DEF 14A 1 proxy.txt UNS 2004 ANNUAL PROXY STATEMENT AND PROXY CARD 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 Sections 240.14a-11(c) or 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: UNISOURCE ENERGY One South Church Avenue Tucson, Arizona 85701 April 7, 2004 James S. Pignatelli (520) 571-4000 Chairman of the Board Dear Shareholders: On March 29, 2004, at a special meeting of our shareholders, we obtained shareholder approval of the acquisition agreement that provides for an affiliate of Saguaro Utility Group L.P. to acquire all of our outstanding shares of common stock for $25.25 per share. The completion of the acquisition still requires the approval of several regulatory agencies and the satisfaction of the other closing conditions contained in the acquisition agreement. We expect that the acquisition will be consummated in the second half of 2004. Until the completion of the acquisition, we will continue to function as a public company. In that regard, it is now appropriate for us to hold the 2004 Annual Shareholders' Meeting for the election of directors. You are cordially invited to attend the 2004 Annual Shareholders' Meeting to be held on Friday, May 7, 2004, at the Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona. The meeting will begin promptly at 10:00 a.m., so please plan to arrive earlier. No admission tickets will be required for attendance at the meeting. Directors and officers will be available before and after the meeting to speak with you. During the meeting, we will answer your questions regarding our business affairs and we will consider the matters explained in the enclosed Proxy Statement. We have enclosed a proxy card that lists all matters that require your vote. Please complete, sign, date and mail the proxy card as soon as possible, whether or not you plan to attend the meeting. You may also vote by telephone or the Internet, as explained on the enclosed proxy card. If you attend the meeting and wish to vote your shares personally, you may revoke your proxy at that time. Your interest and continued support of UniSource Energy Corporation are much appreciated. Sincerely, UNISOURCE ENERGY CORPORATION /s/ James S. Pignatelli ----------------------- James S. Pignatelli Chairman of the Board, President and Chief Executive Officer NOTICE OF ANNUAL SHAREHOLDERS' MEETING To the Holders of Common Stock of UniSource Energy Corporation We will hold the 2004 Annual Shareholders' Meeting ("Meeting") of UniSource Energy Corporation at the Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona, on Friday, May 7, 2004, at 10:00 a.m., Mountain Standard Time. The purpose of the Meeting is to: 1. elect nine directors to our Board of Directors for the ensuing year; and 2. consider any other matters which properly come before the Meeting. Only shareholders of record at the close of business on March 29, 2004, are entitled to vote at the Meeting. We have enclosed our 2003 Annual Report, including audited financial statements, and the Proxy Statement with this notice. Proxy soliciting material is first being sent or given to shareholders on or about April 7, 2004. Your proxy is being solicited by our Board of Directors. Please complete, sign, date and mail the enclosed proxy card as soon as possible, or vote by telephone or the Internet, as explained on the enclosed proxy card. /s/Catherine A. Nichols ----------------------- Catherine A. Nichols Corporate Secretary Dated: April 7, 2004 YOUR VOTE IS IMPORTANT EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED PROXY CARD BY MAIL, OR TO VOTE BY TELEPHONE OR THE INTERNET, AS EXPLAINED ON THE ENCLOSED PROXY CARD. IF THE MAIL OPTION IS SELECTED, USE THE ENCLOSED ENVELOPE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES. RETURNING A SIGNED PROXY WILL NOT PROHIBIT YOU FROM ATTENDING THE MEETING AND VOTING IN PERSON IF YOU SO DESIRE. UNISOURCE ENERGY CORPORATION One South Church Avenue Tucson, Arizona 85701 ANNUAL SHAREHOLDERS' MEETING PROXY STATEMENT Annual Meeting May 7, 2004 Marriott University Park Hotel 10:00 a.m., MST 880 East Second Street Tucson, Arizona 85719 Record Date The record date is March 29, 2004 ("Record Date"). If you were a shareholder of record at the close of business on the Record Date, you may vote at the 2004 Annual Shareholders' Meeting ("Meeting") of UniSource Energy Corporation ("UniSource Energy" as well as references to "we," "our" and "us"). At the close of business on the Record Date, we had 34,037,640 shares of common stock outstanding. Agenda 1. Proposal One: Elect nine directors to our Board of Directors ("Board")for the ensuing year. 2. Consider any other matters which properly come before the Meeting and any adjournments. Independent Auditors Representatives of PricewaterhouseCoopers, LLP are expected to be present at the Meeting with the opportunity to make a statement and respond to appropriate questions from our shareholders. Proxies A form of proxy for execution by shareholders is enclosed. Unless you tell us on the proxy We will follow your card to vote differently, we will vote signed voting instructions. returned proxies "for" the Board's nominees. If none, we will The Board or proxy holders will use their discretion vote signed proxies on other matters that properly come before the "for" the nominees. Meeting. If a nominee cannot or will not serve as a director, the Board or the persons designated as proxies will vote for a person whom they believe will carry on our present policies. Proxies Solicited By The Board. First Mailing Date We anticipate first mailing this Proxy Statement along with the proxy on or about April 7, 2004. Revoking Your Proxy You may revoke your proxy before it is voted at the Meeting. To revoke, follow the procedures listed on page 2 under "Voting Procedures/Revoking Your Proxy." Comments Your comments about any aspects of our business are welcome. You may use the space provided on the proxy We welcome your card for this purpose, if desired. Although we may not comments. The proxy respond on an individual basis, your comments help us card has room for to measure your satisfaction, and we may benefit from them. your suggestions. PLEASE VOTE - YOUR VOTE IS IMPORTANT Prompt return of your proxy will help reduce the costs of re-solicitation. 1

CONTENTS Voting Procedures/Revoking Your Proxy....................................... 2 Proposed Acquisition of UniSource Energy.................................... 3 UniSource Energy Share Ownership............................................ 4 Proposal One: Election of Directors*........................................ 7 Board Information........................................................... 9 Board Compensation.......................................................... 10 Executive Compensation and Other Information**.............................. 12 Equity Compensation Plan Information........................................ 15 Effect of Proposed Acquisition on Compensation.............................. 18 Director Independence Criteria.............................................. 22 Transactions with Management and Others..................................... 23 Compensation Committee Interlocks and Insider Participation................. 23 Compensation Committee Report on Executive Compensation..................... 23 Audit Committee Report...................................................... 26 Performance Graph**......................................................... 28 Submission of Shareholder Proposals......................................... 29 Other Business.............................................................. 29 Appendix A.................................................................. A-1 Appendix B.................................................................. B-1 Appendix C.................................................................. C-1 ------------------- * We expect to vote on this item at the Meeting. ** The Compensation Committee report and the Performance Graph will not be incorporated by reference into any present or future filings we make with the Securities and Exchange Commission ("SEC"), even if those reports incorporate all or any part of this Proxy Statement.

VOTING PROCEDURES/REVOKING YOUR PROXY You can vote by You can vote your shares by telephone, the Internet, by telephone, the mail or in person a the Meeting. Your proxy card Internet, mail or in contains instructions for voting by telephone or the person. We encourage Internet, which are the least expensive and fastest you to vote by methods of voting. To vote by mail, complete, sign and telephone or the date your proxy card, or your broker's voting Internet to help us instruction card if your shares are held by your save money. broker, and return it in the enclosed return envelope. Under Arizona law, a majority of the shares entitled to vote on any single matter which may be brought before the Meeting will constitute a quorum. Business may be conducted once a quorum is represented at the Meeting. Except as otherwise specified by law or in our Articles of Incorporation or Bylaws, if a quorum exists, action on a matter other than the election of directors will be deemed approved if the votes cast in favor of the matter exceed votes cast against it. 2 Directors are elected by a plurality of the votes cast by the shares entitled to vote if a quorum is present. A plurality means receiving the largest number of votes, regardless of whether that is a majority. Withheld votes will be counted as being represented at the Meeting for quorum purposes but will not have an effect on the vote. You may cumulate your In the election of directors, each shareholder has votes for directors. the right to cumulate his votes by casting as many votes in the aggregate equal to the number of his shares of common stock multiplied by the number of directors to be elected. He may cast all of such votes for one nominee or distribute such votes among two or more nominees. For any other matter that may properly come before the Meeting, each share of common stock will be entitled to one vote. You can revoke your Any shareholder giving a proxy has a right to revoke proxy after sending that proxy by giving notice to UniSource Energy in it in by following writing directed to the Corporate Secretary, UniSource these procedures. Energy Corporation, One South Church Avenue, Suite 1820, Tucson, Arizona 85701, or in person at the Meeting at any time before the proxy is exercised. Those who fail to return a proxy or fail to attend the Meeting will not count towards determining any required plurality, majority or quorum. The shares represented by an executed proxy will be voted for the election of directors or withheld in accordance with the specifications in the proxy. If no specification is made in an executed proxy, the proxy will be voted in favor of the nominees as set forth herein. Proxy Solicitation We will bear the entire cost of the solicitation of proxies. Solicitations will be made primarily by mail. Additional solicitation of brokers, banks, nominees and institutional investors may be made pursuant to a special engagement of DF King & Co., Inc., at a cost of approximately $7,500 plus reasonable out-of-pocket expenses. Solicitations may also be made by telephone, facsimile or personal interview, if necessary, to obtain reasonable representation of shareholders at the Meeting. Our employees may solicit proxies for no additional compensation. We will request brokers or other persons holding stock in their names, or in the names of their nominees, to forward proxy materials to the beneficial owners of such stock or request authority for the execution of the proxies. We will reimburse brokers and other persons for reasonable expenses they incur in sending these proxy materials to you if you are a beneficial holder of our shares. PROPOSED ACQUISITION OF UNISOURCE ENERGY On November 21, 2003, we entered into an acquisition agreement with an affiliate of Saguaro Utility Group L.P., an Arizona limited partnership ("Saguaro Utility"). The acquisition agreement provides for the affiliate of Saguaro Utility to acquire all of our outstanding shares of common stock for $25.25 per share. Saguaro Utility will merge its affiliate with and into us. We will survive the merger as a wholly owned indirect subsidiary of Saguaro Utility. Trading in our common stock on the New York Stock Exchange and the Pacific Stock Exchange will cease immediately as of the effective time of the acquisition. After that time, the surviving corporation will delist our shares from the New York Stock Exchange and the Pacific Stock Exchange and deregister our shares under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our headquarters will 3 remain in Tucson, and we expect that our senior management team will remain generally in place. We received shareholder approval of the acquisition agreement on March 29, 2004. The completion of the acquisition still requires the approval of several regulatory agencies and the satisfaction of the other closing conditions contained in the acquisition agreement. We expect that the acquisition will be consummated in the second half of 2004. See "Effect of Proposed Acquisition on Compensation" on page 18 of this Proxy Statement. UNISOURCE ENERGY SHARE OWNERSHIP Security The following table sets forth the number and Ownership percentage of shares beneficially owned as of the of Management Record Date and the nature of such ownership by each of our directors (all of which are nominees), our Chief Executive Officer and our five other most highly compensated executive officers at December 31, 2003 (the "Named Executives") and all directors and officers as a group. Ownership includes direct and indirect (beneficial) ownership, as defined by the SEC rules.

