Document:

Form of Non-Qualified Stock Option Agreement

    Exhibit
      4.2

     

    UNISOURCE
      ENERGY CORPORATION

    2006
      OMNIBUS STOCK AND INCENTIVE PLAN

     

    NOTICE
      OF GRANT OF STOCK OPTIONS

     

    This
      Stock Option Agreement (the “Grant Agreement”) consists of this Grant Notice and
      the Stock Option Agreement immediately following. It sets forth certain specific
      terms and conditions governing the award and exercise of stock options under
      the
UniSource
      Energy Company 2006 Omnibus Stock and Incentive Plan (the “Plan”). All of the
      terms of the Plan are incorporated herein by reference. 

    
      	 	 
	
              Name
                of Grantee: 

               

            	
              [NAME]

               

            
	
              Grant
                Date:

               

            	
              May
                5, 2006

               

            
	
              Number
                of Shares Subject to Option:

               

            	
              [NUMBER
                OF SHARES]

               

            
	
              Exercise
                Price Per Share

               

            	
              [EXERCISE
                PRICE]

               

            
	
              Vesting
                Schedule 

               

            	
              Anniversary
                from Date of Grant        Vested
                Amount

                      1st                     
                33%

                      2nd                     33%

                      3rd                     
                34%

            

    

    

    BY
      EXECUTING THIS GRANT AGREEMENT, GRANTEE ACCEPTS PARTICIPATION IN THE PLAN,
      ACKNOWLEDGES THAT HE OR SHE HAS READ AND UNDERSTANDS THE PROVISIONS OF THIS
      GRANT AGREEMENT AND THE PLAN, AND AGREES THAT THIS GRANT AGREEMENT AND THE
      PLAN
      SHALL GOVERN THE TERMS AND CONDITIONS OF THIS AWARD. 

     

    IN
      WITNESS WHEREOF,
      the
      Company and the Grantee have duly executed this Grant Agreement as of the Grant
      Date set forth above.

     

     

    
      	
              UNISOURCE
                ENERGY CORPORATION:

               

               

            	 	GRANTEE:
	
              By:

            	 	 	 
	
              Name:

            	 	 	 	 
	
              Title:

            	 	 	
              Name:

            	 

    

    
 

    
      
        Option
          Agreement - NQSO (Employee)

      

      
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    UNISOURCE
      ENERGY CORPORATION

    2006
      OMNIBUS STOCK AND INCENTIVE PLAN

     

    NONQUALIFIED
      STOCK OPTION AGREEMENT

     

    NOTE: 
      THIS IS A NONQUALIFIED STOCK OPTION. SECTION 12 BELOW, AND THE PROSPECTUS
      REFERRED TO THEREIN, CONTAIN IMPORTANT INFORMATION ABOUT THE TAX CONSEQUENCES
      OF
      EXERCISING THIS OPTION. 

     

    The
      following supplements the Notice of Grant of Stock Options to which it is
      attached (the “Grant Notice”), and, together with the Grant Notice, constitutes
      the “Option Agreement” referenced in the Grant Notice.

     

    This
      Option Agreement is entered into and made effective as of the grant date
      referenced in the Grant Notice (the “Date of Grant”), and is between UniSource
      Energy Corporation, an Arizona corporation (the “Company”), and the employee of
      the Company or a subsidiary of the Company (the “Grantee”) referenced in the
      Grant Notice. Certain capitalized terms, to the extent not defined where they
      first appear in the Option Agreement, are defined in Section 9
      below.

     

    1.    Shares
      Subject to Option

     

    Pursuant
      to the provisions of the UniSource Energy Corporation 2006 Omnibus Stock and
      Incentive Plan (the “Plan”), the Company has granted to the Grantee an option
      (the “Option”) to purchase the number of shares of the Company’s Common Stock
      (the “Shares”) referenced in the Grant Notice (the “Option Shares”) at the
      purchase price referenced in the Grant Notice (the “Option Price”), in
      accordance with and subject to the terms and conditions set forth in this Option
      Agreement. The Plan and any amendments thereto are incorporated by reference
      and
      made a part hereof.

     

    2.    Vesting
      and Time of Exercise

     

    (a)   Vesting
      upon Termination of Employment other than for Death, Disability or Retirement
      -
      No Change in Control.
      As long
      as the Grantee remains in continuous employment with the Company or a Subsidiary
      as an Employee from the Date of Grant (subject to the rules in Section 3),
      the
      Option shall vest, and Option Shares shall become available for purchase by
      the
      Grantee, in installments on the dates set forth in the Grant Notice or, if
      earlier, as set forth in the following paragraphs: 

     

    (b)   Vesting
      upon Death or Disability.
      Notwithstanding Section 2(a) above, if the Grantee terminates employment due
      to
      death or Disability, all then outstanding Options hereunder shall become fully
      vested upon the date of the Grantee’s termination of employment.

     

    (c)   Vesting
      upon Retirement.
      Notwithstanding Section 2(a) above, if the Grantee terminates employment due
      to
      Retirement, his or her then outstanding Options hereunder shall continue to
      vest
      and be exercisable in accordance with Section 2(a), provided and to the extent
      that the Grantee complies with the provisions of Section 10 below, for a period
      not to exceed three (3) years, or until the Grantee violates any provision
      of
      Section 10 during such period. If

     

     

    
      
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    the
      Participant dies or becomes Disabled during such three (3) year period, Section
      2(b) shall apply.

     

    (d)   Vesting
      upon Termination after Change in Control or Potential Change in
      Control.
      Notwithstanding Section 2(a) above, if, within twenty-four (24) months after
      a
      Change in Control, the Grantee terminates employment for any reason other than
      Cause or resignation without Good Reason, all then outstanding Options hereunder
      shall become fully vested. Notwithstanding Section 2(a) above, if, during a
      Potential Change in Control Period, the Company terminates the Grantee’s
      employment for any reason other than Cause or the Grantee resigns with Good
      Reason, the Grantee shall become immediately vested in a prorated portion of
      his
      or her then outstanding Options equal to the greater of (1) the number of such
      then vested outstanding Options determined without regard to this Section 2(d),
      and (2) the number of Options awarded under this Award Agreement (as adjusted
      pursuant to Section 7 hereof, if applicable) multiplied by a ratio, the
      numerator of which is the number of months from the Date of Grant through the
      end of the month of such termination of employment or resignation and the
      denominator of which is thirty-six (36) (reduced by any previously exercised
      such Options). 

     

    (e)   Exercise
      of Options.
      Except
      as otherwise provided in the Plan or in this Option Agreement, vested Options
      may be exercised in whole or in part at any time and from time to time during
      the term of the Option, provided that no exercise shall be permitted for
      fractional shares. Once vested, the Option may be exercised only by the Grantee
      or, to the extent provided in Section 3(a) hereof, by his or her legal
      representative. Notwithstanding the foregoing, if the Grantee is determined
      to
      be mentally incompetent and a guardian or conservator (or other similar person)
      is appointed by a court of competent jurisdiction to manage the Grantee’s
      affairs, such appointee may exercise the Option on behalf of the Grantee to
      the
      extent that the Grantee could have exercised the Option at such
      time.

     

    3.    Term
      of Option

     

    Except
      as
      provided below, the term of the Option shall be for a ten (10) year period,
      beginning on the Date of Grant and ending on the day immediately preceding
      the
      tenth (10th) anniversary of the Date of Grant (the “Expiration Date”). In no
      event may the Option be exercised later than the Expiration Date.

     

    (a)   Termination
      by Reason of the Grantee’s Death or Disability.
      If the
      Grantee’s employment with the Company and any Subsidiary terminates by reason of
      his or her death or Disability, then the Option may thereafter be exercised
      by
      the Grantee, or by his or her legal representative in the case of death, until
      the earlier of (i) the Expiration Date or (ii) twelve (12) months after the
      date
      of the Grantee’s termination of employment due to death or Disability; provided,
      however, that if the Grantee was eligible for Retirement at the time of his
      termination of employment, the time limit set forth in clause (ii) above shall
      be three (3) years after the Grantee’s termination from employment due to death
      or Disability. If the Grantee’s termination of employment was due to Disability,
      this exercise period shall not be further extended by the Participant’s
      death.

