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TECO ENERGY : MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (form 10-Q)

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11/08/2016 | 12:13pm CET
This Management's Discussion & Analysis contains forward-looking statements,
which are subject to the inherent uncertainties in predicting future results and
conditions. Actual results may differ materially from those forecasted. The
forecasted results are based on the company's current expectations and
assumptions, and the company does not undertake to update that information or
any other information contained in this Managements Discussion & Analysis,
except as may be required by law. Factors that could impact actual results
include: the ability to retain and motivate the workforce during the period of
integration with Emera; regulatory actions by federal, state or local
authorities; unexpected capital needs or unanticipated reductions in cash flow
that affect liquidity; the ability to access the capital and credit markets when
required; general economic conditions affecting customer growth and energy sales
at the utility companies; economic conditions affecting the Florida and New
Mexico economies; weather variations and customer energy usage patterns
affecting sales and operating costs at the utilities and the effect of weather
conditions on energy consumption; the effect of extreme weather conditions or
hurricanes; general operating conditions; input commodity prices affecting cost
at all of the operating companies; natural gas demand at the utilities; and the
ability of TECO Energy's subsidiaries to operate equipment without undue
accidents, breakdowns or failures. Additional information is contained under
"Risk Factors" in TECO Energy's Annual Report on Form 10-K for the year ended
Dec. 31, 2015 and the update in TECO Energy's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2016.

Merger with Emera


On July 1, 2016, TECO Energy's Merger with Emera closed. Upon closing, TECO
Energy became a wholly owned indirect subsidiary of Emera. Pursuant to the
Merger Agreement, upon closing, each issued and outstanding share of TECO Energy
common stock was cancelled and converted into the right to receive $27.55 in
cash, without interest (see Note 14 to the TECO Energy Consolidated Financial
Statements). The acquisition method of accounting was not pushed down to TECO
Energy or its subsidiaries.

Earnings Summary - Unaudited


                                           Three Months Ended Sept. 30,            Nine months ended Sept. 30,
(millions) Except per-share amounts          2016                2015               2016                 2015
Consolidated revenues                    $       726.7       $       693.8     $      2,038.5       $      2,067.4
Net income from continuing operations             69.4                64.9              148.6                190.2
Loss on discontinued operations, net               0.0               (11.7 )             (0.1 )              (67.2 )
Net income                                        69.4                53.2              148.5                123.0


Operating Results

Three Months Ended Sept. 30, 2016


Third quarter 2016 net income was $69.4 million, compared with $53.2 million in
the third quarter of 2015. Net income from continuing operations was $69.4
million in the 2016 third quarter, compared with $64.9 million for the same
period in 2015. Third quarter 2016 results include $27.3 million of costs
related to the Merger with Emera ($45.9 million pretax), compared with $12.2
million in the third quarter of 2015 ($15.4 million pretax) (see Note 14 to the
TECO Energy Consolidated Financial Statements). The third quarter loss in
discontinued operations of $11.7 million in 2015 reflected the operating results
and charges associated with TECO Coal, which was sold in 2015 (see Note 15 to
the TECO Energy Consolidated Financial Statements).

Nine Months Ended Sept. 30, 2016


Year-to-date net income through the third quarter of 2016 was $148.5 million,
compared with $123.0 million in the 2015 year-to-date period. Net income from
continuing operations was $148.6 million in the 2016 year-to-date period,
compared with $190.2 million for the same period in 2015. Year-to-date 2016 net
income reflects $85.8 million of Emera transaction-related costs ($117.4 million
pretax), compared to $12.2 million of Emera transaction-related costs ($15.4
million pretax) and $1.2 million of NMGC integration costs in the year-to-date
2015 results. The $67.2 million year-to-date loss in discontinued operations in
2015 reflected the operating results and charges associated with TECO Coal,
which was sold in 2015.

Operating Company Results

All amounts included in the operating company discussions below are after tax, unless otherwise noted.