Name and Amount and Title Title of Nature of Beneficial Percent of Class Beneficial Owner Ownership (1) of Class -------- -------------------- -------------------- -------- Common James S. Pignatelli 744,282 (2) 2.2% Chairman, President and Chief Executive Officer Common Lawrence J. Aldrich 9,624 (3) * Director Common Larry W. Bickle 15,564 (4) * Director Common Elizabeth T. Bilby 13,625 (5) * Director Common Harold W. Burlingame 12,225 (4) * Director Common John L. Carter 22,371 (6) * Director Common Robert A. Elliott 405 Director Common Kenneth Handy 6,359 (7) * Director Common Warren Y. Jobe 4,359 (7) * Director Common Steven J. Glaser 199,679 (8) * Senior Vice President and Chief Operating Officer, Transmission & Distribution - Tucson Electric Power Company ("TEP") Common Dennis R. Nelson 198,300 (9) * Senior Vice President and Chief Operating Officer - UniSource Energy Services, Inc. ("UES")

4

Name and Amount and Title Title of Nature of Beneficial Percent of Class Beneficial Owner Ownership (1) of Class -------- -------------------- -------------------- -------- Common Michael J. DeConcini 145,023 (10) * Senior Vice President, Investments and Planning / Senior Vice President and Chief Operating Officer, Energy Resources - TEP Common Kevin P. Larson 126,210 (11) * Vice President, Chief Financial Officer and Treasurer Common Vincent Nitido, Jr. 149,303 (12) * Vice President, General Counsel and Chief Administrative Officer Common All directors and executive officers as a 2,078,620 (13) 6.1% group ------------------- * Represents less than 1% of the outstanding common stock of UniSource Energy. (1) Amounts include the following: o Any shares held in the name of the spouse, minor children or other relatives sharing the home of the director or officer. Except as otherwise indicated below, the directors and officers have sole voting and investment power over the shares shown. Voting power includes the power to direct the voting of the shares held, and investment power includes the power to direct the disposition of the shares held. o Shares subject to options exercisable within 60 days, based on information from E*Trade, UniSource Energy's stock option plan administrator. On March 29, 2004, upon the approval of the acquisition agreement by our shareholders, a change of control occurred for purposes of the outstanding stock options under the UniSource Energy Corporation 1994 Omnibus Stock and Incentive Plan, with the effect of making all outstanding stock options of officers and managers immediately exercisable. o Equivalent share amounts allocated to the individuals' 401(k) Plan which, since June 1, 1998, has included a UniSource Energy Stock Fund investment option. (2) Includes 715,188 shares subject to options exercisable within 60 days, and 15,019 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (3) Includes 6,120 shares subject to options exercisable within 60 days. (4) Includes 9,320 shares subject to options exercisable within 60 days. (5) Includes 12,920 shares subject to options exercisable within 60 days. (6) Includes 11,720 shares subject to options exercisable within 60 days. (7) Includes 3,454 shares subject to options exercisable within 60 days. (8) Includes 189,872 shares subject to options exercisable within 60 days, and 2,511 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (9) Includes 183,531 shares subject to options exercisable within 60 days, and 8,257 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (10) Includes 135,350 shares subject to options exercisable within 60 days, and 4,815 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (11) Includes 107,168 shares subject to options exercisable within 60 days, and 2,292 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (12) Includes 141,593 shares subject to options exercisable within 60 days, and 3,940 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004. (13) Includes 1,913,920 shares subject to options exercisable within 60 days, and 43,485 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of March 29, 2004.

5 Security As of March 29, 2004, based on information reported Ownership of in filings made by the following persons with the Certain Beneficial SEC or information otherwise known to us, the Owners following persons were known or reasonably believed to be, as more fully described below, the beneficial owners of more than 5% of our commonstock:

Amount and Name and Address Nature of Percent Title of Class of Beneficial Owner Beneficial Ownership of Class -------------- ------------------- -------------------- -------- Common T. Rowe Price Associates, Inc. 3,237,005 (1) 9.6% 100 E. Pratt Street Baltimore, MD 21202 Common Gabelli Asset Management Inc. 2,781,599 (2) 8.3% One Corporate Center Rye, NY 10580-1435 Common White Mountains Insurance Group 1,798,100 (3) 5.3% 80 South Main Street Hanover, NH 03755 Common BNP Paribas, SA 1,796,010 (4) 5.3% 16 Boulevard des Italiens 75009 Paris, France Common Barclays Private Bank Limited 59/60 1,718,794 (5) 5.1% Grosvenor Street London, WIX 9DA England ------------------- (1) In a statement (Schedule 13G/A) filed with the SEC on February 11, 2004, T. Rowe Price Associates, Inc. ("Price Associates") indicated it has sole voting power over 475,705 shares and sole dispositive power over 3,237,005 shares of our common stock. Price Associates stated that these securities are owned by various individual and institutional investors for which Price Associates serves as investment advisor with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Exchange Act, Price Associates is deemed to be the beneficial owner of such securities; however, Price Associates expressly disclaimed that it is, in fact, the beneficial owner of such securities. (2) In a statement (Schedule 13D/A) filed with the SEC on March 5, 2004, Gabelli Asset Management Inc. and its affiliates ("Gabelli") indicated that they have sole voting power over 2,716,599 shares and sole dispositive power over 2,781,599 shares of our common stock. Gabelli stated that the shares are beneficially owned by Gabelli Funds, LLC (1,148,300 shares), GAMCO Investors, Inc. (1,266,899 shares), Gabelli Securities, Inc. (354,400 shares), Gabelli Foundation, Inc. (10,000 shares) and MJG Associates, Inc. (2,000 shares). (3) In a statement (Schedule 13G/A) filed with the SEC on February 13, 2004, White Mountains Insurance Group ("WMIG") indicated that it has shared voting and shared dispositive power over 1,798,100 shares of our common stock. WMIG indicated that it indirectly controls, through various wholly-owned subsidiaries and certain of its employee benefit plans, 1,798,100 shares. WMIG stated that the shares are beneficially owned by OneBeacon Insurance Company (190,000 shares), The Camden Fire Insurance Association (800,000 shares), Folksamerica Reinsurance Company (143,100 shares) and certain employee benefit plans sponsored by OneBeacon Insurance Company (665,000 shares). WMIG further stated that, through an investment advisory agreement, White Mountains Advisors, LLC has sole voting and sole dispositive power over such shares. (4) In a statement (Schedule 13G) filed with the SEC on February 27, 2004, BNP Paribas, SA (BNP) indicated that it has sole voting and sole dispositive power over 1,796,010 shares of our common stock. (5) In a statement (Schedule 13G) filed with the SEC on February 17, 2004, Barclays Private Bank Limited ("Barclays") indicated that it has sole voting and sole dispositive power over 1,551,851 shares of our common stock. The filing indicated that the 1,718,794 shares are beneficially owned by Barclays Global Investors (974,374 shares), Barclays Global Fund Advisors (594,020 shares) and Barclays Capital Securities Limited (150,400 shares).

