pre14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 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):
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[X]
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No fee required. |
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing. |
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PINNACLE WEST CAPITAL CORPORATION
Post Office Box 53999
PHOENIX, ARIZONA 85072-3999
NOTICE AND PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
Wednesday, May 23, 2007
To our Shareholders:
You are invited to attend the 2007 Annual Meeting of Shareholders of Pinnacle West Capital
Corporation (the Company or Pinnacle West) to be held at the Herberger Theater Center, 222 East
Monroe, Phoenix, Arizona 85004, at 10:30 a.m., Mountain Standard Time, on Wednesday, May 23, 2007.
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:
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Approve an amendment to the Companys Articles of Incorporation to declassify
the Board of Directors that would result in directors being elected annually (Proposal
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Elect eleven (11) directors to serve until the 2008 Annual Meeting of
Shareholders if Proposal 1 is approved; if Proposal 1 is not approved, elect four (4)
Class I directors to serve until the 2010 Annual Meeting of Shareholders (Proposal 2); |
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Approve the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan
(Proposal 3); and |
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Ratify the appointment of the Companys independent auditors for the fiscal
year ending December 31, 2007 (Proposal 4). |
All shareholders of record at the close of business on March 26, 2007 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
Vice President, General Counsel and Secretary
Approximate date of mailing to Shareholders:
April 10, 2007
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
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ii
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GENERAL INFORMATION
This proxy statement contains information regarding the Companys 2007 Annual Meeting of
Shareholders to be held at the Herberger Theater Center, 222 East Monroe, Phoenix, Arizona 85004,
at 10:30 a.m., Mountain Standard Time, on Wednesday, May 23, 2007. The enclosed proxy is being
solicited by the Companys 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 26, 2007 (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?). At the close of business on the record date, there were
[ ] 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 website address for internet voting is on your proxy card.
Internet voting is available 24 hours a day;
Vote by telephone. The toll-free number for telephone voting is on your proxy card.
Telephone voting is available 24 hours a day; 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 of votes; and persons who
need access for legal reasons. If you write comments on your proxy card, your comments will be
provided to the Company, but how you vote will remain confidential.
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 outstanding or 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) will be counted for the purpose of determining whether there is a quorum
for the transaction of business at the meeting.
What are the Boards 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
Boards recommendations are set forth below, together with the description of each item to be voted
on in this proxy statement. In summary, the Board recommends a vote:
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FOR amending the Articles of Incorporation to declassify the Board of Directors and
provide for the annual election of Directors (see Proposal 1); |
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FOR election of the nominated slate of directors (see Proposal 2); |
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FOR approval of the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (see Proposal 3); and |
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FOR ratification of the appointment of Deloitte & Touche LLP as the Companys
independent auditors for the fiscal year ending December 31, 2007 (see Proposal 4). |
What is required to approve the items to be voted on?
Amendment to the Articles of Incorporation. Under the Articles of Incorporation, an
affirmative vote of the holders of not less than two-thirds of the total voting power of all
outstanding shares of voting stock is required to amend the provisions of the Articles of
Incorporation that pertain to the staggered election of Directors, which is the section of
the Articles of Incorporation that will be amended if Proposal 1 receives the votes needed to
pass. In determining whether Proposal 1 has received the requisite number of votes,
abstentions and broker non-votes will have the same effect as votes against Proposal 1.
Election of Directors. Individuals receiving the highest number of votes will be
elected. The number of votes that a shareholder may, but is not required to, cast is
calculated by multiplying the number of shares of common stock owned by the shareholder, as
of the record date, by the number of directors to be elected. Any shareholder may cumulate
his or her votes by casting them 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 nominees total.
Approval of the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan.
Approval of the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan requires the
affirmative vote of a majority of the votes cast, provided that the total votes cast with
respect to this proposal represents over fifty percent (50%) of the shares of common stock
entitled to vote on the proposal. For purposes of approval of this proposal, abstentions
have the effect of a vote against the proposal, and broker non-votes are not considered to be
votes cast.
Ratification of the Appointment of the Independent Auditors. In connection with the
ratification of the appointment of the independent auditors for the fiscal year ending December
31, 2007, the affirmative vote of a majority of the shares voted on that item will be
required for approval. Abstentions and broker non-votes will have no effect on the outcome
of this 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 Chairman of the meeting may limit the number of proxy
representatives permitted to attend if a shareholder sends several representatives to the meeting.
Can I change or revoke my vote after I submit my proxy?
Even after you have submitted your proxy card or voted by telephone or by internet, you may
change or revoke your vote at any time before the proxy is exercised by filing with our Secretary
either a notice of revocation or a signed proxy card bearing a later date. The powers of the proxy
holders will be suspended with respect to your shares if you attend the meeting in person and so
request, although attendance at the meeting will not by itself revoke a previously granted proxy.
How do I get a copy of the Annual Report?
A copy of the Annual Report is available at the Companys website (www.pinnaclewest.com) and
will be provided to any shareholder upon request. Shareholders may request a copy from Shareholder
Services at the telephone number or address set forth in How
many Annual Reports and proxy statements are delivered to a shared address.
2
INFORMATION ABOUT OUR BOARD, ITS COMMITTEES AND OUR CORPORATE GOVERNANCE
How often did the Board meet during 2006?
The full Board of Directors met nine (9) times during 2006. Every director attended at least
ninety-five percent (95%) of the meetings of the full Board and any committees on which he or she
served.
Do we have independent directors?
New York Stock Exchange (NYSE) rules require companies listed on the NYSE to have a majority
of independent directors. These rules describe certain relationships that prevent a director from
being independent and require a companys board of directors to make director independence
determinations in all other circumstances. The Companys Board of Directors has adopted Director
Independence Standards to assist the Board in making director independence determinations. These
Director Independence Standards are available at the Companys website at www.pinnaclewest.com.
How did the Board make its independence determinations?
In accordance with the NYSE rules and the Director Independence Standards, the Board
undertakes an annual review to determine which of its directors are independent. The reviews
generally take place in the first quarter of each year; however, directors are required to notify
the Company of any changes that occur throughout the year that may impact their independence. In
the first quarter of 2006, the Board determined that Mr. Stewart was not independent since at that
time he had been an employee of the Company within the past three years. In determining that Mr.
Stewart is an independent director as part of the 2007 review, the Board considered that Mr.
Stewarts last date of employment with the Company was November 26, 2003, which was more than three
years ago. In addition, even though he had a nuclear consulting
arrangement with Arizona Public Service Company (APS) during 2006,
which has since terminated, the amount of fees paid to him under this arrangement ($8,000) was well
below the amounts set forth in the NYSE rules and the Director Independence Standards. In
determining that Mr. Gallagher is an independent director both in 2006 and 2007, the Board
considered that the law firm of Gallagher and Kennedy, P.A. provided legal services to the Company
in 2005, 2006 and will perform legal services for the Company in 2007. However, since: (i) the
amounts paid to Gallagher and Kennedy, P.A. were less than the dollar thresholds set forth in the
NYSE rules and the Director Independence Standards; (ii) Mr. Gallagher does not furnish legal
services to the Company; and (iii) he has advised the Company that he receives no compensation or
benefits from Gallagher and Kennedy, P.A. as a result of the firm providing legal services to the
Company, the Board determined that Mr. Gallagher was independent. In addition, from time to time
in 2006 and in 2007, the Company contracts for services from several AMEC plc subsidiaries. Ms.
Hesse is a director of AMEC plc. However, since the amounts paid to these entities was less than
the dollar thresholds set forth in the NYSE rules and the Director Independence Standards and the
only position Ms. Hesse holds with AMEC plc is as a director, the Board determined that Ms. Hesse
was independent.
With respect to all of the directors, the Board considered that many of the directors and/or
businesses of which they are officers, directors or shareholders are located in the APS service territory and receive electricity from APS. The Board considered
these relationships as well in determining the directors independence, but because the rates and
charges for electricity provided by APS are fixed by the Arizona Corporation Commission, and the
directors satisfied the other independence criteria specified in the NYSE rules and the Director
Independence Standards, the Board determined that these relationships did not impact any directors
independence. The Board also considered contributions by the Company to charitable and non-profit
organizations where a director also serves as a director of such charities or organizations.
However, since none of the directors is an executive officer of such charitable or non-profit
organizations, the Board determined these payments did not impact any directors independence.
Based on the Boards review, the Board of Directors has determined that two (2) of the
Companys twelve (12) directors are not independent and that ten (10) of the directors are
independent. The ten (10) independent directors are Messrs. Basha, Gallagher, Herberger, Jamieson,
Lopez, Nordstrom and Stewart and Mses. Grant, Hesse and Munro. Messrs. Davis and Post are not
independent under NYSE rules or the Director Independence Standards because of their employment with the Company.
What are the Committees the Board has established?
The Board has a standing Audit Committee, Human Resources Committee, Corporate Governance
Committee and Finance, Nuclear 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? above). The following table sets forth the membership of these Committees
as of the date of this proxy statement:
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Finance, Nuclear |
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Resources |
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Edward N. Basha, Jr. |
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Jack E. Davis |
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Michael L. Gallagher |
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Pamela Grant |
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Roy A. Herberger, Jr. |
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Martha O. Hesse |
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William S. Jamieson, Jr. |
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Humberto S. Lopez |
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Kathryn L. Munro |
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Bruce J. Nordstrom |
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William J. Post |
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William L. Stewart |
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Where can I find the charters of the Boards Committees and how do I get a copy?
All of the charters of the Boards Committees are available at the Companys website
(www.pinnaclewest.com), and will be provided to any shareholder upon request. Shareholders may
request copies by contacting Shareholder Services at the telephone number or address set forth in
How many Annual Reports and proxy statements are delivered to a shared address?.
What are the responsibilities of the Audit Committee?
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities
and Exchange Act of 1934, as amended (the Exchange Act). The primary functions of the Audit
Committee, which held seven (7) meetings in 2006, are to assist the Board in monitoring the
following:
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the integrity of the financial statements of the Company; |
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the independent auditors qualifications, independence and performance; |
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the performance of the Companys internal audit function; and |
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the compliance by the Company with legal and regulatory requirements. |
The Audit Committee is directly responsible for the appointment, compensation, retention and
oversight of the Companys independent auditors. The Board has determined that each member of the
Audit Committee meets the NYSE experience requirements and that Mr. Nordstrom, the Chairman of the
Audit Committee, is an audit committee financial expert within the meaning of the Securities and
Exchange Commission (SEC) rules implementing Section 407 of the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley). Mr. Nordstrom has been a certified public accountant (CPA) for more than
thirty-five (35) years. During his career as a CPA, he has prepared, reviewed, audited and
analyzed a wide variety of financial statements. As founder and chief executive officer of
Nordstrom and Associates, P.C., in addition to directly providing audit services to clients, he
supervises other CPAs in their performance of audit services. All members of the Audit Committee
meet the independence requirements of the NYSE rules, SEC rules and the Director Independence
Standards.
What are the responsibilities of the Human Resources Committee?
The
Human Resources Committee meets as often as necessary to perform its duties and
responsibilities. In 2006, the Human Resources Committee met four (4) times. Among
other things,
the Human Resources Committee has the authority and responsibility
under its charter to:
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review managements plans and programs for the attraction, retention,
succession, motivation, and development of the human resources needed
to achieve corporate
objectives; |
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review and approve policies on compensation, benefits, and perquisites,
including incentive cash compensation plans, equity participation, and other forms of
executive incentives; |
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recommend persons to the full Board for election or appointment as officers; |
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annually review the goals and performance of our elected officers, including
review of compensation, benefits, and perquisites, to satisfy the Committee that there is
equity
in the compensation practices and general integrity in conforming to approved plans and
policies; |
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review and approve corporate goals and objectives relevant to compensation of
our Chief Executive Officer (CEO), assess the CEOs performance in light of
these goals and objectives, and set the CEOs compensation level based on this assessment; |
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make recommendations to the Board with respect to non-CEO executive
compensation, and incentive compensation and equity-based plans that are subject to
Board approval; |
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make recommendations to the Board for director compensation, equity
participation, benefits and perquisites; |
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act as the committee under our long-term incentive plans; and |
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review and recommend changes to pension benefits. |
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charter also provides that in determining the long-term incentive component of CEO
compensation, the Committee will consider the Companys performance and relative
shareholder
return, the value of incentive awards to CEOs at comparable companies, and the awards given
to the
CEO in past years.
What are the responsibilities of the Finance, Nuclear and Operating Committee?
Among other things, the Finance, Nuclear and Operating Committee, which held three (3)
meetings in 2006, has the authority and responsibility under its Charter to:
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review and assess reports from the Palo Verde Nuclear Oversight Committee (the
NOC), which formally reports to the Committee and the Chief Executive Officer of APS; |
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review the Companys historical and projected financial performance and annual budgets; |
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review and recommend approval of short-term investments and borrowing guidelines; |
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review the Companys financing plan and recommend approval of the issuance of
long-term debt, common equity, and other credit facilities; |
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review and recommend to the Board the Companys dividend actions, including stock
dividends and other distributions; |
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review and monitor the performance of the Companys environmental policies; and |
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review and monitor the customer and power plant operations of the Company. |
The purpose of the NOC is to provide executive management of APS and the Company with an
independent assessment of the performance of the Palo Verde Nuclear Generating Station (PVNGS).
Performance includes nuclear safety, plant reliability, plant management, and organizational
effectiveness. The NOC performs assessments of PVNGS against established nuclear industry
standards and practices and corporate requirements.
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 Companys Corporate Governance
Guidelines. The Corporate Governance Guidelines are available on the Companys website
(www.pinnaclewest.com), and will be provided to any shareholder upon request. Shareholders may
request a copy by contacting Shareholder Services at the telephone number or address set forth in
How many Annual Reports and proxy statements are delivered to a shared address?. Additional
functions of the Corporate Governance Committee include the development and recommendation to the
full Board of criteria for selecting new directors; identifying and evaluating individuals
qualified to become members of the Board, consistent with criteria approved by the Board;
recommending director nominees to the full Board; and recommending to the Board the directors who
should serve on each of the Boards committees.
Do the non-management and independent directors meet without management present?
NYSE rules require that non-management directors meet at regularly scheduled sessions without
management. In 2006, all of the Companys non-management directors were given notice of and could
attend the meetings of the Corporate Governance Committee. The Corporate Governance Committee met
five (5) times in 2006 and, at each of these meetings, management was not present for all or part
of the meeting and the Companys independent directors met in executive session. Ms. Munro chairs
the Corporate Governance Committee and the meetings of the non-management directors and, as the
Chair of the Corporate Governance Committee, serves as the Companys lead director.