     

    (b)   Termination
      by Reason of the Grantee’s Retirement.
      If the
      Grantee’s employment with the Company and any Subsidiary terminates by reason of
      his or her Retirement (other than

     

     

    
      
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    due
      to
      Disability, which is addressed in Section 3(a) above), then the Option may
      thereafter be exercised by the Grantee to the extent it was vested and
      exercisable immediately prior to such termination or becomes vested and
      exercisable within the three (3) year period thereafter in accordance with
      Section 2(c), until the earlier of (i) the Expiration Date or (ii) three (3)
      years after the date of Retirement; provided, however, that if the Grantee
      violates any provision of Section 10 during such period, his or her Options
      shall expire immediately as of the earliest date of such violation. If the
      Grantee dies within such three (3) year period, Section 3(a) shall apply as
      of
      the date of death; provided, however, that the maximum exercise period shall
      not
      exceed three (3) years after the date of Retirement.

     

    (c)   Termination
      for Cause.
      If the
      Grantee’s employment with the Company and any Subsidiary is terminated for
      Cause, the Option shall expire immediately upon such termination and all rights
      to purchase Option Shares (whether vested or unvested) under the Option shall
      cease.

     

    (d)   Other
      Terminations.
      If the
      Grantee’s employment with the Company and any Subsidiary terminates for any
      reason other than the Grantee’s death, Disability, Retirement or termination for
      Cause, then the Option may thereafter be exercised by the Grantee, but only
      to
      the extent it was vested and exercisable upon or immediately prior to such
      termination, until the earlier of (i) the Expiration Date or (ii) thirty (30)
      days after the date of such termination; provided, however, that if the Grantee
      violates any provision of Section 10 during such thirty (30) day period, his
      or
      her Options shall expire immediately as of the earliest date of such
      violation.

     

    (e)   Change
      in Employment Status.
      The
      Grantee will not be deemed to have incurred a termination of employment
      hereunder solely as a result of a temporary absence from employment because
      of
      illness, vacation, approved leaves of absence, and transfers of employment
      among
      the Company and its Subsidiaries. The Grantee will not be deemed to have
      incurred a termination of employment hereunder during a period of severance,
      to
      the extent that salary payments continue to the Grantee during such period.
      In
      such event, the Grantee’s termination of employment shall be deemed to occur at
      the conclusion of such period of severance. If the Grantee, either on the Date
      of Grant or subsequent thereto, is or becomes a Director and thereafter ceases
      to be an Employee while remaining a non-employee Director, such change in status
      shall not be a termination of employment for purposes of Sections 3(b) or 3(d)
      until the Grantee’ service as a Director shall have ceased.

     

    4.    Method
      of Exercise

     

    The
      Option may be exercised only by delivering written notice to the Treasurer
      of
      the Company. Contemporaneously with such delivery, the Grantee shall tender
      the
      full purchase price of the Option Shares by one of the following methods, or
      combination thereof, together with payment of any applicable federal, state
      or
      local taxes required by law to be withheld upon such exercise, as described
      in
      Section 12:

     

    (a)   In
      cash,
      or by a certified or cashier’s check payable to the order of the
      Company;

     

     

    
      
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    (b)   If
      the
      Company is then permitting exercise of Options through a same-day sale/cashless
      brokered exercise program, delivery of a properly executed exercise notice
      together with irrevocable instructions to a broker acceptable to the Company
      to
      execute such instructions, in such form and manner as the Company may from
      time
      to time require;
      or

     

    (c)   In
      such
      other method as the Treasurer of the Company shall from time to time permit,
      in
      his or her sole discretion, consistent with the terms of the Plan.

     

    The
      Company, upon fulfillment of the requirements for exercise, shall deliver the
      Option Shares purchased under this Option Agreement. The Grantee shall have
      no
      rights as a stockholder with respect to the Option Shares until the exercise
      of
      the Option and the issuance of a stock certificate for the Option Shares with
      respect to which the Option shall have been exercised.

     

    5.    Option
      Non-Transferable

     

    The
      Option may be not be transferred or assigned by the Grantee or by operation
      of
      law, other than by will or by the laws of descent and distribution. Except
      to
      the extent specifically provided in Section 3(a) above, the Option may be
      exercised during the lifetime of the Grantee only by him or her.

     

    6.    Right
      to Terminate

     

    NOTHING
      CONTAINED IN THE GRANT AGREEMENT OR THIS OPTION AGREEMENT SHALL CREATE A
      CONTRACT OF EMPLOYMENT OR GIVE RISE TO A RIGHT TO CONTINUE IN THE EMPLOY OF
      THE
      COMPANY OR ANY SUBSIDIARY, OR RESTRICT THE RIGHT OF THE COMPANY OR A SUBSIDIARY
      TO TERMINATE THE EMPLOYMENT OF THE GRANTEE AT ANY TIME. 

     

    7.    Adjustments

     

    (a)   In
      the
      event of any change in corporate capitalization, such as a stock split,
      reverse-split, stock dividend, combination, reclassification or similar
      recapitalization not involving the payment of consideration, or in the event
      of
      a corporate transaction, such as any merger, consolidation, separation,
      spin-off, reorganization or any partial or complete liquidation of the Company,
      an adjustment shall be made to the number and class of Option Shares subject
      to
      this Option Agreement, as may be determined to be appropriate and equitable
      by
      the Administrator, in its sole discretion, to prevent dilution or enlargement
      of
      rights; provided, however, that the number of Option Shares subject to this
      Option Agreement shall always be a whole number.

     

    (b)   Anything
      contained in this Option Agreement to the contrary notwithstanding, in
      connection with any transaction specified in Section 9(d)(iii), the
      Administrator may, in its discretion, (i) cancel this Option in consideration
      for payment to the Grantee of an amount equal to the portion of such
      consideration that would have been payable to the Grantee pursuant to such
      transaction if the Option had been fully vested and exercised immediately prior
      to such transaction, less the aggregate Option Price that would have been
      payable by the Grantee therefor, or (ii) if the amount that would have been
      payable to the Grantee pursuant to such

     

     

    
      
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    transaction
      if the Option had been fully vested and exercised immediately prior thereto
      would be equal to or less than the aggregate Option Price that would have been
      payable therefor, cancel the Option for no consideration or payment of any
      kind.
      Payment of any amount payable pursuant to this Section 7(b) may be made in
      cash
      or, in the event that the consideration to be received in such transaction
      includes securities or other property, in cash and/or such securities or other
      property in the Administrator’s discretion.

     

    8.    Registration;
      Restrictions on Transfer

     

    (a)   The
      Company intends that any shares issued pursuant to the Grantee’s exercise of the
      Option shall be listed on the New York Stock Exchange or other nationally
      recognized stock exchange, and registered under the Securities Act of 1933.
      If
      no such shares are available at the time of exercise, the Company may require
      the Grantee to provide such written assurances as it deems necessary to comply
      with the appropriate exemption from registration and may cause a legend to
      be
      placed on the shares being issued calling attention to the fact that they have
      been acquired for investment and have not been registered. If the listing,
      registration or qualification of the shares on any securities exchange or under
      any federal or state law, or the consent or approval of any governmental
      regulatory body is necessary as a condition of or in connection with the
      purchase or issuance of such shares, the Company shall not be obligated to
      issue
      or deliver the certificates representing the shares as to which the Option
      has
      been exercised unless and until such listing, registration, qualification,
      consent or approval shall have been effected or obtained.

     

    (b)   The
      shares issued on exercise of the Option shall be subject to any restrictions
      on
      transfer then in effect pursuant to the Certificate of Incorporation or By-laws
      of the Company, as each may be amended from time to time, and to any other
      restrictions or provisions attached hereto and made a part hereof or set forth
      in any other contract or agreement binding on the Grantee.

     

    9.    Definitions

     

    For
      purposes of this Option Agreement, the following terms shall have the following
      respective meanings.

