Amended and Restated Pledge Agreement


    Exhibit
      4.2

    


    


    AMENDED
      AND RESTATED PLEDGE AGREEMENT

     

    


    This
      AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of August 11, 2006 (the
“Pledge
      Agreement”),
      between UNISOURCE ENERGY CORPORATION, an Arizona corporation (the “Pledgor”
or
      the
“Borrower”),
      and
      UNION BANK OF CALIFORNIA, N.A., as administrative agent (in such capacity,
      the
“Administrative
      Agent”)
      for
      the lenders (the “Lenders”)
      from
      time to time parties to the Amended and Restated Credit Agreement, dated as
      of
      August 11, 2006 (as the same may be amended, supplemented or otherwise modified
      from time to time, the “Credit
      Agreement”),
      among
      the Borrower, the Lenders, The Bank of New York and JPMorgan Chase Bank, N.A.,
      as Co-Syndication Agents, Wells Fargo Bank, National Association and ABN AMRO
      Bank N.V., as Co-Documentation Agents, and the Administrative
      Agent.

     

    Recitals

     

    A.     The
      Pledgor and the Administrative Agent previously entered into that certain Pledge
      Agreement, dated as of April 15, 2005 (as amended, supplemented or otherwise
      modified from time to time prior to the date hereof, the “Existing
      Pledge Agreement”).
      

     

    B. Pursuant
      to the Credit Agreement, the Lenders have severally agreed to make Loans and
      other extensions of credit (collectively, the “Extensions
      of Credit”)
      to the
      Borrower upon the terms and subject to the conditions set forth therein. One
      or
      more Lenders or affiliates of Lenders may from time to time enter into Hedge
      Agreements (as defined in the Credit Agreement) with the Borrower.

     

    C.     It
      is a
      condition precedent to the obligation of the Lenders to make their respective
      Extensions of Credit to the Borrower under the Credit Agreement that the Pledgor
      shall have executed and delivered this Pledge Agreement to the Administrative
      Agent for the benefit of the Lenders.

     

    D.     The
      Pledgor is the legal and beneficial owner of the shares of stock, membership
      interests, partnership interests or similar equity interests, as the case may
      be
      (such shares of stock, membership interests, partnership interests or similar
      equity interests, as the case may be, together with any shares of stock,
      membership interests, partnership interests or similar equity interests, as
      the
      case may be, described in Section 8(b), the “Pledged
      Shares”),
      described on Schedule I hereto, as such Schedule may be updated or amended
      from
      time to time, and issued by the Persons named therein, which Pledged Shares
      constitute the percentage of all the issued and outstanding shares of capital
      stock, membership interests, partnership interests or similar equity interests,
      as the case may be, of such Persons identified on such Schedule I, as such
      Schedule may be updated or amended from time to time. The Pledgor is the legal
      and beneficial owner of the Indebtedness owed to the Pledgor from any Subsidiary
      (such Indebtedness, together with any future Indebtedness at any time owed
      to
      the Pledgor from any Subsidiary, the “Pledged
      Debt”)
      described on Schedule II hereto, as such Schedule may be updated or amended
      from
      time to time.

     

    
      
        
        

      

      
        B-1

        
          

        

      

      
        
        

      

    

     

    Agreement

     

    NOW,
      THEREFORE, in consideration of the premises and to induce the Administrative
      Agent, the Co-Syndication Agents, the Co-Documentation Agents and the Lenders
      to
      enter into the Credit Agreement and to make Loans thereunder, and for other
      good
      and valuable consideration, the receipt and sufficiency of which are hereby
      acknowledged, the Pledgor hereby agrees with the Administrative Agent, for
      the
      benefit of the Lenders, that the Existing Pledge Agreement is hereby amended
      and
      restated, without novation, as follows:

     

    1.     Defined
      Terms.

     

    (a)     Unless
      otherwise defined herein, terms defined in the Credit Agreement and used herein
      shall have the meanings given to them in the Credit Agreement.

     

    (b)     As
      used
      herein, the term “Obligations”
means
      the collective reference to (i) the unpaid principal of and interest on the
      Loans and all other obligations and liabilities of any nature of the Borrower
      to
      the Administrative Agent or any Lender (including, without limitation, interest
      accruing at the then-applicable rate provided in the Credit Agreement after
      the
      maturity of the Loans and interest accruing at the then-applicable rate provided
      in the Credit Agreement after the filing of any petition in bankruptcy, or
      the
      commencement of any insolvency, reorganization or like proceeding, relating
      to
      the Borrower, whether or not a claim for post-filing or post-petition interest
      is allowed in such proceeding), whether direct or indirect, absolute or
      contingent, due or to become due, now existing or hereafter incurred, that
      may
      arise under, out of, or in connection with, the Credit Agreement, the other
      Loan
      Documents or any other documents made, delivered or given in connection
      therewith, whether on account of principal, interest, reimbursement obligations,
      fees, indemnities, costs, expenses or otherwise (including, without limitation,
      all fees and disbursements of counsel to the Administrative Agent or to the
      Lenders that are required to be paid by the Borrower or any Subsidiary pursuant
      to the terms of the Credit Agreement or any other Loan Document) and (ii) all
      obligations and liabilities of the Borrower to any Lender or any affiliate
      of a
      Lender, whether direct or indirect, absolute or contingent, due or to become
      due, now existing or hereafter incurred, that may arise under, out of, or in
      connection with, any Specified Hedge Agreement or any other document made,
      delivered or given in connection therewith.

     

    (c)     References
      to “Lenders” in this Pledge Agreement shall be deemed to include affiliates of
      Lenders that may from time to time enter into Specified Hedge Agreements with
      the Borrower.

