UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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UNISOURCE ENERGY CORPORATION
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(Name of the Registrant as Specified In Its Charter)
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UNISOURCE ENERGY
One South Church Avenue
Tucson, Arizona 85701
April 7, 2004
James S. Pignatelli (520) 571-4000
Chairman of the Board
Dear Shareholders:
On March 29, 2004, at a special meeting of our shareholders, we
obtained shareholder approval of the acquisition agreement that provides for an
affiliate of Saguaro Utility Group L.P. to acquire all of our outstanding shares
of common stock for $25.25 per share. The completion of the acquisition still
requires the approval of several regulatory agencies and the satisfaction of the
other closing conditions contained in the acquisition agreement. We expect that
the acquisition will be consummated in the second half of 2004.
Until the completion of the acquisition, we will continue to function
as a public company. In that regard, it is now appropriate for us to hold the
2004 Annual Shareholders' Meeting for the election of directors. You are
cordially invited to attend the 2004 Annual Shareholders' Meeting to be held on
Friday, May 7, 2004, at the Marriott University Park Hotel, 880 East Second
Street, Tucson, Arizona. The meeting will begin promptly at 10:00 a.m., so
please plan to arrive earlier. No admission tickets will be required for
attendance at the meeting.
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 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 2004 Annual Shareholders' Meeting ("Meeting") of
UniSource Energy Corporation at the Marriott University Park Hotel, 880 East
Second Street, Tucson, Arizona, on Friday, May 7, 2004, at 10:00 a.m., Mountain
Standard Time. The purpose of the Meeting is to:
1. elect nine directors to our Board of Directors for the ensuing year;
and
2. consider any other matters which properly come before the Meeting.
Only shareholders of record at the close of business on March 29, 2004,
are entitled to vote at the Meeting.
We have enclosed our 2003 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 7, 2004. 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.
/s/Catherine A. Nichols
-----------------------
Catherine A. Nichols
Corporate Secretary
Dated: April 7, 2004
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 ENCLOSED PROXY 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 May 7, 2004 Marriott University Park Hotel
10:00 a.m., MST 880 East Second Street
Tucson, Arizona 85719
Record Date The record date is March 29, 2004 ("Record Date").
If you were a shareholder of record at the close of
business on the Record Date, you may vote at the 2004
Annual Shareholders' Meeting ("Meeting") of UniSource
Energy Corporation ("UniSource Energy" as well as
references to "we," "our" and "us"). At the close of
business on the Record Date, we had 34,037,640 shares
of common stock outstanding.
Agenda 1. Proposal One: Elect nine directors to our Board of
Directors ("Board")for the ensuing year.
2. Consider any other matters which properly come
before the Meeting and any adjournments.
Independent Auditors 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
We will follow your card to vote differently, we will vote signed
voting instructions. returned proxies "for" the Board's nominees.
If none, we will The Board or proxy holders will use their discretion
vote signed proxies on other matters that properly come before the
"for" the nominees. 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 on or about April 7, 2004.
Revoking Your Proxy You may revoke your proxy before it is voted at the
Meeting. To revoke, follow the procedures listed on
page 2 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
We welcome your card for this purpose, if desired. Although we may not
comments. The proxy respond on an individual basis, your comments help us
card has room for to measure your satisfaction, and we may benefit from
them. 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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CONTENTS
Voting Procedures/Revoking Your Proxy....................................... 2
Proposed Acquisition of UniSource Energy.................................... 3
UniSource Energy Share Ownership............................................ 4
Proposal One: Election of Directors*........................................ 7
Board Information........................................................... 9
Board Compensation.......................................................... 10
Executive Compensation and Other Information**.............................. 12
Equity Compensation Plan Information........................................ 15
Effect of Proposed Acquisition on Compensation.............................. 18
Director Independence Criteria.............................................. 22
Transactions with Management and Others..................................... 23
Compensation Committee Interlocks and Insider Participation................. 23
Compensation Committee Report on Executive Compensation..................... 23
Audit Committee Report...................................................... 26
Performance Graph**......................................................... 28
Submission of Shareholder Proposals......................................... 29
Other Business.............................................................. 29
Appendix A.................................................................. A-1
Appendix B.................................................................. B-1
Appendix C.................................................................. C-1
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* We expect to vote on this item at the Meeting.
** The Compensation Committee report and the Performance Graph will not be
incorporated by reference into any present or future filings we make with
the Securities and Exchange Commission ("SEC"), even if those reports
incorporate all or any part of this Proxy Statement.
VOTING PROCEDURES/REVOKING YOUR PROXY
You can vote by You can vote your shares by telephone, the Internet,
by telephone, the mail or in person a the Meeting. Your proxy card
Internet, mail or in contains instructions for voting by telephone or the
person. We encourage Internet, which are the least expensive and fastest
you to vote by methods of voting. To vote by mail, complete, sign and
telephone or the date your proxy card, or your broker's voting
Internet to help us instruction card if your shares are held by your
save money. 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.
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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 In the election of directors, each shareholder has
votes for directors. the right to cumulate his votes by casting as many
votes in the aggregate 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 Any shareholder giving a proxy has a right to revoke
proxy after sending that proxy by giving notice to UniSource Energy in
it in by following writing directed to the Corporate Secretary, UniSource
these procedures. 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. Additional solicitation of brokers, banks,
nominees and institutional investors may be made
pursuant to a special engagement of DF King & Co.,
Inc., at a cost of approximately $7,500 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 for no additional
compensation. We will request brokers or other persons
holding stock in their names, or in the names of their
nominees, to forward proxy materials to the beneficial
owners of such stock 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.
PROPOSED ACQUISITION OF UNISOURCE ENERGY
On November 21, 2003, we entered into an
acquisition agreement with an affiliate of Saguaro
Utility Group L.P., an Arizona limited partnership
("Saguaro Utility"). The acquisition agreement
provides for the affiliate of Saguaro Utility to
acquire all of our outstanding shares of common
stock for $25.25 per share. Saguaro Utility will
merge its affiliate with and into us. We will
survive the merger as a wholly owned indirect
subsidiary of Saguaro Utility. Trading in our
common stock on the New York Stock Exchange and the
Pacific Stock Exchange will cease immediately as of
the effective time of the acquisition. After that
time, the surviving corporation will delist our
shares from the New York Stock Exchange and the
Pacific Stock Exchange and deregister our shares
under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Our headquarters will
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remain in Tucson, and we expect that our senior
management team will remain generally in place. We
received shareholder approval of the acquisition
agreement on March 29, 2004. The completion of the
acquisition still requires the approval of several
regulatory agencies and the satisfaction of the
other closing conditions contained in the
acquisition agreement. We expect that the
acquisition will be consummated in the second half
of 2004. See "Effect of Proposed Acquisition on
Compensation" on page 18 of this Proxy Statement.
UNISOURCE ENERGY SHARE OWNERSHIP
Security The following table sets forth the number and
Ownership percentage of shares beneficially owned as of the
of Management Record Date and the nature of such ownership by each
of our directors (all of which are nominees), our
Chief Executive Officer and our five other most highly
compensated executive officers at December 31, 2003
(the "Named Executives") and all directors and
officers as a group. Ownership includes direct and
indirect (beneficial) ownership, as defined by the SEC
rules.
Name and Amount and
Title Title of Nature of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
-------- -------------------- -------------------- --------
Common James S. Pignatelli 744,282 (2) 2.2%
Chairman, President and
Chief Executive Officer
Common Lawrence J. Aldrich 9,624 (3) *
Director
Common Larry W. Bickle 15,564 (4) *
Director
Common Elizabeth T. Bilby 13,625 (5) *
Director
Common Harold W. Burlingame 12,225 (4) *
Director
Common John L. Carter 22,371 (6) *
Director
Common Robert A. Elliott 405
Director
Common Kenneth Handy 6,359 (7) *
Director
Common Warren Y. Jobe 4,359 (7) *
Director
Common Steven J. Glaser 199,679 (8) *
Senior Vice President and
Chief Operating Officer, Transmission
& Distribution - Tucson Electric
Power Company ("TEP")
Common Dennis R. Nelson 198,300 (9) *
Senior Vice President and Chief Operating
Officer - UniSource Energy Services, Inc.
("UES")
4
Name and Amount and
Title Title of Nature of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
-------- -------------------- -------------------- --------
Common Michael J. DeConcini 145,023 (10) *
Senior Vice President, Investments
and Planning / Senior Vice President
and Chief Operating Officer,
Energy Resources - TEP
Common Kevin P. Larson 126,210 (11) *
Vice President, Chief Financial Officer and
Treasurer
Common Vincent Nitido, Jr. 149,303 (12) *
Vice President, General Counsel and Chief
Administrative Officer
Common All directors and executive officers as a 2,078,620 (13) 6.1%
group
-------------------
* Represents less than 1% of the outstanding common stock of UniSource
Energy.