     

    (a)       “Administrator”
      means the Compensation Committee of the Board, or such other committee appointed
      by the Board to administer and interpret the terms and provisions of the
      Plan.

     

    (b)   “Board”
      means the Board of Directors of the Company.

     

    (c)   “Cause”
      means, as determined by the Administrator in its sole discretion:

     

    (i)   the
      Grantee’s conviction of a felony involving moral turpitude or entering into a
      guilty plea or plea of nolo
      contendere
      with
      respect to such crime; 

     

    (ii)   the
      Grantee’s willful and continued failure to substantially perform the duties and
      responsibilities of the Grantee’s position with the Company after a written
      demand for substantial performance is delivered to the Grantee by the Board,
      which

     

     

    
      
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    demand
      specifically identifies the manner in which the Board believes that the Grantee
      has not substantially performed such duties or responsibilities; 

     

    (iii)   the
      willful engaging by the Grantee in fraud or dishonesty relating to Grantee’s
      employment, or other willful misconduct or gross negligence of the Grantee,
      which conduct is demonstrably and materially injurious to the Company or its
      reputation, monetarily or otherwise; or 

     

    (iv)   the
      Grantee’s willful violation of Company policies, which conduct is demonstrably
      and materially injurious to the Company or its reputation, monetarily or
      otherwise. 

     

    (d)   “Change
      in Control” means
      and
      shall be deemed to have occurred as of the date of the first to occur of the
      following events:

     

    (i)   any
      Person or Group acquires stock of the Company that, together with stock held
      by
      such Person or Group, constitutes more than 40% of the total Fair Market Value
      or total voting power of the stock of the Company. However, if any Person or
      Group is considered to own more than forty percent (40%) of the total Fair
      Market Value or total voting power of the stock of the Company, the acquisition
      of additional stock by the same Person or Group is not considered to cause
      a
      Change in Control of the Company. An increase in the percentage of stock owned
      by any Person or Group as a result of a transaction in which the Company
      acquires its stock in exchange for property will be treated as an acquisition
      of
      stock for purposes of this subsection. This subsection applies only when there
      is a transfer of stock of the Company (or issuance of stock of the Company)
      and
      stock in the Company remains outstanding after the transaction; 

     

    (ii)   a
      majority of members of the Company’s Board is replaced during any 24-month
      period by Directors whose appointment or election is not endorsed by a majority
      of the members of the Company’s Board prior to the date of the appointment or
      election; or 

     

    (iii)   there
      is
      consummated a merger or consolidation of the Company or any direct or indirect
      subsidiary of the Company with any other corporation, other than a merger or
      consolidation which would result in the voting securities of the Company
      outstanding immediately prior to such merger or consolidation continuing to
      represent (either by remaining outstanding or by being converted into voting
      securities of the surviving entity or any parent thereof) more than fifty
      percent (50%) of the combined voting power of the securities of the Company
      or
      such surviving entity or any parent thereof outstanding immediately after such
      merger or consolidation; provided, however, that if the approval of any federal
      or state regulatory agency is required in order to effectuate the merger or
      consolidation of the Company or any direct or indirect subsidiary of the Company
      with any other corporation, no such merger or consolidation shall be deemed
      to
      have been consummated prior to the attainment of all such required approval(s);
      or 

     

     

    
      
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    (iv)   the
      stockholders of the Company approve a plan of complete liquidation or
      dissolution of the Company or there is consummated an agreement for the sale
      or
      disposition by the Company of all or substantially all of the Company’s assets,
      other than a sale or disposition by the Company of all or substantially all
      of
      the Company’s assets to an entity, more than fifty percent (50%) of the combined
      voting power of the voting securities of which are owned by stockholders of
      the
      Company in substantially the same proportions as their ownership of the Company
      immediately prior to such sale.

     

    For
      these
      purposes, the term “Person” shall mean an individual, corporation, association,
      joint stock company, business trust or other similar organization, partnership,
      limited liability company, joint venture, trust, unincorporated organization
      or
      government or agency, instrumentality or political subdivision thereof (but
      shall not include the Company, any underwriter temporarily holding securities
      pursuant to an offering of such securities, any trustee or other fiduciary
      holding securities under an employee benefit plan of the Company, or any Company
      owned, directly or indirectly, by the stockholders of the Company in
      substantially the same proportions as their ownership of Voting Stock of the
      Company). The term “Group” shall have the meaning set forth in Rule 13d-5 of the
      Securities Exchange Commission (“SEC”). If any one Person, or Persons acting as
      a Group, is considered to effectively control the Company as described in
      subsections (b) or (c) above, the acquisition of additional control by the
      same
      Person or Persons is not considered to cause a Change in Control. 

     

    (e)   “Code”
      means the Internal Revenue Code of 1986, as amended from time to time, or any
      successor thereto.

     

    (f)   “Director”
      means any individual who is a member of the Board.

     

    (g)   “Disability”
      .means
      that the Grantee (i) is unable to engage in any substantial gainful activity
      by
      reason of any medically determinable physical or mental impairment that can
      be
      expected to result in death or to last for a continuous period of not less
      than
      12 months; (ii) is, by reason of any medically determinable physical or mental
      impairment that can be expected to result in death or can be expected to last
      for a continuous period of not less than 12 months, receiving income replacement
      benefits for a period of not less than 3 months under an accident and health
      plan covering employees of the Company; or (iii) has been determined to be
      totally disabled by the Social Security Administration

     

    (h)   “Employee”
      means any individual who is an employee of the Company or any
      Subsidiary.

     

    (i)   “Fair
      Market Value” means the average of the highest and lowest sales prices of the
      Stock as reported on the consolidated tape for securities listed on the New
      York
      Stock Exchange (“NYSE”) (or, if the Stock is not listed on the NYSE, such other
      established securities market on which the Stock is traded) on a particular
      date. In the event that there are no Stock transactions on such date, the Fair
      Market Value shall be determined by utilization of the above formula as of
      the
      immediately preceding date on which there were Stock transactions.

     

    (j)   “Good
      Reason” for termination by the Grantee of his or her employment shall mean the
      occurrence (without the Grantee’s express written consent) after a Change in
      Control or

     

     

    
      
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    during
      a
      Potential Change in Control Period of any one of the following events, unless,
      except in the case of an act described in subsection (vi) or (vii) below, such
      event is corrected prior to the date of termination specified in the notice
      of
      termination given in respect thereof:

     

    (i)   a
      change
      in the Grantee’s position or responsibilities which represents a material and
      adverse change from the Grantee’s position or responsibilities as in effect
      immediately prior to such change; the assignment to the Grantee of any duties
      or
      responsibilities which are substantially inconsistent with the Grantee’s
      position or responsibilities as in effect immediately prior to such assignment;
      or any removal of the Grantee from or failure to reappoint or reelect the
      Grantee to any of such offices or positions, except in connection with
      termination of the Grantee’s employment for Disability, Cause, as a result of
      the Grantee’s death or by the Grantee other than for Good Reason;

     

    (ii)   a
      reduction in the Grantee’s base salary, other than a reduction of base salary of
      not more than ten percent (10%) generally and simultaneously applicable to
      all
      [senior] executives of the Company; 

     

    (iii)   a
      reduction in the bonus and/or incentive compensation opportunity available
      to
      the Grantee, unless such reduction is generally and simultaneously applicable
      to
      all [senior] executives of the Company;

     

    (iv)   a
      material reduction in the aggregate value of employee benefits provided or
      available to the Grantee, unless such reduction is generally and simultaneously
      applicable to all [senior] executives of the Company; 

     

    (v)   the
      Company requiring the Grantee to be based at an office that is greater than
      50
      miles from where the Grantee’s office is located immediately prior to the Change
      in Control and also more than 50 miles from the Grantee’s then current principal
      place of residence, except for required travel on the Company’s business to an
      extent substantially consistent with the business travel obligations which
      the
      Grantee undertook on behalf of the Company prior to the Change in Control;
      or

     

    (vi)   failure
      by the Company to obtain a satisfactory agreement from any successor to assume
      and agree to perform this Agreement; or 

     

    (vii)   any
      purported termination of the Grantee’s employment which is not effected pursuant
      to a notice of termination required under any agreement applicable to the
      Grantee.

