TECO Energy Completes New Mexico Gas Company Buy

Zacks

TECO Energy, Inc. (TE) announced that it has completed the acquisition of New Mexico Gas Intermediate (:NMGI), the parent of New Mexico Gas Company (NMGC).

The deal was initially announced on May 28 last year. Though the final value of the transaction will be deduced on the basis of post-closing customary adjustments, the acquisition was initially valued at $950 million.

Funding

The company exercised a combination of debt and equity to finance the acquisition. The details are as follows – TECO Energy equity worth $292 million, the private placement of $270 million of debt at NMGI and NMGC, assumption of $200 million of NMGC debt, and cash on hand and short-term debt of TECO Energy.

As of Jun 30, 2014, TECO Energy had total liquidity of $841.3 million, including cash and cash equivalents of $167 million and available credit facilities of $674.3 million. In the first half of 2014, the company’s operating cash flow was $261 million.

A favorable liquidity position backed by stable cash generation capacity allowed TECO Energy to comfortably finance the latest transaction.

About NMGC

NMGC offers gas primarily to residential customers in New Mexico through a combination of transmission pipelines and distribution lines. The company has a customer base of more than 513,000 with significant presence in the fastest growing Central Rio Grande Corridor region.

Acquisition Benefits

TECO Energy expects the latest transaction to be accretive to earnings from 2015. The company will now serve over 1.5 million regulated electricity and gas customers in Florida and New Mexico, including the strong NMGC customer base.

Many utility providers have noticed that their customers are currently converting their space heating systems to natural gas from other energy sources. The latest acquisition will help TECO Energy to meet increasing natural gas demand, thereby improving future cash inflows.

On the other side, NMGC customers will benefit from the takeover in terms of estimated savings worth at least $11 million through a credit on their bills within 30 days.

TECO Energy follows an acquisition-focused growth strategy. The company takes over entities with similar lines of operations that are readily accretive. The company completed several significant acquisitions in the past, including Peoples Gas, West Florida Gas and Griffis Gas. These acquisitions allowed TECO Energy to strengthen its footprint in the respective states besides adding new customers to its portfolio.

Transaction Clauses

NMGC will operate from its headquarters in Albuquerque and retain its erstwhile name. TECO Energy has agreed to retain its ownership of NMGC for at least 10 years.

The rates for NMGC customers will be frozen until the end of 2017.

Deals in the Utility Sector

An inorganic expansion strategy is currently acting as the easiest approach for the utilities to expand their operations. In Apr 2014, Exelon Corporation (EXC) entered into a definite agreement to acquire Pepco Holdings, Inc. (POM) for around $7 billion. Exelon plans to close the transaction in the second half of 2015, subject to necessary approvals.

Zacks Rank

TECO Energy currently has a Zacks Rank #3 (Hold). However, a better-ranked stock in the sector is Consolidated Edison, Inc. (ED), which carries a Zacks Rank #2 (Buy).

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