Arizona utility board votes down proposed buyout of Tucson utility's parent
By David Wichner, The Arizona Daily Star, Tucson -- Dec. 22
State utility regulators rejected a $3 billion leveraged buyout of Tucson Electric Power Co.'s parent company Tuesday, saying hundreds of millions of dollars in new debt posed too great a risk to ratepayers.
Commissioners Kris Mayes and Bill Mundell, already opponents of the deal,
were joined by Commissioner Jeff Hatch-Miller in voting against the amendment,
which sealed the deal's fate.
Hatch-Miller said he remained undecided headed into Tuesday's hearing.
"I had to wait and see if there was clear and convincing evidence that
this was good for Arizona, and I didn't see it," said Hatch-Miller.
He cited the new risk to ratepayers from up to $660 million of new debt at
the parent company. Ratepayers' utility payments would service the debt if a
Wall Street investment group led by takeover specialist Kohlberg Kravis Roberts
& Co., or KKR, completes the buyout.
UniSource Chairman and CEO James Pignatelli sprang to the podium following
the failure of the amendment and told the panel the decision was "the worst
thing that has passed in my time."
Commission Chairman Marc Spitzer said he was disappointed the amendment,
which he sponsored, didn't pass. He contended UniSource and TEP face risks under
the current company structure, including a possible takeover by another utility
and higher borrowing costs.
"It was simply a question of five members, all elected by the public,
all reaching a different conclusion," said Spitzer, a former tax attorney.
"I'm still concerned with the status quo -- I hope the risks don't end up
harming ratepayers."
Pignatelli told reporters after the hearing that UniSource will file for
reconsideration by the commission. But later, UniSource issued a statement
saying it is only considering seeking a rehearing of the matter. The statement
acknowledged timely approval of the deal is "unlikely."
The deal's fate was uncertain headed into hearings that began Monday at the
Corporation Commission's Downtown Tucson office.
After weeklong hearings last summer, Corporation Commission Administrative
Law Judge Jane Rodda recommended in September that the full panel reject the
deal. She argued ratepayers would take on new debt risk with no tangible benefit
in return.
By late Tuesday, after two days of sometimes heated testimony, the deal's
fate appeared to rest on the Spitzer amendment. Among other things, it would
have prompted the buyers to add $50 million in new equity to UniSource's utility
subsidiaries and add new service-quality standards.
But after the amendment went down, the commission approved the judge's
recommended order denying the deal on a 4-1 vote, with Spitzer dissenting.
Commissioner Mike Gleason, who supported the buyout with additional
safeguards, voted for the final order rejecting it, saying he wanted to be with
the majority. Only a commission member who has voted with the majority may later
move for reconsideration of a final order.
"I think there was unfortunately a lot of misinformation put out about
this thing," said the Sun City West Republican, who had sparred with Rodda
Monday as she defended her recommendation.
On Tuesday, Mayes and Mundell pressed for a rate freeze or decrease to offset
the increased risk to ratepayers.
Mayes said TEP ratepayers deserved some financial benefit from the deal,
because they have been paying higher rates much of the past decade to help pull
TEP from the brink of bankruptcy after a series of investments went sour in the
early 1990s.
"Shareholders would have made millions of dollars, but ratepayers would
have been left holding a big bag of nothing but risk," she said.
In a prepared statement, UniSource said it would weigh its options, including
asking for a rehearing or terminating the deal, which would obligate the company
to pay the investment group up to $7 million to cover its costs. UniSource
shareholders would absorb that cost.
The matter cannot be revived until at least mid-January, under procedures to
initiate a rehearing of the case.
If the deal never goes through, Pignatelli said, UniSource will continue to
provide safe, reliable service.
Though TEP rates are frozen until 2008 under a previous rate ruling, the
company says it may need a rate increase whether the buyout is approved or not,
to cover rising costs. The deal would have injected more than $250 million into
TEP, reducing the utility's capital costs and indirectly reducing the need for
higher rates, the company said.
"Although this transaction would provide significant benefits for this
company and our customers, we will retain our fundamental strength and stability
regardless of its outcome," Pignatelli said in the company's statement.
During Tuesday's hearing, Mundell pressed Pignatelli for a possible rate
freeze or credit, citing figures showing that top UniSource management would
reap nearly $40 million in cash compensation and stock sales from the deal.
"With everyone making all these millions of dollars, wouldn't it be
equitable for the ratepayers to receive something from the transaction?"
Mundell asked.
Pignatelli said TEP ratepayers already would get a benefit from a stronger
company with lower debt, which could cut interest costs and relieve some
pressure on rates.
Mundell also pressed a member of the buyout group on the group's plans for
UniSource when it came time to liquidate its investment, which has been
estimated at six to eight years.
He asked KKR member Scott Stuart if the investors, which also include J.P.
Morgan Partners and Wachovia Capital, would be willing to accept a five-year
moratorium on any subsequent sale of UniSource.
Stuart said the investors opposed any sale restrictions.
Tubac resident Marshall Magruder, a gas and electric customer of UniSource
Energy Services who acted as an official party to the buyout case, said he was
relieved by the decision.
"I want a better system, and I don't see this as the way to do it,"
said Magruder, a retired engineer. "All this new debt -- there's only one
person who will pay for that, and that's the ratepayer."
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