(1) Amounts include the following:
o 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.
o Shares subject to options exercisable within 60 days, based on
information from E*Trade, UniSource Energy's stock option plan
administrator. On March 29, 2004, upon the approval of the acquisition
agreement by our shareholders, a change of control occurred for
purposes of the outstanding stock options under the UniSource Energy
Corporation 1994 Omnibus Stock and Incentive Plan, with the effect of
making all outstanding stock options of officers and managers
immediately exercisable.
o 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) Includes 715,188 shares subject to options exercisable within 60 days, and
15,019 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(3) Includes 6,120 shares subject to options exercisable within 60 days.
(4) Includes 9,320 shares subject to options exercisable within 60 days.
(5) Includes 12,920 shares subject to options exercisable within 60 days.
(6) Includes 11,720 shares subject to options exercisable within 60 days.
(7) Includes 3,454 shares subject to options exercisable within 60 days.
(8) Includes 189,872 shares subject to options exercisable within 60 days, and
2,511 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(9) Includes 183,531 shares subject to options exercisable within 60 days, and
8,257 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(10) Includes 135,350 shares subject to options exercisable within 60 days, and
4,815 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(11) Includes 107,168 shares subject to options exercisable within 60 days, and
2,292 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(12) Includes 141,593 shares subject to options exercisable within 60 days, and
3,940 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of March 29, 2004.
(13) Includes 1,913,920 shares subject to options exercisable within 60 days,
and 43,485 shares purchased under the 401(k) Plan UniSource Energy Stock
Fund as of March 29, 2004.
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Security As of March 29, 2004, based on information reported
Ownership of in filings made by the following persons with the
Certain Beneficial SEC or information otherwise known to us, the
Owners following persons were known or reasonably believed to
be, as more fully described below, the beneficial
owners of more than 5% of our commonstock:
Amount and
Name and Address Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
-------------- ------------------- -------------------- --------
Common T. Rowe Price Associates, Inc. 3,237,005 (1) 9.6%
100 E. Pratt Street
Baltimore, MD 21202
Common Gabelli Asset Management Inc. 2,781,599 (2) 8.3%
One Corporate Center
Rye, NY 10580-1435
Common White Mountains Insurance Group 1,798,100 (3) 5.3%
80 South Main Street
Hanover, NH 03755
Common BNP Paribas, SA 1,796,010 (4) 5.3%
16 Boulevard des Italiens
75009 Paris, France
Common Barclays Private Bank Limited 59/60 1,718,794 (5) 5.1%
Grosvenor Street
London, WIX 9DA England
-------------------
(1) In a statement (Schedule 13G/A) filed with the SEC on February 11, 2004, T.
Rowe Price Associates, Inc. ("Price Associates") indicated it has sole
voting power over 475,705 shares and sole dispositive power over 3,237,005
shares of our common stock. Price Associates stated that these securities
are owned by various individual and institutional investors for which Price
Associates serves as investment advisor with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Exchange Act, Price Associates is deemed to be the
beneficial owner of such securities; however, Price Associates expressly
disclaimed that it is, in fact, the beneficial owner of such securities.
(2) In a statement (Schedule 13D/A) filed with the SEC on March 5, 2004,
Gabelli Asset Management Inc. and its affiliates ("Gabelli") indicated that
they have sole voting power over 2,716,599 shares and sole dispositive
power over 2,781,599 shares of our common stock. Gabelli stated that the
shares are beneficially owned by Gabelli Funds, LLC (1,148,300 shares),
GAMCO Investors, Inc. (1,266,899 shares), Gabelli Securities, Inc. (354,400
shares), Gabelli Foundation, Inc. (10,000 shares) and MJG Associates, Inc.
(2,000 shares).
(3) In a statement (Schedule 13G/A) filed with the SEC on February 13, 2004,
White Mountains Insurance Group ("WMIG") indicated that it has shared
voting and shared dispositive power over 1,798,100 shares of our common
stock. WMIG indicated that it indirectly controls, through various
wholly-owned subsidiaries and certain of its employee benefit plans,
1,798,100 shares. WMIG stated that the shares are beneficially owned by
OneBeacon Insurance Company (190,000 shares), The Camden Fire Insurance
Association (800,000 shares), Folksamerica Reinsurance Company (143,100
shares) and certain employee benefit plans sponsored by OneBeacon Insurance
Company (665,000 shares). WMIG further stated that, through an investment
advisory agreement, White Mountains Advisors, LLC has sole voting and sole
dispositive power over such shares.
(4) In a statement (Schedule 13G) filed with the SEC on February 27, 2004, BNP
Paribas, SA (BNP) indicated that it has sole voting and sole dispositive
power over 1,796,010 shares of our common stock.
(5) In a statement (Schedule 13G) filed with the SEC on February 17, 2004,
Barclays Private Bank Limited ("Barclays") indicated that it has sole
voting and sole dispositive power over 1,551,851 shares of our common
stock. The filing indicated that the 1,718,794 shares are beneficially
owned by Barclays Global Investors (974,374 shares), Barclays Global Fund
Advisors (594,020 shares) and Barclays Capital Securities Limited (150,400
shares).
6
Section 16(a) Section 16(a) of the Exchange Act and SEC
Beneficial regulations require directors, certain officers and
Ownership persons who own greater than 10% of our stock to file
Reporting reports of ownership and changes in ownership of
Compliance such stock with the SEC and the New York Stock
Exchange. These directors, officers and greater than
10% beneficial owners are required by law to furnish
us with copies of all forms they file under Section
16(a).
Based solely on a review of the copies of such forms
furnished to us and on written representations of our
directors and officers, we believe that all Section
16(a) filing requirements applicable to our directors
and officers were complied with during 2003.
PROPOSAL ONE: ELECTION OF DIRECTORS
General At the Meeting, our shareholders of record will
elect nine 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
We will elect nine withheld, will be voted for the nine nominees listed
directors this year. 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 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. Chairman of the Board, President and Chief Executive
Pignatelli Officer of UniSource Energy since July 1998; Senior
Vice President and Chief Operating Officer of
UniSource Energy from December 1997 to July 1998;
Chairman of the Board of Directors, President and
Chief Executive Officer of TEP, the principal
subsidiary of UniSource Energy, since July 1998;
Executive Vice President and Chief Operating Officer
of TEP from March 1998 to July 1998; Senior Vice
President and Chief Operating Officer of TEP from 1996
to 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. Board
member since 1998. Age 60.
Lawrence J. General Partner, Valley Ventures III, LP, since
Aldrich September 2002; Managing Director and Founder, Tucson
(4) Ventures, LLC, from February 2000 to September 2002;
President and Chief Executive Officer of Tucson
Newspapers from January 1992 to February 2000;
Director of TEP and Millennium since 2000. Board
member since 2000. Age 51.
Larry W. Bickle Managing Director of Haddington Ventures, LLC, an
(4) investment company, since 1997; Director of St. Mary
Land and Exploration since 1995; Director of
Millennium since 1998. Board member since 1998. Age
58.
Elizabeth T. President of Gourmet Products, Inc., an agricultural
Bilby product marketing company; Director of Marketing of
(1)(2)(3) Green Valley Pecans since 1982. Director of TEP
since 1995; Director of Millennium from 1998-2003.
Board member since 1995. Age 64.
7
Harold W. Senior Executive Advisor for AT&T Wireless Services
Burlingame since July 2001; Executive Vice President,
(1)(3) Communications and Human Resources of AT&T Wireless
Services from April 2000 to June 2001; Executive Vice
President, Merger and Joint Venture Integration of
AT&T from March 1999 to March 2000; Executive Vice
President of Human Resources of AT&T from 1987 to
March 1999; Member of the AT&T Foundation from
November 1986 to December 2002; Chair, Executive
Committee, Organization Resources Counselors since
June 1999; Director of TEP since 1998. Board member
since 1998. Age 63.
John L. Carter Retired as General Manager of the Tucson, Arizona
(1)(2)(3)(4) office of IBM in 1987. President and Chief
Executive Officer of Qualtronics Manufacturing, Inc.
from 1987 to 1993. 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.
Board member since 1996. Age 69.
Robert A. Elliott President and owner of The Elliott Accounting Group
(2)(3) since 1983; Television Analyst/Pre-game Show Co-host
for Fox Sports Arizona since 1999; Radio Host of "In
the Paint" Sports Talk Show for KFNN 1490 AM from 2000
to 2002; Studio Expert Television Analyst for Cox
Sports/Phoenix Suns from 1999 to 2001; Corporate
Secretary of Southern Arizona Community Bank since
1999; Director and Minority Shareholder of Southern
Arizona Community Bank since 1998; Director of Tucson
Urban League since 1998; Treasurer of Tucson Urban
League since 2002; Director of TEP since May 2003.
Board member since 2003. Age 48.
