named executive
officers and the average monthly compensation upon which payments under the
Employees' Retirement Plan and the
23
Supplemental Excess Retirement Benefit Plan would be based, as of December 31,
2002, are as follows: Mr. Post - 30 years, $99,408; Mr. Davis - 30 years,
$59,187; Mr. Stewart - 9 years, $60,079, however, Mr. Stewart is entitled to a
pension benefit equal to 80% of his average monthly wage on the date of his
retirement, regardless of his years of service, using his current average
monthly wage of $60,079, his annual benefit, calculated on the straight-life
basis, currently equals $48,063 (see description of Mr. Stewart's employment
agreement below); Mr. Levine - 18 years, $44,087, notwithstanding the table
above, Mr. Levine's pension benefit will increase by 3% of average annual
compensation for each additional year of service to age 60, so that his pension
benefit will equal 70% of his average annual compensation if he remains employed
until age 60 (see description of Mr. Levine's employment agreement below); and
Mr. Wheeler - 14 years (see description of Mr. Wheeler's employment agreement
below), $31,524. Except with respect to Mr. Wheeler, who is discussed separately
below, although years of service begin accumulating on the date of employment,
benefits do not vest until the completion of five years of service.
In 1986 Mr. Post, and in 1984 and 1985 Mr. Davis, participated in Option II
of the Arizona Public Service Company Deferred Compensation Plan, pursuant to
which, each will receive an annual payment for a ten-year period following their
retirement from the Company (the "Option II Plan"). The Option II Plan allows
the participant to elect the post-retirement year in which the installment
payments begin, provided the initial year is on or after the participant reaches
sixty years of age and on or before the participant reaches seventy years of
age. Under the Option II Plan, in the event Mr. Post elects to begin payments
following his retirement upon reaching 60 years of age, his annual payment would
be $162,020. In the event Mr. Davis elects to begin payments following his
retirement upon reaching 60 years of age, his annual payment would be $152,037.
Each year thereafter that the initial payment is delayed, the annual installment
increases by 6.5%. The annual payments under the Option II Plan are forfeited if
the participant is not employed by the Company or one of its subsidiaries at the
time he becomes available for early retirement (age 55), in which case the
participant is only entitled to receive amounts the participant contributed to
the Option II Plan, plus interest. This forfeiture provision does not apply if
the participant fails to reach retirement age with the Company or one of its
subsidiaries as a result of death.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Under an employment agreement entered into in December of 1999 as amended
effective as of January 1, 2002, between Mr. Stewart and APS, APS agreed to
provide to Mr. Stewart a line of credit up to $1.2 million, drawable annually
beginning January 3, 2000 in $400,000 increments with interest payable at 7.5%.
All outstanding amounts are due March 31, 2005. Under the employment agreement,
Mr. Stewart defers $400,000 in salary per year for a three-year period beginning
in the year 2000, and the deferrals are credited with interest payable at 9%.
The Company must pay deferred amounts to Mr. Stewart in a lump sum in 2005. In
addition, Mr. Stewart is entitled to one additional payment of $800,000 on
January 3, 2005. The agreement further provides that Mr. Stewart's pension
benefit will be 80% of his average monthly wage on the date of his retirement.
The Company and Mr. Wheeler entered into a letter agreement in June of
2001, pursuant to which Mr. Wheeler received an annual base salary of $275,000,
an employment incentive of $100,000 and 3,000 shares of Company stock. Under
this agreement, effective July 1, 2002, Mr. Wheeler's annual base salary
increased to $300,000 and he received an additional 3,000 shares of Company
stock. Mr. Wheeler was also credited with ten years of vested service for
purposes of calculating his pension, effective as of June 29, 2001. Mr. Wheeler
also receives two years of service for pension purposes in each of the first two
years of employment.
