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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[ ] Soliciting Material Pursuant to Sections 240.14a-11(c) or 240.14a-12
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 9, 2003
James S. Pignatelli (520) 571-4000
Chairman of the Board
Dear Shareholders:
You are cordially invited to attend the UniSource Energy Corporation
2003 Annual Shareholders' Meeting to be held on Friday, May 9, 2003, at the
Sheraton Tucson Hotel and Suites, 5151 East Grant Road, 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 Notice and Proxy Statement.
We have enclosed a proxy card that lists all matters that require your
vote. Please vote, sign and return 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 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
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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 Annual Shareholders' Meeting ("Meeting") of UniSource
Energy Corporation ("UniSource Energy," "UNS" or "Company") at the Sheraton
Tucson Hotel and Suites, 5151 East Grant Road, Tucson, Arizona, on Friday,
May 9, 2003, at 10:00 a.m., Mountain Standard Time. The purpose of the
Meeting is to:
1. elect ten directors to the Board for the ensuing year; and
2. consider any other matters which properly come before the Meeting.
Only shareholders of record of common stock at the close of business on
March 19, 2003, are entitled to vote at the Meeting.
We have enclosed our 2002 Annual Report, including financial statements,
and the Proxy Statement with this notice. Proxy soliciting material is first
being sent or given to shareholders on April 9, 2003. Your proxy is being
solicited by the UniSource Energy Board of Directors.
Please vote, sign, date and mail the enclosed proxy as soon as possible
in the enclosed return envelope. You may also vote by telephone or the
Internet, as explained on the enclosed proxy card.
/s/ Catherine A. Nichols
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Catherine A. Nichols
Corporate Secretary
Dated: April 9, 2003
YOUR VOTE IS IMPORTANT
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY BY MAIL, OR TO VOTE BY TELEPHONE OR THE INTERNET, AS EXPLAINED
ON THE 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 9, 2003 Sheraton Tucson Hotel and Suites
10:00 a.m., MST 5151 East Grant Road
Tucson, Arizona 85712
RECORD DATE The record date is March 19, 2003 ("Record Date"). If
you were a shareholder of record at the close of
business on March 19, 2003, you may vote at the Annual
Shareholders' Meeting ("Meeting") of UniSource Energy
Corporation ("UniSource Energy," UNS" or "Company").
Each share is entitled to one vote. In the election of
directors, you may cumulate votes. At the close of
business on the record date, we had 33,589,031 shares
of our common stock outstanding.
AGENDA 1. Proposal One: Elect ten directors to the Board for
the ensuing year.
2. Consider any other matters which properly come before
the Meeting and any adjournments.
INDEPENDENT Representatives of PricewaterhouseCoopers, LLP are
AUDITORS expected to be present at the Meeting with the
opportunity to make a statement and respond to
appropriate questions.
PROXIES A form of proxy for execution by shareholders is
enclosed. Unless you tell us on the proxy card to vote
We will follow differently, we will vote signed returned proxies "for"
your voting the Board's nominees. The Board or proxy holders will
instructions. If use their discretion on other matters. If a nominee
none, we will vote cannot or will not serve as a director, the Board or the
signed proxies persons designated as proxies will vote for a person
"for" the whom they believe will carry on our present policies.
nominees.
PROXIES The Board of Directors ("Board").
SOLICITED BY
FIRST MAILING We anticipate first mailing this Proxy Statement and the
DATE form of proxy on April 9, 2003.
REVOKING YOUR You may revoke your proxy before it is voted at the
PROXY 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 respond on an individual basis, your comments help us to
proxy card has measure your satisfaction, and we may benefit from your
room for them. suggestions.
PLEASE VOTE - YOUR VOTE IS IMPORTANT
Prompt return of your proxy will help reduce the costs of re-solicitation.
1
CONTENTS
Voting Procedures/Revoking Your Proxy......................................2
UniSource Energy Share Ownership...........................................3
Proposal One: Election of Directors*.......................................7
Board Information..........................................................9
Board Compensation........................................................10
Executive Compensation and Other Information**............................11
Equity Compensation Plan Information......................................14
Officer Change in Control Agreements......................................16
Director Independence Criteria............................................17
Transactions with Management and Others...................................18
Compensation Committee Interlocks and Insider Participation...............18
Compensation Committee Report on Executive Compensation...................18
Audit Committee Report....................................................21
Performance Graph**.......................................................22
Submission of Shareholder Proposals.......................................23
Other Business............................................................23
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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,
telephone, the mail or in person at the Meeting. Your proxy card
Internet, mail or contains instructions for voting by telephone or the
in person. We Internet, which are the least expensive and fastest
encourage you to methods of voting. To vote by mail, complete and sign
vote by telephone your proxy card, or your broker's voting instruction
or the Internet to card if your shares are held by your broker, and return
help us save money. it in the enclosed return envelope.
Under Arizona law, a majority of the shares entitled to
vote on any single matter which may be brought before
the Meeting will constitute a quorum. Business may be
conducted once a quorum is represented at the Meeting.
Except as otherwise specified by law or in our Articles
of Incorporation or Bylaws, if a quorum exists, action
on a matter other than the election of directors will be
deemed approved if the votes cast in favor of the matter
exceed votes cast against it.
Directors are elected by a plurality of 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.
2
You may cumulate In the election of directors, each of our common stock
your votes for shareholders has the right to cumulate his votes by
directors. 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.
You can revoke Any shareholder giving a proxy has a right to revoke
your proxy after that proxy by giving notice to UniSource Energy in
sending it in by writing directed to the Corporate Secretary, UniSource
following these Energy Corporation, One South Church Avenue, Suite 1820,
procedures. 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 the proxy, the proxy will be
voted in favor of the nominees as set forth herein.
PROXY We will bear the entire cost of the solicitation of
SOLICITATION 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 and Company, 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.
