One
South Church Avenue
Tucson,
Arizona 85701
April
2,
2007
|
James
S. Pignatelli
|
(520)
571-4000
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|
Chairman
of the Board
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Dear
Shareholders:
You
are
cordially invited to attend the UniSource Energy Corporation 2007 Annual
Shareholders’ Meeting (the “Meeting”) to be held on Friday, May 11, 2007, at the
FOX Theatre, 17 West Congress, Tucson, Arizona. The Meeting will begin promptly
at 10:00 a.m., Mountain Standard Time, so please plan to arrive earlier. No
admission tickets will be required for attendance at the Meeting. We have
included a map indicating the location of the FOX Theatre and parking options
in
the downtown area near the Theatre.
Directors
and officers will be available before and after the Meeting to speak with you.
During the Meeting, we will answer your questions regarding our business affairs
and we will consider the matters explained in the enclosed Proxy
Statement.
We
have
enclosed a proxy card that lists all matters that require your vote. Please
complete, sign, date and mail the proxy card as soon as possible, whether or
not
you plan to attend the Meeting. You may also vote by telephone or the Internet,
as explained on the enclosed proxy card. If you attend the Meeting and wish
to
vote your shares personally, you may revoke your proxy at that time.
Your
interest in and continued support of UniSource Energy Corporation are much
appreciated.
Sincerely,
UNISOURCE
ENERGY CORPORATION
/s/
James
S. Pignatelli
James
S.
Pignatelli
Chairman
of the Board, President and
Chief
Executive Officer
NOTICE
OF ANNUAL SHAREHOLDERS’ MEETING
To
the Holders of Common Stock of
UniSource
Energy Corporation
We
will
hold the 2007 Annual Shareholders’ Meeting of UniSource Energy Corporation at
the FOX Theatre, 17 West Congress, Tucson, Arizona, on Friday, May 11, 2007,
at
10:00 a.m., Mountain Standard Time (“MST”). The purpose of the Meeting is to:
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1.
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elect
12 directors to our Board of Directors for the ensuing
year;
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2.
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ratify
the selection of the independent auditor for 2007;
and
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3.
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consider
any other matters which properly come before the
Meeting.
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Only
shareholders of record at the close of business on March 26, 2007, are entitled
to vote at the Meeting.
We
have
enclosed our 2006 Annual Report, including audited financial statements, and
the
Proxy Statement with this notice. Proxy soliciting material is first being
sent
or given to shareholders on or about April 2, 2007. Your proxy is being
solicited by our Board of Directors.
Please
complete, sign, date and mail the enclosed proxy card as soon as possible,
or
vote by telephone or the Internet, as explained on the enclosed proxy card.
Linda
H.
Kennedy
Corporate
Secretary
Dated:
April 2, 2007
YOUR
VOTE IS IMPORTANT
EACH
SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED
PROXY CARD BY MAIL, OR TO VOTE BY TELEPHONE OR
THE INTERNET, AS EXPLAINED ON THE
ENCLOSEDPROXY CARD. IF THE MAIL OPTION IS SELECTED, USE THE
ENCLOSED ENVELOPE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED
STATES. RETURNING A SIGNED PROXY WILL NOT PROHIBIT YOU FROM ATTENDING THE
MEETING AND VOTING IN PERSON IF YOU SO DESIRE.
UNISOURCE
ENERGY CORPORATION
One
South
Church Avenue
Tucson,
Arizona 85701
ANNUAL
SHAREHOLDERS’ MEETING
PROXY
STATEMENT
|
ANNUAL
MEETING:
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|
|
May
11, 2007
10:00
a.m., MST
|
FOX
Theatre
17
West Congress
Tucson,
AZ 85701
|
RECORD
DATE:
The
record date is March 26, 2007 (“Record Date”). If you were a shareholder of
record at the close of business on the Record Date, you may vote at the
2007
Annual Shareholders’ Meeting (“Meeting”) of UniSource Energy Corporation
(“UniSource Energy” as well as references to the “Company,” “we,” “our” and
“us”). At the close of business on the Record Date, we had 35,272,970 shares
of
common stock outstanding.
AGENDA:
1. Proposal
One: Elect 12 directors to our Board of Directors (“Board”) for the ensuing
year.
2. Proposal
Two: Ratify the selection of the independent auditor for 2007.
3. Proposal
Three: Consider any other matters which properly come before the Meeting
and any
adjournments.
INDEPENDENT
AUDITOR:
Representatives
of PricewaterhouseCoopers, LLP are expected to be present at the Meeting
with
the opportunity to make a statement and respond to appropriate questions
from
our shareholders.
PROXIES:
A
form of
proxy for execution by shareholders is enclosed. Unless you tell us on
the proxy
card to vote differently, we will vote signed returned proxies “for” the Board’s
nominees. The Board or proxy holders will use their discretion on other
matters
that properly come before the Meeting. If a nominee cannot or will not
serve as
a director, the Board or the persons designated as proxies will vote for
a
person whom they believe will carry on our present policies.
PROXIES
SOLICITED BY:
The
Board.
FIRST
MAILING DATE:
We
anticipate first mailing this Proxy Statement along with the proxy card
on or
about April 2, 2007.
REVOKING
YOUR PROXY:
You
may
revoke your proxy before it is voted at the Meeting. To revoke, follow
the
procedures listed on page 3 under “Voting Procedures/Revoking Your
Proxy.”
COMMENTS:
Your
comments about any aspects of our business are welcome. You may use the
space
provided on the proxy card for this purpose, if desired. Although we may
not
respond on an individual basis, your comments help us to measure your
satisfaction, and we may benefit from your suggestions.
PLEASE
VOTE - YOUR VOTE IS IMPORTANT
Prompt
return of your proxy will help reduce the costs of
re-solicitation.
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Appendix
A
___________________
* We
expect to vote on this item at the Meeting.
You
can vote by telephone, the Internet, mail or in person.
You
can
vote your shares by telephone, the Internet, mail or in person at the Meeting.
Your proxy card contains instructions for voting by telephone or the Internet,
which are the least expensive and fastest methods of voting. To vote by mail,
complete, sign and date your proxy card, or your broker’s voting instruction
card if your shares are held by your broker, and return it in the enclosed
return envelope.
Under
Arizona law, a majority of the shares entitled to vote on any single matter
which may be brought before the Meeting will constitute a quorum. Business
may
be conducted once a quorum is represented at the Meeting. Except as otherwise
specified by law or in our Articles of Incorporation or Bylaws, if a quorum
exists, action on a matter other than the election of directors will be deemed
approved if the votes cast in favor of the matter exceed votes cast against
it.
Directors
are elected by a plurality of votes.
Directors
are elected by a plurality of the votes cast by the shares entitled to vote
if a
quorum is present. A plurality means receiving the largest number of votes,
regardless of whether that is a majority. Withheld votes will be counted
as
being represented at the Meeting for quorum purposes but will not have an
effect
on the vote.
You
may cumulate your votes for directors.
In
the
election of directors, each shareholder has the right to cumulate his votes
by
casting a total number of votes equal to the number of his shares of common
stock multiplied by the number of directors to be elected. He may cast
all of such votes for one nominee or distribute such votes among two or more
nominees. For any other matter that may properly come before the Meeting,
each
share of common stock will be entitled to one vote.
You
can revoke your proxy after sending it in by following these
procedures.
Any
shareholder giving a proxy has a right to revoke that proxy by giving notice
to
UniSource Energy in writing directed to the Corporate Secretary, UniSource
Energy Corporation, One South Church Avenue, Suite 1820, Tucson, Arizona
85701,
or in person at the Meeting at any time before the proxy is exercised. Those
who
fail to return a proxy or fail to attend the Meeting will not count towards
determining any required plurality, majority or quorum.
The
shares represented by an executed proxy will be voted for the election of
directors or withheld in accordance with the specifications in the proxy.
If no specification is made in an executed proxy, the proxy will
be voted
in favor of the nominees as set forth herein.
Proxy
Solicitation
We
will
bear the entire cost of the solicitation of proxies. Solicitations will
be made primarily by mail. In addition, we may make additional
solicitation of brokers, banks, nominees and institutional investors pursuant
to
a special engagement of DF King & Co., Inc., at a cost of approximately
$10,500 plus reasonable out-of-pocket expenses. Solicitations may also
be made by telephone, facsimile or personal interview, if necessary, to obtain
reasonable representation of shareholders at the Meeting. Our employees may
solicit proxies but they will not receive additional compensation for such
services. We will request brokers or other persons holding shares in
their names, or in the names of their nominees, to forward proxy materials
to
the beneficial owners of such shares or request authority for the execution
of
the proxies. We will reimburse brokers and other persons for reasonable
expenses they incur in sending these proxy materials to you if you are a
beneficial holder of our shares.
UNISOURCE
ENERGY SHARE OWNERSHIP
Security
Ownership of Management
The
following table sets forth the number and percentage of shares of UniSource
Energy common stock beneficially owned as of March 1,
2007 and the nature of such ownership by each of our
directors (all of whom are nominees), our Chief Executive Officer (“CEO”) and
our four other most highly compensated executive officers (together with
our
CEO, the “Named Executives”) for the year ended December 31, 2006, and all
directors and officers as a group. Ownership includes direct and
indirect (beneficial) ownership, as defined by the SEC rules.
|
Amount
and Nature of Beneficial Ownership(1)
|
Other(2)
|
|||||||
|
Name
and
Title
of
Beneficial
Owner
|
Directly
Owned Shares
|
Shares
Purchased Under the 401(k) Plan
|
Shares
Subject to Options Exercisable Within 60 Days
|
Total
Beneficial Ownership
|
Percent
of Class
|
Restricted
Stock Units
|
Deferred
Shares Under Deferred Compensation Plan
|
Total
|
|
James
S. Pignatelli
Chairman,
President and
Chief
Executive Officer
|
36,067
|
18,416
|
685,772
|
740,255
|
2.1%
|
117,271
|
30,854
|
888,380
|
|
Lawrence
J. Aldrich
Director
|
3,912
|
0
|
8,358
|
12,270
|
*
|
4,031
|
0
|
16,301
|
|
Barbara
M. Baumann
Director
|
0
|
0
|
0
|
0
|
*
|
2,520
|
0
|
2,520
|
|
Larry
W. Bickle
Director
|
6,652
|
0
|
11,558
|
18,210
|
*
|
3,153
|
0
|
21,363
|
|
Elizabeth
T. Bilby
Director
|
705
|
0
|
11,558
|
12,263
|
*
|
4,462
|
3,607
|
20,332
|
|
Harold
W. Burlingame
Director
|
2,905
|
0
|
11,558
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14,463
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*
|
5,182
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0
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19,645
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|
John
L. Carter
Director
|
13,459
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0
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11,558
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25,017
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*
|
3,795
|
10,708
|
39,520
|
|
Robert
A. Elliott
Director
|
1,813
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0
|
1,196
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3,009
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*
|
2,995
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0
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6,004
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|
Daniel
W. L. Fessler
Director
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2,260
|
0
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2,358
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4,618
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*
|
3,089
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0
|
7,707
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|
Kenneth
Handy
Director
|
1,405
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0
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6,358
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7,763
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*
|
5,314
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1,576
|
14,653
|
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Warren
Y. Jobe
Director
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1,313
|
0
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6,358
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7,671
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*
|
4,833
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0
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12,504
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Joaquin
Ruiz
Director
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0
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0
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0
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0
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*
|
2,520
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0
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2,520
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Raymond
S. Heyman
Senior
Vice President and General Counsel
|
29
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965
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16,667
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17,661
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*
|
0
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82
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17,743
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Dennis
R. Nelson
Senior
Vice President, Utility Services
|
0
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8,850
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0
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8,850
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*
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26,065
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2,348
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37,263
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Kevin
P. Larson
Senior
Vice President, Chief Financial Officer and Treasurer
|
28,435
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2,456
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90,483
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121,374
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*
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0
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1,018
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122,392
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Michael
J. DeConcini
Senior
Vice President and Chief Operating Officer, Transmission
and Distribution
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8,941
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5,161
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131,037
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145,139
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*
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25,752
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678
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171,569
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All
directors and executive officers as a group
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197,716
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42,368
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1,093,742
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1,333,826
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3.8%
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226,912
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55,013
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1,615,751
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*Represents
less than 1% of the outstanding common stock of UniSource Energy.
|
(1)
|
Amounts
include the following:
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·
|
Any
shares held in the name of the spouse, minor children or other
relatives
sharing the home of the director or officer. Except as otherwise
indicated below, the directors and officers have sole voting and
investment power over the shares shown. Voting power includes the
power to direct the voting of the shares held, and investment power
includes the power to direct the disposition of the shares
held.
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·
|
Shares
subject to options exercisable within 60 days, based on information
from
E*Trade, UniSource Energy’s stock option plan
administrator.
|
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·
|
Equivalent
share amounts allocated to the individuals’ 401(k) Plan which, since June
1, 1998, has included a UniSource Energy Stock Fund investment
option.
|
(2)
While amounts in the “Other” column do not represent a right of the holder to
receive stock within 60 days, these amounts are being disclosed because
management believes they reflect similar objectives of 1) encouraging directors
and officers to have a stake in the Company, and 2) aligning interests of
directors and officers with those of shareholders.
Security
Ownership of Certain Beneficial Owners
As
of
March 1, 2007, based on information reported in filings made by the following
persons with the SEC or information otherwise known to us, the following
persons
were known or reasonably believed to be, as more fully described below,
the
beneficial owners of more than 5% of our common stock:
|
Title
of Class
|
Name
and Address
of
Beneficial Owner
|
Amount
and
Nature
of
Beneficial
Ownership
|
Percent
of
Class
|
|
Common
|
First
Trust Portfolios L.P.
1001
Warrenville Road
Lisle,
IL 60532
|
2,647,517
(1)
|
7.5%
|
|
Common
|
Prospector
Partners, L.L.C.
370
Church Street
Guilford,
CT 06437
|
2,465,668
(2)
|
6.8%
|
|
Common
|
T.
Rowe Price Associates, Inc.
100
E. Pratt Street
Baltimore,
MD 21202
|
2,428,517(3)
|
6.8%
|
|
Common
|
Barclays
Global Investors, NA
45
Fremont Street
San
Francisco, CA 94105
|
2,046,489(4)
|
5.8%
|
(1) In
a statement (Schedule 13G) filed with the SEC on January 26, 2007, First
Trust
Portfolios L.P indicated it has shared voting and shared dispositive
power over
2,647,517 shares of our common stock.
(2) In
a statement (Schedule 13G) filed with the SEC on February 13, 2007, Prospector
Partners, L.L.C. (“Prospector Partners”) indicated it has sole voting and sole
dispositive power over 1,474,497 shares, and shared
voting
and shared dispositive power over 991,170 shares of our common stock.
Prospector
Partners shares investment discretion over the shares with White Mountains
Advisors LLC (“White Mountains”), pursuant to a sub-advisory agreement between
Prospector Partners and White Mountains.
(3) In
a statement (Schedule 13G) filed with the SEC on February 14, 2007, T.
Rowe
Price Associates, Inc. (“Price Associates”) indicated it has sole voting power
over 315,400 shares and sole dispositive power over 2,428,517 shares
of our
common stock. These securities are owned by various individual and institutional
investors which Price Associates serves as investment adviser with power
to
direct investments and/or sole power to vote the securities. For purposes
of the
reporting requirements of the Securities Exchange Act of 1934, as amended,
Price
Associates is deemed to be a beneficial owner of such securities; however,
Price
Associates expressly disclaims that it is, in fact, the beneficial owner
of such
securities.
