21. Mergers and Acquisitions

Pending Merger with Emera Inc.

On Sept. 4, 2015, TECO Energy and Emera entered into the Merger Agreement. Upon closing of the Merger, TECO Energy will become a wholly owned indirect subsidiary of Emera.

Upon the terms and subject to the conditions set forth in the Merger Agreement, which was unanimously approved and adopted by the board of directors of TECO Energy, at the effective time, Merger Sub will merge with and into TECO Energy with TECO Energy continuing as the surviving corporation.

Pursuant to the Merger Agreement, upon the closing of the Merger, which is expected to occur in the summer of 2016, each issued and outstanding share of TECO Energy common stock will be cancelled and converted automatically into the right to receive $27.55 in cash, without interest (Merger Consideration). This represents an aggregate purchase price of approximately $10.4 billion including assumption of approximately $3.9 billion of debt.

The closing of the Merger is subject to certain conditions, including, among others, (i) approval of TECO Energy shareholders representing a majority of the outstanding shares of TECO Energy common stock (which approval was obtained at the special meeting of shareholders held on Dec. 3, 2015), (ii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period (which expired on Feb. 5, 2016), (iii) receipt of all required regulatory approvals, including from the FERC, the NMPRC and the Committee on Foreign Investment in the United States (which, with respect to the FERC, was obtained on Jan. 20, 2016) (iv) the absence of any law or judgment that prevents, makes illegal or prohibits the closing of the Merger, (v) the absence of any material adverse effect with respect to TECO Energy and (vi) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Merger Agreement.

The Merger Agreement contains customary representations, warranties and covenants of TECO Energy, Emera and Merger Sub. The Merger Agreement contains covenants by TECO Energy, among others, that (i) TECO Energy will conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the closing of the Merger and (ii) TECO Energy will not engage in certain transactions during such interim period. The Merger Agreement contains covenants by Emera, among others, that Emera will use its reasonable best efforts to take all actions necessary to obtain all governmental and regulatory approvals.

In addition, the Merger Agreement requires Emera (i) to maintain TECO Energy’s historic levels of community involvement and charitable contributions and support in TECO Energy’s existing service territories, (ii) to maintain TECO Energy’s headquarters in Tampa, Florida, (iii) to honor current union contracts in accordance with their terms and (iv) to provide each continuing non-union employee, for a period of two years following the closing of the Merger, with a base salary or wage rate no less favorable than, and incentive compensation and employee benefits, respectively, substantially comparable in the aggregate to those, that they received as of immediately prior to the closing.

TECO Energy is also subject to a “no shop” restriction that limits its ability to solicit alternative acquisition proposals or provide nonpublic information to, and engage in discussion with, third parties.

The Merger Agreement contains certain termination rights for both TECO Energy and Emera. Either party may terminate the Merger Agreement if (i) the closing of the Merger has not occurred by Sept. 30, 2016 (subject to a 6-month extension if required to obtain necessary regulatory approvals), (ii) a law or judgment preventing or prohibiting the closing of the Merger has become final, (iii) TECO Energy’s shareholders do not approve the Merger or (iv) TECO Energy’s board of directors changes its recommendation so that it is no longer in favor of the Merger. If either party terminates the Merger Agreement because TECO Energy’s board of directors changes its recommendation, TECO Energy must pay Emera a termination fee of $212.5 million. If the Merger Agreement is terminated under certain other circumstances, including the failure to obtain required regulatory approvals, Emera must pay TECO Energy a termination fee of $326.9 million.

During the year ended Dec. 31, 2015, TECO Energy incurred approximately $17.0 million pretax of incremental transaction-related costs, which are included in “Operations and maintenance other expense” on the Consolidated Condensed Statements of Income.

Acquisition of New Mexico Gas Company

Description of Transaction

On Sept. 2, 2014, the company completed the acquisition of NMGI contemplated by the acquisition agreement 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

On the acquisition date, NMGC, with approximately 720 employees, served 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 served 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 Energy’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.

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 2015, increasing to $4 million per year in 2016 and each year after 2016 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 paid to seller	$	530.1
Cash paid to settle long-term debt, including accrued interest and fees		219.9
Long-term debt assumed		200.0
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 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 were recorded related to this portion of the goodwill.

The final purchase price allocation of the acquisition of NMGI and NMGC was as follows:

Purchase Price Allocation
(millions)
Current assets ⁽¹⁾	$	48.7
Property, plant and equipment		616.4
OPEB regulatory asset		6.4
Debt-related regulatory asset		23.9
Goodwill		408.4
Deferred tax assets		52.8
Other assets		29.3
Total assets	$	1,185.9
Current liabilities	$	(38.2	)
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	$	(235.9	)
Total purchase price allocation, excluding cash and working capital adjustments	$	950.0

(1)	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.

Impact of Acquisition

The impact of NMGI and NMGC on the company’s revenues in the Consolidated Statements of Operations for the years ended Dec. 31, 2015 and 2014 was an increase of $316.5 million and $137.5 million, respectively. The impact of NMGI and NMGC on the company’s net income in the Consolidated Statements of Operations for the years ended Dec. 31, 2015 and 2014 was an increase of $19.6 million and $8.2 million, respectively.

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.

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 $8.6 million and $6.2 million for the years ended Dec. 31, 2014 and 2013, respectively.

Pro Forma Impact of Acquisition	For the year ended Dec. 31,
(millions, except per share amounts)	2014		2013
Revenues	$	2,806.6	$	2,704.0
Net income from continuing operations		223.8		216.8
Basic and diluted EPS from continuing operations		0.96		0.93

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 Statement of Income for the years ended Dec. 31, 2015 and 2014.

Transaction and Integration Costs	For the year ended Dec. 31,
(millions)	2015		2014
Legal and other consultants	$	0.5	$	8.0
Bridge loan costs		0.0		3.3
Severance and relocation costs		1.0		2.8
Other costs and tax benefit		0.4		(5.5	)
Total accounting charges	$	1.9	$	8.6

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 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 substantially all cash payments under the plan are expected to be made by the end of 2017 resulting in the substantial completion of the acquisition integration plan. As of Dec. 31, 2015 and 2014, the obligations associated with the severance benefits costs were $0.7 million and $2.6 million, respectively.