     

    In
      order
      for the Grantee’s termination to be deemed to be for Good Reason, the Grantee
      must deliver written notice of termination to the Company describing the
      event(s) alleged to constitute Good Reason within ninety (90) days of the
      occurrence of such event(s). Such notice of termination shall specify the
      Grantee’s date of termination, which date shall not be earlier than fourteen
      (14) days nor more than sixty (60) days after the date of the notice of
      termination. Except in the case of an event described in subsection (vi) or
      (vii) above, the Company may fully correct the event(s) constituting Good Reason
      within a reasonable period of time (not to exceed fourteen (14) days) after
      receiving the notice of termination; provided, however, that no

     

     

    
      
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    opportunity
      to correct for any Good Reason event which recurs after a prior correction
      by
      the Company. 

     

    (k)   “Potential
      Change in Control” shall be deemed to have occurred if any of the following
      events shall have occurred:

     

    (i)   the
      Company enters into an agreement, the consummation of which would result in
      the
      occurrence of a Change in Control; 

     

    (ii)   the
      Company publicly announces an intention to take or to consider taking actions
      which, if consummated, would constitute a Change in Control; 

     

    (iii)   any
      Person becomes the Beneficial Owner, directly or indirectly, of securities
      of
      the Company representing twenty percent (20%) or more of either the then
      outstanding shares of common stock of the Company or the combined voting power
      of the Company’s then outstanding securities; or

     

    (iv)   the
      Board
      adopts a resolution to the effect that, for purposes of this Agreement, a
      Potential Change in Control has occurred.

     

    (l)   “Potential
      Change in Control Period” shall commence upon the occurrence of a Potential
      Change in Control and shall lapse upon the occurrence of a Change in Control
      or,
      if earlier (i) with respect to a Potential Change in Control occurring pursuant
      to Section 9(k)(i); immediately upon the abandonment or termination of the
      applicable agreement; (ii) with respect to a Potential Change in Control
      occurring pursuant to Section 9(k)(ii), immediately upon a public announcement
      by the Company that it has abandoned its intention to take or consider taking
      actions which, if consummated, would result in a Change in Control; or (iii)
      with respect to a Potential Change in Control occurring pursuant to Section
      9(k)(iii) or (iv), upon the two year anniversary of the occurrence of a
      Potential Change in Control (or, in the case of a Potential Change in Control
      occurring pursuant to Section 9(k)(iv), such earlier date as may be determined
      by the Board). In addition to the foregoing, any termination of the Grantee
      by
      the Company at the request of a third party in contemplation of a Change in
      Control or Potential Change in Control shall be deemed to have occurred within
      a
      Potential Change in Control Period.

     

    (m)   “Retirement”
      means termination of employment of the Grantee after he or she has become
      eligible for an immediate early, normal or late retirement benefit under the
      terms of a defined benefit pension plan sponsored by the Company and applicable
      to the Grantee. 

     

    (n)   “Subsidiary”
      means any corporation, partnership, joint venture, affiliate, or other entity
      in
      which the Company is at least a majority-owner of all issued and outstanding
      equity interests or has a controlling interest.

     

    10.   Restrictive
      Covenants

     

    This
      paragraph shall apply upon Retirement of the Grantee, during any period in
      which
      any Options of the Grantee continue to vest and/or be exercisable in accordance
      with Section 3(b) or 3(d) of this Agreement:

     

     

    
      
        Option
          Agreement - NQSO (Employee)

      

      
        Page
          10 of
          12

        
          

        

      

      
         

      

    

     

    (a)   Non-Competition.
      The
      Grantee shall not, without the Board’s prior written consent, directly or
      indirectly engage in, have any equity interest in, or assist, manage or
      participate in (whether as a director, officer, employee, agent, representative,
      security holder, consultant or otherwise) any Competitive Business; provided,
      however, that: (i) the Grantee shall be permitted to acquire a passive stock
      or
      equity interest in such a Competitive Business provided the stock or other
      equity interest acquired is not more than five percent (5%) of the outstanding
      interest in such a Competitive Business; and (ii) the Grantee shall be permitted
      to acquire any investment through a mutual fund, private equity fund or other
      pooled account that is not controlled by the Grantee and which he has less
      than
      a five percent (5%) interest. For purposes of this provision, the term
“Competitive Business” shall mean the business of purchasing, supplying,
      generating, trading, buying (other than as a retail customer), selling or
      distributing natural gas or electricity, where such business activity occurs
      in,
      or originates or terminates in, the State of Arizona, and also refers to any
      entity (including any subsidiaries, parent entities or other affiliates thereof)
      which, as of the Grantee’s date of termination, engages in any such
      business.

     

    (a)   Non-Solicitation.
      The
      Grantee will not, directly or indirectly recruit or otherwise solicit or induce
      any non-clerical employee, director, consultant, customer, vendor or supplier
      of
      the Company to terminate his, her or its employment or arrangement with the
      Company or otherwise change his, her or its relationship with the Company.
      

     

    (b)   Confidentiality.
      The
      Grantee shall maintain in confidence and shall not directly, indirectly or
      otherwise, use, disseminate, disclose or publish, or use for his or her benefit
      or the benefit of any person, firm, corporation or other entity, any
      confidential or proprietary information or trade secrets of or relating to
      the
      Company, including, without limitation, information with respect to the
      Company’s operations, processes, products, inventions, business practices,
      finances, principals, vendors, suppliers, customers, potential customers,
      marketing methods, costs, prices, contractual relationships, regulatory status,
      business plans, designs, marketing or other business strategies, compensation
      paid to employees or other terms of employment, or deliver to any person, firm,
      corporation or other entity any document, record, notebook, computer program
      or
      similar repository of or containing any such confidential or proprietary
      information or trade secrets. Notwithstanding anything herein to the contrary,
      nothing shall prohibit the Grantee from disclosing any information that is
      generally known by the public. 

     

    (c)   Non-Disparagement.
      The
      Grantee will not criticize, defame, be derogatory toward or otherwise disparage
      the Company (or the Company’s past, present and future officers, directors,
      stockholders, attorneys, agents, representatives, employees or affiliates),
      or
      its or their business plans or actions, to any third party, either orally or
      in
      writing; provided, however, that this provision will not preclude the Grantee
      from giving testimony in response to a lawful subpoena or preclude any conduct
      protected under 18 U.S.C. Section 1514A(a) or any similar state or federal
      law
      providing “whistleblower” protection to the Grantee. 

     

    11.   Administration
      and Interpretation

     

    The
      Administrator shall administer and interpret the terms and provisions of this
      Option Agreement and of the Plan. Any interpretation and construction by the
      Administrator of any

     

     

    
      
        Option
          Agreement - NQSO (Employee)

      

      
        Page
          11 of
          12

        
          

        

      

      
         

      

    

     

    term
      or
      provision of the Plan, this Option Agreement, or other matters related to the
      Plan shall be final, conclusive and binding upon the Grantee and his or her
      estate, permitted transferees and assignees, personal representative and
      beneficiaries.

     

    12.   Notice
      Concerning Federal Income Taxation

     

    As
      the
      Option granted hereby is a nonqualified stock option (an “NQSO”), the Grantee
      will recognize compensation income for regular federal income tax purposes
      on
      the date this Option is exercised in the amount by which the fair market value
      of the Option Shares purchased on the date of exercise exceeds the Option Price
      for such shares. The Grantee must remit both federal and applicable state and
      local withholding taxes to the Company with respect to compensation income
      realized on the purchased shares. The Grantee and other holders are urged to
      review the Prospectus for the offering under which the Option is granted for
      a
      more detailed discussion of the federal tax law governing NQSOs.