(4) In
a statement (Schedule 13G) filed with the SEC on January 23, 2007, Barclays
Global Investors, NA indicated that it has sole voting power over 1,890,165
shares of our common stock and sole dispositive power over 2,046,489
shares of
our common stock. The filing indicated that the 2,046,489 shares are
owned by
Barclays Global Investors, NA (883,734 shares), Barclays Global Fund
Advisors
(1,140,329 shares), and Barclays Global Investors, LTD (22,426
shares).
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, and regulations of
the SEC
require our executive officers, directors and persons who beneficially
own more
than 10% of our common stock, as well as certain affiliates of those
persons, to
file initial reports of ownership and transaction reports covering any
changes
in ownership with the SEC and the New York Stock Exchange (“NYSE”). SEC
regulations require these persons to furnish us with copies of all reports
they
file pursuant to Section 16(a).
Based
solely upon a review of the copies of the reports received by us and
on written
representations of our directors and officers, we believe that during
fiscal
year 2006, except as described below, all filing requirements applicable
to
executive officers and directors were complied with in a timely manner.
Form 4s
were filed late during 2006 for the following referenced persons on the
indicated dates reporting certain acquisitions and dividend equivalents
credited
under the UniSource Energy Corporation Management and Directors Deferred
Compensation Plan: for each of Mr. DeConcini, Mr. Larson and Ms. Kissinger,
on
March 1, April 13 and October 30; for each of Mr. Nelson and Mr. Hansen,
on
April 13; for Mr. Handy, on January 11, March 1, April 7, April 13, October
24
and October 30; for Mr. Burlingame, on January 11; for Mr. Bickle, on
March 1
and April 7; for Ms. Bilby, on April 13, October 24 and October 30; for
Mr.
Carter, on January 11 and April 13.
General
Information
At
the
Meeting, our shareholders of record will elect 12 directors to serve
on our
Board for the ensuing year and until their successors are elected and
qualified.
The shares represented by executed proxies in the form enclosed, unless
withheld, will be voted for the 12 nominees listed below, or, in the
discretion
of the persons acting as proxies, will be voted cumulatively for one
or more of
such nominees. All of the current nominees are present members of the
Board. All of the nominees have consented to serve if elected. If any
nominee becomes unavailable to serve for any reason, or a vacancy should
occur
before the election, it is the intention of the persons designated as
proxies to
vote, in their discretion, for other nominees.
BOARD
NOMINEES
James
S. Pignatelli
Chairman
of the Board, President and Chief Executive Officer of UniSource Energy since
July 1998; Chairman of the Board of Directors, President and Chief Executive
Officer of Tucson Electric Power Company (“TEP”), the principal subsidiary of
UniSource Energy, since July 1998; Chairman of the Board of Directors, President
and Chief Executive Officer of Millennium Energy Holdings, Inc. (“Millennium”),
a wholly owned subsidiary of UniSource Energy, since 1997; Director of UniSource
Energy Services, Inc. (“UES”), a wholly owned subsidiary of UniSource Energy,
since 2003. Board member since 1998. Age 63.
Lawrence
J. Aldrich (4)(5)
President
of Aldrich Capital Company since January 2007; Chief Operating Officer of
The
Critical Path Institute from January 2006 to December 2006; General Partner
of
Valley Ventures, LP from September 2002 to December 2005; Managing Director
and
Founder of Tucson Ventures, LLC, from February 2000 to September 2002; Director
of TEP and Millennium since 2000; Director of UES since 2004. Board member
since
2000. Age 54.
Barbara
M. Baumann (1)(2)(4)
President
and Owner of Cross Creek Energy Corporation since 2003; Executive Vice President
of Associated Energy Managers, LLC from 2000 to 2003; Director of St. Mary
Land
& Exploration since 2002; Director of TEP since 2005. Board member since
2005. Age 51.
Larry
W. Bickle (4)(5)
Director
of St. Mary Land & Exploration since 1995; Executive in Residence for
Haddington Ventures, LLC, an investment company (“Haddington”), since January
2006; Managing Director of Haddington from 1997 to 2005; Director of Millennium
since 1998; Director of UES since 2004. Board member since 1998. Age 61.
Elizabeth
T. Bilby (4)(5)
Retired
President of Gourmet Products, Inc., an agricultural product marketing company;
retired Director of Marketing of Green Valley Pecans; Director of TEP since
1995; Director of Millennium since 1998; Director of UES since
2004. Board member since 1995. Age 67.
Harold
W. Burlingame (1)(2)(3)
Former
Executive Vice President of AT&T; Chairman of ORC Worldwide since December
2004; Director of TEP since 1998. Board member since 1998. Age 66.
John
L. Carter (1)(2)(3)(4)
Retired
as Executive Vice President and Chief Financial Officer of Burr Brown
Corporation in 1996; Director of TEP since 1996; Director of Millennium since
1998; Director of UES since 2004; UniSource Energy Lead Director since 2005.
Board member since 1996. Age 72.
Robert
A. Elliott (1)(3)(5)
President
and owner of The Elliott Accounting Group since 1983; Director and Corporate
Secretary of Southern Arizona Community Bank since 1998; Television
Analyst/Pre-game Show Co-host for Fox Sports Arizona since 1999; Chairman
of the
Board of Tucson Metropolitan Chamber of Commerce from 2002 to 2003; Treasurer
of
Tucson Urban League from 2002 to 2003; Chairman of the Board of Tucson Urban
League from 2003 to 2004; Chairman of the Board of the Tucson Airport Authority
from January 2006 to January 2007; Director of TEP since May 2003. Board
member
since 2003. Age 51.
Daniel
W. L. Fessler (2)(3)(5)
Professor
Emeritus of the University of California; Partner in the law firm of LeBoeuf,
Lamb, Greene & MacRae LLP from 1997 to 2003; previously served on the
UniSource Energy and TEP boards of directors from 1998 to 2003; Managing
Principal of Clear Energy Solutions, LLC since December 2004; Director of
TEP
since 2005. Board member since 2005. Age 65.
Kenneth
Handy (1)(3)(4)
Retired
Certified Public Accountant; former financial executive with Kaiser Permanente
Medical Care Program, Oakland, California; Director of Millennium from 2001
to
2003; Director of TEP since 2001. Board member since 2001. Age 68.
Warren
Y. Jobe (1)(2)(4)
Certified
Public Accountant (licensed, but not practicing); Senior Vice President of
Southern Company from 1998 to 2001; Director of WellPoint Health Networks,
Inc.
from 2001 to December 2004; Director of WellPoint, Inc. since December 2004;
Director of HomeBanc Corporation since 2004; Trustee of STI Classic Funds
since
2004; Director of TEP since 2001; Director of Millennium from 2001 to 2003.
Board member since 2001. Age 66.
Joaquin
Ruiz (1)(2)(5)
Professor
of Geosciences, University of Arizona since 1983; Associate Editor, “Geology,”
Geological Society of America from 2000 to 2002; Dean, College of Science,
University of Arizona since 2000; Chair, Search Committee for the Dean of
College of Education, University of Arizona from 2002 to 2003; Member of
Board
of Natural Resources of the National Research Council from 2002 to 2005;
Member,
Human Resources Committee, American Geological Institute from 2000 to 2005;
Member, Governing Board, Instituto Nacional de Astronomia, Optica y Electronica,
Mexico since 2003; Board Member, Center to Improve Diversity in Earth Systems
Sciences, Inc. since 2003; Member of Board of Earth Sciences, National Research
Council of the National Academy of Sciences since 2005; Associate Editor,
“American Journal of Science” since 2005; Associate Editor, American Presidents
Advisory Board of Research Corporation since 2005; TEP Board Member since
2005;
UES Board member since 2005. Board Member since 2005. Age 55.
___________________
(1) Member
of the Audit Committee.
(2) Member
of the Compensation Committee.
(3) Member
of the Corporate Governance and Nominating Committee.
(4) Member
of the Finance Committee.
(5) Member
of the Environmental, Safety and Security Committee.
The
Board recommends that you vote “FOR” these nominees.
The
Audit
Committee has selected PricewaterhouseCoopers, LLP (“Pricewaterhouse”) as the
Company’s independent auditor for the fiscal year 2007, and the Board is asking
the shareholders to ratify that selection. Although current law, rules,
and
regulations, as well as the charter of the Audit Committee, require the
Audit
Committee to engage, retain, and supervise the Company’s independent auditor,
the Board considers the selection of the independent auditor to be an
important
matter of shareholder concern and is submitting the selection of Pricewaterhouse
for ratification by shareholders as a matter of good corporate
practice.
Under
Arizona law, if a quorum of shareholders is present at the Meeting, the
ratification of the selection of PricewaterhouseCoopers as independent
auditor
for 2007 will require that the votes cast in favor of its ratification
exceed
the votes cast against its ratification. Abstentions and broker non-votes
are
counted for purposes of determining whether a quorum exists at the Meeting
but
are not counted and have no effect on the results of the vote for independent
auditor.
The
Board recommends that you vote “FOR” the ratification of the selection of the
independent auditor.
COMPENSATION
COMMITTEE
REPORT ON EXECUTIVE
COMPENSATION
The
Compensation Committee is made up of six directors who are independent
based
upon independence criteria established by our Board, which criteria are
in
compliance with applicable NYSE listing standards. The Board
previously adopted a written charter for the Compensation Committee.
The
Compensation Committee Charter is available for inspection on the Company’s
website at www.UNS.com. The Compensation Committee is in compliance with
its charter.
The
Compensation Committee has reviewed and discussed with management the
“Compensation Discussion and Analysis” section required by Item 402(b) of SEC
Regulation S-K and contained in this Proxy Statement. Based on such review
and
discussions, the Compensation Committee recommended to the Board that
the
“Compensation Discussion and Analysis” section be included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2006 and the
2007
Proxy Statement.
Respectfully
submitted,
THE
COMPENSATION
COMMITTEE
Harold
W. Burlingame, Chair
Barbara
M. Baumann
John
L. Carter
Daniel
W. L. Fessler
Warren
Y. Jobe
Joaquin
Ruiz
The
following Compensation Discussion and Analysis contains statements regarding
future individual and Company performance targets and goals. These targets
and
goals are disclosed in the limited context of UniSource Energy’s compensation
programs and should not be understood to be statements of management’s estimates
of results or other guidance. UniSource Energy specifically cautions
investors
not to apply these statements to other contexts.
COMPENSATION
DISCUSSION
AND
ANALYSIS
COMPENSATION
PHILOSOPHY
Objectives
of the Compensation Program
We
base
our executive compensation policies and decisions with respect to our
Named
Executives on the achievement of the following objectives:
| 1. |
Attract,
motivate and retain highly-skilled executives;
|
| 2. |
Link
the delivery of compensation to the achievement of critical
short- and
long-term financial and strategic objectives, creation of
shareholder value and provision of safe, reliable and economically
available electric and gas service;
|
| 3. |
Align
the interests of management with those of our stakeholders
and encourage
management to think and act like owners, taking into account the
interests of the public that the Company serves;
|
| 4. |
Maximize
the financial efficiency of the compensation program to avoid
unnecessary
tax, accounting and cash flow costs; and
|
| 5. |
Encourage
management to achieve outstanding results through appropriate
means by
delivering compensation in a manner consistent with established
and
emerging corporate governance best practices.
|
In
support of the above objectives, UniSource Energy provides a balanced
total
compensation program that consists of four components:
|
·
|
base
salary;
|
|
·
|
short-term
performance-based incentive compensation;
|
|
·
|
long-term
performance-based incentive compensation; and
|
|
·
|
benefits
and perquisites.
|
Each
of
these components is described in more detail below and in the narrative
and
footnotes to the supporting tables. The following illustrates how the
above
objectives are reflected in our compensation program:
Attracting,
Retaining and Motivating Executive Talent
In
support of our objective to attract, retain and motivate highly-skilled
employees, we provide our Named Executives with compensation packages
that are
competitive with those offered by other electric and gas services companies
of
comparable size and complexity.
The
Compensation Committee generally targets base salary and short-term incentive
opportunities, as well as the allocation among those elements of compensation
for the Named Executives, at the median market rates of selected comparable
companies. Long-term incentive opportunities are targeted at the 75th
percentile of such market rates. Target compensation for individual executives
range above or below those benchmarks based on a variety of factors,
including
each executive’s skill set and experience relative to the general market, the
importance of the position to the Company and the difficulty of replacing
the
executive, and the executive’s past and expected future contribution to our
success.
In
addition to providing competitive direct compensation opportunities,
the Company
also provides certain indirect compensation and benefits programs that
are
intended to assist in attracting and retaining high quality executives.
These
programs include pension and retirement programs and are described in
more
detail below and in the narratives that accompany the tables that follow
this
Compensation Discussion and Analysis section.
Linking
Compensation to Performance
Our
compensation program seeks to link the actual compensation earned by
our Named
Executives to their performance and that of the Company. We achieve this
goal
primarily through two elements of our compensation package: (i) short-term
cash
awards and (ii) equity-based compensation. To ensure that the most senior
executives are held most accountable for achieving our financial, operational
and strategic objectives and for creating shareholder value, we believe
that the
percentage of pay at risk should increase with the level of responsibility
within the Company. The target amounts of performance-based pay programs
(i.e.,
cash incentive and equity-based compensation) comprise approximately
55% to 65%
of the total direct compensation opportunity for our Named Executives.
Non-variable compensation, such as salary and perquisites, are de-emphasized
in
the total compensation program to reinforce the linkage between compensation
and
performance.
Aligning
the Interests of our Named Executive Officers with
Stakeholders
Our
compensation program also seeks to align the interests of our Named Executives
with those of our key stakeholders, including customers, employees and
shareholders. We use the short-term incentive compensation component
to focus
the Named Executives on the importance of providing safe and reliable
customer
service, creating a safe work environment for our employees and improving
financial performance by linking a significant portion of their short-term
cash
incentive compensation to achievement of these objectives. We primarily
rely on
the equity compensation element of our compensation package to align
the
interests of the Named Executives with those of shareholders through
a mix of
stock options and stock awards that vest based on the achievement of
performance
goals set by the Compensation Committee. We also encourage senior executives
to
accumulate a substantial stake in the Company.
Maximizing
the Financial Efficiency of the Program
In
structuring the total compensation package for our Named Executives,
the
Compensation Committee evaluates the accounting cost, cash flow implications
and
tax deductibility of compensation to mitigate financial inefficiencies
to the
greatest extent possible. For instance, as part of this process, the
Compensation Committee evaluates whether compensation costs are fixed
or
variable and places a heavier weighting on variable pay elements to calibrate
expense with the achievement of operating performance objectives and
delivery of
value to shareholders. In addition, the Compensation Committee takes
into
account the objective of having the incentive-based compensation components
qualify for tax deductibility under Section 162(m) of the Internal Revenue
Code,
as amended (the “Code”). See discussion under “Impact of Regulatory
Requirements” on page 19. The Compensation Committee also considers the cash
flow and share dilution implications of cash versus equity-based incentive
plans. In managing overall costs under the variable incentive plans,
the
Compensation Committee sets annual budgets with regard to total expense
and the
dilutive impact on shareholders. These budgets are set at levels determined
to
be reasonable and sustainable by the Company in relation to costs incurred
by
peer companies.
Adhering
to Corporate Governance Best Practices
The
Compensation Committee seeks to continually update the executive officer
compensation program to reflect corporate governance best practices.
For
example, the Compensation Committee has established formal stock ownership
guidelines that encourage each Named Executive to accumulate a meaningful
amount
of Company stock. Additionally, equity-based awards contain a “double-trigger”
vesting provision, which provides for accelerated vesting in the event
of a
future change in control only if the executive is adversely impacted
by the
transaction.
