A $4.3 billion buyout of Tucson Electric Power Co.’s parent, UNS Energy Corp., by Canadian utility giant Fortis Inc., was unanimously approved by state regulators on Tuesday.

The deal — expected to be finalized by the end of the month — won’t result in any dramatic changes for ratepayers of TEP and its rural sister utility, UNS Energy Services (UES), as base rates won’t change and Fortis has pledged to continue operations under existing local management.

But ratepayers will soon see small billing reductions under a provision of the merger deal that calls for $30 million in credits to be distributed among ratepayers over five years.

And going forward, the acquisition should give UNS and its utility subsidiaries better access to capital, which the company and regulators say will benefit ratepayers and shareholders alike. Newfoundland-based Fortis has agreed to inject $220 million in equity capital into UNS upon the merger’s closing.

“TEP and UES will gain new financial strength through this transaction while preserving local control over utility operations,” said David Hutchens, president and CEO of UNS Energy, TEP and UES.

The Corporation Commission members approved the deal swiftly with few questions, noting that their concerns about local control had been satisfied during the collaborative settlement process.

“This a great deal for Arizona and Southern Arizona,” Commission Chairman Bob Stump said, noting that no parties filed objections to the settlement agreement.

The Arizona Corporation Commission voted 5-0 to approve a settlement agreement that calls for UNS to remain under local management and give customers billing credits totaling $30 million over five years, among more than 60 conditions spelled out in the settlement.

The commission’s approval came just seven months after UNS and Fortis filed a request for approval of the $4.3 billion acquisition, which includes the assumption of $1.8 billion in debt. With all the required regulatory approvals secured, the transaction is expected to be completed before the end of August, the company said.

Once the transaction is completed, TEP and UES will proceed with plans to apply so-called “acquisition credits” to customers’ bills from October through March for the next five years. The resulting savings will range from about $1 per month for residential customers to $200 per month for the largest commercial and industrial customers, the company said.

More first-year savings will be realized through temporary reductions in usage-based charges from October 2014 through March 2015; those savings will vary with consumption, the company said.

The credits — which were not included in the original buyout plan but were sought by consumer advocates — have become common in such mergers as a way to share the expected benefits of such deals with ratepayers.

UNS shareholders will get $60.25 in cash for each of their UNS shares, which represents a 31 percent premium over the company’s closing share price when the deal was announced Dec. 11. UNS is one of just a handful of Tucson-based public companies and the only one traded on the New York Stock Exchange.

“The $30 million in customer credits are way for us to not only share immediately the benefits we hope to see in the next few years in savings by being part of this larger, more stable organization ... but also increasing that above and beyond to give our customers some of the benefits of this transaction,” Hutchens said.

After hearings in Tucson in June, a Corporation Commission administrative law judge endorsed the settlement signed by both companies, the Corporation Commission staff, the Residential Utility Consumer Office, labor unions and consumer advocates.

The agreement also required Fortis to add $20 million to the $200 million in equity capital it had proposed contributing in the initial merger agreement.

Tuesday’s outcome at the commission was far different from the last time UNS proposed a sale in 2004. Then, the Corporation Commission rejected a proposed private leveraged buyout of UNS, then known as UniSource Energy Corp., by a group led by Kohlberg Kravis Roberts & Co. That deal was for $25.25 per share, or a total of nearly $3 billion, but regulators winced at the addition of up to $660 million in new debt.

“This is 180 degrees out — (with the Fortis deal) you’re actually deleveraging the company and have specific requirements in the settlement agreement to increase our equity and reduce our debt over time,” Hutchens said.

And that should translate to lower overall rates in the future, according to RUCO, a state watchdog agency.

The settlement also limits the amount of dividends UNS and its utility subsidiaries can pay out for five years, and requires that UNS Energy establish an independent board of directors, mostly of Arizona residents.

Fortis’ $220 million capital contribution to UNS will be used to further TEP’s plan to cut its reliance on coal-fired generation by about a third over the next several years, Hutchens said, adding that Fortis supports the company’s strategy to shed some coal assets to limit environmental and financial risk.

“They’re very much aligned with us in diversifying our portfolio,” he said.

Hutchens said he and other current management will stay in place, and labor unions representing most of TEP’s workers won a settlement provision barring layoffs or benefits cuts for four years.

Among other conditions of the merger settlement approved Tuesday, the company has committed to maintain or improve service quality, keep its current charitable commitments for at least five years, and in future rate cases filed through 2020 the company must show any proposed rate increases are lower than they would have been without the acquisition.

Contact Assistant Business Editor David Wichner at dwichner@tucson.com or 573-4181.


David joined the Star in 1997, after working as a consumer and business reporter in Phoenix for more than a decade. A graduate of Ohio University, he has covered most business beats focusing on technology, defense and utilities. He has won several awards.