424(b)(2)
FILED PURSUANT TO
REGISTRATION NUMBERS
333-52476
333-101457
5,700,000 SHARES
[LOGO] PINNCLE WEST CAPITAL CORPORATION
COMMON STOCK
----------
We are offering 5,700,000 shares of our common stock. We have granted the
underwriters an option to purchase up to 855,000 additional shares of common
stock to cover over-allotments.
Our common stock is listed on the New York Stock Exchange under the symbol
"PNW." The last reported sale price of our common stock on the New York Stock
Exchange on December 17, 2002 was $32.26 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 3 OF THE ACCOMPANYING
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PUBLIC UNDERWRITING PROCEEDS TO
OFFERING DISCOUNTS AND US (BEFORE
PRICE COMMISSIONS EXPENSES)
----- ----------- ---------
Per Share ..................... $ 31.50 $ 1.103 $ 30.397
Total ......................... $ 179,550,000 $ 6,287,100 $ 173,262,900
The underwriters expect to deliver the shares to purchasers on or about
December 23, 2002.
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JOINT BOOK-RUNNING MANAGERS
CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY
JOINT LEAD MANAGER
BARCLAYS CAPITAL
CO-MANAGERS
JPMORGAN
UBS WARBURG
BNY CAPITAL MARKETS, INC.
KBC FINANCIAL PRODUCTS
Prospectus Supplement dated December 17, 2002
to Prospectus dated December 5, 2002
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. NEITHER
WE NOR THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE ANY DIFFERENT OR
ADDITIONAL INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT COVER OF THIS PROSPECTUS SUPPLEMENT OR THE DATE OF THE
ACCOMPANYING PROSPECTUS, AS APPLICABLE.
THIS DOCUMENT IS IN TWO PARTS. THE FIRST PART IS THIS PROSPECTUS SUPPLEMENT,
WHICH DESCRIBES THE TERMS OF THE OFFERING OF COMMON STOCK AND ALSO ADDS TO AND
UPDATES INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE INTO THE ACCOMPANYING PROSPECTUS. THE SECOND PART IS
THE ACCOMPANYING PROSPECTUS, WHICH GIVES MORE GENERAL INFORMATION, SOME OF WHICH
WILL NOT APPLY TO THE COMMON STOCK. IF THE DESCRIPTION OF THE OFFERING VARIES
BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary.................................................................... S-2
Risk Factors............................................................... S-12
Forward-Looking Statements................................................. S-21
Use of Proceeds............................................................ S-22
Capitalization............................................................. S-23
Price Range of Common Stock
and Dividend Policy.................................................... S-24
Description of Capital Stock............................................... S-24
Certain United States Federal Income Tax
Consequences to Non-U.S. Holders........................................ S-25
Underwriting............................................................... S-27
Experts.................................................................... S-29
Legal Opinions............................................................. S-30
Where You Can Find More
Information............................................................. S-30
PROSPECTUS
PAGE
----
Risk Factors................................................................. 3
About this Prospectus........................................................ 8
Forward-Looking Statements................................................... 8
Where You Can Find More Information.......................................... 10
The Company.................................................................. 11
Ratio of Earnings to Fixed Charges........................................... 12
Use of Proceeds.............................................................. 12
General Description of the Securities........................................ 12
Description of Debt Securities............................................... 13
Description of Preferred Stock............................................... 23
Description of Common Stock.................................................. 26
Description of the Purchase Contracts........................................ 33
Description of Units......................................................... 33
Plan of Distribution......................................................... 33
Experts...................................................................... 35
Legal Opinions............................................................... 35
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SUMMARY
This prospectus supplement and the attached prospectus incorporate
important business and financial information about us and our subsidiaries that
is not included in or delivered with these documents. See "Where You Can Find
More Information" below in this prospectus supplement.
The following summary is qualified in its entirety by and should be read
together with the more detailed information and financial statements included or
incorporated by reference in this prospectus supplement and the accompanying
prospectus. In this prospectus supplement, "Pinnacle West," "we," "us" and "our"
refer to Pinnacle West Capital Corporation and its subsidiaries, predecessors
and acquired businesses unless the context requires otherwise.
OUR COMPANY
OVERVIEW
We were incorporated in 1985 under the laws of the State of Arizona and own
all of the outstanding equity securities of Arizona Public Service Company
(APS). APS is an electric utility that provides either retail or wholesale
electric service to substantially all of the state of Arizona, with the major
exceptions of the Tucson metropolitan area and about one-half of the Phoenix
metropolitan area. APS also generates and, through our marketing and trading
division, sells and delivers electricity to wholesale customers in the western
United States.
Our other major subsidiaries are:
* Pinnacle West Energy Corporation (Pinnacle West Energy), through
which we conduct our unregulated electricity generation
operations;
* APS Energy Services Company, Inc. (APSES), which provides
commodity-related energy services and energy-related products and
services to commercial, industrial and institutional retail
customers in the western United States;
* SunCor Development Company (SunCor), a developer of residential,
commercial, and industrial real estate projects in Arizona, New
Mexico, and Utah; and
* El Dorado Investment Company (El Dorado), an investment firm.
PINNACLE WEST CAPITAL CORPORATION
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ARIZONA PUBLIC SERVICE PINNACLE WEST ENERGY APS ENERGY SERVICES SUNCOR EL DORADO INVESTMENT COMPANY
Our marketing and trading division currently sells, into the wholesale
market, the APS and Pinnacle West Energy generation output that is not needed
for APS' native load, which includes loads for retail customers and traditional
cost-of-service wholesale customers. However, the Arizona Corporation
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Commission (ACC) has ordered the ACC staff and interested parties to develop a
competitive procurement process by March 1, 2003 by which APS will competitively
procure, at a minimum, any power needed for its retail customers that it cannot
produce from its existing generation assets. For purposes of this competitive
procurement process, Pinnacle West Energy generation assets are not counted as
APS generation assets. The ACC staff report proposing a competitive procurement
process provides that Pinnacle West Energy would be able to bid in connection
with any such competitive procurement by APS.
Subject to specified risk parameters established by our Board of Directors
and its energy risk management committee, the marketing and trading division
also has engaged in activities to hedge purchases and sales of electricity,
fuels, and emissions allowances and credits and to profit from market price
movements. The marketing and trading division is focused on managing fuel and
power costs for APS' native load.
At September 30, 2002, we employed about 7,580 people, including the
employees of our subsidiaries. Of these employees, about 5,375 were employees of
our major subsidiary, APS, and employees assigned to jointly-owned generating
facilities for which APS serves as the generating facility manager. Our
principal executive offices are located at 400 North Fifth Street, Phoenix,
Arizona 85004 (telephone 602-250-1000).
ARIZONA PUBLIC SERVICE COMPANY
APS was incorporated in 1920 under the laws of Arizona and is an electric
utility, with about 900,000 customers. APS provides either retail or wholesale
electric service to substantially all of the state of Arizona, with the major
exceptions of the Tucson metropolitan area and about one-half of the Phoenix
metropolitan area. APS also generates and, through our marketing and trading
division, sells and delivers electricity to wholesale customers in the western
United States. Population growth in this service territory has averaged 3.3%
since 1995 versus an average of 0.9% for the United States as a whole. During
2001 and through September 30, 2002, no single purchaser or user of energy from
APS accounted for more than 0.7% of APS' total electric revenues. At September
30, 2002, APS employed approximately 5,375 people, which includes employees
assigned to jointly-owned generating facilities for which APS serves as the
generating facility manager. For the nine months ended September 30, 2002, APS
reported net income of $183 million.
PINNACLE WEST ENERGY
Pinnacle West Energy was incorporated in 1999 under the laws of the State
of Arizona and is engaged principally in the business of the development of
generating plants and production of wholesale electricity. Pinnacle West Energy
is the subsidiary through which we conduct our unregulated generation
operations. Pinnacle West Energy was formed primarily to build, own and operate
new generation assets that we believed would be needed to serve APS' native load
(which includes sales to retail customers and traditional cost-of-service
wholesale customers) when the ACC adopted its competition rules and approved a
settlement agreement in 1999. Those rules, as modified by the settlement
agreement, required APS to divest its generation assets to an affiliate,
Pinnacle West Energy, or to unaffiliated parties no later than December 31,
2002, but did not relieve APS of its obligation to secure power for its
standard-offer, full-service customers. Further, the code of conduct imposed on
APS as a result of the competition rules and settlement agreement prevented APS
from itself building or acquiring new generation prior to such divestiture. See
"Regulatory Overview" below.
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Pinnacle West Energy had approximately 80 employees as of September 30,
2002. Pinnacle West Energy reported net income of $18 million in 2001 and a net
loss of $2 million in 2000. For the nine months ended September 30, 2002,
Pinnacle West Energy reported net income of $12 million.
Pinnacle West Energy has completed or announced plans to build about 2,360
megawatts (MW) of natural gas-fired generating capacity from 1999-2004 at an
estimated cost of about $1.4 billion. This does not reflect an expected
reimbursement in 2004 by Southern Nevada Water Authority (SNWA) of approximately
$100 million of Pinnacle West Energy's cumulative capital expenditures in the
Silverhawk project upon SNWA's purchase of a 25% interest in the project at
completion.
CAPACITY COMMERCIAL
FACILITY (MW) OPERATION DATE LOCATION
--------------------------------------------------------------------------------
West Phoenix 4 120 2001 Arizona
Redhawk 1 & 2 1,060 2002 Arizona
Saguaro CT 3 80 2002 Arizona
West Phoenix 5 530 2003* Arizona
Silverhawk 570 2004* Nevada
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TOTAL 2,360
--------------------------------------------------------------------------------
* Targets.
These facilities and another project are described below:
* A 650 MW expansion of the West Phoenix Power Plant. The 120 MW
West Phoenix Unit 4 began commercial operation in June 2001.
Construction has begun on the 530 MW West Phoenix Unit 5, with
commercial operation expected to begin in mid-2003.
* The construction of a two unit combined cycle 1,060 MW generating
station near Palo Verde, called Redhawk. Construction of Units 1
and 2 began in December 2000, and commercial operation began in
July 2002. On November 22, 2002, Pinnacle West Energy announced
the decision to cancel Redhawk Units 3 and 4, two 530 MW natural
gas-fired generators that were scheduled to begin producing
electricity by early 2007. As a result of the plant cancellation,
we expect to record a charge of approximately $50 million before
income taxes ($30 million after-tax or $0.35 per share) in the
fourth quarter of 2002.
* The construction of an 80 MW simple cycle power plant at Saguaro
in southern Arizona. Commercial operation began in July 2002.
* Development of the 570 MW Silverhawk combined-cycle plant 20
miles north of Las Vegas, Nevada. Construction of the plant began
in August 2002, with an expected commercial operation date in
mid-2004. Pinnacle West Energy has signed an agreement with SNWA
under which SNWA is expected to purchase a 25% interest in the
project if certain conditions are satisfied.
* A Pinnacle West Energy affiliate is exploring the possibility of
creating an underground natural gas storage facility on land we
own west of Phoenix. A feasibility study is in progress to
determine if the proposed acreage can support a natural gas
storage cavern.
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APS ENERGY SERVICES COMPANY, INC.
APSES was incorporated in 1998 under the laws of the State of Arizona and
provides commodity-related energy services (such as direct access commodity
contracts, energy procurement, and energy supply consultation) and
energy-related products and services (such as energy master planning, energy use
consultation and facility audits, cogeneration analysis and installation, and
project management) to commercial, industrial and institutional retail customers
in the western United States. APSES had approximately 75 employees as of
September 30, 2002. APSES is a relatively new company in an industry
experiencing some stop-and-go regulatory transitions, but was able to secure a
number of profitable multi-year contracts in the fourth quarter of 2001. These
contracts allowed APSES to more than double its gross margin in 2001 while
keeping operating expenses flat.
For the nine months ended September 30, 2002, APSES reported net income of
approximately $20 million, and is currently contributing cash flow to Pinnacle
West.
SUNCOR DEVELOPMENT COMPANY
SunCor was incorporated in 1965 under the laws of the State of Arizona and
is a developer of residential, commercial and industrial real estate projects in
Arizona, New Mexico and Utah. SunCor and its subsidiaries had approximately 850
full and part-time employees at September 30, 2002.
SunCor's assets consist primarily of land with improvements, commercial
buildings, and other real estate investments. SunCor's largest project is the
Palm Valley master-planned community, which has approximately 7,250 acres
remaining to be developed west of Phoenix in the area of the towns of Avondale,
Goodyear, and Litchfield Park, Arizona.
For the nine months ended September 30, 2002, SunCor reported net income of
$9 million. We expect SunCor to make cash distributions to us of $80 million to
$100 million annually in 2003 through 2005 due to anticipated accelerated asset
sales activity.
EL DORADO INVESTMENT COMPANY
El Dorado was incorporated in 1983 under the laws of the State of Arizona
and is an investment firm. El Dorado is engaged principally in the business of
making equity investments in other companies. El Dorado's short-term goal is to
prudently realize the value of its existing investments. On a long-term basis,
we may use El Dorado, when appropriate, as our subsidiary for investments that
are strategic to our principal business of generating, distributing, and
marketing electricity.
At September 30, 2002, El Dorado had a majority interest in a company
specializing in spent nuclear fuel technology, an investment in a venture
capital partnership, interests in two professional sports teams, an investment
in an energy technology company and miscellaneous small investments.
For the nine months ended September 30, 2002, El Dorado reported a net loss
of $18 million.
OUR BUSINESS STRATEGIES
Our business strategies are linked to the strong growth characteristics of
Arizona and the western U.S. regional market. We are committed to the West and
are pursuing the following primary strategies:
* Continuing to focus on our core electricity business, including
providing reliable service to APS' regulated electricity
customers at stable prices;
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* Capturing growth opportunities in our electricity markets;
* Actively managing our energy production, procurement and sales
activities to manage commodity price risk and provide sufficient
capacity, energy, and ancillary services to reliably meet
obligations to our regulated service customers and other
customers;
* Managing our operating and capital costs, with an emphasis on the
reduction of variable costs per generating unit (fuel,
operations, and maintenance expenses) and on increased
productivity through technological efficiencies;
* Building our generation portfolio consistent with our native
load, cash flow and market conditions;
* Maximizing the long-term value of our assets; and
* Providing superior long-term total returns for shareholders.
REGULATORY OVERVIEW
On September 21, 1999, the ACC approved Rules that provide a framework for
the introduction of retail electric competition in Arizona. On September 23,
1999, the ACC approved a comprehensive settlement agreement among APS and
various parties related to the implementation of retail electric competition in
Arizona. Under the Rules, as modified by the 1999 Settlement Agreement, APS was
required to transfer all of its competitive electric assets and services to an
unaffiliated party or parties or to a separate corporate affiliate or affiliates
no later than December 31, 2002. Consistent with that requirement, APS had been
addressing the legal and regulatory requirements necessary to complete the
transfer of its generation assets to Pinnacle West Energy on or before that
date. The Rules also obligated APS to acquire all of its customers'
standard-offer, full-service generation requirements from the competitive market
(with at least 50% of those requirements coming from a "competitive bidding
process") starting in 2003.
On August 27, 2002, the ACC held an open meeting to consider various issues
relating to retail electric competition in Arizona. At that meeting, the ACC
determined, among other things, that APS would not be permitted to transfer its
generation assets. The ACC stayed indefinitely the existing rule addressing
competitive procurement described in the preceding paragraph. Instead, the ACC
required that APS competitively procure, at a minimum, any power needed for its
retail customers that it cannot produce from its existing generation assets. The
ACC ordered the ACC staff and interested parties to develop a competitive
procurement process by March 1, 2003. For purposes of this competitive
procurement process, the ACC stated that the Pinnacle West Energy generation
assets "shall not be counted as APS assets in determining the amount, timing,
and manner of the competitive solicitation." The ACC ordered the development of
a competitive solicitation process that can begin by March 1, 2003.
On September 16, 2002, APS filed an application with the ACC requesting the
ACC to allow APS to borrow up to $500 million and to lend the proceeds to
Pinnacle West Energy or to the Company; to guarantee up to $500 million of
Pinnacle West Energy's or the Company's debt; or a combination of both, not to
exceed $500 million in the aggregate. In its application, APS stated that the
ACC's reversal of the generation asset transfer requirement and the resulting
bifurcation of generation assets between APS and Pinnacle West Energy under
different regulatory regimes result in Pinnacle West Energy being unable to
attain investment-grade credit ratings. This, in turn, precludes Pinnacle West
Energy from accessing capital markets to refinance the bridge financing that we
provided to fund the construction of Pinnacle West Energy generation assets or
from effectively competing in the wholesale markets. APS
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noted that Pinnacle West Energy had previously received investment-grade credit
ratings contingent upon its receipt of APS generation assets and that our credit
ratings could be adversely affected if Pinnacle West Energy is unable to finance
its capital requirements. The ACC staff filed its testimony in connection with
the financing application on December 13, 2002. The staff recommended approval
of the financing application, subject to certain conditions, including that the
APS loan to Pinnacle West Energy be secured by certain Pinnacle West Energy
assets and have a maturity date of not more than four years, unless otherwise
ordered by the ACC. The ACC staff also recommended that APS not be allowed to
pay dividends if, as a result of the payment, APS' common equity ratio would
fall below 40%. The ACC hearing on the financing application is scheduled to
begin on January 8, 2003.
On November 8, 2002, APS filed an interim financing application with the
ACC requesting the ACC to permit APS to (a) make short-term advances to Pinnacle
West in the form of an inter-affiliate line of credit or (b) guarantee Pinnacle
West's short-term debt. In either case, the waiver would be limited to a maximum
aggregate principal amount of $125 million and for a maximum term of 364 days.
At an ACC special open meeting on November 22, 2002, the ACC approved the
interim financing application, subject to the following conditions: (a) the
terms and conditions, including the pricing schedule, of the line of credit
between Pinnacle West and APS must be the same as those in the Pinnacle West
364-day bank facility that expired on November 29, 2002, but the pricing is at a
mandated higher level; (b) APS must acquire a $125 million security interest in
certain assets of Pinnacle West Energy to secure the financing; (c) all revenues
(which we construe to be fees and interest) received by APS under the line of
credit must be deferred and accounted for in a manner to allow amortization as a
credit to customers in APS' next rate case; and (d) the ACC will examine ways to
improve regulatory insulation between APS and its affiliates in its
consideration of APS' $500 million financing application filed on September 16,
2002. On December 4, 2002, we entered into a 364-day $125 million liquidity line
of credit with APS, consistent with the ACC's approval.
For additional information concerning these regulatory matters, see Note 5
of Notes to Condensed Consolidated Financial Statements in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002, and our Current Reports
on Form 8-K dated November 14, 2002, November 15, 2002, and November 22, 2002.
