UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
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UNISOURCE ENERGY CORPORATION
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(1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which
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THIS FILING CONSISTS OF 1) A PRESS RELEASE OF UNISOURCE ENERGY CORPORATION
("UNISOURCE ENERGY") DATED NOVEMBER 24, 2003, WHICH IS ALSO POSTED ON UNISOURCE
ENERGY'S WEBSITE AT WWW.UNISOURCEENERGY.COM, 2) A SHEET CONTAINING A LIST OF
TRANSACTION TALKING POINTS, 3) A LETTER, DATED NOVEMBER 24, 2003, FROM MR.
PIGNATELLI, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
UNISOURCE ENERGY, TO THE EMPLOYEES OF TUCSON ELECTRIC POWER COMPANY, A
SUBSIDIARY OF UNISOURCE ENERGY, 4) A LETTER, DATED NOVEMBER 24, 2003, FROM MR.
PIGNATELLI TO THE EMPLOYEES OF UNISOURCE ENERGY SERVICES, A SUBSIDIARY OF
UNISOURCE ENERGY, 5) A MANAGER'S QUESTION AND ANSWER SHEET, 6) A SHEET
CONTAINING A LIST OF TRANSACTION FACTS, WHICH IS ALSO POSTED ON UNISOURCE
ENERGY'S WEBSITE AND 7) A SHEET CONTAINING INFORMATION ABOUT EMPLOYEE STOCK
OPTIONS.
[UNISOURCE LOGO] UNISOURCE ENERGY
NEWS
FOR IMMEDIATE RELEASE November 24, 2003
Media Contact: Steven W. Lynn (520) 884-3629 Page 1 of 4
Financial Analyst Contact: Jo Smith (520) 884-3650
UNISOURCE ENERGY APPROVES TRANSACTION WITH INVESTOR GROUP;
SIGNIFICANT EQUITY INVESTMENT WOULD STRENGTHEN LOCAL UTILITIES
TUCSON, ARIZ. - The Board of Directors of UniSource Energy Corporation (NYSE:
UNS) has approved an investor group's offer to acquire all of the company's
outstanding shares in a transaction that would strengthen the capital base of
the company's regulated utility operations.
The transaction provides up to $260 million of additional capital to Tucson
Electric Power Company (TEP), UniSource Energy's principal subsidiary, including
the retirement of a $95 million inter-company loan from TEP to UniSource Energy.
An affiliate of Saguaro Utility Group, L.P. has agreed to pay $25.25 per share
of UniSource Energy common stock, representing a premium of 30 percent over the
closing price on Friday, November 21, 2003. The group's general partner is Sage
Mountain, L.L.C., an Arizona company managed and owned by Frederick B.
Rentschler, former president and chief executive officer of Armour-Dial,
Beatrice Companies and Northwest Airlines. The group's limited partners are
investment funds affiliated with Kohlberg Kravis Roberts & Co., J.P. Morgan
Partners, LLC, and Wachovia Capital Partners.
The approximately $3 billion transaction would leave UniSource Energy's senior
management team in place, and the company's headquarters would remain in Tucson.
No changes in UniSource Energy's operations or personnel are anticipated as a
result of this transaction.
"This transaction gives our local management team additional resources to help
us serve the energy needs of communities across Arizona," said James S.
Pignatelli, who would continue as UniSource Energy's Chairman, President and
Chief Executive Officer under the proposed purchase.
"We will be a stronger company as a result of this transaction. This investment
ensures that we can maintain the service and reliability that have become our
hallmarks while pursuing our plans to bring service improvements to our
customers and communities," Pignatelli said.
"Our Board of Directors approved this transaction after careful consideration of
the best interests of all of our constituents, including our shareholders,
customers, communities and employees. Shareholders of UniSource Energy will
realize the full value of their investments, our customers and communities will
- MORE -
UNISOURCE ENERGY APPROVES OFFER FROM INVESTORS November 24, 2003
Page 2 of 4
benefit from a significantly strengthened, locally operated utility company, and
our employees will enjoy the enhanced opportunities that will accompany our
development," Pignatelli said.
UniSource Energy serves approximately 550,000 customers across Arizona through
its two regulated subsidiaries, TEP and UniSource Energy Services (UES). TEP
provides electric service to more than 360,000 customers in the Tucson
metropolitan area, while UES serves 77,500 electric customers and 126,000 gas
customers in other parts of the state. UniSource Energy's subsidiaries also
include Millennium Energy Holdings, Inc., which oversees the company's
unregulated investments, and UniSource Energy Development Company, which is
developing a 400-MW coal fired generator at TEP's Springerville Generating
Station.
