Fortis to buy UNS Energy for about $2.5 billion

(Reuters) - Fortis Inc FTS.TO has reached a friendly deal to buy Arizona-focused utility UNS Energy Corp UNS.N for about $2.5 billion in cash, the Canadian power company said on Wednesday, as it looks to expand its presence in the United States.

The deal, which will also see Fortis take on about $1.8 billion of UNS debt, highlights an increased focus in North American markets on rate-regulated operations, over deregulated merchant power.

Once completed, regulated utility assets will comprise about 92 percent of Fortis’s total assets.

The $60.25 per share that Fortis is offering for UNS is a premium of 31.4 percent on UNS’s Wednesday close of $45.84 on the New York Stock Exchange. The stock was up 30 percent at $59.40 in after market trading.

The deal, which still needs regulatory and shareholder approval, is expected to close by the end of 2014.

“This is a very good price. I can’t see that shareholders will have anything to complain about as far as the price goes,” said Christopher Ellinghaus, an analyst with Williams Capital Group.

He added that the deal could face hurdles with the Arizona Corporation Commission, which regulates UNS and declined to approve the acquisition of the company by a private equity group in 2004.

“They tried to do a merger before and it didn’t go through,” said Ellinghaus. “It was a financial player at that point. This is a little different. It’s a utility, a foreign utility, which may or may not please the (Commission).”

UNS operates electric and gas systems that serve residential and commercial customers in the southwestern United States. The region is experiencing above-average economic growth, making the assets attractive, Fortis said.

“UNS is a well-run utility with an experienced management team,” Fortis Chief Executive Stanley Marshall said on a conference call with investors. “The acquisition is expected to be accretive to earnings per share the first year of closing, including one-time acquisition-related expenses.”

Marshall noted that the deal also adds to Fortis’s geographical diversity, with no more than a third of total assets being in any single jurisdiction.

Fortis’s rate base is expected to increase by about $3 billion when the deal closes and its total assets will increase by 33.5 percent to $23.5 billion, the company said.

Rate-regulated assets are considered attractive in the current market, as power prices hover near their lowest in a decade, hurting merchant plants that operate in a deregulated market.

Newfoundland-based Fortis is one of Canada’s largest gas and electric distribution utilities, serving more than 2.4 million customers across the country, as well as in New York State and the Caribbean.

Additional reporting by Euan Rocha in Toronto and Supantha Mukherjee in Bangalore; Editing by Peter Galloway