CAPITAL RESOURCES AND CASH REQUIREMENTS
Our primary cash needs are for dividends to our shareholders; equity
infusions into and inter-company loans to our subsidiaries, primarily Pinnacle
West Energy; interest payments; and optional and mandatory repayments of
principal on our long-term and short-term debt. On October 23, 2002, our Board
of Directors increased the common stock dividend to an indicated annual rate of
$1.70 per share from $1.60 per share, effective with the December 1, 2002
dividend payment. We currently intend to continue growing the common dividends
in the future. However, such growth will be dependent on a number of factors
including, but not limited to, payout ratio trends, free cash flow, and
financial market conditions.
Our primary sources of cash are dividends from APS, cash flow from our
marketing and trading operations, external financings, and cash distributions
from our other subsidiaries, primarily SunCor. For the three years 1999 through
2001, total dividends from APS were $510 million. For the nine months ended
September 30, 2002, dividends from APS were approximately $128 million. We
expect SunCor to make cash distributions to the Company of $80 million to $100
million annually in 2003 through 2005 due to anticipated accelerated asset sales
activity.
On February 8, 2002, we issued $215 million of 4.5% Notes due 2004. The
majority of these borrowings were used to fund Pinnacle West Energy capital
expenditures. On July 31, 2002, we
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completed a $300 million bank credit facility that we refer to below as the
"bridge facility." We will use $75 million of the proceeds of this offering to
repay borrowings under the bridge facility and that payment will reduce our
borrowing capacity under the bridge facility to $225 million. The borrowings are
LIBOR-based and can be drawn upon as needed, and are expected to be used
primarily to fund Pinnacle West Energy capital requirements. The bridge facility
matures on July 30, 2003.
The parent company's outstanding unconsolidated debt was approximately $1.1
billion at September 30, 2002. At September 30, 2002, we had credit commitments
from various banks totaling $250 million, which were available to support the
issuance of commercial paper or to be used as bank borrowings. At September 30,
2002, we had about $206 million of commercial paper outstanding and $35 million
of short-term borrowings. In addition, as noted above, we had an additional $300
million of borrowing capacity under the bridge facility, under which $45 million
had been borrowed as of September 30, 2002. The bank backup facility for $125
million of our commercial paper program terminated on November 29, 2002, and was
replaced by the 364-day $125 million liquidity line of credit from APS described
above.
Through early 2004, we will need to refinance approximately $790 million of
parent company indebtedness. We intend to use the net proceeds of this common
stock issuance to refinance a portion of this debt. We anticipate repaying the
remaining indebtedness with proceeds of debt issued under APS' $500 million
financing application, if approved, and with refunding debt and other corporate
cash flows. If the ACC does not grant the approvals requested in APS' $500
million financing application in a timely fashion, we would anticipate taking
the following steps, to the extent necessary in priority order, although the
timing of our liquidity needs may affect the order of the steps taken:
* The reduction of capital expenditures through plant delay or
cancellation;
* The sale of non-core assets; and
* The issuance of new debt and, if appropriate, new equity.
RECENT DEVELOPMENTS
CHANGE IN CREDIT RATINGS
On November 4, 2002, Standard & Poor's (S&P) lowered the senior unsecured
debt rating of Pinnacle West from "BBB" to "BBB-" and lowered the corporate
credit rating of APS from "BBB+" to "BBB." The downgrade of APS' corporate
credit rating reflects S&P's conclusion that the regulatory insulation standard
is insufficient to warrant a separation of the corporate credit ratings of APS
and Pinnacle West. This action also results in a change in the unsecured debt
rating of Pinnacle West because of the structural subordination of its debt to
the debt of APS. Other outstanding ratings for Pinnacle West and APS were
affirmed and the ratings were placed on stable outlook. S&P stated that these
rating actions are not a result of APS' $500 million financing application filed
with the ACC on September 16, 2002. S&P noted that even on a stand-alone basis,
APS' financial health remains solidly within the triple-`B' category, even with
the addition of the $500 million in debt contemplated in the APS financing
application. For a description of APS' financing application, see "Regulatory
Overview" above. The S&P ratings and stable outlook assume that $500 million of
APS debt is used to repay Pinnacle West debt.
On December 4, 2002, Fitch Ratings placed the debt ratings of Pinnacle West
and APS on Rating Watch Negative. The rating watch affects our "BBB" senior
unsecured debt and "F2" commercial paper ratings. Fitch stated that the rating
watch for Pinnacle West reflects concern over our ability to refinance
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$790 million of debt maturing over the next 14 months issued to finance Pinnacle
West Energy's generation expansion program (see "Capital Resources and Cash
Requirements" above), increasing exposure to merchant energy markets, and the
uncertain regulatory treatment of 1,800 MW of Pinnacle West Energy's new
generation. The rating watch also affects APS' "A-" senior secured and "BBB+"
senior unsecured debt ratings, but not its "F2" commercial paper rating, which
Fitch affirmed. Fitch stated that the rating watch for APS reflects regulatory
uncertainty and the potential increase in leverage related to APS' $500 million
financing application. See "Regulatory Overview" above. Fitch also stated that
failure to obtain the $500 million inter-company loan from APS or access
alternative sources of funding would result in a downgrade of our debt.
HIRING OF CHIEF FINANCIAL OFFICER
Donald E. Brandt became our chief financial officer effective December 2,
2002. Mr. Brandt comes to us from St. Louis-based Ameren Corporation where he
most recently served as senior vice president and chief financial officer.
Ameren is a diversified energy services company with market capitalization of
$5.7 billion. Its subsidiaries serve 1.8 million electric and gas customers in
Missouri and central Illinois. Mr. Brandt also served as president of Ameren
Energy, an unregulated energy trading and wholesale marketing subsidiary dealing
in electricity, natural gas, emission credits and fuels.
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THE OFFERING
Common stock offered.................. 5,700,000 shares. We have also granted the underwriters an option
to purchase up to 855,000 additional shares of common stock to
cover over-allotments.
Common stock to be outstanding
after the offering.................... 90,403,173 shares.
Use of proceeds....................... We anticipate using the aggregate net proceeds from this offering
to repay outstanding debt. See "Use of Proceeds" below.
Trading symbol........................ Our common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol "PNW."
Dividend policy....................... The payment of dividends on the common stock will be a business
decision to be made by our Board of Directors from time to time
based upon results of our operations and our financial condition
and any other factors our Board of Directors considers relevant.
Payment of dividends on the common stock may be restricted by loan
agreements, indentures and other transactions entered into by us
from time to time. See "Risk Factors - We have and may enter into
credit and other agreements from time to time that restrict our
ability to pay dividends" below for a description of current
restrictions on our ability to pay dividends on our capital stock.
Risk Factors.......................... Your investment in our common stock will involve risks. You should
carefully consider the discussion of risk in "Risk Factors" in this
prospectus supplement and the accompanying prospectus, and the
other information in this prospectus supplement and the
accompanying prospectus, including information under the heading
"Forward Looking Statements," before deciding whether an investment
in our common stock is suitable for you.
Except as otherwise indicated, all information in this prospectus
supplement assumes no exercise of the underwriters' over-allotment option. The
above information regarding shares to be outstanding after the offering is based
on the number of shares outstanding as of December 16, 2002, and excludes shares
issuable upon exercise of our outstanding options or otherwise reserved for
issuance under our employee benefit plans, and further excludes shares of common
stock that could be issued under our shareholder rights plan.
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SELECTED CONSOLIDATED FINANCIAL DATA
We are providing the following selected financial information to assist you
in analyzing an investment in the shares of our common stock. We derived the
financial information presented below as of and for each of the three years in
the period ended December 31, 2001 from the audited consolidated financial
statements which have been audited by Deloitte & Touche LLP, independent
auditors. Certain reclassifications have been made to the 2000 and 1999 amounts
to conform to the 2001 presentation. These reclassifications did not affect net
income or earnings per share. The summary financial information for the
nine-month periods ended September 30, 2002 and 2001, is derived from our
unaudited consolidated financial statements for the respective periods, and
include, in the opinion of our management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial data.
Financial results for interim periods are not necessarily indicative of results
that may be expected for any other interim period or for the fiscal year. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Current
Report on Form 8-K dated November 21, 2002 (which revises our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001), and in our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2002, our
financial statements and the related notes and the other financial or
statistical information that we include or incorporate by reference in this
prospectus supplement and the accompanying prospectus. See "Where You Can Find
More Information" in this prospectus supplement and the accompanying prospectus.
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ---------------------------------
2002 2001 2001 2000 1999
-------- -------- --------- --------- ---------
(IN MILLIONS, EXPECT PER SHARE DATA)
INCOME STATEMENT DATA:
Operating Revenues................................... $ 1,993 $ 2,873 $ 3,394 $ 3,120 $ 2,200
Operating Income..................................... 499 575 676 645 548
Interest Charges and Financing Costs................. 102 94 128 145 145
Income From Continuing Operations.................... 230 292 327 302 270
Net Income........................................... 230 276 312 302 168
Earnings Per Share From Continuing Operations
Basic....................................... $ 2.71 $ 3.44 $ 3.86 $ 3.57 $ 3.18
Diluted..................................... 2.71 3.43 3.85 3.56 3.17
Dividend Per Share................................... 1.200 1.125 1.525 1.425 1.325
Average Shares Outstanding (000's)
Basic....................................... 84,768 84,731 84,718 84,733 84,717
Diluted..................................... 84,859 84,972 84,930 84,935 85,009
CASH FLOW INFORMATION:
Cash Flow From Operations............................ $ 554 $ 439 $ 571 $ 713 $ 636
Capital Expenditures................................. 690 693 1,041 659 343
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- ---------------------------------
2002 2001 2001 2000 1999
-------- -------- --------- --------- ---------
(IN MILLIONS)
BALANCE SHEET DATA:
Total Assets......................................... $ 8,508 $ 8,363 $ 7,982 $ 7,163 $ 6,609
======== ======== ========= ========= =========
Short-term Debt, including current maturities........ $ 578 $ 600 $ 532 $ 546 $ 153
Long-term Debt....................................... 2,879 2,350 2,673 1,955 2,206
Common Shareholders' Equity.......................... 2,663 2,491 2,499 2,383 2,206
-------- -------- --------- --------- ---------
Total Capitalization................................. $ 6,120 $ 5,441 $ 5,704 $ 4,884 $ 4,565
======== ======== ========= ========= =========
S-11
RISK FACTORS
Before purchasing any common stock, you should carefully consider the
following discussion of risks relating to this offering and our business, and
the other information included or incorporated by reference in this prospectus
supplement and the accompanying prospectus, including information under the
heading "Forward-Looking Statements." Although we have tried to discuss key
factors in this prospectus supplement and the accompanying prospectus, please be
aware that other risks may prove to be important in the future. New risks may
emerge at any time and we cannot predict such risks or estimate the extent to
which they may affect our financial performance.
IF WE ARE NOT ABLE TO ACCESS CAPITAL AT COMPETITIVE RATES, OUR ABILITY TO
IMPLEMENT OUR FINANCIAL STRATEGY WILL BE ADVERSELY AFFECTED.
We rely on access to both short-term money markets and longer-term capital
markets as a significant source of liquidity and for capital requirements not
satisfied by the cash flow from our operations. We believe that we will maintain
sufficient access to these financial markets based upon current credit ratings.
However, certain market disruptions or a downgrade of our credit rating may
increase our cost of borrowing or adversely affect our ability to access one or
more financial markets. Such disruptions could include:
* an economic downturn;
* capital market conditions generally;
* the bankruptcy of an unrelated energy company;
* market prices for electricity and gas;
* terrorist attacks or threatened attacks on our facilities or
unrelated energy companies; or
* the overall health of the utility industry.
Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our debt and reduce funds available to us
for our current plans. Additionally, an increase in our leverage could adversely
affect us by:
* increasing the cost of future debt financing;
* increasing our vulnerability to adverse economic and industry
conditions;
* requiring us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, which would reduce funds
available to us for operations, future business opportunities or
other purposes; and
* placing us at a competitive disadvantage compared to our
competitors that have less debt.
See the following two Risk Factors for more information relating to this
discussion.
S-12
THE CONSTRUCTION COSTS OF THE GENERATION FACILITIES OF PINNACLE WEST ENERGY
COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
Pinnacle West Energy, one of our wholly-owned subsidiaries, has completed
or has under construction about 1,790 MW of natural gas-fired generating
capacity at an estimated cost of about $1 billion. In addition, Pinnacle West
Energy has begun construction of the 570 MW Silverhawk plant in Nevada at an
estimated cost of approximately $400 million. On November 22, 2002, Pinnacle
West Energy announced the decision to cancel Redhawk Units 3 and 4, two
530-megawatt natural gas-fired generators that were scheduled to begin producing
electricity by early 2007. As a result of the plant cancellation, we expect to
record a charge of approximately $50 million before income taxes ($30 million
after-tax or $0.35 per share) in the fourth quarter of 2002. Pinnacle West
Energy's expansion plans will be sized to meet cash flow and market conditions.
Pinnacle West Energy has funded and is currently funding its capital
requirements through capital infusions from us. We finance those infusions
through debt financings and internally generated cash. We financed Pinnacle West
Energy's generation expansion program premised upon Pinnacle West Energy's
receipt of the generation assets of APS, our public utility subsidiary, by the
end of 2002, as previously required by the ACC's electric competition rules and
the 1999 settlement agreement.
Through early-2004, we will need to refinance or repay approximately $790
million of debt incurred by us to finance Pinnacle West Energy's construction of
generation plants built since 1999 to serve APS customers. In addition, we must
finance the ongoing capital expenditures for the Pinnacle West Energy
construction program. Failure to refinance or repay a portion of this debt at
the subsidiary level could adversely impact our credit ratings.
The ACC's reversal of the generation asset transfer requirement results in
Pinnacle West Energy being unable to obtain investment grade credit ratings.
This, in turn, precludes Pinnacle West Energy from accessing capital markets to
finance its ongoing construction program or to refinance the bridge financing
provided by us to fund the construction of Pinnacle West Energy generation
assets or from effectively competing in the wholesale markets.
On September 16, 2002, APS filed an application with the ACC requesting the
ACC to allow APS to borrow up to $500 million and to lend the proceeds to
Pinnacle West Energy or to us; to guarantee up to $500 million of Pinnacle West
Energy's or our debt; or a combination of both, not to exceed $500 million in
the aggregate. On November 8, 2002, APS filed an interim financing application
with the ACC requesting the ACC to permit APS to (a) make short-term advances to
Pinnacle West in the form of an inter-affiliate line of credit in the amount of
$125 million or (b) guarantee $125 million of Pinnacle West's short-term debt.
On November 22, 2002, the ACC approved APS' request to make the $125 million
interim loan or guarantee, subject to various conditions, including the ACC
examining ways to improve regulatory insulation between APS and its affiliates
in the ACC's consideration of APS' $500 million financing application. On
December 13, 2002, the ACC staff filed its testimony in connection with APS'
$500 million financing application and recommended approval of the financing
application, subject to certain conditions, including a proposed restriction on
the ability of APS to pay dividends to Pinnacle West. See "Summary - Regulatory
Overview" above. We are unable to predict what actions, if any, the ACC might
propose or take in connection with these matters.
Our credit ratings could be adversely affected if APS' $500 million
financing application is not approved by the ACC. On November 4, 2002, Standard
and Poor's Corporation lowered our senior unsecured debt rating from "BBB" to
"BBB-." On December 4, 2002, Fitch Ratings placed certain of our debt and that
of APS on Ratings Watch Negative. See "Summary - Recent Developments - Change in
Credit Ratings" above.
S-13
In the event that the ACC does not approve the $500 million financing
application, we believe that we would be able to access the capital markets or
take other steps to refinance or repay our outstanding debt and continue to meet
our ongoing capital requirements, although there can be no assurance that we
would be able to do so and a downgrading of our debt ratings may result. See the
preceding and following Risk Factor.
A SIGNIFICANT REDUCTION IN OUR CREDIT RATINGS COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We cannot be sure that any of our current ratings will remain in effect for
any given period of time, particularly in light of the action recently taken by
Fitch (see "Summary - Recent Developments - Change in Credit Ratings" above) or
that a rating will not be lowered or withdrawn entirely by a rating agency if,
in its judgment, circumstances in the future so warrant. Any downgrade could
increase our borrowing costs which would diminish our financial results. We
would likely be required to pay a higher interest rate in future financings, and
our potential pool of investors and funding sources could decrease. A downgrade
could require additional support in the form of letters of credit or cash or
other collateral and otherwise have a material adverse effect on our business,
financial condition and results of operations. If our short-term ratings were to
be lowered, it could limit our access to the commercial paper market. We note
that the ratings from credit agencies are not recommendations to buy, sell or
hold our securities and that each rating should be evaluated independently of
any other rating. See the preceding two Risk Factors.
DEREGULATION OR RESTRUCTURING OF THE ELECTRIC INDUSTRY MAY RESULT IN
INCREASED COMPETITION, WHICH COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR
BUSINESS AND OUR FINANCIAL RESULTS.
Retail competition could have a significant adverse financial impact on us
due to an impairment of assets, a loss of retail customers, lower profit margins
or increased costs of capital. In 1999, the ACC approved rules that provide a
framework for the introduction of retail electric competition in Arizona. Under
the rules, as modified by a 1999 settlement agreement among APS and various
parties, APS was required to transfer all of its competitive electric assets and
services to an unaffiliated party or parties or to a separate corporate
affiliate or affiliates no later than December 31, 2002. Pursuant to an ACC
order dated September 10, 2002, the ACC unilaterally modified the 1999
settlement agreement and directed APS to cancel any plans to divest interests in
any of its generating assets. The ACC further established a requirement that APS
competitively procure, at a minimum, any power required for its retail customers
that APS cannot produce from its existing generating assets. The ACC ordered the
ACC staff and interested parties to develop a competitive procurement process by
March 1, 2003. These regulatory developments and legal challenges to the rules
have raised considerable uncertainty about the status and pace of retail
electric competition in Arizona. Although some very limited retail competition
existed in APS' service area in 1999 and 2000, there are currently no active
retail competitors offering unbundled energy or other utility services to APS'
customers. As a result, we cannot predict when, and the extent to which,
additional competitors will re-enter APS' service territory. These matters are
discussed in detail in the documents filed by us with the Securities and
Exchange Commission (SEC).
As a result of changes in federal law and regulatory policy, competition in
the wholesale electricity market has greatly increased due to a greater
participation by traditional electricity suppliers, non-utility generators,
independent power producers, and wholesale power marketers and brokers. This
increased competition could affect our load forecasts, plans for power supply
and wholesale energy sales and related revenues. As a result of the changing
regulatory environment and the relatively low barriers to entry, we expect
wholesale competition to increase. As competition continues to increase, our
financial position and results of operations could be adversely affected.
S-14
THE PROCUREMENT OF WHOLESALE POWER BY APS WITHOUT THE ABILITY TO ADJUST
RETAIL RATES COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND FINANCIAL
RESULTS.