How are nominees for the Board selected?
As noted above, the Corporate Governance Committee is responsible for evaluating individuals
qualified to become members of the Board of Directors and recommending director nominees to the
full Board.
Shareholder Nominees. The policy of the Corporate Governance Committee is to consider
properly submitted shareholder nominations for candidates for membership on the Board. See How do
we submit shareholder proposals or director nominations for the next Annual Meeting?.
In evaluating such nominations, the Corporate Governance Committee seeks to achieve a balance of
knowledge, experience and capability on the Board and to address the membership criteria set forth
below under Director Qualifications. Any shareholder nominations proposed for consideration by
the Corporate Governance Committee should include the nominees name and qualifications for Board
membership and should be addressed to:
Corporate Secretary
Pinnacle West Capital Corporation
400 North 5th Street, Mail Station 9068
Phoenix, Arizona 85004
In addition, the Bylaws of the Company permit shareholders to nominate directors for
consideration at any Annual Meeting of Shareholders. For a description of the process for
nominating directors in accordance with the Bylaws, see How do we submit shareholder proposals or
director nominations for the next Annual Meeting?.
Director Qualifications. The Companys Corporate Governance Guidelines contain Board
membership criteria that apply to Corporate Governance Committee recommended nominees for a
position on the Board. Under these criteria, a director must be a shareholder of the Company. In
determining whether an individual should be considered for the Board, the Corporate Governance
Committee considers the following qualities, among others: integrity, specific or general skills
or experience, wisdom, understanding of the Companys business environment, and willingness to
devote adequate time to Board duties.
Identifying and Evaluating Nominees for Directors. The Corporate Governance Committee
utilizes a variety of methods for identifying and evaluating nominees for a director position. The
Corporate Governance Committee regularly assesses the
5
appropriate size of the Board, and whether any vacancies on the Board are expected due to
retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the
Corporate Governance Committee may consider various potential candidates. Candidates may come to
the attention of the Corporate Governance Committee through current Board members, professional
search firms, shareholders or other persons. These candidates will be evaluated at regular or
special meetings of the Corporate Governance Committee, and may be considered at any point during
the year. As described above, the Corporate Governance Committee also will consider properly
submitted shareholder nominations for candidates for the Board.
How are directors compensated?
DIRECTOR COMPENSATION
[TO BE INCLUDED IN THE DEFINITIVE PROXY STATEMENT]
How can shareholders communicate with the Board?
Shareholders and other parties interested in communicating with the Board of Directors may do
so by writing to Board of Directors, Pinnacle West Capital Corporation, 400 North 5th Street, Mail
Station 9068, P.O. Box 53999, Phoenix, Arizona 85072-3999. Communications that are intended
specifically for the non-management directors should be sent to the same address to the attention
of the Corporate Governance Committee Chairman.
Do Board members attend the Annual Meeting?
Yes. The Companys Corporate Governance Guidelines provide that each director is expected to
be present at the Annual Meeting. All of the Board members attended the 2006 Annual Meeting.
Does the Company have a code of business conduct and ethics?
Yes. In order to ensure the highest levels of business ethics, the Board has adopted the
following two codes of conduct:
1. Code of Ethics for Financial Professionals. The Company has adopted a Code of Ethics for
Financial Professionals, which is designed to promote honest and ethical conduct and compliance
with applicable laws, rules, and regulations, particularly as related to the maintenance
of financial records, the preparation of financial statements, and proper public
disclosure. For purposes of this Code, a Financial Professional means (a) any Company professional
employee in the area of finance, accounting, internal audit, energy risk management, marketing and
trading, financial control, tax, investor relations, or treasury, and (b) the Companys Chief
Executive Officer, Chief Financial Officer, Controller, Treasurer, and persons performing similar
functions at any of the Companys subsidiaries.
2. Ethics Policy and Standards of Business Practices. Doing the Right Thing presents the
Ethics Policy and the Standards of Business Practices of the Company and its subsidiaries.
Employees receive a copy of Doing the Right Thing when they join the Company and are provided
updates periodically throughout their employment. These guidelines help ensure that the employees,
officers and directors of the Company and its subsidiaries act with integrity and avoid any real or
perceived violation of the Companys ethics policy, laws or regulations.
The codes of conduct are available at the Companys website (www.pinnaclewest.com) and will be
provided to any shareholder upon request. The shareholders may request copies from Shareholder
Services at the telephone number or address set forth in How many Annual Reports and proxy
statements are delivered to a shared address?. The Company provides significant periodic training
on the Code of Ethics for Financial Professionals and the Ethics Policy and Standards of Business
Practices, including annual computer-based training.
PROPOSAL 1 COMPANY PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO
PROVIDE FOR THE ANNUAL ELECTION OF ALL DIRECTORS
The Board of Directors has adopted a resolution, subject to the requisite approval of the
Companys shareholders, to amend the Companys Articles of Incorporation (Articles) to eliminate
the classification of the Board of Directors and to provide for an annual election by the
shareholders of each director. The text of the proposed amendment to the Articles is attached to
this proxy statement as Appendix A. Under the Companys Articles, the proposed amendment to the
Articles will require the affirmative vote of the holders of not less than two-thirds of the total
voting power of all outstanding shares of voting stock of the Company. The Board of Directors has
approved an amendment of the Companys Bylaws (the Bylaws) to eliminate provisions in
6
the Bylaws that relate to the classification of the Board that will become effective only upon
the amendment of the Articles in Proposal 1 becoming effective.
Background
Since 1985, the Board of Directors has been divided or classified into three classes, with
directors in each class standing for election at every third annual meeting of shareholders. This
proposal, if adopted, would amend the Articles to eliminate the classification structure of the
Board of Directors and provide for the annual election of all directors.
In late 2005, a shareholder of the Company submitted a non-binding shareholder proposal to be
considered at the 2006 Annual Meeting, requesting that the Companys directors take the necessary
steps to declassify the Board of Directors in the most expeditious manner possible. The
shareholder proposal requested that the transition from a classified system to an annual-election
system be completed in one election cycle if practicable. The shareholder proposal received
support from approximately 83% of the votes cast at the 2006 Annual Meeting.
Given the shareholder vote in favor of the proposal at the 2006 Annual Meeting and the
Companys commitment to effective corporate governance, the Board of Directors determined that the
Corporate Governance Committee should further study the advisability of retaining a classified
board and report its findings to the full Board of Directors. Earlier this year, after completing
its review, the Corporate Governance Committee recommended amending the Articles to provide for the
annual election of directors and referred the amendment to the full Board for its consideration.
The Board unanimously agreed to submit amending the Articles to provide for the annual election of
directors to the shareholders for approval.
Reasons for Proposed Amendment
In considering the proposal, the Corporate Governance Committee and the Board of Directors
considered arguments for maintaining, as well as for eliminating, the classified board structure.
The Corporate Governance Committee and the Board of Directors considered several arguments that
favor retention of the classified board structure, including:
|
§ |
|
A classified board provides for continuity and experience in the management of the
unique demands of a company and enhances a companys ability to engage in long-term
strategic planning because a majority of directors will have prior experience as
directors of the company and the stability of multi-year terms; |
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§ |
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A classified board may enhance shareholder value by motivating a would-be-acquiror to
initiate arms-length negotiations because the would-be-acquiror could not replace the
entire board in a single election; and |
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§ |
|
A classified board structure helps to strengthen director independence by lessening
the impact of outside influences, including the threat that a director who refuses to
act in conformity with the wishes of management (or other directors) will not be
re-nominated for office. |
The Corporate Governance Committee and the Board of Directors also considered several
arguments against the retention of the classified board structure, including:
|
§ |
|
Because director elections are the primary means by which the shareholders can affect
corporate management, a classified board structure means that shareholders are unable to
evaluate and elect directors on an annual basis, which may diminish shareholder
influence over company policy; |
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§ |
|
A classified board structure may negatively affect shareholder value by discouraging
takeover proposals and proxy contests because a classified board structure denies
shareholders the opportunity to vote for all directors at the same time; and |
|
|
§ |
|
Shareholders may perceive classified boards as being self-serving. |
After weighing all of these considerations, the Corporate Governance Committee and the Board
of Directors determined that it was in the best interests of the Company and its shareholders to
approve this proposal to amend the Articles to eliminate the classified board structure and provide
for the annual election of all directors. The Board also determined that the shareholders should
have the opportunity to elect the full Board at the 2007 Annual Meeting. See Proposal 2.
Therefore, the directors who would be subject to re-election in 2008 and 2009 under the Companys
current classified board structure have tendered conditional resignations that will be effective if
Proposal 1 is approved by the requisite vote of shareholders. Accordingly, the Board of Directors,
upon recommendation of the Corporate Governance Committee, has approved for submission to the
shareholders Proposal 1 and the adoption of amendments to the Articles that would implement
Proposal 1.
7
Effect of the Voting Outcome
If Proposal 1 is approved, the proposed amendment to the Articles must be filed with the
Arizona Corporation Commission, at which time the amendment will become effective. Directors who
would be subject to re-election in 2008 and 2009 have submitted their resignations contingent on
the amendment of the Articles in accordance with Proposal 1. In addition, Ms. Hesse advised the
Company last September that she would not stand for re-election to the Board of Directors when her
current term expires. As a result, all of the current directors (except Ms. Hesse) will stand for
re-election at the 2007 Annual Meeting. If Proposal 1 is approved, the annual election of
directors will begin with the 2007 Annual Meeting and a full slate of directors will stand for
re-election at the 2007 Annual Meeting for one-year terms pursuant to Proposal 2 (discussed below).
If Proposal 1 is not approved, then the Board of Directors will remain classified and,
pursuant to Proposal 2, only the Class I directors will stand for re-election at the 2007 Annual
Meeting. In that case, each of the Class I directors would serve for a three-year term expiring in
2010 or until such directors successor shall have been duly elected and qualified or his or her
earlier death, resignation or removal. All other directors will continue in their respective
office for the remainder of their respective three-year terms, or until such directors successors
shall have been duly elected and qualified and subject to their earlier resignation, removal or
death.
If a quorum is present, approval of Proposal 1 requires the affirmative vote of the
shareholders present in person or by proxy at the 2007 Annual Meeting and holding not less than
two-thirds, or 66 2/3%, of the total voting power of all outstanding shares of the Companys voting
stock. If you execute and return a proxy, but do not specify how to vote the shares represented by
your proxy, the persons named as proxies will vote FOR the proposed amendment to the Articles.
In determining whether Proposal 1 has received the requisite number of affirmative votes,
abstentions and broker non-votes will count for quorum purposes, and will have the same effect as
votes against Proposal 1.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 TO AMEND THE ARTICLES
OF INCORPORATION TO PROVIDE FOR THE ANNUAL ELECTION OF ALL DIRECTORS
PROPOSAL 2 ELECTION OF DIRECTORS
Who will be elected at the Annual Meeting?
The Board of Directors currently consists of twelve (12) members. Prior to the adoption of
the amendment described in Proposal 1 (discussed above), the Companys Articles 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.
If the shareholders approve the amendment to the Articles to declassify the Board of
Directors, as discussed under Proposal 1 above, conditional resignations submitted by all of the
current directors who would be subject to re-election in 2008 and 2009 will become effective. In
addition, Ms. Hesse advised the Company last September that she would not stand for re-election to
the Board of Directors when her current term expires. As a result, all of the current directors,
except for Ms. Hesse, will stand for re-election at the 2007 Annual Meeting. In the event that
Proposal 1 is approved, the Board has proposed that all nominated directors set forth in the table
on the following page stand for re-election this year to serve as members of the Board of
Directors until the 2008 Annual Meeting of the Shareholders or until their successors are duly
elected and qualified or their earlier death, resignation or removal. The persons named in the
enclosed proxy will vote to elect all of the nominees as directors for terms ending at the 2008
Annual Meeting of the Shareholders unless you withhold authority to vote for any or all of the
nominees by marking the proxy to that effect or so voting in person. If one or more of the eleven
(11) nominees becomes unavailable to serve prior to the date of the 2007 Annual Meeting, the
persons named as proxy holders will vote those shares for the election of such other person(s) as
the Board of Directors may recommend, unless the Board of Directors reduces the total number of
directors.
If the shareholders do not approve the proposed amendment to the Articles to declassify the
Board of Directors as discussed under Proposal 1 above, then the conditional resignations of the
directors will not become effective, the term of office of the four (4) current Class I directors
will expire at the 2007 Annual Meeting, and the terms of office for the Class II and Class III
directors will expire at the 2008 and 2009 Annual Meetings of the Shareholders, respectively. In
that event, the shareholders will be asked to elect four (4) Class I directors this year to serve
as members of the Board of Directors until the 2010 Annual Meeting of the Shareholders or until
their successors are duly elected and qualified. If Proposal 1 is not approved, the persons named
in the enclosed proxy will vote to elect the four (4) Class I nominees as directors for terms
ending at the 2010 Annual Meeting of the Shareholders unless you withhold authority to vote for any
or all of the nominees by marking the proxy to that effect or so voting in person.
8
Who are the current nominees if Proposal 1 is approved?
If the shareholders approve the amendment to the Articles to declassify the Board of
Directors, the eleven (11) nominees for election as directors are set forth on the table on the
following page:
9
NOMINEES FOR DIRECTORS
(TERM EXPIRING AT 2008 ANNUAL MEETING)
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Director |
Name |
|
Age |
|
Occupation, Business & Directorships |
|
Since |
|
Edward N. Basha, Jr.
|
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69 |
|
|
Chairman of the Board of Bashas
supermarket chain since 1968.
Chief Executive Officer of Bashas
and an Arizona civic leader
dedicated to multiple Arizona
community projects.
|
|
|
1999 |
|
|
|
|
|
|
|
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|
Jack E. Davis
|
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60 |
|
|
Chief Operating Officer of the
Company since September 2003 and
President of the Company since
February 2001. Chief Executive
Officer of APS since September 2002
and President of APS from September
2002 until December 2006. 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. Mr. Davis
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.
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2001 |
|
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Michael L. Gallagher
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62 |
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Attorney-at-law with Gallagher &
Kennedy, P.A., Phoenix, Arizona.