UNISOURCE ENERGY SHARE OWNERSHIP
SECURITY The following table sets forth the number and percentage
OWNERSHIP of shares beneficially owned as of the Record Date and
OF MANAGEMENT the nature of such ownership by each of our directors,
nominees, the Chief Executive Officer, the four other
most highly compensated executive officers during 2002
and all directors and officers as a group. Ownership
includes direct and indirect (beneficial) ownership, as
defined by the SEC rules.
3
Allocable Amount of
Name and Amount and Shares Under Deferred
Title of Nature of Compensation Stock
Title Beneficial Beneficial Percent Plan and Restricted
of Class Owner Ownership(1) of Class Stock Unit Account(2)
-------- ---------- ------------ -------- ---------------------
Common James S. Pignatelli 383,115 (3)(4) * 127,256
Chairman, President &
Chief Executive Officer
Common Lawrence J. Aldrich 7,100 (5) * 1,101
Director
Common Larry W. Bickle 10,290 (6) * --
Director
Common Elizabeth T. Bilby 11,101 (7) * 3,827
Director
Common Harold W. Burlingame 9,701 (6) * 1,101
Director
Common John L. Carter 19,847 (8) * 9,472
Director
Common Robert A. Elliott --
Director Nominee
Common Daniel W. L. Fessler 8,747 (6) * 1,101
Director
Common Kenneth Handy 3,834 (9) * 2,843
Director
Common Warren Y. Jobe 1,834 (9) * 1,101
Director
Common H. Wilson Sundt 12,754 (7)(10) * 2,098
Director
Common Steven J. Glaser 123,601 (11)(12) * 28,324
Senior Vice President &
Chief Operating Officer,
Transmission &
Distribution (TEP)
Common Dennis R. Nelson 116,742 (13)(14) * 25,600
Senior Vice President,
Utility Services
Common Kevin P. Larson 62,114 (15)(16) * 14,700
Vice President, Chief
Financial Officer &
Treasurer
4
Common Michael J. DeConcini 55,186 (17)(18) * 23,389
Senior Vice President,
Investments & Planning
(UNS) and Energy
Resources (TEP)
Common All directors and 1,145,670 (19) 3.4% 307,037
executive officers as
a group
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* Represents less than 1% of the outstanding common stock of UniSource Energy.
(1) Amounts include the following:
- Any shares held in the name of the spouse, minor children or other relatives sharing
the home of the director, nominee or officer. Except as otherwise indicated below,
the directors, nominees 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.
- Shares subject to options exercisable within 60 days, based on information from
directors and officers.
- Equivalent share amounts allocated to the individuals' 401(k) Plan which, since June
1, 1998, has included a UniSource Energy Stock Fund election option.
(2) Amounts include the following:
- Shares held in trust under the Deferred Compensation Plan. The Trust maintains a
position in UNS common stock representative of the aggregate UNS stock liability of
all plan participants with deemed investments in UNS stock. Distributions under the
Deferred Compensation Plan are made in stock or cash, at the Company's discretion.
Until the common stock is distributed, directors and officers are not the beneficial
owners of such shares. The number of shares set forth represents the deemed
investment as of December 31, 2002.
- The allocable amount of deferred shares in the participant's Stock Unit Account.
Includes a total of 237,945 shares which vest within 60 days.
(3) Includes 368,964 shares subject to options exercisable within 60 days.
(4) Includes 12,751 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of December 31, 2002.
(5) Includes 4,001 shares subject to options exercisable within 60 days.
(6) Includes 7,201 shares subject to options exercisable within 60 days.
(7) Includes 10,801 shares subject to options exercisable within 60 days.
(8) Includes 9,601 shares subject to options exercisable within 60 days.
(9) Includes 1,334 shares subject to options exercisable within 60 days.
(10) Includes 1,000 shares held by a corporation with which Mr. Sundt is associated.
(11) Includes 100,811 shares subject to options exercisable within 60 days.
(12) Includes 21,348 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of December 31, 2002.
(13) Includes 107,981 shares subject to options exercisable within 60 days.
(14) Includes 7,953 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of December 31, 2002.
(15) Includes 57,054 shares subject to options exercisable within 60 days.
(16) Includes 2,207 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of December 31, 2002.
(17) Includes 50,548 shares subject to options exercisable within 60 days.
(18) Includes 4,638 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of December 31, 2002.
(19) Includes 1,036,402 shares subject to options exercisable within 60 days, and 58,972
shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of December 31,
2002.
5
SECURITY The following companies are the beneficial owners of
OWNERSHIP more than 5% of the outstanding shares of our common
OF CERTAIN stock:
BENEFICIAL OWNERS
Amount and
Title of Name and Address Nature of Percent
Class of Beneficial Owner Beneficial Ownership of Class
-------- ------------------- -------------------- --------
Common T. Rowe Price Associates, Inc. 3,337,900 (1) 9.9%
100 E. Pratt Street
Baltimore, MD 21202
Common White Mountains Insurance Group 2,018,100 (2) 6.3%
80 South Main Street
Hanover, NH 03755
Common The Prudential Financial, Inc. 1,826,550 (3)(4) 5.4%
751 Broad Street
Newark, NJ 07102-3777
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(1) In a statement filed February 14, 2003, with the SEC on Schedule 13G/A
under the Securities Exchange Act of 1934, as amended ("Exchange Act"),
T. Rowe Price Associates, Inc. ("Price Associates") indicated it has
sole voting power over 1,180,500 shares and sole dispositive power over
3,337,900 shares of our outstanding 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 filed February 5, 2003, with the SEC on Schedule 13G/A
under the Exchange Act, White Mountains Insurance Group ("WMIG")
indicated that it has sole voting and sole dispositive power over
2,018,100 shares, shared voting power over 2,018,100 shares and shared
dispositive power over 2,018,100 shares of our common stock. WMIG
indicated that it indirectly controls, through various wholly-owned
subsidiaries and certain of its employee benefit plans, 2,018,100
shares. WMIG stated that the shares are beneficially owned by OneBeacon
Insurance Company (200,000 shares), The Camden Fire Insurance
Association (800,000 shares), Folksamerica Reinsurance Company (138,100
shares) and certain employee benefit plans sponsored by Folksamerica
Reinsurance Company (100,000 shares) and OneBeacon Insurance Company
(780,000 shares). WMIG further stated that, through an investment
advisory agreement, OneBeacon Asset Management Company has sole voting
power and dispositive power over such shares.