A 1999 settlement agreement limits APS' ability to change retail rates
until at least July 1, 2004, which could have a significant adverse financial
impact on us if wholesale power prices significantly exceed the amount included
for generation costs in APS' current bundled retail rates. Under the ACC's
rules, APS is the "provider of last resort" for standard-offer, full-service
customers under rates that have been approved by the ACC. These rates are
established until at least July 1, 2004. The 1999 settlement agreement allows
APS to seek adjustment of these rates in the event of emergency conditions or
circumstances, such as the inability to secure financing on reasonable terms;
material changes in APS' cost of service for ACC-regulated services resulting
from federal, tribal, state or local laws; regulatory requirements; or judicial
decisions, actions or orders. Energy prices in the western wholesale market vary
and, during the course of the last two years, have been volatile. At various
times, prices in the spot wholesale market have significantly exceeded the
amount of generation costs per kilowatt hour (kWh) included in APS' current
retail rates. In the event of shortfalls due to unforeseen increases in load
demand or generation or transmission outages, APS may need to purchase
additional supplemental power in the wholesale spot market. Additionally, the
ACC is developing a process by which APS will competitively solicit bids for
certain wholesale power requirements in 2003 and subsequent years. The ACC's
development of the competitive procurement process will not be completed until
at least early 2003, and the final requirements of the process may adversely
affect the cost of APS' procurement of wholesale power. In sum, there can be no
assurance that APS would be able to fully recover the costs of wholesale power
under its present rate structure. Although APS could seek to adjust its rates
under the emergency provisions of the settlement agreement discussed above, ACC
approval of such an adjustment also cannot be assured.
WE ARE SUBJECT TO COMPLEX GOVERNMENT REGULATION WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND OUR RESULTS OF OPERATIONS.
We are, directly and through our subsidiaries, subject to governmental
regulation which may have a negative impact on our business and results of
operations. We are a "holding company" within the meaning of the Public Utility
Holding Company Act (PUHCA); however, we are exempt from the provisions of PUHCA
by virtue of our filing of an annual exemption statement with the SEC.
APS, our wholly-owned electric utility, is subject to comprehensive
regulation by several federal, state and local regulatory agencies, which
significantly influence its operating environment and may affect its ability to
recover costs from utility customers. APS is required to have numerous permits,
approvals and certificates from the agencies that regulate APS' business. The
Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission
(NRC), the Environmental Protection Agency, and the ACC regulate many aspects of
our utility operations, including siting and construction of facilities,
customer service and the rates that APS can charge customers. We believe the
necessary permits, approvals and certificates have been obtained for our
existing operations. However, we are unable to predict the impact on our
business and operating results from the future regulatory activities of any of
these agencies. Changes in regulations or the imposition of additional
regulations could have an adverse impact on our results of operations.
RECENT EVENTS IN THE ENERGY MARKETS THAT ARE BEYOND OUR CONTROL MAY HAVE
NEGATIVE IMPACTS ON OUR BUSINESS.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the filing of
bankruptcy by the Enron Corporation, and investigations by governmental
authorities into energy trading activities, companies generally in the regulated
and
S-15
unregulated utility businesses have been under an increased amount of public and
regulatory scrutiny. The capital markets and ratings agencies also have
increased their level of scrutiny. We believe that we are complying with all
applicable laws, but it is difficult or impossible to predict or control what
effect these or related issues may have on our business or our access to the
capital markets.
OUR RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED BY MILDER WEATHER.
Weather conditions directly influence the demand for electricity and affect
the price of energy commodities. Electric power demand is generally a seasonal
business. In Arizona, demand for power peaks during the hot summer months, with
market prices also peaking at that time. As a result, our overall operating
results fluctuate substantially on a seasonal basis. In addition, we have
historically sold less power, and consequently earned less income, when weather
conditions are milder. As a result, unusually mild weather could diminish our
results of operations and harm our financial condition.
THERE ARE INHERENT RISKS IN THE OPERATION OF NUCLEAR FACILITIES, SUCH AS
ENVIRONMENTAL, HEALTH AND FINANCIAL RISKS AND THE RISK OF TERRORIST ATTACK.
Through APS, we have an ownership interest in and operate the Palo Verde
Nuclear Generating Station (Palo Verde). Palo Verde is subject to environmental,
health and financial risks such as the ability to dispose of spent nuclear fuel,
the ability to maintain adequate reserves for decommissioning, potential
liabilities arising out of the operation of these facilities, and the costs of
securing the facilities against possible terrorist attacks. We maintain nuclear
decommissioning trust funds and external insurance coverage to minimize our
financial exposure to these risks; however, it is possible that damages could
exceed the amount of insurance coverage.
The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of noncompliance, the NRC has the authority to impose fines or shut
down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. In addition, although we have no reason
to anticipate a serious nuclear incident at Palo Verde, if an incident did
occur, it could materially and adversely affect our results of operations or
financial condition. A major incident at a nuclear facility anywhere in the
world could cause the NRC to limit or prohibit the operation or licensing of any
domestic nuclear unit.
The operation of Palo Verde requires licenses that need to be periodically
renewed and/or extended. We do not anticipate any problems renewing these
licenses. However, as a result of potential terrorist threats and increased
public scrutiny of utilities, the licensing process could result in increased
licensing or compliance costs that are difficult or impossible to predict.
THE USE OF DERIVATIVE CONTRACTS IN THE NORMAL COURSE OF OUR BUSINESS COULD
RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.
Our operations include managing market risks related to commodity prices,
changes in interest rates, and investments held by our pension plan and nuclear
decommissioning trust funds. We are exposed to the impact of market fluctuations
in the price and transportation costs of electricity, natural gas, coal, and
emissions allowances and credits. We have established procedures to manage risks
associated with these market fluctuations by utilizing various commodity
derivatives, including exchange-traded futures and options and over-the-counter
forwards, options, and swaps. As part of our overall risk management program, we
enter into derivative transactions to hedge purchases and sales of electricity,
fuels, and emissions allowances and credits. The changes in market value of such
contracts have a high correlation to price changes in the hedged commodity.
S-16
We are exposed to losses in the event of nonperformance or nonpayment by
counterparties. We use a risk management process to assess and monitor the
financial exposure of all counterparties. Despite the fact that the majority of
trading counterparties are rated as investment grade by the credit rating
agencies, there is still a possibility that one or more of these companies could
default, resulting in a material adverse impact on our earnings for a given
period.
Changing interest rates will affect interest paid on variable-rate debt and
interest earned by our pension plan and nuclear decommissioning trust funds. Our
policy is to manage interest rates through the use of a combination of
fixed-rate and floating-rate debt. The pension plan and nuclear decommissioning
trust funds also have risks associated with changing market values of equity
investments. Pension and nuclear decommissioning costs are recovered in
regulated electricity prices.
THE UNCERTAIN OUTCOME REGARDING THE CREATION OF REGIONAL TRANSMISSION
ORGANIZATIONS, OR RTOS, MAY MATERIALLY IMPACT OUR OPERATIONS, CASH FLOWS OR
FINANCIAL POSITION.
In a December 1999 order, the FERC set minimum characteristics and
functions that must be met by utilities that participate in RTOs. The
characteristics for an acceptable RTO include independence from market
participants, operational control over a region large enough to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. On October 16, 2001, APS and other owners of electric
transmission lines in the southwest filed with the FERC a request for a
declaratory order confirming that their proposal to form WestConnect RTO, LLC
would satisfy the FERC's requirements for the formation of an RTO. On October
10, 2002, the FERC issued an order finding that the WestConnect proposal, if
modified to address specified issues, could meet the FERC's RTO requirements and
provide the basic framework for a standard market design for the southwest. In
its order, the FERC also stated that its approval of various WestConnect
provisions addressed in the order would not be overturned or affected by the
final rule the FERC intends to ultimately adopt in response to its July 31, 2002
Notice of Proposed Rulemaking regarding a standard market design for the
electric utility industry. FERC did not address all of the proposed WestConnect
provisions in its order and some could still be affected by a final rule in the
pending rulemaking proceeding. We cannot currently predict what, if any, impact
there may be to the WestConnect proposal or to us if the FERC adopts the
proposed rule. On November 12, 2002, APS and the other owners filed a request
for rehearing and clarification on portions of the October 10 order.
WE ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND REGULATIONS WHICH MAY
INCREASE OUR COST OF OPERATIONS, IMPACT OUR BUSINESS PLANS, OR EXPOSE US TO
ENVIRONMENTAL LIABILITIES.
We are subject to numerous environmental regulations affecting many aspects
of our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating, and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
outcome (financial or operational) of any related litigation that may arise.
In addition, we may be a responsible party for environmental clean up at
sites identified by a regulatory body. We cannot predict with certainty the
amount and timing of all future expenditures related to environmental matters
because of the difficulty of estimating clean-up costs. There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.
S-17
We cannot be sure that existing environmental regulations will not be
revised or that new regulations seeking to protect the environment will not be
adopted or become applicable to us. Revised or additional regulations that
result in increased compliance costs or additional operating restrictions,
particularly if those costs are not fully recoverable from APS' customers, could
have a material adverse effect on our results of operations.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock could be subject to significant
fluctuations in response to factors such as the following, some of which are
beyond our control:
* variations in our quarterly operating results;
* operating results that vary from the expectations of management,
securities analysts and investors;
* changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
* developments generally affecting industries in which we operate,
particularly the energy distribution and energy generation
industries;
* announcements by us or our competitors of significant contracts,
acquisitions, joint marketing relationships, joint ventures or
capital commitments;
* announcements by third parties of significant claims or
proceedings against us;
* favorable or adverse regulatory developments;
* our dividend policy;
* future sales of our equity or equity-linked securities; and
* general domestic and international economic conditions.
In addition, the stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations may adversely affect the market price
of our common stock.
As of December 17, 2002, the sales price of our common stock since January
1, 1998 has ranged from a high of $52.69 on October 3, 2000 to a low of $21.70
on October 8, 2002.
OUR STOCK PRICE COULD BE AFFECTED BECAUSE A SUBSTANTIAL NUMBER OF SHARES OF
OUR COMMON STOCK COULD BE AVAILABLE FOR SALE IN THE FUTURE.
Sales in the public market of a substantial number of shares of common
stock could depress the market price of the common stock and could impair our
ability to raise capital through the sale of additional equity securities.
Because of the number of shares of our common stock that we are authorized to
issue under our articles of incorporation, a substantial number of shares of our
common stock could be available for future sale.
S-18
OUR CASH FLOW AND ABILITY TO PAY DIVIDENDS LARGELY DEPENDS ON THE
PERFORMANCE OF OUR SUBSIDIARIES.
We conduct our operations primarily through subsidiaries. Substantially all
of our consolidated assets are held by such subsidiaries. Accordingly, our cash
flow and our ability to pay dividends on our capital stock are largely dependent
upon the earnings of these subsidiaries and the distribution or other payment of
such earnings to us in the form of dividends, loans or advances or repayment of
loans and advances from us. The subsidiaries are separate and distinct legal
entities and have no obligation to pay dividends or to make any funds available
for such payment.
The debt agreements of some of our subsidiaries may restrict their ability
to pay dividends, make distributions or otherwise transfer funds to us. Section
39(III) of APS' mortgage requires APS to meet a financial covenant before paying
common stock dividends. Under this covenant, APS may pay dividends on its common
stock if there is a sufficient amount "available" from retained earnings and the
excess of cumulative book depreciation (since the mortgage's inception) over
mortgage depreciation, which is the cumulative amount of additional property
pledged each year to address collateral depreciation. As of December 31, 2001,
the amount "available" under the mortgage would have allowed APS to pay
approximately $2.8 billion of dividends compared to APS' current annual common
stock dividends of $170 million. See also a potential dividend restriction
proposed by the ACC staff in connection with its testimony in connection with
APS' $500 million financing application. See "Summary - Regulatory Overview"
above.
WE HAVE AND MAY ENTER INTO CREDIT AND OTHER AGREEMENTS FROM TIME TO TIME
THAT RESTRICT OUR ABILITY TO PAY DIVIDENDS.
Payment of dividends on the common stock may be restricted by loan
agreements, indentures and other transactions entered into by us from time to
time. As of the date of this prospectus supplement, our bridge facility
restricts our ability to pay dividends to dividends paid on our capital stock in
the ordinary course and consistent with past practice (including increases in
such dividends consistent with past practices). However, if an event of default
exists under that facility, we would be prohibited from paying any dividends
while the event of default continues.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND OF
ARIZONA LAW MAKE IT DIFFICULT FOR SHAREHOLDERS TO CHANGE THE COMPOSITION OF
OUR BOARD AND MAY DISCOURAGE TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO
US AND OUR SHAREHOLDERS.
Certain provisions of our articles of incorporation and bylaws and of
Arizona law make it difficult for shareholders to change the composition of our
board and may discourage unsolicited attempts to acquire us, which could
preclude our shareholders from receiving a change of control premium. These
provisions include the following:
* provisions of our bylaws and Arizona law that restrict our
ability to engage in a wide range of "business combination"
transactions with an "interested shareholder" (generally, any
person who owns 10% or more of our outstanding voting power or
any of our affiliates or associates) or any affiliate or
associate of an interested shareholder, unless specific
conditions are met;
* anti-greenmail provisions of Arizona law and our bylaws that
prohibit us from purchasing shares of our voting stock from
beneficial owners of more than 5% of our outstanding shares
unless specified conditions are satisfied;
S-19
* provisions of our bylaws and Arizona law that provide that
shareholder action may be taken only at an annual or special
meeting or by unanimous written consent, and provisions of our
bylaws that provide that a special meeting of shareholders may
only be called by a majority of our Board of Directors, the
Chairman of our Board of Directors, or our President;
* advance notice procedures for nominating candidates to our Board
of Directors or presenting matters at shareholder meetings;
* provisions of our articles and bylaws that provide for a
staggered Board of Directors;
* provisions of our bylaws that provide that shareholders may only
remove a director with or without cause by a super-majority vote
at a special meeting of shareholders; and
* the ability of our Board of Directors to issue additional shares
of common stock and shares of preferred stock and to determine
the price and, with respect to preferred stock, the other terms,
including preferences and voting rights, of those shares without
shareholder approval.
In addition, we have adopted a shareholder rights plan that may have the
effect of discouraging unsolicited takeover proposals, including takeover
proposals that could result in a premium over the market price of our common
stock.
While these provisions have the effect of encouraging persons seeking to
acquire control of us to negotiate with our Board of Directors, they could
enable the board to hinder or frustrate a transaction that some, or a majority,
of our shareholders might believe to be in their best interests and, in that
case, may prevent or discourage attempts to remove and replace incumbent
directors. For more information, see "Description of Common Stock-Certain
Anti-takeover Effects" in the accompanying prospectus.
S-20
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus, and the additional
information described under the heading "Where You Can Find More Information"
may contain forward-looking statements within the meaning of the safe harbor of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of our management, based on information currently available to our management.
When we use words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "should," or similar expressions, we are making
forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, including those described under "Risk Factors" above, uncertainties, and
assumptions. Our future results may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. These factors include, but
are not limited to:
* the ongoing restructuring of the electric industry, including the
introduction of retail electric competition in Arizona and
decisions impacting wholesale competition;
* the outcome of regulatory and legislative proceedings relating to
the restructuring;
* state and federal regulatory and legislative decisions and
actions, including price caps and other market constraints
imposed by the FERC;
* regional economic and market conditions, including the California
energy situation and completion of generation construction in the
region, which could affect customer growth and the cost of power
supplies;
* the cost of debt and equity capital and access to the capital
markets;
* weather variations affecting local and regional customer energy
usage;
* the effect of conservation programs on energy usage;
* power plant performance;
* the successful completion of our generation expansion program;
* regulatory issues associated with generation expansion, such as
permitting and licensing;
* our ability to compete successfully outside traditional regulated
markets (including the wholesale market);
* our ability to manage our marketing and trading activities and
the use of derivative contracts in our business;
* technological developments in the electric industry;
* the performance of the stock market, which affects the amount of
our required contributions to our pension plan and nuclear
decommissioning trust funds;
S-21
* the strength of the real estate market in the market areas of
SunCor, our real estate subsidiary, which include Arizona, New
Mexico and Utah; and
* other uncertainties, all of which are difficult to predict and
many of which are beyond our control.
You are cautioned not to put undue reliance on any forward-looking
statements. We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
any forward-looking statements contained in this prospectus supplement and the
accompanying prospectus, including in the information incorporated by reference
in this prospectus supplement and the accompanying prospectus.
USE OF PROCEEDS
Our net proceeds from the sale of the 5,700,000 shares of our common stock
offered in this offering are expected to be approximately $173 million, after
deducting the underwriters' discounts and commissions but before deducting the
expenses of this offering. If the underwriters' over-allotment option is
exercised in full, we estimate that the net proceeds will be approximately $199
million.
We anticipate using $75 million of the aggregate net proceeds from this
offering to repay an equal amount of our bridge facility described in the third
paragraph under "Capital Resources and Cash Requirements" on page S-7 of this
prospectus supplement. The estimated average interest rate of the bridge
facility debt to be repaid is 2.35% and the bridge facility debt matures on July
30, 2003. We will use the remaining net proceeds from this offering to repay
commercial paper due on or about December 23, 2002, the proceeds of which were
used to finance Pinnacle West Energy capital requirements or to repay other
indebtedness so used. The estimated average interest rate of the commercial
paper is 1.64%.
S-22
CAPITALIZATION
The following table sets forth our unaudited capitalization as of September
30, 2002, on an actual basis and on an as adjusted basis reflecting the sale of
5,700,000 shares of our common stock offered pursuant to this prospectus
supplement after deducting the underwriting discounts and commissions and
estimated offering expenses that we will pay, and the application of the net
proceeds as described in this prospectus supplement under the caption "Use of
Proceeds." The table should be read in conjunction with our consolidated
financial statements and the related notes incorporated by reference in the
accompanying prospectus.
AS OF SEPTEMBER 30, 2002
------------------------------------------------------------
(UNAUDITED)
(IN MILLIONS)
% OF % OF
ACTUAL CAPITALIZATION AS ADJUSTED CAPITALIZATION
------ -------------- ----------- --------------
Cash and Cash Equivalents................ $ 28 $ 28
======= =======
Short-term Debt, including current
maturities............................... $ 578 9% $ 405 7%
Long-term Debt, less current maturities.. 2,879 47 2,879 47
Common Shareholders' Equity.............. 2,663 44 2,836 46
------- --- ------- ---
Total Capitalization..................... $ 6,120 100% $ 6,120 100%
======= === ======= ===
S-23
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is currently listed on the New York Stock Exchange under
the symbol "PNW." The following table sets forth the high and low sales prices
for transactions involving our common stock for each calendar quarter, as
reported on the New York Stock Exchange Composite Tape, and related dividends
paid per common share during such periods.