Kenneth Handy Retired CPA; Vice President and Chief Financial
(1)(2)(3) Officer of The Permanente Medical Group, Inc. (the
physician services component of the Kaiser Permanente
Medical Care Program in Northern California)from 1978
to 1998; Partner at Ernst & Ernst (now Ernst & Young)
from 1972 to 1978; Director of TEP since 2001;
Director of Millennium from 2001 to 2003. Board member
since August 2001. Age 65.
Warren Y. Jobe Retired CPA; Senior Vice President of Southern Company
(2)(3)(4) from 1998 to 2001; Executive Vice President and Chief
Financial Officer and member of the Board of Directors
of Georgia Power Company from 1982 to 1998; former
President of the Georgia Power Foundation Inc. from
1986 to 2001; Member of the Board of Directors of
Wellpoint Health Networks, Inc. since 2001; Director
of TEP since 2001; Director of Millennium from 2001 to
2003. Board member since August 2001. Age 63.
-------------------
(1) Member of the Corporate Governance and Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Finance Committee.
The Board recommends that you vote "FOR" these nominees.
8
BOARD INFORMATION
Board Meetings In 2003, the Board held a total of 13 regular and
special meetings. Each director attended at least 75%
of his or her Board and committee meetings.
Board Committees THE AUDIT COMMITTEE selects a firm of independent
certified public accountants to audit annually
our financial statements, reviews current and
projected financial results of operations, 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 and
makes recommendations to the Board for any changes
deemed necessary in such procedures, and performs
such other functions delegated by the Board. Our
Audit Committee held 12 meetings in 2003 and was in
full compliance with its written charter.
Upon the recommendation of the Audit Committee, our
Board adopted a code of ethics for our senior
financial officers, including our Chief Executive
Officer, Chief Financial Officer and Controller. A
copy of this code of ethics can be obtained on our
website at the following website address:
http://www.unisourceenergy.com.
THE COMPENSATION COMMITTEE reviews the performance of
our directors and officers and reviews and approves
directors' and officers' compensation. Our
Compensation Committee held six meetings in 2003 and
was in full compliance with its written charter,
which is attached to this Proxy Statement as Appendix
A.
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 three meetings in 2003.
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. The
Corporate Governance and Nominating Committee held
four meetings in 2003 and was in full compliance with
its written charter, which is attached to this Proxy
Statement as Appendix B.
The Corporate Governance and Nominating Committee
identifies and considers nominee candidates supplied
by shareholders and Board members. The Corporate
Secretary, as directed by the Corporate Governance
and Nominating Committee, prepares portfolios for
nominee 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 Committee deems appropropriate, and conducts a
personal interview with each
9
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 Board
manual 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 10, 2004 (assuming that the
acquisition of UniSource Energy is not completed
prior to such date). Recommendations must be in
writing and include detailed biographical material
indicating the candidate's qualifications and a
written statement from the candidate of 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. In light of the acquisition of
UniSource Energy, the Board does not believe it is
appropriate to adopt a formal policy at this time.
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 is
in compliance with applicable New York Stock Exchange
listing standards.
BOARD COMPENSATION
Retainer In 2003, each non-employee director received
and Fees a $20,000 annual cash retainer, $1,000 for each Board
meeting attended, $1,000 for each committee meeting
attended and an additional $1,000 per committee
meeting if acting as a committee chairperson. We
reimburse directors for any expenses related to their
Board and committee service.
Effect of See "Effect of Proposed Acquisition on Compensation"
Proposed beginning on page 18 of this Proxy Statement for a
Acquisition discussion of the effect of the proposed acquisition
of UniSource Energy on compensation of our Board
members.
10
Option and Under the terms of the 1994 Outside Director Stock
Restricted Option Plan, each non-employee director in office on
Share Grants the first business day of each year, and who has been
a director for at least three months, is granted a
stock option covering a number of shares of our common
stock equal to $10,000 divided by the value of an
option as of the date of grant. Option values are
determined using the Black Scholes option value model.
The exercise price of the options is the fair market
value of our shares on the grant date. The options
vest in one-third increments on the grant date
anniversary, and expire in ten years, provided,
however, that all of these options will be cancelled
and paid in cash upon the consummation of the
acquisition.
Each non-employee director in office on the first
business day of each year is granted a number of
restricted shares of our common stock equal to
$10,000 divided by the then fair market value of a
share of our common stock. Restricted shares vest on
the third anniversary of the grant date, provided,
however, that all shares subject to restricted stock
awards outstanding will vest free of restrictions
upon the consummation of the acquisition.
On January 2, 2003, each of the non-employee
directors, with the exception of Mr. Elliott,
received options to purchase 2,358 shares of our
common stock at an exercise price of $17.44, and 573
restricted shares of our common stock. Mr. Elliott
received options to purchase 1,196 shares of our
common stock at an exercise price of $17.84 when he
took office on May 9, 2003.
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
Cash Compensation Security Grants
---------------------------------- ---------------------------------------
Number of Shares Number of
Annual Subject to Securities
Retainer Meeting Restricted Stock Underlying Options
Name (1) Fee ($) (2) Fees ($) (2) Award
-------- ----------- ------------ ----------------- ------------------
Lawrence J. Aldrich 20,000 22,000 (3) 573 2,358
Larry W. Bickle 20,000 19,000 (3)(4) 573 2,358
Elizabeth T. Bilby 20,000 43,000 573 2,358
Harold W. Burlingame 20,000 42,000 573 2,358
John L. Carter 20,000 65,000 (3)(4) 573 2,358
Robert A. Elliott 15,000 35,000 -- 1,196
Daniel W. L. Fessler (5) 15,000 19,000 (3) 573 2,358
Kenneth Handy 20,000 50,000 573 2,358
Warren Y. Jobe 20,000 61,000 573 2,358
H. Wilson Sundt (6) 6,666 16,000 573 2,358
-------------------
(1) Mr. Pignatelli is not listed in this table because directors who are
officers of UniSource Energy or salaried employees of its subsidiaries do
not receive compensation in their capacity as members of the Board. Refer
to the Summary Compensation Table for information concerning his
compensation.
(2) Cash compensation includes amounts earned but deferred at the election of
directors.
(3) As members of the Global Solar Energy, Inc. ("GSE") board, Mr. Aldrich, Mr.
Carter and Mr. Fessler each received an additional $4,000 and Mr. Bickle
received an additional $1,000 for attending GSE board meetings during 2003.
UniSource Energy owns 99% of GSE.
(4) As members of the Infinite Power Solutions, Inc. ("IPS") board, Mr. Bickle
received an additional $5,000 and Mr. Carter received an additional $6,000
for attending IPS board meetings during 2003. UniSource Energy owns 72% of
IPS.
(5) Mr. Fessler resigned from the Board on September 30, 2003. (6) Mr. Sundt
retired from the Board on May 9, 2003.
(6) Mr. SUndt retired from the Board on May 9, 2003.
11
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary See "Effect of The Proposed Acquisition on
of Compensation Compensation" beginning on page 18 of this Proxy
Statement for a discussion of the effect of the
proposed acquisition of UniSource Energy and
related shareholder approval on certain compensation
of our executive officers.
The following table summarizes the compensation and
stock option grants to, and stock options/stock
appreciation rights ("SARs") held by the Named
Executives.
SUMMARY COMPENSATION TABLE
Annual Compensation Compensation Awards
----------------------- -------------------------
Restricted Securities All Other
Name and Stock Awards Underlying Compensation
Principal Position Year Salary ($) Bonus ($) ($) (1) Options/SARs (#) ($) (2)
------------------ ---- --------- -------- ------------ ---------------- ------------
James S. Pignatelli 2003 599,327 550,000 -- 21,226 12,000
Chairman, President and 2002 574,654 320,000 -- 150,000 11,000
Chief Executive Officer 2001 559,423 580,000 -- 150,000 10,500
Steven J. Glaser 2003 274,596 166,000 -- 9,729 11,232
Senior Vice President and Chief 2002 259,654 110,000 -- 45,000 11,000
Operating Officer, Transmission 2001 244,231 132,000 -- 54,000 10,500
& Distribution - TEP
Dennis R. Nelson 2003 269,732 150,000 -- 9,552 12,000
Senior Vice President and Chief 2002 260,000 90,000 -- 45,000 11,000
Operating Officer - UES 2001 259,712 117,000 -- 34,000 10,500
Michael J. DeConcini 2003 229,192 145,000 -- 8,137 10,314
Senior Vice President, 2002 199,654 72,000 -- 40,000 11,000
Investments and Planning / 2001 184,519 97,125 -- 30,000 10,500
Senior Vice President and Chief
Operating Officer, Energy
Resources - TEP
Kevin P. Larson 2003 219,462 145,000 -- 7,783 9,876
Vice President, Chief Financial 2002 199,656 76,000 -- 35,000 11,000
Officer and Treasurer 2001 184,519 113,000 -- 20,000 10,500
Vincent Nitido, Jr. 2003 219,462 145,000 -- 7,783 9,876
Vice President, General Counsel 2002 199,654 68,000 -- 40,000 11,000
and Chief Administrative Officer 2001 184,519 97,125 -- 35,000 10,500
-------------------
(1) As of December 31, 2003, based on the closing market price of UniSource
Energy's stock on that date of $24.66, Mr. Pignatelli held 108,053 stock
units (including dividend equivalent stock units) valued at $2,664,587; Mr.
