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Item 5. Other Events
New Credit Agreement
On
March 25, 2004, Tucson Electric Power Company (TEP), entered into a new $401 million
credit agreement. The agreement replaces the credit facilities provided under TEP’s
$401 million credit agreement that would have expired in 2006. The new credit agreement
includes a $60 million revolving credit facility for general corporate purposes and a $341
million letter of credit facility, to support $329 million aggregate principal amount of
tax-exempt variable rate bonds. The credit agreement has a five year term through June 30,
2009 and is secured by $401 million in aggregate principal amount of Second Mortgage Bonds
issued under TEP’s General Second Mortgage Indenture.
The
credit agreement contains a number of restrictive covenants, including restrictions on
additional indebtedness, liens, sale of assets and sale-leasebacks. The credit agreement
also contains several financial covenants including: (a) minimum consolidated tangible net
worth, (b) a minimum cash coverage ratio, and (c) a maximum leverage ratio. Under the
terms of the credit agreement, TEP may pay dividends so long as it maintains compliance
with the credit agreement. The previous credit agreement had provided that dividends could
not exceed 65% of TEP’s net income. The elimination of such covenant is expected to
satisfy one of the closing conditions contained in the acquisition agreement that
UniSource Energy Corporation (UniSource Energy) entered into with Saguaro Acquisition
Corp. (Saguaro) by permitting TEP to dividend all of its net income to its shareholders.
The credit agreement also provides that under certain circumstances, certain regulatory
actions could result in a required reduction of the commitments.
The
letter of credit fee of 2.35% on the new facility is significantly lower than the previous
credit agreement’s weighted average letter of credit fee of approximately 5%. The
agreement also provides for letter of credit fronting fees of 0.25%, which will reduce to
0.125% upon the closing of Saguaro’s acquisition of UniSource Energy; the previous
agreement’s fronting fee was 0.25%. Unreimbursed drawings on a letter of credit bear
a variable rate of interest based on LIBOR plus 2.25% per annum. Interest savings in 2004
will be partially offset by the write-off of fees associated with the prior facility that
were capitalized and being amortized through 2006 and the amortization of fees associated
with the entry of the new facility.
If
TEP borrows under the revolving credit facility, the borrowing costs would be at a
variable interest rate consisting of a spread over LIBOR or an alternate base rate. The
spread is based upon a pricing grid tied to TEP’s leverage. The per annum rate
currently in effect on borrowings under TEP’s revolving credit facility, based on its
leverage, is LIBOR plus 2.25%. IF TEP’s leverage were to change, the spread over
LIBOR could range from 1.50% to 2.25%. Also, TEP pays a commitment fee of 0.50% on the
unused portion of the revolving credit facility.
Proposed Acquisition of
UniSource Energy
At
a special meeting held on March 29, 2004, the shareholders of UniSource Energy voted to
approve the acquisition agreement UniSource Energy entered on November 21, 2003 with
Saguaro Acquisition Corp., which is a wholly-owned indirect subsidiary of Saguaro Utility
Group L.P. (Saguaro Utility). The acquisition agreement provides that Saguaro Utility will
acquire UniSource Energy by merging Saguaro Acquisition Corp. with and into UniSource
Energy, with UniSource Energy surviving the merger as a wholly-owned indirect subsidiary
of Saguaro Utility.
More
than 69% of the 34,019,401 shares outstanding on the record date voted in favor of the
proposal. Of the 24,505,105 votes cast, 23,737,447 votes were cast in favor of approval of
the acquisition agreement. Under Arizona law, approval of the acquisition agreement
required the affirmative vote of a majority of the outstanding shares of UniSource
Energy’s common stock.
The
acquisition still requires approval by the Arizona Corporation Commission (ACC), the
Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act and
the Federal Regulatory Commission under the Federal Power Act, and the satisfaction of
other conditions set forth in the acquisition agreement. UniSource Energy filed an
application with the ACC for approval of the acquisition on December 29, 2003. Saguaro
Utility filed an application with the SEC for approval of the acquisition on March 30,
2004. The waiting period under the Hart-Scott-Rodino Antitrust Improvement Act was
terminated on March 19, 2004. UniSource Energy expects to close the transaction during the
second half of 2004.
In
addition, on March 25, 2004, an affiliate of Saguaro Utility entered into a $410 million
credit agreement in satisfaction of a commitment obtained by Saguaro Utility from lenders
in November 2003. The credit agreement will be funded upon closing of the acquisition of
UniSource Energy. It includes a $50 million revolving credit facility for general
corporate purposes and a $360 million term loan to be used to fund a portion of the
acquisition. The lenders’ obligation to make such loans are subject to various
closing conditions customary for credit facilities to be used in an acquisition of this
type.
Item 7. Financial
Statements and Exhibits
Exhibits:
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