HIGH LOW DIVIDEND
---- --- --------
2002
Fourth Quarter (through
December 17, 2002) $32.41 $21.70 $0.425
Third Quarter 39.72 25.82 0.400
Second Quarter 46.68 37.08 0.400
First Quarter 45.60 39.36 0.400
2001
Fourth Quarter $43.50 $38.00 $0.400
Third Quarter 49.93 37.65 0.375
Second Quarter 50.70 45.20 0.375
First Quarter 47.96 39.06 0.375
2000
Fourth Quarter $52.69 $41.25 $0.375
Third Quarter 51.31 33.81 0.350
Second Quarter 38.13 27.88 0.350
First Quarter 32.31 25.69 0.350
On December 17, 2002, the last reported sale price of our common stock on
the New York Stock Exchange was $32.26 per share. As of December 16, 2002, there
were approximately 37,155 holders of record of our common stock.
DIVIDEND POLICY
Subject to any preferential rights of any series of preferred stock,
holders of shares of common stock will be entitled to receive dividends on the
stock out of assets legally available for distribution when, as and if
authorized and declared by our Board of Directors. The payment of dividends on
the common stock will be a business decision to be made by our Board of
Directors from time to time based upon results of our operations and our
financial condition and any other factors that our Board of Directors considers
relevant.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock currently consists of 150,000,000 shares of
common stock and 10,000,000 shares of preferred stock. Pursuant to our
shareholder rights plan, each share of our common stock currently has attached
to it one preferred share purchase right. We have issued and have outstanding
approximately 84,703,173 shares of our common stock (as of December 16, 2002)
and no shares of our preferred stock, and we have reserved for issuance
approximately 16,959,541 shares of our common stock (as of November 30, 2002)
and 4,400,000 shares of our preferred stock (under our shareholder rights plan).
For a further description of the terms and conditions of our capital stock, see
"Description of Preferred Stock" and "Description of Common Stock" in the
accompanying prospectus.
S-24
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax
considerations that may be relevant to a holder of our common stock. The summary
is based on laws, Treasury regulations, rulings, and decisions currently in
effect, all of which may change, possibly with retroactive effect. This summary
applies to you only if you are a "Non-U.S. holder." You are a Non-U.S. holder if
you are, for United States federal income tax purposes:
* a nonresident alien individual;
* an entity that is treated as a foreign corporation for U.S.
federal tax purposes;
* an entity that is treated as a foreign partnership for U.S.
federal tax purposes and that is not engaged in a U.S. trade or
business;
* an estate that is not subject to U.S. federal income tax on a net
income basis on income or gain from common stock; or
* a trust that is not subject to primary supervision by a U.S.
court or that is not subject to the authority of U.S. persons
having the authority to control all substantial decisions of the
trust.
Please note that this summary assumes that you will hold your shares of our
common stock as a capital asset. Please also note that this summary does not
address tax considerations applicable to Non-U.S. holders to whom special tax
rules may apply, including:
* banks, financing companies or similar businesses;
* tax-exempt entities;
* insurance companies;
* common trust funds;
* dealers in stocks, securities, commodities, currencies, or other
financial instruments;
* entities that are treated as partnerships for U.S. federal income
tax purposes;
* individuals or entities that will hold more than 5% of our
outstanding common stock; or
* individuals or entities that will hold the common stock as part
of an integrated investment, including a straddle or conversion
transaction, comprised of the common stock and one or more other
positions.
YOU SHOULD CONSULT YOUR TAX ADVISOR IN DETERMINING THE TAX CONSEQUENCES TO
YOU OF PURCHASING, HOLDING AND DISPOSING OF THE COMMON STOCK, INCLUDING THE
APPLICATION TO YOUR PARTICULAR SITUATION OF THE U.S. FEDERAL INCOME TAX
CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE APPLICATION OF STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS.
S-25
DIVIDENDS
Distributions on our common stock will constitute dividends to the extent
of our current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Dividends, if any, paid to you generally will be
subject to a 30% U.S. federal withholding tax, subject to reduction if you
qualify for the benefits of an applicable income tax treaty and timely file any
required forms or certificates. However, except to the extent otherwise provided
in an applicable tax treaty, dividends that are effectively connected to your
conduct of a trade or business within the United States will be taxed at
graduated ordinary federal income tax rates, and, if you are a corporation, you
may be subject to a branch profits tax, which is generally imposed on a foreign
corporation on the repatriation from the United States of effectively connected
earnings and profits. You should consult any applicable tax treaties which may
provide for a lower rate of withholding or other rules different than those
described above. You will not be entitled to a reduction in or an exemption from
U.S. federal withholding tax if we or our paying agents do not receive the
required certification from you or otherwise know or have reason to know that
you are not entitled to a reduction or exemption.
SALE OR DISPOSITION OF COMMON STOCK
You generally will not be subject to U.S. federal income tax on any gain
recognized on the sale, exchange, redemption or other taxable disposition of our
common stock unless: (i) you are an individual present in the United States for
183 days or more in the year of that sale, exchange or redemption and certain
other requirements are met; or (ii) the gain is "U.S. trade or business income,"
which means gain that is effectively connected with your conduct of a trade or
business in the United States or, if you are eligible for the benefits of an
income tax treaty that so provides, attributable to a permanent establishment or
a fixed base in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, backup withholding and domestic information reporting will not
apply to dividends on our common stock paid by us or our paying agents, in their
capacities as such, to a Non-U.S. holder, or to proceeds from the disposition of
common stock paid to a Non-U.S. holder, in each case if the holder has provided
the required certification that it is a Non-U.S. holder and neither we nor our
paying agent has actual knowledge or reason to know that any statement made on
such certificate is incorrect.
The description set forth above is included for general information only
and may not be applicable depending upon a holder's particular situation.
Holders should consult their tax advisors regarding the tax consequences to them
of the purchase, ownership and disposition of our common stock, including the
tax consequences under state, local, foreign and other tax laws and the possible
effects of changes in U.S. federal or other tax laws.
S-26
UNDERWRITING
Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are
acting as representatives of the underwriters named below. Subject to the terms
and conditions stated in the underwriting agreement dated December 17, 2002,
each underwriter named below has agreed to purchase, and we have agreed to sell
to that underwriter, the number of shares of our common stock set forth opposite
the underwriter's name.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Credit Suisse First Boston Corporation .......... 1,425,000
Salomon Smith Barney Inc. ....................... 1,425,000
Barclays Capital Inc. ........................... 1,425,000
J.P. Morgan Securities Inc. ..................... 555,750
UBS Warburg LLC.................................. 555,750
BNY Capital Markets, Inc. ....................... 156,750
KBC Financial Products USA Inc. ................. 156,750
----------
Total 5,700,000
==========
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are severally obligated to purchase all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the shares to dealers at the public offering price less a
concession not to exceed $0.717 per share. The underwriters may allow, and the
dealers may reallow, a concession not to exceed $0.10 per share on sales to
other dealers. If all of the shares are not sold at the initial offering price,
the representatives may change the public offering price and the other selling
terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 855,000 additional
shares of our common stock at the public offering price less the underwriting
discount. The underwriters may exercise the option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent the option is exercised, each underwriter must purchase a number of
additional shares approximately proportionate to that underwriter's initial
purchase commitment.
Our common stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol "PNW."
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of our common stock.
PAID BY PINNACLE WEST
--------------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share $ 1.103 $ 1.103
Total $ 6,287,100 $ 7,230,165
S-27
For a period of 90 days after December 17, 2002, we have agreed not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act of 1933, as amended (Securities Act) relating to, any additional shares of
our common stock or securities convertible into or exchangeable or exercisable
for any shares of our common stock, or publicly disclose the intention to make
any such offer, sale, pledge, disposition or filing, without the prior written
consent of Credit Suisse First Boston Corporation and Salomon Smith Barney Inc.
These restrictions do not apply to our issuance of common stock, or our granting
of stock options and other stock-based awards, in connection with our existing
equity incentive and compensation plans, our savings plan, and our direct stock
purchase and dividend reinvestment plan.
For a period of 90 days after December 17, 2002, our directors and
executive officers have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, enter into a transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of our common
stock, whether any of these transactions are to be settled by delivery of our
common stock or such other securities, in cash or otherwise, or publicly
disclose the intention to make any such offer, sale, pledge or disposition, or
to enter into any such transaction, swap, hedge or other arrangement, without,
in each case, the prior written consent of Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc. These restrictions do not apply to a
bona fide gift or a transfer of common stock to a family member or trust if the
gift recipient or transferee agrees to be bound by the restrictions. Our
directors and executive officers have also agreed not to make any demand for or
exercise any right with respect to the registration of any common stock or any
security convertible into or exercisable or exchangeable for common stock for a
period of 90 days after the public offering date, without the prior written
consent of Credit Suisse First Boston Corporation and Salomon Smith Barney Inc.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (Exchange Act).
* Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
* Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option. In
a naked short position, the number of shares involved is greater
than the number of shares in the over-allotment option. The
underwriters may close out any covered short position by either
exercising their over-allotment option and/or purchasing shares
in the open market.
* Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short position,
the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than
could be covered by the over-allotment option, a naked short
position, the position can only be closed out by buying shares in
the open market. A naked short position is more likely to be
created if
S-28
the underwriters are concerned that there could be downward
pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in the
offering.
* Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on the New York Stock Exchange, Pacific Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.
We estimate that the total expenses of this offering payable by us will be
$102,750.
The underwriters and/ or their affiliates have performed investment
banking, commercial banking and advisory services for us and our affiliates from
time to time for which they have received customary fees and expenses. The
underwriters and/or their affiliates may, from time to time, engage in
transactions with and perform services for us and our affiliates in the ordinary
course of their business.
Affiliates of each of Credit Suisse First Boston Corporation, Salomon Smith
Barney Inc. and Barclays Capital Inc. are lenders under our bridge facility
(described in the third paragraph under "Capital Resources and Cash
Requirements" on page S-7 of this prospectus supplement) which we intend to
repay with part of the net proceeds of this offering. See "Use of Proceeds."
Because Credit Suisse First Boston Corporation, Salomon Smith Barney Inc. and
Barclays Capital Inc. are each an underwriter and affiliates of each may receive
more than 10% of the entire net proceeds in this offering, these underwriters
may be deemed to have a "conflict of interest" under Rule 2710(c)(8) of the
Conduct Rules of the National Association of Securities Dealers, Inc.
Accordingly, this offering will be made in compliance with the applicable
provisions of Rule 2720 of the conduct rules. Pursuant to that rule, the
appointment of a qualified independent underwriter is not necessary in
connection with this offering, as a bona fide independent market (as defined in
the NASD Conduct Rules) exists in the common shares.
In connection with this offering, certain of the underwriters or securities
dealers may distribute preliminary prospectuses electronically.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those liabilities.
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this prospectus supplement by reference from the Company's
Current Report on Form 8-K dated November 21, 2002 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to the change in 2001 in the method of accounting for derivatives and hedging
activities in order to comply with the provisions of Statement of Financial
Accounting Standards No. 133), which is incorporated herein by reference, and
have been so incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
S-29
LEGAL OPINIONS
Certain legal matters with respect to this offering of our common stock
will be passed upon for Pinnacle West by Snell & Wilmer L.L.P., One Arizona
Center, Phoenix, Arizona 85004. Certain legal matters relating to the offering
will be passed upon for the underwriters by Sullivan & Cromwell, 1888 Century
Park East, Los Angeles, California 90067. Snell & Wilmer L.L.P. may rely as to
all matters of New York law upon the opinion of Sullivan & Cromwell. Sullivan &
Cromwell may rely as to all matters of Arizona law upon the opinion of Snell &
Wilmer L.L.P.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, and other information with
the SEC. Our SEC filings are available to the public over the Internet at the
SEC's web site: http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room, which is located at 450 Fifth Street
NW, in Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Reports and other information
concerning us can also be inspected and copied at the offices of the New York
Stock Exchange at 20 Broad Street, New York, New York 10005, and the Pacific
Stock Exchange at 301 Pine Street, San Francisco, California 94104. Our filings
with the SEC are also available on our own web site at
http://www.pinnaclewest.com. The information on our web site is not part of this
prospectus supplement or the accompanying prospectus.
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus supplement and the accompanying prospectus. See
"Where You Can Find More Information" in the accompanying prospectus.
S-30
Prospectus
PINNACLE WEST CAPITAL CORPORATION
$600,000,000
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
PURCHASE CONTRACTS
UNITS
We may offer and sell these securities from time to time in one or more
offerings. This prospectus provides you with a general description of the
securities we may offer.
Each time we sell these securities, we will provide a supplement to this
prospectus that contains specific information about the offering and the terms
of the securities. The supplement may also add, update, or change information
contained in this prospectus. You should carefully read this prospectus and any
supplement, as well as the documents incorporated or deemed to be incorporated
by reference in this prospectus, before you invest in any of these securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS TO READ ABOUT
CERTAIN FACTORS YOU SHOULD CONSIDER.
Our principal executive offices are located at 400 North Fifth Street,
Phoenix, AZ 85004. Our telephone number is (602) 250-1000.
Our common stock is listed on the New York Stock Exchange under the symbol
"PNW."
----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
We may offer and sell these securities directly to purchasers, through
agents, dealers, or underwriters as designated from time to time, or through a
combination of these methods. Additional information on our plan of distribution
can be found inside under "Plan of Distribution." We will describe the plan of
distribution for any securities in the relevant prospectus supplement. If any
agents, dealers or underwriters are involved in the sale of any securities, the
relevant prospectus supplement will set forth any applicable commissions or
discounts.
This prospectus may not be used to consummate sales of these securities
unless accompanied by the applicable prospectus supplement.
----------
The date of this prospectus is December 5, 2002
TABLE OF CONTENTS
PAGE
----
RISK FACTORS.............................................................. 3
ABOUT THIS PROSPECTUS..................................................... 8
FORWARD-LOOKING STATEMENTS................................................ 8
WHERE YOU CAN FIND MORE INFORMATION....................................... 10
THE COMPANY............................................................... 11
RATIO OF EARNINGS TO FIXED CHARGES (a).................................... 12
USE OF PROCEEDS........................................................... 12
GENERAL DESCRIPTION OF THE SECURITIES..................................... 12
DESCRIPTION OF DEBT SECURITIES............................................ 13
DESCRIPTION OF PREFERRED STOCK............................................ 23
DESCRIPTION OF COMMON STOCK............................................... 26
DESCRIPTION OF THE PURCHASE CONTRACTS..................................... 33
DESCRIPTION OF UNITS...................................................... 33
PLAN OF DISTRIBUTION...................................................... 33
EXPERTS .................................................................. 35
LEGAL OPINIONS............................................................ 35
Unless otherwise indicated, currency amounts in this prospectus and any
prospectus supplement are stated in United States dollars ("$," "dollars," "U.S.
dollars," or "U.S.$").
2
RISK FACTORS
Before purchasing our debt securities you should carefully consider the
following risk factors as well as the other information contained in this
prospectus and the information incorporated by reference in order to evaluate an
investment in our securities.
THE CONSTRUCTION COSTS OF THE GENERATION FACILITIES OF PINNACLE WEST ENERGY
CORPORATION ("PINNACLE WEST ENERGY") COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.
Pinnacle West Energy, one of our wholly-owned subsidiaries, has completed
or has under construction about 1,700 MW of natural gas-fired generating
capacity at an estimated cost of about $1 billion. In addition, Pinnacle West
Energy has begun construction of the 570 MW Silverhawk plant in Nevada at an
estimated cost of approximately $400 million. On November 22, 2002, Pinnacle
West Energy announced the decision to cancel Redhawk Units 3 and 4. The two
530-megawatt natural gas-fired generators were scheduled to begin producing
electricity by early 2007. As a result of the plant cancellation, we expect to
record a charge of approximately $50 million before income taxes ($30 million
after-tax or $0.35 per share) in the fourth quarter of 2002. Pinnacle West
Energy's expansion plans will be sized to meet cash flow and market conditions.
Pinnacle West Energy has funded and is currently funding its capital
requirements through capital infusions from us. We finance those infusions
through debt financings and internally generated cash. We financed Pinnacle West
Energy's generation expansion program premised upon Pinnacle West Energy's
receipt of the generation assets of Arizona Public Service Company ("APS"), our
public utility subsidiary, by the end of 2002, as previously required by the
Arizona Corporation Commission's ("ACC") electric competition rules and the 1999
settlement agreement.
Through early-2004, we will need to refinance or repay approximately $790
million of bridge debt incurred by us to finance Pinnacle West Energy's
construction of generation plants built since 1999 to serve APS customers. In
addition, we must finance the ongoing capital expenditures for the Pinnacle West
Energy construction program. Failure to refinance or repay a portion of this
bridge debt at the subsidiary level could adversely impact our credit ratings.
The ACC's reversal of the generation asset transfer requirement results in
Pinnacle West Energy being unable to obtain investment grade credit ratings.
This, in turn, precludes Pinnacle West Energy from accessing capital markets to
finance its ongoing construction program or to refinance the bridge financing
provided by us to fund the construction of Pinnacle West Energy generation
assets or from effectively competing in the wholesale markets.
On September 16, 2002, APS filed an application with the ACC requesting the
ACC to allow APS to borrow up to $500 million and to lend the proceeds to
Pinnacle West Energy or to us; to guarantee up to $500 million of Pinnacle West
Energy's or our debt, or a combination of both, not to exceed $500 million in
the aggregate. On November 8, 2002, APS filed an Interim Financing Application
with the ACC requesting the ACC to permit APS to (a) make short-term advances to
Pinnacle West in the form of an inter-affiliate line of credit in the amount of
$125 million or (b) guarantee $125 million of Pinnacle West's short-term debt.
On November 22, 2002, the ACC approved APS' request to make the $125 million
interim loan or guarantee, subject to various conditions, including (a) APS
acquiring a $125 million security interest in certain Pinnacle West Energy
assets and (b) the ACC examining regulatory insulation between APS and its
affiliates in connection with the ACC's consideration of APS' $500 million
financing application. We are unable to predict what actions, if any, the ACC
might propose or take in connection with this examination.
Our credit ratings could be adversely affected if APS' $500 million
financing application is not approved by the ACC. On November 4, 2002, Standard
and Poor's Corporation lowered the Company's senior unsecured debt rating from
"BBB" to "BBB-."
3
In the event that the ACC does not approve the $500 million financing
application , we believe that we would be able to access the capital markets or
take other steps to refinance or repay the outstanding bridge debt and continue
to meet our ongoing capital requirements, although there can be no assurance
that we would be able to do so. See the following two Risk Factors.
IF WE ARE NOT ABLE TO ACCESS CAPITAL AT COMPETITIVE RATES, OUR ABILITY TO
IMPLEMENT OUR FINANCIAL STRATEGY WILL BE ADVERSELY AFFECTED.
We rely on access to both short-term money markets and longer-term capital
markets as a significant source of liquidity and for capital requirements not
satisfied by the cash flow from our operations. We believe that we will maintain
sufficient access to these financial markets based upon current credit ratings.