     

    (d)     The
      words
“hereof,” “herein” and “hereunder” and words of similar import when used in this
      Pledge Agreement shall refer to this Pledge Agreement

     

    
      
        
        

      

      
        B-2

        
          

        

      

      
        
        

      

    

     

     as
      a whole and not to any particular provision of this Pledge Agreement, and
      Section references are to Sections of this Pledge Agreement unless otherwise
      specified.

     

    (e)     The
      meanings given to terms defined herein shall be equally applicable to both
      the
      singular and plural forms of such terms.

     

    2.     Grant
      of Security.
      The
      Pledgor hereby transfers, assigns and pledges to the Administrative Agent for
      the benefit of the Lenders, and hereby grants to the Administrative Agent for
      the benefit of the Lenders a security interest in, the following, whether now
      owned or existing or hereafter acquired or existing (collectively, the
“Collateral”):

     

    (a)     the
      Pledged Shares and the certificates representing the Pledged Shares and any
      interest of the Pledgor in the entries on the books of any financial
      intermediary pertaining to the Pledged Shares, and all dividends, cash,
      warrants, rights, instruments and other property or proceeds from time to time
      received, receivable or otherwise distributed in respect of or in exchange
      for
      any or all of the Pledged Shares;

     

    (b)     the
      Pledged Debt and the instruments evidencing the Pledged Debt, and all interest,
      cash, instruments and other property or proceeds from time to time received,
      receivable or otherwise distributed in respect of or in exchange for any or
      all
      of the Pledged Debt; and

     

    (c)     to
      the
      extent not covered by clauses (a) and (b) above, respectively, all proceeds
      of
      any or all of the foregoing Collateral. For purposes of this Pledge Agreement,
      the term “proceeds” includes whatever is receivable or received when Collateral
      or proceeds are sold, exchanged, collected or otherwise disposed of, whether
      such disposition is voluntary or involuntary, and includes, without limitation,
      proceeds of any indemnity or guaranty payable to the Pledgor or the
      Administrative Agent from time to time with respect to any of the
      Collateral.

     

    3.     Security
      for Obligations.
      This
      Pledge Agreement secures, and the Collateral is collateral security for, the
      payment of all Obligations. Without limiting the generality of the foregoing,
      this Pledge Agreement secures the payment of all amounts that constitute part
      of
      the Obligations and would be owed by the Pledgor to the Administrative Agent
      or
      the Lenders under the Loan Documents but for the fact that they are
      unenforceable or not allowable due to the existence of a bankruptcy,
      reorganization or similar proceeding involving the Pledgor.

     

    4.     Delivery
      of the Collateral.
      All
      certificates or instruments, if any, representing or evidencing the Collateral
      shall be promptly delivered to and held by or on behalf of the Administrative
      Agent pursuant hereto and shall be in suitable form for transfer by delivery,
      or
      shall be accompanied by duly executed instruments of transfer or assignment
      in
      blank, all in form and substance reasonably satisfactory to the Administrative
      Agent. The Administrative Agent shall have the right, at any time after the
      occurrence and during the continuance of an Event of Default and without notice
      to the Pledgor, to transfer to or to register in the name of the Administrative
      Agent or any of its nominees any or all of the Pledged Shares.

     

    
      
        
        

      

      
        B-3

        
          

        

      

      
        
        

      

    

     

    5.     Representations
      and Warranties.
      The
      Pledgor represents and warrants as follows:

     

    (a)     The
      Pledged Shares set forth on Schedule I hereto represents the percentage of
      all
      the issued and outstanding Capital Stock of each domestic Subsidiary directly
      owned by the Pledgor as identified on Schedule I, as such Schedule may be
      updated or amended from time to time.

     

    (b)     The
      Pledged Debt set forth on Schedule II hereto (as such Schedule may be updated
      or
      amended from time to time) represents all Indebtedness of any Subsidiary owed
      to
      the Pledgor.

     

    (c)     The
      Pledgor is the legal and beneficial owner of the Collateral, as indicated on
      Schedule I and Schedule II, as such Schedules may be updated or amended from
      time to time, pledged or assigned by the Pledgor hereunder free and clear of
      any
      Lien, except for the Lien created by this Pledge Agreement or Liens permitted
      under Section 8 hereof.

     

    (d)     As
      of the
      date of this Pledge Agreement, the Pledged Shares pledged by the Pledgor
      hereunder have been duly authorized and validly issued and are fully paid and
      non-assessable.

     

    (e)     The
      execution and delivery by the Pledgor of this Pledge Agreement and the creation
      of a security interest in the Collateral pledged by the Pledgor hereunder
      pursuant hereto create a valid and perfected first priority security interest
      in
      the Collateral, prior to any other Liens, securing the payment of the
      Obligations.

     

    (f)     The
      Pledgor has full power, authority and legal right to create a security interest
      in all the Collateral pledged by the Pledgor pursuant to this Pledge Agreement
      and will defend its and the Administrative Agent’s title or interest thereto or
      therein (and in the proceeds thereof) against any and all Liens (other than
      the
      Lien of this Pledge Agreement), however arising, or any and all Persons
      whomsoever.

     

    (g)     No
      authorization, approval or other action by, and no notice to or filing with,
      any
      Government Authority or regulatory body, other than the filing of a UCC-1
      financing statement with the Arizona Secretary of State, is required for either
      (i) the pledge by the Pledgor of the Collateral pursuant to this Pledge
      Agreement and the grant by the Pledgor of the security interest granted hereby,
      (ii) except as set forth in Section 26, the execution, delivery or performance
      of this Pledge Agreement by the Pledgor or (iii) except as set forth in Section
      26, the exercise by the Administrative Agent of the voting or other rights,
      or
      the remedies in respect of the Collateral, provided for in this Pledge Agreement
      (except as may be required in connection with a disposition of Collateral by
      laws affecting the offering and sale of securities generally).

