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. )
Filed by
the Registrant [X]
Filed by
a Party other than the Registrant [ ]
Check the
appropriate box:
[
] Preliminary Proxy Statement
[
] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X]
Definitive Proxy Statement
[
] Definitive Additional Materials
[
] Soliciting Material Pursuant to Section 240.14a-12
UNISOURCE
ENERGY CORPORATION
--------------------------------------------------------------------------------
(Name of
the Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of
Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
[X] No
fee required.
[
] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title
of each class of securities to which transaction applies:
2)
Aggregate number of securities to which transaction applies:
3) Per
unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11(set forth the amount on which the filing
fee is calculated and state how it was determined):
4)
Proposed maximum aggregate value of transaction:
5) Total
fee paid:
[
] Fee paid previously with preliminary materials.
[
] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1) Amount
Previously Paid:
2) Form,
Schedule or Registration Statement No.:
3) Filing
Party:
4) Date
Filed:
One
South Church Avenue
Tucson,
Arizona 85701
March 25,
2008
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James
S. Pignatelli
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(520)
571-4000
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Chairman
of the Board
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Dear
Shareholders:
You
are cordially invited to attend the UniSource Energy Corporation 2008 Annual
Shareholders’ Meeting (the “Meeting”) to be held on Friday, May 2, 2008, at the
FOX Theatre, 17 West Congress, Tucson, Arizona. The Meeting will begin promptly
at 10:00 a.m., Mountain Standard Time, so please plan to arrive earlier. No
admission tickets will be required for attendance at the Meeting. We
have included a map indicating the location of the FOX Theatre in the downtown
area.
Directors
and officers will be available before and after the Meeting to speak with you.
During the Meeting, we will answer your questions regarding our business affairs
and we will consider the matters explained in the enclosed Proxy
Statement.
We
have enclosed a proxy card that lists all matters that require your vote. Please
complete, sign, date and mail the proxy card as soon as possible, whether or not
you plan to attend the Meeting. You may also vote by telephone or the Internet,
as explained on the enclosed proxy card. If you attend the Meeting and wish to
vote your shares personally, you may revoke your proxy at that
time.
Your interest in and continued support
of UniSource Energy Corporation are much appreciated.
Sincerely,
UNISOURCE
ENERGY CORPORATION
/s/ James
S. Pignatelli
James S.
Pignatelli
Chairman
of the Board, President and
Chief
Executive Officer
NOTICE
OF ANNUAL SHAREHOLDERS’ MEETING
To
the Holders of Common Stock of
UniSource
Energy Corporation
We
will hold the 2008 Annual Shareholders’ Meeting of UniSource Energy Corporation
at the FOX Theatre, 17 West Congress, Tucson, Arizona, on Friday, May 2, 2008,
at 10:00 a.m., Mountain Standard Time (“MST”). The purpose of the Meeting is
to:
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1.
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elect
14 directors to our Board of Directors for the ensuing
year;
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2.
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ratify
the selection of the independent auditor for 2008;
and
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3.
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consider
any other matters which properly come before the
Meeting.
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Only
shareholders of record at the close of business on March 17, 2008, are entitled
to vote at the Meeting.
We
have enclosed our 2007 Annual Report, including audited financial statements,
and the Proxy Statement with this notice. Proxy soliciting material is first
being made available in electronic form, as well as being sent or given to
shareholders in hard copy on or about March 25, 2008. 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/ Linda
H. Kennedy
Linda H.
Kennedy
Corporate
Secretary
Dated:
March 25, 2008
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
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ANNUAL
MEETING:
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May
2, 2008
10:00
a.m., MST
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FOX
Theatre
17
West Congress
Tucson,
AZ 85701
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RECORD
DATE:
The
record date is March 17, 2008 (“Record Date”). If you were a shareholder of
record at the close of business on the Record Date, you may vote at the 2008
Annual Shareholders’ Meeting (“Meeting”) of UniSource Energy Corporation
(“UniSource Energy” as well as references to the “Company,” “we,” “our” and
“us”). At the close of business on the Record Date, we had 35,410,077 shares of
common stock outstanding.
AGENDA:
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1.
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Proposal
One: Elect 14 directors to our Board of Directors (“Board”) for
the ensuing year.
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2.
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Proposal
Two: Ratify the selection of the independent auditor for
2008.
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3.
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Proposal
Three: Consider any other matters which properly come before the Meeting
and any adjournments.
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INDEPENDENT
AUDITOR:
Representatives
of PricewaterhouseCoopers, LLP are expected to be present at the Meeting with
the opportunity to make a statement and respond to appropriate questions from
our shareholders.
PROXIES:
A form of
proxy for execution by shareholders is enclosed. Unless you tell us on the proxy
card to vote differently, we will vote signed returned proxies “for” the Board’s
nominees. The Board or proxy holders will use their discretion on other matters
that properly come before the Meeting. If a nominee cannot or will not serve as
a director, the Board or the persons designated as proxies will vote for a
person whom they believe will carry on our present policies.
PROXIES SOLICITED
BY:
The
Board.
FIRST MAILING
DATE:
We
anticipate first making available electronically and mailing this Proxy
Statement along with the proxy card on or about March 25, 2008.
REVOKING YOUR
PROXY:
You may
revoke your proxy before it is voted at the Meeting. To revoke, follow the
procedures listed on page 4 under “Voting Procedures/Revoking Your
Proxy.”
COMMENTS:
Your
comments about any aspects of our business are welcome. You may use the space
provided on the proxy card for this purpose, if desired. Although we may not
respond on an individual basis, your comments help us to measure your
satisfaction, and we may benefit from your suggestions.
PLEASE
VOTE – YOUR VOTE IS IMPORTANT
Prompt
return of your proxy will help reduce the costs of re-solicitation.
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___________________
* We
expect to vote on this item at the Meeting.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY
MATERIALS FOR
THE
SHAREHOLDER MEETING TO BE HELD ON MAY 2, 2008
In
accordance with new rules adopted by the Securities and Exchange Commission in
2007, the Company is now making available a copy of its 2008 proxy statement and
related materials on its website at www.UNS.com. The
rules permit the Company to rely generally upon internet availability to provide
shareholders with a copy of the proxy statement, however, the Company has
elected for at least this year to also furnish a hard copy of the proxy
statement to its shareholders. If in the future the Company decides
to provide the proxy statement principally through the internet, the Company
will mail a notice of internet availability to its shareholders of record at
least 40 days prior to the annual meeting, and will also provide a method for
receiving a hard copy of the proxy statement if a shareholder desires
one.
VOTING PROCEDURES/REVOKING YOUR
PROXY
You
can vote by telephone, the Internet, mail or in person.
You can
vote your shares by telephone, the Internet, mail or in person at the Meeting.
Your proxy card contains instructions for voting by telephone or the Internet,
which are the least expensive and fastest methods of voting. To vote by mail,
complete, sign and date your proxy card, or your broker’s voting instruction
card if your shares are held by your broker, and return it in the enclosed
return envelope.
Under
Arizona law, a majority of the shares entitled to vote on any single matter
which may be brought before the Meeting will constitute a quorum. Business may
be conducted once a quorum is represented at the Meeting. If a quorum exists,
action on a matter other than the election of directors will be deemed approved
if a majority of votes is cast in favor of the matter.
Directors
are elected by a plurality of votes.
Directors
are elected by a plurality of the votes cast by the shares entitled to vote if a
quorum is present. A plurality means receiving the largest number of votes,
regardless of whether that is a majority. Withheld votes will be counted as
being represented at the Meeting for quorum purposes but will not have an effect
on the vote.
You
may cumulate your votes for directors.
In the
election of directors, each shareholder has the right to cumulate his votes by
casting a total number of votes equal to the number of his shares of common
stock multiplied by the number of directors to be elected. He may cast all of
such votes for one nominee or distribute such votes among two or more nominees.
For any other matter that may properly come before the Meeting, each share of
common stock will be entitled to one vote.
You
can revoke your proxy after sending it in by following these
procedures.
Any
shareholder giving a proxy has a right to revoke that proxy by giving notice to
UniSource Energy in writing directed to the Corporate Secretary, UniSource
Energy Corporation, One South Church Avenue, Suite 1820, Tucson, Arizona 85701,
or in person at the Meeting at any time before the proxy is exercised. Those who
fail to return a proxy or fail to attend the Meeting will not count towards
determining any required plurality, majority or quorum.
The
shares represented by an executed proxy will be voted for the election of
directors or withheld in accordance with the specifications in the proxy. If no
specification is made in an executed proxy, the proxy will be voted in favor of
the nominees as set forth herein.
Proxy
Solicitation
We will
bear the entire cost of the solicitation of proxies. Solicitations will be made
primarily by mail. In addition, we may make additional solicitation of brokers,
banks, nominees and institutional investors pursuant to a special engagement of
DF King & Co., Inc., at a cost of approximately $11,500 plus reasonable
out-of-pocket expenses. Solicitations may also be made by telephone, facsimile
or personal interview, if necessary, to obtain reasonable representation of
shareholders at the Meeting. Our employees may solicit proxies but they will not
receive additional compensation for such services. We will request brokers or
other persons holding shares in their names, or in the names of their nominees,
to forward proxy materials to the beneficial owners of such shares or request
authority for the execution of the proxies. We will reimburse brokers and other
persons for reasonable expenses they incur in sending these proxy materials to
you if you are a beneficial holder of our shares.
UNISOURCE ENERGY SHARE OWNERSHIP
Security
Ownership of Management
The
following table sets forth the number and percentage of shares of UniSource
Energy common stock beneficially owned as of March 1, 2008 and the nature of such
ownership by each of our directors (all of whom are nominees), our Chief
Executive Officer (“CEO”) and our four other most highly compensated executive
officers (together with our CEO, the “Named Executives”) for the year ended
December 31, 2007, and all directors and officers as a group. Ownership includes direct
and indirect (beneficial) ownership, as defined by the SEC rules.
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Name
and
Title
of
Beneficial Owner
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Amount and Nature of Beneficial
Ownership(1)
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Other(2)
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Directly
Owned
Shares
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Shares
Purchased
Under
the
401(k)
Plan
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Shares
Subject
to
Options
Exercisable
Within
60
Days
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Total
Beneficial
Ownership
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Percent
of
Class
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Restricted
Stock
Units
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Deferred
Shares
Under
Deferred
Compensation
Plan
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Total
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James
S. Pignatelli
Chairman,
President and
Chief
Executive Officer
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36,067
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19,346
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671,158
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726,571
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2.1%
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119,753
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31,502
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877,826
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Lawrence
J. Aldrich
Director
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3,912
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0
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8,358
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12,270
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*
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4,099
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0
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16,369
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Barbara
M. Baumann
Director
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0
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0
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0
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0
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*
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2,574
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5,121
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7,695
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Larry
W. Bickle
Director
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6,652
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0
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11,558
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18,210
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*
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3,203
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0
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21,413
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Elizabeth
T. Bilby
Director
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705
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0
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10,358
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11,063
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*
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4,540
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4,005
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19,608
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Harold
W. Burlingame
Director
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2,905
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0
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11,558
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14,463
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*
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5,274
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0
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19,737
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John
L. Carter
Director
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19,459
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0
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4,358
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23,817
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*
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3,859
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10,933
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38,609
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Robert
A. Elliott
Director
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1,813
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0
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1,196
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3,009
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*
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3,041
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0
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6,050
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Daniel
W. L. Fessler
Director
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2,260
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0
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2,358
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4,618
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*
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2,906
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0
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7,524
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Kenneth
Handy
Director
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1,405
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0
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6,358
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7,763
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*
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5,409
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14,094
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27,266
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Warren
Y. Jobe
Director
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1,313
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0
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6,358
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7,671
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*
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4,918
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0
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12,589
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Ramiro
G. Peru (3)
Director
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0
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0
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0
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0
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*
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0
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0
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0
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Gregory
A. Pivirotto (3)
Director
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0
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0
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0
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0
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*
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0
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0
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0
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Joaquin
Ruiz
Director
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0
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0
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0
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0
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*
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2,574
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0
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2,574
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Raymond
S. Heyman
Senior
Vice President and General Counsel
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5,305
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1,935
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39,970
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47,210
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*
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0
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84
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47,294
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Kevin
P. Larson
Senior
Vice President, Chief Financial Officer and Treasurer
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39,699
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2,517
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66,419
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108,635
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*
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0
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1,039
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109,674
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Michael
J. DeConcini
Senior
Vice President and Chief Operating Officer, Transmission and
Distribution
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8,941
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5,296
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137,673
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151,910
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*
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26,927
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692
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179,529
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Karen G.
Kissinger
Vice
President, Controller and Chief Compliance Officer
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50,003
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0
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13,415
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63,418
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*
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0
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1,977
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65,395
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All
directors and executive officers as a group
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239,956
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44,200
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1,070,698
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1,354,854
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3.9%
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231,958
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71,698
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1,658,510
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*Represents
less than 1% of the outstanding common stock of UniSource
Energy.
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(1)
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Amounts
include the following:
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·
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Any
shares held in the name of the spouse, minor children or other relatives
sharing the home of the director or officer. Except as otherwise
indicated below, the directors and officers have sole voting and
investment power over the shares shown. Voting power includes
the power to direct the voting of the shares held, and investment power
includes the power to direct the disposition of the shares
held.
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·
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Shares
subject to options exercisable within 60 days, based on information from
E*Trade, UniSource Energy’s stock
option plan administrator.
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·
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Equivalent
share amounts allocated to the individuals’ 401(k) Plan which, since June
1, 1998, has included a UniSource Energy Stock Fund investment
option.
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(2) While amounts
in the “Other” column do not represent a right of the holder to receive stock
within 60 days, these amounts are being disclosed because management believes
they reflect similar objectives of 1) encouraging directors and officers to have
a stake in the Company, and 2) aligning interests of directors and officers with
those of shareholders. Under our non-employee director compensation program,
non-employee directors receive an annual grant of restricted stock units that
have an underlying value equal to one share of UniSource Energy common
stock. The value of the restricted stock units fluctuates based on
changes in the Company’s stock price. Restricted stock units vest on
the first anniversary of grant and are distributed in actual shares of Company
stock or paid out in equivalent cash, at the Company’s option, in the January
following termination of Board service. Similarly, the value of
deferred stock units fluctuates based on changes in the Company’s stock price
and are distributed in actual shares or paid in equivalent cash, at the
Company’s option, on dates selected by the Director or the officer following
termination of service. In our view, restricted stock units and deferred stock
units are tantamount to actual stock ownership as the non-employee director and
officer (in the case of deferred stock units) bear the risk of ownership during
the restricted and deferral periods.
(3) Messrs. Peru
and Pivirotto were appointed to the Board of Directors effective January 1,
2008.
Security
Ownership of Certain Beneficial Owners
As of
March 1, 2008, based on information reported in filings made by the following
persons with the SEC or information otherwise known to us, the following persons
were known or reasonably believed to be, as more fully described below, the
beneficial owners of more than 5% of our common stock:
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Title of Class
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Name
and Address
of Beneficial Owner
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Amount
and
Nature
of
Beneficial Ownership
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Percent
of Class
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Common
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Prospector
Partners, L.L.C.
370
Church Street
Guilford,
CT 06437
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3,299,367(1)
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9.1%
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Common
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T.
Rowe Price Associates, Inc.
100
E. Pratt Street
Baltimore,
MD 21202
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2,580,383(2)
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7.2%
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Common
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First
Trust Portfolios L.P.
1001
Warrenville Road
Lisle,
IL 60532
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2,453,600(3)
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6.9%
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Common
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Barclays
Global Investors, NA
45
Fremont Street
San
Francisco, CA 94105
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2,437,985(4)
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6.9%
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Common
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Luminus
Management, LLC
1700
Broadway, 38th
Floor
New
York, NY 10019
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2,144,877(5)
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6.1%
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Common
|
The
Goldman Sachs Group, Inc.