However, certain market disruptions or a downgrade of our credit rating may
increase our cost of borrowing or adversely affect our ability to access one or
more financial markets. Such disruptions could include:
* an economic downturn;
* capital market conditions generally;
* the bankruptcy of an unrelated energy company;
* market prices for electricity and gas;
* terrorist attacks or threatened attacks on our facilities or unrelated
energy companies; or
* the overall health of the utility industry.
Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our debt and reduce funds available to us
for our current plans. Additionally, an increase in our leverage could adversely
affect us by:
* increasing the cost of future debt financing;
* increasing our vulnerability to adverse economic and industry
conditions;
* requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available
to us for operations, future business opportunities or other purposes;
and
* placing us at a competitive disadvantage compared to our competitors
that have less debt.
See the preceding and following Risk Factor.
A SIGNIFICANT REDUCTION IN OUR CREDIT RATINGS COULD MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We cannot be sure that any of our current ratings will remain in effect for
any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency if, in its judgment, circumstances in the future so
warrant. Any downgrade could increase our borrowing costs which would diminish
our financial results. We would likely be required to pay a higher interest rate
in future financings, and our potential pool of investors and funding sources
could decrease. A downgrade could require additional support in the form of
letters of credit or cash or other collateral and otherwise have a material
adverse effect on our business, financial condition and results of operations.
If our short-term ratings were to be lowered, it could limit our access to the
commercial paper market. We note
4
that the ratings from credit agencies are not recommendations to buy, sell or
hold our securities and that each rating should be evaluated independently of
any other rating. See the preceding two Risk Factors.
THE DEBT SECURITIES WILL BE STRUCTURALLY SUBORDINATED TO THE DEBT
SECURITIES AND OTHER OBLIGATIONS OF OUR SUBSIDIARIES.
Because we are structured as a holding company, all existing and future
debt and other liabilities of our subsidiaries will be effectively senior in
right of payment to our debt securities. None of the indentures under which we
may issue debt securities limits our ability or the ability of our subsidiaries
to incur additional debt in the future. The assets and cash flows of our
subsidiaries will be available, in the first instance, to service their own debt
and other obligations. Our ability to have the benefit of their assets and cash
flows, particularly in the case of any insolvency or financial distress
affecting our subsidiaries, would arise only through our equity ownership
interests in our subsidiaries and only after their creditors have been
satisfied. As discussed in the first Risk Factor above, in connection with the
ACC's consideration of APS' $500 million financing application, the ACC will
examine regulatory insulation between APS and its affiliates. We are unable to
predict what actions, if any, the ACC might propose or take in connection with
this examination.
THE USE OF DERIVATIVE CONTRACTS IN THE NORMAL COURSE OF OUR BUSINESS COULD
RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
Our operations include managing market risks related to commodity prices,
changes in interest rates, and investments held by our pension and nuclear
decommissioning trust funds. We are exposed to the impact of market fluctuations
in the price and transportation costs of electricity, natural gas, coal, and
emissions allowances. We employ established procedures to manage risks
associated with these market fluctuations by utilizing various commodity
derivatives, including exchange-traded futures and options and over-the-counter
forwards, options, and swaps. As part of our overall risk management program, we
enter into derivative transactions to hedge purchases and sales of electricity,
fuels, and emissions allowances and credits. The changes in market value of such
contracts have a high correlation to price changes in the hedged commodity.
We are exposed to losses in the event of nonperformance or nonpayment by
counterparties. We use a risk management process to assess and monitor the
financial exposure of all counterparties. Despite the fact that the majority of
trading counterparties are rated as investment grade by the credit rating
agencies, there is still a possibility that one or more of these companies could
default, resulting in a material adverse impact on our earnings for a given
period.
Changing interest rates will affect interest paid on variable-rate debt and
interest earned by our pension and nuclear decommissioning trust funds. Our
policy is to manage interest rates through the use of a combination of
fixed-rate and floating-rate debt. The pension and nuclear decommissioning fund
also have risks associated with changing market values of equity investments.
Pension and nuclear decommissioning costs are recovered in regulated electricity
prices.
WE ARE SUBJECT TO COMPLEX GOVERNMENT REGULATION WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND OUR RESULTS OF OPERATIONS.
We are, directly and through our subsidiaries, subject to governmental
regulation which may have a negative impact on our business and results of
operations. We are a "holding company" within the meaning of the Public Utility
Holding Company Act ("PUHCA"); however, we are exempt from the provisions of
PUHCA by virtue of our filing of an annual exemption statement with the
Securities and Exchange Commission ("SEC").
APS, our wholly-owned electric utility, is subject to comprehensive
regulation by several federal, state and local regulatory agencies, which
significantly influence its operating environment and may affect its ability to
recover costs from utility customers. APS is required to have numerous permits,
approvals
5
and certificates from the agencies that regulate APS' business. The Federal
Energy Regulatory Commission ("FERC"), the Nuclear Regulatory Commission
("NRC"), the Environmental Protection Agency ("EPA"), and the ACC regulate many
aspects of our utility operations, including siting and construction of
facilities, customer service and the rates that APS can charge customers. We
believe the necessary permits, approvals and certificates have been obtained for
our existing operations. However, we are unable to predict the impact on our
business and operating results from the future regulatory activities of any of
these agencies. Changes in regulations or the imposition of additional
regulations could have an adverse impact on our results of operations.
DEREGULATION OR RESTRUCTURING OF THE ELECTRIC INDUSTRY MAY RESULT IN
INCREASED COMPETITION, WHICH COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR
BUSINESS AND OUR FINANCIAL RESULTS.
Retail competition and the unbundling of regulated energy could have a
significant adverse financial impact on us due to an impairment of assets, a
loss of retail customers, lower profit margins or increased costs of capital. In
1999, the ACC approved rules that provide a framework for the introduction of
retail electric competition in Arizona. Under the rules, as modified by a 1999
settlement agreement among APS and various parties, APS was required to transfer
all of its competitive electric assets and services to an unaffiliated party or
parties or to a separate corporate affiliate or affiliates no later than
December 31, 2002. Pursuant to an ACC order dated September 10, 2002, the ACC
unilaterally modified the 1999 settlement agreement and directed APS to cancel
any plans to divest interests in any of its generating assets. The ACC further
established a requirement that APS competitively procure, at a minimum, any
power required for its retail customers that APS cannot produce from its
existing generating assets. The ACC ordered the ACC staff and interested parties
to develop a competitive procurement process by March 1, 2003. These regulatory
developments and legal challenges to the rules have raised considerable
uncertainty about the status and pace of retail electric competition in Arizona.
Although some very limited retail competition existed in APS' service area in
1999 and 2000, there are currently no active retail competitors offering
unbundled energy or other utility services to APS' customers. As a result, we
cannot predict when, and the extent to which, additional competitors will
re-enter APS' service territory. These matters are discussed in detail in the
documents filed by us with the SEC.
As a result of changes in federal law and regulatory policy, competition in
the wholesale electricity market has greatly increased due to a greater
participation by traditional electricity suppliers, non-utility generators,
independent power producers, and wholesale power marketers and brokers. This
increased competition could affect our load forecasts, plans for power supply
and wholesale energy sales and related revenues. As a result of the changing
regulatory environment and the relatively low barriers to entry, we expect
wholesale competition to increase. As competition continues to increase, our
financial position and results of operations could be adversely affected.
THE UNCERTAIN OUTCOME REGARDING THE CREATION OF REGIONAL TRANSMISSION
ORGANIZATIONS, OR RTOS, MAY MATERIALLY IMPACT OUR OPERATIONS, CASH FLOWS OR
FINANCIAL POSITION.
In a December 1999 order, the FERC set minimum characteristics and
functions that must be met by utilities that participate in RTOs. The
characteristics for an acceptable RTO include independence from market
participants, operational control over a region large enough to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. On October 16, 2001, APS and other owners of electric
transmission lines in the southwest filed with the FERC a request for a
declaratory order confirming that their proposal to form WestConnect RTO, LLC
would satisfy the FERC's requirements for the formation of an RTO. On October
10, 2002, the FERC issued an order finding that the WestConnect proposal, if
modified to address specified issues, could meet the FERC's RTO requirements and
provide the basic framework for a standard market design for the southwest. In
its order, the FERC also stated that its approval of various WestConnect
provisions addressed in the order would not be overturned or affected by the
final rule the FERC intends to ultimately adopt in response to its July 31, 2002
Notice of Proposed Rulemaking regarding a standard market design for the
electric utility industry. FERC did not address all of the proposed WestConnect
provisions in its order and some could still be affected by a final rule in the
pending rulemaking proceeding. We cannot currently predict what, if
6
any, impact there may be to the WestConnect proposal or to us if the FERC adopts
the proposed rule. On November 12, 2002, APS and the other owners filed a
request for rehearing and clarification on portions of the October 10 order.
WE ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND REGULATIONS WHICH MAY
INCREASE OUR COST OF OPERATIONS, IMPACT OUR BUSINESS PLANS, OR EXPOSE US TO
ENVIRONMENTAL LIABILITIES.
We are subject to numerous environmental regulations affecting many aspects
of our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating, and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
outcome (financial or operational) of any related litigation that may arise.
In addition, we may be a responsible party for environmental clean up at
sites identified by a regulatory body. We cannot predict with certainty the
amount and timing of all future expenditures related to environmental matters
because of the difficulty of estimating clean-up costs. There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.
We cannot be sure that existing environmental regulations will not be
revised or that new regulations seeking to protect the environment will not be
adopted or become applicable to us. Revised or additional regulations that
result in increased compliance costs or additional operating restrictions,
particularly if those costs are not fully recoverable from APS' customers, could
have a material adverse effect on our results of operations.
RECENT EVENTS IN THE ENERGY MARKETS THAT ARE BEYOND OUR CONTROL MAY HAVE
NEGATIVE IMPACTS ON OUR BUSINESS.
As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the filing of
bankruptcy by the Enron Corporation, and investigations by governmental
authorities into energy trading activities, companies generally in the regulated
and unregulated utility businesses have been under an increased amount of public
and regulatory scrutiny. The capital markets and ratings agencies also have
increased their level of scrutiny. We believe that we are complying with all
applicable laws, but it is difficult or impossible to predict or control what
effect these or related issues may have on our business or our access to the
capital markets.
OUR RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED BY MILDER WEATHER.
Weather conditions directly influence the demand for electricity and affect
the price of energy commodities. Electric power demand is generally a seasonal
business. In Arizona, demand for power peaks during the hot summer months, with
market prices also peaking at that time. As a result, our overall operating
results fluctuate substantially on a seasonal basis. In addition, we have
historically sold less power, and consequently earned less income, when weather
conditions are milder. As a result, unusually mild weather could diminish our
results of operations and harm our financial condition.
THERE ARE INHERENT RISKS IN THE OPERATION OF NUCLEAR FACILITIES, SUCH AS
ENVIRONMENTAL, HEALTH AND FINANCIAL RISKS AND THE RISK OF TERRORIST ATTACK.
Through APS, we have an ownership interest in and operate the Palo Verde
Nuclear Generating Station ("Palo Verde"). Palo Verde is subject to
environmental, health and financial risks such as the ability to dispose of
spent nuclear fuel, the ability to maintain adequate reserves for
decommissioning, potential liabilities arising out of the operation of these
facilities, and the costs of securing the facilities
7
against possible terrorist attacks. We maintain decommissioning trusts and
external insurance coverage to minimize our financial exposure to these risks;
however, it is possible that damages could exceed the amount of insurance
coverage.
The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of noncompliance, the NRC has the authority to impose fines or shut
down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. In addition, although we have no reason
to anticipate a serious nuclear incident at Palo Verde, if an incident did
occur, it could materially and adversely affect our results of operations or
financial condition. A major incident at a nuclear facility anywhere in the
world could cause the NRC to limit or prohibit the operation or licensing of any
domestic nuclear unit.
The operation of Palo Verde requires licenses that need to be periodically
renewed and/or extended. We do not anticipate any problems renewing these
licenses. However, as a result of potential terrorist threats and increased
public scrutiny of utilities, the licensing process could result in increased
licensing or compliance costs that are difficult or impossible to predict.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement (No. 333-101457) that
we filed with the SEC utilizing a "shelf" registration process. Under this shelf
process, we may offer up to $600,000,000 aggregate initial offering price of the
debt securities, preferred stock, common stock, purchase contracts and units
described in this prospectus in one or more offerings. In this prospectus we
will refer to the debt securities, preferred stock, common stock, share purchase
contracts and units collectively as the "securities." This prospectus provides
you with a general description of the securities we may offer. Each time we
offer securities, we will provide you with a prospectus supplement and, if
applicable, a pricing supplement. The prospectus supplement and any applicable
pricing supplement will describe the specific terms of the securities being
offered. The prospectus supplement and any applicable pricing supplement may
also add, update or change the information in this prospectus. In addition, the
registration statement filed with the SEC includes exhibits that provide more
details about the securities. Please carefully read this prospectus, the
applicable prospectus supplement and any applicable pricing supplement, together
with the information contained in the documents referred to under the heading
"Where You Can Find More Information."
FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement, and the additional
information described under the heading "Where You Can Find More Information"
may contain forward-looking statements within the meaning of the safe harbor of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of our management, based on information currently available to our management.
When we use words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "should," or similar expressions, we are making
forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, including those described under "Risk Factors" above, uncertainties, and
assumptions. Our future results may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. These factors include, but
are not limited to:
* the ongoing restructuring of the electric industry, including the
introduction of retail electric competition in Arizona and decisions
impacting wholesale competition;
* the outcome of regulatory and legislative proceedings relating to the
restructuring;
8
* state and federal regulatory and legislative decisions and actions,
including price caps and other market constraints imposed by the FERC;
* regional economic and market conditions, including the California
energy situation and completion of generation construction in the
region, which could affect customer growth and the cost of power
supplies;
* the cost of debt and equity capital and access to the capital markets;
* weather variations affecting local and regional customer energy usage;
* conservation programs;
* power plant performance;
* the successful completion of our generation expansion program;
* regulatory issues associated with generation expansion, such as
permitting and licensing;
* our ability to compete successfully outside traditional regulated
markets (including the wholesale market);
* technological developments in the electric industry;
* the performance of the stock market, which affects the amount of our
required contributions to our pension plan and decommissioning trust
funds;
* the strength of the real estate market in the market areas of SunCor,
our real estate subsidiary, which include Arizona, New Mexico and
Utah; and
* other uncertainties, all of which are difficult to predict and many of
which are beyond our control.
You are cautioned not to put undue reliance on any forward-looking
statements. We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
any forward-looking statements contained in this prospectus, including in the
information incorporated by reference in this prospectus, and any prospectus
supplement.
9
WHERE YOU CAN FIND MORE INFORMATION
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, and other information with
the SEC. Our SEC filings are available to the public over the Internet at the
SEC's web site: http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room, which is located at 450 Fifth Street
NW, in Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Reports and other information
concerning us can also be inspected and copied at the offices of the New York
Stock Exchange at 20 Broad Street, New York, New York 10005, and the Pacific
Stock Exchange at 301 Pine Street, San Francisco, California 94104. Our filings
with the SEC are also available on our own web site at
http://www.pinnaclewest.com. The information on our web site is not part of this
registration statement.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and later information that we file with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until all securities are sold under this prospectus.
* Annual Report on Form 10-K for the fiscal year ended December 31, 2001
(except for Items 6, 7 and 8, which have been revised in the Current
Report on Form 8-K dated November 21, 2002);
* Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
June 30, and September 30, 2002;
* Current Reports on Form 8-K dated December 14, 2001 and February 8,
March 31, April 26, May 22, June 5, June 11, June 30, July 11, July
23, August 13, August 27, September 10, September 30, October 17,
November 14, November 21, and November 22, 2002;
* The description of the Company's common stock contained in the
registration statement on Form 8-B filed with the SEC on July 25,
1985, and any amendment or report which we have filed (or will file
after the date of this prospectus and prior to the termination of this
offering) for the purpose of updating such description, including the
Company's Current Report on Form 8-K dated March 22, 1999 and Exhibit
4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2002.
You may request a copy of these filings and will receive a copy of these
filings, at no cost, by writing or telephoning us at the following address:
Pinnacle West Capital Corporation
Office of the Secretary
Station 9068
P.O. Box 53999
Phoenix, Arizona 85072-3999
(602) 250-3252
10
THE COMPANY
We own all of the outstanding common stock of Arizona Public Service
Company ("APS"). APS is an electric utility that provides either retail or
wholesale electric service to substantially all of the state of Arizona, with
the major exceptions of the Tucson metropolitan area and about one-half of the
Phoenix metropolitan area. Electricity is provided through a distribution system
owned by APS. APS also generates and, through our marketing and trading
division, sells and delivers electricity to wholesale customers in the western
United States.
Our marketing and trading division currently sells into the wholesale
market, the APS and Pinnacle West Energy generation output that is not needed
for APS' native load, which includes loads for retail customers and traditional
cost-of-service wholesale customers. Subject to specified risk parameters
established by our Board of Directors and its energy risk management committee,
the marketing and trading division also has engaged in activities to hedge
purchases and sales of electricity, fuels, and emissions allowances and credits
and to profit from market price movements. However, the ACC has ordered the ACC
staff and interested parties to develop a competitive procurement process by
March 1, 2003 by which APS will competitively procure, at a minimum, any power
needed for its retail customers that it cannot produce from its existing
generation assets. For purposes of this competitive procurement process,
Pinnacle West Energy generation assets are not counted as APS generation assets.
The draft ACC Staff report proposing a competitive procurement process provides
that Pinnacle West Energy would be able to bid in connection with any such
competitive procurement by APS.
Our other major subsidiaries are:
* Pinnacle West Energy Corporation, through which we conduct our
unregulated electricity generation operations;
* APS Energy Services Company, Inc., which provides commodity-related
energy services (such as direct access commodity contracts, energy
procurement, and energy supply consultation) and energy-related
products and services (such as energy master planning, energy use
consultation and facility audits, cogeneration analysis and
installation, and project management) to commercial, industrial and
institutional retail customers in the western United States;
* SunCor Development Company, a developer of residential, commercial,
and industrial real estate projects in Arizona, New Mexico, and Utah;
and
* El Dorado Investment Company, an investment firm.
11
RATIO OF EARNINGS TO FIXED CHARGES (A)
The following table shows our consolidated ratio of earnings to fixed
charges and our consolidated ratio of earnings to combined fixed charges and
preferred dividends:
Nine Months Ended Twelve Months Ended
September 30 December 31,
------------ ----------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Consolidated ratio of earnings to fixed charges ... 3.30 3.55 3.44 3.11 2.89 2.68
Consolidated ratio of earnings to combined
fixed charges and preferred dividends ............. 3.30 3.55 3.44 3.09 2.69 2.46
The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations excluding extraordinary items and cumulative effect of
change in accounting for derivatives, plus the amount of fixed charges as
defined below. Fixed charges consist of: expensed interest; amortization of debt
discount, premium and expense; and an estimate of interest implicit in rentals.