     

    6.     Further
      Assurances.
      The
      Pledgor agrees that at any time and from time to time, at the expense of the
      Pledgor, it will promptly execute and deliver all further instruments and
      documents, and take all further action, that may be necessary, or that the
      Administrative Agent may reasonably request, in order to perfect and protect
      any
      pledge, assignment or security

     

    
      
        
        

      

      
        B-4

        
          

        

      

      
        
        

      

    

     

    interest
      granted or purported to be granted hereby or to enable the Administrative Agent
      to exercise and enforce its rights and remedies hereunder with respect to any
      Collateral. The Pledgor hereby authorizes the Administrative Agent to file
      one
      or more financing or continuation statements, and amendments thereto, relative
      to all or any part of the Collateral without the signature of the
      Pledgor.

     

    7.     Voting
      Rights, Dividends and Distributions; Etc.

     

    (a)     So
      long
      as no Event of Default shall have occurred and be continuing:

     

    (i)     the
      Pledgor shall be entitled to exercise any and all voting and other consensual
      rights pertaining to the Collateral or any part thereof for any purpose not
      prohibited by the terms of this Pledge Agreement or the other Loan Documents;
      and

     

    (ii)     the
      Administrative Agent shall execute and deliver (or cause to be executed and
      delivered) to the Pledgor all such proxies and other instruments as the Pledgor
      may reasonably request for the purpose of enabling the Pledgor to exercise
      the
      voting and other rights that it is entitled to exercise pursuant to paragraph
      (i) above.

     

    (b)     Subject
      to paragraph (c) below, the Pledgor shall be entitled to receive and retain
      and
      use, free and clear of the Lien of this Pledge Agreement, any and all dividends,
      distributions, principal and interest made or paid in respect of the Collateral;
      provided,
      however,
      that
      any and all dividends and other distributions in equity securities included
      in
      the Collateral shall be, and shall be forthwith delivered to the Administrative
      Agent to hold as, Collateral and shall, if received by the Pledgor, be received
      in trust for the benefit of the Administrative Agent, be segregated from the
      other property or funds of the Pledgor and be forthwith delivered to the
      Administrative Agent as Collateral in the same form as so received (with any
      necessary indorsement).

     

    (c)     Upon
      written notice to the Pledgor by the Administrative Agent following the
      occurrence and during the continuance of an Event of Default (or upon the
      occurrence and during the continuance of an Event of Default under clause (h)
      or
      (i) of Article VII of the Credit Agreement, without any requirement that written
      or any other notice be given), but subject to the terms of Section
      26:

     

    (i)     all
      rights of the Pledgor to exercise or refrain from exercising the voting and
      other consensual rights that it would otherwise be entitled to exercise pursuant
      to Section 7(a)(i) shall cease, and all such rights shall thereupon become
      vested in the Administrative Agent, which shall thereupon have the sole right
      to
      exercise or refrain from exercising such voting and other consensual rights
      during the continuance of such Event of Default;

     

    (ii)     all
      rights of the Pledgor to receive the dividends, distributions and principal
      and
      interest payments that the Pledgor would otherwise be authorized to receive
      and
      retain pursuant to Section 7(b) shall cease, and all

     

    
      
        
        

      

      
        B-5

        
          

        

      

      
        
        

      

    

     

    such
      rights shall thereupon become vested in the Administrative Agent, which shall
      thereupon have the sole right to receive and hold as Collateral such dividends,
      distributions and principal and interest payments during the continuance of
      such
      Event of Default;

     

    (iii)     all
      dividends, distributions and principal and interest payments that are received
      by the Pledgor contrary to the provisions of Section 7(b) and Section 7(c)(ii)
      shall be received in trust for the benefit of the Administrative Agent, shall
      be
      segregated from other funds of the Pledgor and shall forthwith be paid over
      to
      the Administrative Agent as Collateral in the same form as so received (with
      any
      necessary indorsements); and

     

    (iv)     in
      order
      to permit the Administrative Agent to receive all dividends, distributions
      and
      principal and interest payments to which it may be entitled under Section 7(b)
      above, to exercise the voting and other consensual rights that it may be
      entitled to exercise pursuant to Section 7(c)(i) above, and to receive all
      dividends, distributions and principal and interest payments that it may be
      entitled to under Section 7(c)(ii) above, the Pledgor shall, if necessary,
      upon
      written notice from the Administrative Agent, from time to time execute and
      deliver to the Administrative Agent appropriate proxies, dividend payment orders
      and other instruments as the Administrative Agent may reasonably
      request.

     

    8.     Transfers
      and Other Liens Additional Collateral; Etc.

     

    (a)     The
      Pledgor shall not (i) except as expressly permitted by the Credit Agreement,
      sell or otherwise dispose of, or grant any option or warrant with respect to,
      any of the Collateral, (ii) create, incur, assume or suffer to exist any
      consensual Lien upon or with respect to the Capital Stock of TEP, (iii) permit
      UES to create, incur, assume or suffer to exist any consensual Lien upon or
      with
      respect to the Capital Stock of UNS Gas, Inc. or UNS Electric, Inc., or (iv)
      create, incur, assume or suffer to exist any consensual Lien upon or with
      respect to any of the Collateral, except for the Lien under this Pledge
      Agreement, provided
      that in
      the event the Pledgor sells assets or any other Collateral expressly permitted
      by the Credit Agreement and such assets are or include Collateral, the
      Administrative Agent shall release such Collateral to the Pledgor free and
      clear
      of the Lien under this Pledge Agreement concurrently with the consummation
      of
      such sale.