(3) In a statement filed February 7, 2003, with the SEC on Schedule 13G/A
under the Exchange Act, Prudential Financial, Inc. ("Prudential")
indicated that it has sole voting and sole dispositive power over
46,210 shares, shared voting power over 1,769,940 shares and shared
dispositive power over 1,780,340 shares of our common stock. In
addition, through its beneficial ownership of the Prudential Insurance
Company of America ("PICOA"), Prudential stated that it may be deemed
to presently hold 8,100 shares of our outstanding common stock for the
benefit of PICOA's general account. In addition, Prudential stated that
it may have direct or indirect voting and/or investment discretion over
1,818,450 shares of our outstanding common stock, which are held for
its own benefit or for the benefit of its clients by its separate
accounts, externally managed accounts, registered investment companies,
subsidiaries and/or other affiliates. Prudential further stated that
these shares were acquired by Prudential in the ordinary course of
business, and not with the purpose or effect of changing or influencing
control of UniSource Energy and that the filing of this statement
should not be construed as an admission of Prudential, for the purposes
of Sections 13 or 16 of the Exchange Act, that it is the beneficial
owner of these shares.
(4) In a statement filed February 14, 2003, with the SEC on Schedule 13G
under the Exchange Act, Jennison Associates LLC ("Jennison") indicated
that it has sole voting and shared dispositive power over 1,722,340
shares, representing 5.13% of our outstanding common stock, which are
directly held in managed accounts to which Jennison serves as
investment advisor. Jennison stated that it may be deemed to be the
beneficial owner of the shares of our common stock held by such managed
accounts. PICOA owns 100% of equity interests of Jennison. As a result,
PICOA may be deemed to have the power to exercise or to direct the
exercise of such voting and/or dispositive power that Jennison may have
with respect to our common stock held in managed accounts. Jennison
stated that it does not file jointly with PICOA, and as such, shares of
our common stock reported on Jennison's 13G may be included in the
shares reported on the 13G/A filed by Prudential. Jennison further
stated that these shares were acquired by Jennison in the ordinary
course of business, and not with the purpose or effect of changing or
influencing control of UniSource Energy, and that the filing of this
statement should not be construed as an admission of Jennison, for the
purposes of Sections 13 or 16 of the Exchange Act, that it is the
beneficial owner of these shares.
6
SECTION 16(A) Section 16(a) of the Exchange Act and SEC regulations
BENEFICIAL require directors, certain officers and persons who own
OWNERSHIP greater than 10% of our stock to file reports of
REPORTING ownership and changes in ownership of such stock with
COMPLIANCE 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 2002, with the
exception of Mr. Kenneth Handy, a Director of UniSource
Energy, who failed to file timely a Form 4 for one
discretionary transaction under the UniSource Energy
Corporation Deferred Compensation Plan that involved
derivative securities corresponding to 670 shares of UNS
stock. The transaction was subsequently reported to the
SEC on a Form 5.
PROPOSAL ONE: ELECTION OF DIRECTORS
GENERAL At the Meeting, the shareholders will elect ten directors
to serve on our Board for the ensuing year and until
We will elect ten their successors are elected and qualified. The shares
directors this represented by executed proxies in the form enclosed,
year. unless withheld, will be voted for the ten nominees
listed below, or, in the discretion of the persons acting
as proxies, will be voted cumulatively for one or more of
such nominees. All of the current nominees are present
members of the Board except Robert A. Elliott. 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 of Directors, President and Chief
PIGNATELLI Executive 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 Tucson Electric Power Company
("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. Age 59.
LAWRENCE J. General Partner, Valley Ventures III, LP, since
ALDRICH September 2002; Managing Director and Founder, Tucson
(1)(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 50.
LARRY W. Managing Director of Haddington Ventures, LLC, an
BICKLE investment company, since 1997; Director of St. Mary
(1)(4) Land and Exploration since 1995; Director of Millennium
since 1998. Board member since 1998. Age 57.
7
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 since 1998. Board member
since 1995. Age 63.
HAROLD W. Senior Executive Advisor for AT&T Wireless Services
BURLINGAME since July 2001; Executive Vice President,
(1)(2)(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 62.
JOHN L. CARTER Director of TEP since 1996; Director of Millennium since
(4) 1998. Board member since 1996. Age 68.
ROBERT A. President and owner of The Elliott Accounting Group
ELLIOTT 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. Age 47.
DANIEL W. L. Partner in the law firm of LeBoeuf, Lamb, Greene &
FESSLER MacRae LLP since 1997; Member of the Harvard Electricity
(1)(4) Policy Group since 1993; Member of the American Law
Institute since 1985; Director of TEP since 1998. Board
member since 1998. Age 61.
KENNETH HANDY Retired CPA; Vice President and Chief Financial Officer
(2)(3)(4) 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 and Millennium since 2001.
Board member since August 2001. Age 64.
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 and
Millennium since 2001. Board member since August 2001.
Age 62.
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(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 2002, the Board held a total of six regular 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 seven meetings in
2002 and was in full compliance with its written
charter. See Appendix A attached to this Proxy Statement
for a copy of the UniSource Energy Corporation Audit
Committee of the Board of Directors Charter.