Glaser held 27,280 stock units (including dividend equivalent stock units)
valued at $672,725; Mr. Nelson held 24,016 stock units (including dividend
equivalent stock units) valued at $592,235; Mr. DeConcini held 23,729 stock
units (including dividend equivalent stock units) valued at $585,157; Mr.
Larson held 12,953 stock units (including dividend equivalent stock units)
valued at $319,421; and Mr. Nitido held 15,951 stock units valued at
$393,352.
(2) All Other Compensation is comprised of UniSource Energy's contributions to
the 401(k) Plan and Excess 401(k) contributions to the UniSource Energy
Corporation Management and Directors Deferred Compensation Plan.
12
Stock Option During 2003, the Compensation Committee of our Board
Grants in 2003 granted stock options to officers. The options
have exercise prices equal to the fair market
value of our common stock at the date of
grant, and were intended to be incentive stock
options under, and to the maximum extent
permitted by, the Internal Revenue Code of 1986,
as amended ("Code"). These options would have
vested ratably over a three-year period,
provided, however, that all of these options
vested and became immediately exercisable upon
the approval of the acquisition agreement by our
shareholders on March 29, 2004. The aggregate
number of UniSource Energy shares attributable to
the 2003 grants is 97,818.
The following table includes our 2003 grants of
stock options and SARs to the Named Executives.
The amounts shown as potential realizable values
rely on arbitrarily assumed increases in value
required by the SEC. In assessing those amounts,
please note that the ultimate value of the
options, as well as the shares, depends on actual
future share prices. Market conditions and the
efforts of the directors, the officers and others
to foster the future success of UniSource Energy
and its subsidiaries can influence those future
share values.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Percent of Potential Realizable Value
Securities Total Options/ at Assumed Annual Rates
Underlying SARs Granted to of Stock Price Appreciation
Options/SARs Employees Exercise Expiration for Option Term
Name Granted in Fiscal Year Price ($/Sh) Date 5% ($) 10%($)
---- ----------- --------------- ------------ ---------- ------ ------
James S. Pignatelli 21,226 21.7% 17.84 5/9/13 238,145 603,506
Steven J. Glaser 9,729 9.9% 17.84 5/9/13 109,154 276,618
Dennis R. Nelson 9,552 9.8% 17.84 5/9/13 107,169 271,586
Michael J. DeConcini 8,137 8.3% 17.84 5/9/13 91,293 231,354
Kevin P. Larson 7,783 8.0% 17.84 5/9/13 87,321 221,290
Vincent Nitido, Jr. 7,783 8.0% 17.84 5/9/13 87,321 221,290
Option and SAR The following table includes the number and value of
Holdings as of exercisable and non-exercisable options and SARs held
December 31, 2003 by the Named Executives as of December 31, 2003.
13
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs at Fiscal In-the-Money Options/SARs at
Acquired Year-End (#) Fiscal Year End ($)
on Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable (1) Unexercisable (2)
---- ----------- ------------ ----------------------- ----------------------------
James S. Pignatelli -- -- 435,629 / 279,559 4,182,658 / 2,183,048
Steven J. Glaser -- -- 132,143 / 57,729 1,165,173 / 418,784
Dennis R. Nelson -- -- 132,646 / 50,885 1,233,979 / 372,369
Michael J. DeConcini -- -- 63,881 / 71,469 577,106 / 561,437
Kevin P. Larson -- -- 69,386 / 37,782 636,171 / 277,474
Vincent Nitido, Jr. 68,811 / 72,782 613,182 / 570,314
-------------------
(1) The unexercisable Options/SARs reflected in the foregoing table vested
and became exercisable upon shareholder approval of the acquisition
agreement on March 29, 2004.
(2) Includes cash dividend equivalents on stock options awarded in 2002
under the UniSource Energy Corporation Omnibus Stock and Incentive
Plan.
2003 Long-Term The following table includes the number of shares,
Incentive Plan units or other rights awarded to the Named Executives
Awards in the last fiscal year under any long-term incentive
plan.
Payout of the 2003-2005 long-term incentive
plan awards will be based on the achievement,
during the performance period, of four (4)
financial and two (2) operational goals, each
on a UniSource Energy basis. The financial
goals are total shareholder return, earnings
per share, cash flow and equity capitalization.
The operational goals are plant availability
and customer measures. Each goal has an annual
target, and each goal has an exceptional target
for 2005. Two points are awarded for the
achievement of each annual goal, and two
additional points are awarded for achievement
of each exceptional target for 2005. The payout
will be based on cumulative points for the
performance period. There are 48 available
points. Threshold performance is achieved at 24
points, target performance at 30 points and
maximum performance at 37 points.
14
LONG-TERM INCENTIVE PLANS
AWARDS IN LAST FISCAL YEAR
Estimated Future Payouts under
Number of Performance or Non-Stock Price-Based Plans
Shares, Units Other Period Until -------------------------------
or Other Maturation or Threshold Target Maximum
Name Rights (#) Payout (3) (# or$) (# or$) (# or$)
---- -------------- ------------------ --------- ------- --------
James S. Pignatelli 18,370 (1) 1/1/03 - 12/31/05 7,564 18,370 29,176
189,000 (2) $78,000 $189,000 $300,000
Steven J. Glaser 8,420 (1) 1/1/03 - 12/31/05 3,467 8,420 13,372
87,000 (2) $36,000 $87,000 $138,000
Dennis R. Nelson 8,267 (1) 1/1/03 - 12/31/05 3,404 8,267 13,129
85,000 (2) $35,000 $85,000 $135,000
Michael J. DeConcini 7,042 (1) 1/1/03 - 12/31/05 2,900 7,042 11,184
72,000 (2) $30,000 $72,000 $115,000
Kevin P. Larson 6,736 (1) 1/1/03 - 12/31/05 2,774 6,736 10,698
69,000 (2) $29,000 $69,000 $110,000
Vincent Nitido, Jr. 6,736 (1) 1/1/03 - 12/31/05 2,774 6,736 10,698
69,000 (2) $29,000 $69,000 $110,000
-------------------
(1) Performance shares are denominated in shares of UniSource Energy
common stock.
(2) Performance units are denominated in cash. One performance unit
equals $1.00.
(3) The performance share and performance unit awards reflected in the
foregoing table vested at target upon shareholder approval of the
acquisition agreement on March 29, 2004. See table in "Effect of
Proposed Acquisition on Compensation" on page 18 of this Proxy
Statement for amount of shares and cash distributed to the Named
Executives in respect to these awards.
EQUITY COMPENSATION PLAN INFORMATION
Equity Our only equity-based compensation plan that has not
Compensation been approved by shareholders is the Management and
Plans Directors Deferred Compensation Plan (the "DCP").
Shareholder approval of the DCP has not been required.
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 their 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
or her deferrals be credited in the form of
deferred shares. 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. 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 or her deferred
shares under the DCP. The shares used to satisfy our
stock obligations under the DCP are shares
that have been purchased on the open market.
15
EQUITY COMPENSATION PLAN TABLE
The following table sets forth information as of
December 31, 2003, with respect to UniSource Energy's
equity compensation plans.
Number of Shares of Number of Shares of UniSource Energy
UniSource Energy Common Common Stock Remaining Available for
Stock to Future Issuance Under Equity
be Issued Upon Exercise Weighted-Average Compensation Plans (Excluding Shares
of Outstanding Options Exercise Price of Reflected
Plan Category and Rights Outstanding Options in the First Column)
------------- ----------------------- ------------------- --------------------
Equity Compensation Plans 2,874,397 (2) $16.04 (3) 969,931 (4)
Approved by Shareholders (1)
Equity Compensation Plans 60,203 (5) -- -- (6)
Not Approved by Shareholders
Total 2,934,600 -- --
-------------------
(1) The equity compensation plans approved by shareholders are the
UniSource Energy Corporation 1994 Omnibus Stock and Incentive
Plan and the UniSource Energy Corporation 1994 Outside Director
Stock Option Plan.
(2) Includes options outstanding as to 2,482,680 shares, stock units,
dividend equivalent stock units and restricted stock units
(payable in an equivalent number of shares) outstanding as to
257,263 shares, and performance shares outstanding as to 134,454
shares. See table of "Long-Term Incentive Plans - Awards in Last
Fiscal Year." Performance shares shown at estimated maximum
future payout.
(3) Calculated based on the outstanding options and exclusive of
outstanding stock units.
(4) Of these shares, 793,654 were available for additional awards
under the 1994 Omnibus Stock and Incentive Plan and 176,277 were
available for additional awards under the 1994 Outside Director
Stock Option Plan. Although 793,654 shares remained available for
grant under the 1994 Omnibus Stock and Incentive Plan, pursuant
to the plan document no award may be granted under the Plan after
February 3, 2004. Shares available under either of these plans
may be used for any type of award authorized under that plan.