85
Broad Street
New
York, NY 10004
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2,069,252(6)
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5.9%
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(1) In a statement (Schedule
13G) filed with the SEC on February 14, 2008, Prospector Partners, L.L.C.
(“Prospector Partners”) indicated it has sole voting and sole dispositive power
over 2,309,367 shares, and shared voting and shared dispositive power over
990,000 shares of our common stock. Prospector Partners shares
investment discretion over 990,000 shares with White Mountains Advisors LLC
(“White Mountains”), pursuant to a sub-advisory agreement between Prospector
Partners and White Mountains.
(2) In a statement (Schedule
13G) filed with the SEC on February 12, 2008, T. Rowe Price Associates, Inc.
(“Price Associates”) indicated it has sole voting power over 260,700 shares and
sole dispositive power over 2,580,383 shares of our common stock. These
securities are owned by various individual and institutional investors which
Price Associates serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, as amended, Price
Associates is deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of such
securities.
(3) In a statement (Schedule
13G) filed with the SEC on February 12, 2008, First Trust Portfolios L.P.
indicated it has shared voting and shared dispositive power over 2,453,600
shares of our common stock.
(4) In a statement (Schedule
13G) filed with the SEC on February 5, 2008, Barclays Global Investors, NA
indicated that it has sole voting power over 2,001,282 shares of our common
stock and sole dispositive power over 2,437,985 shares of our common stock. The
filing indicated that the 2,437,985 shares are owned by Barclays Global
Investors, NA (1,281,017 shares), Barclays Global Fund Advisors (1,120,804
shares), and Barclays Global Investors, LTD (36,164 shares).
(5) In a statement (Schedule
13G) filed with the SEC on February 1, 2008, Luminus Management LLC indicated it
has sole voting and sole dispositive power over 2,144,877 shares of our common
stock.
(6) In a statement (Schedule
13G) filed with the SEC on February 6, 2008, The Goldman Sachs Group, Inc.
indicated it it has shared voting power over 2,069,240 shares of our common
stock and shared dispositive power over 2,069,252 shares of our common
stock.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, and regulations of the SEC
require our executive officers, directors and persons who beneficially own more
than 10% of our common stock, as well as certain affiliates of those persons, to
file initial reports of ownership and transaction reports covering any changes
in ownership with the SEC and the New York Stock Exchange (“NYSE”). SEC
regulations require these persons to furnish us with copies of all reports they
file pursuant to Section 16(a).
Based
solely upon a review of the copies of the reports received by us and on written
representations of our directors and officers, we
believe that during fiscal year 2007, except as described below, all filing
requirements applicable to executive officers and directors were complied with
in a timely manner. A Form 3 was filed late during 2007 for Catherine
Ries following her election as Vice President of Human Resources.
PROPOSAL ONE: ELECTION OF
DIRECTORS
General
Information
At the
Meeting, our shareholders of record will elect 14 directors to serve on our
Board for the ensuing year and until their successors are elected and qualified.
The shares represented by executed proxies in the form enclosed, unless
withheld, will be voted for the 14 nominees listed below, or, in the discretion
of the persons acting as proxies, will be voted cumulatively for one or more of
such nominees. All of
the current nominees are present members of the Board. All of the nominees have
consented to serve if elected.
If any nominee becomes unavailable to serve for any reason, or a vacancy
should occur before the election, it is the intention of the persons designated
as proxies to vote, in their discretion, for other nominees.
BOARD
NOMINEES
James S.
Pignatelli
Chairman
of the Board, President and Chief Executive Officer of UniSource Energy since
July 1998; Chairman of the Board of Directors, President and Chief Executive
Officer of Tucson Electric Power Company (“TEP”), the principal subsidiary of
UniSource Energy, since July 1998; Chairman of the Board of Directors, President
and Chief Executive Officer of Millennium Energy Holdings, Inc. (“Millennium”),
a wholly owned subsidiary of UniSource Energy, since 1997; Director of UniSource
Energy Services, Inc. (“UES”), a wholly owned subsidiary of UniSource Energy,
since 2003. Board member since 1998. Age 64.
Lawrence J. Aldrich
(1)(2)(5)
Senior
Vice President/Corporate Operations and General Counsel of University Physicians
Healthcare since May 2007; President of Aldrich Capital Company since
January 2007; Chief Operating Officer of The Critical Path Institute from
January 2006 to December 2006; General Partner of Valley Ventures, LP from
September 2002 to December 2005; Managing Director and Founder of Tucson
Ventures, LLC, from February 2000 to September 2002; Director of TEP and
Millennium since 2000; Director of UES since 2004. Board member since 2000. Age
55.
Barbara M. Baumann
(1)(2)(3)
President
and Owner of Cross Creek Energy Corporation since 2003; Executive Vice President
of Associated Energy Managers, LLC from 2000 to 2003; former Vice President of
Amoco Production Company; Director of St. Mary Land & Exploration since
2002; Director of TEP since 2005. Board member since 2005. Age 52.
Larry W. Bickle
(4)(5)
Director
of St. Mary Land & Exploration since 1995; Retired private equity investor;
Managing Director of Haddington from 1997 to 2005; Director of Millennium since
1998; Director of UES since 2004. Board member since 1998. Age
62.
Elizabeth T. Bilby
(4)(5)
Retired
President of Gourmet Products, Inc., an agricultural product marketing company;
retired Director of Marketing of Green Valley Pecans; Director of TEP since
1995; Director of Millennium since 1998; Director of UES since 2004. Board member since
1995. Age 68.
Harold W. Burlingame
(2)(3)(4)(6)
Former
Executive Vice President of AT&T; Chairman of ORC Worldwide since December
2004; Director of TEP since 1998. Board member since 1998. Age 67.
John L. Carter
(1)(2)(3)(4)(5)(6)
Retired
as Executive Vice President and Chief Financial Officer of Burr Brown
Corporation in 1996; Director of TEP since 1996; Director of Millennium since
1998; Director of UES since 2004; UniSource Energy Lead Director since 2005. Board member since
1996. Age
73.
Robert A. Elliott
(2)(3)(4)(6)
President
and owner of The Elliott Accounting Group since 1983; Director and Corporate
Secretary of Southern Arizona Community Bank since 1998; Television
Analyst/Pre-game Show Co-host for Fox Sports Arizona since 1999; Chairman of the
Board of Tucson Metropolitan Chamber of Commerce from 2002 to 2003; Treasurer of
Tucson Urban League from 2002 to 2003; Chairman of the Board of Tucson Urban
League from 2003 to 2004; Chairman of the Board of the Tucson Airport Authority
from January 2006 to January 2007; Director of TEP since May 2003. Board member
since 2003. Age 52.
Daniel W. L. Fessler
(2)(3)(5)(6)
Professor
Emeritus of the University of California; Partner in the law firm of LeBoeuf,
Lamb, Greene & MacRae LLP from 1997 to 2003; previously served on the
UniSource Energy and TEP boards of directors from 1998 to 2003; Managing
Principal of Clear Energy Solutions, LLC since December 2004; Director of TEP
since 2005. Board member since 2005. Age 66.
Kenneth Handy
(1)(4)(5)
Retired
Certified Public Accountant; former financial executive with Kaiser Permanente
Medical Care Program, Oakland, California; Director of Millennium from 2001 to
2003; Director of TEP since 2001. Board member since 2001. Age 69.
Warren Y. Jobe
(1)(3)(4)(6)
Certified
Public Accountant (licensed, but not practicing); Senior Vice President of
Southern Company from 1998 to 2001; Director of WellPoint Health Networks, Inc.
from 2001 to December 2004; Director of WellPoint, Inc. since December 2004;
Director of HomeBanc Corporation since 2004; Trustee of STI Classic Funds since
2004; Director of TEP since 2001; Director of Millennium from 2001 to 2003.
Board member since 2001. Age 67.
Ramiro G. Peru
(2)(4)
Executive
Vice President and Chief Financial Officer of Phelps Dodge Corporation from 2004
to 2007; Director of WellPoint Health Networks, Inc. since 2003; Director of
Southern Peru Copper Corporation from 2002 to 2004; Director of University of
Arizona Foundation since 2005. Board member since January
2008. Age 52.
Gregory A. Pivirotto
(1)(3)
President
and Chief Executive Officer and Director of University Medical Center
Corporation since 1994; Certified Public Accountant since 1978; Director of
Arizona Hospital & Healthcare Association from 1997 to 2005; Director of
Tucson Airport Authority since 2008; Board member since January
2008. Age 55.
Joaquin Ruiz
(1)(2)(5)
Professor
of Geosciences, University of Arizona since 1983; Associate Editor, “Geology,”
Geological Society of America from 2000 to 2002; Dean, College of Science,
University of Arizona since 2000; Chair, Search Committee for the Dean of
College of Education, University of Arizona from 2002 to 2003; Member of Board
of Natural Resources of the National Research Council from 2002 to 2005; Member,
Human Resources Committee, American Geological Institute from 2000 to 2005;
Member, Governing Board, Instituto Nacional de Astronomia, Optica y Electronica,
Mexico since 2003; Board Member, Center to Improve Diversity in Earth Systems
Sciences, Inc. since 2003; Member of Board of Earth Sciences, National Research
Council of the National Academy of Sciences since 2005; Associate Editor,
“American Journal of Science” since 2005; Associate Editor, American Presidents
Advisory Board of Research Corporation since 2005; TEP Board Member since 2005;
UES Board member since 2005. Board Member since 2005. Age 56.
___________________
(1) Member
of the Audit Committee.
(2) Member
of the Compensation Committee.
(3) Member
of the Corporate Governance and Nominating Committee.
(4) Member
of the Finance Committee.
(5) Member of the Environmental, Safety and
Security Committee.
(6) Member
of the Corporate Development Committee.
The
Board recommends that you vote “FOR” these nominees.
PROPOSAL TWO: RATIFICATION OF SELECTION OF
INDEPENDENT AUDITOR
The Audit
Committee has selected PricewaterhouseCoopers, LLP (“Pricewaterhouse”) as the
Company’s independent auditor for the fiscal year 2008, and the Board is asking
the shareholders to ratify that selection. Although current law,
rules, and regulations, as well as the charter of the Audit Committee, require
the Audit Committee to engage, retain, and supervise the Company’s independent
auditor, the Board considers the selection of the independent auditor to be an
important matter of shareholder concern and is submitting the selection of
Pricewaterhouse for ratification by shareholders as a matter of good corporate
practice.
Under
Arizona law, if a quorum of shareholders is present at the Meeting, the
ratification of the selection of PricewaterhouseCoopers as independent auditor
for 2008 will require that the votes cast in favor of its ratification exceed
the votes cast against its ratification. Abstentions and broker
non-votes are counted for purposes of determining whether a quorum exists at the
Meeting but are not counted and have no effect on the results of the vote for
independent auditor.
The
Board recommends that you vote “FOR” the ratification of the selection of
the independent auditor.
COMPENSATION DISCUSSION AND
ANALYSIS
The
following Compensation Discussion and Analysis contains statements regarding
future individual and Company performance targets and goals. These
targets and goals are disclosed in the limited context of UniSource Energy’s
compensation programs and should not be understood to be statements of
management’s estimates of results or other guidance. UniSource Energy
specifically cautions investors not to apply these statements to other
contexts.
COMPENSATION
PHILOSOPHY
Objectives
of the Compensation Program
We base
our executive compensation policies and decisions with respect to our Named
Executives on the achievement of the following objectives:
|
1.
|
Attract,
motivate and retain highly-skilled
executives;
|
|
2.
|
Link
the payment of compensation to the achievement of critical short- and
long-term financial and strategic objectives, creation of shareholder
value and provision of safe, reliable and economically available electric
and gas service; and align performance objectives of management with those
of other Company employees by using similar performance
measures;
|
|
3.
|
Align
the interests of management with those of our stakeholders and
encourage management to think and act like owners, taking into account the
interests of the public that the Company
serves;
|
|
4.
|
Maximize
the financial efficiency of the compensation program to avoid unnecessary
tax, accounting and cash flow costs;
and
|
|
5.
|
Encourage
management to achieve outstanding results through appropriate means by
delivering compensation in a manner consistent with established and
emerging corporate governance best
practices.
|
In
support of the above objectives, UniSource Energy provides a balanced total
compensation program that consists of four components:
|
|
·
|
base
salary;
|
|
|
·
|
short-term
performance-based incentive
compensation;
|
|
|
·
|
long-term
performance-based incentive compensation;
and
|
|
|
·
|
benefits
and perquisites.
|
Decisions
made regarding each component of pay are considered in the context of each
officer’s total compensation. For example, if a decision is made to increase an
executive’s base salary, the resultant impact on short- and long-term
performance-based incentive compensation and total compensation levels are
evaluated relative to competitive practice (see “Benchmarking” discussion
below). We do not consider the value of outstanding equity awards in
setting annual total compensation opportunities as we believe that outstanding
equity awards represent compensation for past service.
Each of
these components is described in more detail below and in the narrative and
footnotes to the supporting tables. The following illustrates how the
above objectives are reflected in our compensation program:
Attracting,
Retaining and Motivating Executive Talent
In
support of our objective to attract, retain and motivate highly-skilled
employees, we provide our Named Executives with compensation packages that are
competitive with those offered by other electric and gas services companies of
comparable size and complexity.
The
Compensation Committee generally targets base salary and short-term incentive
opportunities, as well as the allocation among those elements of compensation
for the Named Executives, at the median market rates of selected comparable
companies identified below. Long-term incentive opportunities are
targeted at the 75th
percentile of such market rates. Target compensation for individual
executives range above or below those benchmarks based on a variety of factors,
including each executive’s skill set and experience relative to the general
market, the importance of the position to the Company and the difficulty of
replacing the executive, and the executive’s past and expected future
contribution to our success. Overall, for the Named Executives, total
direct compensation (i.e., salary, 2007 actual PEP awards, and present value of
2007 long-term incentive awards) fell between the median and 75th
percentile of market rates.
In
addition to providing competitive direct compensation opportunities, the Company
also provides certain indirect compensation and benefits programs that are
intended to assist in attracting and retaining high quality
executives. These programs include pension and retirement programs
and are described in more detail below and in the narratives that accompany the
tables that follow this Compensation Discussion and Analysis
section.
Linking
Compensation to Performance
Our
compensation program seeks to link the actual compensation earned by our Named
Executives to their performance and that of the Company. We achieve
this goal primarily through two elements of our compensation
package: (i) short-term cash awards and (ii) equity-based
compensation. To ensure that the most senior executives are held most
accountable for achieving our financial, operational and strategic objectives
and for creating shareholder value, we believe that the percentage of pay at
risk should increase with the level of responsibility within the
Company. The target amounts of performance-based pay programs (i.e.,
cash incentive and equity-based compensation) comprise approximately 55% to 65%
of the total direct compensation opportunity for our Named
Executives. Of the performance-based compensation, approximately
30-45% is short-term and 55-70% is long-term. Non-variable
compensation, such as salary and perquisites, are de-emphasized in the total
compensation program to reinforce the linkage between compensation and
performance.
Aligning
the Interests of our Named Executive Officers with Stakeholders
Our
compensation program also seeks to align the interests of our Named Executives
with those of our key stakeholders, including customers, employees and
shareholders. We use the short-term incentive compensation component
to focus the Named Executives on the importance of providing safe and reliable
customer service, creating a safe work environment for our employees and
improving financial performance by linking a significant portion of their
short-term cash incentive compensation to achievement of these objectives. We
primarily rely on the equity compensation element of our compensation package to
align the interests of the Named Executives with those of shareholders through a
mix of stock options and stock awards that vest based on the achievement of
performance goals set by the Compensation Committee. We also
encourage senior executives to accumulate a substantial stake in the
Company.