     

    (b)     The
      Pledgor shall (i) cause UES, UED and Millennium not to issue any stock or other
      equity securities in addition to or in substitution for the Pledged Shares
      issued by such Person, except to the Pledgor; (ii) except as expressly permitted
      by the Credit Agreement, cause each other issuer of Pledged Shares not to issue
      any stock or other securities in addition to or in substitution for the Pledged
      Shares issued by such issuer, except to the Pledgor; (iii) pledge hereunder,
      immediately upon its acquisition (directly or indirectly) thereof, any and
      all
      additional shares of stock or other securities of UES, UED, Millennium and,
      to
      the extent required by Section 5.12 of the Credit Agreement, each other direct
      domestic Subsidiary, and 66-2/3% of any and all additional shares of stock
      or
      other securities of each direct foreign Subsidiary, in existence on
      the

     

    
      
        
        

      

      
        B-6

        
          

        

      

      
        
        

      

    

     

    date
      hereof or hereafter created or acquired, and such additional shares of stock
      or
      other securities shall thereafter constitute Pledged Shares for all purposes;
      provided
      that the
      Pledgor shall not be required to pledge, and the Pledged Shares shall not
      include the Capital Stock of, any
      Subsidiary that is subject to regulation as a utility under the laws of any
      state of the United States;
      and
      (iv) pledge hereunder, immediately upon its acquisition or funding thereof,
      any
      and all Indebtedness which pursuant to Section 6.01(a)(v) of the Credit
      Agreement is required to be pledged to the Administrative Agent for the benefit
      of the Lenders.

     

    9.     Administrative
      Agent Appointed Attorney-in-Fact.
      The
      Pledgor hereby irrevocably appoints the Administrative Agent as the Pledgor’s
      attorney-in-fact, with full authority in the place and stead of the Pledgor
      and
      in the name of the Pledgor or otherwise to take any action and to execute any
      instrument, in each case after the occurrence and during the continuance of
      an
      Event of Default, that the Administrative Agent may deem reasonably necessary
      or
      advisable to accomplish the purposes of this Pledge Agreement, including,
      without limitation, to receive, indorse and collect all instruments made payable
      to the Pledgor representing any dividend, distribution or principal or interest
      payment in respect of the Collateral or any part thereof and to give full
      discharge for the same.

     

    10.    The
      Administrative Agent’s Duties.
      The
      powers conferred on the Administrative Agent hereunder are solely to protect
      its
      interest in the Collateral and shall not impose any duty upon it to exercise
      any
      such powers. Except for the safe custody of any Collateral in its possession and
      the accounting for moneys actually received by it hereunder, the Administrative
      Agent shall have no duty as to any Collateral, as to ascertaining or taking
      action with respect to calls, conversions, exchanges, maturities, tenders or
      other matters relative to any Pledged Shares, whether or not the Administrative
      Agent or any Lender has or is deemed to have knowledge of such matters, or
      as to
      the taking of any necessary steps to preserve rights against any parties or
      any
      other rights pertaining to any Collateral. The Administrative Agent shall be
      deemed to have exercised reasonable care in the custody and preservation of
      any
      Collateral in its possession if such Collateral is accorded treatment
      substantially equal to that which the Administrative Agen accords its own
      property consisting of negotiable securities.

     

    11.   Remedies.
      If any
      Event of Default shall have occurred and be continuing, the provisions set
      forth
      below shall apply, subject to the receipt of any required regulatory approvals
      (including, without limitation, any required approvals from the ACC) with
      respect to the portion of the Collateral consisting of the common stock of
      a
      Subsidiary which owns or controls a company subject to regulation as a
      utility:

     

    (a)     The
      Administrative Agent may exercise in respect of the Collateral, in addition
      to
      other rights and remedies provided for herein or otherwise available to it,
      all
      the rights and remedies of a secured party upon default under the Uniform
      Commercial Code in effect in the State of New York at such time (the
“New
      York UCC”)
      (whether or not the New York UCC applies to the affected Collateral) and also
      may without notice except as specified below, sell the Collateral or any part
      thereof in one or more parcels at public or private sale, at any exchange
      broker’s board or at any of the Administrative Agent’s offices or elsewhere, for
      cash, on credit or for future delivery, as such time or times at such price
      or
      prices and upon such other terms as are

     

    
      
        
        

      

      
        B-7

        
          

        

      

      
        
        

      

    

     

    commercially
      reasonable irrespective of the impact of any such sales on the market price
      of
      the Collateral. Each purchaser at any such sale shall hold the property sold
      absolutely free from any claim or right on the part of the Pledgor, and the
      Pledgor hereby waives (to the extent permitted by law) all rights of redemption,
      stay and/or appraisal which it now has or may at any time in the future have
      under any rule of law or statute now existing or hereafter enacted. The Pledgor
      agrees that, to the extent notice of sale shall be required by law, at least
      ten
      days’ notice to the Pledgor of the time and place of any public sale or the time
      after which any private sale is to be made shall constitute reasonable
      notification. The Administrative Agent shall not be obligated to make any sale
      of Collateral regardless of notice of sale having been given. The Administrative
      Agent may adjourn any public or private sale from time to time by announcement
      at the time and place fixed therefor, and such sale may, without further notice,
      be made at the time and place to which it was so adjourned. To the extent
      permitted by law, the Pledgor hereby waives any claim against the Administrative
      Agent arising by reason of the fact that the price at which any Collateral
      may
      have been sold at such a private sale was less than the price that might have
      been obtained at a public sale, even if the Administrative Agent accepts the
      first offer received and does not offer such Collateral to more than one
      offeree.