"We are delighted to be making this investment in one of Arizona's great public
utilities," said Scott Stuart, a member of KKR. "As long-term investors, our
goal is to invest in the highest quality businesses and back the strongest
management teams we can find, providing them with the financial resources to
implement their strategic initiatives. Through this investment, UniSource Energy
will be able to move more quickly and decisively to pursue its plans to further
strengthen its businesses and enhance service and reliability for customers in
Arizona. We believe we have found the right team with the right game plan in
UniSource Energy."
"Jim Pignatelli, his senior management team and UniSource Energy's 1,700-plus
employees have built an outstanding reputation for balancing the interests of
the company, its customers and the communities they serve," said Jeffrey Walker,
Managing Partner of J.P. Morgan Partners. "UniSource Energy satisfies the energy
needs in one of the fastest growing regions in the U.S., and we look forward to
supporting their continued growth."
The transaction is structured as a merger and is expected to close in the second
half of 2004. The transaction is subject to customary closing conditions,
including the approval of UniSource Energy shareholders and approvals and other
actions by the Arizona Corporation Commission (ACC), the Securities and Exchange
Commission under the Public Utility Holding Company Act, the Federal Energy
Regulatory Commission under the Federal Power Act and federal antitrust
authorities under the Hart-Scott-Rodino Antitrust Improvements Act.
TEP and UES would remain under the oversight of the ACC, which sets utility
rates for Arizona consumers. The purchase would not affect the rates paid by
UniSource Energy's utility consumers. TEP's rates are frozen through December
2008, while UES' rates are frozen through August 2007.
Pignatelli will discuss the proposed acquisition today during a conference call
that will be available live on the Internet. The conference call is scheduled to
begin at 7 a.m. MST (9 a.m. EST). To listen to the live conference call, dial
(877) 582-0446 from the United States or (706) 645-9751 from outside the United
States five to 10 minutes prior to the event and reference confirmation code
4205023. A telephone replay will be available for seven days. To listen to the
replay, dial (800) 642-1687 from the United States or (706) 645-9291 from
outside the United States and reference confirmation code 4205023.
A live audio-only webcast of the conference call will be available through a
link at www.UniSourceEnergy.com. Listeners are encouraged to visit the Web site
- MORE -
UNISOURCE ENERGY APPROVES OFFER FROM INVESTORS November 24, 2003
Page 3 of 4
at least 30 minutes before the event to register, download and install any
necessary audio software. A recording of the webcast will be available for 30
days through a link at www.UniSourceEnergy.com.
The limited partners of Saguaro Utility Group, L.P. specialize in making
investments on behalf of public and corporate pension funds, endowments,
insurance companies and individuals.
KKR is a private investment firm headquartered in New York, London and Menlo
Park, California, focused on making long-term investments in attractive
businesses to implement value-creating strategies. Founded in 1976, KKR has
completed more than 119 transactions in North America and Europe involving in
excess of $114 billion in total financing. KKR's investors are primarily
institutions, including state and corporate pension funds, banks, insurance
companies and university endowments. For more information, visit www.kkr.com.
J.P. Morgan Partners (JPMP), formerly Chase Capital Partners, is a global
partnership with approximately $21 billion in capital under management (as of
September 30, 2003). It is a leading provider of private equity and has closed
over 1,300 individual transactions since its inception in 1984. JPMP has more
than 130 investment professionals in eight regional offices throughout the
world. J. P. Morgan Partners' primary limited partner is J.P. Morgan Chase & Co.
(NYSE: JPM), one of the largest financial institutions in the United States. For
more information, visit www.jpmorganpartners.com.
Wachovia Capital Partners (WCP) is the principal investing group of Wachovia
Corporation, the nation's fifth-largest financial holding company. Since 1988,
WCP has committed approximately $3 billion of capital to more than 200
companies. WCP has offices in Charlotte, NC and New York City. For more
information, visit www.wachoviacapitalpartners.com
UniSource Energy's primary subsidiaries include TEP, Arizona's second-largest
investor-owned electric utility; UES, an electric and gas utility serving
customers in Northern and Southern Arizona; and Millennium Energy Holdings,
parent company of UniSource Energy's unregulated energy-related businesses. For
more information about UniSource Energy and its subsidiaries visit
www.UniSourceEnergy.com.
New Harbor Incorporated and Morgan Stanley & Co. Incorporated acted as financial
advisors, and Fennemore Craig, P.C., and Thelen Reid & Priest LLP served as
legal counsel to UniSource Energy in connection with the transaction. Credit
Suisse First Boston, J.P. Morgan Securities Inc. and Lehman Brothers Inc. acted
as financial advisors, and Simpson Thacher & Bartlett LLP and Milbank, Tweed,
Hadley & McCloy LLP served as legal counsel to the investor group.
