[Federal Register Volume 68, Number 93 (Wednesday, May 14, 2003)]
[Notices]
[Pages 25913-25916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11991]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27676]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

May 8, 2003.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the

[[Page 25914]]

application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by June 2, 2003, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After June 2, 2003, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

UniSource Energy Corporation (70-10116)

    UniSource Energy Corporation (``UniSource Energy''), One South 
Church Avenue, Suite 100, Tucson, Arizona 85701, an Arizona corporation 
and a public utility holding company claiming exemption from 
registration under section 3(a)(1) of the Act under rule 2 and from all 
other provisions of the Act except section 9(a)(2), has filed an 
application (``Application'') for an order under sections 9(a)(2) and 
10 of the Act authorizing the proposed acquisition of the operating 
electric and gas utility properties (``Assets'') of Citizens 
Communications Company (``Citizens'') that are located in Arizona (the 
``Transaction''). UniSource also requests an order under section 
3(a)(1) of the Act declaring it exempt it from all provisions of the 
Act, except section 9(a)(2), following the consummation of the proposed 
Transaction.
    UniSource proposes alternative structures for the acquisition of 
the Assets. UniSource may combine the Assets in one new utility company 
or keep the Assets separate in two different utility companies (``New 
Utility Companies''). The New Utility Companies will be incorporated 
under Arizona law. UniSource will either acquire and hold the common 
stock of the New Utility Companies directly, or alternatively, as 
direct subsidiaries of a newly formed Arizona corporation (``HoldCo'') 
that will be a direct subsidiary of UniSource (referred to as the 
``HoldCo Structure''). In the event that the HoldCo Structure is 
employed, it is requested that HoldCo be deemed to be an additional 
applicant in this proceeding and that the Commission's order granting 
UniSource an exemption under section 3(a)(1) of the Act also grant 
HoldCo an exemption.
    UniSource Energy owns substantially all of the issued and 
outstanding common stock of Tucson Electric Power Company (``TEP''), an 
Arizona corporation, which provides electric utility service to over 
355,000 customers in a 1,155 square-mile area of southeastern Arizona 
having a population of approximately 891,000, and two direct nonutility 
subsidiaries, Millennium Energy Holdings, Inc. (``Millennium'') and 
UniSource Energy Development Company (``UED''). In 2002, TEP, 
UniSource's predominant subsidiary, accounted for approximately 94% of 
UniSource Energy's total consolidated assets and more than 99% of 
UniSource Energy's operating revenues. TEP's retail service area 
includes the City of Tucson and adjoining areas of Pima County. TEP 
also supplies the power requirements of a military base that is located 
in Cochise County, to the east of Tucson, and sells electricity at 
wholesale to other utilities and power marketing entities in the 
western U.S. UniSource Energy states that in the three-year period of 
2000 through 2002, not more than 4% of TEP's total operating revenues 
were derived from wholesale sales outside of Arizona. As of December 
31, 2002, TEP owned or leased 2,002 MW of net generating capability. 
UniSource Energy itself does not engage in any business activities or 
have any material assets, other than the stock of its subsidiaries.
    TEP has five direct, wholly-owned, nonutility subsidiaries, as 
follows: Escavada Company, which is engaged in the business of 
maintaining miscellaneous assets and property; San Carlos Resources, 
Inc., which holds legal title to Unit No. 2 of the Springerville 
Generating Station, and is the lessee, jointly and severally with TEP, 
of an undivided one-half interest in certain facilities shared in 
common between Unit No. 1 and Unit No. 2 of the Springerville 
Generating Station; Sierrita Resources, Inc., which holds investments 
in financial assets; Tucson Resources, Inc., which also holds 
investments in financial assets; and Tucsonel Inc., which holds an 
undivided interest in the Springerville Generating Station coal-
handling facility. TEP also holds minority interests in entities that 
provide demand side and energy management services and engage in 
development activities relating to technologies that provide pricing 
and other related services to consumers for a wide variety of products, 
including utility services.
    TEP is subject to regulation by the Arizona Corporation Commission 
(``ACC'') with respect to retail electric rates, the issuance of 
securities, affiliate transactions, the maintenance of books and 
records, and other matters and by the Federal Energy Regulatory 
Commission (``FERC'') with respect to wholesale electric rates and 
electric transmission service.
    For the twelve months ended December 31, 2002, UniSource Energy 
reported consolidated operating revenues of $856 million, more than 98% 
of which were derived from retail and wholesale sales of electricity 
and related transmission and distribution services. At December 31, 
2002, UniSource Energy had $2.7 billion in total assets, including 
total net utility plant of $1.7 billion.
    As of March 4, 2003, UniSource Energy had issued and outstanding 
33,583,182 shares of common stock, no par value, which are listed and 
traded on the New York Stock Exchange and the Pacific Exchange. TEP has 
issued and outstanding 32,139,555 shares of common stock, no par value, 
of which 32,139,434 are held by UniSource Energy.
    Citizens, a Delaware corporation, operates as an electric and gas 
utility in Arizona through two operating divisions. Through its Arizona 
Electric Division, Citizens provides electric service to approximately 
77,500 customers in most of Mohave County in northwest Arizona and in 
all of Santa Cruz County in southeast Arizona between TEP's service 
area and the U.S.-Mexico border. Through its Arizona Gas Division, 
Citizens provides natural gas service to approximately 125,000 
customers in most of northern Arizona, including portions of Mohave, 
Yavapai, Coconino, Navajo, Greenlee, and Apache Counties, as well as 
Santa Cruz County in southeast Arizona. Citizens owns generating units 
in Arizona having a total capacity of about 47 MW. Citizens' Arizona 
electric transmission and distribution system consists of approximately 
56 circuit-miles of 115 kV transmission lines, 229 circuit-miles of 69 
kV transmission lines, and 3,116 circuit-miles of underground and 
overhead distribution lines. Citizens also owns 38 substations having a 
total installed transformer capacity of 1,077,300 kVA. Citizens' 
Arizona gas transmission and distribution system consists of 
approximately 168 miles of steel transmission mains, 2,459 miles of