     

    (b)     All
      cash
      and cash proceeds received by the Administrative Agent in respect of any sale
      of, collection from, or other realization upon, all or any part of the
      Collateral may, in the discretion of the Administrative Agent, be held by the
      Administrative Agent as collateral for, and/or then or at any time thereafter
      applied (after payment of any amounts payable to the Administrative Agent
      pursuant to Section 9.03 of the Credit Agreement) in whole or in part by the
      Administrative Agent for the benefit of the Lenders against, all or any part
      of
      the Obligations in such order as the Administrative Agent shall elect. Any
      surplus of such cash or cash proceeds held by the Administrative Agent and
      remaining after payment in full of all the Obligations shall be paid over to
      the
      Pledgor or to any other Person that may be lawfully entitled to receive such
      surplus.

     

    (c)     The
      Administrative Agent may exercise any and all rights and remedies of the Pledgor
      in respect of the Collateral.

     

    (d)     All
      payments received by the Pledgor after the occurrence and during the continuance
      of an Event of Default in respect of the Collateral shall be received in trust
      for the benefit of the Administrative Agent, shall be segregated from other
      funds of the Pledgor and shall be forthwith paid over to the Administrative
      Agent in the same form as so received (with any necessary
      indorsement).

     

    12.     Amendments,
      etc. with Respect to the Obligations; Waiver of Rights.
      The
      Pledgor shall remain obligated hereunder notwithstanding that, without any
      reservation of rights against the Pledgor and without notice to or further
      assent by the Pledgor, any demand for payment of any of the Obligations made
      by
      the Administrative Agent or any Lender may be rescinded by such party and any
      of
      the Obligations continued, and the Obligations, or the liability of any other
      party upon or for any part thereof, or any collateral security or guarantee
      therefor or right of offset with respect thereto, may, from time to time, in
      whole or in part, be renewed, extended, amended, modified, accelerated,
      compromised, waived, surrendered or

     

    
      
        
        

      

      
        B-8

        
          

        

      

      
        
        

      

    

     

     released
      by the Administrative Agent or any Lender, and the Credit Agreement, the other
      Loan Documents and any other documents executed and delivered in connection
      therewith and the Specified Hedge Agreements and any other documents executed
      and delivered in connection therewith may be amended, modified, supplemented
      or
      terminated, in whole or in part, as the Administrative Agent (or the Required
      Lenders, as the case may be, or, in the case of any Specified Hedge Agreement,
      the Lender or Lender’s affiliate party thereto) may deem advisable from time to
      time, and any collateral security, guarantee or right of offset at any time
      held
      by the Administrative Agent or any Lender for the payment of the Obligations
      may
      be sold, exchanged, waived, surrendered or released. Neither the Administrative
      Agent nor any Lender shall have any obligation to protect, secure, perfect
      or
      insure any Lien at any time held by it as security for the Obligations or for
      this Pledge Agreement or any property subject thereto. When making any demand
      hereunder against the Pledgor, the Administrative Agent or any Lender may,
      but
      shall be under no obligation to, make a similar demand on any other pledgor,
      and
      any failure by the Administrative Agent or any Lender to make any such demand
      or
      to collect any payments from any other pledgor or any release of any other
      pledgor shall not relieve the Pledgor of its obligations or liabilities
      hereunder, and shall not impair or affect the rights and remedies, express
      or
      implied, or as a matter of law, of the Administrative Agent or any Lender
      against the Pledgor. For the purposes hereof, “demand” shall include the
      commencement and continuance of any legal proceedings.

     

    13.     Continuing
      Security Interest, Assignments Under the Credit Agreement.
      This
      Pledge Agreement shall create a continuing security interest in the Collateral
      and shall (a) remain in full force and effect until the payment in full in
      cash
      of the Obligations and the termination of all Commitments under the Credit
      Agreement, (b) be binding upon the Pledgor, its successors and assigns and
      (c)
      inure, together with the rights and remedies of the Administrative Agent
      hereunder, to the benefit of the Administrative Agent, the Lenders and their
      respective successors, transferees and assigns.

     

    14.     Reinstatement.
      This
      Pledge Agreement shall continue to be effective, or be reinstated, as the case
      may be, if at any time payment, or any part thereof, of any of the Obligations
      is rescinded or must otherwise be restored or returned by the Administrative
      Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation
      or
      reorganization of the Pledgor, or upon or as a result of the appointment of
      a
      receiver, intervenor or conservator of, or trustee or similar officer for,
      the
      Pledgor or any substantial part of the property of the Pledgor, or otherwise,
      all as though such payments had not been made.

     

    15.     Notices.
      All
      notices, requests and demands pursuant hereto shall be made in accordance with
      Section 9.01 of the Credit Agreement, provided
      that any
      such notice, request or demand shall be addressed to the Pledgor at the notice
      address set forth under its signature below.

     

    16.     Counterparts.
      This
      Pledge Agreement may be executed by one or more of the parties on any number
      of
      separate counterparts, and all of said counterparts taken together shall be
      deemed to constitute one and the same instrument. A set of the counterparts
      of
      this Pledge Agreement signed by the Pledgor and the Administrative Agent shall
      be lodged with the Administrative Agent and the Pledgor.

     

    
      
        
        

      

      
        B-9

        
          

        

      

      
        
        

      

    

     

    17.     Severability.
      Any
      provision of this Pledge Agreement that is prohibited or unenforceable in any
      jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
      such prohibition or unenforceability without invalidating the remaining
      provisions hereof, and any such prohibition or unenforceability in any
      jurisdiction shall not invalidate or render unenforceable such provision in
      any
      other jurisdiction.