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Tampa Electric Company - Electric Division


Tampa Electric's net income for the third quarter of 2016 was $94.1 million,
compared with $82.1 million for the same period in 2015.  Third-quarter net
income in 2016 included $6.2 million of AFUDC-equity, which represents allowed
equity cost capitalized to construction costs, and $6.2 million of federal R&D
tax credits, compared with $4.6 million of AFUDC-equity in the 2015 quarter.
Results for the quarter reflected a 1.6% higher average number of customers.
Energy sales were higher due to above normal summer weather compared to the
third quarter of 2015 when weather was only slightly above normal. Third quarter
results also reflected higher operations and maintenance expense and higher
depreciation expense than in 2015, as further discussed below.

Total degree days in Tampa Electric's service area in the third quarter of 2016
were 8% above normal and 6% above the 2015 period. Pretax base revenues were
$16.5 million higher than in 2015 due to higher energy sales from above normal
weather, customer growth and a $1.5 million increase from higher base rates
effective Nov. 1, 2015 as a result of the 2013 rate case settlement.

While net energy for load is a calendar measurement of retail energy sales
rather than a billing-cycle measurement, the quarterly energy sales shown on the
following table reflect the energy sales based on billing cycles, which can vary
period to period. Retail energy sales to residential and commercial customers
increased in the third quarter of 2016 primarily due to above-normal summer
temperatures compared to the 2015 quarter when summer temperatures were slightly
above normal.  Sales to non-phosphate industrial customers increased due to the
strength of the Tampa area economy.  Sales to lower-margin industrial-phosphate
customers increased as self-generation by those customers decreased.

In the third quarter of 2016, operations and maintenance expense, excluding all
FPSC-approved cost-recovery clauses, increased $4.0 million driven by higher
employee-related accruals in 2016 compared to 2015.  Depreciation and
amortization expense increased $1.8 million in 2016 as a result of normal
additions to facilities to reliably serve customers.

Tampa Electric's year-to-date net income was $212.9 million, compared with
$198.0 million in the 2015 period, driven by higher base revenue from 1.6%
higher average number of customers partially offset by higher operations and
maintenance and depreciation expense.  Year-to-date net income in 2016 included
$17.8 million of AFUDC-equity and $6.2 million of federal R&D tax credits,
compared with $12.1 million of AFUDC-equity in the 2015 period. Energy sales
were higher compared to 2015 due to the above-normal third quarter temperatures
and customer growth.

Year-to-date total degree days in Tampa Electric's service area were 6% above
normal but 2% below the 2015 period, when degree days where 7% above normal.
Total net energy for load increased 1.8% in the year-to-date 2016 period,
compared with the same period in 2015. In the 2016 year-to-date period, pretax
base revenues were $20.2 million higher than in 2015, including approximately $4
million of higher pretax base revenue resulting from higher base rates effective
Nov. 1, 2015 as a result of the 2013 rate case settlement.

In the 2016 year-to-date period, retail energy sales to residential and commercial customers increased primarily from customer growth. Sales to non-phosphate industrial customers and to lower-margin industrial-phosphate customers increased as a result of the same factors as the third quarter.


In the 2016 year-to-date period, operations and maintenance expense, excluding
all FPSC-approved cost-recovery clauses, was approximately $5.0 million higher
than in the 2015 period, reflecting higher costs to safely and reliably operate
and maintain the generating, transmission and distribution systems and provide
high-quality customer service; and higher employee-related costs, including
higher short-term incentive accruals in 2016 compared to 2015.  Depreciation and
amortization expense increased $5.3 million in 2016, as a result of normal
additions to facilities to reliably serve customers.