Maximizing
the Financial Efficiency of the Program
In
structuring the total compensation package for our Named Executives, the
Compensation Committee evaluates the accounting cost, cash flow implications and
tax deductibility of compensation to mitigate financial inefficiencies to the
greatest extent possible. For instance, as part of this process, the
Compensation Committee evaluates whether compensation costs are fixed or
variable and places a heavier weighting on variable pay elements to calibrate
expense with the achievement of operating performance objectives and delivery of
value to shareholders. In addition, the Compensation Committee takes
into account the objective of having the incentive-based compensation components
qualify for tax deductibility under Section 162(m) of the Internal Revenue Code,
as amended (the “Code”). See discussion under “Impact of Regulatory
Requirements” on page 20. The Compensation Committee also considers
the cash flow and share dilution implications of cash versus equity-based
incentive plans. In managing overall costs under the variable
incentive plans, the Compensation Committee sets annual budgets with regard to
total expense and the dilutive impact on shareholders. These budgets
are set at levels determined to be reasonable and sustainable by the Company in
relation to costs incurred by peer companies.
Adhering
to Corporate Governance Best Practices
The
Compensation Committee seeks to continually update the executive officer
compensation program to reflect corporate governance best practices. For
example, the Compensation Committee has established formal stock ownership
guidelines that encourage each Named Executive to accumulate a meaningful amount
of Company stock. Additionally, equity-based awards contain a “double-trigger”
vesting provision, which provides for accelerated vesting in the event of a
future change in control only if the executive is adversely impacted by the
transaction.
Benchmarking
The
Compensation Committee considers certain factors for purposes of establishing
salaries and variable compensation opportunities. Factors that are
considered in its assessment include (i) the competitive environment for Named
Executives, and what relevant competitors pay and (ii) the need to provide each
element of compensation and the amounts targeted and delivered.
To
provide a foundation for the executive compensation program, UniSource Energy
participates in an annual executive compensation survey of the energy services
industry and periodically reviews the senior executive compensation levels and
practices among a peer group of companies intended to represent our competitors
for business and talent. The energy services industry compensation survey
conducted by Towers Perrin includes compensation data from 91 energy services
companies with median revenues of $3 billion. The Towers Perrin data
is size-adjusted based on company or business unit revenues, as
appropriate. The peer group is reviewed periodically and includes the
15 electric and gas utility companies named below that are comparable to
UniSource Energy in terms of size as measured by annual revenues and market
capitalization. This group is the same peer group that was used in prior
competitive analyses, with the exception of Duquesne Light Company, which is no
longer part of the peer group as it has been acquired by another company.
UniSource Energy’s 2006 revenues were between the median and 75th
percentile of the peer companies and market capitalization as of September 2007
approximated the 25th
percentile of the peer companies.
|
AGL
Resources Inc.
|
DPL
Inc.
|
Otter
Tail Power Company
|
Southwest
Gas Corp.
|
|
Avista
Corp.
|
El
Paso Electric Co.
|
PNM
Resources Inc.
|
UIL
Holdings Corp.
|
|
CH
Energy Group Inc.
|
IDACORP
Inc.
|
South
Jersey Industries
|
Westar
Energy Inc.
|
|
Cleco
Corporation
|
Northwest
Natural Gas Co.
|
Southern
Union Co.
|
A
comprehensive review of UniSource Energy’s executive compensation levels and
aggregate long-term incentive cost and share usage practices relative to peer
group was most recently conducted in October 2007. The analysis was based on the
most up-to-date competitive data available.
The
benchmark information is supplemented annually with information from Frederic W.
Cook and Co., Inc., the independent consultant retained by the Compensation
Committee, relating to general market trends, changes in regulatory requirements
related to executive compensation and emerging best practices in corporate
governance. See discussion relating to compensation consultant under
“Compensation Consultant” on page 39.
ELEMENTS OF
COMPENSATION
Base
Salary
Base
salary is used to provide each Named Executive a set amount of money during the
year with the expectation that he or she will perform his or her
responsibilities to the best of his or her ability and in the best interests of
our Company. We believe that competitive base salaries are necessary
to attract and retain executive talent critical to achieving the Company’s
business goals. In general, our Named Executives’ base salaries are targeted to
the median of the benchmark companies described above. However, individual
salaries can and do vary from the benchmark median data based on such factors as
individual performance, potential for future advancement, the importance of the
executive’s position to the Company and the difficulty of replacement, current
responsibilities, length of time in the current position, and, for recently
hired executives, their prior compensation packages. Currently, all
of our Named Executives’ salaries are within a 10 percent range of the benchmark
median.
Increases
to Named Executives’ base salaries are considered annually by the Compensation
Committee. In approving base pay increases for executives other than
the CEO, the Compensation Committee also considers recommendations made by the
CEO.
In
December 2007, the Compensation Committee approved base salary increases for the
Named Executives for 2008. These increases include a one-time $6,000
adjustment to compensate the Named Executives for the elimination of the car
benefit, as discussed in “Other Compensation-Perquisites” on page 19
below. The following table indicates the Named Executives’ base
salaries for 2007 and 2008:
|
Name
|
2007
Base Pay
|
Approved
2008 Base Pay
|
|
James
S. Pignatelli
|
$695,000
|
$726,000
|
|
Kevin
P. Larson
|
$300,000
|
$316,000
|
|
Michael
J. DeConcini
|
$300,000
|
$321,000
|
|
Raymond
S. Heyman
|
$300,000
|
$316,000
|
|
Karen
G. Kissinger
|
$237,000
|
$249,000
|
Short-Term
Incentive Compensation (Cash Awards)
The
Compensation Committee provides for short-term incentive compensation in the
form of cash awards under the Performance Enhancement Plan (“PEP”) in order to
link a significant portion of the Named Executives’ annual compensation to the
Company’s annual financial and operational performance.
To
provide a short-term incentive award to the CEO that is fully tax deductible as
performance-based compensation, the Compensation Committee adopts the following
approach in accordance with the 2006 Omnibus Stock and Incentive Plan (the “2006
Omnibus Plan”). The first step is to establish a performance target
and a maximum award that could be paid if the performance target were
met. For 2007, the Committee set a performance target of $1.49
Diluted EPS for the CEO’s short-term incentive award, and provided that upon
attainment of that target, the CEO could be paid a maximum award of $2 million,
which is the maximum award that could be paid in accordance with the 2006
Omnibus Plan. If that performance target is obtained, the Committee then decides
whether it is appropriate to pay the full amount authorized or whether some
smaller anount would be more appropriate. The Committee retains this
discretion to reduce the award so that it can make sure that the actual payment
to the CEO falls within the targeted range of compensation for the CEO’s
short-term performance incentive element based upon the achievement of the
performance objectives under the PEP, described in more detail
below.
Each
year, before the end of the first quarter, the Compensation Committee
establishes performance objectives that must be met in whole or in part before
the Company pays PEP awards. The Compensation Committee generally attempts to
align the target opportunity for each Named Executive with the median rate for
equivalent positions at the benchmark companies. In 2007, the target incentive
opportunity for the executive officers ranged from 40% to 80% of base salary,
depending on position. As described more fully below, the actual amounts paid
could be changed depending on the achievement of specified performance
objectives. The Compensation Committee has the discretion to
increase, reduce or eliminate a PEP award regardless of whether the performance
goals applicable to the Named Executive’s incentive award have been achieved,
but no such discretion was exercised in 2007, except for the CEO whose maximum
award under the 2006 Omnibus Plan was reduced by about 73% so that it would fall
within the targeted PEP ranges.
Financial
and Operating Performance Objectives-2007
The PEP
performance targets are based on factors that are essential for the long-term
success of the Company and are identical to the performance objectives used in
the Company’s performance plan for non-union employees. In 2007, the
financial and operating objectives were diluted earnings per share (“EPS”), cost
containment (“O&M”) and customer service and core business goals relating to
customer service, regulatory, reliability, project implementation and safety
matters.
The
measures and individual weightings for the 2007 PEP were selected by the
Compensation Committee to ensure an appropriate focus on profitable growth and
expense control, as well as operational and customer service excellence. This
approach directs employees to work toward common goals that are in the interests
of our various stakeholders including customers, employees and
shareholders.
These
criteria were also used in 2006 except that earnings per share did not take into
account a diluted EPS measure but rather used a basic EPS measure without
account dilution. The change to diluted shares was made to work in
tandem with the Company’s reporting metrics to the financial
community. Thirty percent (30%) of the PEP award is based on
attaining the EPS targets, 30% is based on keeping O&M costs within a
specified range, and the remaining 40% is based on the achievement of our
customer service and core business goals.
The 2007
PEP measures and weighting apply to Named Executives as well as other non-union
employees.
In
developing the PEP performance targets, the CFO of the Company, with assistance
from other personnel, compiles relevant data and makes recommendations to the
Compensation Committee for a particular year, but the Compensation Committee
ultimately determines the performance objectives that are adopted.
The 2007
quantative performance objectives were:
|
2007
Performance Objectives
|
Target
Range
|
|
EPS
|
$1.55
(threshold) to $1.95 per share (outstanding)
|
|
O&M
|
$276
million (threshold) to $266 million
(outstanding)
|
In
addition, the 2007 customer service and core business goals were:
|
|
·
|
Averaging
customer service response time at or below 3
minutes;
|
|
|
·
|
Volunteering
community service of at least 35,000 hours by
employees;
|
|
|
·
|
Completing
specific departmental project
goals;
|
|
|
·
|
Achieving
various operational reliability goals;
and
|
|
|
·
|
Maintaining
OSHA incident rates at or below national
average.
|
2007 PEP Results
In 2007,
the Company achieved $1.57 per share of diluted EPS, which was above the
threshold level, but only 55% of the target level. The Company’s
O&M expenses for 2007 were $269.7 million, which was 113% of its cost
containment target and the Company achieved 123% of target performance for its
customer service and core business goals. Based
on these results, the actual total weighted achievement level was
99.5% of target for 2007. Management recommended a PEP payout of
97.5% because of the lower end performance of EPS; the Compensation Committee
accepted management's recommendation and used its discretion to reduce
short-term incentive payments for the Named Executives. Accordingly, in February
2008, the Compensation Committee determined that the cash incentive pool under
the PEP would be created at 97.5% of proposed amounts for Named Executives other
than Mr. Pignatelli, and determined that Mr. Pignatelli would receive slightly
less than 30% of his maximum award, even though performance exceeded the $1.49
Diluted EPS target set for his award. See the “Summary Compensation
Table” for the payouts under the 2007 PEP awards.
Long-Term
Incentive Compensation (Equity Awards)
We
believe that equity awards, in tandem with our executive stock ownership
guidelines discussed below, encourage ownership of Company stock by executive
officers, which in turn aligns the interest of those officers with the interest
of our shareholders. In addition, the vesting provisions applicable to the
awards encourage a focus on long-term operating performance, link compensation
expense to the achievement of multi-year financial results and help to retain
executive officers.
The
long-term incentive opportunity for each Named Executive is based on a multiple
of salary. The current long-term incentive multiple, which is 100% of base
salary for each Named Executive, was established in 2003 to retain the
executives in light of a then pending merger. The value of the Named Executives’
long-term incentive multiples, which is generally consistent with the 75th
percentile of benchmark practice, has been maintained for the Named Executives
to strengthen the retention value of the compensation program following the
termination of the proposed merger transaction in 2004 and to avoid a reduction
in Named Executives’ compensation, which would allow some of the Named
Executives to terminate employment for “good reason” and receive change in
control severance benefits. See “Elements of Post-Employment Compensation -
Change in Control” for greater detail. While Mr. Heyman is not
covered under a change in control agreement, the Compensation Committee set his
long-term incentive opportunity at 100% of salary to advance internal pay equity
with the other Named Executives with comparable responsibility levels. Mr.
Pignatelli’s long-term incentive opportunity of 100% of salary is below the
targeted 75th
percentile, however, his total direct compensation falls between the median and
75th
percentile.
In
developing the long-term performance targets, the CFO of the Company compiles
relevant data and makes recommendations to the Compensation Committee, but the
Compensation Committee ultimately determines the performance objectives that are
adopted for the applicable long-term plan.
For 2007,
management recommended and the Compensation Committee approved long-term
incentive awards consisting of stock options and performance shares, weighted
50% for each in terms of value. We believe that this balanced approach focuses
the Named Executives on increasing shareholder value and achieving longer-term
financial goals. Moreover, stock option grants and performance share awards are
intended to qualify as performance-based compensation under Section 162(m) of
the Code, which ensures that awards granted to the CEO and other Named
Executives are tax deductible by the Company.
Stock
Option Grants
Options
are designed, in part, to reward longer term success in Company performance that
is reflected in increases in share price. The Company’s options,
granted at the market price on the date of grant, help focus executives on
long-term growth. In addition, options are intended to help retain
key employees because they can be exercised in one-third increments over a three
year period. The three-year incremental vesting also keeps executives
focused on long-term performance.
Performance
Share Awards
Performance
shares are designed, in part, to reward achievement of financial performance
objectives whether or not reflected in actual share price in the short term.
Performance shares also support important financial efficiency objectives by
ensuring that cost is variable and incurred by the Company only to the extent
that financial goals are achieved.
The
2007-2009 performance share awards are tied to the achievement of Diluted EPS
(defined as EPS applied to fully diluted outstanding shares) and cash flow goals
over a three-year performance period. These goals were selected
because they are considered to be the most significant drivers of long-term
value creation for our shareholders. The goals are equally weighted
and the Named Executives can earn 0% to 150% of the target shares based on
actual achievement of the goals. The 2007-2009 performance share
goals are set forth in the following table.
2007-2009
Performance Share Goals
|
Goal
|
Less
than Threshold
|
Threshold
|
Target
|
Outstanding
|
|
Cumulative
Diluted EPS
|
Less
than $6.12
|
$6.12
|
$6.41
|
$7.40
|
|
Cumulative
Cash Flow from Operations
|
Less
than $845 million
|
$845
million
|
$865
million
|
$915
million
|
For 2007,
Diluted EPS was $1.57 per share and cash flow was $322.8
million. These one-year results will contribute towards the
cumulative three-year performance period. See the “Grants of
Plan-Based Awards Table” on page 24 for the minimum, target and maximum awards
for each of the Named Executives for the 2007-2009 performance share
awards.
The
2006-2008 performance share awards are similar to the 2007-2009 awards but are
tied to the achievement of Basic EPS (defined as EPS applied to undiluted
outstanding shares), rather than Diluted EPS, and cash flow goals over the
2006-2008 performance period. The 2006-2008 performace share goals
are set forth in the following table.
2006-2008
Performance Share Goals
|
Goal
|
Less
than Threshold
|
Threshold
|
Target
|
Outstanding
|
|
Cumulative
EPS
|
Less
than $5.80
|
$5.80
|
$6.07
|
$6.38
|
|
Cumulative
Cash Flow from Operations
|
Less
than $879.6 million
|
$879.6
million
|
$
888.3 million
|
$901.1
million
|
For 2006,
Basic EPS was $1.96 per share and cash flow was $282.5 million, and for
2007, Basic EPS was $1.64 per share and cash flow was $322.8 million.
These two-year results will contribute towards the cumulative three-year
performance period. See the “Outstanding Equity Awards Table” on page
25 for the number and market value of unearned share awards for each of the
Named Executives.
2005-2007
Long-Term Incentive Plan
During
2004 and 2005, the Company did not have shares available for stock awards under
a shareholder approved incentive plan so it adopted a cash incentive based
long-term incentive plan (“LTIP”) during that period. The 2005-2007
LTIP was based on the achievement of two performance goals, EPS and UniSource
Energy consolidated operating cash flow, over the three-year period
2005-2007. The three-year performance results for 2005-2007 fell
short of the threshold payout level and accordingly, no payouts were
made. The absence of a payout under the 2005-2007 LTIP did not
influence any other compensation decisions made in 2007 or 2008.
The
targets and goals discussed above are disclosed in the limited context of
UniSource Energy’s compensation programs and should not be understood to be
statements of management’s estimates of results or other
guidance. UniSource Energy specifically cautions investors not to
apply these statements to other contexts.