[[Page 25915]]

steel and plastic distribution mains, and 127,015 customer service 
lines.
    Citizens is subject to regulation in Arizona by the ACC with 
respect to retail electric and gas rates, the issuance of securities, 
affiliate transactions, the maintenance of books and records, and other 
matters and by the FERC with respect to wholesale power sales and 
interstate transmission service.
    Citizens and UniSource Energy have entered into separate Asset 
Purchase Agreements, each dated October 29, 2002, relating to the 
purchase of Citizens' electric and gas utility businesses in Arizona. 
Under the terms of the Asset Purchase Agreement relating to Citizens' 
electric utility business, Citizens has agreed to sell and UniSource 
Energy has agreed to purchase all of the assets (subject to certain 
stated exceptions) used by Citizens in connection with or otherwise 
necessary for the conduct of its electric utility business in Arizona 
(the ``Electric Assets''). Under the terms of the Asset Purchase 
Agreement relating to Citizens' gas utility business, Citizens has 
agreed to sell and UniSource Energy has agreed to purchase all of the 
assets (subject to certain stated exceptions) used by Citizens in 
connection with or otherwise necessary for the conduct of its gas 
utility business in Arizona (the ``Gas Assets'').
    UniSource Energy has agreed to pay Citizens $92 million in cash for 
the Electric Assets and $138 million in cash for the Gas Assets, 
subject in each case to adjustment based on the date on which the 
Transaction closes and on the amount of certain assets and liabilities 
associated with the Assets at the time of closing. In addition, the 
base price for the Electric Assets and the Gas Assets will be reduced 
by $10 million in the aggregate if the Transaction closes by July 28, 
2003. However, whether or not the Transaction closes by July 28, 2003, 
UniSource Energy has agreed to reduce rate base for the Gas Assets by 
$10 million. UniSource Energy will not assume Citizens' obligations 
under existing industrial development revenue bonds that were issued to 
finance portions of the purchased assets. Citizens will remain liable 
on these obligations.
    Under the Asset Purchase Agreements, UniSource Energy and Citizens 
also agreed to coordinate the overall development of the positions to 
be taken and the regulatory actions to be requested regarding the two 
utility rate cases that Citizens has pending before the ACC. As part of 
the Joint Application of Citizens Communications Company and UniSource 
Energy Corporation to the Arizona Corporation Commission (``Joint 
Application''), UniSource Energy is seeking approval for a reduced 
level of rate increases. On April 1, 2003, UniSource Energy, Citizens, 
TEP and the staff of the Utilities Division of the ACC entered into a 
Settlement Agreement (``Settlement''), which sets forth the agreement 
and understanding of the parties with respect to the settlement of all 
issues arising under the Joint Application, the amount of the reduction 
in Citizens' proposed gas rate increase, UniSource Energy's forfeiture 
of any right to seek recovery of the under-collected balance under 
Citizens' purchase power and fuel adjustment clause, and other 
matters.\1\ The proposed Settlement is subject to approval by the ACC. 
UniSource Energy states that under the proposed Settlement Citizens' 
electric and gas customers would save a total of about $29 million per 
year, as compared to the amount of rate increases proposed in Citizens' 
pending applications. The proposed Settlement also contains the 
agreement of the parties with respect to UniSource Energy's plan for 
financing the Transaction, as described below.
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    \1\ Under the proposed Settlement, UniSource Energy has agreed 
to seek an increase in rates of the new gas utility of approximately 
20.9%, versus the 28.9% increase requested by Citizens. In addition, 
UniSource Energy has agreed to forfeit its right to seek recovery of 
the under-collected balance under Citizens' electric purchase power 
and fuel adjuster clause (estimated to be at least $135 million as 