     

    18.     Integration.
      This
      Pledge Agreement represents the agreement of the Pledgor with respect to the
      subject matter hereof and there are no promises or representations by the
      Administrative Agent or any Lender relative to the subject matter hereof not
      reflected herein or in the other Loan Documents.

     

    19.     Amendments
      in Writing; No Waiver; Cumulative Remedies.

     

    (a)     None
      of
      the terms or provisions of this Pledge Agreement may be waived, amended,
      supplemented or otherwise modified except by a written instrument executed
      by
      the Pledgor and the Administrative Agent in accordance with Section 9.02 of
      the
      Credit Agreement.

     

    (b)     Neither
      the Administrative Agent nor any Lender shall by any act (except by a written
      instrument pursuant to Section 19(a)), delay, indulgence, omission or otherwise
      be deemed to have waived any right or remedy hereunder or to have acquiesced
      in
      any Default or in any breach of any of the terms and conditions hereof. No
      failure to exercise, nor any delay in exercising, on the part of the
      Administrative Agent or any Lender, any right, power or privilege hereunder
      shall operate as a waiver thereof. No single or partial exercise of any right,
      power or privilege hereunder shall preclude any other or further exercise
      thereof or the exercise of any other right, power or privilege. A waiver by
      the
      Administrative Agent or any Lender of any right or remedy hereunder on any
      one
      occasion shall not be construed as a bar to any right or remedy that the
      Administrative Agent or such Lender would otherwise have on any future
      occasion.

     

    (c)     he
      rights and
      remedies herein provided are cumulative, may be exercised singly or concurrently
      and are not exclusive of any other rights or remedies provided by
      law.

     

    20.     Section
      Headings.
      The
      Section headings used in this Pledge Agreement are for convenience of reference
      only and are not to affect the construction hereof or be taken into
      consideration in the interpretation hereof.

     

    21.     Successors
      and Assigns.
      This
      Pledge Agreement shall be binding upon the successors and assigns of the Pledgor
      and shall inure to the benefit of the Administrative Agent and the Lenders
      and
      their successors and assigns; provided
      that the
      Pledgor may not assign, transfer or delegate any of its rights or obligations
      under this Pledge Agreement without the prior written consent of the
      Administrative Agent, and any such attempted assignment, transfer or delegation
      shall be null and void.

     

    22.     WAIVER
      OF JURY TRIAL.
      EACH OF
      THE PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AND
      UNCONDITIONALLY

     

    
      
        
        

      

      
        B-10

        
          

        

      

      
        
        

      

    

     

    WAIVES
      TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS PLEDGE
      AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.

     

    23.     Submission
      to Jurisdiction; Waivers.
      The
      Pledgor hereby irrevocably and unconditionally:

     

    (a)     submits
      for itself and its property in any legal action or proceeding relating to this
      Pledge Agreement or any other Loan Document, or for recognition and enforcement
      of any judgment in respect thereof, to the non-exclusive general jurisdiction
      of
      the Courts of the State of New York, the courts of the United States of America
      for the Southern District of New York and appellate courts from any
      thereof;

     

    (b)     consents
      that any such action or proceeding may be brought in such courts and waives
      any
      objection that it may now or hereafter have to the venue of any such action
      or
      proceeding in any such court or that such action or proceeding was brought
      in an
      inconvenient court and agrees not to plead or claim the same;

     

    (c)     agrees
      that service of process in any such action or proceeding may be effected by
      mailing a copy thereof by registered or certified mail (or any substantially
      similar form of mail), postage prepaid, to the Pledgor at its address referred
      to in Section 15 or at such other address of which the Administrative Agent
      shall have been notified pursuant thereto;

     

    (d)     agrees
      that nothing herein shall affect the right to effect service of process in
      any
      other manner permitted by law or shall limit the right to sue in any other
      jurisdiction; and

     

    (e)     waives,
      to the maximum extent not prohibited by law, any right it may have to claim
      or
      recover in any legal action or proceeding referred to in this Section 23 any
      special, exemplary, punitive or consequential damages.

     

    24.     GOVERNING
      LAW.
      THIS
      PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
      ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

     

    25.     Obligations
      Absolute; Waivers and Acknowledgments; Subrogation.

     

    (a)     Obligations
      Absolute.
      The
      obligations of the Pledgor under or in respect of this Agreement are independent
      of the Obligations or any other Obligations of the Borrower under or in respect
      of the Loan Documents, and a separate action or actions may be brought and
      prosecuted against the Pledgor to enforce this Agreement, irrespective of
      whether any action is brought against any other Person or pursuant to any other
      Loan Document or whether any other Person is joined in any such action or
      actions. The liability of the Pledgor under this Agreement shall be irrevocable,
      absolute and unconditional irrespective of, and the Pledgor hereby irrevocably
      waives any defenses it may now have or hereafter acquire in any way relating
      to,
      any or all of the following:

     

    
      
        
        

      

      
        B-11

        
          

        

      

      
        
        

      

    

     

    (i)     any
      lack
      of validity or enforceability of any Loan Document or any agreement or
      instrument relating thereto;

     

    (ii)     any
      change in the time, manner or place of payment of, or in any other term of,
      all
      or any of the Obligations or any other Obligations of the Borrower under or
      in
      respect of the Loan Documents, or any other amendment or waiver of or any
      consent to departure from any Loan Document, including, without limitation,
      any
      increase in the Obligations resulting from the extension of additional credit
      to
      the Borrower or any of the Subsidiaries or otherwise; 

     

    (iii)     any
      taking, exchange, release or non-perfection of any Collateral or any other
      collateral, or any taking, release or amendment or waiver of, or consent to
      departure from, any guaranty, for all or any of the Obligations;

     