24
APS and Mr. Levine entered into a five-year employment agreement effective
as of October 1, 2002. The agreement provides for Mr. Levine to receive an
annual base salary of $550,000. Mr. Levine is also entitled to an incentive
bonus of up to 60% of base salary with a target level of 40% of base salary
under the officer incentive plan if certain corporate, departmental and
individual targets are met. Consistent with the employment agreement, during
2002 the Human Resources Committee granted Mr. Levine performance accelerated
stock options and performance share awards under the 2002 Plan (see "Executive
Compensation - Option Grants During 2002" and "Executive Compensation -
Long-Term Incentive Plan Awards During 2002" for information about the
performance accelerated stock options and performance share awards granted to
Mr. Levine during 2002). During each year of his employment agreement, APS is
also required to request that the Human Resources Committee grant Mr. Levine
2000 performance shares under the 2002 Stock Plan, without any vesting
requirement. The 2002 grant of these performance shares is reflected as a
"Restricted Stock Award" in the Summary Compensation Table. Mr. Levine was
credited with an additional five years of service for pension purposes,
resulting in a total of eighteen years of service as of January 2002, and his
pension benefit grows at 3% per year until his benefit reaches 70%, which is
scheduled to occur when he reaches age sixty. Mr. Levine may also receive
additional incentive bonuses upon the Palo Verde Nuclear Generating Station
maintaining specified federal and nuclear oversight program ratings, for nuclear
safety and for successful outage results.
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 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 comprises 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
25
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 (the "General Plan"). Effective January 1, 1996, the
Company established a revocable trust to fund the benefits under the General
Plan, the Option II Plan, and certain other benefits. Upon the occurrence of a
"change of control" within the meaning of the General Plan and the trust, the
interest rate under the General Plan shall be the enhanced rate established by
the plan committee, and the trust will become irrevocable and the Company will
be required to fully fund the benefits earned under the General Plan and the
Option II Plan within 60 days after the occurrence of that event. The "change of
control," for purposes of the plans and trust, is defined in the same manner as
the "change of control" definition contained in the severance agreements
described above.
PROPOSAL 2 -- SHAREHOLDER PROPOSAL
WHAT IS THE SHAREHOLDER'S 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 66.921 shares, as of the record date), c/o Betty Schroeder, 5349 West
Bar X Street, Tucson, Arizona 85713 intends to present the following proposal at
the 2003 Annual Meeting. The proposal and supporting statement exactly as
submitted to the Company, are set forth below. The Board of Directors opposes
this proposal for the reasons stated on pages 27-28.
WHEREAS:
As long as Palo Verde's nuclear reactors operate, they will continue generating
radioactively and thermally hot, irradiated fuel rods that must be cooled, after
removal from the Reactor Vessel, and placed in wet storage in the on-site Spent
Fuel Pool for at least five years before they can be moved.
In 2002 the President and Congress approved the siting of a federal underground
repository for irradiated fuel rods at Yucca Mountain, Nevada. The repository is
not yet finally designed or licensed; its construction will not be completed
until at least 2010. The nuclear industry describes Yucca Mountain as one single
site where all the nation's irradiated fuel rods could be consolidated. However,
since the irradiated rods of each plant must be kept at that plant's site
temporarily, submerged in water, highly radioactive rods will continue to be
scattered at operating plants nationwide as long as nuclear plants continue
operating. The irradiated fuel rods must be kept isolated from the biosphere for
hundreds of thousands of years.
Capacity at Yucca Mountain is limited by law. Older irradiated fuel rods now
being stored at older reactors will have priority for disposal space. There may
not be room for a sizable amount of Palo Verde's fuel rods in this first
national repository.
The US Nuclear Regulatory Commission has granted many utilities permission to
store far more irradiated rods in on-site fuel pools than was intended in their
initial design. Robert Alvarez, a former Energy Department senior policy
advisor, told a Senate hearing, "An attack against a spent fuel pool
26
could drain enough water to cause a catastrophic radiological fire that cannot
be extinguished." He cited a 1997 analysis that said such a fire could
contaminate up to 188 square miles.
On February 7, 2002, Homeland Security Director Tom Ridge said that structural
changes may be necessary to fortify nuclear plants against September 11 kinds of
attacks, and other threats not previously considered. He said, "there may
ultimately be some actual bricks and mortar adjustments that are made to some of
these facilities."
Construction on-site at Palo Verde reactors, of fortified bunkers or other
structures (below- or partially below- grade), that can be concealed from
off-site locations and be safeguarded, may be essential for the interim storage
on-site of Palo Verde's irradiated fuel rods.