Awards authorized under the 1994 Omnibus Stock and Incentive Plan
include options, stock appreciation rights, restricted stock,
performance shares, and stock units. Awards authorized under the
1994 Outside Director Stock Plan include options, restricted
stock, and dividend equivalents. The aggregate amount of shares
issuable under these plans is subject to certain limitations set
forth in the acquisition agreement.
(5) Reflects an aggregate of 60,203 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. The UniSource Energy shares used to
satisfy our stock obligations under the DCP are shares that have
been purchased on the open market. Similarly, the aggregate
amount of shares issuable under these plans is subject to certain
limitations set forth in the acquisition agreement.
Pension Plans The following table shows the estimated annual
retirement benefit payable to participants, including
the Named Executives, for the average annual
compensation and years of service indicated.
Compensation is comprised of the officers' average
annual compensation during the five consecutive years
of employment with the highest compensation within
the last 15 years preceding retirement. Compensation
is comprised of salary and bonus, as shown on the
Summary Compensation Table.
16
PENSION PLAN TABLE
Years of Service
---------------------------------------------------------------------------------------------
Remuneration ($) 10 15 20 25 30 35
125,000 54,850 54,850 54,850 54,850 54,850 54,850
150,000 65,820 65,820 65,820 65,820 65,820 65,820
175,000 76,790 76,790 76,790 76,790 76,790 76,790
200,000 87,760 87,760 87,760 87,760 87,760 87,760
225,000 98,730 98,730 98,730 98,730 98,730 98,730
250,000 109,700 109,700 109,700 109,700 109,700 109,700
300,000 131,640 131,640 131,640 131,640 131,640 131,640
400,000 175,520 175,520 175,520 175,520 175,520 175,520
450,000 197,460 197,460 197,460 197,460 197,460 197,460
500,000 219,400 219,400 219,400 219,400 219,400 219,400
550,000 241,340 241,340 241,340 241,340 241,340 241,340
600,000 263,280 263,280 263,280 263,280 263,280 263,280
650,000 285,220 285,220 285,220 285,220 285,220 285,220
700,000 307,160 307,160 307,160 307,160 307,160 307,160
750,000 329,100 329,100 329,100 329,100 329,100 329,100
800,000 351,040 351,040 351,040 351,040 351,040 351,040
850,000 372,980 372,980 372,980 372,980 372,980 372,980
900,000 394,920 394,920 394,920 394,920 394,920 394,920
950,000 416,860 416,860 416,860 416,860 416,860 416,860
1,000,000 438,800 438,800 438,800 438,800 438,800 438,800
1,100,000 482,680 482,680 482,680 482,680 482,680 482,680
1,200,000 526,560 526,560 526,560 526,560 526,560 526,560
1,300,000 570,440 570,440 570,440 570,440 570,440 570,440
1,400,000 614,320 614,320 614,320 614,320 614,320 614,320
The amount of the pension benefit is equal to a base of
40% of the compensation for ten years of service, plus
9.7% (life annuity factor) of such calculated amount.
The estimated benefits shown in the Pension Plan Table
are straight life annuities not subject to a reduction
for any Social Security benefits. The table also
reflects amounts payable under the Excess Benefits Plan
which will pay from the general funds of UniSource
Energy the difference, if any, between the benefits
under TEP's pension plan and any benefit payments,
which may be limited by federal regulations.
17
The credited years of service for UniSource Energy's Named
Executives are as follows:
Credited
Name Years of Service
---- ----------------
James S. Pignatelli 9
Steven J. Glaser 14
Dennis R. Nelson 26
Kevin P. Larson 18
Michael J. DeConcini 15
Vincent Nitido, Jr. 13
EFFECT OF PROPOSED ACQUISITION ON COMPENSATION
New Employment As of the date of this Proxy Statement, no member
Arrangements of our management has entered into any amendments
or modifications to existing employment agreements
with us or our subsidiaries in anticipation of the
acquisition. Nor has any member of our management
entered into any agreement, arrangement or
understanding with Saguaro Utility or its affiliates
regarding employment with, or the right to purchase or
participate in the equity of, the surviving
corporation. Although no such agreement,
arrangement or understanding currently exists, it
is generally expected that our existing
management will remain after the acquisition is
completed, which means that members of our
existing management may, prior to the closing of
the acquisition, enter into new arrangements with
Saguaro Utility or its affiliates regarding
employment with, or the right to purchase or
participate in the equity of, the surviving
corporation.
Change in Control TEP has Change in Control Agreements
Agreements ("Agreements") with all of its officers. 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
Change in (ii) if a change in control occurs during the term of
Control Agreements the Agreement, five years after the change in control.
were adopted On March 29, 2004, upon the approval of the
to attract acquisition agreement by our shareholders, a change in
and retain control occurred for purposes of the Agreements. This
quality management. will be true irrespective of whether or not the
acquisition is completed.
The Agreements provide that each officer shall be
employed by TEP, or one of its subsidiaries or
affiliates, in a position comparable to his or
her current position, with compensation and
benefits, which are at least equal to their then
current compensation and benefits, for a 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).
In the event that the 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,
the officer is entitled to severance benefits in
the form of: (i) a lump sum payment equal to the
present value of three times annual salary and
bonus compensation; (ii) the present value of the
additional amount the officer would have received
under the TEP 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 awards under the
1994 Omnibus Stock and Incentive Plan or any
18
successor plan, which are 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 excise taxes that may become payable under
certain conditions. Any payments made in respect
of such excise taxes are not deductible by us.
Assuming Mr. Pignatelli's and the other Named
Executives' employment was terminated, the total
payments made by UniSource Energy pursuant to the
Agreements would not be expected to exceed $17
million.
Treatment of Our Board has over time granted options to our
Stock Options executive officers and managers that allow those
individuals to purchase our common stock at fair
market value on the date of issuance. Members of
our Board have also over time received grants of
options to purchase our common stock at specified
prices. On March 29, 2004, upon the approval of the
acquisition agreement by our shareholders, a change
of control occurred for purposes of the outstanding
stock options under the UniSource Energy Corporation
1994 Omnibus Stock and Incentive Plan, with the
effect of making all outstanding stock options of
officers and managers immediately exercisable. Upon
consummation of the acquisition, all outstanding
stock options under the UniSource Energy Corporation
1994 Outside Director Stock Option Plan will become
immediately exercisable by members of our Board. In
connection with the acquisition agreement, Saguaro
Utility, through its affiliate, has agreed to pay at
the effective time of the acquisition, with respect
to all outstanding options, an amount in cash equal
to the product of:
o the total number of shares of our common stock
underlying a holder's options, and
o the excess of $25.25 over the exercise price per
share of the shares of our common stock underlying
such options.
Due to this provision, as of the Record Date, our
Board members and the Named Executives listed in the
chart that immediately follows this paragraph will
be entitled to receive, at the effective time of the
acquisition, the following cash payments,
respectively, with respect to the cancellation of
their options (assuming that the options outstanding
as of the Record Date are not exercised or canceled
prior to the effective time):
Name and Title Amount (1)
-------------- ----------
James S. Pignatelli
Chairman, President and Chief Executive $6,790,211
Officer
Lawrence J. Aldrich
Director $66,268
Larry W. Bickle
Director $109,306
Elizabeth T. Bilby
Director $139,568
19
Name and Title Amount (1)
-------------- ----------
Harold W. Burlingame
Director $109,306
John L. Carter
Director $127,868
Robert A. Elliott
Director $8,862
Kenneth Handy
Director $48,636
Warren Y. Jobe
Director $48,636
Steven J. Glaser
Senior Vice President and Chief Operating $1,697,485
Officer, Transmission & Distribution -TEP
Dennis R. Nelson
Senior Vice President and Chief Operating $1,716,325
Officer - UES
Michael J. DeConcini
Senior Vice President, Investments and $1,220,738
Planning / Senior Vice President and Chief
Operating Officer, Energy Resources - TEP
Kevin P. Larson
Vice President, Chief Financial Officer and $979,258
Treasurer
Vincent Nitido, Jr.
Vice President, General Counsel and Chief $1,269,188
Administrative Officer
All directors and executive officers as a
group $17,960,593
-------------------
(1) Includes cash payments attributable to shares subject to options
exercisable within 60 days as disclosed in the Security Ownership of
Management table on pages 4-5 under the column heading "Amount and Nature
of Beneficial Ownership."
Treatment As discussed under "Equity Compensation Plan
of Other Information" on page 15 of this Proxy Statement, we
Compensation maintain a deferred compensation plan that permits
officers and directors to defer a percentage
of the compensation or fees that would otherwise be
payable to the individual for their services to us.