Certain statements included in this news release are intended as "forward
looking statements." These statements include assumptions, expectations,
predictions intentions or beliefs about future events, particularly regarding
the proposed acquisition of UniSource Energy Corporation. UniSource Energy
cautions that actual future results may vary materially from those expected or
implied in any forward-looking statements. Some of the key factors that could
cause actual results to vary materially from those expressed or implied include
the receipt of required regulatory approvals, which are significant, and the
satisfaction of other conditions precedent to the consummation of the
- MORE -
UNISOURCE ENERGY APPROVES OFFER FROM INVESTORS November 24, 2003
Page 4 of 4
transaction, including the approval of the transaction by the shareholders of
UniSource Energy Corporation, and the availability of financing of the
transaction. There can be no assurance that such conditions will be satisfied or
that such transaction will be consummated. More information about the risks and
uncertainties relating to these forward-looking statements are found in
UniSource Energy Corporation's SEC filings, which are available free of charge
on the SEC's web site at http://www.sec.gov.
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.
TRANSACTION TALKING POINTS
THE TRANSACTION TREATS UNISOURCE ENERGY SHAREHOLDERS FAIRLY WHILE IMPROVING THE
FINANCIAL STRENGTH OF TUCSON ELECTRIC POWER.
Our shareholders will be rewarded for their faith in our company with a healthy
30% per-share premium, allowing them to more rapidly realize the full value of
their investments. Resources provided through this transaction will
significantly increase TEP's equity, strengthening the company's balance sheet
and improving our access to outside capital. Our new investors are interested in
building UniSource Energy's value over time as a privately held company. With a
stronger balance sheet for TEP and a long-term success focus, UniSource Energy
will be in an even better position to provide safe, reliable service to our
customers.
TEP AND UES WOULD REMAIN UNDER LOCAL CONTROL.
UniSource Energy will remain an Arizona company, and TEP and UES will continue
to operate as local utilities. Our corporate headquarters will remain in Tucson,
and the current management team will remain in place. Our new investors like the
way our company has been run, and they don't plan on making any significant
changes to our employment levels or other local operations. Indeed, they hope to
capitalize on the long-term returns that come from our successful business
approach.
TEP AND UES REMAIN COMMITTED TO OUR CUSTOMERS AND THE COMMUNITIES WE SERVE.
Our management and employees remain committed to providing our customers with
safe, reliable energy and the same high standards of utility operations they are
accustomed to receiving from TEP, and now UES. Our new investors also share our
interest in improving the quality of life in the communities we serve. They
understand, as we do, that our success is linked to the vitality of our service
territories. We will continue to play an active role in the Arizona communities
we serve.
IN SUMMARY:
Over the past several years, we have succeeded in returning this company to
financial stability, while emphasizing a strong commitment to reliability and
community service. Those are the qualities that attracted our new investors to
UniSource Energy. Their new resources will now allow us to strengthen those
commitments while building the company's long-term value.
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.
November 24, 2003
Dear Fellow Employee,
I'd like to share some exciting news with you.
The hard work that delivered this company from the brink of bankruptcy to
financial stability has not gone unnoticed. Our efforts have given us a unique
opportunity to significantly strengthen Tucson Electric Power Company while
remaining true to the fundamental philosophies that contributed to our success.
Our Board of Directors has accepted an investment group's offer to purchase all
of UniSource Energy's outstanding shares. If the purchase is approved by our
shareholders and endorsed by regulators in a timely fashion, UniSource Energy
would become a privately owned company sometime next year.
The group has offered to buy our outstanding stock for $25.25 a share, a healthy
premium that allows shareholders to rapidly realize the full value of their
investments. The transaction provides up to $260 million of additional capital
to TEP, including the retirement of a $95 million inter-company loan from TEP to
UniSource Energy. With a stronger balance sheet at TEP and support for our
long-term vision, the UniSource Energy companies will be in an even better
position to provide safe, reliable service to our customers.
The transaction would leave our local utilities under local control. Our
corporate headquarters will remain in Tucson, and our local management team will
be retained. Our prospective investors like the way our company has been run,
and they don't plan on making any significant changes to our employment levels
or other local operations.
Our prospective investors also have committed to supporting our community
service programs. They understand that our company's success is linked to the
vitality of the communities we serve, and they have embraced the volunteer
spirit of our employees.
The investor group consists of three highly regarded firms that make investments
on behalf of public and corporate pension funds, endowments, insurance companies
and individuals. Members of the group - including Kohlberg Kravis Roberts & Co.,
J.P. Morgan Partners, LLC and Wachovia Capital Partners - are committed to
supporting the long-term success of UniSource Energy. And they plan to do so by
keeping our company intact and giving us the resources to achieve the same goals
we've been pursuing for years.