RESOLVED:
In light of heightened public safety concerns, we request that the Company
prepare a report, at reasonable cost, that outlines the current vulnerability
and substantial risks of the interim storage of irradiated fuel rods at the Palo
Verde Plant and that proposes measures to reduce those risks. A copy of the
report, omitting proprietary and security information, should be available to
shareholders on request by September 2003.
SUPPORTING STATEMENT:
Pinnacle West remains morally responsible and financially liable for Palo Verde,
for securing its radioactive wastes, and for protecting workers and the public
into the indefinite future. We believe this study is essential for realistic and
responsible economic and ethical planning.
WHAT IS THE BOARD'S RESPONSE TO THE PROPOSAL?
BOARD OF DIRECTORS' STATEMENT AGAINST SHAREHOLDER PROPOSAL
The Company, APS and the Palo Verde Nuclear Generating Station ("Palo
Verde") take pride in our commitment to safety. Protecting the health and safety
of the public as well as that of our employees is, and always will be, a top
priority.
In 1982, Congress passed the Nuclear Waste Policy Act ("NWPA"), which
requires the federal government to permanently dispose of all spent nuclear fuel
generated at the nation's nuclear power plants. Pursuant to the NWPA, the
Department of Energy ("DOE") has entered into a contract with APS and the other
owners of Palo Verde for the disposal of spent nuclear fuel. Thus, the DOE has
both a contractual and a statutory obligation to take possession and dispose of
all of the spent nuclear fuel generated at Palo Verde. In 2002, Congress
approved the Yucca Mountain site in Nevada as the nation's nuclear waste
repository. The DOE, which has responsibility for building Yucca Mountain, has
currently scheduled completion of that construction for 2010. However, the DOE's
obligation to dispose of spent nuclear fuel from Palo Verde is not contingent
upon the completion of, or storage capacities at, Yucca Mountain.
Until such time as the DOE fulfills its obligation to take possession and
dispose of the spent nuclear fuel generated at Palo Verde, the spent fuel will
be safely stored onsite in either the spent fuel pools or dry fuel storage
systems. The Nuclear Regulatory Commission ("NRC") is the federal government
agency that is responsible for licensing and regulating commercial nuclear power
plants. This responsibility includes protecting the public health and safety,
and the environment, as well as safeguarding nuclear materials and nuclear power
plants in the interests of national security. The design and construction of the
spent fuel pools and the dry fuel storage systems at Palo Verde are approved and
licensed by the NRC. Additionally, the NRC also regulates and inspects their
operation.
27
After the terrorist attacks of September 11, 2001, the NRC issued a number
of advisories to nuclear power plant licensees in order to further strengthen
licensees' capabilities and readiness to respond to a potential attack. In
February 2002, the NRC issued an order modifying the licenses of all operating
nuclear power plants. The NRC order requires the implementation of specified
interim safeguards and security compensatory measures in order to address the
generalized high-level threat environment post September 11, 2001. These new
requirements, which supplement existing requirements, provide the NRC with
reasonable assurance that the public health and safety and common defense and
security at the nation's commercial nuclear power plants continue to be
adequately protected. Palo Verde implemented the measures required by the NRC's
order and the NRC has reviewed and inspected Palo Verde's actions and determined
that Palo Verde is in compliance. At such time as the NRC imposes additional or
new requirements, Palo Verde will also take the steps necessary to meet or
exceed these requirements.
In light of the actions that Palo Verde has taken to enhance security, as
well as the continuing NRC reviews in this area, the Company does not believe
that it is necessary, prudent, cost-effective or in the best interest of nuclear
safety to prepare a report separate and apart from the actions or ongoing
reviews being taken by the industry and the NRC.
Because of the extensive security measures presently in place at Palo Verde
to protect the station, including its spent fuel, and the ongoing NRC reviews in
this area, 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.
28
ADDITIONAL INFORMATION
HOW DO WE SUBMIT SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING?
Shareholders who intend to have their proposals considered for inclusion in
the proxy statement and form of proxy relating to the 2004 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 SEC. The
Company must receive the proposal at its principal executive office on or before
December 9, 2003. Shareholders who intend to present proposals at the 2004
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, 2004,
but not earlier than January 22, 2004, 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, 2004, 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 2004 Annual Meeting. The
Company suggests that proponents submit their proposals to the Office of the
Secretary by Certified Mail - Return Receipt Requested.
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 the same phone number and addresses.