Tampa Electric's regulated operating statistics for the three and nine months ended Sept. 30, 2016 and 2015 are as follows:

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(millions, except average
customers and total degree
days)                                Operating Revenues                       Kilowatt-hour sales
Three months ended Sept. 30,   2016        2015       % Change           2016         2015      % Change
By Customer Type
Residential                  $   331.0   $   311.8          6.2          2,960.1      2,728.8         8.5
Commercial                       167.3       167.1          0.1          1,814.0      1,753.6         3.4
Industrial - Phosphate            12.9        11.0         17.3            159.4        130.8        21.9
Industrial - Other                28.8        27.7          4.0            339.4        313.7         8.2
Other sales of electricity        47.6        46.2          3.0            502.9        473.8         6.1
Deferred and other revenues
(1)                              (17.5 )     (18.2 )        3.8
Total energy sales               570.1       545.6          4.5          5,775.8      5,400.7         6.9
Sales for resale                   2.0         0.2        900.0             56.6          5.0     1,032.0
Other operating revenue           13.8        14.4         (4.2 )
Total revenues               $   585.9   $   560.2          4.6          5,832.4      5,405.7         7.9
Average customers
(thousands)                      731.8       720.1          1.6
Retail net energy for load
(kilowatt hours)                                                         6,045.2      5,700.1         6.1
Total degree days                                                          1,768        1,666         6.1

Nine months ended Sept. 30,
By Customer Type
Residential                  $   801.0   $   792.6          1.1          7,115.4      6,898.8         3.1
Commercial                       447.7       454.9         (1.6 )        4,767.2      4,713.6         1.1
Industrial - Phosphate            38.7        38.3          1.0            480.9        471.8         1.9
Industrial - Other                81.6        80.3          1.6            957.3        912.6         4.9
Other sales of electricity       130.4       131.7         (1.0 )        1,351.0      1,329.9         1.6
Deferred and other revenues
(1)                              (35.0 )      (1.4 )   (2,400.0 )
Total energy sales             1,464.4     1,496.4         (2.1 )       14,671.8     14,326.7         2.4
Sales for resale                   4.1         3.0         36.7            130.2         89.7        45.2
Other operating revenue           41.1        43.8         (6.2 )
Total revenues               $ 1,509.6   $ 1,543.2         (2.2 )       14,802.0     14,416.4         2.7
Average customers
(thousands)                      729.1       717.3          1.6
Retail net energy for load
(kilowatt hours)                                                        15,623.7     15,345.0         1.8
Total degree days                                                          3,625        3,700        (2.0 )

(1) Primarily reflects the timing of environmental and fuel clause recoveries.

Tampa Electric Company - Natural Gas Division


PGS reported net income of $6.5 million for the third quarter, compared with
$6.2 million in the 2015 quarter. Results reflect a 2.7% higher average number
of customers in the quarter and increased therm sales to commercial customers as
a result of customer growth and a stronger economy. Off system sales increased
due to power generation demand resulting from warmer weather and coal-to-gas
switching. Third-quarter results in 2016 reflected operations and maintenance
expense $0.6 million higher than in the 2015 period driven by higher
employee-related costs in 2016 compared to 2015. Depreciation and amortization
increased $0.6 million due to normal additions to facilities to serve
customers.

PGS reported net income of $26.7 million for the year-to-date period, compared
with $28.4 million in the 2015 year-to-date period. Results reflect a 2.4%
higher average number of customers and increased residential and commercial
therm sales due to strong economic conditions in Florida. Off system sales
increased due to the same reasons as in the third quarter. Operations and
maintenance expense increased $2.8 million compared to the 2015 period, driven
by higher general operating costs around pipeline safety compliance and customer
growth. Depreciation and amortization increased $1.6 million due to normal
additions to facilities to serve customers.

PGS's regulated operating statistics for the three and nine months ended Sept. 30, 2016 and 2015 are as follows:

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(millions, except average
customers)                         Operating Revenues                            Therms
Three months ended Sept.
30,                           2016       2015      % Change          2016        2015       % Change
By Customer Type
Residential                 $   25.8   $   26.8         (3.7 )          10.8        10.9         (0.9 )
Commercial                      31.0       30.8          0.6           108.2       106.0          2.1
Industrial                       3.5        3.3          6.1            79.9        68.8         16.1
Off system sales                27.7       13.5        105.2            79.5        43.0         84.9
Power generation                 1.8        1.7          5.9           204.8       192.2          6.6
Other revenues                  11.1       11.2         (0.9 )
   Total                    $  100.9   $   87.3         15.6           483.2       420.9         14.8
By Sales Type
System supply               $   61.0   $   48.5         25.8            96.1        60.1         59.9
Transportation                  28.8       27.6          4.3           387.1       360.8          7.3
Other revenues                  11.1       11.2         (0.9 )
   Total                    $  100.9   $   87.3         15.6           483.2       420.9         14.8
Average customers
(thousands)                    370.9      361.0          2.7

