SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
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14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ARIZONA PUBLIC SERVICE COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement)
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<PAGE>
Arizona Public Service Company
P.O. BOX 53999
PHOENIX, ARIZONA 85072-3999
NOTICE AND PROXY STATEMENT
For Annual Meeting of Shareholders To Be Held On
Tuesday, May 19, 1998
To the Shareholders:
The seventy-eighth annual meeting of shareholders of Arizona Public Service
Company will be held in the offices of the Company at 400 North Fifth Street in
Phoenix, Arizona at 10:00 a.m. on Tuesday, May 19, 1998 for the following
purposes:
1) To elect a Board of Directors to serve for the ensuing year or until
their successors are elected and qualified; and
2) To transact such other business as may properly come before the meeting
or any adjournment thereof.
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Company's Board of Directors. So far as management is
aware, the matters described in this Proxy Statement will be the only ones to be
acted upon at the meeting. If any other matters properly come before the meeting
or any adjournment thereof, the proxy committee named in the enclosed proxy will
vote on those matters in accordance with its judgment.
Shareholders are requested to mark, date, sign and mail promptly the
enclosed proxy. A postage-paid envelope is provided for mailing in the United
States. You are entitled to revoke your proxy at any time before it is exercised
and vote your shares in person if you attend the meeting.
The management of the Company cordially invites you to attend the meeting.
By order of the Board of Directors
NANCY C. LOFTIN
Vice President, Chief Legal
Counsel and Secretary
Approximate date of mailing to shareholders:
April 1, 1998
<PAGE>
ELECTION OF DIRECTORS
It is the intention of the persons named in the enclosed proxy to vote for
the nominees listed below to serve as members of the Board of Directors until
the next annual meeting of shareholders or until their successors are elected
and qualified. If, between the mailing of this Proxy Statement and the meeting
date, any such individual becomes unavailable to serve, the proxies may be voted
for a person properly nominated or the number of directors to be elected will be
reduced. The following information has been furnished by the respective nominees
as of March 13, 1998. The term "Pinnacle West" refers to Pinnacle West Capital
Corporation, the Company's parent.
Nominees
O. Mark DeMichele, 63, has been a director since 1982. He is currently a
co-managing partner of Urban Realty Partners LLC. From 1988 until his retirement
in February 1997, Mr. DeMichele was the Company's President and Chief Executive
Officer.
Michael L. Gallagher, 53, has been a director since June 1997. He is an attorney
and president of Gallagher & Kennedy, P.A., Phoenix, Arizona.
Martha O. Hesse, 55, has been a director since 1991. She is President of Hesse
Gas Company. In 1990 Ms. Hesse served as Senior Vice President of First Chicago
Corporation (financial services), and from 1986 to 1989 she was Chairman of the
Federal Energy Regulatory Commission. She is also a director of Pinnacle West,
Mutual Trust Life Insurance Company and Laidlaw Inc.
Marianne Moody Jennings, 44, has been a director since March 1987. She is a
Professor of Legal and Ethical Studies in Business at the College of Business,
Arizona State University. In addition, Ms. Jennings is a textbook author, and
since 1977 she has been a consultant for various firms. Ms. Jennings is also a
columnist for The Arizona Republic.
Robert E. Keever, 57, has been a director since June 1997. Since 1995 he has
been Principal of R.E. Keever Investments, Scottsdale, Arizona. Prior to that he
was President of the CorDev Corporation (executive consulting firm).
Robert G. Matlock, 64, has been a director since April 1993. He has, since 1984,
been an independent management consultant to various governmental agencies
involved in developing nuclear energy resources and to utilities operating
nuclear facilities.
Bruce J. Nordstrom, 48, has been a director since June 1997. He is a certified
public accountant at his own firm of Nordstrom and Associates, Flagstaff,
Arizona.
2
<PAGE>
John R. Norton III, 68, is Chairman of the Board and Chief Executive Officer of
J.R. Norton Company (agricultural production), Phoenix, Arizona, and was first
elected as a director of the Company in January 1984. Mr. Norton resigned as a
director in May 1985 to accept appointment as U.S. Deputy Secretary of
Agriculture, a position he held until February 1986. In February 1986 he was
reelected as a director of the Company. Mr. Norton is also a director of
Pinnacle West, Aztar Corporation (casino hotels), Terra Industries Inc.
(agricultural chemicals) and Apollo Group, Inc.
William J. Post, 47, has been a director since September 1994. Mr. Post has been
the Company's President and Chief Executive Officer since February 1997. He had
been the Company's Chief Operating Officer since September 1994, as well as a
Senior Vice President since June 1993. Prior to that time, he had served as a
Vice President and officer of the Company since 1982. In February 1997 he also
assumed the position of President of Pinnacle West after having served as its
Executive Vice President since June 1995. Mr. Post is also a director of
Pinnacle West.