Chairman Emeritus of Gallagher &
Kennedy since 2001. Mr. Gallagher
served as President of Gallagher &
Kennedy from 1978 through 2000.
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1999 |
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Pamela Grant
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68 |
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Civic leader. President of
TableScapes, Inc. (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, Ms. Grant was
President, Chair and CEO of
Goldwaters Department Stores, a
division of Associated Dry Goods.
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1985 |
|
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Roy A.
Herberger, Jr.
|
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64 |
|
|
President Emeritus of Thunderbird
School of Global Management, since
November 2004. Mr. Herberger was
President of Thunderbird from 1989
until August 2004. Mr. Herberger
is also a director of MedAire, Inc.
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1992 |
|
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William S. Jamieson, Jr.
|
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|
63 |
|
|
President of Micah Institute of
Asheville, North Carolina since
January 2005. From January 1999 to
December 2004, Mr. Jamieson was
President of the Institute for
Servant Leadership.
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1991 |
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Humberto S. Lopez
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|
61 |
|
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President of HSL Properties, Inc.
(real estate development and
investment), Tucson, Arizona since
1975.
|
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1995 |
|
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Kathryn L. Munro
|
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|
58 |
|
|
Principal of BridgeWest, LLC
(investment company) since July
2003. Ms. Munro was Chair of
BridgeWest, LLC from February 1999
until July 2003. From 1996 to
1998, Ms. Munro served as CEO of
Bank of Americas 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
Knight Transportation, Inc.
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2000 |
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Bruce J. Nordstrom
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57 |
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|
President of and certified public
accountant at the firm of Nordstrom
and Associates, PC, Flagstaff,
Arizona, since 1988.
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2000 |
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William J. Post
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56 |
|
|
Chairman of the Board of the
Company since 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 has held various officer
positions at APS since 1982. Mr.
Post is also a director of Phelps
Dodge Corporation.
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1997 |
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William L. Stewart
|
|
|
63 |
|
|
Mr. Stewart retired from the
Company effective November 26,
2003. Mr. Stewart served as Chief
Executive Officer of Pinnacle West
Energy Corporation (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 provided nuclear
consulting services to APS in 2006. |
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|
2001 |
|
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF
THE NOMINATED SLATE OF DIRECTORS
10
Which directors will be nominated if Proposal 1 is not approved?
If the shareholders do not approve Proposal 1 to declassify the Board of Directors, the four
(4) nominees for election as Class I directors (term expiring at the 2010 Annual Meeting) are: Roy
A. Herberger, Jr.; Humberto S. Lopez; Kathryn L. Munro; and William L. Stewart (see biographical
information above).
Which directors will continue in office if Proposal 1 is not approved?
If the shareholders do not approve Proposal 1 to declassify the Board of Directors, the
following incumbent directors would continue to serve on the Board of Directors for the indicated
terms: Class II Directors (terms expiring at the 2008 Annual Meeting): Edward N. Basha, Jr.;
Michael L. Gallagher; Bruce J. Nordstrom; and William J. Post; and Class III Directors (terms
expiring at the 2009 Annual Meeting): Jack E. Davis; Pamela Grant; William S. Jamieson, Jr.; and
Martha O. Hesse. Ms. Hesse, 64, has been a director since 1991, and was President of Hesse Gas
Company from 1990 to 2003, Senior Vice President of First Chicago Corporation (financial services)
in 1990, and Chair of the Federal Energy Regulatory Commission from 1986 to 1989. She is also a
director of Terra Industries, Inc., Enbridge Energy Partners, L.P. and AMEC plc. As noted above,
Ms. Hesse advised the Company last September that she would not stand for re-election to the Board
of Directors when her current term expires. If the shareholders approve Proposal 1, Ms. Hesses
conditional resignation from the Board will become effective and her term will end. If the
shareholders do not approve Proposal 1, Ms. Hesses current term will continue.
SHARES OF PINNACLE WEST STOCK OWNED BY MANAGEMENT AND LARGE SHAREHOLDERS
The following table shows the amount of Pinnacle West common stock owned by the Companys
directors, nominees, Messrs. Post, Brandt, Davis, Levine and Flores, which officers are the
Companys named executive officers pursuant to the SEC rules (the Named Executive Officers),
other executive officers and those persons who beneficially own more than 5% of the Companys
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 53999, Mail
Station 8602, Phoenix, Arizona 85072-3999. Unless otherwise indicated, all information is as of
March 26, 2007, the record date for the Annual Meeting.
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Number of Shares Beneficially |
|
Shares Acquirable Within |
|
|
Name |
|
Owned 1 |
|
60 Days 2 |
|
Percent of Class |
Directors and Nominees: |
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|
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|
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Edward N. Basha, Jr. |
|
|
10,535 |
|
|
|
0 |
|
|
|
* |
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Jack E. Davis |
|
|
58,686 |
|
|
|
66,000 |
|
|
|
* |
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Michael L. Gallagher |
|
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11,667 |
|
|
|
0 |
|
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|
* |
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Pamela Grant |
|
|
21,956 |
|
|
|
0 |
|
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|
* |
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Roy A. Herberger, Jr. |
|
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14,260 |
|
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|
0 |
|
|
|
* |
|
Martha O. Hesse |
|
|
6,937 |
|
|
|
0 |
|
|
|
* |
|
William S. Jamieson, Jr. |
|
|
11,590 |
|
|
|
0 |
|
|
|
* |
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Humberto S. Lopez |
|
|
33,065 |
|
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|
0 |
|
|
|
* |
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Kathryn L. Munro |
|
|
9,895 |
|
|
|
0 |
|
|
|
* |
|
Bruce J. Nordstrom |
|
|
12,191 |
|
|
|
0 |
|
|
|
* |
|
William J. Post |
|
|
70,819 |
|
|
|
467,750 |
|
|
|
* |
|
William L. Stewart |
|
|
32,463 |
|
|
|
0 |
|
|
|
* |
|
|
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|
Other Named Executive Officers: |
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|
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|
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|
|
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Donald E. Brandt |
|
|
4,283 |
|
|
|
0 |
|
|
|
* |
|
James M. Levine3 |
|
|
40,267 |
|
|
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52,625 |
|
|
|
* |
|
Armando B. Flores4 |
|
|
20,363 |
|
|
|
0 |
|
|
|
* |
|
|
|
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|
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|
|
|
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|
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|
All
Directors and Executive Officers as a Group (21 Persons): |
|
|
436,986 |
|
|
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660,125 |
|
|
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1.1 |
% |
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5% Beneficial Owners5: |
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Barclays Global Investors, NA. and certain other entities |
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|
7,734,321 |
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N/A |
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7.8 |
% |
45 Fremont Street |
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San Francisco, CA 94105 |
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11
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Number of Shares Beneficially |
|
Shares Acquirable Within |
|
|
Name |
|
Owned 1 |
|
60 Days 2 |
|
Percent of Class |
Franklin Resources, Inc. and certain other entities |
|
|
6,644,900 |
|
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|
N/A |
|
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6.7 |
% |
One Franklin Parkway |
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San Mateo, CA 94403-1906 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
T. Rowe Price Associates, Inc. |
|
|
5,987,590 |
|
|
|
N/A |
|
|
|
5.9 |
% |
100 E. Pratt Street |
|
|
|
|
|
|
|
|
|
|
|
|
Baltimore, MD 21202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Bank and Trust Company |
|
|
6,373,403 |
|
|
|
N/A |
|
|
|
6.4 |
% |
225 Franklin Street
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston, MA 02110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Does not include shares that could be purchased by the exercise of options
available at March 26, 2007 or within 60 days thereof under the Companys equity incentive plans.
Those shares are shown in a separate column on this table. The following shares are held in joint
tenancy: Directors and Nominees: Mr. Davis 50,600; Mr. Gallagher 11,667; Mr. Herberger -
7,810; Ms. Hesse 3,955; Mr. Post 22,192; and Mr. Stewart 32,463; other Named Executive
Officers: Mr. Flores 17,436; and All Directors and Executive
Officers as a Group: 162,507. The following shares are held in joint trusts: Directors and
Nominees: Mr. Lopez 33,065; and Ms. Munro 8,885; and All Directors and Executive Officers as a Group: 79,666. Mr. Basha has donated 10,275 of his shares to
a charitable foundation and 260 of his shares are held in a custodial account; however, he has
shared voting rights with respect to such shares. |
|
2 |
|
Reflects the number of shares that could be purchased by the exercise of options
available at March 26, 2007 or within 60 days thereafter under the Companys equity incentive
plans. |
|
3 |
|
Mr. Levine retired effective February 28, 2007. His ownership is shown as of the date
of his retirement. |
|
4 |
|
As of March 26, 2007, Mr. Flores had pledged an aggregate of 5,918 shares of common
stock in accordance with the terms and conditions of a brokerage firms line of credit. |
|
5 |
|
Barclays Global Investors, NA.; Barclays Global Fund Advisors; Barclays Global
Investors, Ltd; Barclays Global Investors Japan Trust and Banking Company Limited; and Barclays
Global Investors Japan Limited (collectively, Barclays); Schedule 13G filing, dated January 31,
2007 and filed with the SEC on January 23, 2007, reports beneficial ownership collectively of
7,734,321 shares, with sole voting power as to 1,898,796 shares and sole dispositive power as to
2,342,440 shares in Barclays Global Investors, NA., sole voting power and sole dispositive power as
to 4,975,189 shares in Barclays Global Fund Advisors, sole voting power and sole dispositive power
as to 309,185 shares in Barclays Global Investors, Ltd., sole voting power and sole dispositive
power as to 98,577 shares in Barclays Global Investors Japan Trust and Banking Company Limited, and
sole voting power and sole dispositive power as to 8,930 shares in Barclays Global Investors Japan
Limited. Franklin Resources, Inc., Charles B. Johnson, Rupert H. Johnson, Jr., Franklin Advisers,
Inc. and Franklin Custodian Funds, Inc. on behalf of Franklin Income Fund (collectively,
Franklin) Schedule 13G filing, dated January 31, 2007 and filed with the SEC on February 5, 2007,
reports beneficial ownership collectively of 6,644,900 shares, with sole voting power as to
6,631,100 shares and sole dispositive power as to 6,642,800 shares in Franklin Advisers, Inc. T.
Rowe Price Associates, Inc. Schedule 13G filing, dated February 14, 2007 and filed with the SEC on
February 13, 2007, reports beneficial ownership of 5,987,590 shares with sole voting power as to
939,367 shares and sole dispositive power as to 5,987,590 shares. State Street Bank and Trust
Company Schedule 13G filing, dated February 12, 2007 and filed with the SEC on February 12, 2007,
reports beneficial ownership of 6,373,403 shares, with sole voting power as to 3,175,996 shares,
shared voting power as to 3,197,437 and shared dispositive power as to 6,373,403 shares. The
Company makes no representations as to the accuracy or completeness of such information and
believes these filings represent share ownership as of December 31, 2006. |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Companys directors and officers, and
persons who own more than 10% of the Companys common stock to file reports of ownership and
changes of ownership with the SEC. Based solely on the Companys review of these reports, the
Company believes that its directors, officers, and greater than 10% beneficial owners complied with
their respective Section 16(a) reporting requirements for fiscal year 2006 and prior
fiscal years on a timely basis except as otherwise previously disclosed.
12
RELATED PARTY TRANSACTIONS
The Audit Committee of the Board of Directors is responsible for reviewing and approving
all material transactions with any related party. Related parties include any of our directors,
executive officers, certain of our shareholders, and with respect to each of them, their immediate
family members and certain entities in which they own an interest that is greater than 10% (a
Related Party). This obligation is set forth in writing in our Statement of Policy Regarding
Related Party Transactions (the Policy).
To identify Related Party transactions, each year the Company submits and requires our
directors and officers to complete Director and Officer Questionnaires identifying any transactions
with the Company in which a Related Party has an interest. We review Related Party transactions
due to the potential for a conflict of interest. A conflict of interest occurs when an
individuals private interest interferes, or appears to interfere, in any way with our interests.
Our Ethics Policy and Standards of Business Practices,Doing the Right Thing, requires all
directors, officers and employees who may have a potential or apparent conflict of interest to
notify their immediate leader and the Companys ethics department. In addition, the Policy
specifically provides that any Related Party Transaction, as defined in the Policy, must be
approved or ratified by the Audit Committee. A Related Party Transaction is any transaction in
which a Related Party and the Company or any of its subsidiaries are participants and where the
amount involved exceeds $120,000 in the aggregate.
Our directors and executive officers are required to bring Related Party Transactions to the
attention of the Companys General Counsel so that the Related Party Transaction may be reviewed in
accordance with the Policy. The following transactions are exempt from the review requirement:
|
|
|
Transactions in which rates or charges are fixed in conformity with law or
governmental authority (such as APS rates approved by the Arizona Corporation
Commission) or the rates or charges are determined by competitive bid; |
|
|
|
|
Transactions with SunCor or its affiliates (such as home purchases) that are offered
to the Related Party on terms comparable to those that could be obtained in arms length
dealing with an unrelated party; |
|
|
|
|
Transactions involving charitable or non-profit organizations where the Related Party
serves only as a director or chairman of the organizations Board of Directors for no
compensation; |
|
|
|
|
Transactions in which the Related Partys interest arises only: (i) from such
persons position as a director of the entity involved in the transaction; (ii) from the
direct or indirect ownership by such person, in the aggregate of less than a ten (10)
percent equity interest in the entity involved in the transaction; or (iii) the interest
arises under both (i) and (ii) above; and |
|
|
|
|
Any transaction involving a director that was considered by the Board in assessing
the directors independence and which resulted in a determination that disclosure of the
transaction was not required under Item 404(a) of SEC Regulation S-K. |
The Audit Committee will only approve or ratify a Related Party Transaction if the transaction
is on terms no less favorable than those that could be obtained in arms length dealing with an
unrelated party and the Audit Committee finds that the terms of the transaction are fair and
reasonable.
We expect the Companys directors, officers and employees to act and make decisions that are
in the Companys best interests and encourage them to avoid situations that present a conflict
between the Companys interests and their own personal interests. The Companys directors,
officers and employees are prohibited from taking any action that may make it difficult for them to
perform their duties, responsibilities and services to the Company in an objective and fair manner.