Nine months ended Sept. 30,
By Customer Type
Residential                 $  106.8   $  104.1          2.6            58.3        57.9          0.7
Commercial                     108.3      104.9          3.2           367.1       354.1          3.7
Industrial                      10.2        9.8          4.1           241.3       215.1         12.2
Off system sales                59.0       35.7         65.3           205.5       112.7         82.3
Power generation                 3.9        5.6        (30.4 )         584.5       567.6          3.0
Other revenues                  40.0       38.4          4.2
   Total                    $  328.2   $  298.5          9.9         1,456.7     1,307.4         11.4
By Sales Type
System supply               $  194.0   $  169.6         14.4           282.7       192.0         47.2
Transportation                  94.2       90.5          4.1         1,174.0     1,115.4          5.3
Other revenues                  40.0       38.4          4.2
   Total                    $  328.2   $  298.5          9.9         1,456.7     1,307.4         11.4
Average customers
(thousands)                    369.4      360.6          2.4





New Mexico Gas Company

NMGC reported a third-quarter 2016 loss of $19.8 million, compared with a $2.8
million loss in the 2015 period. In the third quarter of 2016, NMGC recorded
approximately $18 million of costs ($30.4 million pretax) related to the
conditions contained in the Emera acquisition stipulation agreement approved by
the NMPRC, of which the bill credit was recognized as a reduction in revenues
and the remaining items recorded as expenses (see Note 14 to the TECO Energy
Consolidated Financial Statements). Excluding the impact of the stipulation
agreement, NMGC's loss for the quarter was $1.3 million compared to the prior
year quarter loss of $2.8 million.

Growth in the average number of customers in the 2016 third quarter and
year-to-date periods were 0.6%. In the third quarter, heating degree days were
above the 2015 quarter but 16% below normal. Excluding the costs related to the
stipulation mentioned above, non-fuel operating and maintenance expense was
slightly lower than in the 2015 quarter due to cost efficiency initiatives.

NMGC reported a year-to-date loss of $4.8 million compared with net income of
$11.0 million in the 2015 period, due to the recording of costs in the third
quarter related to the conditions contained in the Emera acquisition stipulation
agreement. Excluding the impact of the stipulation agreement, year-to-date net
income was $13.7 million compared to $11.0 million in 2015. Year-to-date results
reflected customer growth and the benefit of heating degree days that were
slightly higher than in 2015, but more than 4% below normal. Excluding the costs
related to the stipulation mentioned above, operating and maintenance expense
was slightly lower due to cost efficiency initiatives.

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NMGC's regulated operating statistics for the three and nine months ended Sept. 30, 2016 and 2015 are as follows:



(millions, except average
customers and total degree
days)                                  Operating Revenues                            Therms
Three months ended Sept. 30,     2016         2015        % Change        2016       2015      % Change
By Customer Type
Residential                   $     30.4    $    30.3           0.3         23.4       22.5          4.0
Commercial                           8.0          8.3          (3.6 )       11.3       11.7         (3.4 )
Industrial                           0.1          0.2         (50.0 )        0.2        0.4        (50.0 )
On system transportation             3.3          3.1           6.5         73.4       70.0          4.9
Off system transportation            0.2          0.2             -         12.4       12.1          2.5
Other revenues (1)                  (6.3 )        1.6        (493.8 )
   Total                      $     35.7    $    43.7         (18.3 )      120.7      116.7          3.4
By Sales Type
System supply                 $     38.5    $    38.8          (0.8 )       34.9       34.6          0.9
Transportation                       3.5          3.3           6.1         85.8       82.1          4.5
Other revenues (1)                  (6.3 )        1.6        (493.8 )
   Total                      $     35.7    $    43.7         (18.3 )      120.7      116.7          3.4
Average customers (thousands)      517.5        514.5           0.6
Total degree days                                                           