Donald M. Riley, 54, has been a director since June 1987. He is Chairman of the
Board and former President and General Manager of Gilpin's Construction Company,
Inc. (general contractor), Yuma, Arizona.
George A. Schreiber, Jr., 49, has been a director since February 1997. Mr.
Schreiber was elected to the positions of Executive Vice President and Chief
Financial Officer of both the Company and Pinnacle West as of February 1997.
From February 1990 to January 1997 he was Managing Director at PaineWebber, Inc.
He is also a director of Pinnacle West.
Quentin P. Smith, Jr., 46, has been a director since June 1997. He has been
President of Cadre Business Advisors LLC, a management consulting firm in
Phoenix, Arizona since 1995. From 1993 to 1995 he was a Partner with the
accounting firm of Arthur Andersen. From 1992 to 1993 he was retired after
selling a data processing service bureau he co-owned.
Richard Snell, 67, has been a director since July 1975. He was elected Chairman
of the Board of the Company concurrent with his selection as Chairman of the
Board, President, and Chief Executive Officer of Pinnacle West in February 1990.
Mr. Snell resigned from the position of President of Pinnacle West in February
1997; he remains Chairman and CEO. He is also a director of Aztar Corporation,
Banc One Arizona Corporation and Central Newspapers, Inc.
Dianne C. Walker, 41, has been a director since June 1994. She is an independent
consultant on electric utility mergers and acquisitions and asset purchase
transactions. Ms. Walker served as an electric energy consultant for Bear
Stearns and Kidder Peabody from January 1990 to December 1994. Ms. Walker is
also a director of Satellite Technology, Inc., Comdial Corporation, and
MicroTest, Inc.
3
<PAGE>
Ben F. Williams, Jr., 68, has been a director since December 1970. He practices
law as a sole practitioner in Tucson, Arizona. Mr. Williams was a partner in the
law firm of Lesher and Williams, Tucson, Arizona, from January 1992 to June
1994. Prior to 1992, Mr. Williams practiced law as a sole practitioner in
Douglas, Arizona.
VOTING SECURITIES
Each of the 74,782,998 shares of the Company's capital stock (71,264,947
shares of common and 3,518,051 shares of preferred) outstanding at the close of
business on March 13, 1998 entitles the holder to notice of, and to vote at, the
meeting or any adjournment thereof, but shares can be voted at the meeting only
if the holder is present or represented by proxy.
PRINCIPAL HOLDERS OF VOTING SECURITIES
No director or director-nominee is the beneficial owner of any of the
outstanding capital stock.
The following table shows each person who at the close of business on
December 31, 1997 was known by the Company to beneficially own more than 5% of
any class of the capital stock of the Company:
<TABLE>
<CAPTION>
Percent
Title of Name and Address of Amount and Nature of of
Class Beneficial Owner Beneficial Ownership (1) Class
----- ---------------- ------------------------ -----
<S> <C> <C> <C>
Common Pinnacle West Capital Corporation 71,264,947 100.00%
400 East Van Buren, Suite 700 (Direct)
Phoenix, AZ 85004
Preferred J.P. Morgan & Co., Inc. 57,583 16.32%
Series Q 60 Wall Street
New York, NY 10260
Preferred The Colonial Group, Inc. 192,000 11.34%
Series W One Financial Center
Boston, MA 02111
Wellington Management Company
Preferred 75 State Street
Series W Boston, MA 02108 225,000 13.29%
</TABLE>
(1) J.P. Morgan & Co., Inc. has shared voting power with respect to 37,583
shares and sole dispositive power with respect to 57,583 shares. The
Colonial Group, Inc. has shared voting power and shared dispositive power
with respect to 192,000 shares. Wellington Management Company has shared
dispositive power with respect to 225,000 shares. This information was
obtained from filings made with the Securities and Exchange Commission. The
Company makes no representation as to the accuracy or completeness of the
information reported in those filings.
4
<PAGE>
OWNERSHIP OF PINNACLE WEST SECURITIES
BY MANAGEMENT
At March 13, 1998, shares of Pinnacle West common stock beneficially owned
by the indicated persons or groups were as follows:
Shares
Beneficially Percent
Owned (1) of Class
--------- --------
Non-Employee Directors and Nominees
- -----------------------------------
O. Mark DeMichele 18,513
Michael L. Gallagher (2) 508
Martha O. Hesse 17,400
Marianne M. Jennings (2) 400
Robert E. Keever 400
Robert G. Matlock (2) 1,200
Bruce J. Nordstrom 1,009
John R. Norton III (2) 30,000
Donald M. Riley 620
Quentin P. Smith Jr. 415
Dianne C. Walker 400
Ben F. Williams, Jr. (2) 2,347
Employee Directors and Officers
- -------------------------------
William J. Post 87,368
George A. Schreiber, Jr. 25,900
Richard Snell 476,418
Other Officers Named on Page 10
- -------------------------------
Jack E. Davis (2) 28,327
James M. Levine 33,220
William L. Stewart (2) 36,998
All directors, nominees and executive
officers as a group (29 persons) (2) 1,009,044 1.19%
------------------------------------
- ---------------
(1) Includes shares which may be acquired by the exercise of stock options
within 60 days as follows: 14,000 for Ms. Hesse; 17,500 for Mr. Norton;
56,499 for Mr. Post; 2,000 for Mr. Schreiber; 417,499 for Mr. Snell; 7,666
for Mr. Davis and 668,718 for all directors and officers as a group. In the
case of officers, also includes shares of restricted stock and vested
shares, as of December 31, 1997, in the Company's savings plan.