     

     

    
      
        Option
          Agreement - NQSO (Employee)

      

      
        Page
          12 of
          12Form of Performance Share Agreement

    Exhibit
      4.3

    
       

      UNISOURCE
        ENERGY CORPORATION

      2006
        OMNIBUS STOCK AND INCENTIVE PLAN

       

      NOTICE
        OF GRANT OF PERFORMANCE SHARES

      

            This
          Performance Share Agreement (the “Grant Agreement”) consists of this Grant
          Notice and the Performance Share Agreement immediately following. It sets
          forth
          certain specific terms and conditions governing performance awards under
          the
UniSource
          Energy Company 2006 Omnibus Stock and Incentive Plan (the “Plan”). All of the
          terms of the Plan are incorporated herein by reference.
          

      

      
        	 	 
	
                Name
                  of Grantee: 

                 

              	
                [NAME]

                 

              
	
                
                  Performance
                    Period::

                

                 

              	
                
                  January 1,
                    2006 to December 31, 2008

                

                 

              
	
                Target
                  Award:

                 

              	
                [NUMBER
                  OF SHARES]

                 

              
	
                Date
                  of Grant

                 

              	
                May
                  5, 2006

                 

              

      

       

      
        
          
            	 
	
                    PERFORMANCE
                      CRITERIA

                  
	
                     

                    Degree
                      of Performance Attainment

                  	 	
                    Cumulative
                      EPS

                  	 	
                     

                    %
                      of Target Shares Earned

                  	 	
                     

                    Cumulative
                      Cash Flow from Ops.

                  	 	
                     

                    %
                      of Target Shares Earned

                  
	
                    Outstanding

                     

                  	 	
                    $6.38

                  	 	
                    75%

                     

                  	 	
                    $901.1M

                     

                  	 	
                    75%

                     

                  
	
                    Target

                     

                  	 	
                    $6.07

                  	 	
                    50%

                     

                  	 	
                    $888.3M

                     

                  	 	
                    50%

                     

                  
	
                    Threshold

                     

                  	 	
                    $5.80

                  	 	
                    25%

                     

                  	 	
                    $879.6M

                     

                  	 	
                    25%

                     

                  
	
                    Less
                      than Threshold

                     

                  	 	
                    <
                      $5.80

                  	 	
                    0%

                     

                  	 	
                    <
                      879.6M

                     

                  	 	
                    0%

                     

                  
	
                    Intermediate
                      payouts determined by interpolation.  EPS and Cash Flow
                      are applied independently, and the percentage of Target Shares
                      earned for each are added
                      together.

                  

          

        

      

      
         

      

      
        BY
          EXECUTING THIS GRANT AGREEMENT, GRANTEE ACCEPTS PARTICIPATION IN THE PLAN,
          ACKNOWLEDGES THAT HE OR SHE HAS READ AND UNDERSTANDS THE PROVISIONS OF
          THIS
          GRANT AGREEMENT AND THE PLAN, AND AGREES THAT THIS GRANT AGREEMENT AND
          THE PLAN
          SHALL GOVERN THE TERMS AND CONDITIONS OF THIS AWARD. 

         

        IN
          WITNESS WHEREOF,
          the
          Company and the Grantee have duly executed this Grant Agreement as of the
          Grant
          Date set forth above.

         

      

       

      
        	
                UNISOURCE
                  ENERGY CORPORATION:

                 

                 

              	 	GRANTEE:
	
                By:

              	 	 	 
	
                Name:

              	 	 	 	 
	
                Title:

              	 	 	
                Name:

              	 

      

      
 

      
        
          Performance
            Share Agreement 

        

        
          Page
            1 of
            11

          
            

          

        

        
          
          

        

      

      UNISOURCE
        ENERGY CORPORATION

      2006
        OMNIBUS STOCK AND INCENTIVE PLAN

       

      PERFORMANCE
        SHARE AGREEMENT

       

          The
        following
        supplements the Notice of Grant of Performance Shares to which it is attached
        (the “Grant Notice”), and, together with the Grant Notice, constitutes the
“Performance Share Agreement” referenced in the Grant Notice.

       

          This
        Performance Share Agreement is entered into and made effective as of the
        grant
        date referenced in the Grant Notice (the “Date of Grant”), and is between
        UniSource Energy Corporation, an Arizona corporation (the “Company”), and the
        employee of the Company or a subsidiary of the Company (the “Grantee”)
        referenced in the Grant Notice. Certain capitalized terms, to the extent
        not
        defined where they first appear in the Performance Share Agreement, are defined
        in Section 11 below.

       

          1.    Performance
        Shares

       

          Pursuant
        to
        the provisions of the UniSource Energy Corporation 2006 Omnibus Stock and
        Incentive Plan (the “Plan”), the Company has awarded Grantee an opportunity to
        earn shares of the Company’s Common Stock based upon the Company’s performance
        (the “Performance Shares”) over the Performance Period specified in the Grant
        Notice, in accordance with and subject to the terms and conditions set forth
        in
        this Performance Share Agreement. The Plan and any amendments thereto are
        incorporated by reference and made a part hereof.

       

          
2.    Earning
        of Performance Shares; Performance Criteria

       

          Subject
        to the terms
        of the Plan and this Grant Agreement, the Grantee shall be entitled to receive
        payment of the number and value of Performance Shares earned by the Grantee
        over
        the Performance Period, where the number of Performance Shares is determined
        as
        a function of the extent to which the corresponding performance goals have
        been
        achieved. If a Grantee terminates employment during the Performance Period
        due
        to Retirement, Disability or death, the amount of shares earned hereunder
        shall
        be determined at the conclusion of the Performance Period based upon actual
        performance during the Performance Period, as described in Section 3
        below.

       

          Performance
        Shares are earned based upon performance of “Cumulative Earnings Per Share
        (EPS)” and “Cumulative Cash Flow from Operations” over the Performance Period.
        For this purpose, “Cumulative EPS” means the aggregate sum of basic EPS
        determined in accordance with Statement of Financial Accounting Standards
        No.
        128 and reported on the year-end financial statements of the Company for
        each
        complete fiscal year within the Performance Period; and “Cumulative Cash Flow
        from Operations” means the aggregate sum of net cash flow from operating
        activities determined in accordance with Statement of Financial Accounting
        Standards No. 95 and reported on the year-end financial statements of the
        Company for each complete fiscal year within the Performance Period.

       

       

      
        
          
            Performance
              Share Agreement 

          

          
            Page 2
              of 11

            
              

            

          

          
            
            

          

        

      

       

      The
        highest aggregate number of shares that may be earned under this Grant Agreement
        is 200% of the number of Target Award specified on the Notice of Grant of
        Performance Shares (as adjusted pursuant to Section 9 hereof).

       

          
3.    Vesting
        of Performance Shares

       

          (a)    Vesting
        upon Termination of Employment other than for Death, Disability or Retirement
        -
        No Change in Control.
        Performance Shares earned under Section 2 above shall become vested
        provided that the Grantee remains in continuous employment with the Company
        or a
        Subsidiary as an Employee from the Date of Grant through the last day of
        the
        Performance Period. Except as otherwise provided in Section 3(b) through
        (d) or
        in Section 4 below, or as otherwise determined by the Committee, the Grantee
        shall forfeit any Performance Shares granted hereunder if he or she terminates
        employment with the Company and its Subsidiaries on or prior to the last
        day of
        the Performance Period. 

       

          (b)    Vesting
        upon Death or Disability.
        Notwithstanding Section 3(a) above, if the Grantee terminates employment
        due to
        death or Disability, a proportion of outstanding Performance Shares hereunder
        shall become vested upon the date of the Grantee’s termination of employment,
        determined by multiplying the number of Performance Shares issued and earned
        under this Grant Agreement at the conclusion of the Performance Period by
        a
        fraction, the numerator of which is the number of completed months of the
        Grantee’s service during the Performance Period prior to his or her termination
        of employment, and the denominator of which is thirty-six (36). 