We've given our prospective investors good reason to entrust us with their
resources. Since TEP encountered serious financial trouble in the early 1990s,
we have established UniSource Energy's fundamental strength as a traditional
utility company and regained the trust of our shareholders and our customers.
Our achievements left us in an intriguing position. During my regular round of
employee meetings two years ago, I noted that we were "too small to be big and
too big to be small" and suggested we would look to expand the company through
an acquisition strategy.
That vision became a reality this year with our purchase of gas and electric
assets from Citizens Communications Company. The transaction dramatically
expanded our customer base in the state of Arizona, enhancing our value as a
vertically integrated utility company.
Our approach has been received favorably by the Arizona Corporation Commission.
The ACC has supported our efforts to strengthen our traditional utility
operations through expansion of both our generation and transmission systems.
We recently broke ground on a third unit at TEP's Springerville Generating
Station, and we've secured regulatory approval for a fourth unit. We're still
pursuing federal approval to build a transmission line that would improve
electric service for our new customers in Santa Cruz County. Although the
process has been slow and costly, we remain firm in our resolve to complete the
line and provide not only reliability to southern Arizona but also an additional
international link to our western electric grid.
Our prospective investors have tracked our progress, and they like what they've
seen. They want to maintain UniSource Energy's position as a strong local
utility company with sound finances, satisfied customers and solid partnerships
with the communities we serve.
So what will this transaction mean for you? Will you see drastic changes in your
work life, your job description, your retirement plan, your benefits, your
supervisor?
In a word, the answer to all of those questions is no. Our day-to-day operations
will be largely unaffected by this transaction. Indeed, the most significant
change will be our improved access to the resources we need to help us achieve
our current objectives and pursue new initiatives that further strengthen our
company.
Managing change can be difficult, but this transaction will deliver significant
benefits for our company, our customers and our community. I'm confident that
you will help ensure that this change in ownership has minimal impact on our
customers and on our corporate culture.
I'll be discussing this transaction with employees during a video conference
that will begin today at 8:15 a.m. A list of locations where you can participate
is included with this letter. A video recording of the conference also will be
available for review beginning later today on the TEP Circuit intranet site.
Over the coming weeks, we will work hard to keep you fully informed as this
transaction progresses. I've planned a series of meetings with employees to
answer any questions you may have regarding the transaction; a schedule of those
meetings is attached. We've also set up a special section on the TEP Circuit to
distribute information about the purchase. For those without computer access,
we'll post printed updates in a variety of locations throughout our company
facilities. As always, your department manager is prepared to answer questions
or address your concerns.
Thank you for everything you've done to prepare UniSource Energy for this
exciting opportunity.
Sincerely,
/s/ James S. Pignatelli
James S. Pignatelli
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.
November 24, 2003
Dear Fellow Employee,
I'd like to share some exciting news with you.
The hard work that has gone into building our company's value has not gone
unnoticed. Our efforts have given us a unique opportunity to enhance the long
term prospects of UniSource Energy while remaining true to the fundamental
philosophies that contributed to our success.
Our Board of Directors has accepted an investment group's offer to purchase all
of UniSource Energy's outstanding shares. If the purchase is approved by our
shareholders and endorsed by regulators in a timely fashion, UniSource Energy
would become a privately owned company sometime next year, and UniSource Energy
Services would remain its subsidiary.
The group has offered to buy our outstanding stock for $25.25 a share, a healthy
premium that allows shareholders to rapidly realize the full value of their
investments. The transaction provides up to $260 million of additional capital
to Tucson Electric Power Company, including the retirement of a $95 million
inter-company loan from TEP to UniSource Energy. With a stronger balance sheet
at TEP and support for our long-term vision, the UniSource Energy companies will
be in an even better position to provide safe, reliable service to our
customers.
The transaction would leave our local utilities under local control. Our
corporate headquarters will remain in Tucson, and our local management team will
be retained. Our prospective investors like the way our company has been run,
and they don't plan on making any significant changes to our employment levels
or other local operations.
Our prospective investors also have committed to supporting our community
service programs. They understand that our company's success is linked to the
vitality of the communities we serve, and they have embraced the volunteer
spirit of our employees.
The investor group consists of three highly regarded firms that specialize in
making investments in private companies on behalf of public and corporate
pension funds, endowments, insurance companies and individuals. Members of the
group - including Kohlberg Kravis Roberts & Co., J.P. Morgan Partners, LLC, and
Wachovia Capital Partners - are committed to supporting the long-term success of
UniSource Energy. And they plan to do so by keeping our company intact and
giving us the resources to achieve the same goals we've been pursuing for years.