As
the
Compensation Committee analyzes and discusses executive compensation
in its
meetings, it considers certain factors for purposes of establishing salaries
and
variable compensation opportunities. Factors that are considered in its
assessment include the following:
|
·
|
total
compensation, taking into account all equity awards granted
since the
executive started with the Company, total wealth accumulation
and future
compensation opportunities, as depicted in tally
sheets;
|
|
·
|
internal
pay equity;
|
|
·
|
stock
ownership and retention policies, including hold-until-retirement
policies;
|
|
·
|
competitive
environment for Named Executives, and what relevant competitors
pay;
and
|
|
·
|
the
need to provide each element of compensation and the amounts
targeted and
delivered.
|
Benchmarking
To
provide a foundation for the executive compensation program, UniSource
Energy
participates in an annual executive compensation survey of the energy
services
industry and periodically reviews the senior executive compensation
levels and
practices among a peer group of companies intended to represent our
competitors
for business and talent. The peer group is reviewed periodically
and includes
the 16 electric and gas utility companies named below that are comparable
to
UniSource Energy in terms of size as measured by annual revenues
and market
capitalization. UniSource Energy’s revenues and market capitalization are
generally consistent with the median of the peer companies.
|
AGL
Resources Inc.
|
DPL
Inc.
|
Northwest
Natural Gas Co.
|
Southern
Union Co.
|
|
Avista
Corp.
|
Duquesne
Light Company
|
Otter
Tail Power Company
|
Southwest
Gas Corp.
|
|
CH
Energy Group Inc.
|
El
Paso Electric Co.
|
PNM
Resources Inc.
|
UIL
Holdings Corp.
|
|
Cleco
Corporation
|
IDACORP
Inc.
|
South
Jersey Industries
|
Westar
Energy Inc.
|
A
comprehensive review of UniSource Energy’s executive compensation levels and
aggregate long-term incentive cost and share usage practices relative
to peer
group was most recently conducted in October 2005.
The
benchmark information is supplemented with information from Frederic
W. Cook and
Co., Inc., the independent consultant retained by the Compensation
Committee,
relating to general market trends, changes in regulatory requirements
related to
executive compensation and emerging best practices in corporate
governance.
ELEMENTS
OF COMPENSATION
Base
Salary
We
believe that competitive base salaries are necessary to attract and
retain
executive talent critical to achieving the Company’s business goals. In general,
our Named Executives’ base salaries are targeted to the median of the benchmark
companies described above. However, individual salaries can and do
vary from the
benchmark median data based on such factors as individual performance,
potential
for future advancement, the importance of the executive’s position to the
Company and the difficulty of replacement, current responsibilities,
length of
time in the current position, and, for recently hired executives,
their prior
compensation packages.
Increases
to Named Executives’ base salaries are considered annually by the Compensation
Committee. In approving base pay increases for executives other than
the CEO,
the Compensation Committee also considers recommendations made by
the
CEO.
In
December 2006, the Compensation Committee approved the following
base salary
increases for the Named Executives for 2007:
|
Name
|
2006
Base Pay
|
Approved
2007 Base Pay
|
|
James
S. Pignatelli
|
$670,000
|
$695,000
|
|
Kevin
P. Larson
|
$290,000
|
$300,000
|
|
Dennis
R. Nelson
|
$290,000
|
$295,000
|
|
Michael
J. DeConcini
|
$290,000
|
$300,000
|
|
Raymond
S. Heyman
|
$290,000
|
$300,000
|
Short-Term
Incentive Compensation (Cash Incentive Awards)
The
Compensation Committee provides for short-term incentive compensation payments
under the Performance Enhancement Plan (“PEP”) in order to tie a significant
portion of the Named Executives’ annual compensation to the Company’s annual
financial and operational performance. Each year the Compensation Committee
establishes targets that are expressed as a percentage of salary, objective
performance criteria that must be met in order for payouts to be made and
other
terms and conditions of awards under the PEP. Each of these components is
discussed below. We typically approve short-term incentive metrics in the
first
quarter.
The
Compensation Committee generally attempts to align target cash incentive
opportunities for each Named Executive with the median rate for equivalent
positions at the benchmark companies. In 2006, target incentive opportunities
under the PEP for the Named Executives ranged from 50% to 80% of base salary,
depending on position and were payable in cash. Depending upon achievement
of
the objective performance goals, a Named Executive’s actual payout may be above
or below the targeted amount. The maximum potential award for any participant
in
the PEP, including the Named Executives, was 150% of the target cash incentive
amount. For years prior to 2007, the Compensation Committee had the discretion
to increase, reduce or eliminate an award regardless of whether the performance
goals applicable to the Named Executive’s incentive award have been
achieved.
In
2006,
the performance criteria approved by the Compensation Committee and applicable
to all Named Executives and other non-union employees were earnings per share
(“EPS”), cost containment (“O&M”) and customer service and core business
goals relating to customer service, regulatory, reliability and safety. The
customer service and core business goals included, among others, customer
service response time average at or below 3 minutes, community service of
at
least 35,000 hours volunteered by employees, Springerville Unit 3 and Luna
generation project implementation, various operational reliability goals,
and
OSHA incident rates at or below national average. The EPS and O&M goals were
weighted 30% each and the operational goals were weighted 40%. The EPS range
was
$1.65 to $2.05 per basic share, the O&M expense range was $228 million to
$238 million, and the customer service and core business goals range was
200 to
600 points (which are calculated in accordance with a formula that takes
into
account the relative weighting of each customer service or core business
goal).
Each of the three major goals had an individual threshold, and payouts under
the
PEP can occur along a range of 15% to 150% of target. These measures and
the
individual weightings were selected by the Compensation Committee to ensure
an
appropriate focus on profitable growth and expense control, as well as
operational and customer service excellence. We believe that the cash incentive
compensation plan represents the interests of various stakeholders, including
customers, employees, and shareholders.
For
2006
performance, the Company achieved its basic EPS goal at a level of 115% of
target, or $1.91 per share, its cost containment goal at 75% of target, or
$235.5 million, and its customer service and core business goals at 100%
of
target, or 400 points. Accordingly, the total weighted achievement level
was 97%
of target for 2006. In February 2007, the Compensation Committee determined
that
the cash incentive funding under the PEP would be 100%, with adjustments
made to
individual Named Executive’s awards to reflect individual performance. See
Footnote 3 of the Summary Compensation Table for the payouts under the 2006
PEP
awards.
In
February 2007, the Compensation Committee approved the short-term PEP program
for 2007. The structure of the 2007 program remains the same as 2006, but
certain changes were made, including replacement of Basic EPS with Diluted
EPS
and greater emphasis on customer service, safety and core business
goals.
Long-Term
Incentive Compensation (Equity Awards)
We
provide long-term incentives in the form of various types of equity awards
to
help achieve several key compensation objectives. We believe that equity
awards,
in tandem with our executive stock ownership guidelines discussed below,
encourage ownership of Company stock by executive officers, which in turn
aligns
the interest of
those
officers with the interest of our shareholders. In addition, the vesting
provisions applicable to the awards encourage a focus on long-term operating
performance, link compensation expense to the achievement of multi-year
financial results and help to retain executive officers.
The
UniSource Energy Corporation 2006 Omnibus Stock and Incentive Plan (the
“2006
Omnibus Plan”) was approved by our shareholders in 2006 and permits the grant of
stock options, stock appreciation rights, restricted stock, restricted
stock
units, performance shares, and performance units. This plan gives the Company
flexibility in providing competitive long-term incentive
compensation.
Annually,
during the first quarter, the Compensation Committee approves the long-term
incentive awards to be granted for the upcoming year. This includes the
type of
equity to be granted, as well as the size of the awards for Named Executives.
In
determining the type and aggregate size of awards to be provided, as well
as the
performance metrics that will apply, the Compensation Committee considers
the
strategic goals of the Company, trends in corporate governance, accounting
impact, tax deductibility, cash flow considerations, the impact on EPS
and the
number of shares that would be required to be allocated for the award and
the
resulting impact to shareholders.
Long-term
incentive opportunities are expressed as a multiple of salary. The long-term
incentive multiple is then applied to the Named Executive’s base salary to
determine the size of the award. The long-term incentive multiple, which
is 100%
for each Named Executive, was established in 2003 to retain the executives
in
light of a then pending merger. The value of the Named Executives’ long-term
incentive multiples, which is generally consistent with the 75th
percentile of benchmark practice, has been maintained for the Named Executives
to strengthen the retention value of the compensation program following
the
termination of the proposed merger transaction in 2004. The impact of the
proposed merger transaction on executive officer compensation is described
in
greater detail in “Elements of Post-Termination Compensation - Change in
Control”.
During
2004 and 2005, the Company did not have shares available for stock awards
under
a shareholder approved incentive plan so it adopted a cash incentive based
long-term incentive plan (“LTIP”) during that period. Under the 2004 LTIP, the
Named Executives received payouts based on the achievement of three performance
goals during 2004, which were EPS, TEP operating cash flow and UniSource
Energy
consolidated operating cash flow. The achievement level for the 2004 performance
period was 120% of target and the Named Executives received payouts beginning
in
2005 in three installments under the 2004 LTIP, the last of which is reflected
in the Summary Compensation Table below. The 2005-2007 LTIP is based on
the
achievement of two performance goals, EPS and UniSource Energy consolidated
operating cash flow, over the three-year period 2005-2007. Actual 2005
and 2006
results, together with projections for 2007, indicate that the three-year
performance results will likely fall short of the threshold payout
level.
For
2006,
management recommended and the Compensation Committee approved long-term
incentive awards consisting of stock options and performance shares. We
believe
that our long-term incentive program is well-balanced in that it focuses
the
Named Executives on increasing shareholder value and achieving longer-term
financial goals. Options are designed, in part, to reward longer term success
in
Company performance that is reflected in increases in share price and
performance shares are designed, in part, to reward achievement of financial
performance objectives whether or not reflected in actual share price in
the
short term. In addition, performance shares support important financial
efficiency objectives by ensuring that cost is variable and incurred by
the
Company only to the extent that financial goals are achieved.
The
2006-2008 performance share awards are tied to the achievement of Basic
EPS
(defined as EPS applied to undiluted outstanding shares) and cash flow
goals
over a three-year performance period. These goals were selected since they
are
considered to be the most significant drivers of long-term value creation
for
our shareholders. The goals are equally weighted and the Named Executives
can
earn 0% to 150% of the target shares based on actual achievement of the
goals.
Under the 2006-2008 long-term award, a cumulative Basic EPS range of $5.80
to
$6.38 and a cumulative cash flow from operations range of $879.6 million
to
$901.1 million must be achieved over the 2006-2008 period in order to meet
their
target. For 2006, Basic EPS was $1.91 per share and cash flow was
$282.5
million
which will contribute towards the cumulative three-year performance period.
These targets and goals are disclosed in the limited context of UniSource
Energy’s compensation programs and should not be understood to be statements of
management’s estimates of results or other guidance. UniSource Energy
specifically cautions investors not to apply these statements to other
contexts.
See the Grants of Plan-Based Awards Table on page 22 for the minimum, target
and
maximum awards for each of the Named Executives.
The
2006-2008 stock option and performance awards were made in May 2006 following
shareholder approval of the 2006 Omnibus Plan. Future long-term incentive
awards
are expected to be granted by the Compensation Committee during the first
quarter following the close of the fiscal year. When the Compensation
Committee
approves grants of plan-based equity awards, the exercise price is set
at the
market closing price of UniSource Energy common stock on the date that
the grant
is made, consistent with recent developments in SEC rules and guidelines.
Awards
are not coordinated with the release of material non-public
information.
In
addition, the Company does not typically provide for off-cycle stock
option
grants and has no specific number of shares under the 2006 Omnibus Plan
set
aside for such grants. However, occasionally in connection with a new
hire of an
executive, such a grant may be made to the extent approved by the Compensation
Committee. The exercise price of any off-cycle option granted to a newly
hired
executive will be the closing market price on the date that the Compensation
Committee approves any such award, consistent with the pricing practices
associated with on-cycle plan-based equity awards.
Stock
option grants and performance share awards are intended to qualify as
performance-based compensation under Section 162(m) of the Code, which
ensures
that awards granted to the CEO and other Named Executives are tax deductible
by
the Company.
In
March
2007, the Compensation Committee approved awards of stock options and
performance shares to the Named Executives under a 2007-2009 stock option
and
performance award. The terms of the stock options and the design of the
performance share plan are similar to the 2006-2008 long-term incentive
program
described above and in the footnotes to the Grants of Plan-Based Awards
Table,
although for the 2007-2009 long-term award, Diluted EPS has replaced
Basic
EPS.
OTHER
COMPENSATION
Perquisites
The
Company provides Named Executives with limited personal benefits and
perquisites. These are not tied to any formal individual or Company performance
criteria but are intended to enhance the attraction and overall retention
value
of the executive compensation program and be responsive to similar benefits
provided to executives and other key personnel in other similar companies
in the
industry. Executive officers, along with managers and certain other supervisory
personnel, are provided with the use of a vehicle and related vehicle
operating
costs of fuel and car insurance are paid for by the Company. In addition,
the
Company from time to time reimburses certain executives for business
or similar
social club initiation fees and periodic special assessments. Finally,
the
Company also reimburses executives for the travel expenses of their spouses
incurred in connection with the annual Board strategic retreat. For
identification of specific perquisites and associated values that are
set forth
in accordance with applicable SEC requirements, refer to the Summary
Compensation Table on page 20.
Retirement
Benefits
Our
Named
Executives are also eligible to participate in certain employee benefits
plans
and arrangements offered by the Company. These include the Tucson Electric
Power
Company 401(k) Plan, the Tucson Electric Power Company Salaried Employees
Retirement Plan (the “Retirement Plan”), the Tucson Electric Power Company
Excess Benefits Plan (the “Excess Benefits Plan”) and the Management and
Directors Deferred Compensation Plan (the “DCP”). A description of the pension
and other retirement plans is provided under “Elements of Post-Employment
Compensation-Retirement and Other Benefits,” below.
ELEMENTS
OF POST-EMPLOYMENT COMPENSATION
Termination
and Change in Control
In
1998,
TEP, a wholly owned subsidiary of the Company, entered into Change in
Control
Agreements (“Change in Control Agreements” or “Agreements”) with all of the then
Named Executives to help keep them focused on their work responsibilities
during
the uncertainty that accompanies a change in control, to provide benefits
for a
period of time following certain terminations of employment after a change
in
control event or transaction and to help us attract and retain key
personnel.
For
the
purpose of the Agreements, a change in control includes the acquisition
of
beneficial ownership of 30% of the common stock of UniSource Energy,
certain
changes in the Board, approval by the shareholders of certain mergers
or
consolidations or certain transfers of the assets of UniSource Energy.
The Agreements provide that each officer shall be employed
by TEP or one of
its subsidiaries or affiliates, in a position comparable to his current
position, with compensation and benefits, which are at least equal to
his then
current compensation and benefits, for an employment period of five years
after
a change in control (subject to earlier termination due to the officer’s
acceptance of a position with another company or termination for
cause).
The
Agreements are in effect until the later of: (i) five years after the
date
either TEP or the officer gives written notice of termination of the
Agreement,
or (ii) if a change in control occurs during the term of the Agreements,
five
years after the change in control. On March 29, 2004, a change in control
occurred for purposes of the Agreements when our shareholders, at a special
meeting, approved the acquisition agreement that provided for an affiliate
of
Saguaro Utility Group L.P. to acquire all of our outstanding shares of
common
stock.
On
March
3, 2005, TEP provided the officers of the Company with written notice
of
termination of the Agreements effective March 3, 2010, the fifth anniversary
of
the date of the written notice of termination. In December 2006, the
CEO of the
Company and one other Named Executive, Dennis R. Nelson, waived all rights
they
otherwise would have had for the remaining effective period under their
Agreements and terminated the Agreements to which they and TEP had been
party.
