Fortis Inc. to Acquire UNS Energy Corporation for US$4.3 Billion

12/11/2013 16:32 EST

ST. JOHN'S, NEWFOUNDLAND AND LABRADOR - Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) announced today 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.

"These are significant regulated utility assets located in the U.S. South West, a region experiencing above-average economic growth," says Stan Marshall, President and Chief Executive Officer, Fortis Inc. "The Acquisition of UNS Energy is consistent with our strategy of investing in high-quality regulated Canadian and U.S. utility assets and is expected to be accretive to earnings per common share in the first full year after closing, excluding one-time Acquisition-related costs. The Acquisition further mitigates business risk for Fortis by enhancing the geographic diversification of our businesses, resulting in no more than one-third of total assets being located in any one regulatory jurisdiction."

"The Corporation's pre-Acquisition six-year utility capital spending program through 2018 is expected to be $7.5 billion. Capital investment over that period is expected to allow utility rate base and hydroelectric generation investment to grow at a combined compound annual growth rate of approximately 7%," says Marshall.

Acquisition Highlights

The business operated by UNS Energy is attractive to Fortis for the following reasons:

(i) The Acquisition is expected to be accretive to earnings per common share of Fortis in the first full year, excluding one-time Acquisition-related costs.
(ii) UNS Energy operates a well-run electric and gas system, serving a diversified, primarily residential and commercial, customer base. Over the past 10 years, UNS Energy has increased net income by a compound annual growth rate ("CAGR") of 7.7% and total assets by a CAGR of 3.1%.
(iii) The Acquisition increases the diversification of the Corporation's regulated assets and earnings by geographic location and regulatory jurisdiction.
(iv) UNS Energy is a single-state utility that operates within a supportive regulatory environment. The regulated utility rates for retail electric and natural gas service are determined by the ACC on a cost-of-service basis, with rate-design structures that pass through costs related to fuel, purchased power, environmental compliance, renewable resources, energy efficiency and distributed generation.
(v) Favourable local economic conditions support growth. According to the University of Arizona Economic and Business Research Centre, by 2018 growth in jobs, retail sales and personal income is expected to reach 2.9%, 5.1% and 6.0% respectively.
(vi) UNS Energy's continued investment in its electric and gas businesses to provide safe, reliable and cost-effective energy service to its customers is expected to result in attractive rate base growth. UNS Energy has forecasted that capital investment will total approximately US$2.3 billion over the period 2013 through 2018. As a result of capital expenditures related to UNS Energy's generation diversification, UNS Energy's rate base is expected to grow at a CAGR of approximately 7% through 2018.
(vii) UNS Energy expects to invest significant capital into diversifying its generation fleet, including the purchase of the natural gas-fired combined-cycle Gila River Unit 3 generation plant and utility scale renewables generation. Renewables investments will diversify UNS Energy's generation resources, as well as comply with regulation regarding the mitigation of environmental impact.
(viii) UNS Energy has an experienced management team committed to providing customers with safe, reliable, cost-effective energy service. Management has also demonstrated strong regulatory expertise, completing each of the past three rate cases in approximately one year on average.

"UNS Energy's regulated utility operations in Arizona are similar in many respects to our regulated utility operations in New York State and across Canada," Marshall explains. "UNS Energy will be able to avail itself of the operational, regulatory and financial expertise throughout Fortis."

The Corporation's financial strength will improve UNS Energy's access to capital to fund the ongoing diversification of its generating fleet. Upon closing, Fortis will inject US$200 million into UNS Energy to help fund the planned purchases of Unit 3 at the natural gas-fired combined cycle Gila River Power Plant and a portion of Unit 1 at the Springerville Generating Station, transactions that will reduce the reliance on coal-fired power by Tucson Electric Power ("TEP").

"UNS Energy will remain a standalone utility in the Fortis model. Its headquarters and management team will remain in Tucson, Arizona and its customers will not pay for any costs related to the transaction," says Marshall. "UNS Energy employees share the same commitment to serving their customers and communities as employees throughout our federation of utilities and we look forward to welcoming them to Fortis."

The Fortis approach to utility management is based on creating value for customers that ultimately translates into long-term value for shareholders. Fortis structures its operations as separate operating companies in each jurisdiction. Focused local management teams have the benefit of access to utility management experience and expertise of Fortis. The senior management team of UNS Energy, which Fortis expects to retain, will add valuable operational expertise in electric generation, transmission and distribution and natural gas distribution to the existing expertise of Fortis in such areas. This approach allows local managers to continue to build relationships with, and be responsive to, both their customers and regulators while availing of the resources of a large utility group. Fortis recognizes that regulation is a key aspect of its core business and has developed a disciplined, cost-conscious asset investment and operating philosophy which is responsive to regulation.

The management of Fortis has substantial experience in integrating newly acquired enterprises into the Fortis Group. Over the past 10 years, Fortis has completed three major regulated utility acquisitions: the US$1.5 billion acquisition of CH Energy Group, Inc. was announced in February 2012 and closed in June 2013; the $3.7 billion acquisition of FortisBC Energy (formerly, Terasen Inc.) was announced in February 2007 and closed in May 2007; and the $1.5 billion acquisition of FortisBC Electric and FortisAlberta (formerly, together, Aquila Networks Canada (Alberta) Ltd.) was announced in September 2003 and closed in May 2004. Over the last decade, the total assets of Fortis have grown at a CAGR of approximately 23%.

