UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No	Exact name of each registrant as specified in its charter, state of incorporation, address of principal executive offices, telephone number	I.R.S. Employer Identification Number
1-8180	TECO ENERGY, INC.	59-2052286
	(a Florida corporation) TECO Plaza 702 N. Franklin Street Tampa, Florida 33602 (813) 228-1111

1-5007	TAMPA ELECTRIC COMPANY	59-0475140
	(a Florida corporation) TECO Plaza 702 N. Franklin Street Tampa, Florida 33602 (813) 228-1111

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether TECO Energy, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

Indicate by check mark whether Tampa Electric Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

Indicate by check mark whether TECO Energy, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

Indicate by check mark whether Tampa Electric Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of Nov. 4, 2016, there were 1,000 shares of TECO Energy, Inc.’s common stock outstanding, all of which were held, beneficially and of record, by Emera US Holdings Inc. As of Nov. 4, 2016, there were 10 shares of Tampa Electric Company’s common stock issued and outstanding, all of which were held, beneficially and of record, by TECO Energy, Inc.

Tampa Electric Company meets the conditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

This combined Form 10-Q represents separate filings by TECO Energy, Inc. and Tampa Electric Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries.

DEFINITIONS

Acronyms and defined terms used in this and other filings with the U.S. Securities and Exchange Commission include the following:

Term		Meaning
ABS		asset-backed security
AFUDC		allowance for funds used during construction
AFUDC-debt		debt component of allowance for funds used during construction
AFUDC-equity		equity component of allowance for funds used during construction
AMT		alternative minimum tax
AOCI		accumulated other comprehensive income
APBO		accumulated postretirement benefit obligation
ARO		asset retirement obligation
BACT		Best Available Control Technology
CAIR		Clean Air Interstate Rule
Cambrian		Cambrian Coal Corporation
capacity clause		capacity cost-recovery clause, as established by the FPSC
CCRs		coal combustion residuals
CES		Continental Energy Systems
CMO		collateralized mortgage obligation
CNG		compressed natural gas
company		TECO Energy, Inc.
CPI		consumer price index
CSAPR		Cross State Air Pollution Rule
CO₂		carbon dioxide
CT		combustion turbine
DR-CAFTA		Dominican Republic Central America – United States Free Trade Agreement
ECRC		environmental cost recovery clause
EEI		Edison Electric Institute
EGWP		Employee Group Waiver Plan
Emera		Emera Inc., a geographically diverse energy and services company headquartered in Nova Scotia, Canada
EPA		U.S. Environmental Protection Agency
EPS		earnings per share
ERISA		Employee Retirement Income Security Act
EROA		expected return on plan assets
EUSHI		Emera US Holdings Inc.
FASB		Financial Accounting Standards Board
FDEP		Florida Department of Environmental Protection
FERC		Federal Energy Regulatory Commission
FGT		Florida Gas Transmission Company
FPSC		Florida Public Service Commission
GCBF		gas cost billing factor
GHG		greenhouse gas(es)
HAFTA		Highway and Transportation Funding Act
HCIDA		Hillsborough County Industrial Development Authority
ICSID		International Centre for the Settlement of Investment Disputes
IGCC		integrated gasification combined-cycle
IOU		investor owned utility
IRS		Internal Revenue Service
ISDA		International Swaps and Derivatives Association
ITCs		investment tax credits
KW		kilowatt(s)
KWH		kilowatt-hour(s)
LIBOR		London Interbank Offered Rate
MAP-21		Moving Ahead for Progress in the 21st Century Act
MBS		mortgage-backed securities
MD&A		the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations
Merger		Merger of Merger Sub Company with and into TECO Energy, with TECO Energy as the surviving corporation