(2) Includes in the cases of: Mr. Norton, 500 shares held by his wife and 2,000
shares held in a trust for Mr. Norton's late mother for which he serves as
trustee; Mr. Williams, 47 shares
5
<PAGE>
held by his wife and 500 shares held in joint tenancy with his wife; and
shares as to which investment or voting power is shared with spouses, as
follows: Mr. Gallagher, 508; Ms. Jennings, 400; Mr. Matlock, 1,200; Mr.
Davis, 10,588; and Mr. Stewart, 15,537. Also includes for the group, 62,978
shares in which voting or investment power is shared with others.
THE BOARD AND ITS COMMITTEES
The full Board of Directors met eleven times in 1997. No director attended
fewer than 75% of the meetings of the full Board and of the committees on which
he or she served.
The Company's Audit Review Committee reviews the performance and
independence of the Company's independent accounting firm, makes an annual
recommendation to the full Board with respect to the appointment of the firm,
approves the general nature of the services to be performed by the firm, and
solicits and reviews the firm's recommendations. The Committee also consults
with the Company's internal audit group and periodically reviews the
relationships among that group, management of the Company, and its independent
accountants. The Committee met three times in 1997 and consisted of Ms. Hesse as
chairman and Messrs. Keever, Nordstrom, Norton and Williams.
The Human Resources Committee makes recommendations to the full Board with
respect to executive salaries, bonuses and benefits and regularly reviews the
Company's policies in all of the foregoing areas. Its report on executive
compensation policy follows, and its members are identified at the end of that
report. In addition, the Committee also recommends prospective new Board members
to the full Board. The Committee may consider shareholder suggestions with
respect to new nominees for the Board if the suggestion is sent to the Secretary
of the Company at the address on the cover page of this Proxy Statement. The
Committee met six times in 1997.
Non-employee directors receive an annual retainer consisting of $19,500
cash and $6,000 worth of Pinnacle West common stock. In order to receive the
shares of stock a director is required to already own 200 shares in his or her
first year on the board, and that ownership requirement increases by 200 shares
annually up to a maximum of 1,000 shares. With certain exceptions, non-employee
directors also receive $900 for each board meeting attended and $700 for each
committee meeting attended.
The Company has a directors' retirement plan which, with certain
exceptions, provides to non-employee directors over the age of 65 an annual
payment of $12,000 upon their retirement from the Board. This payment is limited
to the number of credited years that the director served on the Board or until
the director dies, whichever occurs first. With limited exceptions, directors
will be credited only for years of service on the Board prior to age 65.
The Company has a consulting agreement with Robert G. Matlock & Associates,
Inc., of which Mr. Robert G. Matlock is President and Chief Executive Officer,
under which it is paid $150 per hour (maximum of $40,000 per year), plus
expenses, for consulting services relating to the Company's nuclear operations.
In 1997, $18,271 was paid under this agreement.
Mr. Gallagher is President of Gallagher & Kennedy, P.A., a law firm which
provided legal services to the Company in 1997 and which will provide such
services in 1998. In 1997, the Company paid $276,385 to this firm, such amount
comprising less than 1% of the firm's annual revenues.
6
<PAGE>
REPORT OF THE HUMAN RESOURCES COMMITTEE
The Company's Human Resources Committee (the "Committee") is composed of
six directors, none of whom currently is, or has ever been, an officer or
employee of the Company or any of its subsidiaries. The responsibilities of the
Committee include reviewing annually, and recommending to the full Board of
Directors, the cash compensation paid to the Company's officers, establishing
annual goals for such officers, and approving the payment of variable pay
incentives when such goals are met. Pursuant to these duties, the Committee
obtains information regarding stock incentive plans authorized by Pinnacle West
shareholders, under which stock options and other long-term incentives may be
awarded to the Company's officers and key employees by the human resources
committee of the board of Pinnacle West. Information regarding the compensation
objectives and philosophy of the Pinnacle West human resources committee was
taken from that committee's report contained in the proxy statement relating to
Pinnacle West's 1998 Annual Meeting of Shareholders.