THE COMPENSATION COMMITTEE reviews the performance of
our directors and officers and makes recommendations to
the Board with respect to directors' and officers'
compensation. Our Compensation Committee held three
meetings in 2002.
THE FINANCE COMMITTEE reviews and recommends to the
Board long-range financial policies and objectives and
actions required to achieve those objectives.
Specifically, the Finance Committee reviews capital and
operating budgets, current and projected financial
results of operations, short-term and long-range
financing plans, dividend policy, risk management
activities and major commercial banking, investment
banking, financial consulting and other financial
relations of UniSource Energy. Our Finance Committee
held four meetings in 2002.
THE CORPORATE GOVERNANCE AND NOMINATING COMMITTEE is
responsible for the Company's Code of Ethics and
Principles of Conduct, 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 five meetings
in 2002. At such times as director vacancies occur, the
Corporate Governance and Nominating Committee will
consider written recommendations from shareholders for
the Board. The deadline for consideration of
recommendations for next year's annual meeting of the
shareholders is December 11, 2003. Recommendations must
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.
9
BOARD COMPENSATION
RETAINER AND FEES In 2002, each non-employee director received 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 service.
OPTION GRANTS On January 3, 2002, each of the non-employee directors
received options to purchase 2,000 shares of our common
stock, at an exercise price of $18.74.
At the 2002 annual meeting, shareholders approved an
amendment to the 1994 Outside Director Stock Option
Plan, which provides that each non-employee director
will be granted a stock option when he or she first
takes office that covers a number of shares of our
common stock equal to $5,000 divided by the value of an
option as of the date of grant. The amendment also
generally provides that each non-employee director in
office on the first business day of each year, and who
has been a director for at least three months, will be
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 amendment also provides for a one-time stock option
grant equal to the difference between $10,000 divided by
the value of an option as of the grant date less 2,000
shares. This calculation did not result in any
additional stock option grants in 2002.
The amendment also generally provides that each non-
employee director in office on the first business day of
each year will be granted a number of restricted shares
of our common stock equal to $10,000 divided by the then
fair market value of a share of our common stock. The
amendment also provides for a one-time restricted stock
grant. Accordingly, each of the non-employee directors
in office on May 10, 2002, the effective date of the
amendment, received a restricted stock grant of 516
shares.
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
Cash Compensation Security Grants
-------------------------------- ---------------------------------
Number of Number of
Annual Shares Subject Securities
Retainer Meeting to Restricted Underlying
Name (1) Fee ($) (2) Fees ($) (2) Stock Award Options/SARs(3)
-------- ----------- ------------ ------------- ---------------
Lawrence J. Aldrich 20,000 31,000 516 2,000
Larry W. Bickle 20,000 34,000 (4) 516 2,000
Elizabeth T. Bilby 20,000 40,000 516 2,000
Harold W. Burlingame 20,000 35,000 516 2,000
Jose L. Canchola 10,000 8,000 -- 2,000
John L. Carter 20,000 37,000 (4) 516 2,000
Daniel W. L. Fessler 20,000 32,000 (5) 516 2,000
Kenneth Handy 20,000 35,000 516 2,000
Warren Y. Jobe 20,000 40,000 516 2,000
Martha R. Seger 10,000 15,000 -- 2,000
H. Wilson Sundt 20,000 34,000 516 2,000
10
---------------------
(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) Stock options awarded in 2002 under the UniSource Energy Corporation 1994 Outside
Director Stock Option Plan carry dividend equivalent rights. A bookkeeping account
established in the option holder's name is credited with a cash amount equal to the
cash dividends or cash distributions that become payable on a number of shares of
UniSource Energy common stock equal to the number of shares that are subject to the
option award. Dividend equivalents are subject to the same vesting schedule as the
underlying option, and are payable on the earlier of (i) the date of option exercise,
or (ii) the date of termination of the option, to the extent vested.
(4) As members of the Global Energy Solutions, Inc. ("GES") board, Mr. Bickle and Mr.
Carter each received an additional $2,000 for attending GES board meetings during
2002. UniSource Energy owned 67% of GES, which has since been merged into Global Solar
Energy, Inc. ("GSE").
(5) As a member of the GSE board, Mr. Fessler received an additional $3,000 for attending
GSE board meetings during 2002. UniSource Energy owns 87% of GSE.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF The following table summarizes the compensation and
COMPENSATION stock option grants to, and stock options/stock
appreciation rights ("SARs") held by, our Chief
Executive Officer and our four other most highly
compensated executive officers at December 31, 2002
("Named Executives").
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
---------------------- ---------------------
Restricted Securities All Other
Name and Stock Awards Underlying Compensation
Principal Position Year Salary ($) Bonus ($) ($)(1) Options/SARs (#) ($)(2)
------------------ ---- ---------- --------- ---------- ---------------- --------
James S. Pignatelli 2002 574,654 320,000 -- 150,000 11,000
Chairman, President & 2001 559,423 580,000 -- 150,000 (3) 10,500
Chief Executive 2000 528,462 440,000 -- 175,000 (3) 10,500
Officer
Steven J. Glaser 2002 259,654 110,000 -- 45,000 11,000
Senior Vice President 2001 244,231 132,000 -- 54,000 10,500
& Chief Operating 2000 204,519 115,000 -- 40,000 10,500
Officer, Transmission
& Distribution (TEP)
Dennis R. Nelson 2002 260,000 90,000 -- 45,000 11,000
Senior Vice President, 2001 259,712 117,000 -- 34,000 10,500
Utility Services 2000 244,423 112,000 -- 40,000 10,500
Kevin P. Larson 2002 199,656 76,000 -- 35,000 11,000
Vice President, Chief 2001 184,519 113,000 -- 20,000 10,500
Financial Officer & 2000 159,808 78,500 -- 17,000 9,216
Treasurer
Michael J. DeConcini 2002 199,654 72,000 -- 40,000 11,000
Senior Vice President, 2001 184,519 97,125 -- 30,000 (3) 10,500
Investments & Planning 2000 159,616 100,000 -- 40,000 (3) 8,758
(UNS) and Energy
Resources (TEP)
11
-----------------------
(1) As of December 31, 2002, based on the closing market price of UniSource Energy's stock on
that date of $17.29, Mr. Pignatelli held 50,262 restricted stock units and 55,659 stock
units (including dividend equivalent stock units) valued at $1,831,374; Mr. Glaser held
11,924 restricted stock units and 14,668 stock units (including dividend equivalent stock
units) valued at $459,776; Mr. Nelson held 9,424 restricted stock units and 14,078 stock
units (including dividend equivalent stock units) valued at $406,350; Mr. Larson held
7,783 restricted stock units and 6,330 stock units (including dividend equivalent stock
units) valued at $244,014; and Mr. DeConcini held 11,539 restricted stock units and 11,619
stock units (including dividend equivalent stock units) valued at $400,402.