of July 28, 2003). As a result, electric rates of the new electric 
utility would increase by 22%, rather than the 45% increase proposed 
by Citizens.
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    UniSource Energy states that the Transaction is subject to, among 
other conditions precedent, receipt by the parties of required 
approvals by the ACC, the FERC and this Commission, and filing of pre-
merger notification statements under the Hart-Scott-Rodino Antitrust 
Improvements Act of 1976, as amended, and expiration or early 
termination of the statutory waiting period. The boards of directors of 
UniSource Energy and Citizens have each approved the proposed 
Transaction. The Transaction does not require shareholder approval by 
either company.
    UniSource Energy states that it intends to fund the purchase price 
under the Asset Purchase Agreements using a combination of several 
sources, including: (1) Available cash at UniSource Energy; (2) 
possibly the issuance of new equity by UniSource Energy; (3) a loan 
from TEP; and (4) debt issued by the New Utility Companies or HoldCo 
(if the HoldCo Structure is utilized), which will be repaid either 
directly or indirectly from the cash flows of the New Utility 
Companies. The issuance of new debt securities by the New Utility 
Companies and the loan from TEP are subject to approval by the ACC.
    More specifically, in the Joint Application, UniSource Energy is 
requesting the authorization of the ACC for the New Utility Companies 
to: (1) Issue or guarantee up to $175 million of debt securities for 
the purpose of funding a portion of the purchase price and initial 
working capital requirements of the New Utility Companies; (2) issue or 
guarantee additional debt securities from time to time under the terms 
of a new revolving credit agreement that will provide ongoing liquidity 
support to the New Utility Companies; (3) enter into indentures or 
security agreements which grant liens on some or all of the properties 
held by such companies to secure the debt obligations of such 
companies; and (4) issue common stock to UniSource Energy (or to HoldCo 
if the HoldCo Structure is used). Additionally, UniSource Energy and 
TEP are seeking authority from the ACC to allow TEP to fund up to $50 
million of the aggregate purchase price through a loan to UniSource 
Energy. Authorization of this loan from TEP would provide financing 
flexibility to UniSource Energy in the event that, at the time of the 
consummation of the Transaction, UniSource Energy is unable to issue 
common stock on reasonable terms in order to fund the purchase price.
    Under the proposed Settlement filed with the ACC, the New Utility 
Companies are expected to have an initial capital structure of about 
40% common equity and 60% long-term debt. UniSource Energy's objective 
is to capitalize the New Utility Companies at a level that is 
consistent with an investment grade rating, in accordance with current 
ratings criteria published by the principal rating agencies. UniSource 
Energy has agreed that, until common equity as a percentage of total 
capitalization (i.e., common and preferred equity and long-term debt, 
including current portion) of each of the New Utility Companies equals 
40%, such company will not pay dividends to UniSource or HoldCo, as the 
case may be, in an amount exceeding 75% of such company's earnings. The 
$50 million loan from TEP would have a maturity not to exceed four 
years, would be secured by a pledge of 100% of the common stock of the 
New Utility Companies or HoldCo (if the HoldCo Structure is used), and 
would bear interest at 383 basis points above the yield-to-maturity of 
an equivalent four-year U.S. Treasury security as determined on the 
date of the loan. The

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Settlement further specifies that 264 basis points of the interest 
income earned by TEP on the TEP loan will be recorded as a deferred 
credit and used to offset rates in the future, and that the balance of 
the interest income will be used to build the equity capitalization of 
TEP.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11991 Filed 5-13-03; 8:45 am]
BILLING CODE 8010-01-P