A participant in this plan may elect that his or
her deferrals be credited in, among other things,
the form of a deemed investment in shares of our
common stock. A trust has been established that
maintains a position in our common stock
corresponding to the plan participants' deemed
investment in our common stock. Distributions are
made in stock or cash, at our discretion. In
addition, our Board has, over time, granted our
executive officers and managers restricted stock
units under our stock and incentive plans. Upon
vesting, officers and managers may defer receipt of
these restricted stock unit awards, in which case,
the deferred awards are
20
credited to a bookkeeping account in the form of
dividend equivalent-bearing stock units. The table
that follows sets forth the allocable amount of shares
of common stock credited to our directors and the
Named Executives as of the Record Date with respect to
the deferred compensation plan and dividend
equivalent-bearing stock units.
Our Board has also, over time, granted our
executive officers and managers other equity-based
compensation awards, including performance shares
and performance units under our stock and incentive
plans. Performance shares are distributed as shares
of our common stock, and performance units are
distributed as cash, in each case, when, and to the
extent, that performance goals during a specified
performance period have been met. On March 29,
2004, upon the approval of the acquisition
agreement by our shareholders, a change of control
occurred for purposes of these awards and the
awards fully vested, at target. See "2003 Long-Term
Incentive Plan Awards" on page 14 of this Proxy
Statement. As provided in the following table, upon
the change of control, all shares of common stock
were distributed with respect to performance shares
and all cash payments were made with respect to
performance units.
Number of Performance Shares
Allocable Amount of Issued/Amount of Cash Paid with
Name and Title Deferred Shares Respect to Performance Units
-------------- ------------------- --------------------------------
James S. Pignatelli 137,385 12,675 / $327,958
Chairman, President and
Chief Executive Officer
Lawrence J. Aldrich 1,548 --
Director
Larry W. Bickle 405 --
Director
Elizabeth T. Bilby 4,378 --
Director
Harold W. Burlingame 1,548 --
Director
John L. Carter 10,338 --
Director
Robert A. Elliott 405 --
Director
Kenneth Handy 3,438 --
Director
Warren Y. Jobe 1,548 --
Director
Steven J. Glaser 29,574 5,809 / $150,708
Senior Vice President and
Chief Operating Officer, Transmission &
Distribution - TEP
21
Number of Performance Shares
Allocable Amount of Issued/Amount of Cash Paid with
Name and Title Deferred Shares Respect to Performance Units
-------------- ------------------- --------------------------------
Dennis R. Nelson 26,353 5,704 / $147,537
Senior Vice President and Chief Operating
Officer - UES
Michael J. DeConcini 24,307 4,858 / $125,290
Senior Vice President, Investments and
Planning / Senior Vice President and Chief
Operating Officer,
Energy Resources - TEP
Kevin P. Larson 774 3,770 / $141,370
Vice President, Chief Financial Officer and
Treasurer
Vincent Nitido, Jr. 16,470 3,770 / $141,370
Vice President, General Counsel and Chief
Administrative Officer
All directors and executive officers as a 302,686 53,566 / $1,629,620
group
DIRECTOR INDEPENDENCE CRITERIA
Board independence The Board has established the following criteria for
is determined by determining independence, including for the purpose of
consideration of serving upon the Audit Committee, the Compensation
established criteria. Committee and the Corporate Governance and Nominating
Committee.
Directors that meet each of the following criteria are
deemed independent:
1. A director who is a former employee of
UniSource Energy cannot be "independent"
until five years after employment has
ended, provided, however, that a director
who serves as an interim Chairman or CEO is
excluded from the definition of a "former
employee" and thus deemed independent
immediately after his or her service as
interim Chairman or CEO ends.
2. A director who is, or in the past five
years has been, affiliated with or employed
by a (present or former) auditor of
UniSource Energy (or of an affiliate)
cannot be "independent" until five years
after the end of either the affiliation or
the auditing relationship.
3. A director cannot be "independent" if he or
she is, or in the past five years has been,
part of an interlocking directorate in
which an executive officer of UniSource
Energy serves on the compensation committee
of another company that concurrently
employs the director.
4. Directors with immediate family members in
the foregoing categories (items 1-3) are
likewise subject to the five-year
"cooling-off" provisions for purposes of
determining "independence," provided,
however, that employment of a family member
in a non-officer position does not preclude
a director from being deemed "independent."
22
5. A director who possesses an interest in any
transaction for which disclosure would be
required pursuant to Item 404(a) of SEC
Regulation S-K (generally, this item
requires proxy statement disclosure of
transactions exceeding $60,000 between a
director and UniSource Energy or any of our
subsidiaries) cannot be independent.
6. Directors that do not meet item 5 of the
aforementioned criteria may nonetheless be
deemed independent by a majority of
independent directors, provided the basis
for such determination shall be disclosed
in our Proxy Statement.
Based upon the foregoing criteria, the Board has
deemed each director to be independent, with the
exception of Lawrence J. Aldrich and Larry W. Bickle.
See "Transactions with Management and Others" below.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Haddington Millennium was authorized by its Board of Directors
Energy in 2000 to invest $15 million, in aggregate, over a
Partners II LP three- to five-year period in Haddington Energy
Partners II LP. Mr. Bickle, a member of ourBoard, is
the managing director of Haddington Ventures LLC, the
general partner of Haddington Energy Partners II LP.
As of December 31, 2003, Millennium had funded
approximately $8.5 million under this commitment,
$2.4 million of which was funded in 2003.
Valley Millennium made a commitment of $5 million capital
Ventures plus a share of expenses to Tucson Ventures, LLC,
III, LP a venture capital fund, in 2000. Tucson Ventures, LLC
merged with Valley Ventures III, LP, also a venture
capital fund, in 2002. In connection with the merger
of the funds, Millennium's commitment was revised to a
total of $6 million, including expenses. Mr. Aldrich,
a member of our Board, is a general partner of the
company that manages Valley Ventures III, LP. As of
December 31, 2003, Millennium had funded
approximately $1.2 million under this commitment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Millennium Energy Mr. Stephen Alexander, an immediate family member of
Investments Mrs. Bilby, a member of our Compensation Committee,
is employed by Millennium. As Director of Energy
Investments, Mr. Alexander assists in overseeing
Millennium's investment portfolio. For his services
in 2003, Mr. Alexander received compensation of
approximately $150,000 from Millennium.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee The Compensation Committee is responsible for
developing and administering executive compensation
policies and programs for UniSource Energy and TEP and
making recommendations to the Board with respect
thereto. The Compensation Committee makes
recommendations to the Board with respect to the
compensation of UniSource Energy's executive
officers, including Mr. Pignatelli and the other
Named Executives, and sets policies for and
reviews the compensation awarded to other key
members of management. UniSource Energy applies a
consistent philosophy to compensation for all
executive employees, including the Named
Executives.
23
Overall UniSource Energy's executive compensation policies and
Objectives programs generally are intended to (i) relate the
compensation of employees to the success of UniSource
Energy and the corresponding creation of shareholder
value, and (ii) attract, retain and motivate
executives and key employees with competitive
compensation opportunities.
Executive The Compensation Committee reviews our
Compensation executives' compensation each year. Compensation
Generally depends on many factors, including individual
performance, responsibilities, future challenges and
objectives and the executive's potential contribution
to our future success. The Compensation Committee also
looks at our financial performance and the
compensation levels at comparable companies.
UniSource Energy's 2003 compensation program consisted
of three components:
o base salary;
o short-term incentive compensation; and
o long-term incentive compensation.
Base Salary The base salary component of compensation is intended
to be competitive with that paid by comparable
companies in the energy industry. In developing the
compensation program, the Compensation Committee
retained an external consultant to conduct a
competitive analysis of pay for UniSource Energy's
officer group. In conducting its analysis for 2003,
the consultant selected a peer group of energy
companies with a revenue range of $264 million to $6
billion. UniSource Energy ranks at the 37th
percentile of the peer group. Twenty-one of the 25
peer group companies have both regulated utility and
non-regulated energy businesses. The Compensation
Committee believes the companies in the comparator
group are a more appropriate comparison for UniSource
Energy than the Edison Electric 100 companies used in
the Performance Graph on page 28 of this Proxy
Statement, because the type of business and annual
revenues of the companies included in the survey are
more closely related to those of UniSource Energy and
the companies in the comparator group represent
primary competitors to UniSource Energy for top-level
management personnel. The external data from companies
in the comparator group was used to develop market
compensation for each executive position. "Market
compensation" refers to the median salary for
executives in the comparator group. Base salaries for
UniSource Energy's executive officers, including Mr.
Pignatelli and the other Named Executives, were set at
market compensation levels in January 2003, in
recognition of the increasingly competitive
environment in the electric industry, the need to
continue to attract and retain highly qualified
executives and the fact that a substantial portion of
each executive's total compensation package is
"at-risk," based on the achievement of certain
corporate goals. See "Short-Term Incentive
Compensation and Long-Term Incentive Compensation"
below.