    (iv)     any
      manner of application of Collateral or any other collateral, or proceeds
      thereof, to all or any of the Obligations, or any manner of sale or other
      disposition of any Collateral or any other collateral for all or any of the
      Obligations or any other Obligations of the Borrower under the Loan Documents
      or
      any other assets of the Borrower or any of the Subsidiaries;

     

    (v)     any
      change, restructuring or termination of the corporate structure or existence
      of
      the Borrower or any of the Subsidiaries;

     

    (vi)     any
      failure of the Administrative Agent or any Lender to disclose to the Pledgor
      any
      information relating to the business, condition (financial or otherwise),
      operations, performance or properties of the Borrower now or hereafter known
      to
      the Administrative Agent or any Lender (the Pledgor waiving any duty on the
      part
      of Administrative Agent and the Lenders to disclose such
      information);

     

    (vii)     the
      failure of any other Person to execute or deliver any other agreement or the
      release or reduction of liability of any other pledgor or any surety with
      respect to the Obligations; or

     

    (viii)     any
      other
      circumstance (including, without limitation, any statute of limitations) or
      any
      existence of or reliance on any representation by the Administrative Agent
      or
      any Lender that might otherwise constitute a defense available to, or a
      discharge of, the Pledgor or any surety.

     

    (b)     Waivers
      and Acknowledgments.

     

    (i)     The
      Pledgor hereby unconditionally and irrevocably waives promptness, diligence,
      notice of acceptance, presentment, demand for performance, notice of
      nonperformance, default, acceleration, protest or dishonor and any other notice
      with respect to any of the Obligations and this Agreement and any requirement
      that the Administrative Agent or any Lender protect, secure, perfect or insure
      any Lien or any property subject thereto or exhaust any right or take any action
      against any other Person or any collateral.

     

    
      
        
        

      

      
        B-12

        
          

        

      

      
        
        

      

    

     

    (ii)     The
      Pledgor hereby unconditionally and irrevocably waives any right to revoke this
      Agreement and acknowledges that this Agreement is continuing in nature and
      applies to all Obligations, whether existing now or in the future.

     

    (iii)     The
      Pledgor hereby unconditionally and irrevocably waives (x) any defense arising
      by
      reason of any claim or defense based upon an election of remedies by the
      Administrative Agent or any Lender that in any manner impairs, reduces, releases
      or otherwise adversely affects the subrogation, reimbursement, exoneration,
      contribution or indemnification rights of the Pledgor or other rights of the
      Pledgor to proceed against any guarantor or any other Person or any collateral
      and (y) any defense based on any right of set-off or counterclaim against or
      in
      respect of the obligations of the Pledgor hereunder.

     

    (iv)     The
      Pledgor acknowledges that the Administrative Agent or any Lender may, without
      notice to or demand upon the Pledgor and without affecting the liability of
      the
      Pledgor under this Agreement, foreclose under any mortgage by nonjudicial sale,
      and the Pledgor hereby waives any defense to the recovery by the Administrative
      Agent or any Lender against the Pledgor of any deficiency after such nonjudicial
      sale and any defense or benefits that may be afforded by applicable
      law.

     

    (v)     The
      Pledgor hereby unconditionally and irrevocably waives any duty on the part
      of
      the Administrative Agent or any the Lender to disclose to the Pledgor any
      matter, fact or thing relating to the business, condition (financial or
      otherwise), operations, performance, properties or prospects of the Borrower
      or
      any of the Subsidiaries now or hereafter known by the Administrative Agent
      or
      any Lender.

     

    (vi)     The
      Pledgor acknowledges that it will receive substantial direct and indirect
      benefits from the financing arrangements contemplated by the Loan Documents
      and
      that the waivers set forth in this Section 25 are knowingly made in
      contemplation of such benefits.

     

    (c)     Subrogation.
      The
      Pledgor hereby unconditionally and irrevocably agrees not to exercise any rights
      that it may now have or hereafter acquire against any insider Person that arise
      from the existence, payment, performance or enforcement of the Obligations
      under
      or in respect of this Agreement or the enforcement of the security interests
      under this Agreement, including, without limitation, any right of subrogation,
      reimbursement, exoneration, contribution or indemnification and any right to
      participate in any claim or remedy of the Administrative Agent or any Lender
      against any insider Person or any collateral, whether or not such claim, remedy
      or right arises in equity or under contract, statute or common law, including,
      without limitation, the right to take or receive from any insider Person,
      directly or indirectly, in cash or other property or by set-off or in any other
      manner, payment or security on account of such claim, remedy or right, unless
      and until all of the Obligations and all other amounts payable under this
      Agreement shall have been paid in full in cash and the Commitments shall have
      expired

     

    
      
        
        

      

      
        B-13

        
          

        

      

      
        
        

      

    

     

    or
      been
      terminated. If any amount shall be paid to the Pledgor in violation of the
      immediately preceding sentence at any time prior to the later of (i) the payment
      in full in cash of the Obligations and all other amounts payable under this
      Agreement and (ii) the Final Maturity Date, such amount shall be received and
      held in trust for the benefit of the Administrative Agent, shall be segregated
      from other property and funds of the Pledgor and shall forthwith be paid or
      delivered to the Administrative Agent in the same form as so received (with
      any
      necessary endorsement or assignment) to be credited and applied to the
      Obligations and all other amounts payable under this Agreement, whether matured
      or unmatured, in accordance with the terms of the Loan Documents, or to be
      held
      as collateral for any Obligations or other amounts payable under this Agreement
      thereafter arising. If (x) all of the Obligations and all other amounts payable
      under this Agreement shall have been paid in full in cash and (y) the Final
      Maturity Date shall have occurred, the Administrative Agent will, at the
      Pledgor’s request and expense, execute and deliver to the Pledgor appropriate
      documents, without recourse and without representation or warranty, necessary
      to
      evidence the transfer by subrogation to the Pledgor of an interest in the
      Obligations resulting from such payment made by the Pledgor pursuant to this
      Agreement.