6 Section 16(a) Section 16(a) of the Exchange Act and SEC Beneficial regulations require directors, certain officers and Ownership persons who own greater than 10% of our stock to file Reporting reports of ownership and changes in ownership of Compliance such stock with the SEC and the New York Stock Exchange. These directors, officers and greater than 10% beneficial owners are required by law to furnish us with copies of all forms they file under Section 16(a). Based solely on a review of the copies of such forms furnished to us and on written representations of our directors and officers, we believe that all Section 16(a) filing requirements applicable to our directors and officers were complied with during 2003. PROPOSAL ONE: ELECTION OF DIRECTORS General At the Meeting, our shareholders of record will elect nine directors to serve on our Board for the ensuing year and until their successors are elected and qualified. The shares represented by executed proxies in the form enclosed, unless We will elect nine withheld, will be voted for the nine nominees listed directors this year. below, or, in the discretion of the persons acting as proxies, will be voted cumulatively for one or more of such nominees. All of the current nominees are present members of the Board. All of the nominees have consented to serve if elected. If any nominee becomes unavailable for any reason, or a vacancy should occur before the election, it is the intention of the persons designated as proxies to vote, in their discretion, for other nominees. BOARD NOMINEES James S. Chairman of the Board, President and Chief Executive Pignatelli Officer of UniSource Energy since July 1998; Senior Vice President and Chief Operating Officer of UniSource Energy from December 1997 to July 1998; Chairman of the Board of Directors, President and Chief Executive Officer of TEP, the principal subsidiary of UniSource Energy, since July 1998; Executive Vice President and Chief Operating Officer of TEP from March 1998 to July 1998; Senior Vice President and Chief Operating Officer of TEP from 1996 to 1998; Chairman of the Board of Directors, President and Chief Executive Officer of Millennium Energy Holdings, Inc. ("Millennium"), a wholly owned subsidiary of UniSource Energy, since 1997. Board member since 1998. Age 60. Lawrence J. General Partner, Valley Ventures III, LP, since Aldrich September 2002; Managing Director and Founder, Tucson (4) Ventures, LLC, from February 2000 to September 2002; President and Chief Executive Officer of Tucson Newspapers from January 1992 to February 2000; Director of TEP and Millennium since 2000. Board member since 2000. Age 51. Larry W. Bickle Managing Director of Haddington Ventures, LLC, an (4) investment company, since 1997; Director of St. Mary Land and Exploration since 1995; Director of Millennium since 1998. Board member since 1998. Age 58. Elizabeth T. President of Gourmet Products, Inc., an agricultural Bilby product marketing company; Director of Marketing of (1)(2)(3) Green Valley Pecans since 1982. Director of TEP since 1995; Director of Millennium from 1998-2003. Board member since 1995. Age 64. 7 Harold W. Senior Executive Advisor for AT&T Wireless Services Burlingame since July 2001; Executive Vice President, (1)(3) Communications and Human Resources of AT&T Wireless Services from April 2000 to June 2001; Executive Vice President, Merger and Joint Venture Integration of AT&T from March 1999 to March 2000; Executive Vice President of Human Resources of AT&T from 1987 to March 1999; Member of the AT&T Foundation from November 1986 to December 2002; Chair, Executive Committee, Organization Resources Counselors since June 1999; Director of TEP since 1998. Board member since 1998. Age 63. John L. Carter Retired as General Manager of the Tucson, Arizona (1)(2)(3)(4) office of IBM in 1987. President and Chief Executive Officer of Qualtronics Manufacturing, Inc. from 1987 to 1993. Retired as Executive Vice President and Chief Financial Officer of Burr-Brown Corporation in 1996. Director of TEP since 1996; Director of Millennium since 1998. Board member since 1996. Age 69. Robert A. Elliott President and owner of The Elliott Accounting Group (2)(3) since 1983; Television Analyst/Pre-game Show Co-host for Fox Sports Arizona since 1999; Radio Host of "In the Paint" Sports Talk Show for KFNN 1490 AM from 2000 to 2002; Studio Expert Television Analyst for Cox Sports/Phoenix Suns from 1999 to 2001; Corporate Secretary of Southern Arizona Community Bank since 1999; Director and Minority Shareholder of Southern Arizona Community Bank since 1998; Director of Tucson Urban League since 1998; Treasurer of Tucson Urban League since 2002; Director of TEP since May 2003. Board member since 2003. Age 48. Kenneth Handy Retired CPA; Vice President and Chief Financial (1)(2)(3) Officer of The Permanente Medical Group, Inc. (the physician services component of the Kaiser Permanente Medical Care Program in Northern California)from 1978 to 1998; Partner at Ernst & Ernst (now Ernst & Young) from 1972 to 1978; Director of TEP since 2001; Director of Millennium from 2001 to 2003. Board member since August 2001. Age 65. Warren Y. Jobe Retired CPA; Senior Vice President of Southern Company (2)(3)(4) from 1998 to 2001; Executive Vice President and Chief Financial Officer and member of the Board of Directors of Georgia Power Company from 1982 to 1998; former President of the Georgia Power Foundation Inc. from 1986 to 2001; Member of the Board of Directors of Wellpoint Health Networks, Inc. since 2001; Director of TEP since 2001; Director of Millennium from 2001 to 2003. Board member since August 2001. Age 63. ------------------- (1) Member of the Corporate Governance and Nominating Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. (4) Member of the Finance Committee. The Board recommends that you vote "FOR" these nominees. 8 BOARD INFORMATION Board Meetings In 2003, the Board held a total of 13 regular and special meetings. Each director attended at least 75% of his or her Board and committee meetings. Board Committees THE AUDIT COMMITTEE selects a firm of independent certified public accountants to audit annually our financial statements, reviews current and projected financial results of operations, reviews and discusses the scope of such audit, receives and reviews the audit reports and recommendations, transmits its recommendations to the Board, reviews our accounting and internal control procedures with our internal audit department from time to time and makes recommendations to the Board for any changes deemed necessary in such procedures, and performs such other functions delegated by the Board. Our Audit Committee held 12 meetings in 2003 and was in full compliance with its written charter. Upon the recommendation of the Audit Committee, our Board adopted a code of ethics for our senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Controller. A copy of this code of ethics can be obtained on our website at the following website address: http://www.unisourceenergy.com. THE COMPENSATION COMMITTEE reviews the performance of our directors and officers and reviews and approves directors' and officers' compensation. Our Compensation Committee held six meetings in 2003 and was in full compliance with its written charter, which is attached to this Proxy Statement as Appendix A. THE FINANCE COMMITTEE reviews and recommends to the Board long-range financial policies, objectives and actions required to achieve those objectives. Specifically, the Finance Committee reviews capital and operating budgets, current and projected financial results of operations, short-term and long-range financing plans, dividend policy, risk management activities and major commercial banking, investment banking, financial consulting and other financial relations of UniSource Energy. Our Finance Committee held three meetings in 2003. THE CORPORATE GOVERNANCE AND NOMINATING COMMITTEE reviews and recommends corporate governance principles, interviews potential directors, and nominates and recommends to the shareholders and directors, as the case may be, qualified persons to serve as directors. The Corporate Governance and Nominating Committee also reviews and recommends membership for all the committees to the Board and reviews applicable rules and regulations relating to the duties and responsibilities of the Board. The Corporate Governance and Nominating Committee held four meetings in 2003 and was in full compliance with its written charter, which is attached to this Proxy Statement as Appendix B. The Corporate Governance and Nominating Committee identifies and considers nominee candidates supplied by shareholders and Board members. The Corporate Secretary, as directed by the Corporate Governance and Nominating Committee, prepares portfolios for nominee candidates that include confirmation of the candidate's interest, independence, biographical information, review of business background and experience and reference checks. The Corporate Governance and Nominating Committee then evaluates candidates using, in large part, the criteria set forth in the next paragraph and any other criteria the Committee deems appropropriate, and conducts a personal interview with each 9 candidate. Upon completion of this process, formal invitations are extended to accept election to the Board. The Corporate Governance and Nominating Committee has not adopted specific, minimum qualifications with respect to a Committee-recommended Board nominee, but desirable qualifications are set forth in the Board manual and include prior community, professional or business experience that demonstrates leadership capabilities, the ability to review and analyze complex business issues, the ability to effectively represent the interests of our shareholders while keeping in perspective the interests of our customers, the ability to devote the time and interest required to attend and fully prepare for all regular and special Board meetings, the ability to communicate and work effectively with the other Board members and personnel and the ability to fully adhere to any applicable laws, rules or regulations relating to the performance of a director's duties and responsibilities. While no formal policy exists, the Corporate Governance and Nominating Committee does consider recommendations for Board nominees received from our shareholders. The deadline for consideration of recommendations for next year's annual meeting of the shareholders is December 10, 2004 (assuming that the acquisition of UniSource Energy is not completed prior to such date). Recommendations must be in writing and include detailed biographical material indicating the candidate's qualifications and a written statement from the candidate of willingness and availability to serve. Recommendations should be directed to the Corporate Secretary, UniSource Energy Corporation, One South Church Avenue, Suite 1820, Tucson, Arizona 85701. In light of the acquisition of UniSource Energy, the Board does not believe it is appropriate to adopt a formal policy at this time. Each member of our Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee is independent based upon independence criteria established by our Board, which criteria is in compliance with applicable New York Stock Exchange listing standards. BOARD COMPENSATION Retainer In 2003, each non-employee director received and Fees a $20,000 annual cash retainer, $1,000 for each Board meeting attended, $1,000 for each committee meeting attended and an additional $1,000 per committee meeting if acting as a committee chairperson. We reimburse directors for any expenses related to their Board and committee service. Effect of See "Effect of Proposed Acquisition on Compensation" Proposed beginning on page 18 of this Proxy Statement for a Acquisition discussion of the effect of the proposed acquisition of UniSource Energy on compensation of our Board members. 10 Option and Under the terms of the 1994 Outside Director Stock Restricted Option Plan, each non-employee director in office on Share Grants the first business day of each year, and who has been a director for at least three months, is granted a stock option covering a number of shares of our common stock equal to $10,000 divided by the value of an option as of the date of grant. Option values are determined using the Black Scholes option value model. The exercise price of the options is the fair market value of our shares on the grant date. The options vest in one-third increments on the grant date anniversary, and expire in ten years, provided, however, that all of these options will be cancelled and paid in cash upon the consummation of the acquisition. Each non-employee director in office on the first business day of each year is granted a number of restricted shares of our common stock equal to $10,000 divided by the then fair market value of a share of our common stock. Restricted shares vest on the third anniversary of the grant date, provided, however, that all shares subject to restricted stock awards outstanding will vest free of restrictions upon the consummation of the acquisition. On January 2, 2003, each of the non-employee directors, with the exception of Mr. Elliott, received options to purchase 2,358 shares of our common stock at an exercise price of $17.44, and 573 restricted shares of our common stock. Mr. Elliott received options to purchase 1,196 shares of our common stock at an exercise price of $17.84 when he took office on May 9, 2003. DIRECTOR COMPENSATION FOR LAST FISCAL YEAR

Cash Compensation Security Grants ---------------------------------- --------------------------------------- Number of Shares Number of Annual Subject to Securities Retainer Meeting Restricted Stock Underlying Options Name (1) Fee ($) (2) Fees ($) (2) Award -------- ----------- ------------ ----------------- ------------------ Lawrence J. Aldrich 20,000 22,000 (3) 573 2,358 Larry W. Bickle 20,000 19,000 (3)(4) 573 2,358 Elizabeth T. Bilby 20,000 43,000 573 2,358 Harold W. Burlingame 20,000 42,000 573 2,358 John L. Carter 20,000 65,000 (3)(4) 573 2,358 Robert A. Elliott 15,000 35,000 -- 1,196 Daniel W. L. Fessler (5) 15,000 19,000 (3) 573 2,358 Kenneth Handy 20,000 50,000 573 2,358 Warren Y. Jobe 20,000 61,000 573 2,358 H. Wilson Sundt (6) 6,666 16,000 573 2,358 ------------------- (1) Mr. Pignatelli is not listed in this table because directors who are officers of UniSource Energy or salaried employees of its subsidiaries do not receive compensation in their capacity as members of the Board. Refer to the Summary Compensation Table for information concerning his compensation. (2) Cash compensation includes amounts earned but deferred at the election of directors. (3) As members of the Global Solar Energy, Inc. ("GSE") board, Mr. Aldrich, Mr. Carter and Mr. Fessler each received an additional $4,000 and Mr. Bickle received an additional $1,000 for attending GSE board meetings during 2003. UniSource Energy owns 99% of GSE. (4) As members of the Infinite Power Solutions, Inc. ("IPS") board, Mr. Bickle received an additional $5,000 and Mr. Carter received an additional $6,000 for attending IPS board meetings during 2003. UniSource Energy owns 72% of IPS. (5) Mr. Fessler resigned from the Board on September 30, 2003. (6) Mr. Sundt retired from the Board on May 9, 2003. (6) Mr. SUndt retired from the Board on May 9, 2003.

11 EXECUTIVE COMPENSATION AND OTHER INFORMATION Summary See "Effect of The Proposed Acquisition on of Compensation Compensation" beginning on page 18 of this Proxy Statement for a discussion of the effect of the proposed acquisition of UniSource Energy and related shareholder approval on certain compensation of our executive officers. The following table summarizes the compensation and stock option grants to, and stock options/stock appreciation rights ("SARs") held by the Named Executives.