       

          (c)    Vesting
        upon Retirement.
        Notwithstanding Section 3(a) above, if the Grantee terminates employment
        due to
        Retirement, a proportion of outstanding Performance Shares hereunder shall
        become vested upon the date of the Grantee’s Retirement, determined by
        multiplying the number of Performance Shares issued and earned at the conclusion
        of the Performance Period under this Grant Agreement by a fraction, the
        numerator of which is the number of completed months of the Grantee’ service
        during the Performance Period prior to Retirement, and the denominator of
        which
        is thirty-six (36); provided, however, that no vesting shall occur hereunder
        unless the Grantee complies with the provisions of Section 12 below throughout
        the remaining period of the Performance Period and after the conclusion of
        the
        Performance Period until payment of the Performance Shares. 

       

          (d)    Vesting
        upon Potential Change in Control.
        Notwithstanding Section 3(a) above, if, during a Potential Change in Control
        Period, the Company terminates the Grantee’s employment for any reason other
        than Cause or the Grantee resigns with Good Reason, the Grantee shall become
        immediately vested in a portion of his or her then outstanding Performance
        Shares as described in subparagraph (i) or (ii) below: 

       

      (i)    If
        such
        termination or resignation occurs within the first eighteen (18) months of
        the
        Performance Period, the Grantee shall become vested in a number of Performance
        Shares equal to the number of Target Award shares set forth in the Notice
        of
        Grant multiplied by a fraction, the numerator of which is the number of months
        from the Date of Grant through the end of the month of such termination or
        resignation and the denominator of which is thirty-six (36). 

       

       

      
        
          
            Performance
              Share Agreement 

          

          
            Page
              3 of
              11

            
              

            

          

          
            
            

          

           

        

      

      (i)    If
        such
        termination or resignation occurs after the first eighteen (18) months of
        the
        Performance Period, the Grantee shall become vested in the number of Performance
        Shares the Grantee would have earned if the Performance Period had ended
        on the
        date of such termination or resignation. 

       

      (e)    Change
        in Employment Status.
        The
        Grantee will not be deemed to have incurred a termination of employment
        hereunder solely as a result of a temporary absence from employment because
        of
        illness, vacation, approved leaves of absence, and transfers of employment
        among
        the Company and its Subsidiaries. 

       

           
 
        4.    Payment
        of Performance Shares

       

      Performance
        Shares will be paid in whole shares of the Common Stock of the Company within
        two and one-half (21⁄2) months after the end of the Performance Period; provided,
        however, that payment may be delayed if (a) the Committee reasonably determines
        that it is administratively impracticable to make payment by the time set
        forth
        above or that making such payment will jeopardize the solvency of the Company,
        (b) calculation of the amount of the payment is not administratively practicable
        due to events beyond the control of the Company, or (c) the Company reasonably
        anticipates that such payment (or any portion thereof) would not be deductible
        by the Company under Internal Revenue Code Section 162(m). If payment is
        delayed
        under the preceding sentence, payment will be made as soon as possible after
        the
        reason for delay no longer applies. The Company will withhold from any such
        payout cash or shares of Common Stock having a value equivalent to the amount
        needed to satisfy the minimum statutory tax withholding requirements of the
        Company in the appropriate taxing jurisdiction. Any fractional shares will
        be
        paid in cash.

       

      Notwithstanding
        the foregoing, the Committee may, in its sole discretion, permit a Grantee
        who
        continues as an employee of the Company throughout the Performance Period
        to
        elect to defer payment of Performance Shares hereunder by an election made
        under
        such terms, in such form, at such time and in such manner as the Committee
        shall
        determine, provided that such election shall not be made later than six months
        prior to the end of the Performance Period. 

       

            
        5.    Shareholder
        Rights on Performance Shares

       

      During
        the Performance Period and until the date of payment of Performance Shares
        as
        provided for in Section 4, the Grantee will not have voting rights with respect
        to the Performance Shares and will not receive or be entitled to receive
        dividends declared with respect to the Performance Shares during such period.
        

       

            
        6.   Issuance
        of Restricted Stock upon a Change in Control

       

      (a)   Conversion
        of Performance Shares.
        If a
        Change in Control occurs during the Performance Period, outstanding Performance
        Shares hereunder will automatically be converted into shares of Common Stock
        of
        the Company, as described in subparagraph (i) or (ii) below, whichever is
        applicable, which shall be subject to forfeiture until vested as described
        in
        paragraph (b) below (“Restricted Stock”). 

       

       

      
        
          
            Performance
              Share Agreement 

          

          
            Page
              4 of
              11

            
              

            

          

          
            
            

          

           

        

      

      (i)    If
        the
        Change in Control occurs within the first eighteen (18) months of the
        Performance Period, the Grantee shall receive shares of Restricted Stock
        equal
        to the number of Target Award shares set forth in the Notice of
        Grant.

       

      (ii)    If
        the
        Change in Control occurs after the first eighteen (18) months of the Performance
        Period, the Grantee shall receive shares of Restricted Stock equal to the
        number
        of Performance Shares the Grantee would have earned if the Performance Period
        had ended on the date of the Change in Control. 

       

      (b)    Vesting
        of Restricted Stock.
        Restricted Stock hereunder shall become vested provided that the Grantee
        remains
        in continuous employment with the Company or a Subsidiary as an Employee
        from
        the Date of Grant through the last day of the Performance Period or if the
        Grantee terminates employment due to Retirement, Disability or death. In
        addition, if the Grantee terminates employment for any reason other than
        Cause
        or resignation without Good Reason prior to the end of the Performance Period
        and within twenty-four (24) months after a Change in Control, all shares
        of
        Restricted Stock received under paragraph (a) above shall become fully
        vested.

       

      (c)    Shareholder
        Rights for Restricted Stock.
        The
        Grantee may exercise full voting rights with respect to shares of Restricted
        Stock during the Period of Restriction. The Grantee shall be paid regular
        cash
        dividends declared by the Company with respect to the underlying Shares during
        the Period of Restriction. Any other distributions with respect to the
        underlying Shares shall be held (without provision for interest accrual)
        subject
        to the Period of Restriction applicable to the underlying Shares. 

       

            
        7.    Award
        Non-Transferable

       

      A
        Performance Share or share of Restricted Stock may be not be transferred
        or
        assigned by the Grantee or by operation of law, other than by will or by
        the
        laws of descent and distribution. 

       

            
        8.    Right
        to Terminate

       

      NOTHING
        CONTAINED IN THE GRANT AGREEMENT OR THIS PERFORMANCE SHARE AGREEMENT SHALL
        CREATE A CONTRACT OF EMPLOYMENT OR GIVE RISE TO A RIGHT TO CONTINUE IN THE
        EMPLOY OF THE COMPANY OR ANY SUBSIDIARY, OR RESTRICT THE RIGHT OF THE COMPANY
        OR
        A SUBSIDIARY TO TERMINATE THE EMPLOYMENT OF THE GRANTEE AT ANY TIME.

       

            
        9.    
Adjustments

       

      In
        the
        event of any change in corporate capitalization, such as a stock split,
        reverse-split, stock dividend, combination, reclassification or similar
        recapitalization not involving the payment of consideration, or in the event
        of
        a corporate transaction, such as any merger, consolidation, separation,
        spin-off, reorganization or any partial or complete liquidation of the Company,
        an adjustment shall be made to the number and class of Performance Shares
        or
        Restricted Stock, as applicable, subject to this Agreement, as may be determined
        to be 

       

       

      
        
          
            Performance
              Share Agreement 

          

          
            Page 5
              of 11

            
              

            

          

          
            
            

          

        

      

       

      appropriate
        and equitable by the Administrator, in its sole discretion, to prevent dilution
        or enlargement of rights; provided, however, that the number of Shares subject
        to this Agreement shall always be a whole number.

       

            
        10.    Registration;
        Restrictions on Transfer

       

      (a)    The
        Company intends that any shares issued pursuant to this Agreement shall be
        listed on the New York Stock Exchange or other nationally recognized stock
        exchange, and registered under the Securities Act of 1933. If no such shares
        are
        available at the time of exercise, the Company may require the Grantee to
        provide such written assurances as it deems necessary to comply with the
        appropriate exemption from registration and may cause a legend to be placed
        on
        the shares being issued calling attention to the fact that they have been
        acquired for investment and have not been registered. If the listing,
        registration or qualification of the shares on any securities exchange or
        under
        any federal or state law, or the consent or approval of any governmental
        regulatory body is necessary as a condition of or in connection with the
        purchase or issuance of such shares, the Company shall not be obligated to
        issue
        or deliver shares earned hereunder unless and until such listing, registration,
        qualification, consent or approval shall have been effected or
        obtained.