Term		Meaning
Merger Agreement		Agreement and Plan of Merger dated Sept. 4, 2015, by and among TECO Energy, Emera and Merger Sub Company
Merger Sub Company		Emera US Inc., a Florida corporation
MMA		The Medicare Prescription Drug, Improvement and Modernization Act of 2003
MMBTU		one million British Thermal Units
MRV		market-related value
MW		megawatt(s)
MWH		megawatt-hour(s)
NAESB		North American Energy Standards Board
NAV		net asset value
NMGC		New Mexico Gas Company, Inc.
NMGI		New Mexico Gas Intermediate, Inc.
NMPRC		New Mexico Public Regulation Commission
NOL		net operating loss
Note		Note to consolidated financial statements
NO_x		nitrogen oxide
NPNS		normal purchase normal sale
NYMEX		New York Mercantile Exchange
O&M expenses		operations and maintenance expenses
OCI		other comprehensive income
OPC		Office of Public Counsel
OPEB		other postretirement benefits
OTC		over-the-counter
Parent		TECO Energy (the holding company, excluding subsidiaries)
PBGC		Pension Benefit Guarantee Corporation
PBO		postretirement benefit obligation
PCI		pulverized coal injection
PGA		purchased gas adjustment
PGAC		purchased gas adjustment clause
PGS		Peoples Gas System, the gas division of Tampa Electric Company
PPA		power purchase agreement
PPSA		Power Plant Siting Act
PRP		potentially responsible party
R&D		research and development
REIT		real estate investment trust
RFP		request for proposal
ROE		return on common equity
Regulatory ROE		return on common equity as determined for regulatory purposes
ROW		rights-of-way
S&P		Standard and Poor’s
SCR		selective catalytic reduction
SEC		U.S. Securities and Exchange Commission
SO₂		sulfur dioxide
SERP		Supplemental Executive Retirement Plan
SPA		Securities Purchase Agreement dated Sept. 21, 2015, by and between TECO Diversified and Cambrian relating to the purchase of TECO Coal by Cambrian
STIF		short-term investment fund
Tampa Electric		Tampa Electric, the electric division of Tampa Electric Company
TCAE		Tampa Centro Americana de Electridad, Limitada, majority owner of the Alborada Power Station
TEC		Tampa Electric Company, the principal subsidiary of TECO Energy, Inc.
TECO Coal		TECO Coal LLC, and its subsidiaries, a coal producing subsidiary of TECO Diversified
TECO Diversified		TECO Diversified, Inc., a subsidiary of TECO Energy, Inc. and parent of TECO Coal Corporation
TECO Energy		TECO Energy, Inc.
TECO Finance		TECO Finance, Inc., a financing subsidiary for the unregulated businesses of TECO Energy, Inc.
TECO Guatemala		TECO Guatemala, Inc., a subsidiary of TECO Energy, Inc., parent company of formerly owned generating and transmission assets in Guatemala
TGH		TECO Guatemala Holdings, LLC
TRC		TEC Receivables Company
TSI		TECO Services, Inc.

Term		Meaning
U.S. GAAP		generally accepted accounting principles in the United States
VIE		variable interest entity
WRERA		The Worker, Retiree and Employer Recovery Act of 2008

PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

TECO ENERGY, INC.

Consolidated Condensed Balance Sheets

Unaudited

Assets	Sept. 30,			Dec. 31,
(millions)	2016			2015
Current assets
Cash and cash equivalents	$	24.4		$	23.8
Receivables, less allowance for uncollectibles of $2.9 and $2.1 at Sept. 30, 2016 and Dec. 31, 2015, respectively		268.2			280.7
Inventories, at average cost
Fuel	85.2			113.4
Materials and supplies		83.7			76.8
Regulatory assets		21.8			44.8
Prepayments and other current assets		24.0			30.8
Total current assets		507.3			570.3

Property, plant and equipment
Utility plant in service
Electric		7,473.9			7,270.3
Gas		2,216.6			2,113.8
Construction work in progress		916.8			794.7
Other property		16.8			15.9
Property, plant and equipment, at original costs		10,624.1			10,194.7
Accumulated depreciation		(2,862.2	)		(2,712.9	)
Total property, plant and equipment, net		7,761.9			7,481.8