The ratio of earnings to combined fixed charges and preferred dividends was
computed by dividing earnings by the sum of fixed charges and preferred
dividends. For this purpose, earnings consist of pre-tax income from continuing
operations excluding extraordinary items and cumulative effect of change in
accounting for derivatives, plus the amount of combined fixed charges and
preferred dividends as defined below. Combined fixed charges and preferred
dividends consist of: expensed interest; amortization of debt discount, premium
and expense; an estimate of interest implicit in rentals; and preferred stock
dividend requirements of majority-owned subsidiaries increased to reflect our
pre-tax earnings requirement.
----------
(a) We have reclassified certain prior year amounts to conform to the current
year presentation.
USE OF PROCEEDS
We intend to use the proceeds from the sale of these securities for general
corporate purposes, which may include the repayment of indebtedness, capital
expenditures, the funding of working capital, acquisitions and stock repurchases
and/or capital infusions into one or more of our subsidiaries for any of those
purposes. The specific use of proceeds from the sale of these securities will be
set forth in each prospectus supplement relating to each offering of these
securities.
GENERAL DESCRIPTION OF THE SECURITIES
We, directly or through agents, dealers or underwriters that we designate,
may offer and sell, from time to time, up to $600,000,000 (or the equivalent in
one or more foreign currencies or currency units) aggregate initial offering
price of:
* our debt securities, in one or more series, which may be senior debt
securities or subordinated debt securities, in each case consisting of
notes or other unsecured evidences of indebtedness;
* shares of our preferred stock;
* shares of our common stock;
12
* purchase contracts to acquire any of the other securities that may be
sold under this prospectus; or
* any combination of these securities, individually or as units.
We may offer and sell these securities either individually or as units
consisting of one or more of these securities, each on terms to be determined at
the time of sale. We may issue debt securities and/or shares of preferred stock
that are exchangeable for and/or convertible into common stock or any of the
other securities that may be sold under this prospectus. When particular
securities are offered, a supplement to this prospectus will be delivered with
this prospectus, which will describe the terms of the offering and sale of the
offered securities.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The following description highlights the general terms of the debt
securities. When we offer debt securities in the future, the prospectus
supplement will explain the particular terms of those securities and the extent
to which any of these general provisions will not apply.
We can issue an unlimited amount of debt securities under the indentures
listed below. We can issue debt securities from time to time and in one or more
series as determined by us. In addition, we can issue debt securities of any
series with terms different from the terms of debt securities of any other
series and the terms of particular debt securities within any series may differ
from each other, all without the consent of the holders of previously issued
series of debt securities. The debt securities of each series will be our
direct, unsecured obligations. The debt securities may be issued in one or more
new series under:
* an Indenture, dated as of December 1, 2000, between The Bank of New
York and us, in the case of subordinated debt securities;
* an Indenture, dated as of December 1, 2000, between The Bank of New
York and us, as amended by the First Supplemental Indenture thereto
dated as of March 15, 2001, in the case of senior debt securities; or
* in the case of convertible debt securities, one of two new indentures
between us and The Bank of New York, as trustee, for convertible
senior debt securities or convertible subordinated debt securities.
We have issued and there are outstanding $300 million of our 6.40% Notes
due 2006 under the senior debt securities indenture described above.
Because we are structured as a holding company, all existing and future
indebtedness and other liabilities of our subsidiaries will be effectively
senior in right of payment to our debt securities, whether senior debt
securities or subordinated debt securities. None of the above Indentures limits
our ability or the ability of our subsidiaries to incur additional indebtedness
in the future. The assets and cash flows of our subsidiaries will be available,
in the first instance, to service their own debt and other obligations and our
ability to have the benefit of their assets and cash flows, particularly in the
case of any insolvency or financial distress affecting our subsidiaries, would
arise only through our equity ownership interests in our subsidiaries and only
after their creditors had been satisfied. Additional information is provided
below under "Subordination" as to the allocation of outstanding indebtedness on
our part and on the part of our subsidiaries.
We have summarized selected provisions of the Indentures below. The summary
is not complete. We have filed the forms of the Indentures as exhibits to the
registration statement. You should
13
read the Indentures in their entirety, including the definitions of certain
terms, together with this prospectus and the prospectus supplement before you
make any investment decision. Although separate Indentures are used for
subordinated debt securities, senior debt securities, convertible subordinated
debt securities and convertible senior debt securities, the description of the
Indenture in this section applies to all Indentures, unless otherwise noted.
You should refer to the prospectus supplement attached to this prospectus
for the following information about a new series of debt securities:
* title of the debt securities;
* the aggregate principal amount of the debt securities or the series of
which they are a part;
* the date on which the debt securities mature;
* the interest rate;
* when the interest on the debt securities accrues and is payable;
* the record dates;
* places where principal, premium, or interest will be payable;
* periods within which, and prices at which we can redeem debt
securities at our option;
* any obligation on our part to redeem or purchase debt securities
pursuant to a sinking fund or at the option of the holder;
* denominations and multiples at which debt securities will be issued if
other than $1,000;
* any index or formula from which the amount of principal or any premium
or interest may be determined;
* any allowance for alternative currencies and determination of value;
* whether the debt securities are convertible and the terms and
conditions applicable to conversion, including the conversion price or
rate, the conversion period, and other conversion terms and
provisions;
* whether the debt securities are defeasible under the terms of the
Indenture;
* whether we are issuing the debt securities as global securities;
* any additional or different events of default and any change in the
right of the trustee or the holders to declare the principal amount
due and payable if there is any default;
* any addition to or change in the covenants in the Indenture; and
* any other terms.
We may sell the debt securities at a substantial discount below their
principal amount. The prospectus supplement may describe special federal income
tax considerations that apply to debt
14
securities sold at an original issue discount or to debt securities that are
denominated in a currency other than United States dollars.
Unless the applicable prospectus supplement specifies otherwise, the debt
securities will not be listed on any securities exchange.
Other than the protections described in this prospectus and in the
prospectus supplement, holders of debt securities would not be protected by the
covenants in the Indenture from a highly-leveraged transaction.
SUBORDINATION
Each Indenture relating to the subordinated debt securities states that,
unless otherwise provided in a supplemental indenture or a board resolution, the
debt securities will be subordinate to all senior debt. This is true whether the
senior debt is outstanding as of the date of the Indenture or is incurred
afterwards. The balance of the information under this heading assumes that a
supplemental indenture or a board resolution results in a series of debt
securities being subordinated obligations.
The Indenture states that we cannot make payments of principal, premium, or
interest on the subordinated debt if:
* the principal, premium or interest on senior debt is not paid when due
and the applicable grace period for the default has ended and the
default has not been cured or waived; or
* the maturity of any senior debt has been accelerated because of a
default.
The Indenture provides that we must pay all senior debt in full before the
holders of the subordinated debt securities may receive or retain any payment if
our assets are distributed to our creditors upon any of the following:
* dissolution;
* winding-up;
* liquidation;
* reorganization, whether voluntary or involuntary;
* bankruptcy;
* insolvency;
* receivership; or
* any other proceedings.
The Indenture provides that when all amounts owing on the senior debt are
paid in full, the holders of the subordinated debt securities will be subrogated
to the rights of the holders of senior debt to receive payments or distributions
applicable to senior debt.
The Indenture defines senior debt as the principal, premium, interest and
any other payment due under any of the following, whether outstanding at the
date of the Indenture or thereafter incurred, created or assumed:
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* all of our debt evidenced by notes, debentures, bonds, or other
securities we sell for money;
* all debt of others of the kinds described in the preceding bullet
point that we assume or guarantee in any manner; and
* all renewals, extensions, or refundings of debt of the kinds described
in either of the two preceding bullet points.
However, the preceding will not be considered senior debt if the document
creating the debt or the assumption or guarantee of the debt states that it is
not superior to or that it is on equal footing with the subordinated debt
securities.
The Indenture does not limit the aggregate amount of senior debt that we
may issue. As of September 30, 2002, our outstanding senior debt (excluding our
subsidiaries) was approximately $792 million. In addition, as of September 30,
2002, our subsidiaries, principally APS, had approximately $2.3 billion of debt
outstanding, of which $430 million represented APS first mortgage bonds or
senior notes, both of which are directly or indirectly secured by substantially
all of APS' assets. As discussed above under "General", our debt securities,
whether senior debt securities or subordinated securities, are structurally
subordinated to the debt securities and other obligations of our subsidiaries.
CONVERTIBILITY
No series of debt securities, whether senior or subordinated, will be
convertible into, or exchangeable for, other securities or property except as
set forth in the applicable prospectus supplement. You should refer to the
prospectus supplement that accompanies this prospectus for a description of the
specific conversion provisions and terms of any series of convertible debt
securities that we may offer by that prospectus supplement. These terms and
provisions may include:
* the title and specific designation of the convertible debt securities,
including whether they are convertible senior debt securities or
convertible subordinated debt securities;
* the terms and conditions upon which conversion of the convertible debt
securities may be effected, including the conversion price, the
conversion period and other conversion provisions;
* the terms and conditions on which we may, or may be required to,
redeem the convertible debt securities;
* the place or places where we must pay the convertible debt securities
and where any convertible debt securities issued in registered form
may be sent for transfer, conversion or exchange; and
* any other terms of the convertible debt securities and any other
deletions from or modifications or additions to the indenture in
respect of the convertible debt securities, including those relating
to the subordination of any convertible debt securities or any
addition to or changes in the events of default or covenants of any
convertible debt securities.
FORM, EXCHANGE, AND TRANSFER
Each series of debt securities will be issuable only in fully registered
form and without coupons. In addition, unless otherwise specified in a
prospectus supplement, the debt securities will be issued in denominations of
$1,000 and multiples of $1,000. We, the trustee, and any of our agents may treat
the
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registered holder of a debt security as the absolute owner for the purpose of
making payments, giving notices, and for all other purposes.
The holders of debt securities may exchange them for any other debt
securities of the same series, in authorized denominations and equal principal
amount. However, this type of exchange will be subject to the terms of the
Indenture and any limitations that apply to global securities.
A holder may transfer debt securities by presenting the endorsed security
at the office of a security registrar or at the office of any transfer agent we
designate. The holder will not be charged for any exchange or registration of
transfer, but we may require payment to cover any tax or other governmental
charge in connection with the transaction. We have appointed the trustee under
each Indenture as security registrar. A prospectus supplement will name any
transfer agent we designate for any debt securities if different from the
security registrar. We may designate additional transfer agents or rescind the
designation of any transfer agent or approve a change in the office through
which any transfer agent acts at any time, except that we will maintain a
transfer agent in each place of payment for debt securities.
If the debt securities of any series are to be redeemed in part, we will
not be required to do any of the following:
* issue, register the transfer of, or exchange any debt securities of
that series and/or tenor beginning 15 days before the day of mailing
of a notice of redemption of any debt security that may be selected
for redemption and ending at the close of business on the day of the
mailing; or
* register the transfer of or exchange any debt security selected for
redemption, except for an unredeemed portion of a debt security that
is being redeemed in part.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable prospectus supplement, we will
pay interest on a debt security on any interest payment date to the person in
whose name the debt security is registered.
Unless otherwise indicated in the applicable prospectus supplement, the
principal, premium, and interest on the debt securities of a particular series
will be payable at the office of the paying agents that we may designate.
However, we may pay any interest by check mailed to the address, as it appears
in the security register, of the person entitled to that interest. Also, unless
otherwise indicated in the applicable prospectus supplement, the corporate trust
office of the trustee in The City of New York will be our sole paying agent for
payments with respect to debt securities of each series. Any other paying agent
that we initially designate for the debt securities of a particular series will
be named in the applicable prospectus supplement. We may at any time designate
additional paying agents or rescind the designation of any paying agent or
approve a change in the office through which any paying agent acts, except that
we will maintain a paying agent in each place of payment for the debt securities
of a particular series.
All money that we pay to a paying agent for the payment of the principal,
premium, or interest on any debt security that remains unclaimed at the end of
two years after the principal, premium, or interest has become due and payable
will be repaid to us, and the holder of the debt security may look only to us
for payment.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Unless otherwise indicated in the applicable prospectus supplement, we may
not:
* consolidate with or merge into any other entity;
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* convey, transfer, or lease our properties and assets substantially as
an entirety to any entity; or
* permit any entity to consolidate with or merge into us or convey,
transfer, or lease its properties and assets substantially as an
entirety to us,
unless the following conditions are met:
* the successor entity is a corporation, partnership, trust, or other
entity organized and validly existing under the laws of any domestic
jurisdiction and assumes our obligations on the debt securities and
under the Indenture;
* immediately after giving effect to the transaction, no event of
default, and no event which, after notice or lapse of time or both,
would become an event of default, shall have occurred and be
continuing; and
* other conditions are met.
Upon any merger, consolidation, or transfer or lease of properties, the
successor person will be substituted for us under the Indenture, and,
thereafter, except in the case of a lease, we will be relieved of all
obligations and covenants under the Indenture and the debt securities.
EVENTS OF DEFAULT
Each of the following will be an event of default under the Indenture with
respect to debt securities of any series:
* our failure to pay principal of or any premium on any debt security of
that series when due;
* our failure to pay any interest on any debt securities of that series
when due, and the continuance of that failure for 30 days;
* our failure to deposit any sinking fund payment, when due, in respect
of any debt securities of that series;
* our failure to perform any of our other covenants in the Indenture
relating to that series and the continuance of that failure for 90
days after written notice has been given by the trustee or the holders
of at least 25% in principal amount of the outstanding debt securities
of that series;
* bankruptcy, insolvency, or reorganization events involving us; and
* any other event of default for that series described in the applicable
prospectus supplement.
If an event of default occurs and is continuing other than an event of
default relating to bankruptcy, insolvency, or reorganization, either the
trustee or the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of the affected series may declare the principal
amount of the debt securities of that series to be due and payable immediately.
In the case of any debt security that is an original issue discount security or
the principal amount of which is not then determinable, the trustee or the
holders of at least 25% in aggregate principal amount of the outstanding debt
securities of that series may declare the portion of the principal amount of the
debt security specified in the terms of such debt security to be immediately due
and payable upon an event of default.
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If an event of default involving bankruptcy, insolvency, or reorganization
occurs, the principal amount of all the debt securities of the affected series
will automatically, and without any action by the trustee or any holder, become
immediately due and payable. After any acceleration, but before a judgment or
decree based on acceleration, the holders of a majority in aggregate principal
amount of the outstanding debt securities of that series may rescind and annul
the acceleration if all events of default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
The trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders,
unless the holders have offered the trustee indemnity satisfactory to it.
Subject to provisions for the indemnification of the trustee, the holders of a
majority in principal amount of the outstanding debt securities of any series
will have the right to direct the time, method, and place of conducting any
proceeding for any remedy available to the trustee, or exercising any trust or
power conferred on the trustee, with respect to the debt securities of that
series.
No holder of a debt security of any series will have any right to institute
any proceeding under the Indenture, or for the appointment of a receiver or a
trustee, or for any other remedy under the Indenture, unless:
* the holder has previously given the trustee written notice of a
continuing event of default with respect to the debt securities of
that series;
* the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of that series have made written request,
and the holder or holders have offered reasonable indemnity, to the
trustee to institute the proceeding as trustee; and
* the trustee has failed to institute the proceeding, and has not
received from the holders of a majority in aggregate principal amount
of the outstanding debt securities of that series a direction
inconsistent with the request within 60 days after the notice,
request, and offer of indemnity.
The limitations provided above do not apply to a suit instituted by a
holder of a debt security for the enforcement of payment of the principal,
premium, or interest on the debt security on or after the applicable due date.
We are required to furnish to the trustee annually a certificate of various
officers stating whether or not we are in default in the performance or
observance of any of the terms, provisions, and conditions of the Indenture and,
if so, specifying all known defaults.
MODIFICATION AND WAIVER
In limited cases the trustee, as well as us, may make modifications and
amendments to the Indenture without the consent of the holders of any series of
debt securities. The trustee may make modifications and amendments to the
Indenture with the consent of the holders of not less than 66 2/3% in aggregate
principal amount of the outstanding debt securities of each series affected by
the modification or amendment. However, without the consent of the holder of
each outstanding debt security affected, no modification or amendment may:
* reduce the principal amount of, or any premium or interest on, any
debt security;
* reduce the amount of principal of an original issue discount security
or any other debt security payable upon acceleration of the maturity
of the security;
* change the stated maturity of the principal of, or any installment of
principal of or interest on, any debt security;
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* change the place or currency of payment of principal of, or any
premium or interest on, any debt security;
* make provisions with respect to conversion or exchange rights of
holders of debt securities;
* impair the right to institute suit for the enforcement of any payment
on or with respect to any debt security; or
* reduce the percentage in principal amount of outstanding debt
securities of any series, the consent of whose holders is required for
modification or amendment of the Indenture necessary for waiver of
compliance with certain provisions of the Indenture or of certain
defaults, or modify the provisions of the Indenture relating to
modification and waiver.
Compliance with certain restrictive provisions of the Indenture may be
waived by the holders of not less than 66 2/3% in aggregate principal amount of
the outstanding debt securities of any series. The holders of a majority in
principal amount of the outstanding debt securities of any series may waive any
past default under the Indenture, except:
* a default in the payment of principal, premium, or interest; and
* a default under covenants and provisions of the Indenture which cannot
be amended without the consent of the holder of each outstanding debt
security of the affected series.
In determining whether the holders of the requisite principal amount of the
outstanding debt securities have given or taken any direction, notice, consent,
waiver, or other action under the Indenture as of any date:
* the principal amount of an outstanding original issue discount
security will be the amount of the principal that would be due and
payable upon acceleration of the maturity on that date;
* if the principal amount payable at the stated maturity of a debt
security is not determinable, the principal amount of the outstanding
debt security will be an amount determined in the manner prescribed
for the debt security; and
* the principal amount of an outstanding debt security denominated in
one or more foreign currencies will be the U.S. dollar equivalent of
the principal amount of the debt security or, in the case of a debt
security described in the previous clause above, the amount described
in that clause.
If debt securities have been fully defeased or if we have deposited money
with the trustee to redeem debt securities, they will not be considered
outstanding.
Except in limited circumstances, we will be entitled to set any day as a
record date for the purpose of determining the holders of outstanding debt
securities of any series entitled to give or take any direction, notice,
consent, waiver, or other action under the Indenture. In limited circumstances,
the trustee will be entitled to set a record date for action by holders. If a
record date is set for any action to be taken by holders of a particular series,
the action may be taken only by persons who are holders of outstanding debt
securities of that series on the record date. To be effective, the action must
be taken by holders of the requisite principal amount of the debt securities
within a specified period following the record date. For any particular record
date, this period will be 180 days or any other shorter period as we may
specify. The period may be shortened or lengthened, but not beyond 180 days.