We've given our prospective investors good reason to entrust us with their
resources. Since TEP encountered serious financial trouble in the early 1990s,
we have established UniSource Energy's fundamental strength as a traditional
utility company and regained the trust of our shareholders and our customers.
Our achievements left us in an intriguing position. During my regular round of
meetings with TEP employees two years ago, I noted that we were "too small to be
big and too big to be small" and suggested we would look to expand the company
through an acquisition strategy.
That vision became a reality this year with the creation of UES. Our purchase of
gas and electric assets from Citizens Communications Company dramatically
expanded our customer base in the state of Arizona, enhancing our value as a
vertically integrated utility company.
Our approach has been received favorably by the Arizona Corporation Commission.
The ACC has supported our efforts to strengthen our traditional utility
operations through expansion of both our generation and transmission systems.
We recently broke ground on a third unit at TEP's Springerville Generating
Station, and we've secured regulatory approval for a fourth unit. We're still
pursuing federal approval to build a transmission line that would improve
electric service for our UES customers in Santa Cruz County. Although the
process has been slow and costly, we remain firm in our resolve to complete the
line and provide not only reliability to southern Arizona but also an additional
international link to our western electric grid.
Our prospective investors have tracked our progress, and they like what they've
seen. They want to maintain UniSource Energy's position as a strong local
utility company with sound finances, satisfied customers and solid partnerships
with the communities we serve.
So what will this transaction mean for you? Will you see drastic changes in your
work life, your job description, your retirement plan, your benefits, your
supervisor?
In a word, the answer to all of those questions is no. Our day-to-day operations
will be largely unaffected by this transaction. Indeed, the most significant
change will be our improved access to the resources we need to help us achieve
our current objectives and pursue new initiatives that further strengthen our
company.
Managing change can be difficult, but this transaction will deliver significant
benefits for our company, our customers and our community. I'm confident that
you will help ensure that this change in ownership has minimal impact on our
customers and on our corporate culture.
I'll be discussing this transaction with employees during a video conference
that will begin today at 8:15 a.m. A list of UES locations where this conference
will be available live is included with this letter. A video recording of the
conference will be available to all UES employees later today through a link on
your UES Link intranet site.
Over the coming weeks and months, we will work hard to keep you fully informed
as this transaction progresses. I've planned a series of meetings with employees
to answer any questions you may have regarding the transaction; a schedule of
those meetings is attached. We've also set up a special section on the UES Link
to distribute information about the purchase. For those without computer access,
we'll post printed updates in a variety of locations throughout UES facilities.
As always, your department manager is prepared to answer questions or address
your concerns.
Thank you for everything you've done to prepare UniSource Energy for this
exciting opportunity.
Sincerely,
/s/ James S. Pignatelli
James S. Pignatelli
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.
Privileged & Confidential 1
MANAGER'S Q&A
TRANSACTION BASICS
------------------
WHAT ACTION DID THE BOARD TAKE?
The board voted to accept an offer from a group of three leading investment
firms to purchase all the outstanding shares of UniSource Energy, subject
to shareholder approval and the usual regulatory clearances.
HOW MUCH IS THE GROUP PAYING TO PURCHASE UNISOURCE ENERGY'S SHARES?
The agreement calls for the investor group to pay $25.25 per share - a
premium of 30 percent to Friday's closing price for UNS common stock. With
assumption of debt and including other assets, the total value of the
transaction is approximately $3 billion.
WHO IS THE PURCHASER?
The purchaser is an affiliate of Saguaro Utility Group, L.P. The group's
general partner is Sage Mountain, L.L.C., an Arizona company managed and
owned by Frederick B. Rentschler, former president and chief executive
officer of Armour-Dial, Beatrice Companies and Northwest Airlines.
The group's limited partners are investment funds affiliated with Kohlberg
Kravis Roberts & Co., J.P Morgan Partners, LLC, and Wachovia Capital
Partners. The limited partners of Saguaro Utility Group, L.P. specialize in
making investments on behalf of public and corporate pension funds,
endowments, insurance companies and individuals.
HOW WILL THIS CHANGE UNISOURCE ENERGY'S OWNERSHIP?
Currently, most of our stock is held by mutual fund companies. After the
transaction, our company will be privately held by the investor group.
WHAT WILL BE THE PERCENTAGES OF OWNERSHIP BY THE LIMITED PARTNERS AFTER THE
TRANSACTION IS COMPLETED?
After completion of the transaction, KKR would hold approximately 62% of
the equity, J.P Morgan Partners about 31% and Wachovia Capital Partners
about 7%.