SUMMARY COMPENSATION TABLE Annual Compensation Compensation Awards ----------------------- ------------------------- Restricted Securities All Other Name and Stock Awards Underlying Compensation Principal Position Year Salary ($) Bonus ($) ($) (1) Options/SARs (#) ($) (2) ------------------ ---- --------- -------- ------------ ---------------- ------------ James S. Pignatelli 2003 599,327 550,000 -- 21,226 12,000 Chairman, President and 2002 574,654 320,000 -- 150,000 11,000 Chief Executive Officer 2001 559,423 580,000 -- 150,000 10,500 Steven J. Glaser 2003 274,596 166,000 -- 9,729 11,232 Senior Vice President and Chief 2002 259,654 110,000 -- 45,000 11,000 Operating Officer, Transmission 2001 244,231 132,000 -- 54,000 10,500 & Distribution - TEP Dennis R. Nelson 2003 269,732 150,000 -- 9,552 12,000 Senior Vice President and Chief 2002 260,000 90,000 -- 45,000 11,000 Operating Officer - UES 2001 259,712 117,000 -- 34,000 10,500 Michael J. DeConcini 2003 229,192 145,000 -- 8,137 10,314 Senior Vice President, 2002 199,654 72,000 -- 40,000 11,000 Investments and Planning / 2001 184,519 97,125 -- 30,000 10,500 Senior Vice President and Chief Operating Officer, Energy Resources - TEP Kevin P. Larson 2003 219,462 145,000 -- 7,783 9,876 Vice President, Chief Financial 2002 199,656 76,000 -- 35,000 11,000 Officer and Treasurer 2001 184,519 113,000 -- 20,000 10,500 Vincent Nitido, Jr. 2003 219,462 145,000 -- 7,783 9,876 Vice President, General Counsel 2002 199,654 68,000 -- 40,000 11,000 and Chief Administrative Officer 2001 184,519 97,125 -- 35,000 10,500 ------------------- (1) As of December 31, 2003, based on the closing market price of UniSource Energy's stock on that date of $24.66, Mr. Pignatelli held 108,053 stock units (including dividend equivalent stock units) valued at $2,664,587; Mr. Glaser held 27,280 stock units (including dividend equivalent stock units) valued at $672,725; Mr. Nelson held 24,016 stock units (including dividend equivalent stock units) valued at $592,235; Mr. DeConcini held 23,729 stock units (including dividend equivalent stock units) valued at $585,157; Mr. Larson held 12,953 stock units (including dividend equivalent stock units) valued at $319,421; and Mr. Nitido held 15,951 stock units valued at $393,352. (2) All Other Compensation is comprised of UniSource Energy's contributions to the 401(k) Plan and Excess 401(k) contributions to the UniSource Energy Corporation Management and Directors Deferred Compensation Plan.

12 Stock Option During 2003, the Compensation Committee of our Board Grants in 2003 granted stock options to officers. The options have exercise prices equal to the fair market value of our common stock at the date of grant, and were intended to be incentive stock options under, and to the maximum extent permitted by, the Internal Revenue Code of 1986, as amended ("Code"). These options would have vested ratably over a three-year period, provided, however, that all of these options vested and became immediately exercisable upon the approval of the acquisition agreement by our shareholders on March 29, 2004. The aggregate number of UniSource Energy shares attributable to the 2003 grants is 97,818. The following table includes our 2003 grants of stock options and SARs to the Named Executives. The amounts shown as potential realizable values rely on arbitrarily assumed increases in value required by the SEC. In assessing those amounts, please note that the ultimate value of the options, as well as the shares, depends on actual future share prices. Market conditions and the efforts of the directors, the officers and others to foster the future success of UniSource Energy and its subsidiaries can influence those future share values.

OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants Number of Percent of Potential Realizable Value Securities Total Options/ at Assumed Annual Rates Underlying SARs Granted to of Stock Price Appreciation Options/SARs Employees Exercise Expiration for Option Term Name Granted in Fiscal Year Price ($/Sh) Date 5% ($) 10%($) ---- ----------- --------------- ------------ ---------- ------ ------ James S. Pignatelli 21,226 21.7% 17.84 5/9/13 238,145 603,506 Steven J. Glaser 9,729 9.9% 17.84 5/9/13 109,154 276,618 Dennis R. Nelson 9,552 9.8% 17.84 5/9/13 107,169 271,586 Michael J. DeConcini 8,137 8.3% 17.84 5/9/13 91,293 231,354 Kevin P. Larson 7,783 8.0% 17.84 5/9/13 87,321 221,290 Vincent Nitido, Jr. 7,783 8.0% 17.84 5/9/13 87,321 221,290

Option and SAR The following table includes the number and value of Holdings as of exercisable and non-exercisable options and SARs held December 31, 2003 by the Named Executives as of December 31, 2003. 13

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Number of Securities Underlying Unexercised Value of Unexercised Shares Options/SARs at Fiscal In-the-Money Options/SARs at Acquired Year-End (#) Fiscal Year End ($) on Exercise Value Exercisable/ Exercisable/ Name (#) Realized ($) Unexercisable (1) Unexercisable (2) ---- ----------- ------------ ----------------------- ---------------------------- James S. Pignatelli -- -- 435,629 / 279,559 4,182,658 / 2,183,048 Steven J. Glaser -- -- 132,143 / 57,729 1,165,173 / 418,784 Dennis R. Nelson -- -- 132,646 / 50,885 1,233,979 / 372,369 Michael J. DeConcini -- -- 63,881 / 71,469 577,106 / 561,437 Kevin P. Larson -- -- 69,386 / 37,782 636,171 / 277,474 Vincent Nitido, Jr. 68,811 / 72,782 613,182 / 570,314 ------------------- (1) The unexercisable Options/SARs reflected in the foregoing table vested and became exercisable upon shareholder approval of the acquisition agreement on March 29, 2004. (2) Includes cash dividend equivalents on stock options awarded in 2002 under the UniSource Energy Corporation Omnibus Stock and Incentive Plan.

2003 Long-Term The following table includes the number of shares, Incentive Plan units or other rights awarded to the Named Executives Awards in the last fiscal year under any long-term incentive plan. Payout of the 2003-2005 long-term incentive plan awards will be based on the achievement, during the performance period, of four (4) financial and two (2) operational goals, each on a UniSource Energy basis. The financial goals are total shareholder return, earnings per share, cash flow and equity capitalization. The operational goals are plant availability and customer measures. Each goal has an annual target, and each goal has an exceptional target for 2005. Two points are awarded for the achievement of each annual goal, and two additional points are awarded for achievement of each exceptional target for 2005. The payout will be based on cumulative points for the performance period. There are 48 available points. Threshold performance is achieved at 24 points, target performance at 30 points and maximum performance at 37 points. 14

LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR Estimated Future Payouts under Number of Performance or Non-Stock Price-Based Plans Shares, Units Other Period Until ------------------------------- or Other Maturation or Threshold Target Maximum Name Rights (#) Payout (3) (# or$) (# or$) (# or$) ---- -------------- ------------------ --------- ------- -------- James S. Pignatelli 18,370 (1) 1/1/03 - 12/31/05 7,564 18,370 29,176 189,000 (2) $78,000 $189,000 $300,000 Steven J. Glaser 8,420 (1) 1/1/03 - 12/31/05 3,467 8,420 13,372 87,000 (2) $36,000 $87,000 $138,000 Dennis R. Nelson 8,267 (1) 1/1/03 - 12/31/05 3,404 8,267 13,129 85,000 (2) $35,000 $85,000 $135,000 Michael J. DeConcini 7,042 (1) 1/1/03 - 12/31/05 2,900 7,042 11,184 72,000 (2) $30,000 $72,000 $115,000 Kevin P. Larson 6,736 (1) 1/1/03 - 12/31/05 2,774 6,736 10,698 69,000 (2) $29,000 $69,000 $110,000 Vincent Nitido, Jr. 6,736 (1) 1/1/03 - 12/31/05 2,774 6,736 10,698 69,000 (2) $29,000 $69,000 $110,000 ------------------- (1) Performance shares are denominated in shares of UniSource Energy common stock. (2) Performance units are denominated in cash. One performance unit equals $1.00. (3) The performance share and performance unit awards reflected in the foregoing table vested at target upon shareholder approval of the acquisition agreement on March 29, 2004. See table in "Effect of Proposed Acquisition on Compensation" on page 18 of this Proxy Statement for amount of shares and cash distributed to the Named Executives in respect to these awards.

EQUITY COMPENSATION PLAN INFORMATION Equity Our only equity-based compensation plan that has not Compensation been approved by shareholders is the Management and Plans Directors Deferred Compensation Plan (the "DCP"). Shareholder approval of the DCP has not been required. Under the DCP, certain eligible officers and other employees selected for participation, and non-employee members of the Board, may elect to defer a percentage of the compensation or fees that would otherwise become payable to the individual for their services to us. We also credit DCP accounts of employees participating in our 401(k) Plan with the additional amount of UniSource Energy matching contributions that the participant would have been entitled to under the 401(k) Plan if certain Code limits did not apply to limit the amount of UniSource Energy matching contributions made under the 401(k) Plan. Each participant in the DCP may elect that his or her deferrals be credited in the form of deferred shares. Deferred shares are bookkeeping entries that, when payable, will be paid in the form of an equivalent number of shares of UniSource Energy common stock. Deferred shares accrue dividend equivalents, credited in the form of additional deferred shares, as dividends are paid by UniSource Energy on its issued and outstanding common stock. Each participant elects the time and manner of payment (lump sum or installments) of his or her deferred shares under the DCP. The shares used to satisfy our stock obligations under the DCP are shares that have been purchased on the open market. 15 EQUITY COMPENSATION PLAN TABLE The following table sets forth information as of December 31, 2003, with respect to UniSource Energy's equity compensation plans.

