NEW YORK (TheStreet) -- Tampa, Fla., utility Teco Energy Inc. (TE) said Tuesday it agreed to purchase New Mexico Gas Co. from Lindsay Goldberg & Co. LLC-backed Continental Energy Systems LLC and its unit New Mexico Gas Intermediate Inc. for $950 million, aiming to add growth in the Sunbelt.
The price includes $200 million in debt assumption. Teco expects the deal to add to earnings starting in 2015.
New Mexico Gas had Ebitda of $86 million and net income of $23.2 million for the 12-month period ended Jan. 31.
Teco expects to close the deal in the first quarter if it clears New Mexico and federal regulatory approvals. The transaction doesn't require shareholder approval.
Teco said it will pay for the deal with the help of a bridge financing facility provided by Morgan Stanley. Permanent financing is expected to include Teco equity, cash on hand and long-term debt at New Mexico Gas. Teco had $150 million in cash on its balance sheet at the parent level at the end of the first quarter.
Continental Energy bought New Mexico Gas from PNM Resources Inc. in 2008 for $620 million. It put the company on the block earlier this year after selling its other gas distributor Semco Holding Corp., which has operations in Michigan and Alaska, to AltaGas Ltd. in 2012 for $1.1 billion.
New Mexico Gas serves 509,000 primarily residential customers throughout New Mexico, with the majority in the Central Rio Grande Corridor region, one of the fastest-growing areas of the state. Its assets include 1,600 miles of transmission pipeline and 10,000 miles of distribution lines. The company employs 740 people.
Teco CEO John Ramil said in a statement that the acquisition adds 50% to its customer base in a single transaction, giving it 1.5 million regulated electric and gas utility customers.
"We expect it to provide opportunities for future growth in an attractive Sunbelt location," he said. "It will increase the percentage of earnings from regulated operations and reduce earnings volatility."
Ramil noted Teco's experience in acquiring and integrating regulated gas distribution operations. It acquired Peoples Gas in 1997 and expanded in part by acquiring and integrating other small gas local distribution companies, or LDCs, and related businesses such as West Florida Gas and Griffis Gas. "Most of the people involved in those activities, at all levels, are part of the team today," he said.
Teco also owns Tampa Electric Co. and Teco Coal.
On a conference call, analysts seemed to question the rationale for a Florida natural gas distributor buying a target so far afield without significant synergies or accretion expected. But management reiterated that they were buying New Mexico Gas for the growth opportunities it provided. "We're going to run a very efficient business there, which is already run very well," Ramil said. "There are some corporate things to do on the synergy front, but the driver is growth."
Management wouldn't quantify how much growth it expects from the new unit, but said it's been averaging about 1% per year. It did reveal it expects to spend $50 million to $75 million per year on capital expenditures, including expanding in certain areas to meet demand in the winter, versus the $100 million it spends at Peoples.
"We see the opportunity to invest more than has been done in the past, which has been done to maintain the system and some growth," Ramil said.
One analyst noted other utilities' tough experiences with New Mexico regulators. But management said they looked "pretty hard" at the due diligence work and found that New Mexico Gas has built a "constructive" relationship with regulators, "compatible with how we work with our regulators," Ramil said.
The regulatory process in New Mexico typically takes eight to nine months, management said.
When asked, Ramil said the company would consider additional acquisitions in the Sunbelt once it closes and fully integrates New Mexico Gas. But he said the company wouldn't sell Teco Coal to help pay for the New Mexico Gas acquisition, as it finds it more valuable than the market does right now.
Natural gas distributors have been hot targets recently. In December, Laclede Group agreed to buy Missouri Gas Co. and New England Gas Co., units of Energy Transfer Energy LP's and Energy Transfer Partners LP's Southern Union Co., for $1.2 billion. (Laclede later transferred its purchase rights for New England Gas to Algonquin Power & Utilities Corp. for $74 million.)
Later in December, SteelRiver Infrastructure Partners' Peoples Natural Gas bought Equitable Gas Co. from EQT Corp. for $720 million.
Morgan Stanley's Dan More is providing financial advice to Teco. A Skadden, Arps, Slate, Meagher & Flom LLP team including Sheldon Adler, Karen Suber, Sean Shimamoto, Neil Leff, Bruce Goldner, Dwight Yoo, Lawrence Frishman and David Schwartz is offering legal assistance. Cuddy & McCarthy LLP's Patrick Ortiz and Chuck Garcia are also providing legal advice to Teco, whose in-house legal team includes Charles Attal III, David Nicholson and Ellen Anderton.
Credit Suisse Securities (USA) LLC's Jamie Welch and Ahmad Masud and Tudor, Pickering, Holt & Co. LLC's George Ward are advising Continental Energy, while Cravath, Swaine & Moore LLP's Andrew Thompson and Richard Hall are providing legal assistance.