The Committee's overall compensation philosophy is designed to (i) attract
and retain qualified individuals critical to the Company's success, (ii)
reinforce strategic objectives and (iii) promote long-term stock ownership by
executives. The Committee's executive compensation policy is incentive-based and
provides for short- and long-term incentives in the form of bonuses and equity.
The policy is designed to reward individual performance in critical areas of the
Company's operations, including cost management, earnings performance, customer
service, safety, and environmental concerns. Each year, incentive goals are
developed, focusing on the Company's profitability and its operational results
in the short and long term.
In 1997, independent consultants provided the Committee with compensation
information for a number of other organizations engaged primarily in the
electric utility business and having characteristics similar to the Company. In
addition, information was provided for a general industry group consisting of
companies of similar size. The Committee applied its compensation philosophy
(and specifically its goal of rewarding performance) to this comparative
information to determine the levels of executive compensation it recommended for
Board approval.
Base Salaries. Each year the Committee reviews executive officers' base
salaries. To determine an appropriate salary level, consideration is given to
individual performance, level of responsibility, prior experience and expertise,
and base pay of officers performing similar functions at comparable utility
companies. The Company is achieving its stated market position of paying base
salaries slightly ahead of market median. Some officers received above-average
increases in order to either bring them closer to the stated market position or
in recognition of their expertise and importance to the organization. Mr.
Stewart received a salary increase under the terms of his employment agreement
(see page 14.)
Bonuses. The Company has established a policy of having a significant
portion of compensation achieved through incentives, such as bonuses, tied to
Company performance and the attainment of goals established by the Committee.
Under the Company's bonus plan for officers, the most important goal
established by the Committee in 1997 was the lowering of the cost of producing
electricity (defined as the unit cost ratio, or UCR). If the Company had not
achieved a minimum level of UCR reduction as established by the Committee at the
beginning of the year, then no bonuses would have been paid.
7
<PAGE>
Once this minimum threshold was met, then potential bonus payments for
officers ranged from 15% to 60% of salary, depending on their position,
performance and the overall degree of success in meeting UCR goals. One hundred
percent of Mr. Post's bonus payment, and 50% of the other officers' bonus
payments, were based on achievement of UCR goals. The remaining 50% of the
bonuses for officers (other than Mr. Post) were based on achievement of business
unit performance goals, as determined by Mr. Post with review and concurrence by
the Committee at the beginning of the year. In 1997, maximum levels of business
unit performance were achieved and somewhat higher than targeted levels of UCR
reduction were achieved. The bonuses paid for 1997 ranged from 25% to 41% of
salary. Those officers of the Company who are most directly responsible for the
success of the Palo Verde Nuclear Generating Station were awarded a special
bonus in July of 1997 in recognition of their efforts in obtaining superior
ratings from the NRC and the Institute of Nuclear Power Operations. In addition,
if these superior ratings are maintained, then each of them has the potential to
earn an additional annual bonus ranging from $25,000 to $50,000.
Long-Term Incentives. The human resources committee of the board of
Pinnacle West makes the decisions on long-term incentive grants and believes
that the ultimate measure of management's performance is its ability to deliver
rewards to shareholders in the form of share price appreciation and rising
dividends over time. To those ends, the Pinnacle West committee makes systematic
grants of restricted stock and stock options to officers and key management
employees of Pinnacle West and its subsidiaries, including the Company, in order
that they may participate in those rewards through stock ownership.
The Pinnacle West committee also believes that senior management personnel,
including those of its subsidiaries, should have a significant, ongoing personal
investment in Pinnacle West. To that end, restricted stock grants, besides being
compensatory in nature, are utilized to encourage the attainment and retention
of targeted levels of individual stock ownership by conditioning their vesting
upon the ownership of certain numbers of shares for predetermined periods of
time.
The size of awards made by the human resources committee of the board of
Pinnacle West to the Company's participants in the program is determined by
making assumptions as to how, generally, Pinnacle West stock should perform if
Pinnacle West achieves its longer-term goals, and individual grants were then
determined by bringing the recipient's total compensation to a target level
relative to comparator groups, provided that the stock performs as assumed.
This Committee concurs with the position taken by the board of Pinnacle
West and its program regarding grants of restricted stock and stock options to
officers of the Company.
CEO Compensation. Mr. Post's salary was increased in February 1997 as a
result of his assuming the position of President and CEO of APS and President of
Pinnacle West. As discussed above, all of Mr. Post's bonus, a maximum potential
of 60% of salary, was tied to the Company meeting pre-established goals of
electricity cost reduction. The Company's 1997 level of UCR reduction resulted
in Mr. Post being awarded a bonus of slightly more than 40% of salary. The size
of awards of restricted stock and stock options made to Mr. Post by the Pinnacle
West committee were determined under their reward-for-performance philosophies
(with which we concur). Pinnacle West is charged for half of the cash
compensation paid to Mr. Post because of his dual role.