Number of Shares of Number of Shares of UniSource Energy UniSource Energy Common Common Stock Remaining Available for Stock to Future Issuance Under Equity be Issued Upon Exercise Weighted-Average Compensation Plans (Excluding Shares of Outstanding Options Exercise Price of Reflected Plan Category and Rights Outstanding Options in the First Column) ------------- ----------------------- ------------------- -------------------- Equity Compensation Plans 2,874,397 (2) $16.04 (3) 969,931 (4) Approved by Shareholders (1) Equity Compensation Plans 60,203 (5) -- -- (6) Not Approved by Shareholders Total 2,934,600 -- -- ------------------- (1) The equity compensation plans approved by shareholders are the UniSource Energy Corporation 1994 Omnibus Stock and Incentive Plan and the UniSource Energy Corporation 1994 Outside Director Stock Option Plan. (2) Includes options outstanding as to 2,482,680 shares, stock units, dividend equivalent stock units and restricted stock units (payable in an equivalent number of shares) outstanding as to 257,263 shares, and performance shares outstanding as to 134,454 shares. See table of "Long-Term Incentive Plans - Awards in Last Fiscal Year." Performance shares shown at estimated maximum future payout. (3) Calculated based on the outstanding options and exclusive of outstanding stock units. (4) Of these shares, 793,654 were available for additional awards under the 1994 Omnibus Stock and Incentive Plan and 176,277 were available for additional awards under the 1994 Outside Director Stock Option Plan. Although 793,654 shares remained available for grant under the 1994 Omnibus Stock and Incentive Plan, pursuant to the plan document no award may be granted under the Plan after February 3, 2004. Shares available under either of these plans may be used for any type of award authorized under that plan. Awards authorized under the 1994 Omnibus Stock and Incentive Plan include options, stock appreciation rights, restricted stock, performance shares, and stock units. Awards authorized under the 1994 Outside Director Stock Plan include options, restricted stock, and dividend equivalents. The aggregate amount of shares issuable under these plans is subject to certain limitations set forth in the acquisition agreement. (5) Reflects an aggregate of 60,203 deferred shares credited under the DCP. (6) There is no explicit share limit under the DCP. The number of shares to be delivered with respect to the DCP in the future depends on the levels of fees and compensation that participants elect to defer under the DCP. The UniSource Energy shares used to satisfy our stock obligations under the DCP are shares that have been purchased on the open market. Similarly, the aggregate amount of shares issuable under these plans is subject to certain limitations set forth in the acquisition agreement.

Pension Plans The following table shows the estimated annual retirement benefit payable to participants, including the Named Executives, for the average annual compensation and years of service indicated. Compensation is comprised of the officers' average annual compensation during the five consecutive years of employment with the highest compensation within the last 15 years preceding retirement. Compensation is comprised of salary and bonus, as shown on the Summary Compensation Table. 16

PENSION PLAN TABLE Years of Service --------------------------------------------------------------------------------------------- Remuneration ($) 10 15 20 25 30 35 125,000 54,850 54,850 54,850 54,850 54,850 54,850 150,000 65,820 65,820 65,820 65,820 65,820 65,820 175,000 76,790 76,790 76,790 76,790 76,790 76,790 200,000 87,760 87,760 87,760 87,760 87,760 87,760 225,000 98,730 98,730 98,730 98,730 98,730 98,730 250,000 109,700 109,700 109,700 109,700 109,700 109,700 300,000 131,640 131,640 131,640 131,640 131,640 131,640 400,000 175,520 175,520 175,520 175,520 175,520 175,520 450,000 197,460 197,460 197,460 197,460 197,460 197,460 500,000 219,400 219,400 219,400 219,400 219,400 219,400 550,000 241,340 241,340 241,340 241,340 241,340 241,340 600,000 263,280 263,280 263,280 263,280 263,280 263,280 650,000 285,220 285,220 285,220 285,220 285,220 285,220 700,000 307,160 307,160 307,160 307,160 307,160 307,160 750,000 329,100 329,100 329,100 329,100 329,100 329,100 800,000 351,040 351,040 351,040 351,040 351,040 351,040 850,000 372,980 372,980 372,980 372,980 372,980 372,980 900,000 394,920 394,920 394,920 394,920 394,920 394,920 950,000 416,860 416,860 416,860 416,860 416,860 416,860 1,000,000 438,800 438,800 438,800 438,800 438,800 438,800 1,100,000 482,680 482,680 482,680 482,680 482,680 482,680 1,200,000 526,560 526,560 526,560 526,560 526,560 526,560 1,300,000 570,440 570,440 570,440 570,440 570,440 570,440 1,400,000 614,320 614,320 614,320 614,320 614,320 614,320

The amount of the pension benefit is equal to a base of 40% of the compensation for ten years of service, plus 9.7% (life annuity factor) of such calculated amount. The estimated benefits shown in the Pension Plan Table are straight life annuities not subject to a reduction for any Social Security benefits. The table also reflects amounts payable under the Excess Benefits Plan which will pay from the general funds of UniSource Energy the difference, if any, between the benefits under TEP's pension plan and any benefit payments, which may be limited by federal regulations. 17 The credited years of service for UniSource Energy's Named Executives are as follows:

Credited Name Years of Service ---- ---------------- James S. Pignatelli 9 Steven J. Glaser 14 Dennis R. Nelson 26 Kevin P. Larson 18 Michael J. DeConcini 15 Vincent Nitido, Jr. 13

EFFECT OF PROPOSED ACQUISITION ON COMPENSATION New Employment As of the date of this Proxy Statement, no member Arrangements of our management has entered into any amendments or modifications to existing employment agreements with us or our subsidiaries in anticipation of the acquisition. Nor has any member of our management entered into any agreement, arrangement or understanding with Saguaro Utility or its affiliates regarding employment with, or the right to purchase or participate in the equity of, the surviving corporation. Although no such agreement, arrangement or understanding currently exists, it is generally expected that our existing management will remain after the acquisition is completed, which means that members of our existing management may, prior to the closing of the acquisition, enter into new arrangements with Saguaro Utility or its affiliates regarding employment with, or the right to purchase or participate in the equity of, the surviving corporation. Change in Control TEP has Change in Control Agreements Agreements ("Agreements") with all of its officers. The Agreements are in effect until the later of: (i) five years after the date either TEP or the officer gives written notice of termination of the Agreement, or Change in (ii) if a change in control occurs during the term of Control Agreements the Agreement, five years after the change in control. were adopted On March 29, 2004, upon the approval of the to attract acquisition agreement by our shareholders, a change in and retain control occurred for purposes of the Agreements. This quality management. will be true irrespective of whether or not the acquisition is completed. The Agreements provide that each officer shall be employed by TEP, or one of its subsidiaries or affiliates, in a position comparable to his or her current position, with compensation and benefits, which are at least equal to their then current compensation and benefits, for a period of five years after a change in control (subject to earlier termination due to the officer's acceptance of a position with another company or termination for cause). In the event that the officer's employment is terminated by TEP (with the exception of termination due to the officer's acceptance of another position or for cause), or if the officer terminates employment because of a reduction in position, responsibility, compensation or for certain other stated reasons, the officer is entitled to severance benefits in the form of: (i) a lump sum payment equal to the present value of three times annual salary and bonus compensation; (ii) the present value of the additional amount the officer would have received under the TEP Retirement Plan if the officer had continued to be employed for the five-year period after a change in control occurs; plus (iii) the present value of any employee awards under the 1994 Omnibus Stock and Incentive Plan or any 18 successor plan, which are outstanding at the time of the officer's termination (whether vested or not), prorated based on length of service. Such officer is also entitled to continue to participate in TEP's health, death and disability benefit plans for five years after the termination. The Agreements further provide that TEP will make a payment to the officer to offset any excise taxes that may become payable under certain conditions. Any payments made in respect of such excise taxes are not deductible by us. Assuming Mr. Pignatelli's and the other Named Executives' employment was terminated, the total payments made by UniSource Energy pursuant to the Agreements would not be expected to exceed $17 million. Treatment of Our Board has over time granted options to our Stock Options executive officers and managers that allow those individuals to purchase our common stock at fair market value on the date of issuance. Members of our Board have also over time received grants of options to purchase our common stock at specified prices. On March 29, 2004, upon the approval of the acquisition agreement by our shareholders, a change of control occurred for purposes of the outstanding stock options under the UniSource Energy Corporation 1994 Omnibus Stock and Incentive Plan, with the effect of making all outstanding stock options of officers and managers immediately exercisable. Upon consummation of the acquisition, all outstanding stock options under the UniSource Energy Corporation 1994 Outside Director Stock Option Plan will become immediately exercisable by members of our Board. In connection with the acquisition agreement, Saguaro Utility, through its affiliate, has agreed to pay at the effective time of the acquisition, with respect to all outstanding options, an amount in cash equal to the product of: o the total number of shares of our common stock underlying a holder's options, and o the excess of $25.25 over the exercise price per share of the shares of our common stock underlying such options. Due to this provision, as of the Record Date, our Board members and the Named Executives listed in the chart that immediately follows this paragraph will be entitled to receive, at the effective time of the acquisition, the following cash payments, respectively, with respect to the cancellation of their options (assuming that the options outstanding as of the Record Date are not exercised or canceled prior to the effective time):

Name and Title Amount (1) -------------- ---------- James S. Pignatelli Chairman, President and Chief Executive $6,790,211 Officer Lawrence J. Aldrich Director $66,268 Larry W. Bickle Director $109,306 Elizabeth T. Bilby Director $139,568

19 Name and Title Amount (1) -------------- ---------- Harold W. Burlingame Director $109,306 John L. Carter Director $127,868 Robert A. Elliott Director $8,862 Kenneth Handy Director $48,636 Warren Y. Jobe Director $48,636 Steven J. Glaser Senior Vice President and Chief Operating $1,697,485 Officer, Transmission & Distribution -TEP Dennis R. Nelson Senior Vice President and Chief Operating $1,716,325 Officer - UES Michael J. DeConcini Senior Vice President, Investments and $1,220,738 Planning / Senior Vice President and Chief Operating Officer, Energy Resources - TEP Kevin P. Larson Vice President, Chief Financial Officer and $979,258 Treasurer Vincent Nitido, Jr. Vice President, General Counsel and Chief $1,269,188 Administrative Officer All directors and executive officers as a group $17,960,593 ------------------- (1) Includes cash payments attributable to shares subject to options exercisable within 60 days as disclosed in the Security Ownership of Management table on pages 4-5 under the column heading "Amount and Nature of Beneficial Ownership." Treatment As discussed under "Equity Compensation Plan of Other Information" on page 15 of this Proxy Statement, we Compensation maintain a deferred compensation plan that permits officers and directors to defer a percentage of the compensation or fees that would otherwise be payable to the individual for their services to us. A participant in this plan may elect that his or her deferrals be credited in, among other things, the form of a deemed investment in shares of our common stock. A trust has been established that maintains a position in our common stock corresponding to the plan participants' deemed investment in our common stock. Distributions are made in stock or cash, at our discretion. In addition, our Board has, over time, granted our executive officers and managers restricted stock units under our stock and incentive plans. Upon vesting, officers and managers may defer receipt of these restricted stock unit awards, in which case, the deferred awards are 20 credited to a bookkeeping account in the form of dividend equivalent-bearing stock units. The table that follows sets forth the allocable amount of shares of common stock credited to our directors and the Named Executives as of the Record Date with respect to the deferred compensation plan and dividend equivalent-bearing stock units. Our Board has also, over time, granted our executive officers and managers other equity-based compensation awards, including performance shares and performance units under our stock and incentive plans. Performance shares are distributed as shares of our common stock, and performance units are distributed as cash, in each case, when, and to the extent, that performance goals during a specified performance period have been met. On March 29, 2004, upon the approval of the acquisition agreement by our shareholders, a change of control occurred for purposes of these awards and the awards fully vested, at target. See "2003 Long-Term Incentive Plan Awards" on page 14 of this Proxy Statement. As provided in the following table, upon the change of control, all shares of common stock were distributed with respect to performance shares and all cash payments were made with respect to performance units.

