After two days of debate and several failed amendments, the Arizona Corporation Commission (ACC) last Tuesday rejected the proposed sale of Tucson Electric Power’s (TEP’s) parent company, UniSource Energy Corp., to a private investor group headed by the Wall Street leveraged-buyout firm of Kohlberg Kravis Roberts & Co. (KKR). The commissioners on a 4-1 vote supported a regulatory judge’s recommendation to reject the multi-billion-dollar deal.

ACC Chairman Marc Spitzer attempted to salvage the sale through an amendment pumping up the equity infusion into the deal, but in the end he was outvoted by his elected colleagues on the five-member commission. Spitzer said he thought there were risks in staying with the status quo, which includes UniSource being over-leveraged with a 76% debt-to-equity ratio, the level of its debt at the end of the third quarter, last Sept. 30.

“While I am not happy with the result, I am very proud of the process, I respect my colleagues,” Spitzer said. His colleagues indicated that the proponents of the sale failed to prove that the sale was in the best interests of the utility ratepayers. The ACC staff recommended approval if 43 conditions were imposed.

Last November, ACC Administrative Law Judge Jane Rodda issued a proposed decision denying the pending sale of UniSource to a private investment group, Saguaro Utility Group, and three Wall Street heavyweights headed by KKR. Rodda said she found that the risks of the proposed acquisition of UniSource outweighed any expected benefits, and in the final judgment Tuesday four of the ACC regulators agreed with her.

The decision is subject to appeal, and comments by UniSource CEO James Pignatelli indicated the proponents will consider such a move that might be predicated on reaching a further understanding with the ACC staff over Spitzer’s proposed amendment.

UniSource is the holding company for TEP and UniSource Energy Services, two utilities regulated by the ACC, which has to approve taking the holding company private. The Arizona commission was not bound by the ALJ’s recommendation.

For many months, UniSource senior officials had been predicting an ACC decision by the end of the year, and under the terms of their deal, they had until the end of the first quarter next year to obtain state regulatory approval for the proposed sale to the Saguaro group, whose major backers include the Wall Street titans, J. P. Morgan Partners LLC, and Wachovia Capital Partner, in addition to KKR.

Saguaro’s general partner is Sage Mountain LLC, an Arizona-based company managed and owned by Frederick Rentschler, a former CEO at Armour-Dial, Beatrice Companies and Northwest Airlines.

UniSource argued that the deal would not only strengthen the company’s financial status and ability to attract capital, but would upgrade its utilities’ ability to ensure safe, reliable service. ALJ Rodda was not swayed, however.

“The ALJ concluded that the transaction does not meet the standard of being in the public interest,” said the ACC spokesperson. “The judge also determined that the transaction does not support a finding that is required by the affiliated interest rules.”

In her proposed decision, Rodda identified such risks as increased debt, what she described as “inadequate” bankruptcy protections, limited access to information from the limited partnership that would own UniSource, and undue power concentrated in the general partner.

Last August UniSource’s CEO and other officials reaffirmed it earnings expectations for the year and its expected successful sale to the private investment group, while it filed for a delay of its second quarter earnings report by two weeks. Pignatelli told a financial analysts conference call at the time that the company was on track to win state and federal approvals for its sale in the fourth quarter.

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