During
the remaining term of the Agreements currently in effect, in the event
that an
officer’s employment is terminated by TEP (with the exception of termination
due
to the officer’s acceptance of another position or for cause), or if the officer
terminates employment because of a reduction in position, responsibility,
compensation or for certain other stated reasons prior to March 3, 2010,
the
officer is entitled to severance benefits in the form of: (i) a lump
sum payment
equal to the present value of three times the sum of annual salary and
target
bonus (“cash severance”), (ii) the present value of the additional amount
(including any amount under the Excess Benefits Plan) the officer would
have
received under the Retirement Plan if the officer had continued to be
employed
for the five-year period after a change in control occurs, plus (iii)
the
present value of any employee award under the 2006 Omnibus Plan or any
successor
plan, which is outstanding at the time of the officer’s termination (whether
vested or not), prorated based on length of service. Such officer
is also entitled to continue to participate in TEP’s health, death and
disability benefit plans for five years after the termination. The
Agreements further provide that TEP will make a payment to the officer
to offset
any golden parachute excise taxes that may be imposed in accordance with
Code
sections 280G and 4999. Any payments made in respect of such excise taxes
are
not deductible by us. Cash severance would also be paid under the Agreements
if
an officer dies or becomes disabled prior to March 3, 2010. Refer to
“Potential
Payments upon Termination or Change in Control” on page 27 for quantification of
potential amounts payable under the Agreements.
Beginning
in 2006, all long-term incentive awards contain a “double trigger” vesting
provision, which provides for accelerated vesting only if outstanding
awards are
not assumed by an acquirer or the Named Executive is terminated without
cause
within 24 months of a change in control. The double trigger, which is
viewed as
a corporate governance “best practice”, ensures that the Named Executives do not
receive accelerated benefits unless they are adversely affected by the
change in
control.
Other
than the Agreements described above, we have not entered into any other
severance agreements or employment agreements with any Named Executives
except
that in December 2006, TEP entered into an employment agreement for a
term of
six months with Dennis R. Nelson in conjunction with the termination
of his
Change in Control Agreement. At the time the Company and Mr. Nelson entered
into
such agreement, Mr. Nelson announced his intention to retire in June
2007. The
employment agreement with Mr. Nelson, Senior Vice President, Utility
Services,
terminates upon his retirement on June 1, 2007. The employment agreement
provides that TEP will pay Mr. Nelson a fixed salary of not less than
his
current annual salary of $295,000, subject to periodic review and increase
by
the Board of Directors, and for Mr. Nelson’s continued participation in TEP’s
compensation and employee benefit plans. The agreement provides that
TEP will
pay Mr. Nelson a severance payment in the event that TEP terminates Mr.
Nelson’s
employment for reasons other than cause, disability or death, or, if
Mr. Nelson
terminates his employment following (1) a material reduction of his
responsibilities; (2) a material reduction of compensation; (3) relocation
or
reassignment beyond 50 miles from the location that he works currently;
or (4)
certain liquidation, dissolution, consolidation or merger transactions
involving
the company. Severance is to be paid in a lump sum cash payment and the
amount
will equal any annual target bonus owing but unpaid for 2006, $300,000
(less any
amount paid in respect of the 2006 target bonus), and a prorated annual
target
bonus for the year of the termination. In addition, the agreement provides
that
Mr. Nelson will receive service credit for eligibility and benefits purposes
until June 1, 2007 and will be entitled to participate in the Company
retiree
medical plan regardless of the actual date his employment is
terminated.
The
Compensation Committee and the Board are currently in the process of
evaluating
future alternatives associated with change-in-control protection that
may be
offered to Named Executives who have not been party to a Change in Control
Agreement. For additional information on amounts that would be payable
to those
Named Executives who currently have Agreements still in effect, refer
to the
Potential Payments upon Termination or Change in Control Table on page
27.
Retirement
and Other Benefits
Benefits
Generally
The
Company offers retirement and other core benefits to its employees, including
executive officers, in order to provide them with a reasonable level
of
financial support in the event of illness or injury and to enhance productivity
and job satisfaction. The benefits are the same for all employees and
executive
officers and include medical and dental coverage, disability insurance
and life
insurance. In addition, the Tucson Electric Power Company 401(k) Plan
and the
Retirement Plan provide a reasonable level of retirement income reflecting
employees’ careers with the Company. All employees, including executive
officers, participate in these plans; the cost of these benefits (other
than the
Retirement Plan) is partially borne by the employee, including each executive
officer. To the extent that any officer’s retirement benefit exceeds Internal
Revenue Service (“IRS”) limits for amounts that can be paid through a qualified
plan, the Company also offers non-qualified retirement plans, including
the
Excess Benefits Plan and the DCP. These plans provide only the difference
between the calculated benefits and the IRS limits.
Tucson
Electric Power Company Excess Benefits Plan
The
Retirement Plan is subject to Code limitations on the amount of compensation
that can be taken into account and on the amount of benefits that can
be
provided. The Excess Benefits Plan provides retirement benefits to officers
in
addition to the maximum amount of benefits payable under the Retirement
Plan.
The Excess Benefits Plan retirement benefit is calculated generally using
the
same pension formula as the Retirement Plan formula but with some modifications.
Compensation for purposes of the Excess Benefits Plan is determined without
regard to IRS limits on compensation and by including voluntary salary
reductions to the DCP, and any annual incentive payment received under
the PEP.
The retirement benefit payable from the Excess Benefits Plan is reduced
by the
benefit payable to that person from the Retirement Plan.
Benefits
under the Excess Benefits Plan are provided to officers but, with limited
exceptions, are not generally available to other employees. These benefits
are
not tied to any formal individual or Company performance criteria but
are
intended to enhance the attraction and retention value of the executive
compensation program and are consistent with similar competitive compensation
benefits made available to executives in the industry.
UniSource
Energy Corporation Management and Directors Deferred Compensation
Plan
The
DCP
allows participants (which include directors, officers and managers)
the
opportunity to accumulate tax-deferred capital by allowing them to defer
a
portion of their pay on a pre-tax basis. A participant may elect to defer
a
percentage of his salary or any bonus up to 100%.
The
DCP
provides Named Executives and other participants with the opportunity
to defer a
portion of their base salary and bonus into various investment alternatives,
including UniSource Energy stock units. Additionally, we credit the DCP
accounts
of executives participating in our 401(k) Plan with the additional amount
of
UniSource Energy matching contributions that the participant would have
been
entitled to under our 401(k) Plan but for certain Code limits. We believe
this
plan assists with our attraction and retention objectives since it provides
an
industry-competitive and tax-efficient benefit to our executives. The
DCP is not
funded by the Company and participants have an unsecured contractual
commitment
by the Company to pay amounts owed under the DCP. Additional details
on the DCP
are provided in the narrative and footnotes to the Non-Qualified Deferred
Compensation Table on pages 26-27.
STOCK
OWNERSHIP POLICY
To
further support our objective of aligning management and shareholder
interests,
we adopted a formal stock ownership policy, which encourages all officers
to
accumulate a substantial ownership stake in Company shares. The policy
has the
following key features:
|
·
|
Participants
are encouraged to accumulate Company shares with a target value
of a
multiple of their base salary, ranging from one times base
salary for Vice
Presidents to five times for our CEO. The Named Executives
other than the
CEO have a target value equal to three times their base
salary.
|
|
·
|
If
a participant has not yet reached the applicable target ownership
requirement, he is expected to retain a portion of the net
after-tax
shares acquired from any stock option exercise, vesting of
restricted
stock or payments related to the performance share program.
The applicable
retention rates are 100% for the CEO, 50% for the other Named
Executives
and 25% for the other Vice Presidents.
|
|
·
|
Unexercised
stock options, unvested stock options and unearned performance
shares do
not count towards meeting the ownership
guidelines.
|
Annually,
management provides a report to the Compensation Committee regarding
the number
and value of the shares held by each officer subject to the guidelines.
As of
December 31, 2006, all executives who were hired before 2005, including
the CEO,
have achieved their target ownership level; five officers appointed subsequently
are making progress toward meeting the guidelines.
IMPACT
OF REGULATORY REQUIREMENTS
Under
Section 162(m) of the Code, certain items of compensation paid to the
CEO and to
each of the other Named Executives in excess of $1,000,000 annually are
not
deductible for federal income tax purposes unless the compensation is
awarded
under a performance-based plan approved by the shareholders. With respect
to
performance-based compensation, Section 162(m) of the Code requires that
performance metrics be set within 90 days of the commencement of the
performance
period. Accordingly, the Compensation Committee schedules its meetings
so that
the incentive-based compensation programs designed to provide performance-based
compensation, within the meaning of Code section 162(m), are approved
during the
first quarter of the year. To
the
extent that the Company complies with the performance-based compensation
provision of Section 162(m), the awards granted to the CEO and other
Named
Executives are tax deductible by the Company.
The
Compensation Committee believes that it is in the best interest of the
Company
to receive maximum tax deductibility for compensation paid to the Named
Executives under Section 162(m) of the Code, although to maintain flexibility
in
compensating Named Executives in a manner designed to promote varying
corporate
goals, the Compensation Committee may award compensation that is not
fully
deductible under certain circumstances. The Company’s compensation plans reflect
the Compensation Committee’s intent and general practice to pay compensation
that the Company can deduct for purposes of federal income tax. Executive
compensation decisions, however, are multifaceted. The Compensation Committee
reserves the right to pay amounts that are not tax deductible to meet
the design
goals of our executive compensation program.
The
Compensation Committee also considers other financial implications when
developing and implementing the Company’s compensation program, including
accounting costs, cash flow impact and potential share dilution.
SUMMARY
COMPENSATION
TABLE—2006
The
following table sets forth summary compensation information for the year
ended
December 31, 2006 for our CEO, our Chief Financial Officer and three
other most
highly compensated Named Executives:
|
Name
and
Principal
Position
|
Year
($)
|
Salary
($)
|
Stock
Awards
($)(1)
|
Option
Awards
($)(2)
|
Non-Equity
Incentive Plan Compen-sation
($)(3)
|
Change
in Pension Value and Non-Qualified Deferred Compen- sation
Earnings
($)(4)
|
All
Other Compen- sation
($)(5)
|
Total
($)
|
|
James
S. Pignatelli
Chairman,
President and
Chief
Executive Officer
|
2006
|
666,923
|
95,476
|
339,742
|
867,500
|
210,550
|
17,646
|
2,197,837
|
|
Kevin
P. Larson
Senior
Vice President and
Chief
Financial Officer
|
2006
|
288,462
|
41,317
|
32,671
|
259,184
|
74,313
|
15,352
|
711,299
|
|
Dennis
R. Nelson
Senior
Vice President,
Utility
Services
|
2006
|
288,846
|
20,668
|
147,017
|
248,220
|
66,113
|
14,469
|
785,333
|
|
Michael
J. DeConcini
Senior
Vice President and Chief
Operating Officer, Transmission
and Distribution
|
2006
|
288,462
|
41,317
|
32,671
|
265,196
|
38,573
|
14,768
|
680,987
|
|
Raymond
S. Heyman
Senior
Vice President and
General
Counsel
|
2006
|
288,462
|
41,317
|
155,783
|
167,000
|
65,352
|
14,020
|
731,934
|
(1)
The
amounts included in the “Stock Awards” column represent the compensation expense
recognized by the Company for performance share awards granted to
the Named
Executives in 2006, calculated in accordance with Statement of Financial
Accounting Standards share based payment (revised 2004) (“FAS 123R”). The
Company’s FAS 123R assumptions used in these calculations are set forth on
pages
136-140 of our annual report
on
Form
10-K filed with the SEC on February 28, 2007 and available on the
Company’s
website at www.UNS.com.
(2)
The
amounts included in the “Option Awards” column represent the compensation
expense recognized by the Company for stock option awards granted
to the Named
Executives in 2006 and a 2005 stock option award to Mr. Heyman, calculated
in
accordance with FAS 123R. The Company’s FAS 123R assumptions used in these
calculations are set forth on pages 136-140 of our annual report
on Form 10-K
filed with the SEC on February 28, 2007 and available on the Company’s website
at www.UNS.com. Since Mr. Pignatelli and Mr. Nelson are retirement
eligible, their accruals were accelerated and expensed in 2006 rather
than over
a three-year vesting period.
(3)
The
Non-Equity Incentive Plan Compensation listed on this table reflects
the second
of three installments associated with the 2004 long-term incentive
plan awards
plus the payout under the 2006 PEP awards. The 2006 payouts under
the 2004
long-term incentive plan awards were as follows: Mr. Pignatelli,
$250,500; Mr.
Larson, $92,184; Mr. Nelson, $110,220; Mr. DeConcini, $98,196. The
PEP awards
included in this column were paid during the first quarter of 2007
and are as
follows: Mr. Pignatelli, $617,000; Mr. Larson, $167,000; Mr. Nelson,
$138,000;
Mr. DeConcini, $167,000; and Mr. Heyman, $167,000.
(4)
This
column reflects the change in the actuarial present value of the
accumulated
benefit under all defined benefit plans (the Retirement Plan and
Excess Benefits
Plan). Our non-qualified DCP does not provide participants with above-market
earnings. Our non-qualified DCP offers participants a menu of investment
options
and these accounts provide participants with a return based on their
selection
of investment opportunities.
(5)
The
amounts in the “All Other Compensation” column include the following payments
that we made on behalf of the Named Executives:
|
Name
|
Year
|
Car
Benefit
($)
|
Qualified
Plan 401(k) Matching Contributions
($)
|
Non-Qualified
Plan 401(k) Matching Contributions
($)
|
Club
Memberships
($)
|
Spouse
Travel
($)
|
Total
($)
|
|
James
S. Pignatelli
|
2006
|
1,566
|
9,900
|
5,100
|
1,080
|
0
|
17,646
|
|
Kevin
P. Larson
|
2006
|
2,062
|
9,900
|
3,081
|
0
|
309
|
15,352
|
|
Dennis
R. Nelson
|
2006
|
1,471
|
9,900
|
3,098
|
0
|
0
|
14,469
|
|
Michael
J. DeConcini
|
2006
|
398
|
9,900
|
3,081
|
1,080
|
309
|
14,768
|
|
Raymond
S. Heyman
|
2006
|
684
|
9,900
|
3,081
|
0
|
355
|
14,020
|
The
“Car
Benefits,” “Club Memberships,” and “Spouse Travel” columns include the
incremental cost to the Company of such benefits. For the car benefit, the
incremental cost includes the cost of fuel and maintenance of a vehicle provided
to the Named Executive for personal use. The Company also pays for the auto
insurance, but that cost is very small and cannot be quantified because the
insurance is provided through a comprehensive policy that covers many insurable
risks and the underwriters do not provide any cost allocation information.
Spouse travel costs include airfare for the Named Executives’ spouses for the
annual Board retreat.
We
have
no employment agreements with our Named Executives other than a 6-month
employment agreement with Mr. Nelson, which will expire in June 2007 when
Mr.
Nelson will be retiring. See discussion in “Elements of Post-Employment
Compensation-Termination and Change in Control” at pages 17-18.
GRANTS
OF
PLAN-BASED AWARDS—2006
The
following table sets forth information regarding plan-based awards to our
Named
Executives in 2006. The compensation plans under which the grants in the
following table were made are generally described in the “Compensation
Discussion and Analysis” section, beginning on page 10 and include the UniSource
Energy PEP, which provides for non-equity (cash) performance awards, and
the
2006 Omnibus Plan, which provides for equity-based performance awards including
stock options and performance shares.
|
Name
|
Grant
Date
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
(1)
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
(2)
|
All
Other Option Awards: Number of Securities Under-lying
Options
(#)(3)
|
Exercise
or Base Price of Option Awards
($/Sh)
(4)
|
Closing
Market Price on Grant Date
($/Sh)
(4)
|
Grant
Date Fair Value of Awards
($)(5)
|
||||
|
Thresh-old
($)(1)
|
Target
($)
|
Maxi-
mum
($)
|
Thresh-old
(#)
|
Target
(#)
|
Maxi-
mum
(#)
|
||||||
|
James
S.