HOW WILL THIS TRANSACTION AFFECT TEP'S FINANCIAL CONDITION?
The new capital will significantly strengthen the finances of TEP, ensuring
that it continues to have the resources to meet the growing needs of
consumers and businesses in its service area. With a stronger balance
sheet, TEP will be well positioned to remain an efficient, reliable
provider of energy services for the region for many years to come.
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Privileged & Confidential 2
STRATEGIC RATIONALE
-------------------
WHY DID UNISOURCE ENERGY ACCEPT THIS OFFER?
This transaction makes sense for three reasons.
FIRST, IT DELIVERS A SIGNIFICANT, IMMEDIATE PREMIUM TO SHAREHOLDERS IN
CASH. The investor group sees substantial value in our customer-focused
strategy, the quality of our management team, the prospects for growth in
our region and our strong cash flow.
SECOND, IT KEEPS OUR UTILITY OPERATIONS UNDER THE SAME LOCAL MANAGEMENT AND
AFFIRMS OUR COMMITMENT TO THE ARIZONA COMMUNITIES WE SERVE AND SUPPORT.
Each member of the investor group shares UniSource Energy's commitment to
remaining a locally controlled utility and an active contributor to a wide
range of community programs.
THIRD, THE TRANSACTION BRINGS TEP INCREASED ACCESS TO CAPITAL,
STRENGTHENING OUR ABILITY TO DELIVER ON OUR COMMITMENT TO PROVIDE SAFE,
RELIABLE, EFFICIENT ENERGY SERVICES TO OUR CUSTOMERS. With a stronger
financial foundation, we will be well positioned to meet our customers'
growing needs and remain an important partner in our region's economic
development.
WHAT ARE THE INVESTOR GROUP'S STRATEGIC GOALS?
The investor group seeks long-term appreciation of the portfolio it manages
for its investors, which include public and private pension funds,
endowments and individuals. They see UniSource Energy as a promising
investment because of the growth in our region, the quality of the
management team, our focused strategy and our strong cash flow.
APPROVAL PROCESS
----------------
WHEN WILL SHAREHOLDERS VOTE ON THE TRANSACTION?
We expect the shareholder vote to take place in the second quarter of 2004.
WHAT REGULATORY APPROVALS ARE NEEDED?
Even though the acquisition does not result in any significant change in
TEP's operations, the Arizona Corporation Commission would need to approve
the transaction because it is a reorganization of the holding company.
Other required approvals include the SEC, under the Public Utility Holding
Company Act, and FERC. We will also file the required notifications with
the Federal Trade Commission and the Department of Justice under
Hart-Scott-Rodino antitrust rule, which requires a standard waiting period.
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Privileged & Confidential 3
HOW LONG DO YOU EXPECT THE ENTIRE APPROVAL PROCESS TO TAKE?
It's too soon to say. Our first concern now is making sure that
shareholders and regulators have the information they need to begin their
review and assessment. The entire approval process will certainly take
several months, perhaps as long as a year.
MANAGEMENT AND CORPORATE STRUCTURE
----------------------------------
WILL THE CURRENT MANAGEMENT OF UNISOURCE ENERGY BE RETAINED?
Yes. UniSource Energy and TEP will continue to be locally managed
companies. The senior management team will remain in place, with James S.
Pignatelli continuing to serve as Chairman, President and Chief Executive
Officer of UniSource Energy and TEP.
WHERE WILL THE COMPANY'S CORPORATE HEADQUARTERS AND MANAGEMENT BE LOCATED?
The corporate headquarters and the senior management of the company will
remain in Tucson.
WILL UNISOURCE ENERGY STOCK CONTINUE TO BE LISTED ON THE NEW YORK STOCK
EXCHANGE?
No. After the transaction is completed, the stock will no longer be listed
or publicly traded.
EMPLOYEES
---------
HOW WILL THE TRANSACTION BENEFIT EMPLOYEES?
Strengthening TEP's finances increases its ability to grow and prosper,
expanding the career opportunities for our employees. Moreover, this
transaction secures the company's future as a locally managed utility that
makes the communities it serves its first priority.
HOW WILL OUR MANAGEMENT STRUCTURE CHANGE?
The current management will remain in place. Our approach to running our
business and our commitment to our employees, customers and communities
will not change.
WHAT ARE THE PLANS FOR EMPLOYMENT AT UNISOURCE ENERGY'S OPERATIONS? DO YOU
EXPECT TO REDUCE STAFF?
No. This will have no impact on employment levels or our day-to-day
operations. We have informed leaders of the IBEW about these changes, and
we will keep them informed as we go through the approval process.
WILL EMPLOYEE BENEFITS OR COMPENSATION CHANGE?