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 Communications, Inc. 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.
29
APPENDIX A
AUDIT COMMITTEE CHARTER
(March 19, 2003)
I. GENERAL
The Audit Committee is a committee of the Board of Directors of the
Company. Its primary function is to assist the Board in monitoring (1) the
integrity of the Company's financial statements, (2) the independent
auditor's qualifications and independence, (3) the performance of the
Company's internal audit function and independent auditors, and (4) the
compliance by the Company with legal and regulatory requirements.
The Audit Committee shall prepare the report required by the rules of the
Securities and Exchange Commission (the "Commission") to be included in the
Company's annual proxy statement.
The Audit Committee will report regularly to the Board.
II. COMMITTEE COMPOSITION AND MEMBER QUALIFICATIONS
The Audit Committee will consist of three or more directors who meet the
independence and experience requirements of the New York Stock Exchange
("NYSE").
No Audit Committee member may simultaneously serve on the audit committee
of more than three public companies, including the Company.
Each member of the Audit Committee must meet the independence requirements
of Section 10A(m)(3) of the Securities Exchange Act of 1934 (the "Exchange
Act"), as reflected in Commission Release No. 33-8173 (January 8, 2003).
Under these requirements, a member of the Audit Committee will not be
considered independent if he or she (i) accepts any consulting, advisory,
or other compensatory fee from the Company (other than in his or her
capacity as a member of the Board or a Board committee) or (ii) is an
affiliated person of the Company or any of its subsidiaries. The Board will
determine whether the Audit Committee members meet the required
independence standards.
At least one member of the Audit Committee shall be an "audit committee
financial expert," as defined by the Commission.
The Board will select the members of the Audit Committee on at least an
annual basis. Members of the Audit Committee may be removed by the Board at
any time.
III. MEETINGS
The Committee will meet as often as it determines, but not less frequently
than quarterly. The Committee may create subcommittees and vest those
subcommittees with the authority of the full Committee with respect to
specific matters delegated to such subcommittees.
The Committee will meet separately, at least quarterly, with each of
management, the internal auditors, and the independent auditor.
30
IV. AUDIT COMMITTEE AUTHORITY AND RESPONSIBILITIES
GENERAL
(1) The Audit Committee shall have the sole authority to appoint or
replace the independent auditor. The Audit Committee shall be directly
responsible for the compensation and oversight of the work of the
independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting)
for the purpose of preparing or issuing an audit report or related
work. The independent auditor shall report directly to the Audit
Committee.
(2) The Audit Committee shall preapprove all auditing services and
permitted non-audit services (including the fees and terms thereof) to
be performed for the Company by its independent auditor, subject to
the DE MINIMUS exceptions for non-audit services described in Section
10A(i)(1)(B) of the Exchange Act which are approved by the Audit
Committee prior to the completion of the audit. The Audit Committee
may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant
preapprovals of audit and permitted non-audit services, provided that
decisions of such subcommittee to grant preapprovals are presented to
the full Audit Committee at its next scheduled meeting.
(3) The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting, or
other advisors. The Company shall provide for appropriate funding, as
determined by the Audit Committee, for payment of compensation to the
independent auditor and any such advisors.
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE INDEPENDENT AUDITOR
(4) Review and evaluate the lead partner of the independent auditor team.
(5) Discuss with the independent auditor at least annually (a) the
independent auditor's internal quality-control procedures, (b) any
material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities within the
preceding five years respecting one or more independent audits carried
out by the firm, (c) any steps taken to deal with any such issues, and
(d) all relationships between the independent auditor and the Company.
In addition to discussing the foregoing matters with the independent
auditor, the Committee shall take other appropriate actions as it may
deem necessary to satisfy itself of the independent auditor's
independence. The Audit Committee shall present its conclusions with
respect to the independent auditor to the Board.
(6) Ensure the rotation of the audit partners as required by law.
(7) Recommend to the Board policies for the Company's hiring of employees
or former employees of the independent auditor who participated in any
capacity in the audit of the Company.
(8) Discuss with the independent auditor any issues on which the Company's
audit team consulted the independent auditor's national accounting
office on auditing or accounting issues presented by the engagement
and, if the Committee deems it
31
necessary or appropriate, discuss such issues directly with the
national accounting office.