     

    26.     Actions
      Requiring Approval.

     

    (a)     If
      an
      Event of Default shall have occurred and be continuing, the Pledgor shall take
      any action which the Administrative Agent may request in the exercise of its
      rights and remedies under this Pledge Agreement in order to transfer or assign
      the Collateral to the Administrative Agent or to such one or more third parties
      as the Administrative Agent may designate, or to a combination of the foregoing.
      The parties hereto acknowledge that, in connection with the exercise of remedies
      hereunder with respect to any portion of the Collateral consisting of the common
      stock of a Subsidiary that owns or controls a company subject to regulation
      as a
      utility, the receipt of consent or approval from certain Governmental
      Authorities (including, without limitation, the ACC) may be required. To enforce
      the provisions of this Section 26, the Administrative Agent is empowered to
      seek
      from any Governmental Authority (including, without limitation, the ACC), to
      the
      extent required, consent to or approval of any involuntary transfer of control
      of any entity whose Collateral is subject to this Pledge Agreement for the
      purpose of seeking a bona fide purchaser to whom control will ultimately be
      transferred. The Pledgor agrees to cooperate with any such purchaser and with
      the Administrative Agent in the preparation, execution and filing of any forms
      and providing any information that may be necessary or helpful in obtaining
      any
      applicable Governmental Authority’s consent to the assignment to such purchaser
      of the Collateral. The Pledgor hereby agrees to consent to any such involuntary
      transfer of control upon the request of the Administrative Agent after and
      during the continuation of an Event of Default and, without limiting any rights
      of the Administrative Agent under this Pledge Agreement, to authorize the
      Administrative Agent to nominate a trustee or receiver to assume control of
      the
      Collateral, subject only to required judicial or other consent required by
      Governmental Authorities, in order to effectuate the transactions contemplated
      in this Section 26. Such trustee or receiver shall have all the rights and
      powers as provided to it by law or court order, or to the Administrative Agent
      under this

     

    
      
        
        

      

      
        B-14

        
          

        

      

      
        
        

      

    

     

     Pledge
      Agreement. The Pledgor shall cooperate fully in obtaining the approval or
      consent of each Governmental Authority required to effectuate the
      foregoing.

     

    (b)     If
      an
      Event of Default shall have occurred and be continuing, the Pledgor shall use
      its best efforts to assist in obtaining consent or approval of any Governmental
      Authority (including, without limitation, the ACC), if required, for any action
      or transactions contemplated by this Pledge Agreement, including, without
      limitation, the preparation, execution and filing of the transferor’s or
      assignor’s portion of any application or applications for consent to the
      transfer of control or assignment necessary or appropriate under applicable
      rules and regulations for approval of the transfer or assignment of any portion
      of the Collateral.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
        
          
          

        

        
          B-15

          
            

          

        

        
          
          

        

      

    

    


    IN
      WITNESS WHEREOF, each of the undersigned has caused this Pledge Agreement to
      be
      duly executed and delivered by its duly authorized officer as of the day and
      year first above written.

    

       

      
        
          
            
              
                
                  	
                           Address
                            for Notices:

                           

                          One
                            South Church Avenue

                          Tucson,
                            Arizona  95701

                          Attention: 
                            Chief Financial Officer

                          Telecopy
                            No.:  (520) 884-3612

                        	
                          UNISOURCE
                            ENERGY CORPORATION

                        
	 	
                          By

                        	
                           
                            /s/ Kevin P. Larson

                        
	 	 	
                          Name:  
                            

                        	
                          Kevin P. Larson

                        
	 	 	Title:	
                          Sr.
                            Vice President, CFO and Treasurer

                        
	 	 	
                           

                        
	 	
                          UNION
                            BANK OF CALIFORNIA, N.A.,

                          as
                            Administrative Agent

                           

                           

                           

                           

                        
	 	
                          By:

                        	
                            /s/
                            Kevin M. Zitar

                        
	 	 	Name:	
                           Kevin M. Zitar

                        
	 	 	Title:	 Vice
                          President
	 	 	 	 


                

                 

                
                  
                    
                    

                  

                  
                    B-16

                    
                      

                    

                  

                  
                    
                    

                  

                

              

            

          

        

      

    

    SCHEDULE
      I

    List
      of Pledged Shares

     

    
      	
              Issuer

            	
              Class
                of

              Stock/Par

              Value

            	
              Stock

              Certificate

              No(s)

            	
              Number

              of

              Shares

            	
              Percentage
                of

              Outstanding

              Shares/Interests

            
	
               

              UniSource
                Energy Services, Inc.

            	
               

              Common/No
                Par Value

               

            	
               

              1

               

            	
               

              1000

               

            	
               

              100%

               

            
	
               

              Millennium
                Energy Holdings, Inc.

               

            	
               

              Common/$1.00

               

            	
               

              3

               

            	
               

              1

               

            	
               

              100%

               

            
	
               

              UniSource
                Energy Development

              Company

               

            	
               

              Common/$1.00

               

            	
               

              2

               

            	
               

              1

               

            	
               

              100%

               

            


    

     

    
      
        
        

      

      
        B-17

        
          

        

      

      
        
        

      

    

    


    SCHEDULE
      II

    List
      of Pledged Debt

     

    


    
      	
              Maker

            	
              Date

            	
              Principal
                Original

              Amount

            
	 	 	 
	 	 	 
	 	 	 


    

    


    
      
        
        

      

      
        B-18