PrefBlog

Fortis Inc. has announced:

that it has entered into an agreement and plan of merger to acquire UNS Energy Corporation (“UNS Energy”) (NYSE:UNS) for US$60.25 per common share in cash, representing an aggregate purchase price of approximately US$4.3 billion, including the assumption of approximately US$1.8 billion of debt on closing (the “Acquisition”). The closing of the Acquisition, which is expected to occur by the end of 2014, is subject to receipt of UNS Energy common shareholder approval and certain regulatory and government approvals, including approval by the Arizona Corporation Commission (“ACC”), 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.

UNS Energy is a vertically integrated utility services holding company, headquartered in Tucson, Arizona, engaged through three subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona. UNS Energy’s fiscal 2012 operating revenues totalled approximately US$1.5 billion and, as at September 30, 2013, UNS Energy had total assets of approximately US$4.3 billion. UNS Energy serves approximately 654,000 electricity and gas customers.

Following the Acquisition, based on pro forma financial information as at September 30, 2013, total assets of Fortis will increase by approximately 33.5% to approximately $23.5 billion and regulated utility assets will comprise approximately 92% of total assets. Regulated assets in Canada and the United States will comprise approximately 55% and 34%, respectively, of total assets. The Corporation’s consolidated rate base is expected to increase by approximately US$3 billion at the time of closing of the Acquisition. Following the Acquisition, Fortis utilities will serve more than 3,000,000 electricity and gas customers.

They also announced a big chunk of financing:

its direct wholly owned subsidiary, FortisUS Holdings Nova Scotia Limited (the “Selling Debentureholder”), has agreed to sell $1,594,000,000 aggregate principal amount of 4.00% convertible unsecured subordinated debentures (“Debentures”) of Fortis in a secondary offering on a “bought deal” basis to the public (the “Public Offering”) and separately has agreed to sell $206,000,000 aggregate principal amount of Debentures to certain institutional investors on a private placement basis (the “Private Placement” and together with the Public Offering, the “Offerings”). In connection with the Public Offering, the underwriters have also been granted an over-allotment option to purchase up to an additional $239,100,000 aggregate principal amount of Debentures at the offering price, within 30 days from the date of the closing of the Public 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 Offerings and the remaining $667 is payable on a date (“Final Instalment Date”) to be fixed following satisfaction of all conditions precedent to the closing of Fortis’ acquisition of UNS Energy Corporation (NYSE:UNS).
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The Debentures will mature on January 9, 2024 and will bear interest at an annual rate of 4.00% per $1,000 principal amount of Debentures (an effective annual yield of 12.00% based on a first instalment of $333) until and including the Final Instalment Date, after which the interest rate will be 0%.

If the Final Instalment Date occurs on a day that is prior to the first anniversary of the closing of the Offering, holders of Debentures who have paid the final instalment on or before the Final Instalment Date will be entitled to receive, on the business day following the Final Instalment Date, in addition to the payment of accrued and unpaid interest to and including the Final Instalment Date, an amount equal to the interest that would have accrued from the day following the Final Instalment Date to, but excluding, the first anniversary of the closing of the Offering had the Debentures remained outstanding until such date (the “Make-Whole Payment”). No Make-Whole Payment will be payable if the Final Instalment Date occurs on or after the first anniversary of the closing of the Offering.

At the option of investors and provided that payment of the final instalment has been made, each Debenture will be convertible into common shares of Fortis (“Common Shares”) at any time after the Final Instalment Date but prior to maturity or redemption by the Corporation at a conversion price of $30.72 per Common Share, being a conversion rate of 32.5521 Common Shares per $1,000 principal amount of Debentures, subject to adjustment in certain circumstances.

The Debentures will not be redeemable except that Fortis will redeem the Debentures at a price equal to their principal amount plus accrued and unpaid interest following the earlier of: (i) notification to holders that the conditions necessary to approve the acquisition of UNS Energy Corporation will not be satisfied; (ii) termination of the acquisition agreement; and (iii) July 2, 2015, if notice of the Final Instalment Date has not been given to investors on or before June 30, 2015. Upon any such redemption, the Corporation will pay for each Debenture: (i) $333 plus accrued and unpaid interest to the holder of the Instalment Receipt; and (ii) $667 to the Selling Debentureholder on behalf of the holder of the Instalment Receipt in satisfaction of the final instalment. In addition, after the Final Instalment Date, any Debentures not converted may be redeemed by Fortis at a price equal to their principal amount plus unpaid interest, which accrued prior to the Final Instalment Date.

At maturity, Fortis will have the right to pay the principal amount due in Common Shares, which will be valued at 95% of their weighted average trading price on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the maturity date.

Mark Chediak and Rebecca Penty of Bloomberg note:

The transaction is Fortis’s second announced purchase of a U.S. utility in the past two years. The company completed its $969 million acquisition of CH Energy Group Inc. in June, after agreeing to freeze rates for New York customers. Fortis has been focused on the U.S. for acquisitions because there are “many more opportunities” than in Canada, where most utilities are owned by the government, Chief Financial Officer Barry Perry said on a conference call last month.

DBRS has announced that it:

has today placed the A (low) Issuer Rating, A (low) Unsecured Debentures and Pfd-2 (low) Preferred Shares ratings of Fortis Inc. (Fortis or the Company) Under Review with Developing Implications. This action follows the announcement that the Company has agreed to acquire UNS Energy Corporation (UNS) for a total consideration of approximately $4.3 billion, including the assumption of $1.8 billion of debt on closing (the Acquisition). The rating action reflects DBRS’s view that the proposed Acquisition would have a modestly negative impact on Fortis’ business risk profile while the impact on the financial risk profile is uncertain since the financing plan has not been finalized.
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The focus of DBRS’s analysis is on Fortis’ 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 strong at 9.17 times in 9M2013, while debt-to-capital was approximately 21%. DBRS notes that the non-consolidated leverage of 21% is slightly above the acceptable range for a holding company with respect to DBRS’s one-notch criteria. However, this increase is expected to be temporary and the leverage will fall in-line with the current rating category following the completion of the Waneta project. Currently, it is uncertain as to how Fortis plannts to finance the proposed Acquisition. As a result, DBRS has placed the ratings of Fortis 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 proposed Acquisition or any cost overruns of its current projects in such a way that its non-consolidated debt-to-capital structure is significantly above 20% and its other non-consolidated credit metrics deteriorate significantly without corrective action within a reasonable time frame, then negative rating action is likely to occur.

Fortis Inc. has several preferred issues trading on the Toronto Exchange: FTS.PR.E (OperatingRetractible); FTS.PR.F and FTS.PR.J (PerpetualDiscount); and FTS.PR.G, FTS.PR.H and FTS.PR.K (FixedReset).

This entry was posted on Wednesday, December 11th, 2013 at 9:26 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.