Other assets
Regulatory assets		458.7			395.2
Goodwill		408.4			408.4
Deferred charges and other assets		87.4			77.8
Total other assets		954.5			881.4
Total assets	$	9,223.7		$	8,933.5

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Balance Sheets - continued

Unaudited

Liabilities and Capital	Sept. 30,			Dec. 31,
(millions, except share amounts)	2016			2015
Current liabilities
Long-term debt due within one year	$	0.0		$	333.3
Notes payable		610.5			247.0
Accounts payable		264.0			255.4
Customer deposits		160.6			182.1
Regulatory liabilities		148.2			84.8
Derivative liabilities		1.6			24.1
Interest accrued		53.1			36.2
Taxes accrued		65.0			13.2
Other		44.5			22.6
Total current liabilities		1,347.5			1,198.7

Other liabilities
Deferred income taxes		650.1			570.7
Investment tax credits		10.2			10.5
Regulatory liabilities		718.8			715.8
Deferred credits and other liabilities		412.6			389.6
Long-term debt, less amount due within one year		3,490.3			3,489.2
Total other liabilities		5,282.0			5,175.8

Commitments and contingencies (see Note 8)

Capital
Common equity (10.0 million shares authorized, par value $0.01 and 1,000 shares outstanding at Sept. 30, 2016; 400.0 million shares authorized, par value $1 and 235.3 million shares outstanding at Dec. 31, 2015)		0.0			235.3
Additional paid in capital		2,154.7			1,894.5
Retained earnings		457.1			441.4
Accumulated other comprehensive loss		(17.6	)		(12.2	)
Total capital		2,594.2			2,559.0
Total liabilities and capital	$	9,223.7		$	8,933.5

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Statements of Income

Unaudited

	Three months ended Sept. 30,
(millions, except per share amounts)	2016			2015
Revenues
Regulated electric	$	585.2		$	559.3
Regulated gas		138.6			131.5
Unregulated		2.9			3.0
Total revenues		726.7			693.8
Expenses
Regulated operations and maintenance
Fuel		173.5			176.6
Purchased power		38.3			23.8
Cost of natural gas sold		53.2			42.0
Other		153.6			150.1
Merger transaction-related costs		37.9			15.4
Depreciation and amortization		92.0			87.8
Taxes, other than income		56.3			51.5
Total expenses		604.8			547.2
Income from operations		121.9			146.6
Other income
Allowance for other funds used during construction		6.5			4.7
Other income, net		2.1			1.4
Total other income		8.6			6.1
Interest charges
Interest expense		47.1			48.4
Allowance for borrowed funds used during construction		(3.2	)		(2.3	)
Total interest charges		43.9			46.1
Income from continuing operations before provision for income taxes		86.6			106.6
Provision for income taxes		17.2			41.7
Net income from continuing operations		69.4			64.9
Discontinued operations
Loss from discontinued operations		(0.2	)		(17.8	)
Benefit for income taxes		0.2			6.1
Loss from discontinued operations, net		0.0			(11.7	)
Net income	$	69.4		$	53.2

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Statements of Income

Unaudited

	Nine months ended Sept. 30,
(millions, except per share amounts)	2016			2015
Revenues
Regulated electric	$	1,506.6		$	1,540.8
Regulated gas		522.9			518.1
Unregulated		9.0			8.5
Total revenues		2,038.5			2,067.4
Expenses
Regulated operations and maintenance
Fuel		426.1			492.5
Purchased power		80.5			60.5
Cost of natural gas sold		200.8			194.1
Other		452.2			451.9
Merger transaction-related costs		109.4			15.4
Depreciation and amortization		272.0			260.3
Taxes, other than income		160.8			156.6
Total expenses		1,701.8			1,631.3
Income from operations		336.7			436.1
Other income
Allowance for other funds used during construction		18.1			12.2
Other income, net		4.6			4.4
Total other income		22.7			16.6
Interest charges
Interest expense		142.7			146.4
Allowance for borrowed funds used during construction		(9.1	)		(6.0	)
Total interest charges		133.6			140.4
Income from continuing operations before provision for income taxes		225.8			312.3
Provision for income taxes		77.2			122.1
Net income from continuing operations		148.6			190.2
Discontinued operations
Loss from discontinued operations		(0.4	)		(105.5	)
Benefit for income taxes		0.3			38.3
Loss from discontinued operations, net		(0.1	)		(67.2	)
Net income	$	148.5		$	123.0

