To: Editors, News Directors	Date: November 8, 2004
For: Immediate Release

ALJ Issues Recommendation in UniSource Reorganization

Commissioners can Accept, Change or Deny Recommendation

PHOENIX – Administrative Law Judge Jane Rodda issued her Recommended Opinion and Order in the UniSource reorganization case.  Tucson-based UniSource is the parent company of Tucson Electric Power (TEP) and UniSource Energy Services.  These two subsidiaries are regulated by the Arizona Corporation Commission and provide electric or natural gas utility service to 550,000 customers in Arizona.

Following the administrative law hearing, which ended in July, Rodda studied the testimony of the various parties, read through thousands of pages of transcripts and legal briefs and evaluated the merits of the case.  This recommendation represents her determination that the reorganization is not in the public interest.  

What factors led the Administrative Law Judge to recommend denial of the transaction?

The Recommended Opinion and Order finds that the risks of the proposed reorganization of UniSource outweigh any expected benefits and recommends that it be denied.  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.  The judge reached a different conclusion after reviewing all aspects of the proposal.  The Administrative Law Judge concluded that the transaction does not meet the standard of being in the public interest.  The judge also determined that the transaction does not support a finding that is required by the affiliated interest rules, specifically R14-2-803(c).

In assessing the transaction and testimony, the Administrative Law Judge finds that the risks of the transaction include:

· Increased leverage.  Although under the reorganization proposal, TEP’s debt would be paid down and its capital structure improved from 25% equity to 40% equity, the debt would be replaced by new debt at the holding company level.  Overall leverage would increase slightly, but the source of repayment – TEP earnings – remains the source of debt service.  Judge Rodda found that the financial risk associated with the leverage exposes ratepayers to unacceptable risk, without compensable benefit.

· Inadequate protection from bankruptcy.  The judge finds that shifting the debt to the parent level increases the risks associated with a potential bankruptcy at the parent level.  UniSource has stated it will not commit to the protective language suggested by Staff’s conditions.  Even if it could guarantee that lenders would accept the language, the proposed condition does not address the situation in which a creditor could obtain control of UniSource stock through a sale in bankruptcy.  The risk of bankruptcy appears remote at this time, but the inability to protect ratepayers from its potential remains a weakness of the transaction, the judge finds.  Ratepayers would receive no benefit for the risk.

· The limited partnership structure also adds risks.  As was demonstrated in the course of this proceeding, the Commission’s oversight and ability to obtain relevant information from the limited partners is not as strong as with a publicly-traded corporate parent.  Any inability to obtain potentially relevant documents may weaken the Commission’s ability to monitor the activities of non-utility affiliates.

· Corporate governance.  The general partner would have tremendous authority over the operations of the holding company and the utility subsidiaries but has no experience in the public utility arena.  The lack of experience by the General Partner is exacerbated by the reduction in experience at the board of directors level.

Did the Administrative Law Judge consider the benefits of the transaction?

The Administrative Law Judge concludes that the benefits of the transaction are minimal.

· Shareholder premium.  Shareholders would receive a premium over the market price of their stock, but ratepayers receive no immediate benefit.  The recommendation finds that ratepayers are entitled to receive a benefit because of their contribution to the restoration of TEP’s financial health after the company flirted with bankruptcy in the 1990s.

· Improved capital structure.  The improvement in the TEP capital structure is not likely to have an appreciable effect on rates, even with the expected decrease in the cost of debt and equity.

· Local presence.  The judge found that the promise to maintain a local presence is a hollow one as there is no evidence that UniSource would be acquired by another entity or is likely to move its headquarters.  In any event, the Commission must approve any future proposed merger or acquisition, and community presence would be a factor in the Commission’s public interest deliberations regarding the proposed transaction.

· Investments in operations and maintenance.  The judge concluded that the record does not support a conclusion that ratepayers receive a benefit from the commitment to spend $1.5 billion for operations and maintenance over the next three years.  Moreover, UniSource and its public utility subsidiaries are already obligated to spend sufficient capital to ensure adequate and reliable service on an ongoing basis.

As proposed by UniSource, intervenors AUIA and the IBEW Locals 387 and 769 support the reorganization.  The Commission staff and intervenors RUCO, Mohave County and Mr. Magruder initially opposed the transaction.  The parties opposing the transaction generally believed the increased risk from the leveraged buyout by private investors added risk without providing comparable benefits to ratepayers.  Even if the Commission adopted all of the conditions that its staff recommended in an attempt to reduce risks, the Commission’s staff remained neutral on whether the transaction should be approved.

Who is 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.

Will our rates be affected if the reorganization takes place?

There are no electric or gas rate changes associated with this reorganization application.  Tucson Electric Power’s rates are frozen through 2008 and UniSource Electric and Gas rates are frozen through August 1, 2007.

What will the Commissioners do now that the recommendation is out?

The Commissioners will spend the next several weeks studying Rodda’s recommendation, reviewing transcripts and testimony and preparing to make a final decision on the case.  Parties and intervenors that take issue with the judge’s recommendation may file statements outlining their concerns by November 17, 2004.  The Commissioners are not bound by Rodda’s recommendation.  They can propose changes to the recommendation, deny it or accept it as written.

I don’t understand.  If the Administrative Law Judge is on staff, isn’t she working under the direction of the Commissioners?

Staff does work under the direction of the Commissioners; however, where there are contested cases – cases with two or more opposing parties – the Commissioners have the role of final judges.  Administrative Law Judges work in the Hearing Division of the Commission.  Their role is to set procedural rules and deadlines, take evidence, preside over oral argument at the hearing and then make a recommendation to the Commissioners.  The judge makes a recommendation based on his or her reading of the evidence, testimony and his or her study of state laws and regulations.

The Commissioners are prohibited from speaking to any of the other parties or outside persons about the merits of the case while the case is pending.  There are barriers – rules of conduct – to prevent cases from being decided before all the facts are gathered and a 360-degree review of the case is complete. 

Can I talk to the Administrative Law Judge or the Commissioners about this case?

No, not at this time.  The judge’s recommendation stands on its own merit and she will not entertain calls or inquiries about specific aspects of the recommendation.  Because the Commissioners have to act as judges in this case, they will not comment on the substance or merits of the Recommended Opinion and Order until all five Commissioners can meet in a public open meeting to discuss the case.

When will the Commissioners meet to decide this case?

The Commission staff will be working over the next several weeks to find a date and time when all five Commissioners and the parties can meet.  This meeting is likely to take place in the Commission’s Tucson office.  Please check the UniSource Reorganization page on our website periodically (http://www.cc.state.az.us/utility/electric/uecr.htm).  The official notice of the meeting will be posted there as soon as the schedule is finalized.

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.