(2) All Other Compensation is comprised of UniSource Energy's contributions to the 401(k)
Plan.
(3) The following options in the common stock of both GSE and Infinite Power Solutions, Inc.
("IPS"), pursuant to each company's Stock Incentive Plan are included in the aggregate
number of options granted: (i) 50,000 options granted in 2001 and 75,000 options granted
in 2000 to Mr. Pignatelli, and (ii) 10,000 options granted in 2001 and 20,000 options
granted in 2000 to Mr. DeConcini. Options in UniSource Energy common stock were granted
concurrent with and in an amount equal to the aforementioned grant of GSE and IPS options.
The exercise of options in GSE and/or IPS reduces the relative number of options available
for exercise in the other company and UniSource Energy. The UniSource Energy options will
become exercisable only if GSE or IPS shares are not registered under the applicable
securities laws and are not listed on a recognized national exchange within five years of
the award dates. If the UniSource Energy options become exercisable, all remaining GSE
and/or IPS options will terminate.
STOCK OPTION During 2002, the Compensation Committee of our Board
GRANTS IN 2002 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"). The options vest ratably over a
three-year period. The aggregate number of UNS shares
attributable to the 2002 grants is 568,000.
The following table includes our 2002 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.
12
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Potential Relizable
Number of Percent of Value at Assumed
Securities Total Options/ Annual Rates of Stock
Underlying SARs Granted Exercise Price Appreciation
Options/SARs to Employees Price Expiration for Option Term
Name Granted (1) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ------------ -------------- -------- ---------- --------- ---------
James S. Pignatelli 150,000 26.4% 18.12 1/2/12 1,709,336 4,331,792
Steven J. Glaser 45,000 7.9% 18.12 1/2/12 512,801 1,299,538
Dennis R. Nelson 45,000 7.9% 18.12 1/2/12 512,801 1,299,538
Kevin P. Larson 35,000 6.2% 18.12 1/2/12 398,845 1,010,751
Michael J. DeConcini 40,000 7.0% 18.12 1/2/12 455,823 1,155,145
-----------------
(1) Stock options awarded in 2002 under the UniSource Energy Corporation 1994 Omnibus Stock
and Incentive Plan carry dividend equivalent rights. A bookkeeping account established in
the option holder's name is credited with a cash amount equal to the cash dividends or
cash distributions that become payable on a number of shares of UniSource Energy common
stock equal to the number of shares that are subject to the option award. Dividend
equivalents are subject to the same vesting schedule as the underlying option, and are
payable on the earlier of (i) the date of option exercise, or (ii) the date of termination
of the option, to the extent vested.
2002 OPTION AND The following table includes the number and value of
SAR HOLDINGS exercisable and non-exercisable options and SARs held by
the Named Executives as of December 31, 2002.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Fiscal Options/SARs at
Acquired Year-End (#) Fiscal Year End ($)
On Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable
------ ----------- ------------ ---------------------- --------------------
James S. Pignatelli -- -- 278,205/108,333 (1) 921,767/217,749
Steven J. Glaser -- -- 66,320/13,333 179,630/26,799
Dennis R. Nelson -- -- 81,646/13,333 235,678/26,799
Kevin P. Larson -- -- 38,719/5,666 116,477/11,389
Michael J. DeConcini -- -- 30,547/26,666 (1) 95,702/53,599
-----------------------
(1) Mr. Pignatelli holds options to acquire up to 125,000 shares of GSE common stock and
options to acquire up to 125,000 shares of IPS common stock. Mr. DeConcini holds options
to acquire up to 30,000 shares of GSE common stock and options to acquire up to 30,000
shares of IPS common stock. These IPS and GSE options were granted in 2000 and 2001. Of
the UNS options granted to Mr. Pignatelli and Mr. DeConcini reflected in the foregoing
table, options covering up to 125,000 shares of UNS common stock granted to Mr. Pignatelli
will automatically terminate to the extent Mr. Pignatelli exercises his options in IPS or
GSE and options to acquire up to 30,000 shares of UNS common stock granted to Mr.
DeConcini will automatically terminate to the extent Mr. DeConcini exercises his IPS or
GSE options. There is no readily available market price for the common stock of GSE and
IPS.
13
EQUITY COMPENSATION PLAN INFORMATION
EQUITY UniSource Energy's only equity-based compensation plan
COMPENSATION that has not been approved by shareholders is the
PLANS Management and 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 the Company. UniSource Energy also credits
DCP accounts of employees participating in the Company's
401(k) Plan with the additional amount of Company
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 Company
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 UniSource Energy
shares used to satisfy the Company's stock obligations
under the DCP are shares that have been purchased on the
open market.
EQUITY COMPENSATION PLAN TABLE
The following table sets forth information as of
December 31, 2002, with respect to UniSource Energy's
equity compensation plans.