8
<PAGE>
Tax Consideration. Publicly traded corporations generally are not permitted
to deduct, for federal income tax purposes, annual compensation in excess of $1
million paid to any of certain top executives, except to the extent the
compensation qualifies as "performance-based." While the Committee prefers to
reward performance through the bonus and equity participation programs, certain
features of these programs do not fit the law's stringent definition of
"performance-based," and limited amounts of compensation may therefore not be
deductible.
The foregoing report of the Human Resources Committee is provided by its
members: Mmes. Hesse and Jennings and Messrs. Riley (Chairman), Matlock, Smith
and Williams.
PERFORMANCE GRAPH
The Company has elected to change its comparator index from the Dow Jones
Equity Market Index to the S&P 500 Index because the use of the latter index is
more prevalent in proxy statements. Comparisons shown this year include both
indices.
The annual changes for the five-year period shown in the following graph
are based on the assumption that $100 was invested on the last trading day in
1992 in Pinnacle West stock and in the market represented by each of three
indices (the S&P 500 Index, the Dow Jones Equity Market Index and the Edison
Electric Institute Index of 100 Investor-Owned Electrics), and that any
dividends were reinvested. The common stock of Pinnacle West is used to measure
the performance of the Company because the Company is the largest subsidiary of
Pinnacle West and its operations account for substantially all of Pinnacle
West's operating revenues.
Pinnacle Dow Jones
West EEI S&P 500 Equity Market
---- --- ------- -------------
12/31/92 $100.00 $100.00 $100.00 $100.00
12/31/93 110.80 111.15 109.92 90.41
12/31/94 101.27 98.29 111.34 115.95
12/31/95 153.12 128.78 152.66 128.72
12/31/96 174.56 130.32 187.28 151.81
12/31/97 239.16 166.00 249.28 179.19
9
<PAGE>
EXECUTIVE COMPENSATION
The following tables on compensation and stock options relate to the five
most highly compensated executive officers of the Company. Information given
with respect to stock options and restricted stock relate to shares of the
common stock of Pinnacle West.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards
- ---------------------------------------------------------------------------------------------------------------------
Other
Name and Annual Restricted
Principal Compen- Stock All Other
Position Year Salary Bonus sation Awards (1) Options Compensation (2)
- -------- ---- ------ ------ ------ ---------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jack E. Davis 1997 $268,364 $103,230 $107,325 13,500 $ 9,492
Exec. VP, Commercial 1996 193,669 127,142 69,168 11,000 10,016
Operations 1995 174,763 66,057 32,928 6,000 8,020
O. Mark DeMichele (3) 1997 $117,188 $0 $0 0 $5,134
Former President & CEO 1996 409,904 245,942 603,648 0 25,436
1995 409,904 245,942 526,848 21,000 24,037
James M. Levine 1997 $209,167 $151,610 $58,944 5,500 $10,873
Senior VP Nuclear 1996 189,534 103,320 37,728 6,000 10,301
1995 180,473 101,405 32,928 6,000 10,419
William J. Post (3) 1997 $420,834 $171,000 $131,175 16,500 $11,949
President & CEO 1996 325,000 165,100 106,896 17,000 11,015
1995 287,500 175,500 93,296 17,000 12,229
George A. Schreiber, Jr. 1997 $333,807 $124,875 $220,102 (4) $145,053 19,500 $226,677
Exec. VP & CFO (3)
William L. Stewart 1997 $432,517 $204,512 $35,806 (4) $186,825 13,500 $10,212
Exec. VP, Generation 1996 349,693 232,374 285,776 17,000 10,057
1995 306,595 186,214 90,552 16,500 10,175
</TABLE>
(1) The value of the restricted stock is based on the closing market price of
Pinnacle West common stock on the date the restricted shares were granted.
The restrictions lapse on most restricted stock awards made in 1997 upon
(i) the passage of three years from date of grant or upon retirement after
the age of 60, and (ii) the holding of certain numbers of unrestricted
shares for certain periods of time, as determined by the Pinnacle West
Human Resources Committee at the time of grant. Dividends that are payable
in cash or stock will be withheld until the restrictions lapse. 2,000 of
the 4,700 shares granted to Mr. Stewart in 1997 did not have an
unrestricted stock matching requirement.
The aggregate number of restricted shares held and their value (in
brackets) as of December 31, 1997 are as follows: Mr. Davis -- 6,100
[$258,488]; Mr. DeMichele -- 0 [$0]; Mr. Levine -- 4,000 [$169,500]; Mr.
Post -- 10,426 [$441,802]; Mr. Schreiber -- 3,900 [$165,263] and Mr.