Short-Term The Board adopted a Short-Term Incentive Plan to
Incentive provide compensation for meeting or exceeding
Compensation specified objectives designed to contribute to the
attainment of UniSource Energy's performance
targets and long-term strategic plan. Under the
Short-Term Incentive Plan, target award levels
are set as a percentage of each participant's
base salary. In 2003, the target award levels for
our executive officers ranged from 30% to 70% of
base salary. Awards for Mr. Pignatelli and the
remaining executive officers are determined by
the Board
24
based on the accomplishment of previously established
individual goals and contribution to business results.
Based on the foregoing factors, the Compensation
Committee made awards to the Named Executives ranging
from 56% to 92% of base salary. Incentive compensation
awarded to Mr. Pignatelli and the other Named
Executives is set forth in the preceding Summary
Compensation Table.
Long-Term UniSource Energy's long-term incentive compensation
Incentive is intended to attract and retain quality employees
Compensation over the long-term in a manner that directly aligns
them with shareholder interest.
At the recommendation of the Compensation
Committee, the Board unanimously adopted and, at
the 1994 annual meeting of the shareholders, the
shareholders approved the Tucson Electric Power
Company (now UniSource Energy) 1994 Omnibus Stock
and Incentive Plan. On May 9, 2003, the
Compensation Committee issued stock options
(intended to be incentive stock options),
performance shares (denominated in shares) and
performance units (denominated in cash) to all
executive officers of UniSource Energy, including
Mr. Pignatelli and the other Named Executives. In
calculating the level of awards to the executive
officers, the Compensation Committee considered
the above analysis of executive compensation for
comparative companies. Based on such analysis,
the Compensation Committee awarded Mr. Pignatelli
and the other Named Executives stock options,
performance shares and performance units with a
total value equal to 100% of base salary for
target performance. The number of UniSource
Energy shares covered by the stock option grant
to Mr. Pignatelli was 21,226, the number of
performance shares was 18,370, and the number of
performance units was 189,000. See "2003
Long-Term Incentives Plan Awards" on page 14 of
this Proxy Statement for a discussion of the
performance criteria upon which the payout of
performance shares and performance units is
dependent. In determining the 2003 long-term
incentive awards, the Compensation Committee did
not consider the number of options previously
granted or outstanding.
Tax Code The Compensation Committee does not presently have a
Concerns policy regarding qualifying compensation paid to
executive officers for deductibility under Section
162(m) of the Code.
Respectfully submitted,
THE COMPENSATION COMMITTEE
H. Wilson Sundt, Chair (1/03-5/03)
Harold W. Burlingame, Chair (6/03-12/03)
Elizabeth T.Bilby
John L. Carter
Robert A. Elliott
Kenneth Handy
Warren Y. Jobe
25
AUDIT COMMITTEE REPORT
The Committee The Audit Committee is made up of five financially
literate directors who are independent based
upon independence criteria established by our Board,
which criteria is in compliance with applicable
New York Stock Exchange listing standards. Our Board
has determined that each member of the Audit Committee
has accounting and/or related financial management
expertise and as such has not designated any single
Audit Committee member as the Audit Committee
"financial expert." However, our Board anticipates
that it will formally designate one member of the
Audit Committee to be the Audit Committee "financial
expert" at its May 2004 Board meeting. The Board
previously adopted a written charter for the Audit
Committee. The Committee has complied with its
charter, including the requirement to meet
periodically with our independent auditors, internal
audit department and management to discuss the
auditors' findings and other financial and accounting
matters.
In connection with our December 31, 2003 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 SAS 61
(Codification of Statements on Auditing Standards, AU
Sec. 380); (iii) received from
PricewaterhouseCoopers, LLP the written disclosures
and the letter required by Independence Standards
Board Standard No. 1 (Independence Discussions with
Audit Committees); and (iv) discussed with
PricewaterhouseCoopers, LLP its independence.
Based on all of its activities during the year, the
Audit Committee recommended to the Board that the
audited financial statements for 2003 be included in
the Annual Report on Form 10-K for filing with the
SEC.
Pre-Approved Rules adopted by the SEC in order to implement
Policies requirements of the Sarbanes-Oxley Act of 2002
and Procedures 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.
26
Fees The following table details fees paid to
PricewaterhouseCoopers, LLP for professional services
during 2002 and 2003. 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 auditors.
2002 2003
---- ----
Audit Fees $821,739 $1,030,489
Audit-Related Fees $194,989 $713,470
Tax Fees $62,453 $55,466
All Other Fees $39,812 $2,598
Fees for audit services 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, 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 principally include
accounting and electric system assets from Citizens
Communications Company on August 11, 2003 and due
diligence related to the Springerville expansion and
proposed acquisition of UniSource Energy by an
affiliate of Saguaro Utility. Tax fees include tax
compliance, tax advice, and tax planning. All other
fees principally include accounting training.
Amounts previously reported for 2002 have been
reclassified to conform to the categories required
for 2003.
Respectfully submitted,
THE AUDIT COMMITTEE
Warren Y. Jobe, Chair
Elizabeth T. Bilby
John L. Carter
Robert A. Elliott
Kenneth Handy
27
PERFORMANCE GRAPH
Comparison of Cumulative Five-Year Total Return Among
UniSource Energy, Standard & Poor's 500 Index
and EEI Index of 64 Investor-Owned Utilities (1)
The graph showing on the hard copy represents the comparison of four year
cumulative total return between UniSource Energy Corporation, the S&P 500
Index, and EEI Index of 100 investor-owned utilities. The graph's X-axis
shows the years 1998 to 2003, and the Y-axis shows dollar values from zero
to 250. The data points are connected by lines with the following markers:
UniSource Energy Corporation - triangles; S&P 500 - diamonds; EEI Index -
100 Electrics - squares. The data points are as follows:
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
UniSource Energy
Corporation $100 $83 $142 $141 $137 $202
S&P 500 Index $100 $121 $120 $110 $76 $97
EEI Index - 100
Electrics $100 $81 $110 $97 $94 $116
(1) Assumes $100 invested on December 31, 1998 in UniSource Energy
Corporation common stock, S&P Index and EEI Index. It is assumed that
all dividends are reinvested in stock at the frequency paid and the
returns of each component peer group issuer are weighted according to
the issuer's stock market capitalization at the beginning of the
period.
Data and Calculations 1999 2000 2001 2002 2003
--------------------- ---- ---- ---- ---- ----
S&P 500 Total Return Change 21.04% -9.10% -11.89% -22.10% 28.69%
EEI Index - 64 Electrics Change -18.60% 47.97% -8.79% -14.73% 23.48%
UniSource Energy Change -17.13% 71.80% -1.30% -2.20% 46.72%
28
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 our shareholders,
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 2005 annual meeting of shareholders, any such
notice must be submitted to the Corporate Secretary of
UniSource Energy on or before February 24, 2005
(assuming that the acquisition of UniSource Energy
is not completed prior to such date).
We must receive your This requirement is separate and apart from the SEC's
shareholder proposals requirements that a shareholder must meet in order to
by December 10, 2004. have a shareholder proposal included in our Proxy
Statement. Shareholder proposals intended to be
presented at our 2005 annual meeting of the
shareholders (assuming that the acquisition of
UniSource Energy is not completed prior to our 2005
annual meeting of shareholders) must be received by us
no later than December 10, 2004 (assuming that the
acquisition of UniSource Energy is not completed prior
to such date), 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.
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 2003 Annual Report on Form 10-K 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. You may also obtain
our SEC filings through the Internet at www.sec.gov or
www.UniSourceEnergy.com.
By order of the Board of Directors,
/s/ Catherine A. Nichols
------------------------
Catherine A. Nichols
Corporate Secretary
PLEASE VOTE - YOUR VOTE IS IMPORTANT
29
APPENDIX A
December 4, 2003
UNISOURCE ENERGY CORPORATION
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
1. COMPOSITION
The Compensation Committee of the Board of Directors consists of not
fewer than three Directors appointed annually by the Board. All members
of the Committee shall be determined to be independent in accordance
with the NYSE Listed Company Manual. The Board shall designate one of
the Committee members as Chairman of the Committee.
2. MEMBER QUALIFICATIONS
A Director shall be qualified to serve on the Committee if he or she
qualifies as independent under the NYSE Listed Company Manual.
3. MEMBER APPOINTMENT AND REMOVAL
All members of the Committee shall be appointed and/or removed by the
Corporate Governance & Nominating Committee.
4. MEETINGS
The Committee will hold at least three regular meetings each year, and
such additional meetings, as it may deem necessary. In addition to the
Committee members and the Secretary, the Chairman of the Board, Chief
Executive Officer and President and other members of management may
attend as is appropriate.
5. 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, time and
frequency. In the absence of such rules, the Committee will meet at the
call of its Chairman as is required to accomplish the purposes of the
Committee.
6. COMPENSATION
Each member will be paid for each meeting attended the same fee paid
for attendance at other Committee meetings of the Board, and will be
reimbursed for travel expenses incurred by attendance at meetings.