Pignatelli |
268,000
|
536,000
|
804,000
|
||||||||
|
5/6/2006
|
5,580
|
11,160
|
16,740
|
316,832
|
|||||||
|
5/6/2006
|
46,010
|
30.55
|
30.57
|
339,742
|
|||||||
|
Kevin
P.
Larson |
72,500
|
145,000
|
217,500
|
||||||||
|
5/6/2006
|
2,415
|
4,830
|
7,245
|
137,124
|
|||||||
|
5/6/2006
|
19,910
|
30.55
|
30.57
|
147,017
|
|||||||
|
Dennis
R.
Nelson |
72,500
|
145,000
|
217,500
|
||||||||
|
5/6/2006
|
2,415
|
4,830
|
7,245
|
137,124
|
|||||||
|
5/6/2006
|
19,910
|
30.55
|
30.57
|
147,017
|
|||||||
|
Michael
J.
DeConcini |
72,500
|
145,000
|
217,500
|
||||||||
|
5/6/2006
|
2,415
|
4,830
|
7,245
|
137,124
|
|||||||
|
5/6/2006
|
19,910
|
30.55
|
30.57
|
147,017
|
|||||||
|
Raymond
S. Heyman |
72,500
|
145,000
|
217,500
|
||||||||
|
5/6/2006
|
2,415
|
4,830
|
7,245
|
137,124
|
|||||||
|
5/6/2006
|
19,910
|
30.55
|
30.57
|
147,017
|
|||||||
(1)
The
amounts shown in this column reflect the range of payouts (50%-150%) targeted
for 2006 performance under the Company’s PEP, as described in the “Short-Term
Incentive Compensation” section of the Compensation Discussion and Analysis
above. These amounts are based on the individual’s current salary and position.
The amount of cash incentive actually paid under the PEP for 2006 is reflected
in the Summary Compensation Table above.
(2)
The
amounts shown in this column reflect the range (50%-150%) of grants in the
form
of performance shares targeted for 2006 performance under the 2006 Omnibus
Plan
for long-term incentive compensation, as described in the “Long-Term Incentive
Compensation” section of the Compensation Discussion and Analysis above.
(3)
Stock
options granted under the 2006 Omnibus Plan are described in the Outstanding
Equity Awards at Fiscal Year-End Table below. Options are granted at 100%
of the
fair market value on the date of grant; they vest in one-third increments
over a
three year period and expire after 10 years.
(4)
Exercise price for the May 5, 2006 stock option award was $30.55, which was
the
average of the high and the low price of the Company’s common stock on the NYSE
on the grant date. The definition of the “Fair Market Value” in the UniSource
Energy 2006 Omnibus Plan was amended in September 2006, from the average
of the
high and the low prices to the close on the date of grant to conform to new
SEC
rules and guidelines.
(5)
This
amount has been determined in accordance with FAS 123R based on the fair
value
of our common stock as of the grant date of $30.55 per share. For Mr. Nelson,
50% of the amount reflected in this column for his performance share grant
is
expected to be forfeited because of his retirement in June 2007.
OUTSTANDING
EQUITY
AWARDS AT FISCAL YEAR-END -
2006
The
following table summarizes the number of securities underlying outstanding
plan
awards for each Named Executive as of December 31, 2006:
|
Option
Award (1)
|
Stock
Awards
|
|||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Options (#) Unexer-
cisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)(2)
|
|
James
S. Pignatelli
|
16,800
|
|
14.44
|
6/26/2007
|
|
|
|
|
58,246
|
|
15.56
|
7/9/2008
|
|
|
|
|
114,500
|
|
12.28
|
7/16/2009
|
|
|
|
|
175,000
|
|
15.28
|
8/3/2010
|
|
|
|
|
150,000
|
|
17.91
|
8/2/2011
|
|
|
|
|
150,000
|
|
18.12
|
1/2/2012
|
|
|
|
|
21,226
|
|
17.84
|
5/9/2013
|
|
|
|
|
|
46,010
|
30.55
|
5/5/2016
|
|
|
|
|
|
|
|
|
8,370
|
305,756
|
|
Kevin
P. Larson
|
6,200
|
|
15.56
|
7/9/2008
|
|
|
|
|
4,500
|
|
12.28
|
7/16/2009
|
|
|
|
|
17,000
|
|
15.28
|
8/3/2010
|
|
|
|
|
20,000
|
|
17.91
|
8/2/2011
|
|
|
|
|
35,000
|
|
18.12
|
1/2/2012
|
|
|
|
|
7,783
|
|
17.84
|
5/9/2013
|
|
|
|
|
|
19,910
|
30.55
|
5/5/2016
|
|
|
|
|
|
|
|
|
3,623
|
132,330
|
|
Dennis
R. Nelson
|
|
19,910
|
30.55
|
5/5/2016
|
|
|
|
|
|
|
|
|
3,623
|
132,330
|
|
Michael
J. DeConcini
|
4,000
|
|
15.56
|
7/9/2008
|
|
|
|
|
8,900
|
|
12.28
|
7/16/2009
|
|
|
|
|
40,000
|
|
15.28
|
8/3/2010
|
|
|
|
|
30,000
|
|
17.91
|
8/2/2011
|
|
|
|
|
40,000
|
|
18.12
|
1/2/2012
|
|
|
|
|
8,137
|
|
17.84
|
5/9/2013
|
|
|
|
|
|
19,910
|
30.55
|
5/5/2016
|
|
|
|
|
|
|
|
|
3,623
|
132,330
|
|
Raymond
S. Heyman
|
16,667
|
33,333
|
33.55
|
9/15/2015
|
|
|
|
|
|
19,910
|
30.55
|
5/5/2016
|
|
|
|
|
|
|
|
|
3,623
|
132,330
|
(1)
All
options listed above vest at a rate of 33 1/3% per year over the first three
years of the 10-year option term.
(2)
Represents the market value of unearned performance shares calculated based
on
the prorated achievement of the EPS goal at target and the cash flow goal at
threshold, taking into account the closing Company stock market price on
December 31, 2006.
OPTION
EXERCISES
AND STOCK VESTED
The
following table includes certain information with respect to the options
exercised by our Named Executives during the year ended December 31,
2006:
|
Option
Awards
|
||
|
Name
|
Number
of Shares Acquired on Exercise
(#)(1)
|
Value
Realized on Exercise
($)(2)
|
|
James
S. Pignatelli
|
13,109
|
224,164
|
|
Dennis
R. Nelson
|
163,952
|
2,497,882
|
|
Michael
J. DeConcini
|
3,971
|
68,281
|
(1)
Of
shares exercised, the following amounts were due to options that otherwise
would
have expired during the year: James S. Pignatelli, 13,109 and Michael J.
DeConcini, 3,971. Mr. Pignatelli and Mr. DeConcini retained all of the shares
acquired through the exercise of the options indicated above.
(2)
For
options that are exercised in cashless transactions, we base this value on
the
spread between the exercise price and the actual price at which the shares
of
common stock are sold in the market. For options that are exercised and retained
by the Named Executive, we base this value on the spread between the exercise
price and the actual market price of our common stock at the time of
exercise.
PENSION
BENEFITS
The
following table shows the present value of accumulated benefits payable to
each
of the Named Executives, including the number of years of service credited
to
each such Named Executive, under each of the Retirement Plan and the Excess
Benefits Plan determined using interest rate and mortality rate assumptions
consistent with those used in the Company’s financial statements as set forth on
pages 131-136 of the Company’s Annual Report on Form 10-K. Information regarding
the Retirement Plan and the Excess Benefits Plan can be found under the heading
“Retirement and Other Benefits” on page 18.
|
Name
|
Plan
Name
|
Number
of Years
Credited Service (#)
|
Present
Value of Accumulated Benefit
($)
|
Payments
During Last Fiscal Year
($)
|
|
James
S. Pignatelli
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
12.3
|
414,610
|
0
|
|
Tucson
Electric Power Excess Benefits Plan
|
12.3
|
3,934,623
|
0
|
|
|
Kevin
P. Larson
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
21.7
|
334,857
|
0
|
|
Tucson
Electric Power Excess Benefits Plan
|
21.7
|
302,193
|
0
|
|
|
Dennis
R. Nelson
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
28.4
|
542,386
|
0
|
|
Tucson
Electric Power Excess Benefits Plan
|
28.4
|
481,335
|
0
|
|
|
Michael
J. DeConcini
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
17.9
|
182,738
|
0
|
|
Tucson
Electric Power Excess Benefits Plan
|
17.9
|
242,757
|
0
|
|
|
Raymond
S. Heyman
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
1.3
|
21,453
|
0
|
|
Tucson
Electric Power Excess Benefits Plan
|
1.3
|
57,125
|
0
|
(1)
The
Retirement Plan is intended to meet the requirements of a qualified benefit
plan
for Code purposes, and is funded by the Company and made available to all
eligible employees. The Retirement Plan provides an annual income upon
retirement based on the following formula:
1.6%
x years of service (up to 25
years) x final average pay
Final
average pay is calculated as the average of basic monthly earnings on the
first
of the month following the employee’s birthday during the five consecutive plan
years in which basic monthly earnings were the highest, within the last 15
plan
years before retirement. Years of service are based on years and months of
employment. A Retirement Plan participant is fully vested in his or her
retirement benefit after five years of service. The maximum benefit available
under the Retirement Plan is an annual income of 40% of final average pay
(as
defined above). Plan compensation for purposes of determining final average
pay
is limited by IRS compensation limits under Code Section 401(a)(17). For
2006,
the limit was $220,000 in annual income.
NON-QUALIFIED
DEFERRED
COMPENSATION
UniSource
Energy sponsors the DCP for directors, officers and certain other employees
of
UniSource Energy. Under the DCP, employee participants are allowed to defer
up
to 100% of base salary and cash bonuses and non-employee director participants
are allowed to defer up to 100% of their cash compensation. This deferral
plan
also allows the executive employee participants to obtain the 401(k) Company
match beyond the IRS-prescribed contribution and salary limitations of
the
Company’s 401(k) Plan. The Company makes contributions to the DCP coincident
with the deferrals made by the participants. The deferrals are used to
purchase
trust owned life insurance which is held in a rabbi trust. The deferred
amounts
are valued daily as if invested in one or more of a number of investment
funds,
each of which may appreciate or depreciate in value over time. The choice
of
investment funds is determined by the individual participant.
|
Name
|
Executive
Contributions
in
Last
Fiscal Year
($)(1) |
Registrant
Contributions
in Last
Fiscal
Year
($)
|
Aggregate
Earnings
in Last
Fiscal
Year
($)(2)
|
Aggregate
Withdrawals/ Distributions
($) |
Aggregate
Balance
at Last Fiscal Year End ($) |
|
James
S. Pignatelli
|
120,000
|
4,550
|
234,262
|
0
|
1,575,648
|
|
Kevin
P. Larson
|
0
|
1,961
|
5,635
|
0
|
33,963
|
|
Dennis
R. Nelson
|
0
|
3,250
|
14,759
|
0
|
97,504
|
|
Michael
J. DeConcini
|
0
|
2,456
|
3,554
|
0
|
21,602
|
(1)
Represents contributions to the DCP by the Named Executives during the year.
These amounts are included in the salary column of the Summary Compensation
Table above.
(2)
Represents the total market based earnings (losses) for the year on all deferred
compensation under the plan based on the investment returns associated with
the
investment choices made by the Named Executive.
The
following table shows the deemed investment options available, and the annual
rate of return for the calendar year ended December 31, 2006, under the
DCP.
|
Name
of Fund
|
Rate
of Return
|
Name
of Fund
|
Rate
of Return
|
|
Fidelity
Retirement Money Market
|
4.82%
|
Fidelity
Spartan Us Equity Index
|
15.72%
|
|
Fidelity
Intermediate Bond
|
4.26%
|
Fidelity
Growth Company
|
9.56%
|
|
Janus
Flexible Bond
|
4.12%
|
Fidelity
Low Price Stock
|
17.76%
|
|
Fidelity
Asset Manager
|
9.19%
|
Janus
Worldwide
|
17.90%
|
|
Fidelity
Equity-Income
|
19.81%
|
UniSource
Energy Corporation Stock
|
20.12%
|
|
Fidelity
Magellan
|
7.22%
|
POTENTIAL
PAYMENTS
UPON TERMINATION OR CHANGE IN
CONTROL
The
following table and summary set forth potential payments payable to our current
Named Executives upon termination of employment or a change in control. The
table below reflects amounts payable to our Named Executives assuming their
employment was terminated on December 31, 2006:
|
Name
|
If
Retirement or Voluntary Termination Occurs (1)
|
If
“Change In Control” Termination Occurs ($) (2)
|
If
Death or Disability
Occurs
($) (3)
|
|
James
S. Pignatelli
|
0
|
0
|
275,140
|
|
Kevin
P. Larson
|
0
|
2,770,779
|
119,062
|
|
Dennis
R. Nelson
|
0
|
0
|
119,062
|
|
Michael
J. DeConcini
|
0
|
2,758,085
|
119,062
|
|
Raymond
S. Heyman
|
0
|
0
|
218,394
|
(1) In
the event of retirement or voluntary termination, each of the Named Executives
would be entitled to receive vested and accrued benefits payable from the
Retirement Plan and the Excess Benefits Plan, but no form or amount of any
such
payment would be increased or otherwise enhanced nor vesting accelerated
with
respect to such plans. In addition, no accelerated vesting of options or
performance shares would occur. Retirement Plan and Excess Benefits Plan
information for the Named Executives is set forth in the Pension Benefits
Table
above. Mr. Heyman is not vested in the retirement plans as of December 31,
2006.
(2) If
a change in control occurs, and an officer’s employment is terminated by TEP
(other than due to the officer’s acceptance of another position or for cause),
or if the officer terminates employment because of a reduction in salary,
responsibility, compensation or for certain other stated reasons, the officer
is
entitled to severance benefits. These include: a) severance payout, b) pro-rated
bonus, c) accelerated vesting of stock options, d) performance shares payout,
e)
enhanced retirement benefits, f) medical benefits continuation, and g) tax
gross-up. In December 2006, James S. Pignatelli and Dennis R. Nelson, waived
all
rights under their Change in Control Agreements and terminated the Agreements
to
which they and TEP had been party. Mr. Heyman does not have a Change in Control
Agreement. For additional discussion on change in control agreements, refer
to
“Elements of Post Employment Compensation-Termination and Change in Control” on
page 17 in the “Compensation Discussion and Analysis” section.
(3) Amounts
in this column reflect the value of unvested options that would be accelerated
upon the death or disability of the Named Executives. Amounts are calculated
based on the difference between the market price of common stock at December
31,
2006 and the exercise price for all unvested options. There is no acceleration
of performance shares. In addition, in the event of death, the Named Executive’s
survivor would be entitled to receive a death benefit in the form of a lump
sum
or survivor annuity which is principally funded from the Retirement Plan
and
Excess Benefits Plan. The amount payable to the survivor would be less than
the
amount that would otherwise have been payable to the Named Executive had
the
Named Executive survived and received retirement benefits under the Retirement
Plan and Excess Benefits Plan. There would be no enhancements as to form,
amount
or vesting of such benefits in the event of a Named Executive’s death. The
survivor would also receive life insurance proceeds from the life insurance
coverage provided by the Company under the employee life insurance
benefit.
