Fitch: TEP's Ratings Unaffected by Merger Termination; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed Tucson Electric Power Company's (TEP) ratings as follows:

-- First mortgage bonds 'BB+';

-- Second mortgage bonds 'BB+';

-- Unsecured revenue bonds 'BB-';

The Rating Outlook is Stable.

TEP's ratings are unaffected by Saguaro Utility Group L.P.'s (Saguaro) Dec. 30, 2004 termination of its proposed acquisition of the utility's direct corporate parent, UniSource Energy Corporation (UNS). As part of the merger termination, UNS paid Saguaro $7 million to cover expenses associated with the merger.

The current ratings are consistent with TEP's existing credit profile, which did not assume any merger benefits. The ratings reflect TEP's weak interest coverage ratios, highly leveraged balance sheet, and high business risk associated with the absence of a power cost adjustment clause and rate cap (through 2008) under its 1999 industry restructuring settlement agreement. The ratings also consider the utility's competitive, primarily coal-fired generating capacity and assume that management will continue to use projected free cash flow (i.e., operating cash flow after capital expenditures and dividends) to reduce debt. The primary concern for TEP fixed income investors is the potential for a rate reduction in TEP's pending rate review by the Arizona Corporation Commission.