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DEFEASANCE AND COVENANT DEFEASANCE
We may elect to have the provisions of the Indenture relating to defeasance
and discharge of indebtedness, or defeasance of restrictive covenants in the
Indenture, applied to the debt securities of any series, or to any specified
part of a series. The prospectus supplement describing a series of debt
securities will state whether we can make these elections for that series.
DEFEASANCE AND DISCHARGE
We will be discharged from all of our obligations with respect to the debt
securities of a series if we deposit with the trustee money in an amount
sufficient to pay the principal, premium, and interest on the debt securities of
that series when due in accordance with the terms of the Indenture and the debt
securities. We can also deposit securities that will provide the necessary
monies. However, we will not be discharged from the obligations to exchange or
register the transfer of debt securities, to replace stolen, lost, or mutilated
debt securities, to maintain paying agencies, and to hold moneys for payment in
trust. The defeasance or discharge may occur only if we deliver to the trustee
an opinion of counsel stating that we have received from, or there has been
published by, the United States Internal Revenue Service a ruling, or there has
been a change in tax law, in either case to the effect that holders of such debt
securities:
* will not recognize gain or loss for federal income tax purposes as a
result of the deposit, defeasance, and discharge; and
* will be subject to federal income tax on the same amount, in the same
manner, and at the same times as would have been the case if the
deposit, defeasance, and discharge were not to occur.
DEFEASANCE OF COVENANTS
We may elect to omit compliance with restrictive covenants in the Indenture
and any additional covenants that may be described in the applicable prospectus
supplement for a series of debt securities. This election will preclude some
actions from being considered defaults under the Indenture for the applicable
series. In order to exercise this option, we will be required to deposit, in
trust for the benefit of the holders of debt securities, funds in an amount
sufficient to pay the principal, premium and interest on the debt securities of
the applicable series. We may also deposit securities that will provide the
necessary monies. We will also be required to deliver to the trustee an opinion
of counsel to the effect that holders of the debt securities will not recognize
gain or loss for federal income tax purposes as a result of such deposit and
defeasance of certain obligations and will be subject to federal income tax on
the same amount, in the same manner and at the same times as would have been the
case if the deposit and defeasance were not to occur. If we exercise this option
with respect to any debt securities and the debt securities are declared due and
payable because of the occurrence of any event of default, the amount of funds
deposited in trust would be sufficient to pay amounts due on the debt securities
at the time of their respective stated maturities but may not be sufficient to
pay amounts due on the debt securities on any acceleration resulting from an
event of default. In that case, we would remain liable for the additional
payments.
GOVERNING LAW
The law of the State of New York will govern the Indenture and the debt
securities.
GLOBAL SECURITIES
Some or all of the debt securities of any series may be represented, in
whole or in part, by one or more global securities, which will have an aggregate
principal amount equal to that of the debt securities they represent. We will
register each global security in the name of a depositary or nominee identified
in
21
a prospectus supplement and deposit the global security with the depositary or
nominee. Each global security will bear a legend regarding the restrictions on
exchanges and registration of transfer referred to below and other matters
specified in a supplemental indenture to the Indenture.
No global security may be exchanged for debt securities registered, and no
transfer of a global security may be registered, in the name of any person other
than the depositary for the global security or any nominee of the depositary,
unless:
* the depositary has notified us that it is unwilling or unable to
continue as depositary for the global security or has ceased to be
qualified to act as depositary;
* a default has occurred and is continuing with respect to the debt
securities represented by the global security; or
* any other circumstances exist that may be described in the applicable
supplemental indenture and prospectus supplement.
We will register all securities issued in exchange for a global security or
any portion of a global security in the names specified by the depositary.
As long as the depositary or its nominee is the registered holder of a
global security, the depositary or nominee will be considered the sole owner and
holder of the global security and the debt securities that it represents. Except
in the limited circumstances referred to above, owners of beneficial interests
in a global security will not:
* be entitled to have the global security or debt securities registered
in their names;
* receive or be entitled to receive physical delivery of certificated
debt securities in exchange for a global security; and
* be considered to be the owners or holders of the global security or
any debt securities for any purpose under the Indenture.
We will make all payments of principal, premium, and interest on a global
security to the depositary or its nominee. The laws of some jurisdictions
require that purchasers of securities take physical delivery of securities in
definitive form. These laws make it difficult to transfer beneficial interests
in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions that have accounts with the depositary or its nominee, referred to
as Participants, and to persons that may hold beneficial interests through
Participants. In connection with the issuance of any global security, the
depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of debt securities represented by the global
security to the accounts of its Participants. Ownership of beneficial interests
in a global security will only be shown on records maintained by the depositary
or the Participant. Likewise, the transfer of ownership interests will be
effected only through the same records. Payments, transfers, exchanges, and
other matters relating to beneficial interests in a global security may be
subject to various policies and procedures adopted by the depositary from time
to time. Neither we, the trustee, nor any of our agents will have responsibility
or liability for any aspect of the depositary's or any Participant's records
relating to, or for payments made on account of, beneficial interests in a
global security, or for maintaining, supervising, or reviewing any records
relating to the beneficial interests.
REGARDING THE TRUSTEE
The Bank of New York is the trustee under our Indentures relating to the
subordinated debt securities and convertible subordinated debt securities and
our Indentures relating to the senior debt securities and the convertible senior
debt
22
securities. We maintain normal banking arrangements with The Bank of New York,
which include a $40 million commitment pursuant to a revolving credit agreement,
none of which was outstanding at September 30, 2002.
The Bank of New York also serves as:
* master trustee/custodian of our pension plan;
* investment manager for our nonunion post-retirement medical fund; and
* custodian of international fixed-income assets for our pension plan.
An affiliate of The Bank of New York also serves as an underwriter on
certain of our debt issuances from time to time.
The Bank of New York is the trustee under APS' first mortgage bond
indenture, senior note indenture, and subordinated debt securities indenture.
The Bank of New York is also the trustee for the holders of several issues of
pollution control bonds issued on APS' behalf, and an affiliate of The Bank of
New York is the remarketing agent for a series of APS' pollution control bonds.
APS maintains normal banking arrangements with The Bank of New York, which
include a $15.6 million commitment by The Bank of New York pursuant to an APS
revolving credit agreement, none of which was outstanding at September 30, 2002.
DESCRIPTION OF PREFERRED STOCK
We may issue, from time to time, shares of one or more series or classes of
our preferred stock. The following description sets forth certain general terms
and provisions of the preferred stock to which any prospectus supplement may
relate. The particular terms of any series of preferred stock and the extent, if
any, to which these general provisions may apply to the series of preferred
stock offered will be described in the prospectus supplement relating to that
preferred stock.
The following summary of provisions of the preferred stock does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, the provisions of our articles of incorporation, bylaws and the amendment to
our articles relating to a specific series of the preferred stock (the
"statement of preferred stock designations"), which will be in the form filed as
an exhibit to, or incorporated by reference in, the registration statement of
which this prospectus is a part. Before investing in any series of our preferred
stock, you should read our articles, bylaws and the relevant statement of
preferred stock designations.
GENERAL
Under our articles of incorporation, we have the authority to issue up to
10,000,000 shares of preferred stock. No shares of preferred stock are currently
outstanding. 4,400,000 shares of preferred stock are reserved for issuance under
our shareholders rights plan. See "Description of Common Stock--Certain
Anti-takeover Effects--Shareholder Rights Plan." Our Board of Directors is
authorized to issue shares of preferred stock, in one or more series, and to fix
for each series voting powers and those preferences and relative, participating,
optional or other special rights and those qualifications, limitations or
restrictions as are permitted by the Arizona Business Corporation Act (the
"ABCA").
Our Board of Directors is authorized to determine the terms for each series
of preferred stock, and the prospectus supplement will describe the terms of any
series of preferred stock being offered, including:
* the designation of the shares and the number of shares that constitute
the series;
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* the dividend rate (or the method of calculation thereof), if any, on
the shares of the series and the priority as to payment of dividends
with respect to other classes or series of our capital stock;
* the dividend periods (or the method of calculation thereof);
* the voting rights of the shares;
* the liquidation preference and the priority as to payment of the
liquidation preference with respect to other classes or series of our
capital stock and any other rights of the shares of the series upon
our liquidation or winding-up;
* whether or not and on what terms the shares of the series will be
subject to redemption or repurchase at our option or at the option of
the holders thereof;
* whether and on what terms the shares of the series will be convertible
into or exchangeable for other securities;
* whether the shares of the series of preferred stock will be listed on
a securities exchange;
* any special United States federal income tax considerations applicable
to the series; and
* the other rights and privileges and any qualifications, limitations or
restrictions of the rights or privileges of the series.
DIVIDENDS
Holders of shares of preferred stock shall be entitled to receive, when and
as declared by our Board of Directors out of our funds legally available
therefor, a cash dividend payable at the dates and at the rates, if any, per
share as set forth in the applicable prospectus supplement.
CONVERTIBILITY
No series of preferred stock will be convertible into, or exchangeable for,
other securities or property except as set forth in the applicable prospectus
supplement.
REDEMPTION AND SINKING FUND
No series of preferred stock will be redeemable or receive the benefit of a
sinking fund except as set forth in the applicable prospectus supplement.
LIQUIDATION RIGHTS
Unless otherwise set forth in the applicable prospectus supplement, in the
event of our liquidation, dissolution or winding up, the holders of shares of
each series of preferred stock are entitled to receive distributions out of our
assets available for distribution to stockholders, before any distribution of
assets is made to holders of (i) any other shares of preferred stock ranking
junior to that series of preferred stock as to rights upon liquidation and (ii)
shares of common stock. The amount of liquidating distributions received by
holders of preferred stock will generally equal the liquidation preference
specified in the applicable prospectus supplement for that series of preferred
stock, plus any dividends accrued and accumulated but unpaid to the date of
final distribution. The holders of each series of preferred stock will not be
entitled to receive the liquidating distribution of, plus such dividends on,
those shares until the liquidation preference of any shares of our capital stock
ranking senior to that series of the preferred stock as to the rights upon
liquidation shall have been paid or set aside for payment in full.
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If upon our liquidation, dissolution or winding up, the amounts payable
with respect to the preferred stock, and any other preferred stock ranking as to
any distribution on a parity with the preferred stock are not paid in full, then
the holders of the preferred stock and the other parity preferred stock will
share ratably in any distribution of assets in proportion to the full respective
preferential amount to which they are entitled. Unless otherwise specified in a
prospectus supplement for a series of preferred stock, after payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of preferred stock will not be entitled to any further participation
in any distribution of our assets. Neither a consolidation or merger of us with
another corporation nor a sale of securities shall be considered a liquidation,
dissolution or winding up of us.
VOTING RIGHTS
The holders of each series of preferred stock we may issue will have no
voting rights, except as required by law and as described below or in the
applicable prospectus supplement. Our Board of Directors may, upon issuance of a
series of preferred stock, grant voting rights to the holders of that series,
including rights to elect additional board members if we fail to pay dividends
in a timely fashion.
Arizona law provides for certain voting rights for holders of a class of
stock, even if the stock does not have other voting rights. Thus, the holders of
all shares of a class, would be entitled to vote on any amendment to our
articles of incorporation that would:
* increase or decrease the aggregate number of authorized shares of the
class;
* effect an exchange or reclassification of all or part of the shares of
the class into shares of another class;
* effect an exchange or reclassification, or create the right of
exchange of all or part of the shares of another class into shares of
the class;
* change the designations, rights, obligations, preferences, or
limitations of all or part of the shares of the class;
* change the shares of all or part of the class into a different number
of shares of the same class;
* create a new class of shares having rights or preferences with respect
to distributions or to dissolution that are prior, superior or
substantially equal to the shares of the class;
* increase rights, preferences or number of authorized shares of any
class that, after giving effect to the amendment, have rights or
preferences with respect to distributions or to dissolution that are
prior, superior or substantially equal to the shares of the class;
* limit or deny an existing preemptive right of all or part of the
class; and
* cancel or otherwise affect rights to distributions or dividends that
have accumulated but have not yet been declared on all or part of the
shares of the class.
If the proposed amendment would affect a series of the class, but not the
entire class, in one or more of the ways described in the bullets above, then
the shares of the affected series will have the right to vote on the amendment
as a separate voting group. However, if a proposed amendment that would entitle
two or more series of the class to vote as separate voting groups would affect
those series in the same or a substantially similar way, the shares of all the
series so affected must vote together as a single voting group on the proposed
amendment.
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Unless the articles of incorporation, Arizona law or the Board of Directors
would require a greater vote or a different quorum, if an amendment to the
articles would allow the preferred stock or one or more series of the preferred
stock to vote as voting groups, the vote required by each voting group would be:
* a majority of the votes entitled to be cast by the voting group, if
the amendment would create dissenters' rights; and
* in any other case, if a quorum is present in person or by proxy
consisting of a majority of the votes entitled to be cast on the
matter by the voting group, the votes cast by the voting group in
favor of the amendment must exceed the votes cast against the
amendment by the voting group.
Arizona law may also require that the preferred stock be entitled to vote
on certain other extraordinary transactions.
MISCELLANEOUS
The holders of our preferred stock will have no preemptive rights. All
shares of preferred stock being offered by the applicable prospectus supplement
will be fully paid and not liable to further calls or assessment by us. If we
should redeem or otherwise reacquire shares of our preferred stock, then these
shares will resume the status of authorized and unissued shares of preferred
stock undesignated as to series, and will be available for subsequent issuance.
There are no restrictions on repurchase or redemption of the preferred stock
while there is any arrearage on sinking fund installments except as may be set
forth in an applicable prospectus supplement. Payment of dividends on any series
of preferred stock may be restricted by loan agreements, indentures and other
transactions entered into by us. Any material contractual restrictions on
dividend payments will be described or incorporated by reference in the
applicable prospectus supplement.
When we offer to sell a series of preferred stock, we will describe the
specific terms of the series in the applicable prospectus supplement. If any
particular terms of a series of preferred stock described in a prospectus
supplement differ from any of the terms described in this prospectus, then the
terms described in the applicable prospectus supplement will be deemed to
supersede the terms described in this prospectus.
NO OTHER RIGHTS
The shares of a series of preferred stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the applicable prospectus supplement, our
articles of incorporation or the applicable statement of preferred stock
designations or as otherwise required by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for each series of preferred stock will be
designated in the applicable prospectus supplement.
DESCRIPTION OF COMMON STOCK
We may issue, from time to time, shares of our common stock, the general
terms and provisions of which are summarized below. This summary does not
purport to be complete and is subject to, and is qualified in its entirety by
express reference to, the provisions of our articles of incorporation, bylaws
and the applicable prospectus supplement.
26
AUTHORIZED SHARES
Under our articles of incorporation, we have the authority to issue
150,000,000 shares of common stock. We have issued and have outstanding
approximately 84,755,377 shares of our common stock (as of November 12, 2002)
and we have reserved for issuance approximately 16,962,874 shares of our common
stock (as of November 19, 2002), excluding any shares of common stock that could
be issued under the shareholders rights plan.
DIVIDENDS
Subject to any preferential rights of any series of preferred stock,
holders of shares of common stock will be entitled to receive dividends on the
stock out of assets legally available for distribution when, as and if
authorized and declared by our Board of Directors. The payment of dividends on
the common stock will be a business decision to be made by our Board of
Directors from time to time based upon results of our operations and our
financial condition and any other factors as our Board of Directors considers
relevant. Payment of dividends on the common stock may be restricted by loan
agreements, indentures and other transactions entered into by us from time to
time. Any material contractual restrictions on dividend payments will be
described in the applicable prospectus supplement.
VOTING RIGHTS
Holders of common stock are entitled to one vote per share on all matters
voted on generally by the stockholders, including the election of directors,
and, except as otherwise required by law or except as provided with respect to
any series of preferred stock, the holders of the shares possess all voting
power. Arizona law provides for cumulative voting for the election of directors.
As a result, any shareholder may cumulate his or her votes by casting them all
for any one director nominee or by distributing them among two or more nominees.
STAGGERED TERMS OF DIRECTORS
Our Board of Directors is elected in three classes with staggered
three-year terms. We currently have five directors in class I and four directors
each in classes II and III. One class of directors is elected each year for a
three-year term. Election of directors with staggered terms lessens the
effectiveness of cumulative voting rights by reducing the number of directors
who are elected in any given year.
LIQUIDATION RIGHTS
Subject to any preferential rights of any series of preferred stock,
holders of shares of common stock are entitled to share ratably in our assets
legally available for distribution to our stockholders in the event of our
liquidation, dissolution or winding up.
ABSENCE OF OTHER RIGHTS
Holders of common stock have no preferential, preemptive, conversion or
exchange rights.
MISCELLANEOUS
All shares of common stock being offered by the applicable prospectus
supplement will be fully paid and not liable to further calls or assessment by
us.
TRANSFER AGENT AND REGISTRAR
We are the principal transfer agent and registrar for the common stock.
27
PREFERRED STOCK
Our Board of Directors has the authority, without any further action by our
stockholders, to issue from time to time shares of preferred stock, in one or
more series and to fix the designations, preferences, rights, qualifications,
limitations and restrictions thereof, including voting rights, dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series. The
issuance of preferred stock with voting rights could have an adverse effect on
the voting power of holders of common stock by increasing the number of
outstanding shares having voting rights. In addition, if our board of directors
authorizes preferred stock with conversion rights, the number of shares of
common stock outstanding could potentially be increased up to the authorized
amount. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock. Any such
issuance could also have the effect of delaying, deterring or preventing a
change in control of us and may adversely affect the rights of holders of our
common stock.
CERTAIN ANTI-TAKEOVER EFFECTS
GENERAL. Certain provisions of our articles of incorporation, bylaws, and
the Arizona Revised Statutes ("ARS"), as well as our shareholder rights plan,
may have an anti-takeover effect and may delay or prevent a tender offer or
other acquisition transaction that a shareholder might consider to be in his or
her best interest, including a transaction that results in a premium over the
market price of the common stock. The summary of the provisions of our articles,
bylaws, shareholder rights plan, and the ARS set forth below does not purport to
be complete and is qualified in its entirety by reference to our articles,
bylaws, shareholder rights plan, and the ARS.