In
addition, in the case of a termination of Mr. Nelson’s employment for reasons
other than cause, disability or death, or if Mr. Nelson terminates his
employment following (1) a material reduction of his responsibilities, (2)
a
material reduction of compensation, (3) relocation or reassignment beyond
50
miles from the location where he currently works, or (4) certain liquidation,
dissolution, consolidation or merger transactions involving the Company,
Mr.
Nelson will be entitled to certain severance benefits. These benefits are
described in “Elements of Post-Employment Compensation - Termination and Change
in Control” on page 17.
EQUITY
COMPENSATION
PLAN
INFORMATION
Equity
Compensation Plans
Our
only
equity-based compensation plan that has not been approved by shareholders
is the
DCP. Shareholder approval of the DCP has not been required because the
provisions of the DCP permit the Company to payout deferred shares accumulated
under the DCP in the form of cash. Under the DCP, certain eligible officers
and
other employees selected for participation, and non-employee members of the
Board, may elect to defer a percentage of the compensation or fees that would
otherwise become payable to the individual for his services to us. We also
credit DCP accounts of employees participating in our 401(k) Plan with the
additional amount of UniSource Energy matching contributions that the
participant would have been entitled to under the 401(k) Plan if certain
Code
limits did not apply to limit the amount of UniSource Energy matching
contributions made under the 401(k) Plan. Each participant in the DCP may
elect
that his deferrals be credited in the form of deferred shares instead of
cash.
Deferred shares are bookkeeping entries that, when payable, will be paid
in the
form of an
equivalent
number of shares of UniSource Energy common stock, subject to shareholder
approval prior to the issuance of any such shares, or in cash if the Company
so
elects. Deferred shares accrue dividend equivalents, credited in the form
of
additional deferred shares, as dividends are paid by UniSource Energy on
its
issued and outstanding common stock. Each participant elects the time and
manner
of payment (lump sum or installments) of his deferred shares under the DCP.
Any
shares used to satisfy our common stock obligations under the DCP will be
shares
that have been purchased on the open market. To date, payment of deferred
amounts have been only in the form of cash.
Equity
Compensation
The
following table sets forth information as of December 31, 2006, with respect
to
UniSource Energy’s equity compensation plans.
|
Plan
Category
|
Number
of Shares of UniSource
Energy
Common Stock to be
Issued
Upon Exercise of
Outstanding
Options
and Rights
|
Weighted-Average
Exercise
Price
of Outstanding Options
|
Number
of Shares of UniSource
Energy
Common Stock
Remaining
Available for Future
Issuance
Under Equity
Compensation
Plans (Excluding
Shares
Reflected in the First
Column)
|
|
Equity
Compensation Plans Approved by Shareholders (1)
|
1,662,742
(2)
|
$18.59
(3)
|
2,020,778
(4)
|
|
Equity
Compensation Plans Not Approved by Shareholders
|
60,292
(5)
|
--
|
--
(6)
|
|
Total
|
1,723,034
|
--
|
--
|
(1) The
equity compensation plans approved by shareholders are the UniSource Energy
Corporation 1994 Omnibus Stock and Incentive Plan (“1994 Stock and Incentive
Plan”), the UniSource Energy Corporation 1994 Outside Director Stock Option Plan
(the “1994 Directors Plan”) and the 2006 Omnibus Plan. The 1994 Stock and
Incentive Plan and the 1994 Directors Plan were superseded by the 2006 Omnibus
Plan. The 1994 plans remain in effect until all awards have expired or
terminated or shall have been exercised or fully vested, and any stock thereto
shall have been purchased or acquired.
(2) Includes
options outstanding as to 1,388,328 shares, stock units, dividend equivalent
stock units and restricted stock units (payable in an equivalent number of
shares) outstanding as to 274,414 shares.
(3) Calculated
based on the outstanding options and exclusive of outstanding stock
units.
(4) The
1994 Stock and Incentive Plan expired in accordance with its terms, effective
February 3, 2004. On March 30, 2006, the Compensation Committee terminated
the
1994 Directors Plan effective January 1, 2006, contingent upon shareholder
approval of the 2006 Omnibus Plan. The Compensation Committee further resolved
that no awards would be issued under the 1994 Directors Plan after December
31,
2006 (once the 2006 Omnibus Plan was adopted). Awards authorized under the
1994
Directors Plan include options, restricted stock, stock units
and
dividend equivalents. The 2006 Omnibus Plan was approved by shareholders
in May
2006. Both the 1994 Stock and Incentive Plan and the 1994 Directors Plan
remain
nominally in effect with respect to currently outstanding awards. No shares
that
were available to be issued under the 1994 Directors Plan at the time of
its
termination are available for awards under the 2006 Omnibus Plan with respect
to
awards that are forfeited, terminated, canceled or expired.
(5) Deferred
shares credited under the DCP.
(6) There
is no explicit share limit under the DCP. The number of shares to be delivered
with respect to the DCP in the future depends on the levels of fees and
compensation that participants elect to defer under the DCP. Any UniSource
Energy shares used to satisfy our common stock obligations under the DCP
will be
shares that have been purchased on the open market.
DIRECTOR
COMPENSATION
The
following
table summarizes the compensation earned by non-employee directors of the
Company for the year ended December 31, 2006:
|
Name
(1)
|
Fees
Earned or
Paid in Cash ($)(2)
|
Stock
Awards ($)
(3)(4)(5)(6)
|
Total
($)
|
|
Lawrence
J. Aldrich
|
44,000
|
40,000
|
84,000
|
|
Barbara
M. Baumann
|
51,000
|
40,000
|
91,000
|
|
Larry
W. Bickle
|
43,000
|
55,000
|
98,000
|
|
Elizabeth
T. Bilby
|
44,000
|
40,000
|
84,000
|
|
Harold
W. Burlingame
|
52,000
|
55,000
|
107,000
|
|
John
L. Carter
|
58,000
|
60,000
|
118,000
|
|
Robert
A. Elliott
|
53,000
|
50,000
|
103,000
|
|
Daniel
W. L. Fessler
|
47,000
|
40,000
|
87,000
|
|
Kenneth
Handy
|
53,000
|
58,333
|
111,333
|
|
Warren
Y. Jobe
|
51,000
|
56,667
|
107,667
|
|
Joaquin
Ruiz
|
43,000
|
40,000
|
83,000
|
(1) Mr.
James S. Pignatelli, the President and CEO, is not included in this table
as he
is an employee of the Company and thus receives no compensation for his
service
as director. The compensation received by Mr. Pignatelli as an employee
of the
Company is shown in the Summary Compensation Table.
(2) In
2006, each non-employee director received a $20,000 annual cash retainer,
$1,000
for each Board meeting attended and $1,000 for each committee meeting attended.
For each of Lawrence J. Aldrich, Barbara M. Baumann, Elizabeth T. Bilby,
Harold
W. Burlingame, Kenneth Handy and Joaquin Ruiz, 100% of fees earned in 2006
were
deferred into the DCP.
(3) Each
non-employee director received an annual restricted stock unit award valued
at
$40,000 in 2006. Values reflected in the table are consistent with FAS 123R
grant date fair value. The directors were awarded 1,309.5 restricted stock
units
on May 5, 2006, the date of the annual shareholder meeting, at a fair market
value share price of $30.55. The restricted stock unit awards vest after
one
year and are distributed in January following termination of Board Service.
The
award price for the annual director equity award was the average of the high
and
the low of the Company’s common stock on the NYSE on the award date. The
definition of the “Fair Market Value” in the 2006 Omnibus Plan was amended in
September 2006, from the average of the high and the low price to the close
on
the date of grant in order to conform to new SEC rules and
guidelines.
(4) The
non-employee director committee chairpersons and Lead Director received
retainers in the form of restricted stock units in 2006. The chairperson
and
Lead annual retainers were as follows: Audit and Lead Director, $20,000;
all
other committee chairs, $15,000.
(5) As
of December 31, 2006, Mr. Aldrich held 4,020 stock units (including dividend
equivalent stock units); Mrs. Baumann held 2,513 stock units (including dividend
equivalent stock units). Mr. Bickle held 3,147 stock units (including dividend
equivalent stock units); Mrs. Bilby held 4,448 stock units (including dividend
equivalent stock units); Mr. Burlingame held 5,163 stock units (including
dividend equivalent stock units); Mr. Carter held 3,785 stock units (including
dividend equivalent stock units); Mr. Fessler held 3,078 stock units (including
dividend equivalent stock units); Mr. Handy held 5,295 stock units (including
dividend equivalent stock units); Mr. Jobe held 4,817 stock units (including
dividend equivalent stock units); and Mr. Ruiz held 2,513 stock units (including
dividend equivalent stock units).
(6) As
of December 31, 2006, Mr. Aldrich held 8,358 stock options; Mr. Bickle held
11,558 stock options; Mrs. Bilby held 11,558 stock options; Mr. Burlingame
held
11,558 stock options; Mr. Carter held 11,558 stock options; Mr. Elliott held
1,196 stock options; Mr. Fessler held 2,358 stock options; Mr. Handy held
6,358
stock options; and Mr. Jobe held 6,358 stock options.
In
December 2006, the Board approved certain changes to the compensation of
Board
members, effective January 1, 2007. As a result, in 2007, each of the Board
members will receive an annual cash retainer in the amount of $40,000; the
Lead
Director will receive a cash retainer of $20,000; the Audit Chair will receive
a
$10,000 cash retainer, the Compensation and Corporate Governance Committee
Chairs will receive $7,500 cash retainers and all other committee Chairs
will
receive $5,000 cash retainers. Meeting fees of $1,000 per meeting attended
(including committee meetings) will remain the same as in 2006. In addition,
each director will receive an annual equity compensation amount equal to
$45,000
in restricted stock units, which after a one year vesting period will convert
to
deferred stock units payable one year after retirement or termination of
Board
service.
In
2006,
the Board held a total of seven regular and special meetings. Each director
attended at least 75% of the aggregate total of Board meetings and meetings
of
committees of which they are a member. Additionally, the non-management
Directors met at regularly scheduled executive sessions without management
present. Mr. Carter, a non-management director, presided over and was the
Lead
Director at these executive sessions.
The
Company does not have a formal policy with respect to attendance of Board
members at annual meetings of shareholders, but encourages such attendance.
All
of the Board members attended the 2006 Annual Meeting.
Board
Communication
Shareholders
or other interested parties wishing to communicate with the Board, the
non-management directors or any individual director may contact the Lead
Director by mail, addressed to UniSource Energy Lead Director, c/o Corporate
Secretary, UniSource Energy Corporation, One South Church Avenue, Suite
2030,
Tucson, Arizona 85701. The communications will be kept confidential and
forwarded to the Lead Director. Communications received by the Lead Director
will be forwarded to the appropriate director(s) or to an individual
non-management director.
Shareholders
or other interested parties wishing to communicate with the Board regarding
non-financial matters may contact the Chairperson of the Corporate Governance
and Nominating Committee either by mail, addressed to Chairperson, Corporate
Governance and Nominating Committee, UniSource Energy Corporation, P.O.
Box
31771, Tucson, Arizona 85751-1771, or by e-mail at
unscorpgov@earthlink.net. Shareholders or other interested parties
wishing to communicate with the Board regarding financial matters may
contact
the Chairperson of the Audit Committee either by mail, addressed to Chairperson,
Audit Committee, UniSource Energy Corporation, P.O. Box 30201, Tucson,
Arizona
85751-0201, or by e-mail at unscorpaudit@earthlink.net.
Items
that are unrelated to a director’s duties and responsibilities as a Board member
may be excluded from consideration, including, without limitation, solicitations
and advertisements, junk mail, product-related communications, job referral
materials such as resumes, surveys and material that is determined to
be illegal
or otherwise inappropriate.
DIRECTOR
INDEPENDENCE
CRITERIA
The
Board
has adopted Director Independence Standards to comply with NYSE rules
for
determining independence, among other things, in order to determine eligibility
to serve on the Audit Committee, the Compensation Committee and the Corporate
Governance and Nominating Committee. The Director Independence Standards,
amended as of February 9, 2007, are available on our website at
www.UNS.com and are available in print to any shareholder who requests
it.
No
director may be deemed independent unless the Board affirmatively determines,
after due deliberation, that the director has no material relationship
with the
Company either directly or as a partner, shareholder or officer of an
organization that has a relationship with the Company. In each case,
the Board
broadly considers all the relevant facts and circumstances from the standpoint
of the director as well as from that of persons or organizations with
which the
director has an affiliation and applies these standards.
Annually,
the Board determines whether each director meets the criteria of independence.
Based upon the foregoing criteria, the Board has deemed each director
to be
independent, with the exceptions of Mr. Bickle, Ms. Bilby and Mr. Pignatelli.
In
December 2006, the Board reviewed the independence criteria in connection
with a
reassessment of the independence status of Mr. Aldrich. In considering
whether
Mr. Aldrich is independent, the Board considered his prior relationship
with
Valley Ventures III, LP, a venture capital fund in which Millennium has
invested. Mr. Aldrich had been a general partner of the company that
manages
Valley Ventures III, LP through December 2005, at which time Mr. Aldrich
terminated his role and interest as a general partner, but maintained
a
non-voting financial interest in Valley Ventures III, LP. As a result
of the
termination of his role as a general partner, the Board concluded that
the
relationship no longer precluded the determination that he is
independent.
As a result of those deliberations and the application of the independence
criteria, the Board determined that Mr. Aldrich is now independent. For
each
other director who is deemed independent, there were no other transactions,
relationships or arrangements that were considered by the Board in determining
that the director is independent. See “Transactions with Management and Others”
below.
Board
Committees
The
Corporate Governance and Nominating
Committee
The
Corporate Governance and Nominating Committee reviews and recommends
corporate
governance principles, interviews potential directors and nominates and
recommends to the shareholders and directors, as the case may be, qualified
persons to serve as directors. The Corporate Governance and Nominating
Committee
also reviews and recommends membership for all the committees to the
Board and
reviews applicable rules and regulations relating to the duties and
responsibilities of the Board. Our Corporate Governance and Nominating
Committee
held four meetings in 2006 and was in compliance with its written
charter.
The
Corporate Governance and Nominating Committee identifies and considers
candidates supplied by shareholders and Board members. The Corporate
Secretary,
as directed by the Corporate Governance and Nominating Committee, prepares
portfolios for candidates that include confirmation of the candidate’s interest,
independence, biographical information, review of business background
and
experience and reference checks. The Corporate Governance and Nominating
Committee then evaluates candidates using, in large part, the criteria
set forth
in the next paragraph and any other criteria the Corporate Governance
and
Nominating Committee deems appropriate, and conducts a personal interview
with
each candidate. Upon completion of this process, formal invitations are
extended
to accept election to the Board.
The
Corporate Governance and Nominating Committee has not adopted specific
minimum
qualifications with respect to a committee-recommended Board nominee,
but
desirable qualifications are set forth in the Corporate Governance Guidelines
and include prior community, professional or business experience that
demonstrates leadership capabilities, the ability to review and analyze
complex
business issues, the ability to effectively represent the interests of
our
shareholders while keeping in perspective the interests of our customers,
the
ability to devote the time and interest required to attend and fully
prepare for
all regular and special Board meetings, the ability to communicate and
work
effectively with the other Board members and personnel and the ability
to fully
adhere to any applicable laws, rules or regulations relating to the performance
of a director’s duties and responsibilities.
While
no
formal policy exists, the Corporate Governance and Nominating Committee
does
consider recommendations for Board nominees received from our shareholders.