The transaction itself has no impact on benefit or compensation decisions.
Our managers have always conducted periodic reexaminations of our benefits
and compensation to ensure that our company remains competitive and
continues to attract a high-quality workforce. That process will remain
unchanged.
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Privileged & Confidential 4
WHAT WILL HAPPEN TO OPTIONS HELD BY EMPLOYEES?
The agreement calls for all options to vest and be exercised at the close
of the transaction, with cash to be paid for the shares received. All
unvested options will thus be eligible to be exercised with completion of
the transaction.
Employees who received the 1994 option grants should be aware that these
will expire on June 4, 2004, probably in advance of the completion of the
transaction. Employees should consult their accountants or a financial
advisor about the tax impact of exercising their options. More details on
options will be provided soon.
CUSTOMERS
---------
WILL THIS TRANSACTION LEAD TO REQUESTS FOR RATE INCREASES?
No, the transaction doesn't have any impact on rates. The Arizona
Corporation Commission sets our rates, and we are currently operating under
a rate cap that extends through 2008.
WHAT DIFFERENCES WILL CUSTOMERS NOTICE AFTER THE TRANSACTION?
The change will have no impact on our daily operations, so customers will
not see any changes in our service or our presence in the community.
HOW DO CUSTOMERS BENEFIT FROM THIS TRANSACTION?
There are significant long-term benefits for our customers and the
communities we serve. This transaction will strengthen TEP's financial
foundation, giving us the resources we need to continue to grow with our
local economy and provide safe, reliable, efficient energy services.
There is also a specific commitment on the part of the investor group that
ensures UniSource Energy will continue its commitment to community
programs. This was a significant factor in the board's decision to approve
the transaction.
COMMUNITY INVOLVEMENT
---------------------
TEP AND UNISOURCE ENERGY HAVE MADE COMMITMENTS TO SUPPORT COMMUNITY PROGRAMS.
WILL THOSE COMMITMENTS BE KEPT BY THE INVESTOR GROUP?
Yes, the company will continue its community support. The investor group
has made a specific commitment to our involvement with programs that
improve our community. This was a significant factor in our directors'
decision to approve their offer.
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Privileged & Confidential 5
UniSource Energy shareholders are urged to read the proxy statement
regarding the proposed transaction when it becomes available because it
will contain important information. The proxy statement will be filed with
the U.S. Securities and Exchange Commission by UniSource Energy, and
stockholders may obtain a free copy of the proxy statement when it becomes
available and other documents filed or furnished by UniSource Energy with
the SEC at the SEC's web site at www.sec.gov. The proxy statement and other
documents filed or furnished by UniSource Energy may also be obtained for
free by directing a request to UniSource Energy at (866) 275-4867. Those
documents will be mailed to all UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to
be participants in the solicitation of proxies from UniSource Energy's
shareholders in favor of the merger. Investors may obtain a detailed list
of names, affiliations and interests of participants in the solicitation of
proxies of UniSource Energy shareholders to approve the merger at the
following address: UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ
85701. Shareholders of UniSource Energy may obtain additional information
regarding the interests of the participants by reading the proxy statement
when it becomes available.
[UNISOURCE LOGO] UNISOURCE ENERGY
NEWS
TRANSACTION FACT SHEET
TRANSACTION OVERVIEW
--------------------
o Investor group will pay $25.25 each for all UniSource Energy shares
outstanding, a premium of 30% to the closing price on Friday, Nov. 21,
2003.
o Total value of transaction, including assumed debt and other costs, is
estimated at approximately $3 billion.
o Company will continue to be headquartered in Tucson, Arizona
o Current management will remain in place, headed by Jim Pignatelli,
Chairman, President and CEO.
o Transaction subject to shareholder vote and regulatory approvals.
BENEFITS
--------
o Keeps UniSource Energy's utility operations under local management and
affirms its commitment to the Arizona communities the company serves
and supports.
o Brings the company as much as $260 million of increased capital,
strengthening its ability to provide safe, reliable service to its
customers.
o Delivers a significant, immediate premium to shareholders in a cash
transaction.
APPROVAL PROCESS
----------------
o Shareholder vote on proposed acquisition expected in the second
quarter of 2004
o Arizona Corporation Commission to review transaction.
o Other reviews to be conducted by the SEC and FERC.
o Transaction expected to be completed within a year.
INVESTOR GROUP
--------------
o KOHLBERG KRAVIS ROBERTS & CO. (KKR) is a private investment firm
headquartered in New York, London and Menlo Park, California. It is
focused on making long-term investments in attractive businesses to
implement value-creating strategies. Founded in 1976, KKR has
completed more than 119 transactions in North America and Europe
involving in excess of $114 billion in total financing. KKR's
investors are primarily institutions, including state and corporate
pension funds, banks, insurance companies and university endowments.