(9) Meet with the independent auditor prior to the audit to discuss the
planning and staffing of the audit.
OVERSIGHT OF THE COMPANY'S INTERNAL AUDIT FUNCTION
(10) Review and concur in the appointment, replacement or dismissal of the
director of audit services.
(11) Review the significant reports to management prepared by the internal
auditing department and management's responses.
(12) Discuss with the independent auditor and the director of audit
services the responsibilities, budget, and staffing and any
recommended changes in the planned scope of the internal audit.
FINANCIAL STATEMENT AND DISCLOSURE MATTERS
(13) Review and discuss with management and the independent auditor, prior
to the filing of the Company's Annual Report on Form 10-K, (a) the
annual audited financial statements contained in the Form 10-K, and
(b) the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in the Form 10-K.
(14) Review and discuss with management and the independent auditor, prior
to the filing of the Company's Quarterly Report on Form 10-Q, (a) the
Company's quarterly financial statements contained in the Form 10-Q,
as well as the results of the independent auditor's review of the
quarterly financial statements, and (b) the "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
contained in the Form 10-Q.
(15) Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with the
preparation of the Company's financial statements, including any
significant changes in the Company's selection or application of
accounting principles, any major issues as to the adequacy of the
Company's internal controls and any special steps adopted in light of
material control deficiencies.
(16) Review and discuss quarterly reports from the independent auditors on:
(a) All critical accounting policies and practices to be used.
(b) All alternative treatments of financial information within
generally accepted accounting principles that have been discussed
with management, ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred by the
independent auditor.
32
(c) Other material written communications between the independent
auditor and management, such as any management letter or schedule
of unadjusted differences.
(17) Discuss with management the Company's earnings press releases,
including the use of "pro forma" or "adjusted" non-GAAP information,
as well as financial information and earnings guidance provided to
analysts and rating agencies. Such discussion may be done generally
(consisting of discussing the types of information to be disclosed and
the types of presentations to be made).
(18) Discuss with management and the independent auditor the effect on the
Company's financial statements of regulatory and accounting
initiatives and off-balance sheet structures.
(19) Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and control such
exposures, including the Company's risk assessment and risk management
policies.
(20) Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the audit, including any difficulties encountered in the
course of the audit work, any restrictions on the scope of activities
or access to requested information, and any significant disagreements
with management.
(21) Review disclosures made to the Audit Committee by the Company's CEO
and CFO during their certification process for the Form 10-K and Form
10-Q about any significant deficiencies in the design or operation of
internal controls or material weaknesses therein and any fraud
involving management or other employees who have a significant role in
the Company's internal controls.
COMPLIANCE OVERSIGHT RESPONSIBILITIES
(22) Obtain from the independent auditor assurance that Section 10A(b) of
the Exchange Act has not been implicated. Generally, Section 10A(b)
requires the independent auditor, if it detects or becomes aware of
any illegal act, to ensure that the Audit Committee is adequately
informed.
(23) Review management's monitoring of the Company's compliance with the
Company's Ethics Policy and Standards of Business Practices.
(24) Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any published reports
which raise material issues regarding the Company's financial
statements or accounting policies.
(25) Discuss with the Company's General Counsel legal matters that may have
a material impact on the financial statements or the Company's
compliance policies.
(26) Conduct a Committee self-assessment on at least an annual basis to
determine whether the Committee is functioning effectively, consistent
with the self-assessment process reflected in the Company's corporate
governance principles (see Paragraph 3(f) of the Corporate Governance
Committee Charter).
33
(27) Review this Audit Committee Charter at least annually and, if
appropriate, recommend changes to the Board of Directors.
V. AUDIT COMMITTEE'S ROLE - GENERAL
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 or to assure compliance with laws and regulations and the
Company's Ethics Policy and Standards of Business Practices.
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 19, 2003.
