FTS: Outlook Negative, Says S&P

Standard & Poor’s has announced:

  • On Dec. 11, Fortis Inc. announced the US$4.3 billion proposed acquisition of UNS Energy Corp., an Arizona-based holding company that wholly owns Tucson Electric Power Co. (TEP).
  • The cash portion proposed for the acquisition is being financed primarily with the issuance of convertible debentures which we view as debt, and the additional debt load pushes Fortis beyond our 10% adjusted funds from operations-to-debt downgrade threshold.
  • As a result, we are revising our outlook on Fortis and its Canadian and Caribbean subsidiaries to negative from stable.
  • At the same time, we revised our outlook on TEP to positive from stable pending the close of the acquisition.
  • We are also affirming all ratings on the companies, including our ‘A-‘ long-term corporate credit rating (CCR) on Fortis and our ‘BBB’ long-term CCR on TEP.

We expect Fortis to partially finance the cash portion through US$1.8 billion of convertible debentures with a C$239 million overallotment option. The debentures have features that encourage holders to convert, such as interest payments ceasing following closing of the acquisition. However, we treat the debentures as debt until converted. As a result, we expect adjusted funds from operations (AFFO)-to-debt to decline to below 9% until the debentures fully convert to equity. “This is below our 10% downgrade threshold for the rating,” said Standard & Poor’s credit analyst Gerry Hannochko.

The negative outlook on Fortis reflects our expectation that credit metrics would materially weaken due to the C$1.8 billion of convertible debentures to finance the UNS acquisition. Although we expect that the debentures would have a very high likelihood of conversion, in the meantime, credit metrics would be below our thresholds. We expect to continue to assess the financial risk profile using the low volatility table. Revising the outlook to stable would likely occur when the convertible debentures are converted to equity, lessening the debt burden. If conversion of the debentures does not occur as expected and metrics remain weak, we could lower the rating one notch if the consolidated AFFO-to-total debt deteriorates below 10%.

The DBRS assessment of Review-Developing on FTS was reported on PrefBlog.

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).

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