Fortis $2.5 Billion Purchase of UNS Extends U.S. Push
Fortis Inc. (FTS)’s purchase of Arizona-based UNS Energy Corp. (UNS) for $2.5 billion in cash extends a push by Canada’s largest investor-owned natural gas and electric utility into markets with more growth prospects.
Fortis will pay $60.25 a share and assume about $1.8 billion in debt, the St. John’s, Newfoundland and Labrador-based company said in a statement yesterday. The price is 31 percent more than UNS’s $45.84 closing price yesterday.
“It looks like a healthy premium,” Paul Patterson, a New York-based analyst with Glenrock Associates LLC, said in a phone interview. “As with most utility mergers, the key issue will be how Arizona regulators respond to the proposed transaction.”
Arizona regulators in 2004 rejected a buyout of UNS, then known as UniSource Energy Corp., by a group led by KKR & Co., saying the deal wasn’t in the “public interest.” UNS said the Fortis takeover would give the company new financial strength, with the buyer injecting $200 million to its balance sheet and keeping existing staffing levels and its Tucson headquarters.
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.
The deal is expected to close by the end of 2014 and needs approval from Arizona, the Federal Energy Regulatory Commission and the Committee on Foreign Investment in the U.S.
Fortis has a “totally different model of operation” than KKR, Fortis Chief Executive Officer Stanley Marshall said on a conference call yesterday.
“Each one of our utilities maintains its own infrastructure, management teams,” Marshall said. “It’s essentially autonomous and ring-fenced. I think most regulators would find our model very, very satisfactory.”
UNS, whose largest shareholder is BlackRock Inc., rose 29 percent to $58.51 at the close in New York, the biggest gain in more than 20 years. Fortis fell 3.4 percent to C$30.04, the most since June 20.
UNS is moving away from coal-fired electricity, planning investments in gas-fired generators and renewable energy. Arizona requires utilities to get 15 percent of their power from renewable sources by 2025.
Fortis will acquire UNS’s three subsidiaries -- Tucson Electric Power, UNS Electric and UNS Gas. Tucson Electric Power is the second-largest investor-owned utility in Arizona, serving about 412,000 homes and businesses. UNS Electric and UNS Gas have about 242,000 power and gas customers.
“UNS is a well-run utility with an experienced management team, committed to providing customers with safe, reliable, cost-effective energy service,” Marshall said.
DBRS Ltd., a Toronto-based credit rating company, placed Fortis under review. “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,” DBRS said in a statement.
Fortis said the Bank of Nova Scotia has agreed to provide financing for the deal. The company had C$7.7 billion ($7.27 billion) in total debt as of Sept. 30, according to data compiled by Bloomberg.
Canadian utilities and electricity generators have expanded into the U.S. market with its larger number of regulated companies.
“In the last year, we’ve seen quite a bit of interest in the U.S. Sun Belt states,” said Travis Miller, a Chicago-based analyst for Morningstar Inc. “These states generally have good population and economic fundamentals that make it attractive for regulated utilities.”
Currently, the only large Canadian utility being considered for a sale is SNC-Lavalin Group Inc.’s AltaLink utility unit. SNC-Lavalin Chief Executive Officer Robert Card on Nov. 1 said the company will consider selling all of its AltaLink division as well as listing a minority stake on the stock market.
AltaLink could be worth C$1.58 billion to C$3.54 billion, according to Maxim Sytchev, an analyst with Dundee Capital Markets. That would make it the largest Canadian utility asset for sale at the moment.
Algonquin Power & Utilities Corp., a smaller competitor to Fortis, has also been snapping up U.S. power companies. The Oakville, Ontario-based company last month announced the purchase of 400 megawatts of U.S. wind power assets from Gamesa Corp. Tecnologica SA, Spain’s largest wind-turbine maker. It acquired New England Gas Co. earlier this year.
Fortis serves more than 2.4 million gas and electric customers in Canada, New York and the Caribbean. The company also owns hotels and commercial office space in Canada, according to its website.
The acquisition will add to Fortis earnings within the first year of closing, excluding one-time costs, Marshall said. Following the deal, Fortis will have no more than a third of its business located in any one regulatory jurisdiction, he said.
The Bank of Nova Scotia provided Fortis with financial advice on the takeover, while White & Case LLP, Davies Ward Phillips & Vineberg LLP and Snell & Wilmer LLP acted as legal advisers. Lazard Ltd. and Baker Botts LLP advised UNS on the deal.
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