Equity
Grant Timing and Practice
Generally,
during the first quarter following the close of a fiscal year, the Compensation
Committee approves the long-term incentive awards to be granted for the upcoming
year, including the type of equity to be granted, as well as the size of the
awards for Named Executives. In determining the type and aggregate size of
awards to be provided, as well as the performance metrics that will apply, the
Compensation Committee considers the strategic goals of the Company, trends in
corporate governance, accounting impact, tax deductibility, cash flow
considerations, the impact on EPS and the number of shares that would be
required to be allocated for the award and the resulting impact to
shareholders. When the Compensation Committee approves grants of
plan-based equity awards, the exercise price is set at the market closing price
of UniSource Energy common stock on the date that the grant is
made. Awards are not coordinated with the release of material
non-public information.
In
addition, the Company does not typically provide for off-cycle stock option
grants and has no specific number of shares under the 2006 Omnibus Plan set
aside for such grants. However, occasionally in connection with a new
hire of an executive, such a grant may be made to the extent approved by the
Compensation Committee. The exercise price of any off-cycle option
granted to a newly hired executive will be the closing market price on the date
that the Compensation Committee approves any such award, consistent with the
pricing practices associated with on-cycle plan-based equity
awards.
STOCK OWNERSHIP
POLICY
To
further support our objective of aligning management and shareholder interests,
we adopted a formal stock ownership policy, which encourages all officers to
accumulate a substantial ownership stake in Company shares. The policy has the
following key features:
|
|
·
|
Participants
are encouraged to accumulate Company shares with a target value of a
multiple of their base salary, ranging from one times base salary for Vice
Presidents, three times for senior Vice Presidents and five times for our
CEO.
|
|
|
·
|
If
a participant has not yet reached the applicable target ownership
requirement, he or she is expected to retain a portion of the net
after-tax shares acquired from any stock option exercise, vesting of
restricted stock or payments related to the performance share
program. The applicable retention rates are 100% for the CEO,
50% for Named Executives who are senior vice presidents and 25% for the
other vice presidents.
|
|
|
·
|
Unexercised
stock options, unvested stock options and unearned performance shares do
not count towards meeting the ownership
guidelines.
|
Annually,
management provides a report to the Compensation Committee regarding the number
and value of the shares held by each officer subject to the guidelines. As of
December 31, 2007, all of the Named Executives who were hired before 2005,
including the CEO, have achieved their target ownership level. The
Named Executive who was hired after 2005 is making progress toward meeting the
guideline.
OTHER
COMPENSATION
Perquisites
The
Company provides Named Executives with limited personal benefits and
perquisites. These are not tied to any formal individual or Company
performance criteria but are intended to enhance the attraction and overall
retention value of the executive compensation program and be responsive to
similar benefits provided to executives and other key personnel in other similar
companies in the industry. As a benefit, the Company from
time to time reimburses certain executives for business or similar social club
initiation fees and periodic special assessments. The Company also
reimburses executives for the travel expenses of their spouses incurred in
connection with the annual Board strategic retreat. Moreover, in the
past, executive officers, along with managers and certain other supervisory
personnel, have been provided with the use of a vehicle, and related vehicle
operating costs of fuel and car insurance have been paid for by the
Company. However, effective January 1, 2008, the Board adopted a new
policy going forward wherein officers will no longer be provided with a car
benefit. This change was made to reduce liability exposure for
employee personal use and to provide vehicle use to employees based more closely
on parameters tied to work-related needs. In consideration of the elimination of
this benefit, the Company made a one-time salary increase of $6000 which was
included in the Named Executives’ salary increases for 2008. For
identification of specific perquisites and associated values, refer to the
“Summary Compensation Table” on page 22.
Retirement
Benefits
Our Named
Executives are also eligible to participate in certain employee benefits plans
and arrangements offered by the Company. These include the Tucson Electric Power
Company 401(k) Plan, the Tucson Electric Power Company Salaried Employees
Retirement Plan (the “Retirement Plan”), the Tucson Electric Power Company
Excess Benefits Plan (the “Excess Benefits Plan”) and the Management and
Directors Deferred Compensation Plan (the “DCP”). A description of
the pension and other retirement plans is provided under “Elements of
Post-Employment Compensation-Retirement and Other Benefits,” below.
ELEMENTS OF POST-EMPLOYMENT
COMPENSATION
Termination
and Change in Control
In 1998,
TEP, a wholly owned subsidiary of the Company, entered into Change in Control
Agreements (“Change in Control Agreements” or “Agreements”) with all of the then
Named Executives to help keep them focused on their work responsibilities during
the uncertainty that accompanies a change in control, to provide benefits for a
period of time following certain terminations of employment after a change in
control event or transaction and to help us attract and retain key personnel.
Some of these Agreements remain in effect until 2010. See discussion
following the “Potential Payments upon Termination or Change in Control Table”
on page 30.
Retirement
and Other Benefits
Benefits
Generally
The
Company offers retirement and other core benefits to its employees, including
executive officers, in order to provide them with a reasonable level of
financial support in the event of illness or injury and to enhance productivity
and job satisfaction. The benefits are the same for all employees and
executive officers and include medical and dental coverage, disability insurance
and life insurance. In addition, the Tucson Electric Power Company
401(k) Plan and the Retirement Plan provide a reasonable level of retirement
income reflecting employees’ careers with the Company. All employees, including
executive officers, participate in these plans; the cost of these benefits
(other than the Retirement Plan) is partially borne by the employee, including
each executive officer. To the extent that any officer’s retirement benefit
exceeds Internal Revenue Service (“IRS”) limits for amounts that can be paid
through a qualified plan, the Company also offers non-qualified retirement
plans, including the Excess Benefits Plan and the DCP. These plans provide only
the difference between the calculated benefits and the IRS
limits. For more information on retirement and certain related
benefits, see the discussion following the “Pension Benefits Table” on page 28
and the “Non-Qualified Deferred Compensation Table” on page 29.
IMPACT OF REGULATORY
REQUIREMENTS
Under
Section 162(m) of the Code, compensation paid to the CEO and to the three
other most highly compensated Named Executives (other than the CEO
and CFO) in excess of $1,000,000 annually is not deductible for federal income
tax purposes unless the compensation is awarded under a performance-based plan
approved by the shareholders. With respect to performance-based
compensation, Section 162(m) of the Code requires that performance metrics be
set within 90 days of the commencement of the performance period. Accordingly,
the Compensation Committee schedules its meetings so that the incentive-based
compensation programs designed to provide performance-based compensation, within
the meaning of Code section 162(m), are approved during the first quarter of the
year. To the extent that the Company complies with the
performance-based compensation provision of Section 162(m), the awards granted
to the CEO and other Named Executives are tax deductible by the
Company. For 2007, the Company believes that there was no executive
compensation that was not tax deductible.
The
Compensation Committee believes that it is in the best interest of the Company
to receive maximum tax deductibility for compensation paid to the CEO and three
highest compensated Named Executives other than the CEO and CFO under Section
162(m) of the Code, although to maintain flexibility in compensating Named
Executives in a manner designed to promote varying corporate goals, the
Compensation Committee may award compensation that is not fully deductible
under certain circumstances. The Company’s compensation plans reflect
the Compensation Committee’s intent and general practice to pay compensation
that the Company can deduct for purposes of federal income
tax. Executive compensation decisions, however, are
multifaceted. The Compensation Committee reserves the right to pay
amounts that are not tax deductible to meet the design goals of our executive
compensation program.
The
Compensation Committee also considers other financial implications when
developing and implementing the Company’s compensation program, including
accounting costs, cash flow impact and potential share dilution.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The
Compensation Committee is made up of eight directors who are independent based
upon independence criteria established by our Board, which criteria are in
compliance with applicable NYSE listing standards. The Board previously
adopted a written charter for the Compensation Committee. The Compensation
Committee Charter is available for inspection on the Company’s website at www.UNS.com.
The
Compensation Committee has reviewed and discussed with management the
“Compensation Discussion and Analysis” section required by Item 402(b) of SEC
Regulation S-K and contained in this Proxy Statement. Based on such
review and discussions, the Compensation Committee recommended to the Board that
the “Compensation Discussion and Analysis” section be included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 and the 2008
Proxy Statement.
Respectfully
submitted,
THE COMPENSATION
COMMITTEE
Harold W. Burlingame,
Chair
Lawrence J. Aldrich
Barbara M. Baumann
John L. Carter
Robert A. Elliott
Daniel W. L. Fessler
Ramiro G. Peru
Joaquin Ruiz
SUMMARY COMPENSATION TABLE—2007
The
following table sets forth summary compensation information for the years ended
December 31, 2006 and December 31, 2007 for our CEO, our Chief Financial Officer
and three other most highly compensated Named Executives:
|
Name
and
Principal
Position
|
Year
($)
|
Salary
($)
|
Stock
Awards
($)(1)
|
Option
Awards
($)(2)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)(3)
|
Change
in
Pension
Value
and
Non-
Qualified
Deferred
Comp-
ensation
Earnings
($)(4)
|
All
Other
Compen-
sation
($)(5)
|
Total
($)
|
|
James
S. Pignatelli
Chairman,
President and
Chief Executive
Officer
|
2007
2006
|
694,438
666,923
|
97,755
95,476
|
319,336
339,742
|
791,000
867,500
|
0
210,550
|
262,236
17,646
|
2,164,765
2,197,837
|
|
Kevin
P. Larson
Senior
Vice President and
Chief Financial
Officer
|
2007
2006
|
299,814
288,462
|
62,731
41,317
|
85,372
32,671
|
237,632
259,184
|
0
74,313
|
49,237
15,352
|
734,786
711,299
|
|
Michael
J. DeConcini
Senior
Vice President and
Chief Operating
Officer,
Transmission
and Distribution
|
2007
2006
|
300,178
288,462
|
62,731
41,317
|
85,372
32,671
|
243,608
265,196
|
0
38,573
|
74,960
14,768
|
766,849
680,987
|
|
Raymond
S. Heyman
Senior
Vice President and
General
Counsel
|
2007
2006
|
304,077
288,462
|
62,731
41,317
|
208,484
155,783
|
146,000
167,000
|
43,651
65,352
|
14,183
14,020
|
779,126
731,934
|
|
Karen
G. Kissinger
Vice
President, Controller and
Chief
Compliance Officer
|
2007
|
236,731
|
49,647
|
67,598
|
179,648
|
0
|
13,011
|
546,635
|
(1) The amounts included in
the “Stock Awards” column represent the compensation expense recognized by the
Company for performance share awards granted to the Named Executives in 2007 and
2006, calculated in accordance with Statement of Financial Accounting Standards
share based payment (revised 2004) (“FAS 123R”). The Company’s FAS 123R
assumptions used in these calculations are set forth on pages 137-140 of our
annual report on Form 10-K filed with the SEC on February 29, 2008 and available
on the Company’s website at www.UNS.com. These
amounts disregard estimates of forfeitures related to service based vesting
conditions. There were no forfeitures in 2007.
(2) The amounts included in
the “Option Awards” column represent the compensation expense recognized by the
Company for stock option awards granted to the Named Executives in 2007 and 2006
and a 2005 stock option award to Mr. Heyman, calculated in accordance with FAS
123R. The Company’s FAS 123R assumptions used in these calculations are set
forth on pages 137-140 of our annual report on Form 10-K filed with the SEC on
February 29, 2008 and available on the Company’s website at www.UNS.com. Since
Mr. Pignatelli is retirement eligible, his accruals in 2007 and 2006 were
expensed at the date of the award rather than expensed over a three-year vesting
period. These amounts disregard estimates of forfeitures related to service
based vesting conditions.
(3) The Non-Equity Incentive
Plan Compensation listed on this table reflects for 2006, the second of three
installments associated with the 2004 long-term incentive plan (“LTIP”) awards
plus the payout under the 2006 PEP awards and for 2007, the third of three
installments associated with the 2004 LTIP awards and the payout under the 2007
PEP awards. The 2007 payouts under the 2004 LTIP awards were as follows: Mr.
Pignatelli, $249,000; Mr. Larson, $91,632; Mr. DeConcini, $97,608; Ms.
Kissinger, $87,648. The 2007 PEP awards included in this column were
paid during the first quarter of 2008, and are as follows: Mr.
Pignatelli, $542,000; Mr. Larson, $146,000; Mr. DeConcini, $146,000; Mr. Heyman,
$146,000; Ms. Kissinger, $92,000.
(4) This column reflects the
change in the actuarial present value of the accumulated benefit under all
defined benefit plans (the Retirement Plan and Excess Benefits
Plan). Due to a change in actuarial assumptions for the 2007
measurement date, the change in pension value for four of the Named Executives
was negative for 2007, and in accordance with the SEC rules, we report these
amounts as zero. DCP earnings are not reflected in this column
because our non-qualified DCP does not provide participants with above-market
earnings. Our non-qualified DCP offers participants a menu of
investment options and these accounts provide participants with a return based
on their selection of investment opportunities.
(5) The amounts in the “All
Other Compensation” column include (i) the value of dividend equivalents with
respect to restricted stock units and stock options, expensed in accordance with
FAS 123R, and (ii) the following payments that we made on behalf of the Named
Executives:
|
Name
|
Year
|
Car
Benefit
($)
|
Qualified
Plan
401(k)
Matching
Contributions
($)
|
Non-
Qualified
Plan
401(k)
Matching
Contributions
($)
|
Club
Member-
ships
($)
|
Spouse
Travel
($)
|
Total
($)
|
|
James
S. Pignatelli
|
2007
|
4,333
|
10,125
|
5,375
|
1,080
|
400
|
21,313
|
|
Kevin
P. Larson
|
2007
|
4,055
|
10,125
|
3,358
|
0
|
199
|
17,737
|
|
Michael
J. DeConcini
|
2007
|
575
|
10,125
|
3,358
|
1,080
|
563
|
15,701
|
|
Raymond
S. Heyman
|
2007
|
500
|
10,125
|
3,558
|
0
|
0
|
14,183
|
|
Karen
G. Kissinger
|
2007
|
1,322
|
10,125
|
528
|
0
|
0
|
11,975
|
The “Car
Benefits,” “Club Memberships,” and “Spouse Travel” columns include the
incremental cost to the Company of such benefits. For the car
benefit, the incremental cost includes the cost of fuel and maintenance of a
vehicle provided to the Named Executive for personal use; this benefit no longer
became applicable as of January 1, 2008, at which time the Board adopted a new
policy that no longer provides for a car benefit to officers. See
“Other Compensation, Perquisites” section of the
Compensation Discussion and Analysis above. Until the adoption of the
new policy, the Company also paid for the auto insurance, but that cost was
immaterial and cannot be quantified because the insurance was provided through a
comprehensive policy that covers many insurable risks and the underwriters do
not provide any cost allocation information. Spouse travel costs
include airfare for the Named Executives’ spouses for the annual Board
retreat.