Number of Performance Shares Allocable Amount of Issued/Amount of Cash Paid with Name and Title Deferred Shares Respect to Performance Units -------------- ------------------- -------------------------------- James S. Pignatelli 137,385 12,675 / $327,958 Chairman, President and Chief Executive Officer Lawrence J. Aldrich 1,548 -- Director Larry W. Bickle 405 -- Director Elizabeth T. Bilby 4,378 -- Director Harold W. Burlingame 1,548 -- Director John L. Carter 10,338 -- Director Robert A. Elliott 405 -- Director Kenneth Handy 3,438 -- Director Warren Y. Jobe 1,548 -- Director Steven J. Glaser 29,574 5,809 / $150,708 Senior Vice President and Chief Operating Officer, Transmission & Distribution - TEP

21

Number of Performance Shares Allocable Amount of Issued/Amount of Cash Paid with Name and Title Deferred Shares Respect to Performance Units -------------- ------------------- -------------------------------- Dennis R. Nelson 26,353 5,704 / $147,537 Senior Vice President and Chief Operating Officer - UES Michael J. DeConcini 24,307 4,858 / $125,290 Senior Vice President, Investments and Planning / Senior Vice President and Chief Operating Officer, Energy Resources - TEP Kevin P. Larson 774 3,770 / $141,370 Vice President, Chief Financial Officer and Treasurer Vincent Nitido, Jr. 16,470 3,770 / $141,370 Vice President, General Counsel and Chief Administrative Officer All directors and executive officers as a 302,686 53,566 / $1,629,620 group

DIRECTOR INDEPENDENCE CRITERIA Board independence The Board has established the following criteria for is determined by determining independence, including for the purpose of consideration of serving upon the Audit Committee, the Compensation established criteria. Committee and the Corporate Governance and Nominating Committee. Directors that meet each of the following criteria are deemed independent: 1. A director who is a former employee of UniSource Energy cannot be "independent" until five years after employment has ended, provided, however, that a director who serves as an interim Chairman or CEO is excluded from the definition of a "former employee" and thus deemed independent immediately after his or her service as interim Chairman or CEO ends. 2. A director who is, or in the past five years has been, affiliated with or employed by a (present or former) auditor of UniSource Energy (or of an affiliate) cannot be "independent" until five years after the end of either the affiliation or the auditing relationship. 3. A director cannot be "independent" if he or she is, or in the past five years has been, part of an interlocking directorate in which an executive officer of UniSource Energy serves on the compensation committee of another company that concurrently employs the director. 4. Directors with immediate family members in the foregoing categories (items 1-3) are likewise subject to the five-year "cooling-off" provisions for purposes of determining "independence," provided, however, that employment of a family member in a non-officer position does not preclude a director from being deemed "independent." 22 5. A director who possesses an interest in any transaction for which disclosure would be required pursuant to Item 404(a) of SEC Regulation S-K (generally, this item requires proxy statement disclosure of transactions exceeding $60,000 between a director and UniSource Energy or any of our subsidiaries) cannot be independent. 6. Directors that do not meet item 5 of the aforementioned criteria may nonetheless be deemed independent by a majority of independent directors, provided the basis for such determination shall be disclosed in our Proxy Statement. Based upon the foregoing criteria, the Board has deemed each director to be independent, with the exception of Lawrence J. Aldrich and Larry W. Bickle. See "Transactions with Management and Others" below. TRANSACTIONS WITH MANAGEMENT AND OTHERS Haddington Millennium was authorized by its Board of Directors Energy in 2000 to invest $15 million, in aggregate, over a Partners II LP three- to five-year period in Haddington Energy Partners II LP. Mr. Bickle, a member of ourBoard, is the managing director of Haddington Ventures LLC, the general partner of Haddington Energy Partners II LP. As of December 31, 2003, Millennium had funded approximately $8.5 million under this commitment, $2.4 million of which was funded in 2003. Valley Millennium made a commitment of $5 million capital Ventures plus a share of expenses to Tucson Ventures, LLC, III, LP a venture capital fund, in 2000. Tucson Ventures, LLC merged with Valley Ventures III, LP, also a venture capital fund, in 2002. In connection with the merger of the funds, Millennium's commitment was revised to a total of $6 million, including expenses. Mr. Aldrich, a member of our Board, is a general partner of the company that manages Valley Ventures III, LP. As of December 31, 2003, Millennium had funded approximately $1.2 million under this commitment. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Millennium Energy Mr. Stephen Alexander, an immediate family member of Investments Mrs. Bilby, a member of our Compensation Committee, is employed by Millennium. As Director of Energy Investments, Mr. Alexander assists in overseeing Millennium's investment portfolio. For his services in 2003, Mr. Alexander received compensation of approximately $150,000 from Millennium. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Committee The Compensation Committee is responsible for developing and administering executive compensation policies and programs for UniSource Energy and TEP and making recommendations to the Board with respect thereto. The Compensation Committee makes recommendations to the Board with respect to the compensation of UniSource Energy's executive officers, including Mr. Pignatelli and the other Named Executives, and sets policies for and reviews the compensation awarded to other key members of management. UniSource Energy applies a consistent philosophy to compensation for all executive employees, including the Named Executives. 23 Overall UniSource Energy's executive compensation policies and Objectives programs generally are intended to (i) relate the compensation of employees to the success of UniSource Energy and the corresponding creation of shareholder value, and (ii) attract, retain and motivate executives and key employees with competitive compensation opportunities. Executive The Compensation Committee reviews our Compensation executives' compensation each year. Compensation Generally depends on many factors, including individual performance, responsibilities, future challenges and objectives and the executive's potential contribution to our future success. The Compensation Committee also looks at our financial performance and the compensation levels at comparable companies. UniSource Energy's 2003 compensation program consisted of three components: o base salary; o short-term incentive compensation; and o long-term incentive compensation. Base Salary The base salary component of compensation is intended to be competitive with that paid by comparable companies in the energy industry. In developing the compensation program, the Compensation Committee retained an external consultant to conduct a competitive analysis of pay for UniSource Energy's officer group. In conducting its analysis for 2003, the consultant selected a peer group of energy companies with a revenue range of $264 million to $6 billion. UniSource Energy ranks at the 37th percentile of the peer group. Twenty-one of the 25 peer group companies have both regulated utility and non-regulated energy businesses. The Compensation Committee believes the companies in the comparator group are a more appropriate comparison for UniSource Energy than the Edison Electric 100 companies used in the Performance Graph on page 28 of this Proxy Statement, because the type of business and annual revenues of the companies included in the survey are more closely related to those of UniSource Energy and the companies in the comparator group represent primary competitors to UniSource Energy for top-level management personnel. The external data from companies in the comparator group was used to develop market compensation for each executive position. "Market compensation" refers to the median salary for executives in the comparator group. Base salaries for UniSource Energy's executive officers, including Mr. Pignatelli and the other Named Executives, were set at market compensation levels in January 2003, in recognition of the increasingly competitive environment in the electric industry, the need to continue to attract and retain highly qualified executives and the fact that a substantial portion of each executive's total compensation package is "at-risk," based on the achievement of certain corporate goals. See "Short-Term Incentive Compensation and Long-Term Incentive Compensation" below. Short-Term The Board adopted a Short-Term Incentive Plan to Incentive provide compensation for meeting or exceeding Compensation specified objectives designed to contribute to the attainment of UniSource Energy's performance targets and long-term strategic plan. Under the Short-Term Incentive Plan, target award levels are set as a percentage of each participant's base salary. In 2003, the target award levels for our executive officers ranged from 30% to 70% of base salary. Awards for Mr. Pignatelli and the remaining executive officers are determined by the Board 24 based on the accomplishment of previously established individual goals and contribution to business results. Based on the foregoing factors, the Compensation Committee made awards to the Named Executives ranging from 56% to 92% of base salary. Incentive compensation awarded to Mr. Pignatelli and the other Named Executives is set forth in the preceding Summary Compensation Table. Long-Term UniSource Energy's long-term incentive compensation Incentive is intended to attract and retain quality employees Compensation over the long-term in a manner that directly aligns them with shareholder interest. At the recommendation of the Compensation Committee, the Board unanimously adopted and, at the 1994 annual meeting of the shareholders, the shareholders approved the Tucson Electric Power Company (now UniSource Energy) 1994 Omnibus Stock and Incentive Plan. On May 9, 2003, the Compensation Committee issued stock options (intended to be incentive stock options), performance shares (denominated in shares) and performance units (denominated in cash) to all executive officers of UniSource Energy, including Mr. Pignatelli and the other Named Executives. In calculating the level of awards to the executive officers, the Compensation Committee considered the above analysis of executive compensation for comparative companies. Based on such analysis, the Compensation Committee awarded Mr. Pignatelli and the other Named Executives stock options, performance shares and performance units with a total value equal to 100% of base salary for target performance. The number of UniSource Energy shares covered by the stock option grant to Mr. Pignatelli was 21,226, the number of performance shares was 18,370, and the number of performance units was 189,000. See "2003 Long-Term Incentives Plan Awards" on page 14 of this Proxy Statement for a discussion of the performance criteria upon which the payout of performance shares and performance units is dependent. In determining the 2003 long-term incentive awards, the Compensation Committee did not consider the number of options previously granted or outstanding. Tax Code The Compensation Committee does not presently have a Concerns policy regarding qualifying compensation paid to executive officers for deductibility under Section 162(m) of the Code. Respectfully submitted, THE COMPENSATION COMMITTEE H. Wilson Sundt, Chair (1/03-5/03) Harold W. Burlingame, Chair (6/03-12/03) Elizabeth T.Bilby John L. Carter Robert A. Elliott Kenneth Handy Warren Y. Jobe 25 AUDIT COMMITTEE REPORT The Committee The Audit Committee is made up of five financially literate directors who are independent based upon independence criteria established by our Board, which criteria is in compliance with applicable New York Stock Exchange listing standards. Our Board has determined that each member of the Audit Committee has accounting and/or related financial management expertise and as such has not designated any single Audit Committee member as the Audit Committee "financial expert." However, our Board anticipates that it will formally designate one member of the Audit Committee to be the Audit Committee "financial expert" at its May 2004 Board meeting. The Board previously adopted a written charter for the Audit Committee. The Committee has complied with its charter, including the requirement to meet periodically with our independent auditors, internal audit department and management to discuss the auditors' findings and other financial and accounting matters. In connection with our December 31, 2003 financial statements, the Audit Committee has (i) reviewed and discussed the audited financial statements with management; (ii) discussed with PricewaterhouseCoopers, LLP, our independent auditor, the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU Sec. 380); (iii) received from PricewaterhouseCoopers, LLP the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees); and (iv) discussed with PricewaterhouseCoopers, LLP its independence. Based on all of its activities during the year, the Audit Committee recommended to the Board that the audited financial statements for 2003 be included in the Annual Report on Form 10-K for filing with the SEC. Pre-Approved Rules adopted by the SEC in order to implement Policies requirements of the Sarbanes-Oxley Act of 2002 and Procedures require public company audit committees to pre-approve audit and non-audit services. Our Audit Committee has adopted a policy pursuant to which audit, audit-related, tax and other services are pre-approved by category of service. Recognizing that situations may arise where it is in our best interest for the auditor to perform services in addition to the annual audit of our financial statements, the policy sets forth guidelines and procedures with respect to approval of the four categories of service designed to achieve the continued independence of the auditor when it is retained to perform such services for us. The policy requires the Audit Committee to be informed of each service and does not include any delegation of the Audit Committee's responsibilities to management. The Audit Committee may delegate to the Chairman of the Audit Committee the authority to grant pre-approvals of audit and non-audit services requiring Audit Committee approval where the Audit Committee Chairman believes it is desirable to pre-approve such services prior to the next regularly scheduled Audit Committee meeting. The decisions of the Audit Committee Chairman to pre-approve any such services from one regularly scheduled Audit Committee meeting to the next shall be reported to the Audit Committee. 26 Fees The following table details fees paid to PricewaterhouseCoopers, LLP for professional services during 2002 and 2003. The Audit Committee has considered whether the provision of services to us by PricewaterhouseCoopers, LLP, beyond those rendered in connection with their audit and review of our financial statements, is compatible with maintaining their independence as auditors.