Numbers of Shares of
Number of Shares of UniSource Energy Common
UniSource Energy Stock Remaining Available
Common Stock to be for Future Issuance Under
Issued Upon Exercise Weighted-Average Equity Compensation Plans
of Outstanding Exercise Price of (Excluding Shares Relfected
Plan Category Options and Rights Outstanding Options in the First Column)
------------- ------------------- ------------------- ---------------------------
Equity Compensation 2,837,974 (2) $15.77 (3) 1,208,623 (4)
Plans Approved by
Shareholders (1)
Equity Compensation 52,756 (5) -- -- (6)
Plans Not Approved
by Shareholders
Total 2,890,730 -- --
-----------------------
(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 2,576,817 shares and stock units (payable in an
equivalent number of shares) outstanding as to 261,157 shares.
14
(3) Calculated based on the outstanding options and exclusive of outstanding stock units.
(4) Of these shares, 1,013,347 were available for additional awards under the 1994 Omnibus
Stock and Incentive Plan and 195,276 were available for additional awards under the 1994
Outside Director Stock Option Plan. 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.
(5) Reflects an aggregate of 52,756 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 the
Company's stock obligations under the DCP are shares that have been purchased on the open
market.
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.
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
15
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.
The credited years of service for UniSource Energy's
Named Executives are as follows:
Credited
Name Years of Service
---- ----------------
James S. Pignatelli 8
Steven J. Glaser 13
Dennis R. Nelson 25
Kevin P. Larson 17
Michael J. DeConcini 14
OFFICER CHANGE IN CONTROL AGREEMENTS
Change in Control TEP has Change in Control Agreements ("Agreements")
Agreements were with all of its officers. The Agreements are in
adopted to attract effect until the latter of: (i) five years after the
and retain quality date either TEP or the officer gives written notice
management. of termination of the Agreement, or (ii) if a change
in control occurs during the term of the Agreement,
five years after the change in control. For the
purpose of the Agreements, a change in control
includes the acquisition of beneficial ownership of
30% of the common stock of UniSource Energy, certain
changes in the UniSource Energy Board of Directors,
approval by the shareholders of certain mergers or
consolidations or certain transfers of the assets of
UniSource Energy. The Agreements provide that each
officer shall be employed by TEP or one of its
subsidiaries or affiliates in a position comparable to
his or her current position, with compensation and
benefits, which are at least equal to their then current
compensation and benefits, for an employment period of
five years after a change in control (subject to earlier
termination due to the officer's acceptance of a
position with another company or termination for cause).
Following a change in control, 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, salary 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; and (iii) the present value of any
employee awards under the 1994 Omnibus Stock and
Incentive Plan or any 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
16
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.
Assuming a change in control occurred on the Record Date
which resulted in the immediate termination of Mr.
Pignatelli and the other Named Executives, the total
payments made by UniSource Energy pursuant to the
Agreements would not be expected to exceed $18 million.
DIRECTOR INDEPENDENCE CRITERIA
Board independence The Board has established the following criteria for
is determined by determining independence for the purpose of serving upon
consideration of the Audit Committee, the Compensation Committee and the
established Corporate Governance and Nominating Committee.
criteria.
Directors that meet each of the following criteria are
deemed independent:
1. A director who is a former employee of the Company
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 the Company (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 the Company 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."
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 the Company or any of its
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 the Company's 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.
17
TRANSACTIONS WITH MANAGEMENT AND OTHERS
HADDINGTON Millennium was authorized by its Board of Directors in
ENERGY 2000 to invest $15 million, in aggregate, over a three-
PARTNERS II LP to five-year period in Haddington Energy Partners II LP.
Mr. Bickle, a member of our Board, is the managing
director of Haddington Ventures LLC, the general partner
of Haddington Energy Partners II LP. As of December 31,
2002, Millennium had funded approximately $7 million
under this commitment, $1 million of which was funded in
2002.
VALLEY VENTURES Millennium made a commitment of $5 million capital plus
III, LP a share of expenses to Tucson Ventures, LLC, 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,
2002, Millennium had funded approximately $1 million
under this commitment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
MILLENNIUM Mr. Stephen Alexander, an immediate family member of
ENERGY Mrs. Bilby, a member of our Compensation Committee, is
INVESTMENTS employed by Millennium. As Director of Energy
Investments, Mr. Alexander assists in overseeing
Millennium's investment portfolio. For his services in
2002, Mr. Alexander received compensation of
approximately $130,000 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.
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 We review executives' pay each year. Compensation
COMPENSATION depends on many factors, including individual
GENERALLY performance, responsibilities, future challenges and
objectives and the executive's potential contribution to
our future success. We also look at UniSource Energy's
financial performance and the compensation levels at
comparable companies.
18
UniSource Energy's 2002 compensation program consisted
of three components:
- base salary;
- short-term incentive compensation; and
- 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 2002, the consultant selected a peer group
of energy companies with a revenue range of $450 million
to $3.8 billion. UniSource Energy ranks at the 36th
percentile of the peer group. Sixteen of the 21 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 22, 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 2002, 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 provide
INCENTIVE compensation for meeting or exceeding specified
COMPENSATION objectives designed to contribute to the attainment of
UniSource Energy's 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
2002, the target award levels for our executive officers
ranged from 30% to 65% of base salary. Awards for Mr.
Pignatelli and the remaining executive officers are
determined by the Board 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 35% to 56% 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 is
INCENTIVE intended to attract and retain quality employees over
COMPENSATION the long term in a manner that directly aligns them with
shareholder interest.
