Arizona Corporation Commission's Staff Opposes UniSource Energy Buyout
The Arizona Daily Star, Tucson - May 2, 2004
The utilities staff of the Arizona Corporation Commission says a proposed $3 billion buyout of UniSource Energy Corp. doesn't do enough to ensure safe, reliable utility service, and has recommended the utility panel reject the deal.
A group of Wall Street investors led by buyout specialists Kohlberg Kravis
Roberts & Co. has proposed buying UniSource in a leveraged deal worth about
$3 billion in cash and debt. UniSource shareholders approved the buyout in
March.
In written testimony filed Friday in preparation for hearings that begin in
late June, the Corporation Commission staff concluded that the deal poses new,
unacceptable risks for Uni-Source's regulated utilities.
Besides the state-regulated TEP, which serves more than 360,000 electric
ratepayers in the Tucson area, the company's UniSource Energy Services
subsidiary serves about 200,000 electric and natural-gas customers in rural
Northern and Southern Arizona.
Already heavily burdened by debt, UniSource could be forced to take on new
and greater debts, and the parent company could look to draw profits from TEP,
according to the staff's testimony.
Steve Lynn, vice president for communications and government relations at
both Uni-Source and TEP, said the company still is confident it can satisfy
regulators of the deal's benefits.
"This is a process. The staff is supposed to raise issues they feel are
important," Lynn said. "We are still confident this is a transaction
that is in the public interest and its benefits go far beyond those issues
raised in the staff report."
Lynn said the company looks forward to allaying the staff's concerns in
hearings set to begin before a Corporation Commission administrative law judge
June 21.
"We can provide the staff and the commission with the information to
successfully satisfy these concerns and win approval of the transaction as being
in the public interest," he said.
The administrative law judge will consider testimony from the staff, the
company, its suitors and intervenors including the Residential Utility Consumers
Office. The judge then will make a recommendation to the full, five-member
commission, which will consider the matter in hearings expected to occur by late
summer.
In its comments, the commission staff said leveraged buyouts typically result
in major pressure to cut costs, but the UniSource deal contains no enforceable
protections against cuts that could affect safe and reliable electric service.
The staff testimony also cites the acquiring partners' lack of utility
management experience and says the buyout documents and subsequent company
testimony fail to adequately address what would happen if the group takes on a
new general partner, or makes other ownership changes or investments, according
to the staff testimony.
The deal also lacks firm commitments regarding commission access to books and
records and issues such as community support or headquarters location, the staff
said.
UniSource has said the acquisition agreement commits the buyers to keep the
company's headquarters in Tucson and to keep charitable giving and other
community involvement at the same or increased levels.
A Corporation Commission official said members of the elected panel would not
comment on the staff's testimony.
"At this point, it would be inappropriate for any of the commissioners
to comment on it when they're actually going to rule on it later on,"
commission spokeswoman Heather Murphy said.
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