For more information, visit www.kkr.com.
o J.P. MORGAN PARTNERS, LLC (JPMP) formerly Chase Capital Partners, is a
global partnership with approximately $21 billion in capital under
management (as of September 30, 2003). It is a leading provider of
private equity and has closed over 1,300 individual transactions since
its inception in 1984. JPMP has more than 130 investment professionals
in eight regional offices throughout the world. JPMorgan Partners'
primary limited partner is J.P. Morgan Chase & Co. (NYSE: JPM), one of
the largest financial institutions in the United States. For more
information, visit www.jpmorganpartners.com.
o WACHOVIA CAPITAL PARTNERS (WCP) is the principal investing group of
Wachovia Corporation, the nation's fifth-largest financial holding
company. Since 1988, WCP has committed approximately $3 billion of
capital to more than 200 companies. WCP has offices in Charlotte, NC
and New York City. For more information, visit
www.wachoviacapitalpartners.com
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.
INFORMATION ABOUT EMPLOYEE STOCK OPTIONS
HOW WOULD THE PROPOSED ACQUISITION OF UNISOURCE ENERGY'S OUTSTANDING SHARES
AFFECT MY STOCK OPTIONS?
On the effective date of the transaction, which is structured as a merger, all
outstanding stock options would be cancelled. Option holders would receive, in
cash, an amount equal to the difference between the option exercise price and
the "Merger Consideration," times the number of shares subject to the option.
FOR EXAMPLE: John Doe was awarded an option to purchase 100 shares of
UniSource Energy stock (NYSE: UNS) on 7/16/1999, at an exercise price of
$12.28. On the merger effective date, John will receive $12.72 (the Merger
Consideration of $25.25 minus the option exercise price of $12.28) times
100 shares subject to the option, or a total of $1,272.00. John's cash
payment is taxable income. Both state and federal income tax will be
withheld from the payment.
Some of the outstanding stock options are incentive stock options. Incentive
stock options qualify for long-term capital gain (or loss) if you hold the
shares more than 12 months after you exercise the option. You would lose the
opportunity to qualify for this preferential tax treatment if your options are
cancelled and you are paid in cash as described above.
Holders of options awarded in 1994 should be aware that the merger's effective
date may come after those options expire on June 13, 2004. If your options
expire before the merger effective date, you won't be eligible for the cash
payment described above. Between now and June 13, 2004, you can exercise your
options through E*Trade Financial, our stock option plan administrator.
Both vested and unvested options outstanding at the time of the merger would be
cashed out as described above. That is to say, you wouldn't lose your unvested
options.
More information about exercising your stock options is contained in a notice
about stock option exercise which will be mailed to all option holders after
Thanksgiving. The notice will include an Options and Awards Summary showing your
outstanding stock option awards, the option exercise price associated with each
award, and the option expiration date(s).
IF PUBLIC TRADING IN UNS STOCK CEASES, WHAT WOULD HAPPEN TO MY 401(k) INVESTMENT
IN COMPANY STOCK?
On the merger effective date, each outstanding share of UNS common stock would
be converted into the right to receive $25.25 in cash (the "Merger
Consideration"). Your 401(k) plan stock account balance would be converted to
cash, and the cash automatically would be invested in a "default" investment
fund. You can reallocate those funds and make other modifications to your
account by visiting www.401.com or by calling Fidelity at 1-800-835-5098. More
information about how the proposed transaction would affect UNS stock held in
the 401(k) plan will be distributed before the transaction is closed..
UniSource Energy shareholders are urged to read the proxy statement regarding
the proposed transaction when it becomes available because it will contain
important information. The proxy statement will be filed with the U.S.
Securities and Exchange Commission by UniSource Energy, and stockholders may
obtain a free copy of the proxy statement when it becomes available and other
documents filed or furnished by UniSource Energy with the SEC at the SEC's web
site at www.sec.gov. The proxy statement and other documents filed or furnished
by UniSource Energy may also be obtained for free by directing a request to
UniSource Energy at (866) 275-4867. Those documents will be mailed to all
UniSource Energy shareholders.
UniSource Energy and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from UniSource Energy's shareholders
in favor of the merger. Investors may obtain a detailed list of names,
affiliations and interests of participants in the solicitation of proxies of
UniSource Energy shareholders to approve the merger at the following address:
UniSource Energy Tower, 1 S. Church Avenue, Tucson, AZ 85701. Shareholders of
UniSource Energy may obtain additional information regarding the interests of
the participants by reading the proxy statement when it becomes available.