19
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 1994 Omnibus Stock and
Incentive Plan. On January 2, 2002, the Compensation
Committee issued stock options intended to be incentive
stock options to all executive officers of UniSource
Energy, including Mr. Pignatelli and the other Named
Executives. In calculating the level of awards to the
other 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 stock
options with a total value equal to 130% of his base
salary. The total value of stock options issued to the
other Named Executives ranged from 87% to 100% of base
salary. The number of UNS shares covered by the stock
option grant to Mr. Pignatelli was 150,000. 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
Elizabeth T. Bilby
Harold W. Burlingame
Kenneth Handy
Warren Y. Jobe
20
AUDIT COMMITTEE REPORT
THE COMMITTEE The Audit Committee is made up of non-employee,
financially literate directors who are independent, as
defined in the applicable New York Stock Exchange
listing standards. Several members of the Audit
Committee have accounting or related financial
management expertise. The Board previously adopted a
written charter for the Audit Committee. On December 5,
2002, the Board approved amendments to the charter. The
Audit Committee Charter is included as Appendix A to
this Proxy Statement. The Committee has complied with
its charter, including the requirement to meet
periodically with UniSource Energy's independent
auditors, our Internal Audit Department and our
management to discuss the auditors' findings and other
financial and accounting matters.
In connection with our December 31, 2002 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.
The following table details fees paid to
PricewaterhouseCoopers, LLP for professional services
during 2002. 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.
Financial Information
Systems Design and All
Audit Fees Implementation Fees Other Fees
---------- --------------------- ----------
$688,311 -- $430,682
Based on all of its activities during the year, the
Audit Committee recommended to the Board that the
audited financial statements for 2002 be included in the
Annual Report on Form 10-K for filing with the SEC.
Respectfully submitted,
THE AUDIT COMMITTEE
Warren Y. Jobe, Chair
Elizabeth T. Bilby
Harold W. Burlingame
Kenneth Handy
H. Wilson Sundt
21
PERFORMANCE GRAPH
Comparison of Cumulative Five-Year Total Return Among
UniSource Energy, Standard & Poor's 500 Index
and EEI Index of 100 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 1997 to 2002, and the Y-axis shows dollar values from zero
to 200. 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:
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
UniSource Energy
Corporation $100 $74 $62 $106 $105 $102
S&P 500 Index $100 $129 $156 $141 $125 $97
EEI Index - 100
Electrics $100 $114 $93 $137 $125 $107
-----------------------
(1) Assumes $100 invested on December 31, 1997 in UniSource Energy 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 1998 1999 2000 2001 2002
--------------------- ---- ---- ---- ---- ----
S&P 500 Total
Return Change 28.58% 21.04% -9.10% -11.89% -22.10%
EEI Index - 100
Electrics Change 13.89% -18.60% 47.97% -8.79% -14.73%
UniSource Energy
Change -25.52% -17.13% 71.80% -1.30% -2.20%
22
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 the 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 2004
annual meeting of the shareholders, any such notice must
be submitted to the Corporate Secretary of UniSource
Energy on or before February 24, 2004.
We must receive This requirement is separate and apart from the SEC's
your shareholder requirements that a shareholder must meet in order to
proposals by have a shareholder proposal included in our Proxy
December 11, 2003. Statement. Shareholder proposals intended to be
presented at our 2004 annual meeting of the shareholders
must be received by us no later than December 11, 2003,
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 2002 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, P.O. Box 711, Tucson, Arizona 85702. 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
23
APPENDIX A
Amended
December 5, 2002
UNISOURCE ENERGY CORPORATION
----------------------------
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
-----------------------------------------
CHARTER
-------
1. COMPOSITION
-----------
The Audit Committee of the Board of Directors (the "Committee") consists
of no fewer than three independent Directors appointed annually by the
Board. Directors eligible to serve on the Committee shall be determined
in accordance with the NYSE Listed Company Manual, Corporate Governance
Standards for Audit Committees and the Sarbanes-Oxley Act of 2002. The
Board shall designate one of the Committee members as Chairman of the
Committee. Each member of the Committee shall be financially literate,
and at least one member shall have accounting or financial management
expertise.
2. MEETINGS
--------
The Committee will hold at least four regular meetings each year, and
such additional meetings as it may deem necessary. Additional meetings
will be called by the Chairman of the Committee. The agendas for the
regular meetings shall include all items necessary to complete the duties
of the Committee as set forth herein. In addition to the Committee
members and the Secretary, the Chairman of the Board, Chief Executive
Officer and other members of management, internal audit and
representatives of the independent auditors may attend as appropriate.
3. RULES OF PROCEDURE
------------------
The Committee will determine its own rules of procedure with respect to
how its meetings are to be called, as well as the place and time.
4. COMPENSATION
------------
Each member will be paid such fees as may be established from time to
time by the Board for service on the Committee, and will be reimbursed
for travel expenses incurred by attendance at meetings. Directors' fees
are the only compensation an Audit Committee member may receive from the
Company.
A-1
5. COMMITTEE SECRETARY
-------------------
The Secretary of the Committee will be the Corporate Secretary of the
Company (or such other representative of management as the Committee may
designate) and not be a member of the Committee. The Secretary will
attend all meetings and maintain minutes, advise members of all meetings
called, arrange with the Chairman or other convening authority for
preparation and distribution of the agenda for each meeting, and carry
out other functions as may be assigned from time to time by the
Committee. At such meetings where attendance by a Company representative
is not appropriate, the Chairman shall act as secretary of the meeting or
appoint another member of the Committee to act as secretary of such
meetings.
6. QUORUM
------
A majority of the total membership of the Committee will constitute a
quorum.
7. COMMITTEE PURPOSE
-----------------
The Audit Committee is appointed by the Board to assist with Board
oversight of
(1) the integrity of the Company's financial statements
(2) the Company's compliance with legal and regulatory requirements
(3) the independent auditor's qualifications and independence, and,
(4) the performance of the Company's internal audit function and
independent auditors.
The Audit Committee must also prepare the report that SEC rules require
be included in the Company's annual proxy statement.
8. SPECIFIC DUTIES OF THE COMMITTEE
--------------------------------
Independent Audit:
-----------------
(1) Sole authority to appoint, retain and terminate the Company's
independent auditor.