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Statements of Comprehensive Income

Unaudited

	Three months ended Sept. 30,						Nine months ended Sept. 30,
(millions)	2016			2015			2016			2015
Net income	$	69.4		$	53.2		$	148.5		$	123.0
Other comprehensive income, net of tax
Gain on cash flow hedges		0.2			0.2			0.6			3.3
Amortization of unrecognized benefit costs and other		0.5			0.2			0.8			1.8
Recognized cost due to curtailment		0.0			0.0			0.1			0.0
Change in benefit obligation due to remeasurement/ valuation		(6.9	)		(5.7	)		(6.9	)		(5.7	)
Recognized cost due to settlement		0.0			7.7			0.0			7.7
Other comprehensive income (loss), net of tax		(6.2	)		2.4			(5.4	)		7.1
Comprehensive income	$	63.2		$	55.6		$	143.1		$	130.1

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Statements of Cash Flows

Unaudited

	Nine months ended Sept. 30,
(millions)	2016			2015
Cash flows from operating activities
Net income	$	148.5		$	123.0
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		272.0			261.5
Deferred income taxes and investment tax credits		76.5			84.6
Allowance for other funds used during construction		(18.1	)		(12.2	)
Non-cash stock compensation		6.4			10.1
Loss on disposals of business/assets, pretax		(0.3	)		10.0
Deferred recovery clauses		54.5			13.1
Asset impairment, pretax		0.0			78.6
Receivables, less allowance for uncollectibles		12.5			46.1
Inventories		21.3			(45.7	)
Prepayments and other current assets		6.8			(14.2	)
Taxes accrued		54.0			31.6
Interest accrued		16.9			14.7
Accounts payable		27.7			(85.7	)
Other		(27.6	)		(34.6	)
Cash flows from operating activities		651.1			480.9
Cash flows from investing activities
Capital expenditures		(573.3	)		(511.0	)
Other investing activities		8.5			(0.2	)
Cash flows used in investing activities		(564.8	)		(511.2	)
Cash flows from financing activities
Dividends and dividend equivalents		(135.4	)		(158.8	)
Proceeds from the sale of common stock and equity contributions		26.2			6.4
Proceeds from long-term debt issuance		0.0			499.7
Repayment of long-term debt		(333.3	)		(274.5	)
Net decrease in short-term debt (maturities of 90 days or less)		(36.5	)		(11.0	)
Proceeds from other short-term debt (maturities over 90 days)		400.0			0.0
Other financing activities		(6.7	)		(1.5	)
Cash flows from (used in) financing activities		(85.7	)		60.3
Net increase in cash and cash equivalents		0.6			30.0
Cash and cash equivalents at beginning of the period		23.8			25.4
Cash and cash equivalents at end of the period	$	24.4		$	55.4
Supplemental disclosure of non-cash activities
Change in accrued capital expenditures	$	(20.6	)	$	(8.1	)

The accompanying notes are an integral part of the consolidated condensed financial statements.

TECO ENERGY, INC.

