To: Editors, News Directors	Date: December 23, 2004
For: Immediate Release

Commission Rejects UniSource Acquisition

PHOENIX – After two full days of deliberation on the proposed purchase of UniSource Energy by an investor group, the Commissioners voted Tuesday to deny the acquisition.  Commissioners Bill Mundell, Jeff Hatch-Miller, Mike Gleason and Kris Mayes voted to approve the Recommended Opinion and Order drafted by Administrative Law Judge Jane Rodda in early November.  Commission Chairman Marc Spitzer cast a dissenting vote. 

Judge Rodda’s recommendation, now approved by a majority of the Commissioners, found that the risks of the proposed UniSource reorganization outweighed any expected benefits and that the standard of review prescribed under Arizona law therefore requires denial of the transaction.

The applicants argued that the transaction should be approved because it would enhance the company’s financial status, its ability to attract capital and its ability to provide safe and reliable utility service.  A majority of the Commissioners and the judge reached a different conclusion after reviewing all aspects of the proposal.  They concluded that the transaction does not meet the standard of being in the public interest.

What did the Commissioners focus on during their two days of deliberation?

The Commissioners each asked detailed questions of the judge, applicant and other parties involved in the case.  Many of the questions dealt with the risks the transaction might pose to the customers – the ratepayers – who depend on the regulated utilities.

Questions from Mayes and Commissioner Mundell centered on whether or not the ratepayers should be compensated with a rate credit and/or a rate freeze for having helped Tucson Electric Power emerge from serious financial troubles in the early 1990s.

Commissioner Gleason drafted eight amendments that, if offered and approved, would have led to approval of the deal with additional safeguards.  Gleason asked pointed questions of the applicant and judge about the issue of “tangible benefits.”  Judge Rodda had concluded that the deal lacked tangible benefits for ratepayers while the applicant and investors argued that the transaction included tangible benefits.

Commissioner Hatch-Miller asked several questions of Frederick Rentschler, former head of Armour-Dial, Northwest Airlines and Beatrice Foods, about how he planned to interact with UniSource’s management.  Rentschler would be the lead director of the controlling limited partnership if the transaction earned Commission approval.

The limited partnership proposed paying $1.2 billion – $556.7 million in equity and $660 million in debt – to acquire UniSource and infuse cash into Tucson Electric Power. 

Although he opposed the original buyout proposal, Chairman Spitzer offered a lengthy amendment that would add ratepayer benefits and protect against specific risks inherent in the original proposal.  The Spitzer amendment would have overturned some of Judge Rodda’s findings and opened the door for the Commissioners to approve the transaction.  Among other things, the Spitzer amendment would have required the investors to infuse an additional $50 million into Tucson Electric Power, UniSource Gas and UniSource Electric.

Spitzer’s amendment also required the investors to form a corporation instead of a limited partnership.  The corporate form, he said, would allow for greater transparency and enhance the Commission’s ability to examine the books and records of the new owners. 

The same amendment would have required the Commission and utility units to establish service reliability standards and specific reliability benchmarks to ensure that consumers have dependable service.  Spitzer’s amendment, offered in the late afternoon on Tuesday, December 21, failed to pass with the only votes in favor coming from Gleason and Spitzer.

The Commissioners voted to approve all but the first paragraph of Commissioner Mundell's amendment which strengthened Judge Rodda's Recommended Opinion and Order.  The Commissioners also approved a Hearing Division amendment that corrected typographical errors.  Finally, the Commissioners voted on the amended order which denied the transaction finding that it was not in the public interest.  (View the Recommended Opinion & Order and amendments at http://www.cc.state.az.us/utility/electric/uecr.htm.)

What could happen next?

The applicant or any other party may request reconsideration of the Commission's decision by filing such a request within 20 days of the date the Commission order is signed.  If an application for reconsideration is filed, it will be at the Commissioners' discretion whether or not they wish to reconsider their decision.

Who was proposing to acquire UniSource and when did these plans surface?

UniSource filed an application on December 29, 2003 to be acquired by Saguaro Utility Group, a private equity partnership.  Saguaro Utility Group’s general partner is Sage Mountain LLC, an Arizona company managed and owned by Frederick Rentschler, former president and CEO of Armour-Dial, Beatrice Companies and Northwest Airlines.  The group’s limited partners are investment funds affiliated with Kohlberg Kravis Roberts & Company, J.P. Morgan Partners and Wachovia Capital Partners.

Tucson-based UniSource is the ultimate parent company of Tucson Electric Power and UniSource Energy Services, UniSource Gas and UniSource Electric.  These two subsidiaries are regulated by the Arizona Corporation Commission and provide electric or natural gas utility service to 550,000 customers in Arizona.

How can I learn more about this case?

For more information about is case or the steps leading up to the release of this Recommended Opinion and Order, visit the Commission’s webpage at http://www.cc.state.az.us/utility/electric/uecr.htm.

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Statements from the Commissioners:

Chairman Marc Spitzer:  “My opinion differed from the opinion of Judge Rodda.  I respect the judgment of my colleagues.  While I recognize that this transaction involved some risk, the concessions agreed to in the company’s exceptions and the additional terms I sought in my amendment would have mitigated that risk.  I think there is equal and perhaps greater risk in the status quo [UniSource as a publicly-traded, shareholder-owned entity].  It is imperative that government be fair and that the institutions of government work properly.  Although I am in disagreement with the results, this process had integrity.”

Commissioner Bill Mundell:  “The broad public policy question today is:  Should a monopoly that provides a necessity of life, electricity or natural gas, be owned by a small group of private investors who purchase the monopoly by taking on a high degree of debt.  Is it in the public interest?  The judge in this case said it is not in the public interest.  The issue for the Commissioners is:  Are we going to disregard the judge’s well-reasoned and thoughtful opinion?  I cannot.  I do not find this transaction in the public interest.”

Commissioner Jeff Hatch-Miller:  “I tried throughout this process to withhold my judgment until we had all the facts.  I was looking for clear and convincing evidence that this buyout was in the best interests of Arizona citizens.  Arizonans were protected from immediate damage yet the deal created extremely high debt – $660 million in debt – and allowed 100 percent of the profits to move out of the regulated utility companies altogether.  Unfortunately, after studying all angles of this case, I could not find the evidence I needed to vote in favor of the deal.  The only just outcome was to deny this application.”

Commissioner Mike Gleason:  “I am disappointed that the majority of the Commissioners did not see the benefits to the reorganization and vote for the Spitzer amendment.  It would have made TEP a stronger utility by reducing its debt, providing better access to capital and providing job security to both management and labor.  I think we missed a golden opportunity.”

Commissioner Kris Mayes:  “My bottom line is whether this transaction adequately protects the ratepayers.  We know the investors have much to gain but I’m not sure the ratepayers have much to gain.  I am voting in favor of Recommended Order as amended because I believe, in the final analysis, this transaction lacked tangible benefits.  The problem was that all the fruits of the ratepayers’ sacrifices would be reaped by the shareholders.  Because ratepayers are not adequately protected, I must vote against the acquisition.”