FTS: Rating Agencies Deprecate Acquisition

Fortis Inc. has announced:

FORTIS INC. TO ACQUIRE ITC HOLDINGS CORP. FOR US$11.3 BILLION

Fortis to increase its 2016 consolidated mid year rate base to approximately
C$26 billion (US$18 billion) with acquisition of the largest independent transmission utility in the United States

Highlights

  • •The acquisition aligns with Fortis’ financial objectives by providing approximately 5% earnings per common share accretion in the first full year following closing, excluding one-time acquisition-related expenses. Fortis continues to target 6% average annual dividend growth through 2020.
  • •ITC owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, serving a combined peak load exceeding 26,000 megawatts along approximately 15,600 miles of transmission line.
  • •Fortis will become one of the top 15 North American public utilities ranked by enterprise value.
  • •ITC’s FERC regulated operations, with substantial rate base growth and robust investment opportunities, add a new growth platform.
  • •Following the acquisition, ITC will continue as a stand-alone transmission company, retaining its focus on growth and operational excellence while benefiting from a broader platform that will support its mission to modernize electrical infrastructure in the U.S.
  • •ITC’s average rate base and CWIP is expected to grow at a compounded average annual rate of approximately 7.5% through 2018.
  • •Fortis intends on retaining all of ITC’s employees and maintaining the corporate headquarters in Novi, Michigan.
  • •The per share consideration of cash and Fortis stock payable to ITC shareholders of US$44.90 represents a 33% premium to the unaffected closing share price on November 27, 2015 and a 37% premium to the 30-day average unaffected share price prior to November 27, 2015. Pro forma, upon closing of the transaction, ITC shareholders will own approximately 27% of the combined company and will receive a meaningful increase in their dividend per share.
  • •In connection with the acquisition, Fortis will apply to list its common shares on the NYSE

Shareholders were not impressed:

Fortis, Canada’s largest utility owner, will pay the equivalent of $44.90 for each ITC share, according to a statement Tuesday. That’s a 14 percent premium to Monday’s close, and a 33 percent premium to the close on Nov. 27, before Bloomberg reported that ITC was exploring a sale. The offer, which totals $11.3 billion including assumed debt, will comprise $22.57 in cash and 0.752 Fortis shares apiece.

Fortis fell 10 percent, the biggest one-day decline on record, to close at C$37.14 in Toronto. ITC fell 1.9 percent to $38.65. The premium, or difference between ITC’s price and the per-share deal value, narrowed to 10 percent, according to data compiled by Bloomberg.

Fortis, based in St. John’s, Newfoundland and Labrador, bought Arizona utility owner UNS Energy Corp. for $2.5 billion in cash in 2014 and New York utility owner CH Energy Group Inc. for about $968.5 million in 2013. With ITC, Fortis expects to capitalize on construction of new high-voltage lines as the administration of President Barack Obama encourages development of wind farms and other sources of renewable energy.

Ha! Just another batch of parasites hoping to scoop up some the ‘green energy’ lolly that’s being tossed around with abandon.

Gillian Tan of Bloomberg points out two problems with the deal:

The deal values ITC at $44.90 a share, easily above the consensus analyst price target on the stock, and also represents a forward price-to-earnings multiple of 20. That’s in line with the lofty valuations ascribed to recent deals, and justifies ITC’s decision to seek out a buyer at a time when its larger rivals are starved of growth and debt is cheap. But borrowing isn’t going to be cheap forever, and the fact that Fortis shareholders are fleeing suggests that they aren’t overly enthused about the company lifting its debt burden to more than $15 billion from some $9.1 billion, even though it plans to maintain an investment-grade credit rating.

There’s another wrinkle: As part of the deal financing, Fortis needs to find an infrastructure fund (or funds) to write a check of between $1 billion and $1.4 billion in return for a stake in ITC of between 15 percent and 19.9 percent. While underbidders could step up (Borealis Infrastructure Management is said to be one, according to Bloomberg News), it’s unclear why Fortis didn’t pre-select a partner. If, for whatever reason it is unable to find one, Fortis said it could issue equity (which will dilute existing shareholders) or sell assets (at which time it’ll be a forced seller), both seemingly sub-optimal alternatives.