GRANTS OF PLAN-BASED AWARDS—2007
The
following table sets forth information regarding plan-based awards to our Named
Executives in 2007. The compensation plans under which the grants in
the following table were made are generally described in the “Compensation
Discussion and Analysis” section, beginning on page 11 and include the UniSource
Energy PEP, which provides for non-equity (cash) performance awards, and the
2006 Omnibus Plan, which provides for equity-based performance awards including
stock options and performance shares.
|
Name
|
Grant
Date
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards
(1)
|
Estimated
Future Payouts
Under
Equity Incentive Plan
Awards
(2)
|
All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options
(#)(3)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
(4)
|
Grant
Date
Fair
Value of
Awards
($)(5)
|
||||
|
Thresh-
old
($)(1)
|
Target
($)
|
Maxi-
mum
($)
|
Thresh-
old
(#)
|
Target
(#)
|
Maxi-
mum
(#)
|
|||||
|
James
S. Pignatelli
|
2/27/2008
|
278,000
|
556,000
|
834,000
|
||||||
|
3/20/2007
|
4,755
|
9,510
|
14,265
|
48,006
|
||||||
|
3/20/2007
|
39,300
|
37.88
|
319,336
|
|||||||
|
Kevin
P. Larson
|
2/27/2008
|
75,000
|
150,000
|
225,000
|
||||||
|
3/20/2007
|
2,050
|
4,100
|
6,150
|
35,477
|
||||||
|
3/20/2007
|
16,960
|
37.88
|
36,366
|
|||||||
|
Michael
J. DeConcini
|
2/27/2008
|
75,000
|
150,000
|
225,000
|
||||||
|
3/20/2007
|
2,050
|
4,100
|
6,150
|
35,477
|
||||||
|
3/20/2007
|
16,960
|
37.88
|
36,366
|
|||||||
|
Raymond
S. Heyman
|
2/27/2008
|
75,000
|
150,000
|
225,000
|
||||||
|
3/20/2007
|
2,050
|
4,100
|
6,150
|
35,477
|
||||||
|
3/20/2007
|
16,960
|
37.88
|
36,366
|
|||||||
|
Karen
G. Kissinger
|
2/27/2008
|
47,400
|
94,800
|
142,200
|
||||||
|
3/20/2007
|
1,620
|
3,240
|
4,860
|
28,033
|
||||||
|
3/20/2007
|
13,400
|
37.88
|
28,733
|
|||||||
(1) The amounts shown in this
column reflect the range of payouts (50%-150%) targeted for 2007 performance
under the Company’s PEP, as described in the “Short-Term Incentive Compensation”
section of the Compensation Discussion and Analysis above. These amounts are
based on the individual’s current salary and position. The amount of
cash incentive actually paid under the PEP for 2007 is reflected in the Summary
Compensation Table above.
(2) The amounts shown in this
column reflect the range (50%-150%) of grants in the form of performance shares
targeted for 2007 performance under the 2006 Omnibus Plan for long-term
incentive compensation, as described in the “Long-Term Incentive Compensation”
section of the Compensation Discussion and Analysis above.
(3) Stock options granted
under the 2006 Omnibus Plan are described in the Outstanding Equity Awards at
Fiscal Year-End Table below. Options are granted at 100% of the fair
market value on the date of grant; they vest in one-third increments over a
three year period and expire after 10 years.
(4) Exercise price for the
March 20, 2007 stock option award was $37.88, which was the closing price of the
Company’s common stock on the NYSE on the grant date.
(5) This amount has been
determined in accordance with FAS 123R based on the fair value of our common
stock as of the grant date of $37.88 per share for 2007
awards.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END –
2007
The
following table summarizes the number of securities underlying outstanding plan
awards for each Named Executive as of December 31, 2007:
|
Option
Awards (1)
|
Stock
Awards (2)
|
|||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Options
(#)
Unexer-
cisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)(3)
|
|
James
S. Pignatelli
|
45,096
|
15.56
|
7/9/2008
|
|||
|
114,500
|
12.28
|
7/16/2009
|
||||
|
175,000
|
15.28
|
8/3/2010
|
||||
|
150,000
|
17.91
|
8/2/2011
|
||||
|
150,000
|
18.12
|
1/2/2012
|
||||
|
21,226
|
17.84
|
5/9/2013
|
||||
|
15,336
|
30,674
|
30.55
|
5/5/2016
|
|||
|
39,300
|
37.88
|
3/20/2017
|
||||
|
5,580
|
176,049
|
|||||
|
7,133
|
225,030
|
|||||
|
Kevin
P. Larson
|
17,000
|
15.28
|
8/3/2010
|
|||
|
35,000
|
18.12
|
1/2/2012
|
||||
|
7,783
|
17.84
|
5/9/2013
|
||||
|
6,636
|
13,274
|
30.55
|
5/5/2016
|
|||
|
16,960
|
37.88
|
3/20/2017
|
||||
|
2,415
|
76,193
|
|||||
|
3,075
|
97,016
|
|||||
|
Michael
J. DeConcini
|
4,000
|
15.56
|
7/9/2008
|
|||
|
8,900
|
12.28
|
7/16/2009
|
||||
|
40,000
|
15.28
|
8/3/2010
|
||||
|
30,000
|
17.91
|
8/2/2011
|
||||
|
40,000
|
18.12
|
1/2/2012
|
||||
|
8,137
|
17.84
|
5/9/2013
|
||||
|
6,636
|
13,274
|
30.55
|
5/5/2016
|
|||
|
16,960
|
37.88
|
3/20/2017
|
||||
|
2,415
|
76,193
|
|||||
|
3,075
|
97,016
|
|||||
|
Raymond
S. Heyman
|
33,334
|
16,666
|
33.55
|
9/15/2015
|
||
|
6,636
|
13,274
|
30.55
|
5/5/2016
|
|||
|
16,960
|
37.88
|
3/20/2017
|
||||
|
2,415
|
76,193
|
|||||
|
3,075
|
97,016
|
|
Karen
G. Kissinger
|
7,000
|
17.91
|
8/2/2011
|
|||
|
1,152
|
18.12
|
1/2/2012
|
||||
|
5,263
|
10,527
|
30.55
|
5/5/2016
|
|||
|
13,400
|
37.88
|
3/20/2017
|
||||
|
1,915
|
60,418
|
|||||
|
2,430
|
76,667
|
(1) All options listed above
vest at a rate of 33 1/3% per year over the first three years of the 10-year
option term.
(2) Performance shares vest
after three years based on performance of the cumulative goals over the
applicable three-year period.
(3) Represents the market
value of unearned performance shares calculated based on the prorated
achievement of the EPS goal at threshold and the cash flow goal at target,
because the Company would have achieved those levels of performance if the
performance period had ended on December 31, 2007 and taking into account the
closing Company stock market price on December 31, 2007.
OPTION EXERCISES AND STOCK VESTED
The
following table includes certain information with respect to the options
exercised by our Named Executives during the year ended December 31,
2007:
|
Option
Awards
|
||
|
Name
|
Number
of Shares
Acquired
on
Exercise
(#)(1)
|
Value
Realized on
Exercise
($)(2)
|
|
James
S. Pignatelli
|
29,950
|
581,963
|
|
Kevin
P. Larson
|
30,700
|
668,059
|
(1) Of
shares exercised, the following numbers of shares were due to options that
otherwise would have expired during the year: James S. Pignatelli,
16,800. Mr. Larson retained 22,949 of the shares acquired through the
exercise of the options indicated above.
(2) For
options that are exercised in cashless transactions, we base this value on the
spread between the exercise price and the actual price at which the shares of
common stock are sold in the market. For options that are exercised
and retained by the Named Executive, we base this value on the spread between
the exercise price and the actual market price of our common stock at the time
of exercise.
PENSION BENEFITS
The
following table shows the present value of accumulated benefits payable to each
of the Named Executives, including the number of years of service credited to
each such Named Executive, under each of the Retirement Plan and the Excess
Benefits Plan determined using interest rate and mortality rate assumptions
consistent with those used in the Company’s financial statements as set forth on
pages 131-137 of the Company’s Annual Report on Form 10-K. Information regarding
the Retirement Plan and the Excess Benefits Plan can be found under the heading
“Retirement and Other Benefits” on page 20.
|
Name
|
Plan
Name
|
Number
of Years
Credited
Service
(#)
|
Present
Value of
Accumulated
Benefit
($)
|
Payments
During Last
Fiscal
Year
($)
|
|
James
S. Pignatelli
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
13.25
|
451,066
|
0
|
|
Tucson
Electric Power Excess Benefits Plan (2)
|
13.25
|
3,859,122
|
0
|
|
|
Kevin
P. Larson
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
22.75
|
322,931
|
0
|
|
Tucson
Electric Power Excess Benefits Plan (2)
|
22.75
|
299,931
|
0
|
|
|
Michael
J. DeConcini
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
19
|
168,535
|
0
|
|
Tucson
Electric Power Excess Benefits Plan (2)
|
19
|
228,325
|
0
|
|
|
Raymond
S. Heyman
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
2.25
|
34,936
|
0
|
|
Tucson
Electric Power Excess Benefits Plan (2)
|
2.25
|
86,933
|
0
|
|
|
Karen
G. Kissinger
|
Tucson
Electric Power Salaried Employees Retirement Plan
(1)
|
16.92
|
271,943
|
0
|
|
Tucson
Electric Power Excess Benefits Plan (2)
|
16.92
|
305,413
|
0
|
(1) The Retirement Plan is
intended to meet the requirements of a qualified benefit plan for Code purposes,
and is funded by the Company and made available to all eligible
employees. The Retirement Plan provides an annual income upon
retirement based on the following formula:
1.6% x years
of service (up to 25 years) x final average
pay
Final
average pay is calculated as the average of basic monthly earnings on the first
of the month following the employee’s birthday during the five consecutive plan
years in which basic monthly earnings were the highest, within the last 15 plan
years before retirement. Years of service are based on years and
months of employment. A Retirement Plan participant is fully vested
in his or her retirement benefit after five years of service. The maximum
benefit available under the Retirement Plan is an annual income of 40% of final
average pay (as defined above). Plan compensation for purposes of
determining final average pay is limited by IRS compensation limits under Code
Section 401(a)(17). For 2007, the limit was $225,000 in annual income. Employees
are eligible to retire early with an unreduced pension benefit if (i) the
combination of their age and years of service equals or exceeds 85 or (ii) they
are age 62 and have completed 10 years of service. All optional forms
of the benefit are actuarially equivalent.
(2) The Retirement Plan is
subject to Code limitations on the amount of compensation that can be taken into
account and on the amount of benefits that can be provided. The Excess Benefits
Plan provides retirement benefits to officers in addition to the maximum amount
of benefits payable under the Retirement Plan. The Excess Benefits
Plan retirement benefit is calculated generally using the same pension formula
as the Retirement Plan formula but with some
modifications. Compensation for purposes of the Excess Benefits Plan
is determined without regard to IRS limits on compensation and by including
voluntary salary reductions to the DCP, and any annual incentive payment
received under the PEP. The retirement benefit payable from the
Excess Benefits Plan is reduced by the benefit payable to that person from the
Retirement Plan. Full vesting occurs after five years of
service. Benefits are payable in a lump sum or annuity, at the
retiree’s election.
Benefits
under the Excess Benefits Plan are provided to officers but, with limited
exceptions, are not generally available to other employees. These
benefits are not tied to any formal individual or Company performance criteria
but are intended to enhance the attraction and retention value of the executive
compensation program and are consistent with similar competitive compensation
benefits made available to executives in the industry.
NON-QUALIFIED DEFERRED COMPENSATION
UniSource
Energy sponsors the DCP for directors, officers and certain other employees of
UniSource Energy. Under the DCP, employee participants are allowed to
defer on a pre-tax basis up to 100% of base salary and cash bonuses and
non-employee director participants are allowed to defer up to 100% of their cash
compensation. This deferral plan also allows the executive employee
participants to obtain the 401(k) Company match beyond the IRS-prescribed
contribution and salary limitations of the Company’s 401(k) Plan. The
Company makes contributions to the DCP coincident with the deferrals made by the
participants. The deferrals are used to purchase trust owned life
insurance which is held in a rabbi trust. The deferred amounts are
valued daily as if invested in one or more of a number of investment funds,
including UniSource Energy stock units, each of which may appreciate or
depreciate in value over time. The choice of investment funds is
determined by the individual participant.
We
believe this plan assists with our attraction and retention objectives since it
provides an industry-competitive and tax-efficient benefit to our executives.
The DCP is not funded by the Company and participants have an unsecured
contractual commitment by the Company to pay amounts owed under the
DCP.
|
Name
|
Executive
Contributions
in
Last
Fiscal Year
($)(1)
|
Registrant
Contributions
in
Last
Fiscal Year
($)
|
Aggregate
Earnings
in Last
Fiscal
Year
($)(2)
|
Aggregate
Withdrawals/
Distributions
($)
|
Aggregate
Balance
at
Last Fiscal
Year
End
($)
|
|
James
S. Pignatelli
|
120,000
|
5,100
|
(88,789)
|
0
|
1,611,959
|
|
Kevin
P. Larson
|
0
|
3,081
|
(4,257)
|
0
|
32,787
|
|
Michael
J. DeConcini
|
0
|
3,081
|
(2,862)
|
0
|
21,820
|
|
Raymond
S. Heyman
|
0
|
3,081
|
(442)
|
0
|
2,638
|
|
Karen
G. Kissinger
|
0
|
415
|
(7,906)
|
0
|
62,383
|
(1) Represents contributions
to the DCP by the Named Executives during the year. These amounts are
included in the salary column of the “Summary Compensation Table”
above.
(2) Represents the total
market based earnings (losses) for the year on all deferred compensation under
the plan based on the investment returns associated with the investment choices
made by the Named Executive. Amounts in this column are not included
in the “Summary Compensation Table.”
The
following table shows the deemed investment options available, and the annual
rate of return for the calendar year ended December 31, 2007, under the
DCP.
|
Name
of Fund
|
Rate
of Return
|
Name
of Fund
|
Rate
of Return
|
|
Fidelity
Retirement Money Market
|
5.12%
|
Fidelity
Spartan Us Equity Index
|
5.43%
|
|
Fidelity
Intermediate Bond
|
3.96%
|
Fidelity
Growth Company
|
19.89%
|
|
Janus
Flexible Bond
|
6.87%
|
Fidelity
Low Price Stock
|
3.16%
|
|
Fidelity
Asset Manager
|
6.33%
|
Janus
Worldwide
|
9.23%
|
|
Fidelity
Equity-Income
|
1.40%
|
UniSource
Energy Corporation Stock
|
(11.30%)
|
|
Fidelity
Magellan
|
18.83%
|
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN
CONTROL
The
following table and summary set forth potential payments payable to our Named
Executives upon termination of employment or a change in control. The
table below reflects amounts payable to our Named Executives assuming their
employment was terminated on December 31, 2007:
|
Name
|
If
Retirement or Voluntary
Termination
Occurs (1)
|
If
“Change In Control”
Termination
Occurs ($) (2)
|
If
Death or Disability
Occurs
($) (3)
|
|
James
S. Pignatelli
|
--
|
0
|
0
|
|
Kevin
P. Larson
|
--
|
2,703,147
|
0
|
|
Michael
J. DeConcini
|
--
|
2,685,846
|
0
|
|
Raymond
S. Heyman
|
--
|
0
|
0
|
|
Karen
G. Kissinger
|
--
|
1,466,510
|
0
|
(1) In the event of
retirement or voluntary termination, each of the Named Executives would be
entitled to receive vested and accrued benefits payable from the Retirement Plan
and the Excess Benefits Plan, but no form or amount of any such payment would be
increased or otherwise enhanced nor would vesting be accelerated with respect to
such plans. In addition, no accelerated vesting of options or
performance shares would occur. Retirement Plan and Excess Benefits
Plan information for the Named Executives is set forth in the “Pension Benefits
Table” above. Mr. Heyman is not vested in the retirement plans as of
December 31, 2007.