30 4 650.0


Nine months ended Sept. 30,
By Customer Type
Residential                   $    145.2    $   156.0          (6.9 )      188.8      182.7          3.3
Commercial                          36.5         41.8         (12.7 )       69.4       69.5         (0.1 )
Industrial                           0.4          0.5         (20.0 )        0.8        1.0        (20.0 )
Off system sales                     0.6          0.3         100.0          3.9        1.2        225.0
On system transportation            13.9         12.8           8.6        245.3      228.1          7.5
Off system transportation            0.7          0.7             -         35.8       34.7          3.2
Other revenues (1)                  (3.3 )        4.6        (171.7 )
   Total                      $    194.0    $   216.7         (10.5 )      544.0      517.2          5.2
By Sales Type
System supply                 $    182.7    $   198.6          (8.0 )      262.9      254.4          3.3
Transportation                      14.6         13.5           8.1        281.1      262.8          7.0
Other revenues (1)                  (3.3 )        4.6        (171.7 )
   Total                      $    194.0    $   216.7         (10.5 )      544.0      517.2          5.2
Average customers (thousands)      518.7        515.7           0.6
Total degree days                                                          

2,457 2,397 2.5

(1) Includes a bill reduction credit of $8.0 million. See Note 14 to the TECO Energy Consolidated Financial Statements.



Other (net)

The segment data in Note 9 to the TECO Energy Consolidated Condensed Financial
Statements presents Other and Eliminations as separate segments. The discussion
below nets the two segments.



The third quarter 2016 net loss for Other - net was $11.4 million, compared with
$20.2 million in the third quarter 2015, which included $0.4 million income from
discontinued operations. The third quarter 2016 net loss from continuing
operations for Other - net was $11.4 million, which included $9.6 million of
costs associated with the Emera transaction primarily for accelerated vesting of
outstanding stock-based compensation awards, a $3.5 million tax benefit related
to stock-based compensation awards paid in the third quarter, and a $3.2 million
tax benefit related to recharacterizing certain prior year lobbying expenses as
deductible for tax purposes. The third quarter 2015 net loss from continuing
operations for Other-net was $20.6 million, which included $12.2 million of
transaction costs related to the Emera transaction.



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Year-to-date 2016 net loss for Other - net was $86.3 million, which included a
$0.1 million loss from discontinued operations, compared with a net loss of
$44.8 million for Other - net in the 2015 period, which included $2.4 million of
income from discontinued operations related to TECO Coal. Year-to-date 2016 net
loss from continuing operations for Other - net was $86.2 million, which
included $68.1 of costs related to the Emera transaction primarily for
employee-related and consultant fees, a $5.8 million tax benefit due to an
accounting rule change related to stock-based incentive compensation recorded in
the first quarter of 2016, lower interest expense as a result of refinancing
debt maturities, and tax benefits recorded in the third quarter. In comparison,
the year-to-date 2015 net loss from continuing operations was $47.2 million,
which included $12.2 million of costs related to the Emera transaction and $1.2
million of NMGC integration-related costs.



Discontinued Operations - TECO Coal


The third quarter 2016 loss from discontinued operations was zero, compared with
a $11.7 million loss in the 2015 period, which reflected TECO Coal's operating
results prior to its sale in September 2015 and a $7.7 million charge related to
black lung liabilities. The year-to-date 2016 loss from discontinued operations
was $0.1 million, compared with a loss of $67.2 million in the 2015 period,
which reflected TECO Coal's operating loss, net of impairment charges of $50.8
million and the black-lung related charge (see Note 15 to the TECO Energy
Consolidated Financial Statements).