So S&P assigned the company status of ‘Outlook Negative’:

  • •On Feb. 9, 2016, Fortis Inc. announced the US$11.3 billion proposed
    acquisition of ITC Holdings Corp. (ITC), a U.S.-based electricity transmission operator.
  • •We are revising our outlook on St. John’s, Nfld.-based holding company Fortis Inc. and its subsidiaries FortisAlberta Inc., Maritime Electric Co. Ltd., and Caribbean Utilities Co. Ltd. to negative from stable.
  • •We are also affirming our long-term corporate credit ratings on Fortis and its subsidiaries.
  • •In addition, we are downgrading Fortis’ senior unsecured debentures to ‘BBB+’ from ‘A-‘.
  • •We are revising our competitive position score to strong from excellent.
  • •The negative outlook reflects the execution risks associated with the transaction including selling up to 19.9% of ITC to one or more infrastructure-focused minority investors.
  • •The negative outlook also reflects the limited cushion in the credit metrics for any post-merger integration or operational issues.


The negative outlook reflects the execution and integration risk associated with the ITC acquisition including the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors. In addition, the outlook reflects that credit metrics have a limited cushion in the two-year outlook period. With the acquisition of ITC, we expect the company will reach 11% AFFO to debt in 2019. However, until then metrics will be about 10%, which leaves little cushion for any operational or post-merger integration errors.

We could take a negative rating action on Fortis by applying a negative comparable rating modifier if the company’s AFFO-to-debt were to fall below 10%, at the low end of the significant financial risk profile during our two-year outlook period. This could happen as a result of cost overruns from the post-merger integration efforts with ITC, material adverse regulatory decisions, or if Fortis encounters operational difficulties.

We could revise the outlook to stable if AFFO-to-debt remains consistently above 10% once the transaction has closed and if the acquisition uncertainties have been resolved.

… and DBRS slapped it with ‘Review-Negative’:

DBRS Limited (DBRS) has today placed the A (low) Issuer Rating, the A (low) Unsecured Debentures rating and the Pfd-2 (low) Preferred Shares rating of Fortis Inc. (Fortis or the Company) Under Review with Negative Implications. This action follows the announcement that the Company has agreed to acquire ITC Holdings Corp. (ITC) for a total consideration of approximately US$11.3 billion, including the assumption of US$4.4 billion of debt on closing (the Acquisition). The rating action reflects DBRS’s view that the Acquisition will have a modestly positive impact on the Company’s business risk profile but a negative impact on its financial risk profile. The Acquisition is expected to close in late 2016 and is subject to both Fortis and ITC shareholder approvals, as well as various regulatory and federal approvals.

Fortis intends to fund the Acquisition by issuing approximately (1) US$3.5 billion to US$3.9 billion of equity, largely satisfied through the share consideration to be paid to ITC shareholders, (2) US$2.0 billion of debt, and by (3) selling 15.0% to 19.9% of ITC to minority investors for approximately US$1.0 billion to US$1.4 billion. DBRS considers the current financing plan to be negative to the Company’s non-consolidated financial risk profile. Based on DBRS’s pro forma 2015 calculations, Fortis had a non-consolidated debt-to-capital ratio of approximately 21.9% and a non-consolidated cash flow-to-debt ratio of 21.4%. Based on the Company’s proposed financing plan and DBRS’s estimate of future dividends from the Acquisition assets to Fortis, DBRS expects a significantly negative impact on the Company’s non-consolidated metrics. As a result, DBRS believes that placing Fortis’s ratings Under Review with Negative Implications is the appropriate rating action at this time.

DBRS will continue to review the final financing plan for the Acquisition and will resolve the Under Review rating action once the transaction closes. The Company’s ratings could be downgraded by one notch if the non-consolidated debt-to-capital ratio following the Acquisition is materially over the 20% threshold and the non-consolidated cash flow-to-debt ratio is significantly below 20%.

Affected issues are: FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M. All are tracked by HIMIPref™.

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