(2) If a change in control
occurs, and an officer’s employment is terminated by TEP (other than due to the
officer’s acceptance of another position or for cause), or if the officer
terminates employment because of a reduction in salary, responsibility,
compensation or for certain other stated reasons, the officer is entitled to
severance benefits. These include: a) severance payout, b) pro-rated bonus, c)
accelerated vesting of stock options, d) performance shares payout, e) enhanced
retirement benefits, f) medical benefits continuation [for five years], and g)
tax gross-up. In December 2006, James S. Pignatelli waived all rights under his
Change in Control Agreement and terminated the Agreement to which he and TEP had
been party. Mr. Heyman does not have a Change in Control
Agreement. The breakout of the above referenced elements for the
three Named Executives is as follows:
|
Named
Executive
|
Cash
($)
|
Prorated
Bonus
($)
|
Stock
Options
($)
|
Performance
Shares
($)
|
Enhanced
Benefits
($)
|
Pension
($)
|
Tax
Gross-up
($)
|
Total
($)
|
|
Kevin
P. Larson
|
1,350,000
|
150,000
|
13,273
|
281,742
|
64,427
|
118,587
|
725,118
|
2,703,147
|
|
Michael
J. DeConcini
|
1,350,000
|
150,000
|
13,273
|
281,742
|
73,258
|
66,823
|
750,750
|
2,685,846
|
|
Karen
Kissinger
|
995,400
|
94,800
|
10,527
|
223,059
|
74,949
|
67,776
|
0
|
1,466,510
|
(3) Amounts in this column
reflect the value of all unvested options that would accelerate upon the death
or disability of the Named Executives, but at December 31, 2007, there is no
intrinsic value to the unvested options that would accelerate because the market
value at that date is less than the exercise price of the unvested
options. There is no acceleration of performance
shares. In addition, in the event of death, the Named Executive’s
survivor would be entitled to receive a death benefit in the form of a lump sum
or survivor annuity which is principally funded from the Retirement Plan and
Excess Benefits Plan. The amount payable to the survivor would be
less than the amount that would otherwise have been payable to the Named
Executive had the Named Executive survived and received retirement benefits
under the Retirement Plan and Excess Benefits Plan. There would be no
enhancements as to form, amount or vesting of such benefits in the event of a
Named Executive’s death. The survivor would also receive life insurance proceeds
from the life insurance coverage provided by the Company under the employee life
insurance benefit.
For the
purpose of the Change in Control Agreements, a change in control includes the
acquisition of beneficial ownership of 30% of the common stock of UniSource
Energy, certain changes in the Board, approval by the shareholders of certain
mergers or consolidations or certain transfers of the assets of UniSource
Energy. The Agreements
provide that each officer shall be employed by TEP or one of its subsidiaries or
affiliates, in a position comparable to his current position, with compensation
and benefits, which are at least equal to his then current compensation and
benefits, for an employment period of five years after a change in control
(subject to earlier termination due to the officer’s acceptance of a position
with another company or termination for cause).
The
Agreements are in effect until the later of: (i) five years after the date
either TEP or the officer gives written notice of termination of the Agreement,
or (ii) if a change in control occurs during the term of the Agreements, five
years after the change in control. On March 29, 2004, a change in
control occurred for purposes of the Agreements when our shareholders, at a
special meeting, approved the acquisition agreement that provided for an
affiliate of Saguaro Utility Group L.P. to acquire all of our outstanding shares
of common stock.
On March
3, 2005, TEP provided the officers of the Company with written notice of
termination of the Agreements effective March 3, 2010, the fifth anniversary of
the date of the written notice of termination. In December 2006, the
CEO of the Company waived all rights he otherwise would have had for the
remaining effective period under his Agreement and terminated the Agreement to
which he and TEP had been party.
During
the remaining term of the Agreements currently in effect, in the event that an
officer’s employment is terminated by TEP (with the exception of termination due
to the officer’s acceptance of another position or for cause), or if the officer
terminates employment because of a reduction in position, responsibility,
compensation or for certain other stated reasons prior to March 3, 2010, the
officer is entitled to severance benefits in the form of: (i) a lump sum payment
equal to the present value of three times the sum of annual salary and target
bonus (“cash severance”), (ii) the present value of the additional amount
(including any amount under the Excess Benefits Plan) the officer would have
received under the Retirement Plan if the officer had continued to be employed
for the five-year period after a change in control occurs, plus (iii) the
present value of any employee award under the 2006 Omnibus Plan or any successor
plan, which is outstanding at the time of the officer’s termination (whether
vested or
not),
prorated based on length of service. Such officer is
also entitled to continue to participate in TEP’s health, death and disability
benefit plans for five years after the termination. The Agreements further
provide that TEP will make a payment to the officer to offset any golden
parachute excise taxes that may be imposed in accordance with Code sections 280G
and 4999. Any payments made in respect of such excise taxes are not
deductible by us. Cash severance would also be paid under the Agreements if an
officer dies or becomes disabled prior to March 3, 2010.
Beginning
in 2006, all long-term incentive awards contain a “double trigger” vesting
provision, which provides for accelerated vesting only if outstanding awards are
not assumed by an acquirer or the Named Executive is terminated without cause
within 24 months of a change in control. The double trigger, which is viewed as
a corporate governance “best practice”, ensures that the Named Executives do not
receive accelerated benefits unless they are adversely affected by the change in
control.
Other
than the Agreements described above, we have not entered into any other
severance agreements or employment agreements with any Named
Executives.
DIRECTOR COMPENSATION
The
following table summarizes the compensation earned by non-employee directors of
the Company for the year ended December 31, 2007:
|
Name
(1)
|
Fees
Earned or
Paid
in Cash
($)(2)
|
Stock
Awards
($)
(3)(4)(5)
|
All
Other
Compensation
($)(6)
|
Total
($)
|
|
Lawrence
J. Aldrich
|
69,000
|
44,790
|
4,414
|
118,204
|
|
Barbara
M. Baumann
|
81,000
|
38,125
|
1,986
|
121,111
|
|
Larry
W. Bickle
|
67,750
|
44,790
|
3,620
|
116,160
|
|
Elizabeth
T. Bilby
|
65,000
|
44,790
|
4,802
|
114,592
|
|
Harold
W. Burlingame
|
79,625
|
44,790
|
5,453
|
129,868
|
|
John
L. Carter
|
96,000
|
44,790
|
4,202
|
144,992
|
|
Robert
A. Elliott
|
79,625
|
44,790
|
1,676
|
126,091
|
|
Daniel
W. L. Fessler
|
73,000
|
130,750
|
2,364
|
206,114
|
|
Kenneth
Handy
|
75,000
|
44,790
|
5,573
|
125,363
|
|
Warren
Y. Jobe
|
78,750
|
44,790
|
5,138
|
128,678
|
|
Ramiro
G. Peru
|
0
|
0
|
0
|
0
|
|
Gregory
A. Pivirotto
|
0
|
0
|
0
|
0
|
|
Joaquin
Ruiz
|
72,000
|
38,125
|
1,986
|
112,111
|
(1) Mr. James S. Pignatelli,
the President and CEO, is not included in this table as he is an employee of the
Company and thus receives no compensation for his service as
director. The compensation received by Mr. Pignatelli as an employee
of the Company is shown in the “Summary Compensation Table.”
(2) In 2007, each
non-employee director received a $40,000 annual cash retainer, $1,000 for each
Board meeting attended and $1,000 for each committee meeting
attended. For each of Lawrence J. Aldrich, Barbara M. Baumann,
Elizabeth T. Bilby, Harold W. Burlingame, Kenneth Handy and Joaquin Ruiz, 100%
of fees earned in 2007 were deferred into the DCP. The non-employee
director committee chairpersons and Lead Director received cash retainers in
2007 for those responsibilities. The chairperson and Lead annual retainers were
as follows: Lead Director, $20,000; Audit Chair, $10,000;
Compensation and Corporate Governance Chairs, $7,500; all other committee
chairs, $5,000.
(3) Each non-employee
director received an annual restricted stock unit award valued at $45,000 in
2007. Values reflected in the table are consistent with FAS 123R
grant date fair value and include amortization of a portion of a May 2006 award
and January 2005 award. This amount disregards estimates of
forfeitures related to service based vesting conditions. Each of the
directors in office on May 11, 2007 were awarded 1,177.7 restricted stock units
at a fair market value share price of $38.21. After a one year
vesting period the restricted stock units convert to deferred stock units
payable one year after retirement or termination of Board
service. The award price for the annual director equity award was the
closing price on the date of grant.
In May
2007, the Compensation Committee approved a grant of 4,902.5 restricted stock
units to Mr. Fessler. Mr. Fessler had served as a director on the
UniSource board of directors from 1998 and retired in 2003. In 2005,
Mr. Fessler rejoined the UniSource board as a director. Upon Mr.
Fessler’s initial retirement from the board in 2003, Mr. Fessler had 7,201
vested stock options outstanding under the 1994 Outside Directors Stock Option
Plan. At the time of his retirement, UniSource Energy mistakenly
informed Mr. Fessler that the options would expire at the end of their original
terms. However, under the terms of the plan, the options expired six
months after his retirement. In reliance on the mistaken information,
Mr. Fessler failed to exercise the options prior to their
expiration. The grant in May 2007 was in an amount intended to
restore Mr. Fessler to the position he would have been in had he exercised the
options at the end of the six month period after his retirement and held the
stock received upon such exercise through the date of the May 2007
award.
(4) As of December 31, 2007,
Mr. Aldrich held 5,277 stock units (including dividend equivalent stock units);
Mrs. Baumann held 3,751 stock units (including dividend equivalent stock units).
Dr. Bickle held 4,381 stock units (including dividend equivalent stock units);
Mrs. Bilby held 5,717 stock units (including dividend equivalent stock units);
Mr. Burlingame held 6,452 stock units (including dividend equivalent stock
units); Mr. Carter held 5,036 stock units (including dividend equivalent stock
units); Mr. Elliott held 4,218 stock units (including dividend equivalent stock
units); Mr. Fessler held 8,986 stock units (including dividend equivalent stock
units); Mr. Handy held 6,587 stock units (including dividend equivalent stock
units); Mr. Jobe held 6,096 stock units (including dividend equivalent stock
units); and Mr. Ruiz held 3,751 stock units (including dividend equivalent stock
units). Mr. Pivirotto and Mr. Peru, newly appointed to the Board in December
2007, were each granted 1,565 restricted stock units on February 11,
2008.
(5) As of December 31, 2007,
Mr. Aldrich held 8,358 stock options; Dr. Bickle held 11,558 stock
options; Mrs. Bilby held 10,358 stock options; Mr. Burlingame held 11,558 stock
options; Mr. Carter held 4,358 stock options; Mr. Elliott held 1,196 stock
options; Mr. Fessler held 2,358 stock options; Mr. Handy held 6,358 stock
options; and Mr. Jobe held 6,358 stock options.
(6) Amounts represent the
value of dividend equivalents associated with restricted stock units and stock
option awards held by the Directors, expensed in accordance with FAS
123R.
EQUITY COMPENSATION PLAN INFORMATION
Equity
Compensation Plans
Our only
equity-based compensation plan that has not been approved by shareholders is the
DCP. Shareholder approval of the DCP has not been required because the
provisions of the DCP permit the Company to payout deferred shares accumulated
under the DCP in the form of cash. Under the DCP, certain eligible officers and
other employees selected for participation, and non-employee members of the
Board, may elect to defer a percentage of the compensation or fees that would
otherwise become payable to the individual for his services to us. We also
credit DCP accounts of employees participating in our 401(k) Plan with the
additional amount of UniSource Energy matching contributions that the
participant would have been entitled to under the 401(k) Plan if certain Code
limits did not apply to limit the amount of UniSource Energy matching
contributions made under the 401(k) Plan. Each participant in the DCP may elect
that his deferrals be credited in the form of deferred shares instead of cash.
Deferred shares are bookkeeping entries that, when payable, will be paid in the
form of an equivalent number
of shares
of UniSource Energy common stock, subject to shareholder approval prior to the
issuance of any such shares, or in cash if the Company so elects. Deferred
shares accrue dividend equivalents, credited in the form of additional deferred
shares, as dividends are paid by UniSource Energy on its issued and outstanding
common stock. Each participant elects the time and manner of payment (lump sum
or installments) of his deferred shares under the DCP. Any shares used to
satisfy our common stock obligations under the DCP will be shares that have been
purchased on the open market. To date, payment of deferred amounts have been
only in the form of cash.
Equity
Compensation
The
following table sets forth information as of December 31, 2007, with respect to
UniSource Energy’s equity compensation plans.
|
Plan Category
|
Number
of Shares of
UniSource
Energy
Common
Stock to
be
Issued Upon Exercise
of
Outstanding
Options and Rights
|
Weighted-Average
Exercise
Price of
Outstanding Options
|
Number
of Shares of
UniSource
Energy
Common
Stock
Remaining
Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding Shares
Reflected
in the First
Column)
|
|
Equity
Compensation Plans Approved by Shareholders (1)
|
1,780,457
(2)
|
$21.21469
(3)
|
1,775,492
(1)
|
|
Equity
Compensation Plans Not Approved by Shareholders
|
72,105 (4)
|
--
|
-- (5)
|
|
Total
|
1,852,562
|
--
|
--
|
(1) The equity compensation
plans that have been approved by shareholders are the UniSource Energy
Corporation 1994 Omnibus Stock and Incentive Plan (“1994 Stock and Incentive
Plan”), the UniSource Energy Corporation 1994 Outside Director Stock Option Plan
(the “1994 Directors Plan”) and the 2006 Omnibus Plan. Awards were
made under the 1994 Stock and Incentive Plan and the 1994 Directors Plan until
February 2004 at which time no further awards could be made under those
plans. In May 2006, the 2006 Omnibus Plan was approved by
shareholders and includes awards in the form of options, restricted stock, stock
units and dividend equivalents. While the 1994 plans expired in February 2004
and no further awards could be made under those plans after that date, the 1994
plans remain in effect with respect to previous awards until all awards have
expired or terminated or shall have been exercised or fully vested, and any
stock thereto shall have been purchased or acquired. No shares that were
available to be issued under the 1994 Directors Plan at the time of its
termination are available for awards under the 2006 Omnibus Plan with respect to
awards that are forfeited, terminated, canceled or expired.
(2) Includes options
outstanding as to 1,451,441 shares, stock units, dividend equivalent stock units
and restricted stock units (payable in an equivalent number of shares)
outstanding as to 329,016 shares.
(3) Calculated based on the
outstanding options and exclusive of outstanding stock units.
(4) Deferred shares credited under the
DCP.
(5) There is no explicit
share limit under the DCP. The number of shares to be delivered with respect to
the DCP in the future depends on the levels of fees and compensation that
participants elect to defer under the DCP. Any UniSource Energy shares used to
satisfy our common stock obligations under
the DCP will be shares that have been purchased on the open market.
CORPORATE GOVERNANCE
Board
Meetings
In 2007,
the Board held a total of six regular and special meetings. Each director
attended at least 95% of the aggregate total number of Board meetings and
meetings of committees of which they are a member. Additionally, the
non-management Directors met at regularly scheduled executive sessions without
management present. Mr. Carter, a non-management director, presided over and was
the Lead Director at these executive sessions.
The
Company does not have a formal policy with respect to attendance of Board
members at annual meetings of shareholders, but encourages such
attendance. All of the Board members holding office at the time
attended the 2007 Annual Meeting.
Board
Communication
Shareholders
or other interested parties wishing to communicate with the Board, the
non-management directors or any individual director may contact the Lead
Director by mail, addressed to UniSource Energy Lead Director, c/o Corporate
Secretary, UniSource Energy Corporation, One South Church Avenue, Suite 1820,
Tucson, Arizona 85701. The communications will be kept confidential and
forwarded to the Lead Director. Communications received by the Lead Director
will be forwarded to the appropriate director(s) or to an individual
non-management director.
Shareholders
or other interested parties wishing to communicate with the Board regarding
non-financial matters may contact the Chairperson of the Corporate Governance
and Nominating Committee either by mail, addressed to Chairperson, Corporate
Governance and Nominating Committee, UniSource Energy Corporation, P.O. Box
31771, Tucson, Arizona 85751-1771, or by e-mail at unscorpgov@earthlink.net.
Shareholders or other interested parties wishing to communicate with the Board
regarding financial matters may contact the Chairperson of the Audit Committee
either by mail, addressed to Chairperson, Audit Committee, UniSource Energy
Corporation, P.O. Box 46093, Denver, Colorado 80201, or by e-mail at unscorpaudit@earthlink.net.
Items
that are unrelated to a director’s duties and responsibilities as a Board member
may be excluded from consideration, including, without limitation, solicitations
and advertisements, junk mail, product-related communications, job referral
materials such as resumes, surveys and material that is determined to be illegal
or otherwise inappropriate.