/s/ William J. Post
----------------------------------------
William J. Post, Chairman of the Board
and Chief Executive Officer
/s/ Martha O. Hesse
----------------------------------------
Martha O. Hesse, Director and Chairman
of the Audit Committee of the Board of
Directors
34
APPENDIX B
CORPORATE GOVERNANCE GUIDELINES
The following Corporate Governance Guidelines (the "Guidelines") have been
adopted by the Board of Directors (the "Board") of Pinnacle West Capital
Corporation (the "Company" or "Pinnacle West") to assist the Board in the
exercise of its responsibilities. These Guidelines reflect the Board's
commitment to monitor the effectiveness of policy and decision-making, both at
the Board and management level, with a view to enhancing shareholder value over
the long term. These Guidelines are in addition to and are not intended to
change or interpret any federal or state law or regulation, or Articles of
Incorporation or Bylaws of the Company. The Guidelines are subject to
modification from time to time by the Board.
RESPONSIBILITIES OF THE BOARD
1. GENERAL RESPONSIBILITIES OF THE BOARD.
Under Arizona law, "the business and affairs of the [Company] shall be
managed under the direction of [the Board]."
2. SPECIFIC PRINCIPAL RESPONSIBILITIES OF THE BOARD.
(a) COMPLIANCE WITH LAW AND MAINTENANCE OF ETHICAL BUSINESS ENVIRONMENT.
The Board recognizes the importance of the Company operating as an ethical and
law-abiding company. The Board is responsible for overseeing the Company's
compliance with its Ethics Policy and its Standards of Business Practices (the
"Policy"), as revised from time to time (the Policy is currently being revised
to reflect recent legislative developments and regulatory pronouncements).
(b) PROVISION OF CRITICAL OVERSIGHT. In addition to its other duties and
responsibilities, the Board is responsible for providing critical oversight of
the Company's business in the best interests of its shareholders and other
stakeholders.
(c) CHIEF EXECUTIVE OFFICER PERFORMANCE REVIEW AND SUCCESSION PLANNING.
(i) The Human Resources Committee reviews and approves corporate
goals and objectives relevant to CEO and officer compensation and assesses
performance in light of those goals and objectives. The Board is responsible for
determining whether Company officers should be retained, replaced or removed. In
carrying out this responsibility, the Board will give due consideration to the
CEO selecting and maintaining members of his or her management team.
(ii) The Board is responsible for establishing and annually reviewing
a CEO succession plan.
(d) ROLE OF BOARD COMMITTEES. The Board has four standing Committees, each
of which performs the key responsibilities reflected in its respective Charter:
(i) Audit Committee: See Audit Committee Charter (Attachment A) *;
- ----------
* Attachments have been intentionally omitted.
35
(ii) Human Resources Committee: See Human Resources Committee Charter
(Attachment B) *;
(iii) Finance and Operating Committee: See Finance and Operating
Committee Charter (Attachment C) *; and
(iv) Corporate Governance Committee: See Corporate Governance
Committee Charter (Attachment D) *.
3. RESPONSIBILITIES OF INDIVIDUAL DIRECTORS.
(a) GENERAL. Each Director is expected to individually contribute to the
Board's satisfaction of its principal responsibilities.
(b) ATTENDANCE AT MEETINGS. Each Director is expected to be present at all
Board meetings and meetings of Committees on which he or she serves.
(c) COMMITMENT OF SUFFICIENT TIME. Each Director is expected to spend the
necessary time to properly discharge his or her responsibilities as a Director,
including reviewing any written materials provided to the Board or Committee in
advance of Board or Committee meetings. The Company will provide the Board and
Committees with the necessary written materials sufficiently in advance of each
meeting to permit appropriate review by each Director.
STRUCTURE, COMPOSITION AND OPERATIONS OF THE BOARD
1. INDEPENDENCE OF THE BOARD.
The Board shall be comprised of a majority of directors who qualify as
independent directors ("Independent Directors") under listing standards of the
New York Stock Exchange and any applicable rules and laws.
2. SIZE OF THE BOARD.
The Board shall consist of at least nine and no more than twenty-one
directors.
3. DIRECTOR QUALIFICATIONS.
The Corporate Governance Committee is responsible for identifying and
recommending to the Board individuals qualified to become Directors. A Director
must be a shareholder of the Company. In addition, the Board believes that the
following qualities should be taken into account when determining whether to
nominate an individual as a Director: integrity; specific or general skills or
experience; wisdom; understanding of the Company's business environment; and
willingness to devote adequate time to Board duties.
- ----------
* Attachments have been intentionally omitted.
36
4. RETIREMENT POLICY.
The Board has adopted a retirement policy for Directors. Under that policy,
no Director after having attained the age of 70 years shall be nominated for
re-election or reappointment to the Board.