       

      (b)    Shares
        issued hereunder shall be subject to any restrictions on transfer then in
        effect
        pursuant to the Certificate of Incorporation or By-laws of the Company, as
        each
        may be amended from time to time, and to any other restrictions or provisions
        attached hereto and made a part hereof or set forth in any other contract
        or
        agreement binding on the Grantee.

       

             
        11.    Definitions

       

      For
        purposes of this Performance Share Agreement, the following terms shall have
        the
        following respective meanings.

       

          (a)    “Administrator”
        means the Compensation Committee of the Board, or such other committee appointed
        by the Board to administer and interpret the terms and provisions of the
        Plan.

       

      (b)    “Board”
        means the Board of Directors of the Company.

       

      (c)    “Cause”
        means, as determined by the Administrator in its sole discretion:

       

      (i)    the
        Grantee’s conviction of a felony involving moral turpitude or entering into a
        guilty plea or plea of nolo
        contendere
        with
        respect to such crime; 

       

      (ii)    the
        Grantee’s willful and continued failure to substantially perform the duties and
        responsibilities of the Grantee’s position with the Company after a written
        demand for substantial performance is delivered to the Grantee by the Board,
        which demand specifically identifies the manner in which the Board believes
        that
        the Grantee has not substantially performed such duties or responsibilities;
        

       

      (iii)    the
        willful engaging by the Grantee in fraud or dishonesty relating to Grantee’s
        employment, or other willful misconduct or gross negligence of the
        Grantee,  

       

       

      
        
          Performance
            Share Agreement 

        

        
          Page
            6 of
            11

          
            

          

        

        
          
          

        

      

    

     

    
             
        which conduct is demonstrably and materially injurious to the Company or
        its
        reputation, monetarily or otherwise; or 

       

      (iv)   the
        Grantee’s willful violation of Company policies, which conduct is demonstrably
        and materially injurious to the Company or its reputation, monetarily or
        otherwise. 

       

      (d)  “Change
        in Control”
        means
        and shall be deemed to have occurred as of the date of the first to occur
        of the
        following events:

       

      (i)    any
        Person or Group acquires stock of the Company that, together with stock held
        by
        such Person or Group, constitutes more than 40% of the total Fair Market
        Value
        or total voting power of the stock of the Company. However, if any Person
        or
        Group is considered to own more than forty percent (40%) of the total Fair
        Market Value or total voting power of the stock of the Company, the acquisition
        of additional stock by the same Person or Group is not considered to cause
        a
        Change in Control of the Company. An increase in the percentage of stock
        owned
        by any Person or Group as a result of a transaction in which the Company
        acquires its stock in exchange for property will be treated as an acquisition
        of
        stock for purposes of this subsection. This subsection applies only when
        there
        is a transfer of stock of the Company (or issuance of stock of the Company)
        and
        stock in the Company remains outstanding after the transaction; 

       

      (ii)    a
        majority of members of the Company’s Board is replaced during any 24-month
        period by Directors whose appointment or election is not endorsed by a majority
        of the members of the Company’s Board prior to the date of the appointment or
        election; or 

       

      (iii)    there
        is
        consummated a merger or consolidation of the Company or any direct or indirect
        subsidiary of the Company with any other corporation, other than a merger
        or
        consolidation which would result in the voting securities of the Company
        outstanding immediately prior to such merger or consolidation continuing
        to
        represent (either by remaining outstanding or by being converted into voting
        securities of the surviving entity or any parent thereof) more than fifty
        percent (50%) of the combined voting power of the securities of the Company
        or
        such surviving entity or any parent thereof outstanding immediately after
        such
        merger or consolidation; provided, however, that if the approval of any federal
        or state regulatory agency is required in order to effectuate the merger
        or
        consolidation of the Company or any direct or indirect subsidiary of the
        Company
        with any other corporation, no such merger or consolidation shall be deemed
        to
        have been consummated prior to the attainment of all such required approval(s);
        or 

       

      (iv)    the
        stockholders of the Company approve a plan of complete liquidation or
        dissolution of the Company or there is consummated an agreement for the sale
        or
        disposition by the Company of all or substantially all of the Company’s assets,
        other than a sale or disposition by the Company of all or substantially all
        of
        the Company’s assets to an entity, more than fifty percent (50%) of the combined
        voting power of the voting 

       

      
         

        
          
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        securities
          of which are owned by stockholders of the Company in substantially the
          same
          proportions as their ownership of the Company immediately prior to such
          sale.

      

       

      For
        these
        purposes, the term “Person” shall mean an individual, corporation, association,
        joint stock company, business trust or other similar organization, partnership,
        limited liability company, joint venture, trust, unincorporated organization
        or
        government or agency, instrumentality or political subdivision thereof (but
        shall not include the Company, any underwriter temporarily holding securities
        pursuant to an offering of such securities, any trustee or other fiduciary
        holding securities under an employee benefit plan of the Company, or any
        Company
        owned, directly or indirectly, by the stockholders of the Company in
        substantially the same proportions as their ownership of Voting Stock of
        the
        Company). The term “Group” shall have the meaning set forth in Rule 13d-5 of the
        Securities Exchange Commission (“SEC”). If any one Person, or Persons acting as
        a Group, is considered to effectively control the Company as described in
        subsections (b) or (c) above, the acquisition of additional control by the
        same
        Person or Persons is not considered to cause a Change in Control. 

       

      (e)    “Code”
        means the Internal Revenue Code of 1986, as amended from time to time, or
        any
        successor thereto.

       

      (f)    “Director”
        means any individual who is a member of the Board.

       

      (g)    “Disability”
        .means
        that the Grantee (i) is unable to engage in any substantial gainful activity
        by
        reason of any medically determinable physical or mental impairment that can
        be
        expected to result in death or to last for a continuous period of not less
        than
        12 months; (ii) is, by reason of any medically determinable physical or mental
        impairment that can be expected to result in death or can be expected to
        last
        for a continuous period of not less than 12 months, receiving income replacement
        benefits for a period of not less than 3 months under an accident and health
        plan covering employees of the Company; or (iii) has been determined to be
        totally disabled by the Social Security Administration

       

      (h)    “Employee”
        means any individual who is an employee of the Company or any
        Subsidiary.

       

      (i)    “Fair
        Market Value” means the average of the highest and lowest sales prices of the
        Stock as reported on the consolidated tape for securities listed on the New
        York
        Stock Exchange (“NYSE”) (or, if the Stock is not listed on the NYSE, such other
        established securities market on which the Stock is traded) on a particular
        date. In the event that there are no Stock transactions on such date, the
        Fair
        Market Value shall be determined by utilization of the above formula as of
        the
        immediately preceding date on which there were Stock transactions.