Stewart -- 21,461 [$909,410].
(2) This column includes (i) the above market portion of interest accrued in
1997 on funds deferred under a deferred compensation plan in the following
amounts: Mr. Davis -- $4,279; Mr. DeMichele -- $5,134; Mr. Levine --
$4,960; Mr. Post -- $4,893; Mr. Schreiber -- $0; and Mr. Stewart -- $2,022;
(ii) Company contributions made during 1997 under the Company's Employee
Savings Plan in the following amounts: Mr. Davis -- $3,668; Mr. DeMichele
-- $0; Mr. Levine -- $4,750; Mr. Post -- $4,750; Mr. Schreiber -- $0 and
Mr. Stewart -- $0; (iii) premiums paid by the Company for life insurance in
the following amounts: Mr. Davis --$1,546; Mr. DeMichele -- $0; Mr. Levine
-- $1,163; Mr. Post -- $2,306; Mr. Schreiber -- $1,088 and Mr. Stewart --
$8,190 and (iv) $225,589 paid to Mr. Schreiber as reimbursement of
relocation expenses.
10
<PAGE>
(3) Mr. DeMichele retired on February 20, 1997. Mr. Post became President and
Chief Executive Officer of the Company and President of Pinnacle West on
February 20, 1997. Mr. Schreiber became Executive Vice President and Chief
Financial Officer of the Company and Pinnacle West on February 3, 1997.
Half of the compensation paid to Messrs. Post and Schreiber are charged to
Pinnacle West because of their dual roles.
(4) The figures shown in this column represent (i) the reimbursement of taxes
on income that Mr. Schreiber was deemed to have received due to
reimbursement of relocation expenses and (ii) the reimbursement of taxes
for income that Mr. Stewart was deemed to have received as a result of the
living arrangements described in his employment agreement with the Company
(see page 14).
11
<PAGE>
Pinnacle West Stock Option Grants in 1997
<TABLE>
<CAPTION>
Percentage of
Options Total Options
Granted Granted to All Exercise Grant Date
in 1997 Employees in Price Expiration Present
Name (Shares)(1) 1997 (per share) Date Value(2)
- ---- ----------- ------ ----------- ---- --------
<S> <C> <C> <C> <C> <C>
Jack E. Davis 13,500 5.18% $39.75 12/17/07 $79,245
O. Mark DeMichele -0- -0- N/A N/A $0
James M. Levine 5,500 2.11% $39.75 12/17/07 $32,285
William J. Post 16,500 6.33% $39.75 12/17/07 $96,855
George A. Schreiber, 6,000 2.30% $31.44 02/03/07 $26,100
Jr. 13,500 5.18% $39.75 12/17/07 79,245
William L. Stewart 13,500 5.18% $39.75 12/17/07 $79,245
</TABLE>
(1) Options vest annually in installments of 33% per year beginning on the
first anniversary of the date of grant. All options not already exercisable
will become exercisable if an individual retires on or after the age of 60.
No SARs
have been granted.
(2) The Black-Scholes option pricing model was used in determining the present
value of the options granted. The assumptions utilized in the model are as
follows: 15.6% for expected volatility; 5.66% for risk-free rate of return;
3.71% for dividend yield and 5 years for the time of exercise.
Stock Option Exercises in 1997
and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options
at Fiscal Year-End at Fiscal Year-End (2)
------------------ ----------------------
Shares
Acquired on Value
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack E. Davis 4,428 $63,447 12,666 22,834 $201,869 $146,931
O. Mark DeMichele 127,767 $1,194,253 0 0 $0 $0
James M. Levine 6,500 $95,062 10,667 11,500 $191,367 $88,766
William J. Post 4,937 $53,517 56,499 33,501 $1,154,778 $253,980
George A. Schreiber, Jr. 0 $0 0 19,500 $0 $102,266
William L. Stewart 28,500 $322,108 17,500 30,334 $293,251 $243,413
</TABLE>
(1) Value of options exercised is the market value of the shares on the
exercise date minus the exercise price.
(2) The value of options equals the market value of Pinnacle West common stock
on December 31, 1997 ($42.375 per share) minus the exercise price of
options.
12
<PAGE>
EXECUTIVE BENEFIT PLANS
Employees' Retirement Plan and Supplemental Excess Benefit Retirement Plan.
The following table illustrates the annual benefits, calculated on a
straight-life annuity basis, that would be provided under the Company Employees'
Retirement Plan and the Supplemental Excess Benefit Retirement Plan to the
Company's officers who retire at age 65 at the indicated compensation and years
of service levels.