BUSINESS COMBINATIONS. ARS ss. 10-2741 through 2743 and Article XII of our
bylaws restrict a wide range of transactions (collectively, "business
combinations") between us or, in certain cases, one of our subsidiaries, and an
interested shareholder (or any affiliate or associate of the interested
shareholder). An "interested shareholder" is, generally, any person who
beneficially owns, directly or indirectly, 10% or more of our outstanding voting
power or any of our affiliates or associates. The statute broadly defines
"business combinations" to include, among other things and with certain
exceptions:
* mergers and consolidations with an interested shareholder or an
affiliate or associate of the interested shareholder;
* share exchanges with an interested shareholder or an affiliate or
associate of the interested shareholder;
* sales, leases or other dispositions of assets to an interested
shareholder or an affiliate or associate of the interested
shareholder, representing 10% or more of (i) the aggregate market
value of all of our consolidated assets as of the end of the most
recent fiscal quarter, (ii) the aggregate market value of all our
outstanding shares, or (iii) our consolidated revenues or net income
for the four most recent fiscal quarters;
* the issuance or transfer of shares of stock having an aggregate market
value of 5% or more of the aggregate market value of all of our
outstanding shares to an interested shareholder or an affiliate or
associate of the interested shareholder;
* the adoption of a plan or proposal for our liquidation or dissolution
or reincorporation in another state or jurisdiction pursuant to an
agreement or arrangement with an interested shareholder or an
affiliate or associate of the interested shareholder;
* corporate actions, such as stock splits and stock dividends, and other
transactions resulting in an increase in the proportionate share of
the outstanding shares of any series
28
or class of stock of us or any of our subsidiaries owned by an
interested shareholder or an affiliate or associate of the interested
shareholder; and
* the receipt by an interested shareholder or an affiliate or associate
of the interested shareholder of the benefit (other than
proportionately as a shareholder) of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by or through us or any of our subsidiaries.
The ARS and our bylaws provide that, subject to certain exceptions, we may
not engage in a business combination with an interested shareholder (or any
affiliate or associate of the interested shareholder) or authorize one of our
subsidiaries to do so, for a period of three years after the date on which the
interested shareholder first acquired the shares that qualify such person as an
interested shareholder (the "share acquisition date"), unless either the
business combination or the interested shareholder's acquisition of shares on
the share acquisition date is approved by a committee of our Board of Directors
(comprised solely of disinterested directors or other disinterested persons)
prior to the interested shareholder's share acquisition date.
In addition, after such three-year period, the ARS and our bylaws prohibit
us from engaging in any business combination with an interested shareholder (or
any affiliate or associate of the interested shareholder), subject to certain
exceptions, unless:
* the business combination or acquisition of shares by the interested
shareholder on the share acquisition date was approved by our Board of
Directors prior to the share acquisition date;
* the business combination is approved by holders of a majority of our
outstanding shares (excluding shares beneficially owned by the
interested shareholder or any affiliate or associate of the interested
shareholder) at a meeting called after such three-year period; or
* the business combination satisfies specified price and other
requirements.
ANTI-GREENMAIL PROVISIONS. ARS ss. 10-2704 and Article XIII of our bylaws
prohibit us from purchasing any shares of our voting stock from any beneficial
owner (or group of beneficial owners acting together to acquire, own or vote our
shares) of more than 5% of the voting power of our outstanding shares at a price
per share in excess of the average closing sale price during the 30 trading days
preceding the purchase or if the person or persons have commenced a tender offer
or announced an intention to seek control of us, during the 30 trading days
prior to the commencement of the tender offer or the making of the announcement,
unless
* the 5% beneficial owner has beneficially owned the shares to be
purchased for a period of at least three years;
* holders of a majority of our voting power (excluding shares held by
the 5% beneficial owner or its affiliates or associates or by any of
our officers and directors) approve the purchase; or
* we make the repurchase offer available to all holders of the class or
series of securities to be purchased and to all holders of other
securities convertible into that class or series.
CONTROL SHARE ACQUISITION STATUTE. Through a provision in our bylaws, we
have opted out of ARS ss. 10-2721 through 2727, the Arizona statutory provisions
regulating control share acquisitions. As a result, potential acquirors are not
subject to the limitations imposed by that statute.
29
SHAREHOLDER RIGHTS PLAN. We have adopted a shareholder rights plan under
which one preferred share purchase right is attached to each outstanding share
of our common stock. The rights become exercisable and will be separated from
the common stock on the Distribution Date, as such term is defined in the plan.
Generally, subject to specified exceptions, the Distribution Date will occur on
the earlier of:
* 10 days following a public announcement that a person or group of
affiliated or associated persons (an "acquiring person") has acquired
beneficial ownership of 15% or more of our outstanding common stock,
or
* 10 business days following the commencement of, or announcement of an
intention to make a tender offer or exchange offer that would result
in the beneficial ownership by a person or group of 15% or more of our
outstanding common stock.
Each right entitles the registered holder to purchase from us one
one-hundredth of a share of Series A Participating Preferred Stock at any
exercise price of $130, subject to adjustment under specified circumstances.
However, after any person has become an acquiring person (a "Flip-In Event"),
upon exercise of the right, the holder will be entitled to receive common stock
valued at twice the exercise price of the right. In other words, a rights holder
may purchase common stock at a 50% discount. In some circumstances, the holder
will receive cash, property or other securities instead of common stock. Upon
the occurrence of a Flip-In Event, any rights owned by an acquiring person, its
affiliates and associates and certain of its transferees will become null and
void.
In the event that a person becomes an acquiring person, we are then merged,
and the common stock is exchanged or converted in the merger, then each right
(other than those formerly held by the acquiring person, which became void)
would "flip-over" and be exercisable for a number of shares of common stock of
the acquiring company having a market value of two times the exercise price of
the right. In other words, a rights holder may purchase the acquiring company's
common stock at a 50% discount.
After a Flip-In Event but before a "flip-over" event (as described above)
occurs and before an acquiring person becomes the owner of 50% or more of the
common stock, the Board may cause the rights (either in whole or in part) to be
exchanged for shares of common stock (or fractional interests in Series A
Preferred Stock, or equivalent securities, of equal value) at a one-to-one
exchange ratio. Rights held by the acquiring person, however, which became void
upon the Flip-In Event, would not be entitled to participate in such exchange.
We may redeem the rights for $0.01 per right at any time prior to the date
on which a person becomes an acquiring person. The shareholder rights plan and
the rights expire in March 2009, subject to extension.
For so long as the rights are redeemable, the terms of the rights may be
amended or supplemented by the Board of Directors at any time and from time to
time without the consent of the holders of the rights. At any time when the
rights are not redeemable, the Board of Directors may amend or supplement the
terms of the rights, provided that such amendment does not adversely affect the
interests of the holders of the rights. In no event may any amendment or
supplement be made which changes the redemption price.
Until a right is exercised, the holder thereof will have no rights as a
stockholder, including, without limitation, the right to vote or to receive
dividends, except as holder of the common stock to which the right is attached.
For information on the terms of the Series A Preferred Stock, see the
certificate of designation for the Series A Preferred Stock, the form of which
is attached as Exhibit A to the Amended and Restated
30
Rights Agreement, dated as of March 26, 1999, filed as an exhibit to our Current
Report on Form 8-K dated March 22, 1999, which is incorporated herein by
reference.
SPECIAL MEETINGS OF SHAREHOLDERS. Pursuant to ARS ss. 10-702, a special
meeting of shareholders may be called by a corporation's Board of Directors or
any other person authorized to do so in its articles of incorporation or bylaws.
Our bylaws provide that, except as required by law, special meetings of
shareholders may only be called by a majority of our Board of Directors, the
Chairman of the Board, or the President.
ELECTION AND REMOVAL OF DIRECTORS. Our Board of Directors is divided into
three classes. The directors in each class serve for a three year term, with one
class being elected each year by our shareholders. The classification of our
Board of Directors generally makes it more difficult for shareholders to effect
a change in control because at least two shareholder meetings are required to
elect a majority of our Board. Arizona law provides for cumulative voting in the
election of directors, which may make it more difficult for shareholders to
elect a majority of the Board of Directors.
Our bylaws provide that any director may be removed with or without cause,
but only at a special meeting of shareholders called for that purpose, by the
vote of 66 2/3% of the outstanding voting power. However, if less than the
entire Board of Directors is to be removed, no one director may be removed if
the votes cast against the director's removal would be sufficient to elect the
director if then cumulatively voted at an election of the class of directors of
which the director is a part.
SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. A shareholder can submit
shareholder proposals and nominate candidates for election to our Board of
Directors if he or she follows the advance notice provisions set forth in our
bylaws.
With respect to shareholder proposals to bring business before the annual
meeting, shareholders must submit a written notice to the Secretary of the
Company not fewer than 90 or more than 120 days prior to the first anniversary
of the date of our previous year's annual meeting of shareholders. However, if
we have changed the date of the annual meeting by more than 30 days from the
date of the previous year's annual meeting, the written notice must be submitted
no later than ten days after the day we make public the date of the annual
meeting. The written notice must briefly describe the business the shareholder
desires to bring before the meeting, the text of the proposal or business, the
reasons for conducting such business at the meeting, and any material interest
in the proposal of the shareholder and the beneficial owner, if any, on whose
behalf the proposal is made.
With respect to director nominations, shareholders must submit written
notice to the Secretary of the Company not fewer than 180 days prior to the date
of the annual meeting. This requirement is also contained in our articles of
incorporation. Our bylaws require that the written notice must contain all
information relating to the director nominee that is required to be included in
a proxy statement pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as well as the written consent of the proposed nominee to be named in
the proxy statement as a nominee and to serving as a director if elected.
All written notices delivered pursuant to the advance notice provisions of
our bylaws are required to state (i) the name and address of the sponsoring
shareholder and the beneficial owner, if any, on whose behalf the proposal or
nomination is made, (ii) the class and number of shares that are owned
beneficially and of record by the shareholder and such beneficial owner, (iii) a
representation that the shareholder is a holder of record entitled to vote at
the meeting and intends to appear in person or by proxy at the meeting to
propose such business or nomination, and (iv) whether the shareholder or
beneficial owner intends or is part of a group that intends to deliver a proxy
statement to holders of at least the number of shares required to adopt the
proposal or elect the nominee or otherwise solicit proxies in favor of the
proposal or nomination.
31
Shareholder proposals and director nominations that are late or that do not
include all required information may be rejected. This could prevent
shareholders from bringing certain matters before an annual meeting, including
proposing the election of non-incumbent directors.
A shareholder must also comply with all applicable laws in proposing
business to be conducted and in nominating directors. The notice provisions of
the bylaws do not affect rights of shareholders to request inclusion of
proposals in our proxy statement pursuant to Rule 14a-8 of the Securities
Exchange Act of 1934.
ADDITIONAL AUTHORIZED SHARES OF CAPITAL STOCK. The authorized but unissued
shares of common stock and preferred stock available for issuance under our
articles of incorporation could be issued at such times, under such
circumstances, and with such terms and conditions as to impede an acquisition
transaction.
AMENDMENT TO ARTICLES OF INCORPORATION AND BYLAWS. ARS ss. 10-1001 through
1003 generally provide that both the Board of Directors and the shareholders
must approve amendments to an Arizona corporation's articles of incorporation,
except that the Board of Directors may adopt specified ministerial amendments
without shareholder approval. Unless the articles of incorporation, Arizona law
or the Board of Directors would require a greater vote or a different quorum,
the vote required by each voting group allowed or required to vote on the
amendment would be:
* a majority of the votes entitled to be cast by the voting group, if
the amendment would create dissenters' rights; and
* in any other case, if a quorum is present in person or by proxy
consisting of a majority of the votes entitled to be cast on the
matter by the voting group, the votes cast by the voting group in
favor of the amendment must exceed the votes cast against the
amendment by the voting group.
Our articles of incorporation require the approval of at least two-thirds
of the total voting power of all outstanding shares of our voting stock to amend
the provisions in Article Third relating to serial preferred stock, Article
Fifth relating to the election of our directors, including number,
classification, term, and nomination procedure, and Article Tenth relating to
this voting requirement.
ARS ss. 10-1020 provides that the Board of Directors may amend the
corporation's bylaws unless either: (i) the articles or applicable law reserves
this power exclusively to shareholders in whole or in part or (ii) the
shareholders in amending a particular bylaw provide expressly that the Board may
not amend or repeal that bylaw. An Arizona corporation's shareholders may amend
the corporation's bylaws even though they may also be amended by the Board of
Directors. Our bylaws provide that the following provisions may not be amended
or repealed without the vote of a majority of the Board of Directors or the vote
of 75% of the outstanding voting power:
* Section 2.02, which deals with authority to call special meetings of
shareholders;
* Section 3.01, which (i) provides for a staggered board of 9 to 21
members comprised of shareholders of the Company, (ii) vests in the
Board of Directors the exclusive power to increase or decrease the
size of the Board within these limits, and (iii) provides that the
Board of Directors may fill vacancies in the Board, whether by reason
of death, resignation, disqualification, an increase in the size of
the Board or otherwise;
* Section 3.13, which deals with removal of directors;
* Article XII, which imposes restrictions on business combinations with
interested shareholders;
32
* Article XIII, which imposes anti-greenmail provisions; and
* Article XIV, which deals with amendments to the bylaws.
DESCRIPTION OF THE PURCHASE CONTRACTS
We may issue, from time to time, purchase contracts, including contracts
obligating holders to purchase from us and us to sell to the holders, a
specified principal amount of debt securities or a specified number of shares of
common stock or preferred stock or any of the other securities that we may sell
under this prospectus (or a range of principal amount or number of shares
pursuant to a predetermined formula) at a future date or dates. The
consideration payable upon settlement of the purchase contracts may be fixed at
the time the purchase contracts are issued or may be determined by a specific
reference to a formula set forth in the purchase contracts. The purchase
contracts may be issued separately or as part of units consisting of a purchase
contract and other securities or obligations issued by us or third parties,
including United States treasury securities, securing the holders' obligations
to purchase the relevant securities under the purchase contracts. The purchase
contracts may require us to make periodic payments to the holders of the
purchase contracts or units or vice versa, and the payments may be unsecured or
prefunded on some basis. The purchase contracts may require holders to secure
their obligations under the purchase contracts in a specified manner and in
certain circumstances we may deliver newly issued prepaid purchase contracts,
often known as prepaid securities, upon release to a holder of any collateral
securing such holder's obligations under the original purchase contract.
The applicable prospectus supplement will describe the terms of any
purchase contracts or purchase units and, if applicable, such other securities
or obligations. The prospectus supplement will describe the terms of any
purchase contracts. The description in the prospectus supplement will not
necessarily be complete and will be qualified in its entirety by reference to
the purchase contracts, and, if applicable, collateral arrangements and
depositary arrangements, relating to the purchase contracts.
DESCRIPTION OF UNITS
We may, from time to time, issue units comprised of one or more of the
other securities that may be offered under this prospectus, in any combination.
Each unit may be issued so that the holder of the unit is also the holder of
each security included in the unit. Thus, the holder of a unit will have the
rights and obligations of a holder of each included security. The unit agreement
under which a unit is issued may provide that the securities included in the
unit may not be held or transferred separately at any time, or at any time
before a specified date.
Any applicable prospectus supplement will describe:
* the material terms of the units and of the securities comprising the
units, including whether and under what circumstances those securities
may be held or transferred separately;
* any material provisions relating to the issuance, payment, settlement,
transfer or exchange of the units or of the securities comprising the
units; and
* any material provisions of the governing unit agreement that differ
from those described above.
PLAN OF DISTRIBUTION
We may sell the securities to one or more underwriters for public offering
and sale by them or may sell the securities to investors through agents or
dealers. Any underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement. We also
reserve
33
the right to sell securities directly to investors on our own behalf in those
jurisdictions where we are authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, or from time to time at market prices prevailing at the
time of sale, at prices related to prevailing market prices or at negotiated
prices. We also may, from time to time, authorize underwriters acting as our
agents to offer and sell the securities upon the terms and conditions set forth
in any prospectus supplement. In connection with the sale of the securities,
underwriters may be deemed to have received compensation from us in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of the securities for whom they may act as agent.
If a dealer is utilized in the sale of the securities in respect of which
this prospectus is delivered, we may sell the securities to the dealer, as
principal. The dealer may then resell the securities to the public at varying
prices to be determined by the dealer at the time of resale.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of the securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in an applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters under the Securities Act, and any discounts and commissions
received by them and any profit realized by them on resale of the securities may
be deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled under agreements with us to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act, and to reimbursement by us for
certain expenses.
In connection with underwritten offerings of securities, underwriters may
over-allot or effect transactions that stabilize, maintain or otherwise affect
the market price of the offered securities at levels above those that might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids, each of
which is described below.
* A stabilizing bid means the placing of any bid, or the effecting of
any purchase, for the purpose of pegging, fixing or maintaining the
price of a security.
* A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase
to reduce a short position created in connection with the offering.
* A penalty bid means an arrangement that permits the managing
underwriter to reclaim a selling concession from a syndicate member in
connection with the offering when offered securities originally sold
by the syndicate member are purchased in syndicate covering
transactions.
These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise. Underwriters are not required to engage in
any of these activities, or to continue the activities if commenced.
If so indicated in an applicable prospectus supplement, we may authorize
dealers acting as our agents to solicit offers by institutions to purchase the
securities from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for payment and
delivery on the date or dates stated in the prospectus supplement. Each delayed
delivery contract will be for an amount not less than, and the aggregate
principal amount or offering price of the securities sold pursuant to delayed
delivery contracts will not be less nor more than, the respective amounts stated
in the prospectus supplement. Institutions with whom delayed delivery contracts,
when authorized, may be entered into include commercial and savings banks,
insurance companies, pension funds, investment
34
companies, educational and charitable institutions and other institutions, but
will in all cases be subject to approval by us.
The securities may also be offered and sold, if so indicated in the
prospectus supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("remarketing firms"), acting as principals for their own
accounts or as agents for us. Any remarketing firm will be identified and the
terms of its agreement, if any, with us and its compensation will be described
in the applicable prospectus supplement. Remarketing firms may be deemed to be
underwriters in connection with the securities remarketed by them. Remarketing
firms may be entitled under agreements which may be entered into with us to
indemnification by us against certain liabilities, including liabilities under
the Securities Act.
The securities may or may not be listed on a national securities exchange
or a foreign securities exchange. No assurances can be given that there will be
a market for any of the securities.
One or more of the underwriters, and/or one or more of their respective
affiliates, may be a lender under our credit agreements and may provide other
commercial banking, investment banking and other services to us and/or our
subsidiaries and affiliates in the ordinary course of business.
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this prospectus by reference from the Company's Current Report
on Form 8-K dated November 21, 2002 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the change
in 2001 in the method of accounting for derivatives and hedging activities in
order to comply with the provisions of Statement of Financial Accounting
Standards No. 133), which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL OPINIONS
Snell & Wilmer L.L.P., One Arizona Center, Phoenix, Arizona 85004 will
opine on the validity of the offered securities for us. We currently anticipate
that Sullivan and Cromwell, 1888 Century Park East, Los Angeles, California
90067 will opine on the validity of the offered securities for any underwriters.
Snell & Wilmer L.L.P. may rely as to all matters of New York law upon the
opinion of Sullivan & Cromwell. Sullivan & Cromwell may rely as to all matters
of Arizona law upon the opinion of Snell & Wilmer L.L.P.
35
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5,700,000 SHARES
[LOGO]
PINNACLE WEST
CAPITAL CORPORATION
COMMON STOCK
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PROSPECTUS SUPPLEMENT
DECEMBER 17, 2002
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CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
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BARCLAYS CAPITAL
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JPMORGAN
UBS WARBURG
BNY CAPITAL MARKETS, INC.
KBC FINANCIAL PRODUCTS
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