2002 2003 ---- ---- Audit Fees $821,739 $1,030,489 Audit-Related Fees $194,989 $713,470 Tax Fees $62,453 $55,466 All Other Fees $39,812 $2,598

Fees for audit services include fees for the audit of our consolidated financial statements included in our Annual Report on Form 10-K and review of financial statements included in our quarterly reports on Form 10-Q, comfort letters, consents and other services related to SEC matters and financing transactions, statutory and regulatory audits, and accounting consultations to the extent necessary for PricewaterhouseCoopers, LLP to fulfill their responsibilities under generally accepted auditing standards. Audit-related fees principally include accounting and electric system assets from Citizens Communications Company on August 11, 2003 and due diligence related to the Springerville expansion and proposed acquisition of UniSource Energy by an affiliate of Saguaro Utility. Tax fees include tax compliance, tax advice, and tax planning. All other fees principally include accounting training. Amounts previously reported for 2002 have been reclassified to conform to the categories required for 2003. Respectfully submitted, THE AUDIT COMMITTEE Warren Y. Jobe, Chair Elizabeth T. Bilby John L. Carter Robert A. Elliott Kenneth Handy 27 PERFORMANCE GRAPH Comparison of Cumulative Five-Year Total Return Among UniSource Energy, Standard & Poor's 500 Index and EEI Index of 64 Investor-Owned Utilities (1) The graph showing on the hard copy represents the comparison of four year cumulative total return between UniSource Energy Corporation, the S&P 500 Index, and EEI Index of 100 investor-owned utilities. The graph's X-axis shows the years 1998 to 2003, and the Y-axis shows dollar values from zero to 250. The data points are connected by lines with the following markers: UniSource Energy Corporation - triangles; S&P 500 - diamonds; EEI Index - 100 Electrics - squares. The data points are as follows:

1998 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- ---- UniSource Energy Corporation $100 $83 $142 $141 $137 $202 S&P 500 Index $100 $121 $120 $110 $76 $97 EEI Index - 100 Electrics $100 $81 $110 $97 $94 $116 (1) Assumes $100 invested on December 31, 1998 in UniSource Energy Corporation common stock, S&P Index and EEI Index. It is assumed that all dividends are reinvested in stock at the frequency paid and the returns of each component peer group issuer are weighted according to the issuer's stock market capitalization at the beginning of the period.

Data and Calculations 1999 2000 2001 2002 2003 --------------------- ---- ---- ---- ---- ---- S&P 500 Total Return Change 21.04% -9.10% -11.89% -22.10% 28.69% EEI Index - 64 Electrics Change -18.60% 47.97% -8.79% -14.73% 23.48% UniSource Energy Change -17.13% 71.80% -1.30% -2.20% 46.72%

