16. Acquisition of New Mexico Gas Intermediate

Description of Transaction

On Sept. 2, 2014, the company completed the acquisition contemplated by the SPA dated May 25, 2013 by and among the company, NMGI, and Continental Energy Systems LLC. As a result of that acquisition, the company acquired all of the capital stock of NMGI. NMGI is the parent company of NMGC. The aggregate purchase price was $950 million, which included the assumption of $200 million of senior secured notes at NMGC, plus certain working capital adjustments.

Description of NMGC

NMGC, with approximately 720 employees, serves more than 513,000 customers, predominately residential, in New Mexico with the majority located in the Central Rio Grande Corridor region, which is one of the fastest growing regions in the state. The company serves approximately 60 percent of the state’s population with customers in 23 of New Mexico’s 33 counties. Customers are served through a combination of approximately 1,600 miles of transmission pipeline and 10,000 miles of distribution lines.

Strategic Rationale for Acquisition

—	A transformative transaction that immediately added more than 513,000 customers in a single state.

—	Provides an opportunity for TECO’s experienced management team to share marketing expertise to a new and growing service territory, and for both companies to share best practices to support growth.

—	Increases the percentage of net income from regulated operations and diversifies TECO Energy’s operating footprint.

—	Provides immediate to near-term shareholder and customer benefits through organic growth opportunities.

Acquisition-Related Regulatory Matters

NMGC is a rate-regulated natural gas utility subject to the regulation of the NMPRC, including with respect to its rates, service standards, accounting, securities issuances, construction of major new transmission and distribution facilities and other matters affecting, directly or indirectly, the provision of natural gas sales and transportation services to NMGC’s customers.

In May 2014, TECO Energy reached a settlement with the New Mexico Industrial Energy Consumers (which represents large customers), the New Mexico Attorney General’s office (which represents the New Mexico residential and small business customers) and the U.S. Department of Energy. As part of this settlement of the application for approval of the acquisition by the NMPRC, TECO Energy agreed, among other things, to:

—	Freeze rates for NMGC customers until the end of 2017,

—	credit NMGC customers with a $2 million rate credit to customer bills in the first year after the close of the transaction, which will increase to $4 million per year until NMGC’s next rate case,

—	cap job losses in New Mexico at 99 over three years, many of which will be through attrition,

—	maintain the NMGC name and headquarters in Albuquerque,

—	support new economic development opportunities designed to attract new businesses to New Mexico through maintaining good service and reasonable customer rates,

—	maintain or increase NMGC’s current level of community involvement and support, and

—	own NMGC for at least 10 years.

On Aug. 13, 2014, the NMPRC approved the acquisition with the conditions set forth in the settlement agreements described above. The transaction closed on Sept. 2, 2014.

Purchase Price

The total consideration in the acquisition was as follows:

Consideration Transferred
(millions)
Cash	$	530.1
Long-term debt assumed or settled, including accrued interest and fees		419.9
Total consideration transferred, excluding cash and working capital adjustments	$	950.0

Purchase Price Allocation

The majority of NMGI’s assets acquired and liabilities assumed relate to deferred income taxes associated with its NOL. These were recorded in accordance with the applicable accounting guidance. Additionally, the company paid off the existing outstanding debt at NMGI and issued $200 million of new NMGI debt at closing. Since the refinancing took place at closing, face value approximated fair value.

The majority of NMGC’s operations are subject to the rate-setting authority of the FERC and NMPRC and are accounted for pursuant to U.S. GAAP, including the accounting guidance for regulated operations. Rate-setting and cost recovery provisions currently in place for NMGC’s regulated operations provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base. Except for long-term debt, the ARO, derivatives, OPEB plans, and deferred taxes, fair values of tangible and intangible assets and liabilities subject to these rate-setting provisions approximate their carrying values. Accordingly, assets acquired and liabilities assumed and pro-forma financial information do not reflect any net adjustments related to these amounts. The difference between fair value and pre-merger carrying amounts for long-term debt, derivatives, and the OPEB plan for regulated operations were recorded as regulatory assets or liabilities.

The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed was recognized as goodwill at the acquisition date. The goodwill reflects the value paid primarily for opportunities for growth, synergies and an improved risk profile. Goodwill resulting from the acquisition was allocated entirely to the NMGC segment. Goodwill of $146.1 million related to the formation of NMGC in 2009 is tax deductible. The incremental goodwill recognized as part of this transaction is not deductible for income tax purposes, and as such, no deferred taxes will be recorded related to this portion of the goodwill.

The initial accounting for the acquisition of NMGI is not complete because the valuations necessary to assess the fair values of certain assets acquired and liabilities assumed are considered preliminary as a result of the short time period between the closing of the acquisition and the end of the quarter. The allocation of the purchase price may be modified up to one year from the date of the acquisition, as more information is obtained about the fair value of assets acquired and liabilities assumed; however, the company expects to finalize these amounts by the end of 2014. The significant assets and liabilities for which preliminary valuation amounts are recognized at Sept. 30, 2014 include the fair value of contingencies and intangible assets and liabilities. The preliminary amounts recognized are subject to revision until the valuations are completed and to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. Any changes to the fair value assessments may affect the purchase price allocation and material changes could require the financial statements to be retroactively amended.

