EMA Outlook-Negative by S&P; Review-Developing by DBRS

Emera Inc. announced on Friday:

a definitive agreement for Emera to acquire TECO Energy (the “Transaction”), creating a North American energy leader, with over US$20 billion of assets and more than 2.4 million electric and gas customers. Upon closing, TECO Energy will become a wholly owned subsidiary of Emera.

Under the terms of the all-cash deal, which has been unanimously approved by the Board of Directors of both companies, TECO Energy shareholders will receive US$27.55 per common share, a 48 percent premium based on TECO Energy’s unaffected closing stock price on July 15, 2015 (the last trading day prior to news reports regarding TECO Energy’s strategic review) and 25 percent above TECO Energy’s unaffected 52-week high. This represents an aggregate purchase price of approximately US$10.4 billion including assumption of approximately US$3.9 billion of debt.

The closing of the Transaction, which is expected to occur by mid-2016, is subject to TECO Energy common shareholder approval and certain regulatory and government approvals, including approval by the New Mexico Public Regulation Commission, the Federal Energy Regulatory Commission and compliance with any applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the satisfaction of customary closing conditions.

… and announced today:

that its direct wholly-owned subsidiary, Emera Holdings NS Company (the “Selling Debentureholder”), has agreed to sell $1,900,000,000 aggregate principal amount of 4.00% convertible unsecured subordinated debentures (“Debentures”) of Emera in a secondary offering on a “bought deal” basis (the “Offering”). In connection with the Offering, the underwriters have also been granted an over-allotment option to purchase up to an additional $285,000,000 aggregate principal amount of Debentures at the offering price, within 30 days from the date of the closing of the Offering solely to cover over-allotments, if any, and for market stabilization purposes.

All Debentures are being sold on an instalment basis at a price of $1,000 per Debenture, of which $333 is payable on the closing of the Offering and the remaining $667 is payable on a date (the “Final Instalment Date”) to be fixed by the Company following satisfaction of all conditions precedent to the closing of Emera’s acquisition of TECO Energy, Inc. (NYSE:TE).

On September 4, 2015 Emera announced that it had entered into an agreement and plan of merger pursuant to which it will indirectly acquire TECO Energy, Inc. (“TECO Energy”), a Florida and New Mexico regulated electric and gas utilities holding company, for an aggregate purchase price of approximately US$10.4 billion including the assumption of approximately US$3.9 billion of debt.

As a result of this activity, S&P has announced:

  • •On Sept. 4, Emera announced the US$10.4 billion proposed acquisition of TECO Energy, a Florida-based holding company that wholly owns regulated utilities Tampa Electric Co. and New Mexico Gas Co.
  • •The proposed acquisition is partly being financed with the issuance of convertible debentures, and the additional debt load pushes Emera’s adjusted funds from operations-to-debt ratio to below 11%, the downgrade trigger.
  • •As a result of the financing risk associated with this large acquisition that will double the size of the company, we are revising our outlook on Emera and its Canadian subsidiary Nova Scotia Power Inc. to negative from stable.
  • •We are also revising the financial risk profile to “aggressive” from “significant”. The business risk of the consolidated entity post acquisition remains “excellent”.
  • •We are affirming all ratings on Emera and NSPI, including our ‘BBB+’ long-term corporate credit ratings.

The negative outlooks on Emera and NSPI reflect the financing risk associated with this large acquisition and our expectation that the consolidated pro forma credit metrics will materially weaken due to the C$1.9 billion convertible debenture issuance to finance, in part, the purchase of TECO Energy.

Although we expect that the debentures have a high likelihood of conversion due to several factors including no interest after acquisition close, targeted sale to institutions that would be buyers of Emera equity, not debt), in the meantime credit metrics are expected to be below 11%. If conversion does not occur as expected and metrics remain below 11%, we could lower the ratings on Emera and NSPI.

We could revise our outlook to stable within our two-year outlook period if we expect consolidated AFFO-to-debt to be sustained comfortably above 11%, all else being equal. This could occur if the debentures are successfully converted.

Prior to the announcement of the convertible debt issue, DBRS announced:

DBRS Limited (DBRS) has today placed the BBB (high) Issuer Rating, BBB (high) Medium-Term Notes and Pfd-3 (high) Preferred Shares – Cumulative ratings of Emera Inc. (Emera or the Company) Under Review with Developing Implications.

The primary focus of DBRS’s FRA [financial risk assessment] analysis is on Emera’ non-consolidated capital structure (parent level) and cash flow from the subsidiaries to the parent to service the parent’s debt and corporate expenses. On a non-consolidated basis, the cash flow-to-interest expense ratio was reasonable at 12.3x in LTM 2015, while debt-to-capital was approximately 19%. DBRS notes that the non-consolidated leverage of 19% is well within the 30% threshold.

Currently, it is uncertain as to how Emera plans to ultimately finance the Acquisition. As a result, DBRS has placed the ratings of Emera Under Review with Developing Implications. DBRS will further review the Company’s financing plan when it is finalized. Upon final review, if the Company finances the Acquisition in such a way that its non-consolidated debt-to-capital structure exceeds 30% and its other non-consolidated credit metrics deteriorate significantly without corrective action within a reasonable time frame, then a negative rating action is likely to occur.

Affected issues are EMA.PR.A, EMA.PR.B, EMA.PR.C, EMA.PR.E and EMA.PR.F. S&P’s announcement also affects NSI.PR.D, which will be posted separately.

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