Income Taxes


The provisions for income taxes from continuing operations for the nine month
periods ended Sept. 30, 2016 and 2015 were $77.2 million and $122.1 million,
respectively. The provision for income taxes for the nine months ended Sept. 30,
2016 was impacted by lower pre-tax income, tax benefits related to federal R&D
tax credits and long-term incentive compensation, offset by the tax impact of
the nondeductible Merger transaction costs (see Notes 2 and 14 to the TECO
Energy Consolidated Financial Statements).



Liquidity and Capital Resources


The table below sets forth the Sept. 30, 2016 consolidated liquidity and cash
balances, the cash balances at the operating companies and Parent, and amounts
available under the TECO Energy/TECO Finance, TEC and NMGC credit facilities.



                                                                                           TECO Finance
(millions)                                  Consolidated         TEC          NMGC         Parent/other
Credit facilities (1)                      $      1,300.0     $   475.0     $   125.0     $         700.0
Drawn amounts/letters of credit (1)                 612.4          49.5          12.9               550.0
Available credit facilities                         687.6         425.5         112.1               150.0
Cash and short-term investments                      24.4          15.4           1.7                 7.3
Total liquidity                            $        712.0     $   440.9     $   113.8     $         157.3



(1) Includes amounts under the TECO Energy/TECO Finance $400 million one-year

    term loan facility which was fully funded on Sept. 30, 2016.




We are evaluating refinancing alternatives for the March 2017 maturity of the
one-year term loan facility at TECO Finance and expect capital market conditions
will continue to allow for a variety of financing options.



Cash Impacts of the Merger with Emera

In 2016, TECO Energy had net cash outflows associated with the Merger of approximately $55 million. In 2017, TECO Energy expects to pay approximately $20 million, primarily representing transaction costs accrued at June 30, 2016.

In

connection with the stipulation agreement approved by the NMPRC, pre-tax costs
of approximately $30 million were recorded in the third quarter of 2016, with
associated cash outflows over a 5-year period. In addition, a $27 million
pro-rated dividend was paid to TECO Energy shareholders in July 2016. During the
third quarter of 2016, Emera contributed $22 million to TECO Energy primarily
related to funding accelerated stock compensation payments.

Cash Impacts Related to Operating Activities


Cash flows from operating activities for the nine months ended Sept. 30, 2016
increased compared to the same period in 2015. The change is primarily due to a
higher deferred recovery clause balance due to over-recovery in 2016 as fuel
prices were lower than projected, higher accounts payable primarily due to
Merger-related transaction costs in 2016 and higher fuel and purchased power
accruals, and lower fuel inventory due to increased use of coal units.

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Covenants in Financing Agreements


In order to utilize their respective bank credit facilities, TECO Energy and its
subsidiaries must meet certain financial tests as defined in the applicable
agreements. In addition, TECO Energy and its subsidiaries have certain
restrictive covenants in specific agreements and debt instruments. At Sept. 30,
2016, TECO Energy and its subsidiaries were in compliance with all required
financial covenants. The table that follows lists the significant financial
covenants and the performance relative to them at Sept. 30, 2016. Reference is
made to the specific agreements and instruments for more details.



Significant Financial Covenants



                                                                                                 Calculation
Instrument                                  Financial Covenant (1)   Requirement/Restriction    Sept. 30, 2016
TEC
Credit facility (2)                         Debt/capital                Cannot exceed 65%             44.4%
Accounts receivable credit facility (2)     Debt/capital                Cannot exceed 65%             44.4%

NMGC

Credit facility (2)                         Debt/capital                Cannot exceed 65%             30.4%
3.54% and 4.87% senior unsecured notes      Debt/capital                Cannot exceed 65%             30.4%

NMGI

2.71% and 3.64% senior unsecured notes      Debt/capital                Cannot exceed 65%             47.6%
TECO Energy/TECO Finance
Credit facility - 2013 $300 million (2)     Debt/capital                Cannot exceed 65%             61.5%
Credit facility - 2016 $400 million (2)     Debt/capital                Cannot exceed 65%             61.5%



(1) As defined in each applicable instrument.