<TABLE>
<CAPTION>
Years of Service
Average Annual ----------------------------------------------------------------------
Compensation (a) 5(b) 10 20 25
- --------------------------------- -------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 15,000 $ 30,000 $ 50,000 $ 60,000
200,000 30,000 60,000 100,000 120,000
250,000 37,500 75,000 125,000 150,000
300,000 45,000 90,000 150,000 180,000
400,000 60,000 120,000 200,000 240,000
500,000 75,000 150,000 250,000 300,000
600,000 90,000 180,000 300,000 360,000
700,000 105,000 210,000 350,000 420,000
800,000 120,000 240,000 400,000 480,000
</TABLE>
- ---------------
(a) Compensation under the retirement plan consists solely of base salary up to
$160,000 (as adjusted for cost-of-living), including any amounts
voluntarily deferred under the Company's 401(k) plan. While the retirement
plan does not include amounts voluntarily deferred under other deferred
compensation plans, bonuses or incentive pay, the Supplemental Excess
Benefit Retirement Plan does include, subject to certain exceptions, these
additional components of compensation plus base salary beyond the $160,000
limit.
(b) Although years of service begin accumulating on the date of employment,
benefits do not vest until the completion of five years of service.
The Company's Supplemental Excess Benefit Retirement Plan provides enhanced
benefits. Benefits payable under this plan that are in excess of the benefits
payable under the Company's retirement plan (which, as a qualified defined
benefit pension plan, is limited pursuant to the Internal Revenue Code), are
payable from the general assets of the Company. The number of credited years of
service for each of the individuals named on page 10 and their 1997 remuneration
covered by the Company's plans are as follows: Mr. Davis -- 25 years, $395,506;
Mr. Levine -- 8 years, $312,487; Mr. Post -- 25 years, $585,934; Mr. Schreiber
- -- 11 years, $333,807 (see description of Mr. Schreiber's employment agreement
below) and Mr. Stewart -- 4 years (see description of Mr. Stewart's employment
agreement below,) $664,891. The amounts
13
<PAGE>
shown in the table are not expected to be subject to any reduction or offset for
social security benefits or other significant amounts.
Employment and Severance Arrangements. Mr. Schreiber and the Company
entered into an agreement which, in order to make up for the retirement benefits
he lost as a result of his decision to accept employment as an officer of the
Company, he will receive deferred compensation equal to the difference of his
actual pension benefit and the pension benefit that he would have been entitled
if his actual "years of service" were increased by ten.
In August 1996 the Company entered into an agreement with Mr. Stewart which
provides a retirement benefit calculated by adding a base amount of 20% of his
average monthly wage and 10% of his average monthly wage for each year of
service up to a maximum of 100% of his average monthly salary. He becomes vested
in this benefit upon completion of four years employment. In addition, Mr.
Stewart is to receive 2,000 shares of restricted Pinnacle West stock annually.
The Company also agreed to purchase Mr. Stewart's home for $1.1 million, the
appraised value and the amount for which the Company believed it could be sold,
and to allow him to live there as long as he remains an employee of the Company.
In August 1997 Mr. Stewart agreed to move out of this house and, as a result,
the Company awarded him an annual salary increase of $54,000 to compensate him
for the loss of this benefit.
Effective January 1, 1992, the Company established a deferred compensation
plan for directors and officers of the Company. Effective January 1, 1996, the
Company established a revocable trust for the purpose of funding the benefits
under the deferred compensation plan. Upon the occurrence of certain events,
which generally include the sale of substantially all the Company's assets, a
merger or consolidation in which the Company is not the surviving entity,
certain changes in the composition of the Board of Directors or someone
acquiring 20 percent or more of the Company's voting stock, the trust will
become irrevocable and the Company will be required to fully fund the benefits
earned under the deferred compensation plan within 60 days after the occurrence
of that event.
The Company has entered into severance agreements, which are identical in
content, with each of its executive officers. The agreements are intended to
provide stability of key management for the Company. Under the agreements, each
officer will receive a payment and other severance benefits having an aggregate
value of not more than 2.99 times the officer's "base income" (the average of
the officer's annual compensation over the five years preceding the year of the
"change in control") if, during the two-year period following a "change in
control" of the Company, the officer's employment is terminated or the terms and
conditions of his or her employment are significantly and detrimentally altered.
"Change in control" includes any change in control event required to be reported
under the Securities Exchange Act of 1934, an unrelated third party's
acquisition of 20% or more of the Company's voting stock or substantially all of
the assets of the Company, a merger or acquisition of the Company in which the
Company is not the surviving corporation unless the Company's shareholders have
the same proportionate interest in the surviving corporation, or a change in the
majority of the members of the Company's Board of Directors over a two-year
period, which change is not approved by two- thirds of the members of the Board
then serving who were members immediately prior to the change. No severance
benefits will be payable to an officer who has attained age 65 or whose
termination is on account of retirement, voluntary termination, disability or
death, or "for cause," as defined in the agreements. An officer will not be
deemed to have voluntarily terminated his or her employment if the officer's
termination is due to a material adverse change in his or her
14
<PAGE>
duties, status, or perquisites, failure to re-elect or redesignate the officer
to a position held prior to the "change in control," a significant relocation of
the officer's job without his or her consent, or a material breach by the
Company of the officer's severance agreement. Each of the executive severance
agreements terminates on December 31 of each year, upon six months' advance
notice by the Company to the officer; if such notice is not given, the agreement
will continue for successive one-year periods until the notice is given.