13
AUDIT MATTERS
Report of the Audit Committee
The Audit Committee of the Board submitted the following report:
In accordance with its written charter adopted by the Board, the primary function of the Audit
Committee is to assist the Board in monitoring (1) the integrity of the financial statements of the
Company, (2) the independent auditors qualifications and independence and performance, (3) the
performance of the Companys internal audit function, and (4) the compliance by the Company with
legal and regulatory requirements. The Audit Committee is directly responsible for the
appointment, compensation, retention and oversight of the Companys independent auditors.
Management is responsible for the Companys financial reporting process, including the Companys
system of internal controls, and for the preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America. The independent auditors
are responsible for auditing and rendering an opinion on those financial statements, as well as
auditing certain aspects of the Companys internal controls. The Committees responsibility is to
monitor these processes.
During 2006, the Audit Committee met seven (7) times. These meetings included sessions with
the Companys internal auditors and with the independent auditor, both with and, at six of these
meetings, without the presence of management.
In discharging its oversight responsibility as to the audit process, the Committee obtained
from Deloitte & Touche LLP, the Companys independent auditors, the formal written disclosures and
the letter required by Independence Standards Board Standard No. 1, Independence Discussions with
Audit Committees. The Committee discussed with the auditors any relationships that may impact the
auditors objectivity and independence and satisfied itself as to the auditors independence. The
Audit Committee further determined that the other services provided to the Company for which the
auditors received the fees were compatible with maintaining the auditors independence.
The Committee discussed and reviewed with Deloitte & Touche LLP all communications required by
auditing standards generally accepted in the United States of America and SEC regulations,
including those described in Statement on Auditing Standards No. 61, as amended, Codification of
Statements on Auditing Standards, AU § 380 and Rule 2-07 of Regulation S-X and, with and without
management present, discussed and reviewed the results of the independent auditors audit of the
financial statements.
The Audit Committee discussed and reviewed the audited financial statements of the Company as
of and for the fiscal year ended December 31, 2006, with the Companys management, the Director of
Audit Services and the independent auditors.
Based on the foregoing, the Committee recommended to the Board that the Companys audited
financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, for filing with the SEC.
|
|
|
COMMITTEE CHAIRMAN
|
|
COMMITTEE MEMBERS |
Bruce J. Nordstrom
|
|
Edward N. Basha, Jr. |
|
|
Pamela Grant |
|
|
William S. Jamieson, Jr. |
|
|
Humberto S. Lopez |
|
|
Kathryn L. Munro |
Who are the Companys independent auditors and will they be at the Annual Meeting?
The Audit Committee has selected Deloitte & Touche LLP, independent registered public
accountants, to examine the Companys financial statements for the fiscal year ending December 31,
2007 and, pursuant to Proposal 4, has requested shareholder ratification of this selection. 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.
14
What fees were paid to our independent registered public accountants in 2005 and 2006?
The following fees were paid to the Companys independent registered public accountants,
Deloitte & Touche LLP, for the last two fiscal years:
|
|
|
|
|
|
|
|
|
Type of Service |
|
2005 |
|
2006 |
Audit Fees 1 |
|
$ |
3,145,077 |
|
|
$ |
2,722,685 |
|
Audit-Related Fees 2 |
|
|
189,400 |
|
|
|
207,890 |
|
Tax Fees 3 |
|
|
33,211 |
|
|
|
37,396 |
|
|
|
|
1 |
|
The aggregate fees billed for services rendered for the audit of the Companys
annual financial statements, attestation procedures on internal controls over financial reporting,
review of financial statements included in Forms 10-Q, services related to SEC matters and filings,
and the financial statement audit of one of the Companys subsidiaries. |
|
2 |
|
The aggregate fees billed for audit-related services, which primarily consist of fees
for auditing of the Companys benefit plans and, for 2005 only, Sarbanes-Oxley Section 404
readiness. |
|
3 |
|
The aggregate fees billed primarily for tax services and preparation of a tax return
for one of the Companys subsidiaries. |
What are the Audit Committees pre-approval policies?
The Audit Committee pre-approves each audit service and non-audit service to be provided by
the Companys independent registered public accountants. The Audit Committee has delegated to the
Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be
performed by the independent public accountants if the services are not expected to cost more than
$50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next
scheduled meeting. All of the services performed by Deloitte & Touche LLP for the Company in 2006
were pre-approved by the Audit Committee.
EXECUTIVE COMPENSATION
[TO BE INCLUDED IN THE DEFINITIVE PROXY STATEMENT]
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2006 with respect to our
compensation plans and individual compensation arrangements under which our equity securities were
authorized for issuance.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
Number of |
|
|
|
|
|
remaining available for |
|
|
securities to be |
|
Weighted-average |
|
future issuance under |
|
|
issued upon exercise |
|
exercise price of |
|
equity compensation |
|
|
of outstanding |
|
outstanding |
|
plans (excluding |
|
|
options, warrants |
|
options, warrants |
|
securities reflected in |
|
|
and rights |
|
and rights |
|
column (a)) |
Plan category |
|
(a)1 |
|
(b)2 |
|
(c) |
Equity
compensation plans
approved by security
holders |
|
|
2,019,488 |
|
|
$ |
40.64 |
|
|
|
3,946,236 |
|
Equity
compensation plans
not approved by
security holders |
|
|
|
|
|
|
|
|
|
|
134,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,019,488 |
|
|
$ |
40.64 |
|
|
|
4,080,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
This amount includes shares subject to outstanding options as well as shares subject
to outstanding performance share awards at the maximum amount issuable under such awards. However,
payout of the performance share awards is contingent on the
Company reaching certain levels of performance during a three-year performance period. If the
performance criteria for these |
15
|
|
|
|
|
awards are not fully satisfied, the award recipient will receive
less than the maximum number of shares available under these grants and may receive nothing from
these grants.
|
|
2 |
|
The weighted average exercise price in this column does not take performance share
awards into account, as those awards have no exercise price. |
Equity Compensation Plans Approved By Security Holders
The
Company has two equity compensation plans that were approved by its shareholders: the
Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan, under which no new stock awards
may be granted; and the 2002 Plan. See Note 16 of the Notes to Consolidated Financial Statements
in the 2006 Form 10-K for additional information regarding these plans.
Equity Compensation Plans Not Approved By Security Holders
The Company has one equity compensation plan, the Directors Equity Plan, for which the
approval of shareholders was not required. If the 2007 Plan is approved by shareholders pursuant
to Proposal 3, we will not issue any additional shares under the Directors Equity Plan.
Number of Shares Subject to the Directors Equity Plan. The total number of shares of
the Companys common stock granted under the Directors Equity Plan may not exceed 200,000. In the
case of a significant corporate event, such as a reorganization, merger or consolidation, the
Directors Equity Plan provides for adjustment of the above limit, the number of shares to be
awarded automatically to eligible non-employee directors and the number of shares of the Companys
common stock non-employee directors are required to own to receive an annual grant of common stock
under the Directors Equity Plan.
Eligibility for Participation. Only non-employee directors may participate in the
Directors Equity Plan. A non-employee director is an individual who is a director of the Company
but who is not also an employee of the Company or any of its subsidiaries.
Terms of Awards. The Directors Equity Plan provides for: (1) annual grants of common
stock to eligible non-employee directors, (2) discretionary grants of common stock to eligible
non-employee directors, and (3) grants of non-qualified stock options to eligible non-employee
directors.
Annual Grants of Stock
Each individual who is a non-employee director as of July 1 of a calendar year, and who meets
the requirements of ownership of the Companys common stock set forth below, will receive 1,100
shares of the Companys common stock for such calendar year. In the first calendar year in which a
non-employee director is eligible to participate in the Directors Equity Plan, he or she must own
at least 900 shares of the Companys common stock as of December 31 of the same calendar year to
receive a grant of 1,100 shares of the Companys common stock. If the non-employee director owns
900 shares of common stock as of June 30, he or she will receive a grant of 1,100 shares of common
stock as of July 1 of the same calendar year. If the non-employee director does not own 900 shares
of the Companys common stock as of June 30, but acquires the necessary shares on or before
December 31 of the same year, he or she will receive a grant of 1,100 shares of common stock within
a reasonable time after the Company verifies that the requisite number of shares has been acquired.
In each subsequent year, the number of shares of the Companys common stock the non-employee
director must own to receive a grant of 1,100 shares of common stock will increase by 900 shares,
until reaching a maximum of 4,500 shares. In each of the subsequent years, the non-employee
director must own the requisite number of shares of the Companys common stock as of June 30 of the
relevant calendar year.
Discretionary Grants of Stock
The Human Resources Committee of the Board of Directors administers the Directors Equity Plan
and may grant shares of the Companys common stock to non-employee directors in its discretion. No
discretionary grants of common stock have been made under the Directors Equity Plan.
Grants of Non-qualified Stock Options
The Committee can grant non-qualified stock options under the Directors Equity Plan. The
terms and the conditions of the option grant, including the exercise price per share, which may not
be less than fair market value on the date of grant, will be set by the Committee in a written
award agreement. The Committee will determine the time or times at which any such options may be
exercised in whole or in part. The Committee will also determine the performance or other
conditions, if any, that must be satisfied before all or part of an option may be exercised. Any
such options granted to a participant will expire on the tenth
anniversary date of the date of grant, unless the option is earlier terminated, forfeited or
surrendered pursuant to a provision of the
16
Directors Equity Plan or the applicable award agreement.
Notwithstanding the foregoing, if a participant ceases to be a Company director for any reason,
including death or disability, any such options held by that participant will expire on the second
anniversary of the date on which the participant ceased to be a Company director, unless otherwise
provided in the applicable award agreement. Unless the Committee provides otherwise, no such
options may be sold, transferred, pledged, assigned or otherwise alienated, other than by will, the
laws of descent and distribution, or under any other circumstances allowed by the Committee. No
options have been granted under the Directors Equity Plan.
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Human Resources Committee are Messrs. Basha, Herberger, Jamieson and
Lopez and Ms. Grant. None of the members of the Human Resources Committee is or has been an
employee of the Company or any of its subsidiaries. There were no interlocking relationships
between the Company and other entities that might affect the determination of the compensation of
the Companys executive officers.
PROPOSAL 3 APPROVAL OF THE PINNACLE WEST CAPITAL CORPORATION 2007 LONG-TERM
INCENTIVE PLAN
General
Equity-based long-term
compensation is an important element of our compensation program. In the past few years, we issued
long-term equity incentive awards under the 2002 Plan. In early 2007, the Board of Directors
approved the 2007 Long-Term Incentive Plan (the 2007 Plan), subject to shareholder approval at
the 2007 Annual Meeting. If shareholder approval is obtained, the 2007 Plan will become effective
on the date approved by shareholders (the Effective Date).
The 2007 Plan provides for the granting of incentive and nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units, performance shares, performance
share units, performance cash awards, dividend equivalents and stock to eligible individuals. The
2007 Plan also allows for awards that qualify as performance-based pay. Performance-based pay
awards are not subject to the $1,000,000 limitation on deductible compensation pursuant to the
Internal Revenue Code, as amended (the Code).
The Board believes that the 2007 Plan will promote the success, and enhance the value, of the
Company by linking the personal interests of participants to those of Company shareholders. The
Board also believes that the 2007 Plan will strengthen the Companys ability to motivate, attract,
and retain employees upon whom the successful operation of the Company is largely dependent.
A summary of the 2007 Plans principal provisions is set forth below. The summary is
qualified by reference to the full text of the 2007 Plan, which is attached as Appendix B.
Administration
The Committee, consisting of at least two directors each of whom qualifies as a non-employee
director as defined in Rule 16b-3(b)(3) of the Exchange Act, and an outside director under
Section 162(m) of the Code, has the exclusive authority to administer the Plan. The Committee has
the power to determine eligibility to receive an award, the amount and type of award and its terms
and conditions.
Eligibility
Persons eligible to participate in the 2007 Plan include present and future employees and
Board members of, and consultants and advisors to, the Company and its subsidiaries, as determined
by the Committee (or in the case of Board members, the Board). Awards made to a prospective member
of the Board, employee, officer, consultant or advisor must specifically provide that no portion of
the award will vest, become exercisable or be issued prior to the date on which the individual
begins providing services to the Company or its subsidiaries.
17
Limitation on Awards and Shares Available
The 2007 Plan authorizes the issuance of up to 8,000,000 shares of the Companys common stock,
plus additional shares that become available for issuance under the Prior Plans as described below.
The amount of stock reserved for grant pursuant to the 2007 Plan is subject to adjustment in the
event of any merger, consolidation, liquidation, issuance of rights or warrants to purchase
securities, recapitalization, reclassification, stock dividend, spin-off, split-off, stock split,
reverse stock split or other distribution with respect to the shares of stock, or any similar
corporate transaction or event in respect of the stock. Shares of stock issued in connection with
awards other than options and stock appreciation rights (SARs) will be counted against the shares
available for grant under the 2007 Plan as two shares for every one share issued in connection with
the award. Shares of stock issued in connection with the exercise of an option or SAR will be
counted against the shares of stock available for grant as one share.
Shares of stock that are potentially deliverable under any award that expires or is cancelled,
forfeited, settled in cash or otherwise terminated without a delivery of such shares will not be
counted against the limit of shares available for issuance under the 2007 Plan and will again be
available for grant under the 2007 Plan. In addition, shares of stock that have been issued in
connection with any award (e.g., restricted stock) that is cancelled, forfeited, or settled in cash,
such that those shares are returned to the Company, will again be available for grant under the
2007 Plan.
If the 2007 Plan is approved, we will not issue any additional shares or awards under either
the 2002 Plan, discussed above or the Directors Equity Plan, discussed under the heading Securities Authorized
For Issuance Under Equity Compensation Plans Equity Compensation Plans Not Approved By Security
Holders. In the discussion below, we refer to the 2002 Plan and the Directors Equity Plan as the
Prior Plans. Under the 2007 Plan, any shares of stock that are potentially deliverable under any
award granted under a Prior Plan will be added to the number of shares of stock available for grant
under the 2007 Plan if the award expires or is cancelled or terminated without a delivery of such
shares to the participant. In addition, any shares of stock that have been issued in connection
with any award granted under a Prior Plan (e.g., restricted stock) will be added to the number of
shares available for grant under the 2007 Plan if the award is cancelled, forfeited, or terminated
such that those shares are returned to the Company.