       

      (j)    “Good
        Reason” for termination by the Grantee of his or her employment shall mean the
        occurrence (without the Grantee’s express written consent) after a Change in
        Control or during a Potential Change in Control Period of any one of the
        following events, unless, except in the case of an act described in subsection
        (vi) or (vii) below, such event is corrected prior to the date of termination
        specified in the notice of termination given in respect thereof:

       

      (i)    a
        change
        in the Grantee’s position or responsibilities which represents a material and
        adverse change from the Grantee’s position or responsibilities as in effect

       

      
        
           

          
            
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      immediately
        prior to such change; the assignment to the Grantee of any duties or
        responsibilities which are substantially inconsistent with the Grantee’s
        position or responsibilities as in effect immediately prior to such assignment;
        or any removal of the Grantee from or failure to reappoint or reelect the
        Grantee to any of such offices or positions, except in connection with
        termination of the Grantee’s employment for Disability, Cause, as a result of
        the Grantee’s death or by the Grantee other than for Good Reason;

       

      (ii)    a
        reduction in the Grantee’s base salary, other than a reduction of base salary of
        not more than ten percent (10%) generally and simultaneously applicable to
        all
        [senior] executives of the Company; 

       

      (iii)    a
        reduction in the bonus and/or incentive compensation opportunity available
        to
        the Grantee, unless such reduction is generally and simultaneously applicable
        to
        all [senior] executives of the Company;

       

      (iv)    a
        material reduction in the aggregate value of employee benefits provided or
        available to the Grantee, unless such reduction is generally and simultaneously
        applicable to all [senior] executives of the Company; 

       

      (v)    the
        Company requiring the Grantee to be based at an office that is greater than
        50
        miles from where the Grantee’s office is located immediately prior to the Change
        in Control and also more than 50 miles from the Grantee’s then current principal
        place of residence, except for required travel on the Company’s business to an
        extent substantially consistent with the business travel obligations which
        the
        Grantee undertook on behalf of the Company prior to the Change in Control;
        or

       

      (vi)    failure
        by the Company to obtain a satisfactory agreement from any successor to assume
        and agree to perform this Agreement; or 

       

      (vii)    any
        purported termination of the Grantee’s employment which is not effected pursuant
        to a notice of termination required under any agreement applicable to the
        Grantee.

       

      In
        order
        for the Grantee’s termination to be deemed to be for Good Reason, the Grantee
        must deliver written notice of termination to the Company describing the
        event(s) alleged to constitute Good Reason within ninety (90) days of the
        occurrence of such event(s). Such notice of termination shall specify the
        Grantee’s date of termination, which date shall not be earlier than fourteen
        (14) days nor more than sixty (60) days after the date of the notice of
        termination. Except in the case of an event described in subsection (vi)
        or
        (vii) above, the Company may fully correct the event(s) constituting Good
        Reason
        within a reasonable period of time (not to exceed fourteen (14) days) after
        receiving the notice of termination; provided, however, that no opportunity
        to
        correct for any Good Reason event which recurs after a prior correction by
        the
        Company. 

       

      (k)    “Potential
        Change in Control” shall be deemed to have occurred if any of the following
        events shall have occurred:

       

      
        
           

          
            
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      (i)    the
        Company enters into an agreement, the consummation of which would result
        in the
        occurrence of a Change in Control; 

       

      (ii)    the
        Company publicly announces an intention to take or to consider taking actions
        which, if consummated, would constitute a Change in Control; 

       

      (iii)    any
        Person becomes the Beneficial Owner, directly or indirectly, of securities
        of
        the Company representing twenty percent (20%) or more of either the then
        outstanding shares of common stock of the Company or the combined voting
        power
        of the Company’s then outstanding securities; or

       

      (iv)    the
        Board
        adopts a resolution to the effect that, for purposes of this Agreement, a
        Potential Change in Control has occurred.

       

      (l)    “Potential
        Change in Control Period” shall commence upon the occurrence of a Potential
        Change in Control and shall lapse upon the occurrence of a Change in Control
        or,
        if earlier (i) with respect to a Potential Change in Control occurring pursuant
        to Section 11(k)(i); immediately upon the abandonment or termination of the
        applicable agreement; (ii) with respect to a Potential Change in Control
        occurring pursuant to Section 11(k)(ii), immediately upon a public announcement
        by the Company that it has abandoned its intention to take or consider taking
        actions which, if consummated, would result in a Change in Control; or (iii)
        with respect to a Potential Change in Control occurring pursuant to Section
        11(k)(iii) or (iv), upon the two year anniversary of the occurrence of a
        Potential Change in Control (or, in the case of a Potential Change in Control
        occurring pursuant to Section 11(k)(iv), such earlier date as may be determined
        by the Board). In addition to the foregoing, any termination of the Grantee
        by
        the Company at the request of a third party in contemplation of a Change
        in
        Control or Potential Change in Control shall be deemed to have occurred within
        a
        Potential Change in Control Period.

       

      (m)    “Retirement”
        means termination of employment of the Grantee after he or she has become
        eligible for an immediate early, normal or late retirement benefit under
        the
        terms of a defined benefit pension plan sponsored by the Company and applicable
        to the Grantee. 

       

      (n)    “Subsidiary”
        means any corporation, partnership, joint venture, affiliate, or other entity
        in
        which the Company is at least a majority-owner of all issued and outstanding
        equity interests or has a controlling interest.

       

             
        12.    Restrictive
        Covenants

       

      This
        paragraph shall apply upon Retirement of the Grantee, during any period in
        which
        any Performance Shares of the Grantee continue to vest and/or be exercisable
        in
        accordance with Section 3(b) or 3(d) of this Agreement:

       

      (a)    Non-Competition.
        The
        Grantee shall not, without the Board’s prior written consent, directly or
        indirectly engage in, have any equity interest in, or assist, manage or
        participate in (whether as a director, officer, employee, agent, representative,
        security holder, consultant or otherwise) any Competitive Business; provided,
        however, that: (i) the Grantee shall

       

      
        
           

          
            
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      be
        permitted to acquire a passive stock or equity interest in such a Competitive
        Business provided the stock or other equity interest acquired is not more
        than
        five percent (5%) of the outstanding interest in such a Competitive Business;
        and (ii) the Grantee shall be permitted to acquire any investment through
        a
        mutual fund, private equity fund or other pooled account that is not controlled
        by the Grantee and which he has less than a five percent (5%) interest. For
        purposes of this provision, the term “Competitive Business” shall mean the
        business of purchasing, supplying, generating, trading, buying (other than
        as a
        retail customer), selling or distributing natural gas or electricity, where
        such
        business activity occurs in, or originates or terminates in, the State of
        Arizona, and also refers to any entity (including any subsidiaries, parent
        entities or other affiliates thereof) which, as of the Grantee’s date of
        termination, engages in any such business.

       

      (b)    Non-Solicitation.
        The
        Grantee will not, directly or indirectly recruit or otherwise solicit or
        induce
        any non-clerical employee, director, consultant, customer, vendor or supplier
        of
        the Company to terminate his, her or its employment or arrangement with the
        Company or otherwise change his, her or its relationship with the Company.
        

       

      (c)     Confidentiality.
        The
        Grantee shall maintain in confidence and shall not directly, indirectly or
        otherwise, use, disseminate, disclose or publish, or use for his or her benefit
        or the benefit of any person, firm, corporation or other entity, any
        confidential or proprietary information or trade secrets of or relating to
        the
        Company, including, without limitation, information with respect to the
        Company’s operations, processes, products, inventions, business practices,
        finances, principals, vendors, suppliers, customers, potential customers,
        marketing methods, costs, prices, contractual relationships, regulatory status,
        business plans, designs, marketing or other business strategies, compensation
        paid to employees or other terms of employment, or deliver to any person,
        firm,
        corporation or other entity any document, record, notebook, computer program
        or
        similar repository of or containing any such confidential or proprietary
        information or trade secrets. Notwithstanding anything herein to the contrary,
        nothing shall prohibit the Grantee from disclosing any information that is
        generally known by the public. 

       

      (d)    Non-Disparagement.
        The
        Grantee will not criticize, defame, be derogatory toward or otherwise disparage
        the Company (or the Company’s past, present and future officers, directors,
        stockholders, attorneys, agents, representatives, employees or affiliates),
        or
        its or their business plans or actions, to any third party, either orally
        or in
        writing; provided, however, that this provision will not preclude the Grantee
        from giving testimony in response to a lawful subpoena or preclude any conduct
        protected under 18 U.S.C. Section 1514A(a) or any similar state or federal
        law
        providing “whistleblower” protection to the Grantee. 

       

             
        13.    Administration
        and Interpretation

       

      The
        Administrator shall administer and interpret the terms and provisions of
        this
        Performance Share Agreement and of the Plan. Any interpretation and construction
        by the Administrator of any term or provision of the Plan, this Performance
        Share Agreement, or other matters related to the Plan shall be final, conclusive
        and binding upon the Grantee and his or her estate, permitted transferees
        and
        assignees, personal representative and beneficiaries.

       

      
        
           

          
            
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