The preliminary purchase price allocation of the acquisition of NMGI and NMGC is as follows:

Preliminary Purchase Price Allocation
(millions)
Current assets^(a)	$	48.7
Property, plant and equipment		618.9
OPEB regulatory asset		6.4
Debt-related regulatory asset		23.9
Goodwill		401.8
Deferred tax assets		52.8
Other assets		30.2
Total assets	$	1,182.7
Current liabilities	$	(35.0	)
Long-term debt fair value adjustment and interest assumed		(22.7	)
Cost of removal regulatory liability		(100.6	)
Deferred tax liabilities		(60.8	)
OPEB liability		(9.8	)
Deferred credits and other liabilities		(3.8	)
Total liabilities	$	(232.7	)
Total purchase price allocation, excluding cash and working capital adjustments	$	950.0

(a)	Includes accounts receivables with fair value of $18.9 million, gross contract value of $19.6 million, and $0.7 million of contractual receivables not expected to be collected.

Current Quarter and Year-to-Date Impact of Acquisition

The impact of NMGI and NMGC on the company’s revenues in the Consolidated Statements of Operations for the three months and nine months ended Sept. 30, 2014 was an increase of $16.2 million. The impact of NMGI and NMGC on the company’s net income in the Consolidated Statements of Operations for the three months and nine months ended Sept. 30, 2014 was a decrease of $2.0 million.

Pro Forma Impact of the Acquisition

The following unaudited pro forma financial information reflects the consolidated results of operations of the company and reflects the amortization of purchase accounting adjustments assuming the acquisition had taken place on Jan. 1, 2013. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved or the future consolidated results of operations of the company. This information is preliminary in nature and subject to change based on final purchase price adjustments.

Pro forma earnings presented below include adjustments related to non-recurring acquisition consummation, integration and other costs incurred by the company during the period. After-tax non-recurring acquisition consummation, integration and other costs incurred by the company were $0.9 million and $5.7 million, respectively, for the three and nine months ended Sept. 30, 2014, and $2.1 million and $3.9 million, respectively, for the three and nine months ended Sept. 30, 2013. The pro forma financial information also excludes potential future cost savings or non-recurring charges related to the acquisition.

Pro Forma Impact of Acquisition	Three months ended Sep 30,				Nine months ended Sep 30,
(millions, except per share amounts)	2014		2013		2014		2013
Revenues	$	720.0	$	684.5	$	2,111.0	$	2,024.1
Net income from continuing operations	$	70.8	$	64.9	$	199.3	$	171.4
Basic and Diluted EPS from continuing operations	$	0.31	$	0.28	$	0.86	$	0.74

Intangible Assets Recorded

Goodwill
(millions)	NMGC		Total
Balance as of Jul 1, 2014	$	0.0	$	0.0
Goodwill acquired in business acquisition		401.8	$	401.8
Balance as of Sep 30, 2014	$	401.8	$	401.8

Goodwill resulting from the acquisition was allocated entirely to the NMGC segment. The goodwill related to the formation of NMGC in 2009 in the amount of $146.1 million is tax deductible. The incremental goodwill recognized of $255.7 million is not deductible for income tax purposes, and as such, no deferred taxes will be recorded related to this portion of the goodwill.

Many of NMGC’s transmission and distribution facilities are located on lands that require the grant of rights-of-way or franchises (collectively, “ROW”) from non-tribal governmental entities, Native American Tribes and Pueblos, or private landowners. Historically, ROW costs have been recovered in rates charged to customers, and NMGC will continue to seek to recover ROW costs in future rates charged to customers. However, TECO Energy has agreed to freeze rates for NMGC’s customers until Dec. 31, 2017 as a condition to the acquisition.

The company’s intangible assets and liabilities acquired through the acquisition of NMGI included in its Consolidated Condensed Balance Sheets, along with the future estimated amortization, were as follows as of Sept. 30, 2014:

Description	Weighted average amortization (years)^(a)				Gross				Accumulated amortization				Net				2014				2015				2016				2017				2018				2019 and beyond
Rights-of-way		17.0			$	27.2			$	(0.1	)		$	27.1			$	0.3			$	1.4			$	1.4			$	1.4			$	1.4			$	21.2

(a)	Weighted average amortization period was calculated as of the date of acquisition.

Transaction and Integration Costs

The following after-tax transaction and integration charges were recognized in connection with the acquisition and are included in the TECO Energy Consolidated Statements of Operations for the nine months ended Sept. 30, 2014.

Transaction and Integration Costs	Total
(millions)
Legal and other consultants	$	7.2
Bridge loan costs		2.9
Employee expenses		0.2
Severance and relocation costs		1.7
Other costs and tax benefit		(4.5	)
Total accounting charges	$	7.5

The company has an ongoing severance plan under which, in general, the longer a terminated employee worked prior to termination, the greater the amount of severance benefits. The company records a liability and expense or regulatory asset for severance once terminations are probable of occurrence and the related severance benefits can be reasonably estimated. For severance benefits that are incremental to its ongoing severance plan (“one-time termination benefits”), the company measures the obligation and records the expense at its fair value at the communication date if there are no future service requirements, or, if future service is required to receive the termination benefit, ratably over the required service period.

In conjunction with the acquisition, in September 2014, TECO Energy and NMGC each offered a severance plan to certain eligible employees. Severance costs incurred were recorded primarily within Operation and maintenance other expense in the Consolidated Condensed Statements of Income. Cash payments under the severance plan began in the third quarter of 2014 and will continue through 2015. Substantially all cash payments under the plan are expected to be made by the end 2015 resulting in the substantial completion of the acquisition integration plan. As of Sept. 30, 2014, the obligations associated with the severance benefits costs are $2.2 million.