The payment of dividend equivalents in conjunction with any outstanding award under the 2007
Long-Term Incentive Plan will not be counted against the shares available for issuance under the
2007 Plan if the dividend equivalents are paid in cash. The exercise of a stock-settled SAR or
net-cashless exercise of an option (or a portion thereof) will reduce the number of shares of stock
available for issuance under the 2007 Plan by the entire number of shares of stock subject to that
SAR or option (or applicable portion thereof), even though a smaller number of shares of stock will
be issued upon such an exercise. Also, shares of stock tendered to pay the exercise price of an
option or tendered or withheld to satisfy a tax withholding obligation arising in connection with
an award will not become available for grant or sale under the 2007 Plan. The Committee may adopt
such other reasonable rules and procedures as it deems to be appropriate for purposes of
determining the number of shares of stock that are available for awards under the 2007 Plan.
No more than 500,000 shares of stock may be granted to any one participant during a calendar
year. The maximum performance-based award (other than a performance cash award) payable to any one
participant during a performance period is 500,000 shares of stock or the cash equivalent. The
maximum performance cash award payable to any one participant for any performance period is
$5,000,000. As of , 2007, the stocks closing price on New York Stock Exchange was
$ per share.
Awards
The following types of incentive awards may be granted under the 2007 Plan: incentive stock
options, nonqualified stock options, stock appreciation rights (SARs), restricted stock,
restricted stock units, performance shares, performance share units, cash, dividend equivalents,
and stock.
Stock options. Incentive stock options and nonqualified stock options may be granted
under the 2007 Plan. Incentive stock options will only be granted to participants who are
employees. The exercise price of all stock options will be at least 100% of the fair market value
of the stock on the date that the option is granted. Stock options may be exercised as determined
by the Committee provided that the term of any option granted under the 2007 Plan shall not exceed
ten years. The Committee will determine the methods by which the exercise price of an option may
be paid and the methods by which shares of stock may be delivered to participants. The Committee
may not reprice options previously granted under the 2007 Plan.
Stock
appreciation rights. The Committee may grant SARs under the 2007 Plan. A SAR
entitles the participant to receive the appreciation on one share of stock. Appreciation is
calculated as the excess of (i) the fair market value on the date of
18
exercise over (ii) the base value of the SAR as determined by the Committee, which shall not
be less than the fair market value on the date of grant. The terms and conditions of any SAR will
be determined by the Committee at the time of the grant.
Restricted stock. The Committee may grant restricted stock under the 2007 Plan. A
restricted stock award gives the participant the right to receive a specified number of shares of
stock at a price determined by the Committee (including zero). Restrictions may limit
transferability and subject the stock to substantial risk of forfeiture until specific conditions
or goals are met. During the restriction period, participants holding shares of restricted stock
may, if permitted by the Committee, have full voting and dividend rights with respect to such
shares. The restrictions will lapse in accordance with a schedule or other conditions as
determined by the Committee. As a general rule, if a participant terminates employment when the
stock is subject to restrictions, the participant forfeits the unvested restricted stock. The
Committee may, in its discretion, waive the restrictions in whole or in part.
Restricted stock units. The Committee may grant restricted stock units under the 2007
Plan. A restricted stock unit award gives the participant the right to receive stock, or a cash
payment equal to the fair market value of the stock, subject to any vesting or other restrictions
the Committee deems appropriate. The restrictions will lapse in accordance with a schedule or
other conditions as determined by the Committee. As a general rule, if a participant terminates
employment when the restricted stock units are subject to restrictions, the participant forfeits
the unvested restricted stock units. The Committee may, in its discretion, waive the restrictions
in whole or in part.
Performance share awards. The Committee may grant performance share awards under the
2007 Plan. A performance share award gives the participant the right to receive stock if certain
performance criteria or goals are satisfied. Performance may be measured on a specific date or
dates or over any period or periods as determined by the Committee.
Performance share units. The Committee may grant performance share units under the
2007 Plan. A performance share unit award gives the participant the right to receive stock or cash
in an amount equal to the fair market value of the stock if certain performance criteria or goals
are satisfied. Performance may be measured on a specified date or dates or over any period or
periods as determined by the Committee.
Dividend equivalents. The Committee may grant dividend equivalents under the Plan. A
dividend equivalent award gives the participant the right to receive a payment when a dividend is
declared on the participants stock award. Dividend equivalents are credited on a date that falls
between the date the award is granted and the date the award is exercised, vests or expires. The
Committee will specify when the dividend equivalents will be converted to cash or stock, the
formula for conversion and any restrictions or limitations on the conversion. Dividend equivalents
will not be granted with respect to options or SARs.
Stock grants. The Committee may grant stock awards under the 2007 Plan. A stock
grant award gives the participant the right to receive, or the right to purchase at a predetermined
price, shares of stock free from vesting restrictions. A stock grant award may be granted or sold
as consideration for past services, other consideration or in lieu of cash compensation due to any
participant.
Performance cash. The Committee may grant performance cash awards under the 2007
Plan. A performance cash award gives the participant the right to receive a cash payment if
certain performance criteria or goals are satisfied. Performance may be measured on a specified
date or dates or over any period or periods determined by the Committee.
Performance-based awards. Under the 2007 Plan, restricted stock, restricted stock
units, performance shares, performance share units, dividend equivalents, stock grants and
performance cash awards may be designated as performance-based awards. Performance-based awards
are subject to additional requirements, some of which are described below, which are required in
order to be treated as performance-based compensation under Section 162(m) of the Code. The
deductibility of these awards is preserved for federal income tax purposes. Because Section 162(m)
of the Code only applies to covered employees, as defined in Section 162(m), only covered
employees will receive awards that will be classified as performance-based awards.
Pre-established performance criteria must be met before a participant is eligible to receive
payment for a performance-based award. Pre-established performance criteria must be based on one
or more of the following: EBITDA; EBIT; costs; operating income; net income; cash flow; operating
cash flow; net cash flow; fuel cost per million BTU; costs per kilowatt hour; retained earnings;
budget achievement; return on equity; return on assets; return on capital employed; return on
invested capital; cash available to Company from a subsidiary or subsidiaries; expense spending;
O&M expense; O&M or capital per kilowatt hour; gross margin; net margin; market capitalization;
customer satisfaction; revenues; financial return ratios; market share; shareholder return and/or
value (including but not limited to total shareholder return); operating profits (including
earnings before or after income taxes, depreciation and amortization); net profits; earnings per
share; earnings per share growth; profit returns and margins; stock price; working capital;
business trends; production cost; project milestones; capacity utilization; quality; economic value
added; plant and equipment performance; operating efficiency; diversity; debt; dividends; bond
ratings; corporate governance; and
19
health and safety (including environmental health and safety). Performance goals may be
expressed in terms of overall Company performance or the performance of a division, business unit,
plant or an individual. The Committee has discretion to select the length of the performance
period, the type of performance-based awards and the criteria or goals used to measure the
performance.
The performance criteria and other related aspects of the 2007 Plan will be subject to
shareholder approval again in 2012 if (as is currently the case) shareholder approval is then
required to maintain the tax-deductible nature of performance-based compensation under the 2007
Plan.
Amendment and Termination
The Committee, with the Boards approval, may terminate, amend, or modify the 2007 Plan at any
time, except where shareholder approval for an amendment is required by applicable law, regulation
or stock exchange rule. As a general rule, the Committee cannot terminate, amend or modify the
2007 Plan in a way that has a material adverse effect on any participants outstanding award
without the participants consent.
The 2007 Plan will terminate on the tenth anniversary of the Effective Date. In no event may
an award be granted under the 2007 Plan on or after the tenth anniversary of the Effective Date.
Awards outstanding on the termination date will not be affected by the termination.
Federal Income Tax Consequences
This is a summary of the principal federal income tax consequences of the 2007 Plan. State,
local and foreign income taxes may also be applicable.
With the exception of a stock grant, a participant will not recognize taxable income at the
time of grant.
Upon exercise of a nonqualified stock option, the lapse of restrictions on restricted stock,
or upon the payment of SARs, restricted stock units, stock grants, performance shares, performance
share units, performance cash, or dividend equivalents, the participant will recognize ordinary
taxable income in an amount equal to the difference between the amount paid for the award, if any,
and the fair market value of the stock or amount received on the date of exercise, lapse of
restriction or payment. The Company will be entitled to a concurrent deduction equal to the
ordinary income recognized by the participant.
A participant who is granted an incentive stock option will not recognize taxable income at
the time of exercise. However, the excess of the stocks fair market value over the option price
could be subject to the alternative minimum tax (assuming the stock received is not subject to a
risk of forfeiture and is not transferable). If stock acquired upon exercise of an incentive stock
option is held for a minimum of two years from the date of grant and one year from the date of
exercise, the gain or loss (in an amount equal to the difference between the sales price and the
exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss,
and the Company will not be entitled to any deduction. If the holding period requirements are not
met, the incentive stock option will not meet the requirements of the Code and the tax consequences
described for nonqualified stock options will apply.
Congress recently enacted Section 409A of the Code, which dramatically changes the tax rules
for deferred compensation arrangements. Among other things, Section 409A expands the definition of
deferred compensation arrangements to include, for example, below market option grants, certain
SARs, restricted stock units, performance shares, performance share units, performance cash and
dividend equivalents (in some circumstances). Upon a violation of Section 409A, a participant must
include in ordinary income all deferred compensation, pay interest from the date of the deferral
and pay an additional 20% tax. The 2007 Plan prohibits the Committee from taking any action with
respect to the operation of the 2007 Plan that would violate Section 409A. Any award agreement
subject to Section 409A will include provisions necessary for compliance as determined by the
Committee. The Company intends that awards granted under the 2007 Plan will comply with the
requirements of Section 409A and intends to administer and interpret the 2007 Plan in such a
manner.
Change-of-Control
If
a change-of-control occurs and awards are converted, assumed, or replaced by a successor,
the Committee may allow all outstanding awards to become fully exercisable and all restrictions on
outstanding awards to lapse prior to the change-of-control. If a
change-of-control occurs and
awards are not converted, assumed, or replaced by a successor, all outstanding awards will
automatically become fully exercisable and all restrictions on outstanding awards will lapse.
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New Plan Benefits
Benefits under the 2007 Plan will depend on the Committees actions and the fair market value
of common stock at various future dates. Consequently, it is not possible to determine the future
benefits that will be received by 2007 Plan participants. On February 20, 2007, the Committee made
certain grants of RSUs under the 2007 Plan conditional on approval of the 2007 Plan at the 2007
Annual Meeting. The
RSUs vest over a four-year period (25% per year) and fully vest
upon a recipients retirement under the Pinnacle West Capital
Corporation Retirement Plan. We made a total of 134,917 conditional grants of RSUs and of those grants, the
following grants were made to the Named Executive Officers: Mr. Post 22,500; Mr. Davis 10,000;
Mr. Brandt 10,000; and Mr. Flores 3,543.
Vote Required
Adoption of the 2007 Plan requires approval by holders of a majority of the outstanding shares
of Company stock who are present, or represented, and entitled to vote thereon, at the 2007 Annual
Meeting provided the total votes cast with respect to this proposal represents over fifty percent
(50%) of the shares of common stock entitled to vote on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF PROPOSAL 3.
PROPOSAL 4 RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS
INDEPENDENT AUDITORS OF THE COMPANY
The Audit Committee has selected Deloitte & Touche LLP as the Companys independent
auditors for the fiscal year ending December 31, 2007 and has further directed that management
submit the selection of the independent auditors for ratification by the shareholders at the Annual
Meeting. Shareholder ratification is not required by the Companys Bylaws or other applicable
legal requirements. However, the Audit Committee is submitting the selection of Deloitte & Touche
LLP to the shareholders for ratification as a matter of good corporate practice. In the event the
shareholders fail to ratify the appointment, the Audit Committee may reconsider this appointment.
Even if the appointment is ratified, the Audit Committee, in its discretion, may direct the
appointment of a different independent accounting firm at any time during the year if the Audit
Committee determines that such a change would be in the Companys and the shareholders best
interests.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANYS
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2007.
ADDITIONAL INFORMATION
How do we submit shareholder proposals or director nominations for the next Annual Meeting?
Any shareholder who intends to have a proposal considered for inclusion in the proxy statement
and form of proxy relating to the 2008 Annual Meeting of the Shareholders and who wishes
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 12, 2007. A shareholder who intends to present a proposal at the 2008 Annual
Meeting but does not wish it to be included in the proxy statement and form of proxy must submit
the proposal by the close of business on February 23, 2008 but
not earlier than January 24, 2008, in accordance with the applicable provisions of the Companys 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 25, 2008, the Companys 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 2008 Annual Meeting. In addition, any shareholder who wishes to submit a nomination to the
Board must deliver written notice of the nomination on or before December 1, 2007 and comply with
the information requirements in the Companys Bylaws relating to shareholder nominations. See How
are nominees for the Board selected?. The Company suggests that proponents submit their proposals
and nominations to the Office of the Secretary by Certified Mail Return Receipt Requested.
21
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 the Annual
Report or proxy statement at the same address now or in the future may:
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call the Companys Shareholder Services at 1-602-250-5511; |
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mail a request to receive separate copies to Shareholder Services at P.O. Box 53999,
Mail Station 8602, Phoenix, AZ 85072-3999; or |
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e-mail a request to: shareholderdept@pinnaclewest.com; |
and the Company will promptly deliver the Annual Report or proxy statement to you upon your
request.
Shareholders who own Company stock through a broker and who wish to receive separate copies of
the Annual Report and proxy statement should contact their broker.
Shareholders
currently receiving multiple copies of the Annual Report and proxy statement 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 or by telephone. The Company has retained Georgeson Inc.
to assist in the distribution of proxy solicitation materials and the solicitation of proxies for
$8,500, plus customary expenses. As required, the Company will reimburse brokerage houses and
others for their out-of-pocket expenses in forwarding documents to beneficial owners of stock.
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APPENDIX A
If Proposal 1, Company Proposal to Amend the Articles of Incorporation to Provide for the
Annual Election of All Directors, is approved by the requisite number of shareholders at the 2007
Annual Meeting, Article Fifth of the restated Articles of Incorporation of the Company will
be amended to read in its entirety as follows (the first paragraph of
the proposed amended Article Fifth reflects the Board
declassification and the second paragraph of the proposed amended
Article Fifth remains unchanged; in addition, the names of the
Companys initial directors have been deleted form the proposed
amended Article Fifth):
FIFTH: The Board of Directors of the corporation shall consist of not less than
9 nor more than 21 shareholders of the corporation or of any parent corporation
thereof. Each director shall hold office until
the next annual meeting of the shareholders or until his or her earlier death,
resignation or removal. The foregoing notwithstanding, each director shall serve
until his or her successor is duly elected and qualified.