28 SUBMISSION OF SHAREHOLDER PROPOSALS General Rule 14a-4 of the SEC's proxy rules allows us to use discretionary voting authority to vote on a matter coming before an annual meeting of our shareholders, which was not included in our Proxy Statement (if we do not have notice of the matter at least 45 days before the date on which we first mailed our proxy materials for the prior year's annual meeting of the shareholders). In addition, we may also use discretionary voting authority if we receive timely notice of such matter (as described in the preceding sentence) and if, in the Proxy Statement, we describe the nature of such matter and how we intend to exercise our discretion to vote on it. Accordingly, for our 2005 annual meeting of shareholders, any such notice must be submitted to the Corporate Secretary of UniSource Energy on or before February 24, 2005 (assuming that the acquisition of UniSource Energy is not completed prior to such date). We must receive your This requirement is separate and apart from the SEC's shareholder proposals requirements that a shareholder must meet in order to by December 10, 2004. have a shareholder proposal included in our Proxy Statement. Shareholder proposals intended to be presented at our 2005 annual meeting of the shareholders (assuming that the acquisition of UniSource Energy is not completed prior to our 2005 annual meeting of shareholders) must be received by us no later than December 10, 2004 (assuming that the acquisition of UniSource Energy is not completed prior to such date), in order to be eligible for inclusion in our Proxy Statement and the form of proxy relating to that meeting. Direct any proposals, as well as related questions, to the undersigned. OTHER BUSINESS The Board knows of no other matters for consideration at the Meeting. If any other business should properly arise, the persons appointed in the enclosed proxy have discretionary authority to vote in accordance with their best judgment. Copies of our 2003 Annual Report on Form 10-K may be obtained by shareholders, without charge, upon written request to Library and Resource Center, UniSource Energy Corporation, 3950 East Irvington Road, Mail Stop RC114, Tucson, Arizona 85714. You may also obtain our SEC filings through the Internet at www.sec.gov or www.UniSourceEnergy.com. By order of the Board of Directors, /s/ Catherine A. Nichols ------------------------ Catherine A. Nichols Corporate Secretary PLEASE VOTE - YOUR VOTE IS IMPORTANT 29 APPENDIX A December 4, 2003 UNISOURCE ENERGY CORPORATION COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS CHARTER 1. COMPOSITION The Compensation Committee of the Board of Directors consists of not fewer than three Directors appointed annually by the Board. All members of the Committee shall be determined to be independent in accordance with the NYSE Listed Company Manual. The Board shall designate one of the Committee members as Chairman of the Committee. 2. MEMBER QUALIFICATIONS A Director shall be qualified to serve on the Committee if he or she qualifies as independent under the NYSE Listed Company Manual. 3. MEMBER APPOINTMENT AND REMOVAL All members of the Committee shall be appointed and/or removed by the Corporate Governance & Nominating Committee. 4. MEETINGS The Committee will hold at least three regular meetings each year, and such additional meetings, as it may deem necessary. In addition to the Committee members and the Secretary, the Chairman of the Board, Chief Executive Officer and President and other members of management may attend as is appropriate. 5. RULES OF PROCEDURE The Committee will determine its own rules of procedure with respect to how its meetings are to be called, as well as the place, time and frequency. In the absence of such rules, the Committee will meet at the call of its Chairman as is required to accomplish the purposes of the Committee. 6. COMPENSATION Each member will be paid for each meeting attended the same fee paid for attendance at other Committee meetings of the Board, and will be reimbursed for travel expenses incurred by attendance at meetings. 7. COMMITTEE SECRETARY The Secretary of the Committee will be the Asst. Corporate Secretary of the Company (or such other officer as the Committee may designate) and not be a member of the Committee. The Secretary will attend all meetings and maintain minutes, advise members of all meetings called, arrange with the Chairman or other convening authority for preparation and distribution of the agenda for each meeting, and carry out other functions as may be assigned from time to time by the Committee. At such meetings where attendance by a Company officer is not appropriate, the Chairman shall act as secretary of the meeting or appoint another member of the Committee to act as secretary of such meetings. A-1 8. QUORUM A majority of the total membership of the Committee will constitute a quorum. 9. RESPONSIBILITIES The function of the Committee is to assure an internally consistent and externally competitive executive compensation program in order to attract, motivate and retain qualified executives. It is also the Committee's function to provide incentives for the attainment of the Company's strategic goals and objectives and to produce a report on executive compensation for inclusion in the Proxy Statement of the Company. For purposes of the Committee's responsibilities, executives are defined as all officers of the Company. 10. SPECIFIC DUTIES OF THE COMMITTEE 1. Approve the compensation philosophy and guidelines for the executive group, including base salary structure, incentive compensation, and long range strategic incentive programs to attract, retain and motivate executives. 2. Review and approve corporate goals and objectives relating to CEO compensation. 3. Evaluate CEO performance in light of corporate goals and objectives and set CEO compensation level based upon evaluation of the performance of such goals and objectives. 4. Review and approve, based on reviews of compensation practices in related and other industries, the appropriate compensation levels including fringes and other benefits for the CEO. 5. Receive the CEO's recommendations, review and approve compensation for all of the Company's executives, including any equity compensation awarded, fringes and other benefits, and the ability to delegate action to Management in conjunction with the aforementioned compensation. 6. Review and approve any management incentive plans, including the participants, goals, payout ratios, etc., which involve executives of the Company. 7. Administer the Company's long range incentive plan, including selection of participants, setting of objectives, and determination of awards, as more fully defined in such plan. Recommend changes to the long range incentive program as deemed necessary considering the Company's performance, relative shareholder return, value of similar awards at similar companies and awards given to the Company's CEO in past years. 8. Review and approve any special employment contract or other special agreement, such as a supplementary pension agreement, for any of the Company's executives. 9. Produce an annual report, in accordance with applicable rules and regulations, on executive compensation for inclusion in the proxy statement. 10. Periodically, receive a briefing by management regarding the administration and appropriateness of the total rewards package including base, short-term and long-term compensation and health and welfare plans, for non-executive employees. 11. Review and approve Director compensation, including short- and long-term incentives. A-2 12. Review and approve policy for reimbursement of Director expenses. 13. As necessary, carry out other duties assigned by the Board to the Committee that are related to compensation and management development. 14. Retain and terminate any consulting firms to be used to assist in the evaluation of director, CEO or executive compensation. This authority shall be exclusive to this Committee. 15. Annually review its performance as a Committee. 11. RESPONSIBILITIES OF THE CHAIRMAN The Chairman of the Committee will present the Committee's recommendations to the Board for its approval and periodically provide the Board, for its information, with a summary of the Committee's determinations and approvals. 12. RESPONSIBILITIES OF THE CHIEF EXECUTIVE OFFICER The Chief Executive Officer of the Company will advise and make recommendations to the Committee and, in the normal course, attend all meetings of the Committee, with the exception of that portion of any meeting where compensation of the Chief Executive Officer is considered. It is also the responsibility of the Chief Executive Officer to coordinate the implementation and execution of Committee determinations. 13. OTHER AUTHORITY The Committee may call upon any person including employees of the Company or its subsidiaries, knowledgeable in matters discussed by the Committee, for information and counsel. 14. ANNUAL SCHEDULE The routine business of the Committee shall be considered in accordance with the Annual Schedule attached as Exhibit A. A-3 EXHIBIT A 11/03 COMPENSATION COMMITTEE ANNUAL SCHEDULE February Review prior year performance under short term incentive program and determine awards Review current year Performance Enhancement Plan Approve report of Committee for inclusion in Proxy August Meet with consultant re upcoming review of Director and Officer compensation October Review of compensation for Directors and Officers December Establish director retainer and meetings fees to be effective January 1st of following year. Establish Officer compensation for following year. Review corporate goals and objectives for following year (The dates on the above schedule are subject to change.) A-4 APPENDIX B February 5, 2004 UNISOURCE ENERGY CORPORATION CORPORATE GOVERNANCE AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS CHARTER 1. COMPOSITION The Corporate Governance and Nominating Committee of the Board of Directors (the "Committee") consists of not fewer than three Directors appointed annually by the Board. All members of the Committee shall be determined to be independent in accordance with the NYSE Listed Company Manual. The Board shall designate one of the Committee members as Chairman of the Committee. 2. QUALIFICATIONS A Director shall be qualified to serve on the Committee if he or she qualifies as independent under the Company's Director Independence Criteria. 4. APPOINTMENT AND REMOVAL OF COMMITTEE MEMBERS All members of the Committee shall be appointed and/or removed by the Board of Directors. 5. MEETINGS The Committee will meet regularly to prepare for any upcoming vacancies on the Board of Directors and to address corporate governance. In addition to the Committee members and the Secretary, the Chairman of the Board, Chief Executive Officer and President and other members of the Board and management may attend as appropriate. 6. RULES OF PROCEDURE The Committee will determine its own rules of procedure with respect to how its meetings are to be called, as well as the place, time and frequency. In the absence of such rules, the Committee will meet at the call of its Chairman as is required to accomplish the purposes of the Committee. 7. COMPENSATION Each member will be paid such fees as may be established from time to time by the Board for service on the Committee, and will be reimbursed for travel expenses incurred by attendance at meetings. 8. COMMITTEE SECRETARY The Secretary of the Committee will be the Asst. Corporate Secretary of the Company (or such other representative of management as the Committee may designate) and will not be a member of the Committee. The Secretary will attend all meetings and maintain minutes, advise members of all meetings called, arrange with the Chairman or other convening authority for preparation and distribution of the agenda for each meeting, and carry out other functions as may be assigned from time to time by the Committee. At such B-1 meetings where attendance by a Company representative is not appropriate, the Chairman shall act as secretary of the meeting or appoint another member of the Committee to act as secretary of such meetings. 9. QUORUM A majority of the total membership of the Committee will constitute a quorum. 10. RESPONSIBILITIES AND SPECIFIC DUTIES OF THE COMMITTEE The functions of the Committee shall be: 1. Regularly review and assess the current Board membership as to size, skills and upcoming vacancies. 2. Make recommendations to the Board with respect to desired background, skill sets, experience and characteristics of Board members, as well as continuing education, conferences and seminars that Directors might attend to enhance their skill sets. 3. Regularly review and/or update the Candidate Evaluation Form. 4. Fill vacancies on Board of Directors by gathering and reviewing information on potential Board members; interviewing potential Board candidates; and, recommending potential Board members to the Board of Directors. 5. Review and approve all UniSource Board committee members and board members of major subsidiaries. 6. Annually review and recommend for approval corporate governance principles. 7. Facilitate periodic evaluation of the Board's collective performance. 8. Annually evaluate the performance of this Committee. 9. To retain and terminate any search firms to be used to identify director candidates including any terms of retention. This authority shall be exclusive to this Committee. 10. Annually review and approve modifications to the Company Board Manual. 11. RESPONSIBILITIES OF THE CHAIRMAN The Chairman of the Committee will present the Committee's recommendations to the Board for its approval and periodically provide the Board, for its information, with a summary of the Committee's determinations and approvals. 12. RESPONSIBILITIES OF THE CHIEF EXECUTIVE OFFICER The Chief Executive Officer of the Company will advise and make recommendations to the Committee and, in the normal course, attend all meetings of the Committee. 13. OTHER AUTHORITY The Committee may call upon any person including employees of the Company or its subsidiaries, knowledgeable in matters discussed by the Committee, for information and counsel. B-2 APPENDIX B FORM OF PROXY CARD UNISOURCE ENERGY YOUR VOTE IS IMPORTANT VOTE BY TELEPHONE OR INTERNET 24 HOURS A DAY - 7 DAYS A WEEK INTERNET -------- https://www.proxyvotenow.com/uns - Go to the website address listed above. - Have your proxy card ready. - Follow the simple instructions that appear on your computer screen. OR TELEPHONE --------- 1-866-358-4695 - Use any touch-tone telephone. - Have your proxy card ready. - Follow the simple recorded instructions. OR MAIL ---- - Mark, sign and date your proxy card. - Detach your proxy card. - Return your proxy card in the postage-paid envelope provided. You can vote your shares by telephone, the Internet, mail or in person at the Annual Shareholders' Meeting. Your telephone or Internet vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card. If you have submitted your proxy by the Internet or telephone there is no need to mail your proxy card. 1-866-358-4695 CALL TOLL-FREE TO VOTE ------------------------------- THE INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M. E.S.T. ON THURSDAY, MAY 6, 2004. DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY THE INTERNET OR TELEPHONE. ------------------------------------------------------------------------------- (FORM OF PROXY CARD - FRONT) Please Sign, Date and Return [X] the Proxy Promptly Using the Votes MUST be indicated (x) Enclosed Envelope. in Black or Blue Ink. The Board of Directors Recommends a vote "FOR" the following proposal: 1. Election of Directors FOR all nominees WITHHOLD AUTHORITY to vote *EXCEPTIONS [ ] listed below for all nominees listed [ ] below [ ] Nominees: 01-James S. Pignatelli, 02-Lawrence J. Aldrich, 03-Larry W. Bickle, 04-Elizabeth T.Bilby, 05-Harold W. Burlingame, 06-John L. Carter, 07-Robert A. Elliott, 08-Kenneth Handy, 09-Warren Y. Jobe (INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the "Exceptions" box and write that nominee's name in the space provided below). *Exceptions ------------------------------------------------------------------ If you agree to access our Annual Report and Proxy Statement electronically in the future, please mark this box. [ ] To change your address, please mark this box. [ ] To include any comments, please mark this box. [ ] ----------------------------------- SCAN LINE ----------------------------------- PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. When shares are held by joint tenants in common or as community property, both should sign. When signing as attorney, executor, administrator, trustee, guardian or custodian, please give full title as such. If a corporation, please sign in corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Receipt is hereby acknowledged of Notice of Annual Meeting, Proxy Statement and the 2003 Annual Report. Date Shareholder sign here ---------------------------------------- Date Co-Owner sign here ---------------------------------------- ------------------------------------------------------------------------------- C-1 [A street map showing the location Marriott University Park Hotel of the Annual Shareholders' Meeting 880 East Second Street is set forth in this area.] Tucson, AZ 85719 520.792.4100 Hotel Direct 800.228.9290 Reservations TRANSPORTATION From Tucson International Airport Shuttle Service Arizona Stagecoach Call 520-889-1000 Automobile - Interstate 10 to Speedway exit DEAR SHAREHOLDERS: If you previously elected to view the UniSource Energy Corporation Proxy Statements and Annual Reports over the Internet instead of receiving copies in the mail, you can now access the Proxy Statement for the 2004 Annual Shareholders' Meeting and the 2003 Annual Report on the Internet through the following address: http://www.UniSourceEnergy.com. You can vote your shares by telephone, the Internet, Mail or in Person at the Annual Shareholders' Meeting. See the Proxy Statement and the enclosed proxy card for further information about voting procedures. If you would like a paper copy of the Proxy Statement and Annual Report, UniSource Energy will provide a copy to you upon request. To obtain a copy of these documents, please call 866-275-4867. ------------------------------------------------------------------------------- (FORM OF PROXY CARD - BACK) UNISOURCE ENERGY This Proxy is Solicited on Behalf of the Board of Directors of the Company for the Annual Shareholders' Meeting to be held Friday, May 7, 2004. P R O X Y The undersigned hereby appoints James S. Pignatelli and Kevin P. Larson, and each of them, with the power of substitution, to represent and to vote on behalf of the undersigned all shares of Common Stock which the undersigned is entitled to vote at the Annual Shareholders' Meeting scheduled to be held at the Marriott University Park Hotel, 880 East Second Street, Tucson, Arizona, on Friday, May 7, 2004, and at any adjournments or postponements thereof, with all powers the undersigned would possess if personally present and in their discretion, upon such other business as may properly come before the meeting. This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" Proposal 1. C-2