7. COMMITTEE SECRETARY
The Secretary of the Committee will be the Asst. Corporate Secretary of
the Company (or such other officer 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 officer 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.
A-1
8. QUORUM
A majority of the total membership of the Committee will constitute a
quorum.
9. RESPONSIBILITIES
The function of the Committee is to assure an internally consistent and
externally competitive executive compensation program in order to
attract, motivate and retain qualified executives. It is also the
Committee's function to provide incentives for the attainment of the
Company's strategic goals and objectives and to produce a report on
executive compensation for inclusion in the Proxy Statement of the
Company.
For purposes of the Committee's responsibilities, executives are
defined as all officers of the Company.
10. SPECIFIC DUTIES OF THE COMMITTEE
1. Approve the compensation philosophy and guidelines for the
executive group, including base salary structure, incentive
compensation, and long range strategic incentive programs to
attract, retain and motivate executives.
2. Review and approve corporate goals and objectives relating to
CEO compensation.
3. Evaluate CEO performance in light of corporate goals and
objectives and set CEO compensation level based upon evaluation
of the performance of such goals and objectives.
4. Review and approve, based on reviews of compensation practices
in related and other industries, the appropriate compensation
levels including fringes and other benefits for the CEO.
5. Receive the CEO's recommendations, review and approve
compensation for all of the Company's executives, including any
equity compensation awarded, fringes and other benefits, and the
ability to delegate action to Management in conjunction with the
aforementioned compensation.
6. Review and approve any management incentive plans, including the
participants, goals, payout ratios, etc., which involve
executives of the Company.
7. Administer the Company's long range incentive plan, including
selection of participants, setting of objectives, and
determination of awards, as more fully defined in such plan.
Recommend changes to the long range incentive program as deemed
necessary considering the Company's performance, relative
shareholder return, value of similar awards at similar companies
and awards given to the Company's CEO in past years.
8. Review and approve any special employment contract or other
special agreement, such as a supplementary pension agreement,
for any of the Company's executives.
9. Produce an annual report, in accordance with applicable rules
and regulations, on executive compensation for inclusion in the
proxy statement.
10. Periodically, receive a briefing by management regarding the
administration and appropriateness of the total rewards package
including base, short-term and long-term compensation and health
and welfare plans, for non-executive employees.
11. Review and approve Director compensation, including short- and
long-term incentives.
A-2
12. Review and approve policy for reimbursement of Director
expenses.
13. As necessary, carry out other duties assigned by the Board to
the Committee that are related to compensation and management
development.
14. Retain and terminate any consulting firms to be used to assist
in the evaluation of director, CEO or executive compensation.
This authority shall be exclusive to this Committee.
15. Annually review its performance as a Committee.
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.
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, with the exception of that portion of any
meeting where compensation of the Chief Executive Officer is
considered. It is also the responsibility of the Chief Executive
Officer to coordinate the implementation and execution of Committee
determinations.
13. OTHER AUTHORITY
The Committee may call upon any person including employees of the
Company or its subsidiaries, knowledgeable in matters discussed by the
Committee, for information and counsel.
14. ANNUAL SCHEDULE
The routine business of the Committee shall be considered in accordance
with the Annual Schedule attached as Exhibit A.
A-3
EXHIBIT A
11/03
COMPENSATION COMMITTEE ANNUAL SCHEDULE
February Review prior year performance under short term
incentive program and determine awards
Review current year Performance Enhancement Plan
Approve report of Committee for inclusion in Proxy
August Meet with consultant re upcoming review of Director
and Officer compensation
October Review of compensation for Directors and Officers
December Establish director retainer and meetings fees to be
effective January 1st of following year.
Establish Officer compensation for following year.
Review corporate goals and objectives for following
year
(The dates on the above schedule
are subject to change.)
A-4
APPENDIX B
February 5, 2004
UNISOURCE ENERGY CORPORATION
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
1. COMPOSITION
The Corporate Governance and Nominating Committee of the Board of
Directors (the "Committee") consists of not fewer than three Directors
appointed annually by the Board. All members of the Committee shall be
determined to be independent in accordance with the NYSE Listed Company
Manual. The Board shall designate one of the Committee members as
Chairman of the Committee.
2. QUALIFICATIONS
A Director shall be qualified to serve on the Committee if he or she
qualifies as independent under the Company's Director Independence
Criteria.
4. APPOINTMENT AND REMOVAL OF COMMITTEE MEMBERS
All members of the Committee shall be appointed and/or removed by the
Board of Directors.
5. MEETINGS
The Committee will meet regularly to prepare for any upcoming vacancies
on the Board of Directors and to address corporate governance. In
addition to the Committee members and the Secretary, the Chairman of
the Board, Chief Executive Officer and President and other members of
the Board and management may attend as appropriate.
6. 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, time and
frequency. In the absence of such rules, the Committee will meet at the
call of its Chairman as is required to accomplish the purposes of the
Committee.
7. 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.
8. COMMITTEE SECRETARY
The Secretary of the Committee will be the Asst. Corporate Secretary of
the Company (or such other representative of management as the
Committee may designate) and will 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
B-1
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.
9. QUORUM
A majority of the total membership of the Committee will constitute a
quorum.
10. RESPONSIBILITIES AND SPECIFIC DUTIES OF THE COMMITTEE
The functions of the Committee shall be:
1. Regularly review and assess the current Board membership as to
size, skills and upcoming vacancies.
2. Make recommendations to the Board with respect to desired
background, skill sets, experience and characteristics of Board
members, as well as continuing education, conferences and
seminars that Directors might attend to enhance their skill
sets.
3. Regularly review and/or update the Candidate Evaluation Form.
4. Fill vacancies on Board of Directors by gathering and reviewing
information on potential Board members; interviewing potential
Board candidates; and, recommending potential Board members to
the Board of Directors.
5. Review and approve all UniSource Board committee members and
board members of major subsidiaries.
6. Annually review and recommend for approval corporate governance
principles.
7. Facilitate periodic evaluation of the Board's collective
performance.
8. Annually evaluate the performance of this Committee.
9. To retain and terminate any search firms to be used to identify
director candidates including any terms of retention. This
authority shall be exclusive to this Committee.
10. Annually review and approve modifications to the Company Board
Manual.
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.
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 Committee may call upon any person including employees of the
Company or its subsidiaries, knowledgeable in matters discussed by the
Committee, for information and counsel.
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APPENDIX B
FORM OF PROXY CARD
UNISOURCE ENERGY
YOUR VOTE IS IMPORTANT
VOTE BY TELEPHONE OR INTERNET
24 HOURS A DAY - 7 DAYS A WEEK
INTERNET
--------
https://www.proxyvotenow.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
---------
1-866-358-4695
- 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.
1-866-358-4695
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 6, 2004.
DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY THE INTERNET OR TELEPHONE.
-------------------------------------------------------------------------------
(FORM OF PROXY CARD - FRONT)
Please Sign, Date and Return [X]
the Proxy Promptly Using the Votes MUST be indicated (x)
Enclosed Envelope. in Black or Blue Ink.
The Board of Directors Recommends a vote "FOR" the following proposal:
1. Election of Directors
FOR all nominees WITHHOLD AUTHORITY to vote *EXCEPTIONS [ ]
listed below for all nominees listed
[ ] below [ ]
Nominees: 01-James S. Pignatelli, 02-Lawrence J. Aldrich, 03-Larry W. Bickle,
04-Elizabeth T.Bilby, 05-Harold W. Burlingame, 06-John L. Carter,
07-Robert A. Elliott, 08-Kenneth Handy, 09-Warren Y. Jobe
(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).
*Exceptions
------------------------------------------------------------------
If you agree to access our
Annual Report and Proxy
Statement electronically in
the future, please mark this
box. [ ]
To change your address,
please mark this box. [ ]
To include any comments,
please mark this box. [ ]
-----------------------------------
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 2003
Annual Report.
Date Shareholder sign here
----------------------------------------
Date Co-Owner sign here
----------------------------------------
-------------------------------------------------------------------------------
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[A street map showing the location Marriott University Park Hotel
of the Annual Shareholders' Meeting 880 East Second Street
is set forth in this area.] Tucson, AZ 85719
520.792.4100 Hotel Direct
800.228.9290 Reservations
TRANSPORTATION
From Tucson International Airport
Shuttle Service
Arizona Stagecoach
Call 520-889-1000
Automobile - Interstate 10 to
Speedway exit
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 2004 Annual
Shareholders' Meeting and the 2003 Annual Report on the Internet through the
following address: http://www.UniSourceEnergy.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 866-275-4867.
-------------------------------------------------------------------------------
(FORM OF PROXY CARD - BACK)
UNISOURCE ENERGY
This Proxy is Solicited on Behalf of the Board of Directors of the Company
for the Annual Shareholders' Meeting to be held Friday, May 7, 2004.
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 Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona,
on Friday, May 7, 2004, 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" Proposal 1.
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