Except
to fill vacancies resulting from the death or resignation of a
director and except for nominations by the Board of Directors or a
committee thereof, nominations for directors must be made in writing
at least 180 days prior to the date of the shareholders meeting
at which election is to occur.
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APPENDIX B
PINNACLE WEST CAPITAL CORPORATION
2007 LONG-TERM INCENTIVE PLAN
EFFECTIVE DATE: ___, 2007
APPROVED BY SHAREHOLDERS: ___, 2007
TERMINATION DATE: ___, 2017
ARTICLE 1
PURPOSE
1.1 GENERAL. The purpose of the Pinnacle West Capital Corporation 2007 Long-Term
Incentive Plan (the Plan) is to promote the success and enhance the value of Pinnacle
West Capital Corporation (the Company) by linking the personal interests of the
Participants to those of Company shareholders and by providing the Participants with an incentive
for outstanding performance to generate superior returns to Company shareholders. The Plan is
further intended to provide flexibility to the Company in its ability to motivate, attract, and
retain the services of the Participants upon whose judgment, interest, and special effort the
successful conduct of the Companys operation is largely dependent.
ARTICLE 2
EFFECTIVE AND EXPIRATION DATE
2.1 EFFECTIVE DATE. The Plan is effective as of the date the Plan is approved by the
Companys shareholders (the Effective Date). The Committee may nonetheless make
contingent Awards before the Effective Date provided that the vesting, exercise, or payment of such
Awards is expressly conditioned on shareholder approval and the Awards are void if shareholders do
not approve the Plan.
2.2 EXPIRATION DATE. The Plan will expire on, and no Award may be granted under the
Plan after, the tenth anniversary of the Effective Date. Any Awards that are outstanding on the
tenth anniversary of the Effective Date shall remain in force according to the terms of the Plan
and the Award Agreement.
ARTICLE 3
DEFINITIONS AND CONSTRUCTION
3.1 DEFINITIONS. The following words and phrases shall have the following meanings:
(a) Affiliate shall mean (i) a corporation other than the Company that is a member
of a controlled group of corporations (within the meaning of Section 414(b) of the Code as
modified by Section 415(h) of the Code) or (ii) a group of trades or businesses under common
control (within the meaning of Section 414(c) of the Code as modified by Section 415(h) of the
Code), which in the case of either clause (i) or (ii) also includes the Company as a member. For
purposes of determining whether an event constitutes a Change of Control within the meaning of
Section 3.1(g), Affiliate status shall be determined on the day immediately preceding the
date of the transaction or event.
(b) APS shall mean Arizona Public Service Company, a Subsidiary of the Company.
(c) Award means any Option, Stock Appreciation Right, Restricted Stock, Performance
Share, Performance Share Unit, Performance Cash, Stock Grant, Dividend Equivalent, or Restricted
Stock Unit granted to a Participant under the Plan.
(d) Award Agreement means any written agreement, contract, or other instrument or
document evidencing an Award.
(e) Beneficial Owner shall have the same meaning as given to that term in Rule 13d-3
of the General Rules and Regulations of the Exchange Act, provided that any pledgee of the voting
securities of the Company or APS shall not be deemed to be the Beneficial Owner thereof prior to
its disposition of, or acquisition of voting rights with respect to, such securities.
(f) Board means the Board of Directors of the Company.
24
(g) Change of Control means and includes each of the following events:
(1) Any person (as such term is defined in Section 3(a)(9) or used in Section 13(d) or 14(d)
of the Exchange Act), other than an Affiliate, through a transaction or series of transactions, is
or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or APS
representing twenty percent (20%) or more of the combined voting power of the then outstanding
securities of the Company or APS, as the case may be; provided, however, that, for purposes of this
Section 1(g), any acquisition directly from the Company shall not constitute a Change of Control;
(2) A merger or consolidation of (A) the Company with any other corporation which would result
in the voting securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof), in combination with the ownership
of any trustee or other fiduciary holding securities under an employee benefit plan of the Company
or an Affiliate, less than sixty percent (60%) of the combined voting power of the securities of
the Company or such surviving entity or any parent thereof outstanding immediately after such
merger or consolidation, or (B) APS with any other corporation which would result in the voting
securities of APS outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the Company or an Affiliate, less
than sixty percent (60%) of the combined voting power of the securities of APS or such surviving
entity or any parent thereof outstanding immediately after such merger or consolidation; provided
that, for purposes of this subparagraph (2), a merger or consolidation effected to implement a
recapitalization of the Company or of APS (or similar transaction) in which no person is or becomes
the Beneficial Owner, directly or indirectly, of securities of the Company or of APS representing
twenty percent (20%) or more of the combined voting power of the then outstanding securities of the
Company or of APS (excluding any securities acquired by that person directly from the Company or an
Affiliate) shall not result in a Change of Control; or
(3) The sale, transfer or other disposition of all or substantially all of the assets of
either the Company or APS to a Person other than the Company or an Affiliate; or
(4) Individuals who, as of July 31, 2005, constitute the board of directors of the Company
(the Company Incumbent Board) or of APS (the APS Incumbent Board) cease for any reason to
constitute at least two-thirds (2/3) of the members of the Company or APS board of directors, as
the case may be; provided, however, that for purposes of this
subparagraph (4), (A)(1) any person
becoming a member of the Company board of directors after July 31, 2005 whose election, or
nomination for election by the Companys shareholders, was approved by a vote of at least
two-thirds (2/3) of the members then comprising the Company Incumbent Board will be, considered as
though such person were a member of the Company Incumbent Board and (2) the Company Incumbent Board
shall not include a director whose initial assumption of office as a director was in connection
with an actual or threatened election contest relating to the election of directors, and (B)(1) any
person becoming a member of the APS board of directors after July 31, 2005 whose election, or
nomination for election by APS shareholder(s), was approved by a vote of at least two-thirds (2/3)
of the members then comprising the APS Incumbent Board or by the Company, as a majority shareholder
of APS, considered as though such person were a member of the APS Incumbent Board and (2) the APS
Incumbent Board shall not include a director whose initial assumption of office as a director was
in connection with an actual or threatened election contest relating to the election of directors.
The Award Agreement for any Award subject to the requirements of Section 409A of the Code may
prescribe a different definition of Change of Control that will apply for purposes of that Award
Agreement and that complies with the requirements of Section 409A of the Code.
(h) Code means the Internal Revenue Code of 1986, as amended.
(i) Committee means the committee of the Board described in Section 4.1.
(j) Covered Employee means an employee who is, or could be, a covered employee
within the meaning of Section 162(m) of the Code.
(k) Dividend Equivalent means a right granted to a Participant pursuant to
Article 10 to receive the equivalent value (in cash or Stock) of dividends paid on Stock.
(l) Exchange Act means the Securities Exchange Act of 1934, as amended.
25
(m) Fair Market Value means, as of any given date, the fair market value of one
share of Stock on such date determined by such methods or procedures as may be established from
time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value
of one share of Stock as of any date shall be the closing price for the Stock as reported on the
New York Stock Exchange (or on any national securities exchange on which the Stock is then listed)
for that date or, if no such prices are reported for that date, the closing price on the next
preceding date for which such prices were reported.
(n) Incentive Stock Option means an Option that is intended to meet the requirements
of Section 422 of the Code or any successor provision thereto.
(o) Non-Qualified Stock Option means an Option that is not intended to be an
Incentive Stock Option.
(p) Option means a right granted to a Participant pursuant to Article 7 of
the Plan to purchase Stock at a specified price during specified time periods. An Option may be
either an Incentive Stock Option or a Non-Qualified Stock Option.
(q) Participant means a person who has been granted an Award pursuant to the Plan.
(r) Performance-Based Award means an Award granted to select Covered Employees
pursuant to Articles 9 and 10, respectively, which is subject to the terms and conditions
set forth in Article 11. All Performance-Based Awards are intended to qualify as
performance-based compensation pursuant to Section 162(m) of the Code.
(s) Performance Cash means a right granted to a Participant pursuant to Article
10 to receive a cash payment contingent on achieving certain performance goals established by
the Committee.
(t) Performance Criteria means the criteria, or any combination of criteria, that
the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a
Participant for a Performance Period. The Performance Criteria that will be used to establish
Performance Goals are limited to the following: EBITDA; EBIT; costs; operating income; net income;
cash flow; operating cash flow; net cash flow; fuel cost per million BTU; costs per kilowatt hour;
retained earnings; budget achievement; return on equity; return on assets; return on capital
employed; return on invested capital; cash available to Company from a Subsidiary or Subsidiaries;
expense spending; O&M expense; O&M or capital per kilowatt hour; gross margin; net margin; market
capitalization; customer satisfaction; revenues; financial return ratios; market share; shareholder
return and/or value (including but not limited to total shareholder return); operating profits
(including earnings before or after income taxes, depreciation and amortization); net profits;
earnings per share; earnings per share growth; profit returns and margins; stock price; working
capital; business trends; production cost; project milestones; capacity utilization; quality;
economic value added; plant and equipment performance; operating efficiency; diversity; debt;
dividends; bond ratings; corporate governance; and health and safety (including environmental
health and safety). The Committee shall, within the time prescribed by Section 162(m) of the Code,
define in an objective fashion the manner of calculating the Performance Criteria it selects to use
for a particular Performance Period for a particular Participant.
(u) Performance Goals means, for a Performance Period, the goals established in
writing by the Committee for the Performance Period based upon the Performance Criteria. Depending
on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be
expressed in terms of overall Company performance or the performance of a division, business unit,
plant, or an individual. The Performance Goals may be stated in terms of absolute levels or
relative to another company or companies or to an index or indices.
(v) Performance Period means the one or more periods of time, which may be of
varying and overlapping durations, as the Committee may select, over which the attainment of one or
more Performance Goals will be measured for the purpose of determining a Participants right to,
and the payment of, a Performance-Based Award.
(w) Performance Share means a right granted to a Participant pursuant to Article
10 to receive Stock, the payment of which is contingent upon achieving certain performance
goals established by the Committee.
(x) Performance Share Unit means a right granted to a Participant pursuant to
Article 10 to receive Stock or cash, the payment of which is contingent upon achieving
certain performance goals established by the Committee.
(y) Plan means this Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan,
as it may be amended from time to time.
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(z) Prior Plans means the Pinnacle West Capital Corporation 2000 Director Equity
Plan and the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan.
(aa) Restricted Stock means Stock granted to a Participant pursuant to Article
9 that is subject to certain restrictions and to risk of forfeiture.
(bb) Restricted Stock Unit means a right granted to a Participant pursuant to
Article 10 to receive Stock or cash, the payment of which is subject to certain
restrictions and to risk of forfeiture.
(cc) Stock means the common stock of the Company or any security that may be
substituted for Stock or into which Stock may be changed pursuant to Article 13.
(dd) Stock Grant Award means the grant of Stock to a Participant pursuant to
Article 10.
(ee) Stock Appreciation Right or SAR means a right granted to a
Participant pursuant to Article 8 to receive the appreciation on one share of Stock.
(ff) Subsidiary means any corporation or other entity of which a majority of the
outstanding voting stock or voting power is beneficially owned directly or indirectly by the
Company.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Human Resources Committee of the
Board. The Committee (or subcommittee thereof) shall consist of at least two individuals, each of
whom qualifies as (a) a non-employee director as defined in Rule 16b-3(b)(3) of the General Rules
and Regulations of the Exchange Act, and (b) an outside director pursuant to Section 162(m) of
the Code and the regulations issued thereunder.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall constitute a quorum.
The acts of a majority of the members present at any meeting at which a quorum is present, and acts
approved in writing by all of the members of the Committee in lieu of a meeting, shall be deemed
the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act
upon any report or other information furnished to that member by any officer or other employee of
the Company or any Subsidiary, the Companys independent registered public accountants, or any
executive compensation consultant or other professional retained by the Company or the Committee to
assist in the administration of the Plan.
4.3 AUTHORITY OF COMMITTEE. Subject to any specific designation in the Plan, the
Committee has the exclusive power, authority and discretion to:
(a) designate Participants to receive Awards;
(b) determine the type or types of Awards to be granted to each Participant;
(c) determine the number of Awards to be granted and the number of shares of Stock to which an
Award will relate;
(d) determine the terms and conditions of any Award granted pursuant to the Plan, including,
but not limited to, the exercise price, grant price, or purchase price, any restrictions or
limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the
exercisability of an Award, and accelerations or waivers thereof, based in each case on such
considerations as the Committee in its sole discretion determines; provided, however, that the
Committee shall not (i) have the authority to accelerate the vesting or waive the forfeiture of any
Performance-Based Awards, or (ii) take any action or fail to take any action with respect to the
operation of the Plan that would cause all or part of the payment under any Award to be subject to
the additional tax under Section 409A of the Code;
(e) determine whether, to what extent, and pursuant to what circumstances an Award may be
settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other
property, or an Award may be canceled, forfeited, or surrendered;
(f) prescribe the form of each Award Agreement, which need not be identical for each
Participant;
27
(g) decide all other matters that must be determined in connection with an Award;
(h) establish, adopt, or revise any rules and regulations as it may deem necessary or
advisable to administer the Plan;
(i) interpret the terms of, and any matter arising pursuant to, the Plan or any Award
Agreement; and
(j) make all other decisions and determinations that may be required pursuant to the Plan or
an Award Agreement as the Committee deems necessary or advisable to administer the Plan.
4.4 DECISIONS BINDING. The Committees interpretation of the Plan, any Awards granted
pursuant to the Plan, any Award Agreement and all decisions and determinations by the Committee
with respect to the Plan are final, binding, and conclusive on all parties.
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1
NUMBER OF SHARES. Subject to the possible increases
provided by Section 5.2 with respect to shares that become available
under the Prior Plans and the adjustment provided in Article 13, the
aggregate number of shares of Stock reserved and available for grant pursuant to the Plan shall be
8,000,000. Any shares of Stock issued in connection with Awards other than Options and Stock
Appreciation Rights shall be counted against the shares available for grant pursuant to the
previous sentence as two shares for every one share issued in connection with such Award. Any
shares of Stock issued in connection with the exercise of an Option or SAR shall be counted against
the shares of Stock available for grant as one share.