The
deadline for consideration of recommendations for next year’s annual meeting of
the shareholders is December 4, 2007. Recommendations must be in writing
and
include detailed biographical material indicating the candidate’s qualifications
and a written statement from the candidate of his willingness and availability
to serve. Recommendations should be directed to the Corporate Secretary,
UniSource Energy Corporation, One South Church Avenue, Suite 1820, Tucson,
Arizona 85701. The Board will consider nominees on a case-by-case basis
and does
not believe a formal policy is warranted at this time due to a manageable
volume
of nominations.
Each
member of our Audit Committee, Compensation Committee and Corporate Governance
and Nominating Committee is independent based upon independence criteria
established by our Board, which criteria are in compliance with applicable
NYSE
listing standards.
Compensation
Committee
The
Compensation Committee operates under the provisions of a committee charter,
which can be found at www.UNS.com. The Compensation Committee Charter can
be revised by action taken by the Compensation Committee. Under the terms
of its
charter, the Compensation Committee is required to consist of not fewer
than
three members of the Board who meet the independence requirements of the
NYSE.
In 2006, the Compensation Committee had six members who met those independence
requirements.
In
2006,
the Compensation Committee held six formal meetings, most of which were
followed
by an executive session in which management did not participate. The
Compensation Committee Chair sets the agenda for each meeting, and in advance
of
each meeting reviews the agenda with management. The annual schedule of
meetings
is approved by the Board during the fourth quarter for the following year.
In
connection with Compensation Committee meetings, each Compensation Committee
member receives a briefing book prior to each meeting that details each
topic to
be considered. The Compensation Committee Chair reports to the Board on
Compensation Committee decisions and key actions following each meeting.
The
Compensation Committee members also complete a written assessment of the
Compensation Committee’s performance, with the last such assessment completed in
September 2006.
The
Board
of Directors has delegated authority to the Compensation Committee to set
CEO
compensation levels, and to review and approve compensation for all of
the
Company’s executives, including any equity compensation awarded under the 2006
Omnibus Plan. Under the terms of its charter, the Compensation Committee
may
delegate certain actions to management of the Company in connection with
executive compensation. Day-to-day administration of director and executive
compensation matters has been delegated to certain Company management personnel,
with oversight provided by the Compensation Committee.
Compensation
Consultant
The
Compensation Committee has retained the services of Frederic W. Cook and
Co.,
Inc. (“Cook”), a nationally recognized compensation consulting firm that serves
as an independent advisor in matters related to executive compensation
and
benefits and director compensation. Representatives from Cook are available
to
Compensation Committee members on an ongoing basis and attend Compensation
Committee meetings, as requested, either in person or telephonically. The
Compensation Committee has sole discretion over the terms and conditions
of the
retention of consultants it retains. Cook maintains no other economic relations
with the Company and does not provide any services to the Company other
than
those provided directly to the Compensation Committee.
The
Compensation Committee Chair customarily provides assignments to Cook.
In its
role as executive compensation consultant to the Compensation Committee,
Cook
assists with peer group selection, the benchmarking of individual compensation
levels, and the design of incentive plans and other compensation arrangements
in
which Company management participates. In furnishing this assistance, Cook
provides competitive data and technical considerations, and recommends
changes
to the pay program and pay levels for consideration by the Compensation
Committee.
Role
of Executives in Establishing Compensation
Certain
executives, including the CEO, the Chief Financial Officer (“CFO”) and the
General Counsel to the Company, routinely attend regular sessions of
Compensation Committee meetings. The CEO makes recommendations to the
Compensation Committee with respect to changes in compensation for senior
executive positions (other than the CEO) and payouts under the annual incentive
plan. The CEO also makes suggestions to the Compensation Committee regarding
the
design of incentive plans and other programs in which senior management
participates.
The
CFO
provides information regarding short-term and long-term compensation targets,
as
well as updates on the progress of short- and long-term objectives. Additional
Company personnel with expertise in and responsibility for compensation
and
benefits provide information regarding executive and director compensation,
including cash compensation, equity awards, pensions, deferred compensation
and
other related information.
The
Audit Committee
The
Audit
Committee reviews current and projected financial results of operations,
selects
a firm of independent registered public accountants to audit our financial
statements annually, reviews and discusses the scope of such audit, receives
and
reviews the audit reports and recommendations, transmits its recommendations
to
the Board, reviews our accounting and internal control procedures with
our
internal audit department from time to time, makes recommendations to the
Board
for any changes deemed necessary in such procedures and performs such other
functions as delegated by the Board. Our Audit Committee held seven meetings
in
2006 and was in compliance with its written charter, as amended on December
2,
2005 and attached to this Proxy Statement as Appendix A.
Upon
the
recommendation of the Audit Committee, our Board adopted a Code of Ethics
for
our directors, officers and employees.
The
Finance Committee
The
Finance Committee reviews and recommends to the Board long-range financial
policies, objectives and actions required to achieve those objectives.
Specifically, the Finance Committee reviews capital and operating
budgets,
current and projected financial results of operations, short-term and long-range
financing plans, dividend policy, risk management activities and major
commercial banking, investment banking, financial consulting and other
financial
relations of UniSource Energy. Our Finance Committee held four meetings
in 2006
and was in compliance with its written charter.
The
Environmental, Safety and Security (“ESS”) Committee
The
ESS
Committee reviews the Company’s structure and operations
to assess whether significant operating risks in the areas of environmental,
safety and security have been identified and appropriate mitigation plans
have
been implemented. The ESS Committee also reviews the processes in place
which
are designed to ensure compliance with all environmental, safety and security
related legal and regulatory requirements, as well as reviews with management
the impact of proposed or enacted laws or regulations related to environmental,
safety and security issues. Our ESS Committee held three meetings in 2006
and
was in compliance with its written charter.
Compensation
Committee Interlocks and Insider Participation
All
members of the Compensation Committee during fiscal year 2006 were independent
directors, and no member was an employee or former employee. No Compensation
Committee member had any relationship requiring disclosure under “Transactions
with Management and Others” on page 36. During fiscal year 2006, none of our
executive officers served on the compensation committee (or its equivalent)
or
board of directors of another entity whose executive officer(s) served
on our
Compensation Committee.
Copies
of Charters, Guidelines and Code of Ethics
A
copy of
the Audit, Compensation, Finance and Corporate Governance and Nominating
Committee Charters, as well as our Corporate Governance Guidelines and
Code of
Ethics, are available on our Web site at www.UNS.com or may be obtained
by shareholders, without charge, upon written request to Library and Resource
Center, UniSource Energy Corporation, 3950 East Irvington Road, Mail Stop
RC114,
Tucson, Arizona 85714.
TRANSACTIONS
WITH
MANAGEMENT AND
OTHERS
Related
Person Transactions Policy
In
February 2007, the Board adopted a written policy on the review of related
person transactions (which is available on our website at www.UNS.com)
that specifies that certain transactions involving directors, nominees,
executive officers, significant shareholders and certain other related
persons
in which the Company is or will be a participant and are of the type required
to
be reported as a related person transaction under Item 404 of Regulation
S-K
shall be reviewed by the Audit Committee for the purpose of determining
whether
such transactions are in the best interest of the Company. The policy also
establishes a requirement for directors, nominees and executive officers
to
report transactions involving a related party that exceeds $120,000 in
value. We
are not aware of any transactions entered into since adoption of the policy
that
did not follow the procedures outlined in the policy.
Melissa
O’Brien
For
2007,
the Company has engaged Melissa O’Brien, who is the daughter of the CEO, to
provide regulatory consulting services to the Company and its subsidiaries
primarily related to energy regulatory matters. During 2006, Ms. O’Brien was
affiliated with the Wrona Law Firm of Park City, Utah (“Wrona”). In 2006, Wrona
billed the Company for services in the amount of approximately $100,000,
all of
which was for work performed by Ms. O’Brien. Prior to her employment with the
Wrona Law Firm, Ms. O’Brien was employed by the Troutman Sander Law Firm as a
regulatory attorney; in this capacity she represented utility companies
in rate
proceedings. In February 2007, Ms. O’Brien terminated her affiliation with Wrona
and entered into a consulting agreement with the Company to continue providing
regulatory services. It is anticipated that billings for Ms. O’Brien’s work in
2007 will exceed $100,000.
Haddington
Energy Partners II LP
Millennium
was authorized by its Board of Directors in 2000 to invest $15 million,
in
aggregate, over a three- to five-year period in Haddington Energy Partners
II LP
(“HEP II”). Mr. Bickle, a member of our Board, is a member and owns 30% of
Haddington Ventures LLC, a private equity fund and the general partner
of HEP
II. Mr. Bickle also is a voting member of the investment committee that
makes
decisions with respect to Haddington Ventures investments. As of December
31,
2006, Millennium had invested $15 million under this commitment since its
inception in exchange for approximately 31% ownership of the limited partner
interest, and has received distributions of $15 million. Millennium continues
to
have an additional interest in two investments that have not been monetized.
Millennium has no remaining funding commitment to Haddington. Millennium’s total
investment balance in Haddington at December 31, 2006 was $5 million. Mr.
Bickle
has advised the Board that the approximate dollar value of his interest
in
Millennium’s investment is $313,000, contingent upon monetization of
Millennium’s remaining interest in HEP II.
AUDIT
COMMITTEE
REPORT
The
Committee
The
Audit
Committee is made up of seven financially literate directors who are independent
based upon independence criteria established by our Board, which criteria
are in
compliance with applicable NYSE listing standards. Our Board has
determined that while each member of the Audit Committee has accounting
and/or
related financial management expertise, Mr. Handy is the Audit Committee
financial expert for the purposes of Item 407(d)(5) of SEC Regulation S-K.
In
addition to Mr. Handy, there are four other financial experts on the Audit
Committee. Each financial expert is independent as that term is used in
Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934,
as
amended. The Board previously adopted a written charter for the Audit Committee.
The Audit Committee Charter is included as Appendix A to this Proxy Statement.
The Audit Committee has complied with its charter, including the requirement
to
meet periodically with our independent auditor, internal audit department
and
management to discuss the auditor’s findings and other financial and accounting
matters.
In
connection with our December 31, 2006 financial statements, the Audit Committee
has: (i) reviewed and discussed the audited financial statements with
management, (ii) discussed with PricewaterhouseCoopers, LLP, our independent
auditor, the matters required to be discussed by Statement on Auditing
Standards
No. 61, as amended (AIPCA, Professional Standards, Vol. 1 AU Sec. 380),
as adopted by the Public Company Accounting Oversight Board in Rule 3200T,
(iii)
received from PricewaterhouseCoopers, LLP the written disclosures and the
letter
required by Independence Standards Board Standard No. 1 (Independence Standard
Board Standard No. 1, Independence Discussions with Audit Committees), as
adopted by the Company Accounting Oversight Board in Rule 3600T, and (iv)
discussed with PricewaterhouseCoopers, LLP its independence.
Based
on
the review and discussions referred to in items (i) through (iv) of the
above
paragraph, the Audit Committee recommended to the Board that the audited
financial statements for 2006 be included in the Annual Report on Form
10-K for
filing with the SEC.
Pre-Approved
Policies and Procedures
Rules
adopted by the SEC in order to implement requirements of the Sarbanes-Oxley
Act
of 2002 require public company audit committees to pre-approve audit and
non-audit services. Our Audit Committee has adopted a policy pursuant to
which
audit, audit-related, tax and other services are pre-approved by category
of
service. Recognizing that situations may arise where it is in our best
interest
for the auditor to perform services in addition to the annual audit of
our
financial statements, the policy sets forth guidelines and procedures with
respect to approval of the four categories of service designed to achieve
the
continued independence of the auditor when it is retained to perform such
services for us. The policy requires the Audit Committee to be informed
of each
service and does not include any delegation of the Audit Committee’s
responsibilities to management. The Audit Committee may delegate to the
Chairman
of the Audit Committee the authority to grant pre-approvals of audit and
non-audit services requiring Audit Committee approval where the Audit Committee
Chairman believes it is desirable to pre-approve such services prior to
the next
regularly scheduled Audit Committee meeting. The decisions of the Audit
Committee Chairman to pre-approve any such services from one regularly
scheduled
Audit Committee meeting to the next shall be reported to the Audit
Committee.
Fees
The
following table details fees paid to PricewaterhouseCoopers, LLP for
professional services during 2005 and 2006. The Audit Committee has considered
whether the provision of services to us by PricewaterhouseCoopers, LLP,
beyond
those rendered in connection with their audit and review of our financial
statements, is compatible with maintaining their independence as
auditor.
|
2005
|
2006
|
||||||
|
Audit
Fees
|
$
|
1,939,820
|
$
|
1,677,681
|
|||
|
Audit-Related
Fees
|
$
|
59,875
|
$
|
45,000
|
|||
|
Tax
Fees
|
$
|
40,465
|
$
|
4,470
|
|||
|
All
Other Fees
|
$
|
3,228
|
$
|
3,243
|
|||
|
Total
|
$
|
1,840,813
|
$
|
1,601,213
|
|||
Audit
fees include fees for the audit of our consolidated financial statements
included in our Annual Report on Form 10-K and review of financial statements
included in our Quarterly Reports on Form 10-Q. Audit fees also include
services
provided by PricewaterhouseCoopers, LLP in connection with the audit
of the
effectiveness of internal control over financial reporting and on management’s
assessment of the effectiveness of internal control over financial reporting,
comfort letters, consents and other services related to SEC matters and
financing transactions, statutory and regulatory audits, and accounting
consultations to the extent necessary for PricewaterhouseCoopers, LLP
to fulfill
their responsibilities under generally accepted auditing standards.
Audit-related
fees during 2006 principally include fees for employee benefit plan audits.
During 2005, audit-related fees related primarily to fees for employee
benefit
plan audits and services related to extending the depreciable life of
utility
plants.
Tax
fees
include tax compliance, tax advice and tax planning.
All
other
fees consist of fees for all other services other than those reported
above and,
in 2005 and 2006, principally include subscription fees for research
tools.
All
services performed by PricewaterhouseCoopers, LLP are approved in advance
by the
Audit Committee in accordance with the Audit Committee’s pre-approval policy for
services provided by the independent auditor.
Respectfully
submitted,
THE
AUDIT
COMMITTEE
Kenneth
Handy, Chair
Warren
Y. Jobe
Barbara
M. Baumann
Harold
W. Burlingame
John
L. Carter
Robert
A. Elliott
Joaquin
Ruiz
SUBMISSION
OF
SHAREHOLDER
PROPOSALS
General
Rule
14a-4 of the SEC’s proxy rules allows us to use discretionary voting authority
to vote on a matter coming before an annual meeting of ourshareholders,
which
was not included in our Proxy Statement (if we do not have notice of
the matter
at least 45 days before the date on which we first mailed our proxy materials
for the prior year’s annual meeting of the shareholders). In addition,
we may also use discretionary voting authority if we receive timely notice
of
such matter (as described in the preceding sentence) and if, in the Proxy
Statement, we describe the nature of such matter and how we intend to
exercise
our discretion to vote on it. Accordingly, for our 2008 annual meeting
of shareholders, any such notice must be submitted to the Corporate Secretary
of
UniSource Energy, One South Church Avenue, Suite 1820, Tucson, Arizona,
85701,
on or before February 17, 2008.
We
must receive your shareholder proposals by December 4,
2007.
This
requirement is separate and apart from the SEC’s requirements that a shareholder
must meet in order to have a shareholder proposal included in our Proxy
Statement. Shareholder proposals intended to be presented at our 2008
annual
meeting of the shareholders must be received by us no later than December
4, 2007 in order to be eligible for inclusion in our Proxy Statement
and the
form of proxy relating to that meeting. Direct any proposals, as well
as related questions, to the undersigned.