(2) See Note 6 to the TECO Energy Consolidated Condensed Financial Statements for

    a description of the credit facilities.



Credit Ratings of Senior Unsecured Debt at Sept. 30, 2016

                                          Standard &
                                         Poor's (S&P)   Moody's   Fitch
              Tampa Electric Company         BBB+         A3       A-
              New Mexico Gas Company         BBB+          -        -
              TECO Energy/TECO Finance       BBB         Baa2      BBB




On July 6, 2016, following the Merger with Emera, Moody's downgraded the senior
unsecured credit ratings of TECO Energy/TECO Finance to Baa2 from Baa1 and the
issuer rating and senior unsecured ratings of Tampa Electric Company to A3 from
A2. This concluded the ratings review commenced by Moody's on June 2, 2016.
Moody's described the ratings outlook for the companies as "Stable".

On July 1, 2016, following the Merger with Emera, S&P affirmed the issuer credit
ratings of TECO Energy and the senior unsecured debt ratings of its
subsidiaries, TECO Finance, Tampa Electric Company and NMGC, and maintained the
ratings outlook at negative.



On Oct. 9, 2015, Fitch Ratings affirmed the issuer default ratings of TECO
Energy at BBB and TEC at BBB+ and affirmed the senior unsecured debt rating of
its subsidiaries, TECO Finance and TEC. Fitch Ratings also described the ratings
outlook as "Stable".

S&P, Moody's and Fitch describe credit ratings in the BBB or Baa category as
representing adequate capacity for payment of financial obligations. The lowest
investment grade credit ratings for S&P is BBB-, for Moody's is Baa3 and for
Fitch is BBB-; thus, the credit rating agencies assign TECO Energy, TECO
Finance, TEC and NMGC's senior unsecured debt investment-grade credit ratings.

A credit rating agency rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Our access to capital markets and cost of financing,
including the applicability of restrictive financial covenants, are influenced
by the ratings of our securities. In addition, certain of TEC's derivative
instruments contain provisions that require TEC's debt to maintain investment
grade credit ratings (see Note 10 to the TECO Energy Consolidated Financial
Statements). The credit ratings listed above are included in this report in
order to provide information that may be relevant to these matters and because
downgrades, if any, in credit ratings may affect our ability to borrow and may
increase financing costs, which may decrease earnings (see the Risk Factors in
Item 1A of Part II of this quarterly report). These credit

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ratings are not necessarily applicable to any particular security that we may
offer and therefore should not be relied upon for making a decision to buy, sell
or hold any of our securities.

Commitments and Contingencies

See Note 8 to the TECO Energy Consolidated Financial Statements for information regarding the company's commitments and contingencies as of Sept. 30, 2016.

Fair Value Measurements


All natural gas derivatives were entered into by the regulated utilities to
manage the impact of natural gas prices on customers. As a result of applying
accounting standards for regulated operations, the changes in value of natural
gas derivatives of Tampa Electric, PGS and NMGC are recorded as regulatory
assets or liabilities to reflect the impact of the risks of hedging activities
in the fuel recovery clause. Because the amounts are deferred and ultimately
collected through the fuel clause, the unrealized gains and losses associated
with the valuation of these assets and liabilities do not impact our results of
operations.

The valuation methods used to determine fair value are described in Notes 7 and
11 to the TECO Energy Consolidated Condensed Financial Statements. In addition,
the company considered the impact of nonperformance risk in determining the fair
value of derivatives. The company considered the net position with each
counterparty, past performance of both parties and the intent of the parties,
indications of credit deterioration and whether the markets in which the company
transacts have experienced dislocation. At Sept. 30, 2016, the fair value of
derivatives was not materially affected by nonperformance risk.

Critical Accounting Policies and Estimates


The company's critical accounting policies relate to deferred income taxes,
employee postretirement benefits, long-lived assets, goodwill and regulatory
accounting. For further discussion of critical accounting policies and
estimates, see TECO Energy's Annual Report on Form 10-K for the year ended Dec.
31, 2015.


                                       55

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