5.2 SHARE CALCULATIONS. Shares of Stock that are potentially deliverable under any
Award that expires or is canceled, forfeited, settled in cash or otherwise terminated without a
delivery of such shares to the Participant will not be counted against the limit set forth in
Section 5.1. In addition, shares of Stock that have been issued in connection with any
Award (e.g., Restricted Stock) that is canceled, forfeited, or settled in cash such that those
shares are returned to the Company will again be available for grant. Any shares of Stock that are
potentially deliverable under any award granted under a Prior Plan will be added to the number of shares of Stock available for grant under Section
5.1 if the award expires or is canceled or terminated without a
delivery of such shares to the Participant. In addition, any shares of Stock that have been issued in connection with any award
granted under a Prior Plan will be added to the number of shares available for grant under
Section 5.1 if the award is canceled, forfeited or
terminated such that those shares are returned to the Company. This Section 5.2 shall apply to the share limit imposed to conform to
the regulations promulgated under the Code with respect to Incentive Stock Options only to the
extent consistent with applicable regulations relating to Incentive Stock Options under the Code.
The payment of Dividend Equivalents in conjunction with any outstanding Awards shall not be counted
against the shares available for issuance under the Plan if the Dividend Equivalents are paid in
cash. The exercise of a stock-settled SAR or net-cashless exercise of an Option (or a portion
thereof) will reduce the number of shares of Stock available for issuance pursuant to Section
5.1 by the entire number of shares of Stock subject to that SAR or Option (or applicable
portion thereof), even though a smaller number of shares of Stock will be issued upon such an
exercise. Also, shares of Stock tendered to pay the exercise price of an Option or tendered or
withheld to satisfy a tax-withholding obligation arising in connection with an Award will not
become available for grant or sale under the Plan. The Committee may adopt such other reasonable
rules and procedures as it deems to be appropriate for purposes of determining the number of shares
of Stock that are available for Awards pursuant to Section 5.1.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist, in
whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open
market.
5.4 INDIVIDUAL LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding any
provision in the Plan to the contrary, and subject to the adjustment in Article 13, the
maximum number of shares (counted, as described in Sections 5.1 and 5.2 above) of Stock
with respect to one or more Awards that may be granted to any one Participant during a calendar
year shall be 500,000.
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ARTICLE 6
ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY. Persons eligible to participate in this Plan include members of the
Board, employees and officers of the Company or a Subsidiary and consultants and advisors providing
services to the Company or a Subsidiary, all as determined by the Committee (or in the case of
Board members, the Board). Prospective members of the Board, employees or officers of, and
consultants and advisors to, the Company or a Subsidiary to whom Awards are granted in connection
with written offers of an employment, consulting or advisory relationship with the Company or a
Subsidiary also may be granted Awards by the Committee (or in the case of Board members, the
Board). The provisions of any Award granted to a prospective member of the Board, employee,
officer, consultant or advisor must specifically provide that no portion of the Award will vest,
become exercisable or be issued prior to the date on which such individual begins providing
services to the Company or any Subsidiary.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may,
from time to time, select from among all eligible individuals, those to whom Awards shall be
granted and shall determine the nature and amount of each Award. No individual shall have any
right to be granted an Award pursuant to this Plan.
ARTICLE 7
STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to Participants on the
following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock pursuant to an Option shall
be determined by the Committee and set forth in the Award Agreement; provided that the exercise
price for any Option shall not be less than the Fair Market Value as of the date of grant.
(b) Time and Conditions of Exercise. The Committee shall determine the time or times
at which an Option may be exercised in whole or in part provided that the term of any Option
granted under the Plan shall not exceed ten years. The Committee shall also determine the
performance or other conditions, if any, that must be satisfied before all or part of an Option may
be exercised.
(c) Payment. The Committee shall determine the methods by which the exercise price of
an Option may be paid, the form of payment, including, without limitation, cash, promissory note,
shares of Stock held for longer than six months (through actual tender or by attestation), or other
property acceptable to the Committee (including broker-assisted cashless exercise arrangements),
and the methods by which shares of Stock shall be delivered or deemed to be delivered to
Participants.
(d) Evidence of Grant. All Options shall be evidenced by a written Award Agreement.
The Award Agreement shall reflect the Committees determinations regarding the exercise price, time
and conditions of exercise, and forms of payment for the Option and such additional provisions as
may be specified by the Committee.
(e) Repricing of Options. The Committee shall not reprice any Options previously
granted under the Plan.
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted only to
Participants who are employees and the terms of any Incentive Stock Options granted pursuant to the
Plan must comply with the following additional provisions of this Section 7.2:
(a) Exercise Price. Subject to Section 7.2(e), the exercise price per share
of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock
Option may not be less than the Fair Market Value as of the date of the grant.
(b) Exercise. In no event may any Incentive Stock Option be exercisable for more than
ten years from the date of its grant.
(c) Lapse of Option. An Incentive Stock Option shall lapse in the following
circumstances:
(1) The Incentive Stock Option shall lapse ten years from the date it is granted, unless an
earlier time is set in the Award Agreement.
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(2) The Incentive Stock Option shall lapse upon termination of employment for any reason other
than the Participants death or disability, unless otherwise provided in the Award Agreement.
(3) If the Participant terminates employment on account of disability or death before the
Option lapses pursuant to paragraph (1) or (2) above, the Incentive Stock Option shall lapse,
unless it is previously exercised, on the earlier of (i) the scheduled termination date of the
Option; or (ii) 12 months after the date of the Participants termination of employment on account
of disability or death. Upon the Participants disability or death, any Incentive Stock Options
exercisable at the Participants disability or death may be exercised by the Participants legal
representative or representatives, by the person or persons entitled to do so pursuant to the
Participants last will and testament, or, if the Participant fails to make testamentary
disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to
receive the Incentive Stock Option pursuant to the applicable laws of descent and distribution.
For purposes of this Section 7.2, the term disability shall have the meaning ascribed to
it in Section 22(e)(3) of the Code.
(d) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of
the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are
first exercisable by a Participant in any calendar year may not exceed $100,000.00 or such other
limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent
that Incentive Stock Options are first exercisable by a Participant in excess of such limitation,
the excess shall be considered Non-Qualified Stock Options.
(e) Ten Percent Owners. An Incentive Stock Option shall be granted to any individual
who, at the date of grant, owns stock possessing more than ten percent of the total combined voting
power of all classes of Stock of the Company only if such Option is granted at a price that is not
less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more
than five years from the date of grant.
(f) Expiration of Incentive Stock Options. No Award of an Incentive Stock Option may
be made pursuant to this Plan after the tenth anniversary of the Effective Date.
(g) Right to Exercise. Except as provided in Section 7.2(c)(3) and in
Section 12.5, during a Participants lifetime, an Incentive Stock Option may be exercised
only by the Participant.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 GRANT OF SARs. The Committee is authorized to grant SARs to Participants on the
following terms and conditions:
(a) Right to Payment. Upon the exercise of a SAR, the Participant to whom it is
granted has the right to receive the excess, if any, of:
(1) the Fair Market Value of a share of Stock on the date of exercise; over
(2) the base value of the SAR as determined by the Committee, which shall not be less than the
Fair Market Value of a share of Stock on the date of grant.
(b) Other Terms. All SARs grants will be evidenced by an Award Agreement. The terms,
methods of exercise, methods of settlement, and any other terms and conditions of any SAR will be
determined by the Committee at the time of the grant of the Award and as set forth in the Award
Agreement; provided that the form of consideration payable in settlement of a SAR shall be Stock or
cash as specified in the Award Agreement.
ARTICLE 9
RESTRICTED STOCK AWARDS
9.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to grant Restricted Stock
to Participants in such amounts and subject to such terms and conditions as may be determined by
the Committee. All Restricted Stock Awards shall be evidenced by a written Restricted Stock Award
Agreement.
9.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions
on transferability and other restrictions as the Committee may impose (including, without
limitation, limitations on the right to vote Restricted Stock
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or the right to receive dividends on the Restricted Stock). These restrictions may lapse
separately or in combination at such times, pursuant to such circumstances, in such installments,
or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.
9.3 FORFEITURE. Except as otherwise determined by the Committee at the time of the
grant of the Award or thereafter, upon termination of employment during the applicable restriction
period, Restricted Stock that is at that time subject to restrictions shall be forfeited; provided,
however, that the Committee may provide in any Restricted Stock Award Agreement that restrictions
or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the
event of terminations resulting from specified causes, and the Committee may in other cases waive
in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.
9.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted pursuant to the Plan
may be evidenced in such manner as the Committee shall determine. If certificates representing
shares of Restricted Stock are registered in the name of the Participant, the certificates must
bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, and the Company may, in its discretion, retain physical possession of the
certificate until such time as all applicable restrictions lapse.
ARTICLE 10
OTHER TYPES OF AWARDS
10.1 OTHER TYPES OF AWARDS IN GENERAL. The Committee also is authorized to grant the
following types of Awards to Participants in such amounts and subject to such terms and conditions
as may be determined by the Committee and as may be set forth in the applicable Award Agreement:
(a) Performance Share Awards. Performance Share Awards will grant the Participant the
right to receive a specified number of shares of Stock depending on the satisfaction of any one or
more of the Performance Criteria or any other specific performance criteria determined to be
appropriate by the Committee. Performance may be measured on a specified date or dates or over any
period or periods determined by the Committee.
(b) Performance Share Unit Awards. Performance Share Unit Awards will grant the
Participant the right to receive a specified number of shares of
Stock or a cash payment equal to the Fair Market Value (determined as of a
specified date) of a specified number of shares of Stock depending on the satisfaction of any one
or more of the Performance Criteria or any other specific performance criteria determined to be
appropriate by the Committee. Performance may be measured on a specified date or dates or over any
period or periods determined by the Committee. The Performance Share
Units shall be settled in Stock or cash as
specified in the Award Agreement.
(c) Restricted Stock Unit Awards. Restricted Stock Unit Awards will grant the
Participant the right to receive a specified number of shares of Stock, or a cash payment equal to
the Fair Market Value (determined as of a specified date) of a specified number of shares of Stock,
subject to any vesting or other restrictions deemed appropriate by the Committee. These
restrictions may lapse separately or in combination at such times, pursuant to such circumstances,
in such installments, or otherwise, as the Committee determines at the time of the grant of the
Award or thereafter. Except as otherwise determined by the Committee at the time of the grant of
the Award or thereafter, upon termination of employment during the applicable restriction period,
Restricted Stock Units that are at that time subject to restrictions shall be forfeited; provided,
however, that the Committee may provide in any Restricted Stock Unit Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock Units will be waived in whole or
in part in the event of terminations resulting from specified causes, and the Committee may in
other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted
Stock Units. The Restricted Stock Units shall be settled in Stock or cash as specified in the
Award Agreement.
(d) Performance Cash Awards. Performance Cash Awards will grant the Participant the
right to receive an amount of cash depending on the satisfaction of any one or more of the
Performance Criteria or other specific criteria determined to be appropriate by the Committee.
Performance may be measured on a specified date or dates or over any period or periods determined
by the Committee.
(e) Dividend Equivalent Awards. Dividend Equivalent Awards will grant the Participant
the right to receive a payment, with or without interest, based on the dividends declared on the
shares of Stock that are subject to any Award, to be credited as of dividend payment dates, during
the period between the date the Award is granted and the date the Award is exercised, vests or
expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or
additional shares of Stock by such formula and at such time and subject to such limitations as may
be determined by the Committee. Dividend Equivalents will not be granted with respect to Options
or SARs.
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(f) Stock Grant Awards. Stock Grant Awards will grant the Participant the right to
receive (or purchase at such price as determined by the Committee) shares of Stock free of any
vesting restrictions. Any purchase price for a Stock Grant Award shall be payable in cash or other
form of consideration acceptable to the Committee. A Stock Grant Award may be granted or sold as
described in the preceding sentence in respect of past services or other valid consideration, or in
lieu of any cash compensation due to such Participant.
10.2 COMPLIANCE WITH SECTION 409A. Some of the Awards that may be granted pursuant to
the Plan (including, but not necessarily limited to, Performance Share Awards, Performance Share
Unit Awards, Performance Cash Awards and Restricted Stock Unit Awards) may be considered to be
non-qualified deferred compensation subject to Section 409A of the Code. If an Award is subject
to Section 409A, the Award Agreement and this Plan are intended to comply fully with and meet all
of the requirements of Section 409A and the Award Agreement shall include such provisions as may be
necessary to assure compliance with Section 409A. An Award subject to Section 409A also shall be
administered in good faith compliance with the provisions of Section 409A as well as applicable
guidance issued by the Internal Revenue Service and the Department of Treasury. To the extent
necessary to comply with Section 409A, any Award that is subject to Section 409A may be modified,
replaced or terminated in the discretion of the Committee. Notwithstanding any provision of this
Plan or any Award Agreement to the contrary, in the event that the Committee determines that any
Award is or may become subject to Section 409A, the Company may adopt such amendments to the Plan
and the related Award Agreements, without the consent of the Participant, or adopt other policies
and procedures (including amendments, policies and procedures with retroactive effective dates), or
take any other action that the Committee determines to be necessary or appropriate to either comply
with Section 409A or to exclude or exempt the Plan or any Award from the requirements of Section
409A.
ARTICLE 11
PERFORMANCE-BASED AWARDS
11.1 PURPOSE. The purpose of this Article 11 is to enable the Committee, in
the exercise of its discretion, to qualify some or all of the Awards granted pursuant to
Articles 9 and 10 as performance-based compensation pursuant to Section 162(m) of the
Code. The Committee has complete discretion concerning whether a particular Award should be
qualified as performance-based compensation. If the Committee concludes that a particular Award
should not be qualified as performance-based compensation, the Committee may grant the Award
without satisfying the requirements of Section 162(m) of the Code. If the Committee, in its
discretion, decides that a particular Award to a Covered Employee should qualify as
performance-based compensation, the Committee will grant a Performance-Based Award to the Covered
Employee and the provisions of this Article 11 then shall control over any contrary
provision contained in Articles 9 or 10.
11.2 APPLICABILITY. This Article 11 shall apply only to those Covered
Employees selected by the Committee to receive Performance-Based Awards. The designation of a
Covered Employee as a Participant for a Performance Period shall not in any manner entitle the
Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a
Participant for a particular Performance Period shall not require designation of such Covered
Employee as a Participant in any subsequent Performance Period and designation of one Covered
Employee as a Participant shall not require designation of any other Covered Employees as a
Participant in such period or in any other period.