(2) Sole authority to approve all audit engagement fees and terms, as
well as all significant, non-audit engagements (in accordance with
SEC) with the independent auditors.
(3) Annually obtain and review a report from the independent auditors
delineating all relationships between the auditor and the Company
(to assess the auditors' independence).
(4) Review the experience and qualifications of the lead partner of the
independent auditor.
(5) At least annually, obtain and review a report from the independent
auditors describing the firm's internal quality control process,
including any material issues raised by the most recent internal
quality control review or peer review of the firm, or by any inquiry
or investigation by governmental, regulatory or professional
authorities within the past five years, respecting one or more
independent audits carried out by the firm, and any steps taken to
deal with any such issues.
A-2
(6) Review the results of each independent audit, including any
qualifications in the independent auditor's opinion, any related
management letter, and management's response to recommendations made
by the independent auditor in connection with the audit.
(7) Review the annual audited financial statements with management and
the independent auditor, including management's discussion and
analysis, major issues regarding accounting and auditing principles
and practices, as well as the adequacy of internal controls.
Recommend to the Board, based on such review and discussion, whether
the audited financial statements should be included in the Company's
annual report on Form 10-K.
(8) Annually review an analysis prepared by management and the
independent auditor of significant financial reporting issues,
quality of financial reporting, and judgments made in connection
with the preparation of the Company's financial statements,
including an analysis of the effect of alternative GAAP methods on
the Company's financial statements. Review the procedures employed
by the Company in preparing published financial statements and
related management commentaries.
(9) Review with management and the independent auditor the Company's
quarterly financial statements prior to the filing of its Form 10-Q,
including management's discussion and analysis and the results of
the independent auditors' review of the quarterly financial
statements (SAS 90). Note: This can be performed by a member of the
Audit Committee.
(10) Discuss annually with the independent auditor the required
communications contained within Statement on Auditing Standards No.
61 relating to the conduct of the audit.
Internal Audit:
--------------
(11) Review the appointment, replacement, reassignment or dismissal of
the Company's General Auditor.
(12) Review and approve the internal audit department charter, annual
audit plan and the audit methodology.
(13) Review management and General Auditor reports submitted to the
Committee that are material to the Company as a whole, and
management's response to those reports.
(14) Annually review the General Auditor's Summary of Officer's Annual
Travel and Entertainment expense schedule. Include in this review a
discussion of perquisites.
Miscellaneous:
-------------
(15) Review earnings press release as well as financial information and
earnings guidance provided to analysts and ratings agencies.
(16) Review quarterly updates from management on material litigation.
(17) Periodically review with management, the Company's policies on major
financial risk exposure, and the measures taken to reduce such risk.
A-3
(18) Annually review the Company's Corporate Code of Conduct and
compliance therewith.
(19) Establish and maintain procedures for the confidential, anonymous
submission by employees of the Company of concerns regarding
accounting or auditing matters.
(20) Establish guidelines for the Company's hiring of employees or former
employees of the independent auditor.
(21) Annually review this Audit Committee Charter and make any necessary
changes.
(22) Annually perform an evaluation of the Committee, its members,
functions and performance.
9. EXECUTIVE SESSION
-----------------
Meet quarterly with management, the General Auditor and the independent
auditor in separate executive sessions.
10. RESPONSIBILITIES OF THE CHAIRMAN
--------------------------------
The Chairman of the Committee will present the Committee's
recommendations to the Board for its approval and periodically provide
the Board, for its information, with a summary of the Committee's
determinations and approvals. Additionally, set the annual compensation
for the General Auditor in conjunction with the Company's Chief Executive
Officer.
11. 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.
12. OTHER AUTHORITY
---------------
The Audit Committee shall have the authority to retain special legal,
accounting or other consultants to advise the Committee. The Audit
Committee has full discretion to meet with individuals within or outside
the Company.
A-4
APPENDIX B
FORM OF PROXY CARD
UNISOURCE ENERGY
Two New Ways to Vote
VOTE BY TELEPHONE OR INTERNET
24 Hours a Day - 7 Days a Week
Save Your Company Money - It's Fast and Convenient
TELEPHONE
---------
1-866-358-4695
- Use any touch-tone telephone.
- Have your proxy card ready.
- Enter your Control Number located in the box below.
- Follow the simple recorded instructions.
OR
INTERNET
--------
https://www.proxyvotenow.com/uns
- Go to the website address listed above.
- Have your proxy card ready.
- Enter your Control Number located in the box below.
- Follow the simple instructions on the website.
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
-------------------------------
CONTROL NUMBER FOR
TELEPHONE OR INTERNET VOTING
--------------------------------
THE INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M.
E.S.T. ON THURSDAY, MAY 8, 2003.
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-Daniel W. L. Fessler, 09-Kenneth Handy,
10-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 2002
Annual Report.
Date Shareholder sign here
----------------------------------------
----------------------------------------
Date Co-Owner sign here
----------------------------------------
----------------------------------------
-------------------------------------------------------------------------------
[A street map showing the location SHERATON TUCSON
of the Annual Shareholders' Meeting ------------------
is set forth in this area.] Hotel & Suites
LOCATION
5151 East Grant Road
Tucson, Arizona 85712
(Between Swan and Craycroft)
520-323-6262 Hotel Direct
800-325-3535 Reservations
TRANSPORTATION
From Tucson International Airport
Shuttle Service
Arizona Stagecoach
Call 520-889-1000 pricing
and reservations
Automobile - Interstate 10 to
Grant Road 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 2003 Annual
Shareholders' Meeting and the 2002 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 9, 2003.
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 Sheraton Tucson Hotel and Suites, 5151 East Grant Road, Tucson, Arizona,
on Friday, May 9, 2003, 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.
(Continued, and to be dated and signed on reverse side.)
UNISOURCE ENERGY CORPORATION
C/O THE BANK OF NEW YORK
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030