DIRECTOR INDEPENDENCE CRITERIA
The Board
has adopted Director Independence Standards to comply with NYSE rules for
determining independence, among other things, in order to determine eligibility
to serve on the Audit Committee, the Compensation Committee and the Corporate
Governance and Nominating Committee. The Director Independence
Standards, amended as of February 9, 2007, are available on our website at www.UNS.com and are
available in print to any shareholder who requests it.
No
director may be deemed independent unless the Board affirmatively determines,
after due deliberation, that the director has no material relationship with the
Company either directly or as a partner, shareholder or officer of an
organization that has a relationship with the Company. In each case,
the Board broadly considers all the relevant facts and circumstances from the
standpoint of the director as well as from that of persons or organizations with
which the director has an affiliation and applies these standards.
Annually,
the Board determines whether each director meets the criteria of independence.
Based upon the foregoing criteria, the Board has deemed each director to be
independent, with the exceptions of Ms. Bilby and Mr. Pignatelli. Dr. Bickle, a
member of our Board, until April 2007 was a member and owned 30% of Haddington
Ventures LLC (“Haddington Ventures”), a private equity fund and the general
partner of HEP II, an investment fund in which Millennium had previously made a
$15 million investment. Dr. Bickle also was a voting member of the
investment committee that made decisions with respect to investments in
Haddington-related funds. As of April 2007, Dr. Bickle redeemed his
interest in Haddington Ventures and resigned his position as a voting member of
the investment committee. As a result of the redemption, Dr. Bickle
has the right to receive a specified percentage of the proceeds from the
disposition of remaining Haddington Ventures-related assets, including HEP II
assets. Dr. Bickle has certain veto rights with respect to proposed
dispositions to the extent they may adversely affect his interest in receiving
proceeds. Other than the right to receive such proceeds, Dr. Bickle
has no other interest in HEP II or other related assets. As a result of the
termination of his role as member and owner of Haddington (including his
membership on the investment committee), and giving due consideration to the
fact that Dr. Bickle now only has an essentially passive interest (subject to
the aforementioned veto rights) in the remaining proceeds from dispositions of
remaining Haddington Ventures-related assets, including HEP II assets, the Board
concluded that the relationship no longer precluded the determination that Dr.
Bickle is independent. In assessing the nature of the veto rights,
the Board concluded that there was not a reasonable or probable business case
where Dr. Bickle would be conflicted with Millennium’s ownership. As
a result of those deliberations and the application of the independence
criteria, the Board determined that Dr. Bickle is now
independent. For each other director who is deemed independent, there
were no other transactions, relationships or arrangements that were considered
by the Board in determining that the director is independent. See “Transactions
with Management and Others” below.
Board
Committees
The Corporate Governance and
Nominating Committee
The
Corporate Governance and Nominating Committee reviews and recommends corporate
governance principles, interviews potential directors and nominates and
recommends to the shareholders and directors, as the case may be, qualified
persons to serve as directors. The Corporate Governance and Nominating Committee
also reviews and recommends membership for all the committees to the Board and
reviews applicable rules and regulations relating to the duties and
responsibilities of the Board. Our Corporate Governance and Nominating Committee
held six meetings in 2007 and was in compliance with its written charter, as
amended in November 2007, a copy of which is available at www.UNS.com.
The
Corporate Governance and Nominating Committee identifies and considers
candidates supplied by shareholders and Board members. The Corporate Secretary,
as directed by the Corporate Governance and Nominating Committee, prepares
portfolios for candidates that include confirmation of the candidate’s interest,
independence, biographical information, review of business background and
experience and reference checks. The Corporate Governance and Nominating
Committee then evaluates candidates using, in large part, the criteria set forth
in the next paragraph and any other criteria the Corporate Governance and
Nominating Committee deems appropriate, and conducts a personal interview with
each candidate. Upon completion of this process, formal invitations are extended
to accept election to the Board.
The
Corporate Governance and Nominating Committee has not adopted specific minimum
qualifications with respect to a committee-recommended Board nominee, but
desirable qualifications are set forth in the Corporate Governance Guidelines
and include prior community, professional or business experience that
demonstrates leadership capabilities, the ability to review and analyze complex
business issues, the ability to effectively represent the interests of our
shareholders while keeping in perspective the interests of our customers, the
ability to devote the time and interest required to attend and fully prepare for
all regular and special Board meetings, the ability to communicate and work
effectively with the other Board members and personnel and the ability to fully
adhere to any applicable laws, rules or regulations relating to the performance
of a director’s duties and responsibilities.
While no
formal policy exists, the Corporate Governance and Nominating Committee does
consider recommendations for Board nominees received from our shareholders. The
deadline for consideration of recommendations for next year’s annual meeting of
the shareholders is November 24, 2008. Recommendations must be in writing and
include detailed biographical material indicating the candidate’s qualifications
and a written statement from the candidate of his willingness and availability
to serve. Recommendations should be directed to the Corporate Secretary,
UniSource Energy Corporation, One South Church Avenue, Suite 1820, Tucson,
Arizona 85701. The Board will consider nominees on a case-by-case basis and does
not believe a formal policy is warranted at this time due to a manageable volume
of nominations.
Each
member of our Audit Committee, Compensation Committee and Corporate Governance
and Nominating Committee is independent based upon independence criteria
established by our Board, which criteria are in compliance with applicable NYSE
listing standards.
Compensation
Committee
The
Compensation Committee operates under the provisions of a committee charter,
which was amended most recently in November 2007 and which can be found at www.UNS.com. The
Compensation Committee Charter can be revised by action taken by the
Compensation Committee. Under the terms of its charter, the
Compensation Committee is required to consist of not fewer than three members of
the Board who meet the independence requirements of the NYSE. In
2007, the Compensation Committee had seven members who met those independence
requirements.
In 2007,
the Compensation Committee held six formal meetings, most of which were followed
by an executive session in which management did not participate. The
Compensation Committee Chair sets the agenda for each meeting, and in advance of
each meeting reviews the agenda with management. The annual schedule of meetings
is approved by the Board during the fourth quarter for the following
year. In connection with Compensation Committee meetings, each
Compensation Committee member receives a briefing book prior to each meeting
that details each topic to be considered. The Compensation Committee Chair
reports to the Board on Compensation Committee decisions and key actions
following each meeting. The Compensation Committee members also complete a
written assessment of the Compensation Committee’s performance, with the last
such assessment completed in June 2007.
The Board
of Directors has delegated authority to the Compensation Committee to set CEO
compensation levels, and to review and approve compensation for all of the
Company’s executives, including any equity compensation awarded under the 2006
Omnibus Plan. Under the terms of its charter, the Compensation
Committee may delegate certain actions to management of the Company in
connection with executive compensation. Day-to-day administration of
director and executive compensation matters has been delegated to certain
Company management personnel, with oversight provided by the Compensation
Committee.
Compensation
Consultant
The
Compensation Committee has retained the services of Frederic W. Cook and Co.,
Inc. (“Cook”), a nationally recognized compensation consulting firm that serves
as an independent advisor in matters related to executive compensation and
benefits and director compensation. Representatives from Cook are available to
Compensation Committee members on an ongoing basis and attend Compensation
Committee meetings, as requested, either in person or telephonically. The
Compensation Committee has sole discretion over the terms and conditions of the
retention of consultants it retains. Cook maintains no other economic
relations with the Company and does not provide any services to the Company
other than those provided directly to the Compensation Committee.
The
Compensation Committee Chair customarily provides assignments to
Cook. In its role as executive compensation consultant to the
Compensation Committee, Cook assists with peer group selection, the benchmarking
of individual compensation levels, and the design of incentive plans and other
compensation arrangements in which Company management
participates. In furnishing this assistance, Cook provides
competitive data and technical considerations, and recommends changes to the pay
program and pay levels for consideration by the Compensation
Committee.
Role
of Executives in Establishing Compensation
Certain
executives, including the CEO, the Chief Financial Officer (“CFO”) and the
General Counsel to the Company, routinely attend regular sessions of
Compensation Committee meetings. The CEO makes recommendations to the
Compensation Committee with respect to changes in compensation for senior
executive positions (other than the CEO) and payouts under the annual incentive
plan. The CEO also makes suggestions to the Compensation Committee
regarding the design of incentive plans and other programs in which senior
management participates.
The CFO
provides information regarding short-term and long-term compensation targets, as
well as updates on the progress of short- and long-term
objectives. Additional Company personnel with expertise in and
responsibility for compensation and benefits provide information regarding
executive and director compensation, including cash compensation, equity awards,
pensions, deferred compensation and other related information.
The
Audit Committee
The Audit
Committee reviews current and projected financial results of operations, selects
a firm of independent registered public accountants to audit our financial
statements annually, reviews and discusses the scope of such audit, receives and
reviews the audit reports and recommendations, transmits its recommendations to
the Board, reviews our accounting and internal control procedures with our
internal audit department from time to time, makes recommendations to the Board
for any changes deemed necessary in such procedures and performs such other
functions as delegated by the Board. Our Audit Committee held six meetings in
2007 and was in compliance with its written charter, as amended in December 2007
and attached to this Proxy Statement as Appendix A.
Upon the
recommendation of the Audit Committee, our Board adopted a Code of Ethics for
our directors, officers and employees.
The
Finance Committee
The
Finance Committee reviews and recommends to the Board long-range financial
policies, objectives and actions required to achieve those objectives. Specifically, the Finance
Committee reviews capital and operating budgets, current and projected financial
results of operations, short-term and long-range financing plans,
dividend
policy,
risk management activities and major commercial banking, investment banking,
financial consulting and other financial relations of UniSource Energy. Our
Finance Committee held three meetings in 2007 and was in compliance with its
written charter.
The
Environmental, Safety and Security (“ESS”) Committee
The ESS
Committee reviews
the Company’s structure and operations to assess whether significant operating
risks in the areas of environmental, safety and security have been identified
and appropriate mitigation plans have been implemented. The ESS Committee also
reviews the processes in place which are designed to ensure compliance with all
environmental, safety and security related legal and regulatory requirements, as
well as reviews with management the impact of proposed or enacted laws or
regulations related to environmental, safety and security issues. Our ESS
Committee held three meetings in 2007 and was in compliance with its written
charter.
Compensation
Committee Interlocks and Insider Participation
All
members of the Compensation Committee during fiscal year 2007 were independent
directors, and no member was an employee or former employee. No
Compensation Committee member had any relationship requiring disclosure under
“Transactions with Management and Others” on page 40. During fiscal
year 2007, none of our executive officers served on the compensation committee
(or its equivalent) or board of directors of another entity whose executive
officer(s) served on our Compensation Committee.
Copies
of Charters, Guidelines and Code of Ethics
A copy of
the Audit, Compensation, Finance and Corporate Governance and Nominating
Committee Charters, as well as our Corporate Governance Guidelines and Code of
Ethics, are available on our Web site at www.UNS.com or may be
obtained by shareholders, without charge, upon written request to Library and
Resource Center, UniSource Energy Corporation, 3950 East Irvington Road, Mail
Stop RC114, Tucson, Arizona 85714.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Related
Person Transactions Policy
In
February 2007, the Board adopted a written policy on the review of related
person transactions (which is available on our website at www.UNS.com) that specifies
that certain transactions involving directors, nominees, executive officers,
significant shareholders and certain other related persons in which the Company
is or will be a participant and are of the type required to be reported as a
related person transaction under Item 404 of Regulation S-K shall be reviewed by
the Audit Committee for the purpose of determining whether such transactions are
in the best interest of the Company. The policy also establishes a
requirement for directors, nominees and executive officers to report
transactions involving a related party that exceeds $120,000 in
value. We are not aware of any transactions entered into since
adoption of the policy that did not follow the procedures outlined in the
policy.
Haddington
Energy Partners II LP
Millennium
was authorized by its Board of Directors in 2000 to invest $15 million, in
aggregate, over a three- to five-year period in Haddington Energy Partners II LP
(“HEP II”). Dr. Bickle, a member of our Board, until April 2007 was a member and
owned 30% of Haddington Ventures LLC (“Haddington Ventures”), a private equity
fund and the general partner of HEP II. Dr. Bickle also was a voting
member of the investment committee that made decisions with respect to
investments in Haddington-related funds. As of April 2007, Dr. Bickle
redeemed his interest in Haddington Ventures and resigned his position as a
voting member of the investment committee.
As a
result of the redemption, Dr. Bickle has the right to receive a specified
percentage of the proceeds from the disposition of remaining Haddington
Ventures-related assets, including HEP II assets. Other than the
right to receive such proceeds, Dr. Bickle has no other interest in HEP II or
other related assets. As of December 31, 2007, Millennium had invested $15
million under this commitment since its inception in exchange for approximately
31% ownership of the limited partner interest, and has received distributions of
$15 million. Millennium continues to have an additional interest in
two HEP II investments that have not been monetized. Millennium has
no remaining funding commitment to HEP II. Millennium’s total
investment balance in HEP II at December 31, 2007 was $5 million.
AUDIT COMMITTEE REPORT
The
Committee
The Audit
Committee is made up of seven financially literate directors who are independent
based upon independence criteria established by our Board, which criteria are in
compliance with applicable NYSE listing standards. Our Board has
determined that while each member of the Audit Committee has accounting and/or
related financial management expertise, Ms. Baumann is the Audit Committee
financial expert for the purposes of Item 407(d)(5) of SEC Regulation S-K. In
addition to Ms. Baumann, there are four other financial experts on the Audit
Committee. Each financial expert is independent as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended. The Board previously adopted a written charter for the Audit Committee.
The Audit Committee Charter is included as Appendix A to this Proxy Statement.
The Audit Committee has complied with its charter, including the requirement to
meet periodically with our independent auditor, internal audit department and
management to discuss the auditor’s findings and other financial and accounting
matters.
In
connection with our December 31, 2007 financial statements, the Audit Committee
has: (i) reviewed and discussed the audited financial statements with
management, (ii) discussed with PricewaterhouseCoopers, LLP, our independent
auditor, the matters required to be discussed by Statement on Auditing Standards
No. 61, as amended (AIPCA, Professional
Standards, Vol. 1 AU Sec. 380), as adopted by the Public Company
Accounting Oversight Board in Rule 3200T, (iii) received from
PricewaterhouseCoopers, LLP the written disclosures and the letter required by
Independence Standards Board Standard No. 1 (Independence Standard Board
Standard No. 1, Independence Discussions
with Audit Committees), as adopted by the Company Accounting Oversight
Board in Rule 3600T, and (iv) discussed with PricewaterhouseCoopers, LLP its
independence.
Based on
the review and discussions referred to in items (i) through (iv) of the above
paragraph, the Audit Committee recommended to the Board that the audited
financial statements for 2007 be included in the Annual Report on Form 10-K for
filing with the SEC.
Pre-Approved
Policies and Procedures
Rules
adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act
of 2002 require public company audit committees to pre-approve audit and
non-audit services. Our Audit Committee has adopted a policy pursuant to which
audit, audit-related, tax and other services are pre-approved by category of
service. Recognizing that situations may arise where it is in our best interest
for the auditor to perform services in addition to the annual audit of our
financial statements, the policy sets forth guidelines and procedures with
respect to approval of the four categories of service designed to achieve the
continued independence of the auditor when it is retained to perform such
services for us. The policy requires the Audit Committee to be informed of each
service and does not include any delegation of the Audit Committee’s
responsibilities to management. The Audit Committee may delegate to the Chairman
of the Audit Committee the authority to grant pre-approvals of audit and
non-audit services requiring Audit Committee approval where the Audit Committee
Chairman believes it is desirable to pre-approve such services prior to the next
regularly scheduled Audit Committee meeting. The decisions of the Audit
Committee Chairman to pre-approve any such services from one regularly scheduled
Audit Committee meeting to the next shall be reported to the Audit
Committee.