GENERAL
Cost of Solicitation. The cost of the solicitation of proxies, which will
be by mail, will be borne by the Company. Brokerage houses and others will be
reimbursed for their out-of-pocket expenses in forwarding documents to
beneficial owners of stock.
Independent Public Accountants. It is anticipated that the Company's
financial statements as of December 31, 1998 and for the year then ended will be
examined by Deloitte & Touche LLP, independent certified public accountants.
Representatives of that firm are expected to be present at the annual meeting
with the opportunity to make a statement if they so desire and to be available
to respond to appropriate questions.
Voting Procedures. A majority of the outstanding shares entitled to vote in
person or by proxy at the meeting will constitute a quorum for the conduct of
business.
For the election of directors, the individuals receiving the highest number
of votes will be elected. The number of votes to which each shareholder will be
entitled is to be determined by multiplying the number of shares of stock owned
as of the March 13, 1998 record date by the number of directors to be elected,
and 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. Broker "non-votes" with respect to any matter are not considered
shares present and will not affect the outcome of the vote on such matter.
Shareholder Proposals for Next Annual Meeting. In order to be considered
for inclusion in the proxy statement and form of proxy relating to the 1999
annual meeting of the Company's shareholders, a proposal intended by a
shareholder for presentation at that meeting must be submitted in accordance
with the applicable rules of the Securities and Exchange Commission and received
by the Company at its principal executive offices on or before December 2, 1998.
Proposals to be presented at the annual meeting which are not intended for
inclusion in the proxy statement and form of proxy must be submitted in
accordance with the applicable provisions of the Company's Bylaws, a copy of
which is available upon written request delivered to the Office of the
Secretary. The Company suggests that proponents submit their proposals to the
Office of the Secretary by Certified Mail -- Return Receipt Requested.
15
<PAGE>
Arizona Public Service Company
P.O. Box 53999
Phoenix, Arizona 85072-3999
April 1, 1998
Dear Shareholders:
The 1998 Annual Meeting of Shareholders of Arizona Public
Service Company will be held in the offices of the Company
at 400 North Fifth Street, Phoenix, Arizona on May 19, 1998
at 10 a.m. Phoenix time.
Your vote is important. Whether or not you plan to attend
the meeting, please review the enclosed proxy statement,
complete the proxy form below and return it promptly in the
envelope provided.
Sincerely,
Nancy C. Loftin
Vice President, Chief Legal
Counsel & Secretary
- --------------------------------------------------------------------------------
PROXY FORM Arizona Public Service Company PROXY FORM
- --------------------------------------------------------------------------------
This proxy is solicited on behalf of the Board of Directors for the
Annual Meeting on May 19, 1998.
The undersigned hereby appoints William J. Post and Nancy C. Loftin,
and each of them, proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Shareholders of Arizona
Public Service Company to be held May 19, 1998 at ten a.m., Phoenix
time, and at any adjournment thereof, and to vote as specified in this
Proxy all the shares of stock of the Company which the undersigned
would be entitled to vote if personally present. The proxies of the
undersigned may vote according to their discretion on any other matter
that may properly come before the meeting.
Voting with respect to the election of Directors may be indicated on
the reverse of this card. Nominees for Director are: O. Mark
DeMichele, Michael L. Gallagher, Martha O. Hesse, Marianne Moody
Jennings, Robert E. Keever, Robert G. Matlock, Bruce J. Nordstrom,
John R. Norton III, William J. Post, Donald M. Riley, George A.
Schreiber, Jr., Quentin P. Smith, Jr., Richard Snell, Dianne C. Walker
and Ben F. Williams, Jr.
This proxy will be voted as specified on the reverse. If no
specification is made, this proxy will be voted FOR the
election of Directors
<PAGE>
Election of Directors
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the election of Directors.
- --------------------------------------------------------------------------------
FOR* WITHHOLD
1. Election of Directors (see other side) [ ] [ ]
*For all nominees, except vote withheld from
the following:
_________________________________________________________
- --------------------------------------------------------------------------------
_______________________________________________
Signature Date
_______________________________________________
Signature Date
Please sign as your name(s) appears to the
left, Joint owners should both sign.
Fiduciaries, attorneys, corporate officers,
etc. should state their capacities.
Any proxy given previously is hereby revoked.
- --------------------------------------------------------------------------------
Fold and detach Fold and detach