DELIVERY
OF
PROXY MATERIALS TO
HOUSEHOLDS
Only
one
copy of our 2006 Annual Report to Shareholders and Proxy Statement for
the
Meeting will be delivered to an address where two or more shareholders
reside
unless we have received contrary instructions from a shareholder at the
address.
A separate proxy card and a separate notice of the Meeting will be delivered
to
each shareholder at the shared address.
If
you
are a shareholder who lives at a shared address and you would like additional
copies of the 2006 Annual Report, this Proxy Statement, or any future
annual
reports or proxy statements, please contact the Library and Resource
Center,
UniSource Energy Corporation, 3950 East Irvington Road, Mail Stop RC114,
Tucson,
Arizona 85714, telephone number (520) 745-3349, and we will promptly
mail you
copies.
If
you
share the same address with another UniSource Energy shareholder and
you
currently receive multiple copies of annual reports or proxy statements,
you may
request delivery of a single copy of future annual reports or proxy statements
at any time by calling (520) 745-3349, or by writing to the Library and
Resource
Center, UniSource Energy Corporation, 3950 East Irvington Road, Mail
Stop RC114,
Tucson, Arizona 85714.
OTHER
BUSINESS
The
Board
knows of no other matters for consideration at the Meeting. If any other
business should properly arise, the persons appointed in the enclosed proxy
have
discretionary authority to vote in accordance with their best
judgment.
Copies
of our 2006 Annual Report on Form 10-K may be obtained by shareholders,
without
charge, upon written request to the Library and Resource Center, UniSource
Energy Corporation, 3950 East Irvington Road, Mail Stop RC114,
Tucson, Arizona 85714. You may also obtain our
SEC filings through the Internet at
www.sec.gov or
www.UNS.com.
By
order of the Board of
Directors,
Linda
H. Kennedy
Corporate
Secretary
PLEASE
VOTE - YOUR VOTE IS IMPORTANT
APPENDIX
A
Amended
December
2, 2005
UNISOURCE
ENERGY CORPORATION
AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
|
1.
|
COMPOSITION
|
The
Audit
Committee of the Board of Directors (the “Committee”) consists of no fewer than
three independent Directors appointed annually by the
Board. Directors eligible to serve on the Committee shall be determined in
accordance with the NYSE Listed Company Manual, Corporate Governance Standards
for Audit Committees and the Sarbanes-Oxley Act of 2002. The Board shall
designate one of the Committee members as Chairman of the Committee. Each
member
of the Committee shall be financially literate, and at least one member shall
have accounting or financial management expertise.
|
2.
|
APPOINTMENT
AND REMOVAL OF COMMITTEE
MEMBERS
|
|
All
members of the Committee shall be appointed and/or removed by the
Board of
Directors.
|
|
3.
|
MEETINGS
|
|
The
Committee will hold at least four regular meetings each year, and
such
additional meetings as it may deem necessary. Additional meetings
will be
called by the Chairman of the Committee. The agendas for the regular
meetings shall include all items necessary to complete the duties
of the
Committee as set forth herein. In addition to the Committee members
and
the Secretary, the Chairman of the Board, Chief Executive Officer
and
other members of management, internal audit and representatives
of the
independent auditor may attend as
appropriate.
|
|
4.
|
RULES
OF PROCEDURE
|
The
Committee will determine its own rules of procedure with respect to how its
meetings are to be called, as well as the place and time.
|
5.
|
COMPENSATION
|
Each
member will be paid such fees as may be established from time to time
by the Board for service on the Committee, and will be
reimbursed for travel expenses incurred by attendance at meetings. Directors’
fees are the only compensation an Audit Committee member may receive from
the
Company.
|
6.
|
COMMITTEE
SECRETARY
|
The
Secretary of the Committee will be the Corporate Secretary of the Company
(or
such other representative of management as the Committee may designate) and
not
be a member of the Committee. The Secretary will attend all meetings and
maintain minutes, advise members of all meetings called, arrange with the
Chairman or other convening authority for preparation and distribution of
the
agenda for each meeting, and carry out other functions as may be assigned
from
time to time by the Committee. At such meetings where attendance by a Company
representative is not appropriate, the Chairman shall act as secretary of
the
meeting or appoint another member of the Committee to act as secretary of
such
meetings.
|
7.
|
QUORUM
|
A
majority of the total membership of the Committee will constitute a
quorum.
|
8.
|
COMMITTEE
PURPOSE
|
The
Audit
Committee is appointed by the Board to assist with Board oversight
of
| (1) |
the
integrity of the Company’s financial
statements
|
| (2) |
the
Company’s compliance with legal and regulatory requirements, except those
handled by the Environmental, Safety & Security
Committee
|
| (3) |
the
independent auditor’s qualifications and independence,
and,
|
| (4) |
the
performance of the Company’s internal audit function and independent
auditor.
|
|
The
Audit Committee must also prepare the report that SEC rules require
be
included in the Company’s annual proxy
statement.
|
|
9.
|
SPECIFIC
DUTIES OF THE
COMMITTEE
|
|
Independent
Audit:
|
|
(1)
|
Sole
authority to appoint, retain and terminate the Company’s independent
auditor.
|
|
(2)
|
Sole
authority to approve all audit engagement fees and terms, as
well as all
significant, non-audit engagements (in accordance with SEC) with
the
independent auditor.
|
|
(3)
|
Annually
obtain and review a report from the independent auditor delineating
all
relationships between the auditor and the Company (to assess
the auditor’s
independence).
|
|
(4)
|
Review
the experience and qualifications of the lead partner of the
independent
auditor.
|
|
(5)
|
Ensure
the rotation of the audit partner(s) as required by
law.
|
|
(6)
|
At
least annually, obtain and review a report from the independent
auditor
describing the firm’s internal quality control process, including any
material issues raised by the most recent internal quality control
review
or peer review of the firm, or by any inquiry or investigation
by
governmental, regulatory or professional authorities within the
past five
years, respecting one or more independent audits carried out
by the firm,
and any steps taken to deal with any such issues.
|
|
(7)
|
Review
the results of each independent audit, including any qualifications
in the
independent auditor’s opinion, and deficiencies identified by the
independent auditor in connection with the audit.
|
|
(8)
|
Review
the annual audited financial statements with management and the
independent auditor, including management’s discussion and analysis, major
issues regarding accounting and auditing principles and practices,
as well
as the adequacy of internal controls. Recommend to the Board,
based on
such review and discussion, whether the audited financial statements
should be included in the Company’s annual report on Form
10-K.
|
|
(9)
|
Annually
review an analysis prepared by management and the independent
auditor of
significant financial reporting issues, quality of financial
reporting,
and judgments made in connection with the preparation of the
Company’s
financial statements, including an analysis
of
|
|
|
the
effect of alternative GAAP methods on the Company’s financial statements.
Review the procedures employed by the
Company in preparing published financial statements and related
management
commentaries.
|
|
(10)
|
Review
with management and the independent auditor the Company’s quarterly
financial statements prior to the filing of its Form 10-Q, including
management’s discussion and analysis and the results of the independent
auditor’s review of the quarterly financial statements (SAS 90). Note:
This can be performed by a member of the Audit
Committee.
|
|
(11)
|
Discuss
annually with the independent auditor the required communications
contained within Statement on Auditing Standards No. 61 relating
to the
conduct of the audit.
|
|
(12)
|
Discuss
with the independent auditor material issues on which the national
office
of the independent auditor was consulted by the Company’s audit
team.
|
|
(13)
|
Meet
with the independent auditor prior to the audit to discuss the
planning
and staffing of the
audit.
|
Internal
Audit:
|
(14)
|
Review
the appointment, replacement, reassignment or dismissal of the
Company’s
General Auditor.
|
|
(15)
|
Review
and approve the internal audit department charter, annual audit
plan and
the audit methodology.
|
|
(16)
|
Review
management and General Auditor reports submitted to the Committee
that are
material to the Company as a whole, and management’s response to those
reports.
|
|
(17)
|
Annually
review the General Auditor’s Summary of Officer’s Annual Travel and
Entertainment expense schedule. Include in this review a discussion
of
perquisites.
|
Miscellaneous:
|
(18)
|
Review
earnings press release as well as financial information and earnings
guidance provided to analysts and ratings agencies.
|
|
(19)
|
Review
quarterly updates from management on material
litigation.
|
|
(20)
|
Periodically
review with management and the Finance Committee, the Company’s policies
on major financial risk exposure, and the measures taken to reduce
such
risk.
|
|
(21)
|
Annually
review the Company’s Corporate Code of Conduct and compliance
therewith.
|
|
(22)
|
Establish
and maintain procedures for the confidential, anonymous submission
by
employees of the Company of concerns regarding accounting or auditing
matters.
|
|
(23)
|
Establish
guidelines for the Company’s hiring of employees or former employees of
the independent auditor.
|
|
(24)
|
Annually
review this Audit Committee Charter and make any necessary
changes.
|
|
(25)
|
Annually
perform an evaluation of the Committee, its members, functions
and
performance.
|
|
(26)
|
Review
disclosures made by the Company’s CEO and CFO during their certification
process for the Form 10-K and Form 10-Q about any significant deficiencies
in the design or operation of internal controls or material weaknesses
therein and any fraud involving management or other employees who
have a
significant role in the Company’s internal
controls.
|
|
10.
|
EXECUTIVE
SESSION
|
|
Meet
quarterly with management, the General Auditor and the independent
auditor
in separate executive sessions.
|
|
11.
|
RESPONSIBILITIES
OF THE CHAIRMAN
|
|
The
Chairman of the Committee will present the Committee’s recommendations to
the Board for its approval and periodically provide the Board,
for its
information, with a summary of the Committee’s determinations and
approvals. Additionally, set the annual compensation for the General
Auditor in conjunction with the Company’s Chief Executive
Officer.
|
|
12.
|
RESPONSIBILITIES
OF THE CHIEF EXECUTIVE
OFFICER
|
|
The
Chief Executive Officer of the Company will advise and make
recommendations to the Committee and, in the normal course, attend
all
meetings of the Committee.
|
|
13.
|
OTHER
AUTHORITY
|
The
Audit
Committee shall have the authority to retain special legal, accounting
or other
consultants to advise the Committee. The Audit Committee has full discretion
to
meet with individuals within or outside the Company.
 |
YOUR
VOTE IS IMPORTANT
VOTE
BY INTERNET / TELEPHONE
24
HOURS A DAY, 7 DAYS A WEEK
|
|
INTERNET
https://www.proxypush.com/uns
·
Go
to the
website address listed above.
· Have
your proxy card ready.
·
Follow
the
simple instructions that appear on your computer screen.
|
OR
|
TELEPHONE
1-866-307-0862
·
Use
any
touch-tone telephone.
·
Have
your proxy card ready.
·
Follow
the
simple recorded instructions.
|
OR
|
MAIL
· Mark,
sign
and date your proxy card.
· Detach
your
proxy card.
· Return
your
proxy card in the postage-paid envelope provided.
|
You
can vote your
shares by telephone, the Internet, mail or in person at the Annual Shareholders’
Meeting. Your telephone or Internet vote authorizes the named proxies
to vote
your shares in the same manner as if you marked, signed and returned
your proxy
card. If you have submitted your proxy by the Internet or telephone,
there is no
need to mail your proxy card.
|
For
Shareholders who have elected to receive UniSource Energy’s Proxy
Statement and Annual Report electronically you can now view
the 2007
Annual Meeting materials on the Internet by pointing your browser
to
www.UNS.com
|
|
| 1-866-307-0862 |
|
CALL
TOLL-FREE TO VOTE
THE
INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00
P.M.
E.S.T. ON THURSDAY, MAY 10, 2007.
o
‚ DETACH
PROXY CARD HERE IF YOU ARE NOT VOTING BY THE TELEPHONE OR
INTERNET ‚
|
Please
Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
|
T
Votes
MUST be
indicated
(x) in Black or Blue ink. |
The
Board
of Directors Recommends a vote “FOR” the following proposals:
| 1. |
Election
of
Directors
|
|
FOR
all nominees listed below
|
£
|
WITHHOLD
AUTHORITY to vote for all nominees listed below
|
£
|
*EXCEPTIONS
|
£
|
If
you agree
to access our Annual Report and Proxy Statement electronically
in the
future, please mark this box.
|
£
|
||
|
Nominees:
01 - James
S. Pignatelli, 02 - Lawrence J. Aldrich, 03 - Barbara
Baumann, 04 - Larry W. Bickle, 05 - Elizabeth T.
Bilby, 06 - Harold W. Burlingame, 07 - John L.
Carter, 08 - Robert A. Elliott, 09 - Daniel W.L.
Fessler, 10 - Kenneth Handy, 11 - Warren Y. Jobe,
12 - Joaquin Ruiz
|
To
change
your address, please mark this box.
|
£
|
|||||||
|
(INSTRUCTIONS:
To withhold authority to vote for any individual nominee,
mark the
“Exceptions” box and write that nominee’s name in the space provided
below).
|
To
include
any comments, please mark this box.
|
£
|
|||||||
|
*Exceptions
|
|||||||||
| 2. |
Ratification
of the Appointment of the Independent Public Accounting
Firm
|
|
FOR
£ AGAINST
£ ABSTAIN
£
|
SCAN
LINE
|
|||||
|
PLEASE
SIGN
EXACTLY AS YOUR NAME APPEARS HEREON. When shares are held
by joint tenants
in common or as community property, both should sign. When
signing as
attorney, executor, administrator, trustee, guardian or custodian,
please
give full title as such. If a corporation, please sign in
corporate name
by President or other authorized officer. If a partnership,
please sign in
partnership name by authorized person. Receipt is hereby
acknowledged of
Notice of Annual Meeting, Proxy Statement and the 2006 Annual
Report.
|
||||||
|
Date Shareholder
sign here
|
Co-Owner
sign
here
|
|||||
DEAR
SHAREHOLDERS:
If
you previously
elected to view the UniSource Energy Corporation Proxy Statements and
Annual
Reports over the Internet instead of receiving copies in the mail, you
can now
access the Proxy Statement for the 2007 Annual Shareholders’ Meeting and the
2006 Annual Report on the Internet through the following address: www.UNS.com.
You can vote your
shares by telephone, the Internet, mail or in person at the Annual Shareholders’
Meeting. See the Proxy Statement and the enclosed proxy card for further
information about voting procedures.
If
you would like a
paper copy of the Proxy Statement and Annual Report, UniSource Energy
will
provide a copy to you upon request. To obtain a copy of these documents,
please
call 520-745-3349.
For
a map of the annual
meeting location, as well as area parking, please refer to the second
page of
the enclosed proxy statement.
This
Proxy
is Solicited on Behalf of the Board of Directors of the Company for
the
Annual Shareholders’ Meeting to be held Friday, May 11, 2007.
Annual Shareholders’ Meeting to be held Friday, May 11, 2007.
P R O X Y
The
undersigned
hereby appoints James S. Pignatelli and Kevin P. Larson, and each of
them, with
the power of substitution, to represent and to vote on behalf of the
undersigned
all shares of Common Stock which the undersigned is entitled to vote
at the
Annual Shareholders’ Meeting scheduled to be held at the Fox Theatre, 17 W.
Congress, Tucson, Arizona, on Friday, May 11, 2007, and at any adjournments
or
postponements thereof, with all powers the undersigned would possess
if
personally present and in their discretion, upon such other business
as may
properly come before the meeting. This proxy, when properly executed,
will be
voted in the manner directed herein by the undersigned shareholder. If
no
direction is made, this proxy will be voted
“FOR”
Proposals
1
and 2.
(Continued,
and
to be dated and signed on reverse side.)
UNISOURCE
ENERGY
CORPORATION
C/O
THE BANK OF NEW
YORK
P.O.
BOX
11030
NEW
YORK, N.Y.
10203-0030