Fitch Ratings Affirms Tucson Electric Power; Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 1, 2003

Fitch Ratings has affirmed Tucson Electric Power Company's (TEP) secured debt ratings at 'BB+' following the announcement of the proposed purchase of its parent company, UniSource Energy (UNS), in a leveraged transaction by Saguaro Utility Group L.P. (Saguaro). The Rating Outlook is Stable.

The rating action reflects the implication that Saguaro will infuse $260 million of cash into TEP that will accelerate debt reductions previously anticipated over a five-year horizon and federal and state regulatory restrictions limiting dividends between TEP and its immediate parent, UNS. Saguaro (which includes limited partners Kohlberg Kravis Roberts & Co., L.P., J.P. Morgan Partners, LLC and Wachovia Capital Partners) has agreed to acquire UNS in a transaction valued at roughly $3 billion, including assumed debt. The leveraged transaction, as planned, contemplates issuance of $660 million of debt by a new holding company that will be structured as the parent of UNS. $260 million of cash proceeds will be invested in TEP and used to reduce utility debt.

Concern regarding TEP's status as a subsidiary of a highly leveraged parent company, is mitigated by the pre-funded debt redemption feature of the merger proposal and regulatory provisions limiting dividends to 100% of the utility's net income. Fitch estimates that TEP's debt/EBITDA ratio will improve about 60 basis points to 3.9 times (x) as a result of the debt reduction, all else equal. The $260 million cash transfer and debt redemption are targeted to improve TEP's regulatory equity to 40% of total capitalization (the calculation by the Arizona Corporation Commission (ACC) excludes capitalized lease obligations) enabling the utility to dividend 100% of net income to its parent. The incremental dividend payment is partially offset by lower interest expense associated with the debt reduction.

The current ratings reflect TEP's weak interest coverage ratios, highly leveraged balance sheet and the high business risk that results from the absence of a power cost adjustment clause or deferral mechanism and the rate cap under its 1999 industry restructuring settlement agreement.

Under the terms of the merger agreement, the investor group will pay roughly $875 million for UNS equity and assume about $2.1 billion of debt. The merger is subject to ratification by shareholders and regulatory approvals are required from the ACC, FERC, the SEC and the Department of Justice under Hart-Scott-Rodino. Management will remain in place and UNS' corporate headquarters will remain in Tucson, Arizona. The merger, if approved, is expected to close within a year.

For further information on Tucson Electric Power Co. please refer to the credit analysis report dated June 18, 2003 and available on the Fitch Ratings web site at 'www.fithratings.com'.