Arizona denial of utility sale may be of interest in Oregon

By Gail Kinsey Hill, The Oregonian, Portland, Ore. -- Dec. 22

Arizona regulators on Tuesday denied the sale of Tucson Electric Power to Saguaro Utility Group, a private equity partnership led by buyout king Kohlberg Kravis Roberts & Co.

The 4-1 vote by the Arizona Corporation Commission accepted the recommended order of an administrative law judge, which found that the risks of the proposed transaction outweighed any expected benefits.

Repercussions of the vote could filter through to Oregon, where utility regulators are deciding whether to approve buyout firm Texas Pacific Group's proposal to acquire Portland General Electric from Enron for $2.35 billion.

Although details differ, the fundamental concept in each deal is similar: A limited-liability corporation created and financially backed by a large buyout firm would acquire a local electric utility. In each case, regulators and consumer groups have expressed concerns about a debt-heavy financing package and a corporate structure that limits financial disclosure, among other aspects of the deals.

Investors also are watching regulators' handling of the deals. Until recently, private-equity investment companies have ignored regulated utilities because they lacked big-profit potential. The interest from KKR and Texas Pacific could mark an acquisition trend, experts say, as investment firms seek a few low-risk acquisitions to anchor their portfolios.

Critics and advocates of Texas Pacific's proposal took different views of the significance of the Arizona decision.

In Arizona, "They looked at this model and the evidence, and they rejected it," said Bob Jenks, executive director of the Citizens' Utility Board in Oregon, a consumer watchdog group. "They saw that it didn't make a lot of sense, and it didn't have many incentives."

Jenks and other consumer and business advocacy groups have asked the Oregon Public Utility Commission to reject the Texas Pacific proposal. The PUC staff also has recommended denial unless Texas Pacific agrees to additional conditions designed to protect PGE finances and to reduce rates for the utility's 755,000 customers.

Texas Pacific shrugged off the Arizona decision.

"It has no bearing on our proposal under review here," said John Mangan, a spokesman for Oregon Electric Utility, the limited-liability corporation created by Texas Pacific to carry out the purchase and to serve as the holding company for PGE.

"There are significant differences" between the two proposals, Mangan said. "Oregon Electric's has substantially more benefits for customers and significantly fewer risks."

Texas Pacific is one of the country's largest investment firms, with $13 billion under management.

KKR, with equity investments topping $18 billion, is considered the leader in the buyout industry.

UniSource Energy Corp., the parent company of Tucson Electric and UniSource Energy Services, on Dec. 29, 2003, first filed its request to be acquired by Saguaro Utility Group in a deal valued at about $3 billion.

UniSource can request reconsideration of the commission's denial. In a statement issued late Tuesday, UniSource said it was reviewing its options.

KKR was not immediately available for comment. In a brief interview last week, KKR founder George Roberts downplayed the significance of the draft order from Administrative Law Judge Jane Rodda.

"Her concerns are not reflective of reality," he said.

Saguaro Utility Group also includes investors J.P. Morgan Partners and Wachovia Capital Partners. Saguaro was to buy all UniSource stock and take the company private.

UniSource subsidiaries serve 550,000 electric and natural gas customers in Arizona.

The Oregon PUC is expected to issue a ruling on the Texas Pacific proposal by the end of January.

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