Overview of UNS Energy

TEP, UNS Energy's largest and principal regulated utility, generates, transmits and distributes electricity to approximately 412,000 retail electric customers in southern Arizona. Its service territory covers 1,155 square miles and includes a population of approximately 1,000,000 people in the greater Tucson metropolitan area in Pima County, as well as parts of Cochise County.

UNS Electric, Inc. ("UNS Electric") serves approximately 93,000 retail electric customers in Arizona's Mohave and Santa Cruz counties. These counties have a combined population of approximately 250,000 people.

UNS Gas, Inc. ("UNS Gas") serves approximately 149,000 retail gas customers in northern Arizona's Mohave, Yavapai, Coconino and Navajo counties, as well as Santa Cruz County in southern Arizona. These counties, with a combined population of approximately 700,000 people, comprise approximately 50% of the land mass in the State of Arizona.

The following table summarizes the percentage of UNS Energy's total assets, operating revenues and net income by regulated utility subsidiary for the nine months ended September 30, 2013.

Percentage of UNS Energy
(For the nine months ended September 30, 2013)
Subsidiary Total
TEP 84 81 85
UNS Electric 9 11 10
UNS Gas 7 8 5
Total 100 100 100

TEP, UNS Electric and UNS Gas are subject to regulation by the ACC under traditional cost of service, with rate-design structures that flow through costs related to fuel, purchased power, environmental compliance, energy efficiency and distributed generation. The 2013 TEP Rate Order allows for a return on equity ("ROE") of 10.0% and common equity of 43.5%. UNS Electric has a settlement agreement pending before the ACC, the terms of which provide for an ROE of 9.5% and common equity of 52.6%. The rates charged by UNS Gas were approved by the ACC in 2012 based on an ROE of 9.75% and common equity of 50.82%.

UNS Energy, through TEP and UNS Electric, owns or leases a total of 2,420 megawatts of generating capacity, consisting of coal (59%), natural gas (34%), dual fuel (6%) and solar (1%) generation. UNS Energy is gradually reducing its coal capacity, largely by substituting portions of TEP's coal generation with natural gas generation and generation from renewables, such as solar, and expects coal to represent less than 30% of generating capacity by the end of the decade. TEP is emerging as an industry leader in the development and support of renewable energy. The utility was named 2012 Investor-Owned Utility of the Year by the Solar Electric Power Association. The ACC's Renewable Energy Standard requires TEP, UNS Electric and other affected utilities to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy requirements in 2025.

The senior unsecured debt of TEP is rated Baa2 by Moody's Investors Service, BBB by Standard and Poor's ("S&P") and BBB- by Fitch Ratings Services.

Acquisition Financing

Fortis has obtained commitments from Scotiabank to provide the financing for the Acquisition. Scotiabank acted as exclusive financial advisor to Fortis.

Legal advisors to Fortis were White & Case LLP, Davies Ward Phillips & Vineberg LLP and Snell & Wilmer LLP.

About Fortis

Fortis is the largest investor-owned gas and electric distribution utility in Canada with total assets of approximately $17.6 billion, as at September 30, 2013, and fiscal 2012 revenues totalling approximately $3.7 billion. The Corporation serves more than 2,400,000 customers across Canada and in New York State and the Caribbean. Its regulated holdings include electric distribution utilities in five Canadian provinces, New York State and two Caribbean countries and natural gas utilities in British Columbia, Canada and New York State. Fortis unsecured debt is rated A- by S&P and A (low) by DBRS.

Fortis shares are listed on the Toronto Stock Exchange and trade under the symbol FTS. Additional information can be accessed at or

Teleconference Call

Fortis will host a conference call for investors and analysts at 6:15 p.m. Newfoundland time (4:45 p.m. Eastern) on December 11, 2013 to discuss this transaction. Analysts and investors can participate in the conference call by calling 1-800-245-1683 (within North America) or 719-325-2120 (outside North America) and entering passcode 353654.

To listen to a postview of the conference call, which will be available for 30 days, interested parties can call 1-888-203-1112 (within North America) or 719-457-0820 (outside North America) and enter passcode 1997237. The archived conference call will be available at within approximately 24 hours following the conference call.

Presentation slides for the conference call will also be made available on the Fortis website at

Fortis includes forward-looking statements in media releases which reflect management's expectations regarding the Corporation's future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "expects", "intend" and similar expressions have been used to identify the forward-looking statements which, without limitation, include those statements related to the acquisition of UNS Energy Corporation, the expected timing and benefits thereof, the conditions precedent to the closing of such acquisition and the Corporation's future growth, results of operations, performance, business prospects and opportunities. These statements reflect management's current beliefs and are based on information currently available to the Corporation's management. Forward-looking statements involve significant risk, uncertainties and assumptions. Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward-looking statements. These factors or assumptions are subject to inherent risks and uncertainties surrounding future expectations generally. Such risk factors or assumptions include, but are not limited to, the ability to obtain stockholder, regulatory and other approvals and to satisfy conditions to closing, the ability to realize the expected benefits of the acquisition, regulation, energy prices, general economic conditions, weather, derivatives and hedging, capital resources, loss of service area, licences and permits, environment, insurance, labour relations, human resources and liquidity risk. Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. For additional information with respect to certain of these risks or factors, reference should be made to the Corporation's continuous disclosure materials filed from time to time with Canadian securities regulatory authorities. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Fortis Inc.
Mr. Barry Perry
Vice President Finance and Chief Financial Officer

Fortis Inc.
Ms. Donna Hynes
Manager, Investor and Public Relations

Copyright 2023 Fortis Inc. All rights reserved.