5. EMPLOYMENT OF DIRECTORS.
The Board does not believe that Directors who retire or change the position
they held when they became a member of the Board should necessarily leave the
Board. The Corporate Governance Committee periodically shall review the
continued appropriateness of Board membership.
6. BOARD COMPENSATION.
The form and amount of Director compensation is recommended to the full
Board of Directors by the Human Resources Committee in accordance with its
Charter. Board compensation should reflect both the workload and scope of
responsibilities associated with Board service, with due consideration being
given to applicable rules and regulations.
The Company's executive officers shall not receive additional compensation
for their service as Directors.
7. BOARD AND COMMITTEE SELF-ASSESSMENT.
The Board and each Board Committee shall conduct an annual self-assessment
to determine whether the Board, its committees and the individual Directors are
functioning effectively. The Corporate Governance Committee is responsible for
developing Board and Committee self-assessments and implementing the
self-assessment process.
8. BOARD ACCESS TO MANAGEMENT.
Directors shall have full and free access to the management of the Company
and, as necessary and appropriate, independent advisors.
9. DIRECTOR ORIENTATION AND CONTINUING EDUCATION.
All new Directors will participate in the Company's orientation program,
which will be conducted shortly after a new Director is elected or appointed.
Continuing education shall be available to Directors in areas related to their
service on the Board.
Effective as of March 19, 2003.
37
APPENDIX C
DIRECTOR INDEPENDENCE STANDARDS
BACKGROUND
The New York Stock Exchange ("NYSE") has proposed amendments to its listing
standards to require NYSE-listed companies, such as the Company, to have a
majority of "independent directors." On March 12, 2003, the NYSE filed with the
Securities and Exchange Commission (the "SEC"), proposed rules (the "Proposed
Rules") regarding director independence. The Proposed Rules amend proposed
director independence rules the NYSE filed with the SEC on August 16, 2002. The
Proposed Rules include a list of relationships that would prevent a director
from being independent under NYSE listing standards. Commentary to the Proposed
Rules includes the following language on this topic:
It is not possible to anticipate, or explicitly to provide for, all
circumstances that might signal potential conflicts of interest, or that
might bear on the materiality of a director's relationship to a listed
company. Accordingly, we think it best that boards making "independence"
determinations broadly consider all relevant facts and circumstances. In
particular, when assessing the materiality of a director's relationship
with the company, the board should consider the issue not merely from the
standpoint of the director, but also from that of persons or organizations
with which the director has an affiliation. Material relationships can
include commercial, industrial, banking, consulting, legal, accounting,
charitable, and familial relationships (among others). The basis for a
board determination that a relationship is not material should be disclosed
in the company's annual proxy statement.
In discussing a board's determination of the "independence" of a director,
commentary to the Proposed Rules includes the following language:
[A] board may adopt and disclose categorical standards to assist it in
making determination of independence, and may make a general disclosure if
a director meets these standards. Any determination of independence for a
director who does not meet these standards must be specifically explained.
A company must disclose any standard it adopts. It may then make the
general statement that the independent directors meet the standards set by
the board without detailing the particular aspects of the immaterial
relationships between individual directors and the company.
In furtherance of proactive corporate governance practices, the Company's
Board of Directors believes it is appropriate to adopt director independence
standards designed to comply with the Proposed Rules and to evaluate each
director's independence in light of these standards. The Board of Directors
recognizes that the final NYSE listing standards on director independence may
require modification of these Director Independence Standards or ratification or
reevaluation of director independence determinations.
DIRECTOR INDEPENDENCE STANDARDS
(1) For purposes of these Director Independence Standards, the term
"Independent" has the meaning ascribed to such term in the Proposed Rules
requiring NYSE-listed companies to have a majority of "independent"
directors.
(2) The Company will publicly disclose director independence determinations in
accordance with NYSE rules and/or applicable law.
38
(3) No director qualifies as Independent unless the Board of Directors
affirmatively determines that the director has no material relationship
with the Company (either directly or as a partner, shareholder, or officer
of an organization that has a relationship with the Company). The Board may
make this determination upon its finding that a director does not have any
of the relationships or interests described in Paragraphs 4-7 below.