Fees
The
following table details fees paid to PricewaterhouseCoopers, LLP for
professional services during 2006 and 2007. The Audit Committee has considered
whether the provision of services to us by PricewaterhouseCoopers, LLP, beyond
those rendered in connection with their audit and review of our financial
statements, is compatible with maintaining their independence as
auditor.
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2007
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2006
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Audit
Fees
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$
1,612,083
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$1,731,126
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Audit-Related
Fees
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$ 47,500
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$ 45,000
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Tax
Fees
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$ 0
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$ 4,470
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All
Other Fees
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$ 447
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$ 3,243
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Total
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$
1,660,030
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$1,783,839
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Audit
fees include fees for the audit of our consolidated financial statements
included in our Annual Report on Form 10-K and review of financial statements
included in our Quarterly Reports on Form 10-Q. Audit fees also include services
provided by PricewaterhouseCoopers, LLP in connection with the audit of the
effectiveness of internal control over financial reporting and on management’s
assessment of the effectiveness of internal control over financial reporting,
comfort letters, consents and other services related to SEC matters and
financing transactions, statutory and regulatory audits, and accounting
consultations to the extent necessary for PricewaterhouseCoopers, LLP to fulfill
their responsibilities under generally accepted auditing standards.
Audit-related
fees during 2007 and 2006 principally include fees for employee benefit plan
audits.
Tax fees
include tax compliance, tax advice and tax planning.
All other
fees consist of fees for all other services other than those reported above and,
in 2006 and 2007, principally include subscription fees for research tools or
attendance at training courses.
All
services performed by PricewaterhouseCoopers, LLP are approved in advance by the
Audit Committee in accordance with the Audit Committee’s pre-approval policy for
services provided by the independent auditor.
Respectfully
submitted,
THE AUDIT COMMITTEE
Barbara M. Baumann,
Chair
Lawrence J. Aldrich
John L. Carter
Kenneth Handy
Warren Y. Jobe
Gregory A, Pivirotto
Joaquin Ruiz
SUBMISSION OF SHAREHOLDER PROPOSALS
General
Rule
14a-4 of the SEC’s proxy rules allows us to use discretionary voting authority
to vote on a matter coming before an annual meeting of 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 2009 annual meeting of shareholders, any such notice
must be submitted to the Corporate Secretary of UniSource Energy, One South
Church Avenue, Suite 1820, Tucson, Arizona, 85701, on or before February 6,
2009.
We
must receive your shareholder proposals by November 24, 2008.
This
requirement is separate and apart from the SEC’s requirements that a shareholder
must meet in order to have a shareholder proposal included in our Proxy
Statement. Shareholder proposals intended to be presented at our 2009 annual
meeting of the shareholders must be received by us no later than November 24,
2008 in order to be eligible for inclusion in our Proxy Statement and the form
of proxy relating to that meeting. Direct any proposals, as
well as related questions, to the undersigned.
DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS
Only one
copy of our 2007 Annual Report to Shareholders and Proxy Statement for the
Meeting will be delivered to an address where two or more shareholders reside
unless we have received contrary instructions from a shareholder at the address.
A separate proxy card and a separate notice of the Meeting will be delivered to
each shareholder at the shared address.
If you
are a shareholder who lives at a shared address and you would like additional
copies of the 2007 Annual Report, this Proxy Statement, or any future annual
reports or proxy statements, please contact the Library and Resource Center,
UniSource Energy Corporation, 3950 East Irvington Road, Mail Stop RC114, Tucson,
Arizona 85714, telephone number (520) 745-3349, and we will promptly mail you
copies.
If you
share the same address with another UniSource Energy shareholder and you
currently receive multiple copies of annual reports or proxy statements, you may
request delivery of a single copy of future annual reports or proxy statements
at any time by calling (520) 745-3349, or by writing to the Library and Resource
Center, UniSource Energy Corporation, 3950 East Irvington Road, Mail Stop RC114,
Tucson, Arizona 85714.
OTHER BUSINESS
The Board
knows of no other matters for consideration at the Meeting. If any other
business should properly arise, the persons appointed in the enclosed proxy have
discretionary authority to vote in accordance with their best
judgment.
Copies
of our 2007 Annual Report on Form 10-K may be obtained by shareholders, without
charge, upon written request to the Library and Resource Center, UniSource
Energy Corporation, 3950 East Irvington Road, Mail Stop RC114, Tucson, Arizona
85714. You may also obtain our SEC filings through the Internet at www.sec.gov or www.UNS.com.
By order of the Board of
Directors,
/s/ Linda
H. Kennedy
Linda H.
Kennedy
Corporate Secretary
PLEASE
VOTE - YOUR VOTE IS IMPORTANT
APPENDIX A
Amended
December
2007
UNISOURCE ENERGY
CORPORATION
AUDIT COMMITTEE OF THE BOARD
OF DIRECTORS
CHARTER
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1.
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COMPOSITION
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The Audit
Committee of the Board of Directors (the “Committee”) consists of no fewer than
three independent
Directors appointed annually by the Board, each of whom satisfies the
independence requirements of the New York Stock Exchange. 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.
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2.
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APPOINTMENT AND
REMOVAL OF COMMITTEE MEMBERS
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All
members of the Committee shall be appointed and/or removed by the Board of
Directors.
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3.
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MEETINGS
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The
Committee will hold at least four regular meetings each year, and such
additional meetings as it may deem necessary. Additional meetings will be called
by the Chairman of the Committee. The agendas for the regular meetings shall
include all items necessary to complete the duties of the Committee as set forth
herein. In addition to the Committee members and the Secretary, the Chairman of
the Board, Chief Executive Officer and other members of management, internal
audit and representatives of the independent auditor may attend as
appropriate.
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4.
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RULES OF
PROCEDURE
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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.
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5.
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COMPENSATION
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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.
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6.
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COMMITTEE
SECRETARY
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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.
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7.
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QUORUM
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A
majority of the total membership of the Committee will constitute a
quorum.
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8.
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COMMITTEE
PURPOSE
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The Audit
Committee is appointed by the Board to assist with Board oversight
of
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(1)
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the
integrity of the Company’s financial
statements
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(2)
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the
Company’s compliance with legal and regulatory requirements, except those
handled by the Environmental, Safety & Security
Committee
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(3)
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the
independent auditor’s qualifications and independence,
and,
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(4)
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the
performance of the Company’s internal audit function and independent
auditors.
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9.
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SPECIFIC DUTIES OF THE
COMMITTEE
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Independent
Audit:
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(1)
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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)
|
Ensure
the rotation of the audit partner(s) as required by
law.
|
|
|
(6)
|
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.
|
|
|
(7)
|
Review
the results of each independent audit, including any qualifications in the
independent auditor’s opinion, and deficiencies identified by the
independent auditor in connection with the
audit.
|
|
|
(8)
|
Review
the annual audited financial statements with management and the
independent auditor, including management’s discussion and analysis, major
issues regarding accounting and auditing principles and practices, as well
as the adequacy of internal controls. Recommend to the Board, based on
such review and discussion, whether the audited financial statements
should be included in the Company’s annual report on Form
10-K.
|
|
|
(9)
|
Annually
review an analysis prepared by management and the independent auditor of
significant financial reporting issues, quality of financial reporting,
and judgments made in connection with the preparation of the Company’s
financial statements, including an analysis of the effect of alternative
GAAP methods on the Company’s financial statements. Review the procedures
employed by the Company in preparing published financial statements and
related management commentaries.
|
|
|
(10)
|
Review
with management and the independent auditor the Company’s quarterly
financial statements prior to the filing of its Form 10-Q, including
management’s discussion and analysis and the results of the independent
auditor’s review of the quarterly financial statements (SAS 90). Note:
This can be performed by a member of the Audit
Committee.
|
|
|
(11)
|
Discuss
annually with the independent auditor the required communications
contained within Statement on Auditing Standards No. 61 relating to the
conduct of the audit.
|
|
|
(12)
|
Discuss
with the independent auditor material issues on which the national office
of the independent auditor was consulted by the Company’s audit
team.
|
|
|
(13)
|
Meet
with the independent auditor prior to the audit to discuss the planning
and staffing of the audit.
|
|
|
(14)
|
Prepare
the Audit Committee Report required by the Securities and Exchange
Act.
|
|
|
Internal
Audit:
|
|
|
(15)
|
Review
the appointment, replacement, reassignment or dismissal of the Company’s
General Auditor.
|
|
|
(16)
|
Review
and approve the internal audit department charter, annual audit plan and
the audit methodology.
|
|
|
(17)
|
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.
|
|
|
(18)
|
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:
|
|
|
(19)
|
Review
earnings press release as well as financial information and earnings
guidance provided to analysts and ratings
agencies.
|
|
|
(20)
|
Review
quarterly updates from management on material
litigation.
|
|
|
(21)
|
Periodically
review with management and the Finance Committee, the Company’s policies
on major financial risk exposure, and the measures taken to reduce such
risk.
|
|
|
(22)
|
Annually
review the Company’s Corporate Code of Conduct and compliance
therewith.
|
|
|
(23)
|
Establish
and maintain procedures for the confidential, anonymous submission by
employees of the Company of concerns regarding accounting or auditing
matters.
|
|
|
(24)
|
Establish
guidelines for the Company’s hiring of employees or former employees of
the independent auditor.
|
|
|
(25)
|
Annually
review this Audit Committee Charter and make any necessary
changes.
|
|
|
(26)
|
Annually
perform an evaluation of the Committee, its members, functions and
performance.
|
|
|
(27)
|
Review
disclosures made by the Company’s CEO and CFO during their certification
process for the Form 10-K and Form 10-Q about any significant deficiencies
in the design or operation of internal controls or material weaknesses
therein and any fraud involving management or other employees who have a
significant role in the Company’s internal
controls.
|
|
|
(28)
|
Review
and oversee the administration of the Company’s Policy on Review of
Transactions with Related Persons.
|
|
10.
|
EXECUTIVE
SESSION
|
The
Committee shall meet quarterly with management, the General Auditor and the
independent auditor in separate executive sessions.
|
11.
|
RESPONSIBILITIES OF
THE CHAIRMAN
|
The
Chairman of the Committee will present the Committee’s recommendations to the
Board for its approval and periodically provide the Board, for its information,
with a summary of the Committee’s determinations and approvals. Additionally,
the Chairman will set the annual compensation for the General Auditor in
conjunction with the Company’s Chief Executive Officer.
|
12.
|
RESPONSIBILITIES OF
THE CHIEF EXECUTIVE OFFICER
|
The Chief
Executive Officer of the Company will advise and make recommendations to the
Committee and, in the normal course, attend all meetings of the
Committee.
|
13.
|
OTHER
AUTHORITY
|
The Audit
Committee shall have the authority to retain special legal, accounting or other
consultants to advise the Committee. The Audit Committee has full discretion to
meet with individuals within or outside the Company.
|
T
|
Votes
must be indicated
(x)
in
Black or Blue ink.
|
Please
Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
|
Please
Mark
Here
for
Address Change or Comments
|
o
|
|
|
SEE
REVERSE SIDE
|
|||||
The
Board of Directors Recommends a vote "FOR" the following proposals:
|
FOR
all nominees listed below
|
WITHHOLD
AUTHORITY to vote for all nominees listed below
|
EXCEPTIONS*
|
FOR
|
AGAINST
|
ABSTAIN
|
||
|
1.
Election of Directors
|
o
|
o
|
o
|
2.
Ratification of Selection of Independent Auditor
|
o
|
o
|
o
|
|
Nominees:
|
||||
|
01
-James S. Pignatelli,
02
- Lawrence J. Aldrich,
03
- Barbara Baumann,
04
- Larry W. Bickle,
05
- Elizabeth T. Bilby,
06
- Harold W. Burlingame,
07
- John L. Carter,
|
08
- Robert A. Elliott,
09
- Daniel W.L. Fessler,
10
- Kenneth Handy,
11
- Warren Y. Jobe,
12
- Ramiro S. Peru,
13
- Gregory A. Pivirotto,
14
- Joaquin Ruiz
|
If
you agree to access our Annual Report and Proxy Statement electronically
in the future, please mark this box.
For
Shareholders who have elected to receive UniSource Energy's Proxy
Statement and Annual Report electronically you can now view the 2008
Annual Meeting materials on the Internet by pointing your browser to
www.UNS.com
|
o
|
|
|
(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
|
|
Signature
|
Signature
|
Date
|
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 2007 Annual Report.
p FOLD AND
DETACH HERE p
WE
ENCOURAGE YOU TO TAKE ADVANTAGE OF INTERNET OR TELEPHONE VOTING,
BOTH
ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.
THE
INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M.
E.S.T.
ON
THURSDAY, MAY 1, 2008.
Your
Internet or telephone vote authorizes the named proxies to vote your shares in
the same manner
as
if you marked, signed and returned your proxy card.
|
INTERNET
http://www.eproxy.com/uns
Use
the Internet to vote your proxy. Have your proxy card in hand when you
access the web site.
|
OR
|
TELEPHONE
1-866-580-9477
Use any
touch-tone telephone to vote your proxy. Have your proxy card in hand when
you call.
|
If you
vote your proxy by Internet or by telephone, you do NOT need to mail back your
proxy card.
To vote
by mail, mark, sign and date your proxy card and return it in the enclosed
postage-paid envelope.
|
Choose
MLinksSM
for fast, easy and secure 24/7 online access to your future proxy
materials, investment plan statements, tax documents and
more. Simply log on to Investor ServiceDirect® at www.bnymellon.com/shareowner/isd where
step-by-step instructions will prompt you through
enrollment.
|
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF
THE COMPANY FOR THE
ANNUAL
SHAREHOLDERS' MEETING TO BE HELD FRIDAY, MAY 2, 2008.
P
R O X Y
The
undersigned hereby appoints James S. Pignatelli and Kevin P. Larson, and each of
them, with the power of substitution, to represent and to vote on behalf of the
undersigned all shares of Common Stock which the undersigned is entitled to vote
at the Annual Shareholders' Meeting scheduled to be held at the Fox Theatre, 17
West Congress, Tucson, Arizona, on Friday, May 2, 2008, and at any adjournments
or postponements thereof, with all powers the undersigned would possess if
personally present and in their discretion, upon such other business as may
properly come before the meeting. This proxy, when properly executed, will be
voted in the manner directed herein by the undersigned shareholder. If no
direction is made, this proxy will be voted "FOR" Proposals 1 and
2.
(Continued
and to be marked, dated and signed, on the other side)
|
Address
Change/Comments (Mark the corresponding box on the reverse
side)
|
|
|
p FOLD AND
DETACH HERE p
You
can now access your UNISOURCE ENERGYaccount online.
Access
your UniSource Energy shareholder account online via Investor ServiceDirect® (ISD).
The
transfer agent for UniSource Energy, now makes it easy and convenient to get
current information on your shareholder account.
|
· View
account status
· View
certificate history
· View
book-entry information
|
· View
payment history for dividends
· Make
address changes
· Obtain
a duplicate 1099 tax form
· Establish/change
your PIN
|
Visit
us on the web at http://www.bnymellon.com/shareowner/isd
For
Technical Assistance Call 1-877-978-7778 between 9am-7pm
Monday-Friday
Eastern Time
|
|
FOX
Theatre
17
W. Congress
Tucson,
AZ
(520)
624-1515
Transportation
from
Tucson International
Shuttle
Service
Arizona
Stagecoach
Call
520-889-1000
Automobile - Interstate
10
to
Congress 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 2008 Annual Shareholders' Meeting and
the 2007 Annual Report on the Internet through the following address: www.UNS.com. You can vote your
shares by telephone, the Internet, mail or in person at the Annual Shareholders'
Meeting. See the Proxy Statement and the enclosed proxy card for further
information about voting procedures.
If you
would like a paper copy of the Proxy Statement and Annual Report, UniSource
Energy will provide a copy to you upon request. To obtain a copy of these
documents, please call 866-275-4867.