11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With regard to a
particular Performance Period, the Committee shall have full discretion to select the length of
such Performance Period, the type of Performance-Based Awards to be issued, the kind and/or level
of the Performance Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary
or any division or business unit thereof.
11.4 PERFORMANCE EVALUATION; ADJUSTMENT OF GOALS. At the time that a
Performance-Based Award is first issued, the Committee, in the Award Agreement or in another
written document, shall specify whether performance will be evaluated including or excluding the
effect of any of the following events that occur during the Performance Period:
(a) Judgments entered or settlements reached in litigation;
(b) The write down of assets;
(c) The impact of any reorganization or restructuring;
(d) The impact of changes in tax laws, accounting principles, regulatory actions or other laws
affecting reported results;
32
(e) Extraordinary non-recurring items as described in Accounting Principles Board Opinion No.
30 and/or in managements discussion and analysis of financial condition and results of operations
appearing in the Companys annual report to shareholders or Annual Report on Form 10-K, as the case
may be, for the applicable year;
(f) The impact of any mergers, acquisitions, spin-offs or other divestitures; and
(g) Foreign exchange gains and losses.
The inclusion or exclusion of these items shall be expressed in a form that satisfies the
requirements of Section 162(m) of the Code. The Committee, in its discretion, also may, within the
time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance
Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of
Participants (i) in the event of, or in anticipation of, any unusual or extraordinary corporate
item, transaction, event, or development, or (ii) in recognition of, or in anticipation of, any
other unusual or nonrecurring events affecting the Company, or the financial statements of the
Company, or in response to, or in anticipation of, changes in applicable laws, regulations,
accounting principles, or business conditions.
11.5 PAYMENT OF PERFORMANCE-BASED AWARDS. Unless otherwise provided in the relevant
Award Agreement, a Participant must be employed by the Company or a Subsidiary on the day a
Performance-Based Award for such Performance Period is paid to the Participant. Furthermore, a
Participant shall be eligible to receive payment pursuant to a Performance-Based Award for a
Performance Period only if the Performance Goals for such period are achieved. In determining the
actual size of an individual Performance-Based Award, the Committee may reduce or eliminate the
amount of the Performance-Based Award earned for the Performance Period, if in its sole and
absolute discretion, such reduction or elimination is appropriate.
11.6 MAXIMUM AWARD PAYABLE. The maximum Performance-Based Award (other than a
Performance Cash Award) payable to any one Participant pursuant to the Plan for a Performance
Period is 500,000 shares of Stock or the equivalent cash value. The maximum Performance Cash Award
payable to any one Participant for any Performance Period is $5,000,000.
ARTICLE 12
PROVISIONS APPLICABLE TO AWARDS
12.1 STAND-ALONE AND TANDEM AWARDS. Awards granted pursuant to the Plan may, in the
discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other
Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards
may be granted either at the same time as or at a different time from the grant of such other
Awards.
12.2 TERM OF AWARD. The term of each Award shall be for the period determined by the
Committee, provided that in no event shall the term of any Option or Stock Appreciation Right
granted in tandem with an Incentive Stock Option exceed a period of ten years from the date of its
grant.
12.3 AWARD AGREEMENT. Awards under the Plan shall be evidenced by Award Agreements
that set forth the terms, conditions and limitations for each Award, including, but not limited
to, the term of the Award, the provisions applicable in the event the Participants employment or
service terminates and the Companys authority to unilaterally or bilaterally amend, modify,
suspend, cancel or rescind an Award.
12.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any applicable
law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the
grant, exercise or settlement of an Award may be made in such forms as the Committee determines at
or after the time of grant, including, without limitation, cash, promissory note, Stock held for
more than six months, other Awards, or other property, or any combination, and may be made in a
single payment or transfer, in installments, or on a deferred basis, in each case determined in
accordance with rules adopted by, and at the discretion of, the Committee.
33
12.5 LIMITS ON TRANSFER.
(a) General. Except as provided in Section 12.5(b) or Section 12.6,
no right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to,
or in favor of, any party other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the Company or a
Subsidiary. Except as provided in Section 12.5(b) or Section 12.6, and except as
otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed
of by a Participant other than by will or the laws of descent and distribution.
(b) Transfers to Family Members. The Committee shall have the authority, in its
discretion, to grant (or to sanction by way of amendment to an existing Award) Awards which may be
transferred by the Participant during his or her lifetime to any Family Member (as defined below).
A transfer of an Award pursuant hereto may only be effected by the Company at the written request
of the Participant. In the event an Award is transferred as contemplated herein, such transferred
Award may not be subsequently transferred by the transferee (other than another transfer meeting
the conditions herein) except by will or the laws of descent and distribution. A transferred Award
shall continue to be governed by and subject to the terms and limitations of the Plan and relevant
Award Agreement, and the transferee shall be entitled to the same rights as the Participant, as if
the transfer had not taken place. For purposes of this Section 12.5(b), the term Family
Member means a Participants spouse and any parent, stepparent, grandparent, child, stepchild, or
grandchild, including adoptive relationships or a trust or any other entity in which these persons
(or the Participant) have more than 50% of the beneficial interest.
12.6 BENEFICIARIES. Notwithstanding Section 12.5, a Participant may, in the
manner determined by the Committee, designate a beneficiary to exercise the rights of the
Participant and to receive any distribution with respect to any Award upon the Participants death,
and, in accordance with Section 7.2(c)(3), upon the Participants disability. A
beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to
the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to
the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any
additional restrictions deemed necessary or appropriate by the Committee. If the Participant is
married and resides in a community property state, a designation of a person other than the
Participants spouse as his beneficiary with respect to more than 50% of the Participants interest
in the Award shall not be effective without the prior written consent of the Participants spouse.
If no beneficiary has been designated or survives the Participant, payment shall be made to the
person entitled thereto pursuant to the Participants will or the laws of descent and distribution.
Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at
any time provided the change or revocation is provided to the Committee.
12.7 STOCK CERTIFICATES. Notwithstanding anything herein to the contrary, the Company
shall not be required to issue or deliver any certificates evidencing shares of Stock pursuant to
the exercise of any Award, unless and until the Board has determined, with advice of counsel, that
the issuance and delivery of such certificates is in compliance with all applicable laws,
regulations of governmental authorities and, if applicable, the requirements of any exchange or
quotation system on which the shares of Stock are listed, quoted or traded. All Stock certificates
delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as
the Committee deems necessary or advisable to comply with Federal, state, or foreign jurisdiction,
securities or other laws, rules and regulations and the rules of any national securities exchange
or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may
place legends on any Stock certificate to reference restrictions applicable to the Stock. In
addition to the terms and conditions provided herein, the Board may require that a Participant make
such reasonable covenants, agreements, and representations as the Board, in its discretion, deems
advisable in order to comply with any such laws, regulations, or requirements.
12.8 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of Control occurs and Awards
are converted, assumed, or replaced by a successor, the Committee shall have the discretion to
cause all outstanding Awards to become fully exercisable and all restrictions on outstanding Awards
to lapse prior to the Change of Control. If a Change of Control occurs and Awards are not
converted, assumed, or replaced by a successor, all outstanding Awards shall automatically become
fully exercisable and all restrictions on outstanding Awards shall lapse. To the extent that this
provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section
7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. Upon, or in
anticipation of, such an event, the Committee may cause every Award outstanding hereunder to
terminate at a specific time in the future and shall give each Participant the right to exercise
Awards during a period of time as the Committee, in its sole and absolute discretion, shall
determine.
12.9 DEFERRAL PURSUANT TO DEFERRED COMPENSATION PLAN. The Award Agreement for any
Award other than an Option or Restricted Stock Award may allow the Participant to defer receipt of
any compensation attributable to the Award pursuant to the terms and provisions of the Deferred
Compensation Plan of 2005. Any such Award Agreement shall comply with the requirements of Section
409A of the Code.
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ARTICLE 13
CHANGES IN CAPITAL STRUCTURE
13.1 ADJUSTMENTS. If there shall occur any merger, consolidation, liquidation,
issuance of rights or warrants to purchase securities, recapitalization, reclassification, stock
dividend, spin-off, split-off, stock split, reverse stock split or other distribution with respect
to the shares of Stock, or any similar corporate transaction or event in respect of the Stock, then
the Committee shall, in the manner and to the extent that it deems appropriate and equitable to the
Participants and consistent with the terms of this Plan, cause a proportionate adjustment to be
made in (i) the maximum numbers and kind of shares provided in Section 5.1 hereof, (ii) the
maximum numbers and kind of shares set forth in Section 5.4 and Section 11.6 hereof
and any other similar numeric limit expressed in the Plan, (iii) the number and kind of shares of
Stock, share units, or other rights subject to the then-outstanding Awards, (iv) the price for each
share or unit or other right subject to then outstanding Awards without change in the aggregate
purchase price or value as to which such Awards remain exercisable or subject to restrictions, (v)
the performance targets or goals appropriate to any outstanding Performance-Based Awards (subject
to such limitations as appropriate for Awards intended to qualify for exemption under Section
162(m) of the Code) or (vi) any other terms of an Award that are affected by the event. Moreover,
in the event of any such transaction or event, the Committee, in its discretion, may provide in
substitution for any or all outstanding Awards under the Plan such alternative consideration
(including cash) as it, in good faith, may determine to be equitable under the circumstances and
may require in connection therewith the surrender of all Awards so replaced. Notwithstanding the
foregoing, any such adjustments shall be made in a manner consistent with the requirements of
Section 409A of the Code and, in the case of Incentive Stock Options, any such adjustments shall be
made in a manner consistent with the requirements of Section 424(a) of the Code.
13.2 NO OTHER RIGHTS. Except as expressly provided in the Plan, no Participant shall
have any rights by reason of any merger, consolidation, liquidation, issuance of rights or warrants
to purchase securities, recapitalization, reclassification, stock dividend, spin-off, split-off,
stock split, reverse stock split or other distribution with respect to the shares of Stock, or any
similar corporate transaction or event in respect of the Stock. Except as expressly provided in
the Plan, no issuance by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number of shares of Stock subject to an Award or the exercise price of any
Award.
ARTICLE 14
AMENDMENT, MODIFICATION, AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the Board, at any
time and from time to time, the Committee may terminate, amend or modify the Plan; provided,
however, that (a) to the extent necessary to comply with any applicable law, regulation, or stock
exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required, (b) shareholder approval is required for any amendment to the
Plan that (i) increases the number of shares available under the Plan (other than any adjustment as
provided by Article 13), (ii) permits the Committee to grant Options with an exercise price
that is below Fair Market Value on the date of grant, (iii) permits the Committee to extend the
exercise period for an Option beyond ten years from the date of grant, or (iv) amends Section
7.1(e) to permit the Committee to reprice previously granted Options, and (c) no such action shall
be taken that would cause all or part of
35
the payment under any Award to be subject to the additional tax under Section 409A of the
Code. Additional rules relating to amendments to the Plan or any Award Agreement to assure
compliance with Section 409A of the Code are set forth in Section 10.2.
14.2 AWARDS PREVIOUSLY GRANTED. Except as otherwise provided in Section 10.2
or pursuant to Section 12.3, no termination, amendment, or modification of the Plan shall
adversely affect in any material way any Award previously granted pursuant to the Plan without the
prior written consent of the Participant.
ARTICLE 15
GENERAL PROVISIONS
15.1 NO RIGHTS TO AWARDS. No Participant, employee, or other person shall have any
claim to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is
obligated to treat Participants, employees, and other persons uniformly.
15.2 NO SHAREHOLDERS RIGHTS. No Award gives the Participant any of the rights of a
shareholder of the Company unless and until shares of Stock are in fact issued to such person in
connection with such Award.
15.3 WITHHOLDING. The Company or any Subsidiary shall have the authority and the
right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient
to satisfy Federal, state, and local taxes (including the Participants FICA obligation) required
by law to be withheld with respect to any taxable event concerning a Participant arising as a
result of this Plan. With the Committees consent as expressed in an Award Agreement or in any
policy adopted by the Committee, a Participant may elect to (a) have the Company withhold from
those shares of Stock that would otherwise be received upon the exercise of any Option, a number of
shares having a Fair Market Value equal to the minimum statutory amount necessary to satisfy the
Companys applicable federal, state, local or foreign income and employment tax withholding
obligations with respect to such Participant, or (b) tender previously-owned shares of Stock held
by the Participant for six months or longer to satisfy the Companys applicable federal, state,
local, or foreign income and employment tax withholding obligations with respect to the
Participant.
15.4 NO RIGHT TO EMPLOYMENT OR SERVICES. Nothing in the Plan or any Award Agreement
shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate
any Participants employment or services at any time, nor confer upon any Participant any right to
continue in the employ or service of the Company or any Subsidiary.
15.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an unfunded plan for
incentive compensation. With respect to any payments not yet made to a Participant pursuant to an
Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights
that are greater than those of a general creditor of the Company or any Subsidiary.
15.6 RELATIONSHIP TO OTHER BENEFITS. No payment pursuant to the Plan shall be taken
into account in determining any benefits pursuant to any pension, retirement, savings, profit
sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary, except as
otherwise provided in such plan.
15.7 EXPENSES. The expenses of administering the Plan shall be borne by the Company.
15.8 TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for
convenience of reference only and, in the event of any conflict, the text of the Plan, rather than
such titles or headings, shall control.
15.9 FRACTIONAL SHARES. No fractional shares of Stock shall be issued and the
Committee shall determine, in its discretion, in the Award Agreement or pursuant to any policy
adopted by the Committee whether cash shall be given in lieu of fractional shares or whether such
fractional shares shall be eliminated by rounding up or down as appropriate.
15.10 SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant
date, obligated to file reports pursuant to Section 16 of the Exchange Act, transactions pursuant
to this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors
pursuant to the Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be void to the extent permitted by law and voidable as deemed
advisable by the Committee.
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15.11 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment
of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations,
and to such approvals by government agencies as may be required. The Company shall be under no
obligation to register pursuant to the Securities Act of 1933, as amended, any of the shares of
Stock paid pursuant to the Plan. If the shares paid pursuant to the Plan may in certain
circumstances be exempt from registration pursuant to the Securities Act of 1933, as amended, the
Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the
availability of any such exemption.
15.12 GOVERNING LAW. The Plan and all Award Agreements shall be construed in
accordance with and governed by the laws of the State of Arizona.
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