(4) A director who receives or whose immediate family member receives, more
than $100,000 per year in direct compensation from the Company or any of
its subsidiaries, other than director and committee fees and pension or
other forms of deferred compensation for prior service (provided such
deferred compensation is not contingent in any way on continued service) is
presumed not to be Independent until five years after he or she ceases to
receive more than $100,000 per year in such compensation. The Board of
Directors may negate this presumption with respect to a director if the
Board determines (and no Independent director dissents) that, based upon
the relevant facts and circumstances, such compensatory relationship is not
material.
(5) A director who is affiliated with or employed by, or whose immediate family
member is affiliated with or employed in a professional capacity by, a
present or former auditor of the Company is not Independent until five
years after the end of either the affiliation or the auditing relationship.
(6) A director who is employed, or whose immediate family member is employed as
an executive officer of another company where any of the Company's present
executive officers serves on that company's compensation committee is not
Independent until five years after the end of such service or the
employment relationship.
(7) A director who is an executive officer or an employee, or whose immediate
family member is an executive officer, of another company (a) that accounts
for at least 2% or $1 million, whichever is greater, of the Company's
consolidated gross revenues, or (b) for which the Company accounts for at
least 2% or $1 million, whichever is greater, of the other company's
consolidated gross revenues, in each case is not Independent until five
years after falling below such threshold.
(8) For purposes of Paragraphs 4-7 above (a) immediate family members consist
of a person's spouse, parents, children, siblings, mothers and
fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and
anyone who shares such person's home, and (b) the five year "look back"
period will not include any years before January 1, 2002.
(9) Nothing in these Director Independence Standards prohibits the Board of
Directors from determining that a director is not Independent based on
other relationships or transactions not specifically described in
Paragraphs 4-7 above.
(10) Nothing in these Director Independence Standards prohibits the Board of
Directors from adopting additional or different qualifications for director
membership on a Board committee, it being understood that such
qualifications will be separately approved by the Board and included in
such Board committee's charter.
Effective as of March 19, 2003.
/s/ William J. Post
----------------------------------------
William J. Post, Chairman of the Board
and Chief Executive Office
39
[LOGO]
PINNACLE WEST CAPITAL CORPORATION
Dear Shareholders,
The 2003 Annual Meeting of Shareholders of Pinnacle West Capital Corporation
will be held at the Herberger Theater Center, 222 East Monroe St., Phoenix,
Arizona on May 21, 2003 at 10:30 a.m. Mountain Standard Time. At the meeting,
shareholders will be asked to elect four (4) Class III Directors to serve on the
Board until 2006 Annual Meeting and 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 (3) voting options.
We encourage you to attend the meeting
and have provided this map
for your reference.
Sincerely, [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.
Nancy C. Loftin,
Vice President, General Counsel and Secretary
- --------------------------------------------------------------------------------
PROXY FORM Pinnacle West Capital Corporation PROXY FORM
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 21, 2003.
The undersigned hereby appoints William J. Post and Nancy C. Loftin,
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 21, 2003, at ten-thirty a.m. (10:30 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 III - Jack E. Davis, Pamela
Grant, Martha O. Hesse and William S. Jamieson, Jr.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL ONE (1) AND
AGAINST PROPOSAL TWO (2).
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL ONE (1) AND AGAINST
PROPOSAL TWO (2).
- --------------------------------------------------------------------------------
FOR WITHHOLD FOR AGAINST WITHHOLD
--- -------- --- ------- --------
1. Election of Directors [ ] [ ] 2. Approval of a shareholder proposal [ ] [ ] [ ]
FOR ALL EXCEPT_________________________
Nominees: ____________________________________________________________________
CLASS III Signature Date
---------
01. Jack E. Davis 03. Martha O. Hesse ____________________________________________________________________
02. Pamela Grant 04. William S. Jamieson, Jr. 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
- --------------------------------------------------------------------------------
VOTE BY INTERNET OR TELEPHONE
QUICK EASY IMMEDIATE
- --------------------------------------------------------------------------------
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 Code Account Number
VOTE BY PHONE
Call toll-free 1-800-457-2983 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 p.m. and 2:30 a.m.,
MST.
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 BY PHONE, DO NOT MAIL YOUR PROXY CARD
THANK YOU FOR VOTING.