Consolidated Condensed Statements of Capital

Unaudited

													Accumulated
							Additional						Other
				Common			Paid in			Retained			Comprehensive			Total
(millions)	Shares			Stock			Capital			Earnings			Income (Loss)			Capital
Balance, Dec. 31, 2015		235.3		$	235.3		$	1,894.5		$	441.4		$	(12.2	)	$	2,559.0
Net income											148.5						148.5
Other comprehensive loss, after tax														(5.4	)		(5.4	)
Common stock issued		0.2			0.2			(1.8	)								(1.6	)
Impact of Merger		(235.5	)		(235.5	)		235.5									0.0
Dividends and dividend equivalents											(135.4	)					(135.4	)
Stock compensation expense								6.4									6.4
Restricted stock—dividends								(1.6	)								(1.6	)
Cumulative effect of change in accounting											2.6						2.6
Equity contribution								22.1									22.1
Other								(0.4	)								(0.4	)
Balance, Sept. 30, 2016		0.0		$	0.0		$	2,154.7		$	457.1		$	(17.6	)	$	2,594.2

The accompanying notes are an integral part of the consolidated financial statements.

TECO ENERGY, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

UNAUDITED

1. Summary of Significant Accounting Policies

See TECO Energy, Inc.’s 2015 Annual Report on Form 10-K for a complete discussion of the company’s accounting policies. The significant accounting policies for all utility and diversified operations include:

Principles of Consolidation and Basis of Presentation

Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated condensed financial statements include all adjustments that are of a recurring nature and necessary to state fairly the financial position of TECO Energy, Inc. and its subsidiaries as of Sept. 30, 2016 and Dec. 31, 2015, and the results of operations and cash flows for the periods ended Sept. 30, 2016 and 2015. The results of operations for the three and nine months ended Sept. 30, 2016 are not necessarily indicative of the results that can be expected for the entire fiscal year ending Dec. 31, 2016.

The use of estimates is inherent in the preparation of financial statements in accordance with U.S. GAAP. Actual results could differ from these estimates. The year-end consolidated condensed balance sheet data was derived from audited financial statements; however, this quarterly report on Form 10-Q does not include all year-end disclosures required for an annual report on Form 10-K by U.S. GAAP.

On July 1, 2016, TECO Energy and Emera completed the Merger contemplated by the Merger Agreement entered into on Sept. 4, 2015. As a result of the Merger, the Merger Sub Company merged with and into TECO Energy with TECO Energy continuing as the surviving corporation and becoming a wholly owned indirect subsidiary of Emera. The acquisition method of accounting was not pushed down to TECO Energy or its subsidiaries. See Note 14 for further information.

Revenues

As of Sept. 30, 2016 and Dec. 31, 2015, unbilled revenues of $71.3 million and $81.1 million, respectively, are included in the “Receivables” line item on the Consolidated Condensed Balance Sheets.

Accounting for Franchise Fees and Gross Receipt Taxes

Tampa Electric and PGS are allowed to recover certain costs from customers on a dollar-per-dollar basis through rates approved by the FPSC. The amounts included in customers’ bills for franchise fees and gross receipt taxes are included as revenues on the Consolidated Condensed Statements of Income. Franchise fees and gross receipt taxes payable by Tampa Electric and PGS are included as an expense on the Consolidated Condensed Statements of Income in “Taxes, other than income”. These amounts totaled $32.6 million and $89.2 million for the three and nine months ended Sept. 30, 2016, respectively, compared to $31.7 million and $88.3 million for the three and nine months ended Sept. 30, 2015, respectively.

NMGC is an agent in the collection and payment of franchise fees and gross receipt taxes and is not required by a tariff to present the amounts on a gross basis. Therefore, NMGC’s franchise fees and gross receipt taxes are presented net with no line-item impact on the Consolidated Condensed Statements of Income.

2. New Accounting Pronouncements

Change in Accounting Policy

The new U.S. GAAP accounting policies that are applicable to and were adopted by the company are described as follows:

Interest – Imputation of Interest

In April 2015, the FASB issued Accounting Standard Update (ASU) 2015-03, Interest – Imputation of Interest, which simplifies the presentation of debt issuance costs. The amendments require debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs is not affected. The company adopted this standard in the first quarter of 2016, and Dec. 31, 2015 balances have been retrospectively restated. This change resulted in $27.7 million of debt issuance costs as of Dec. 31, 2015, previously presented as “Deferred charges and other assets”, being reclassified as a deduction from the carrying amount of the related “Long-term debt, less amount due within one year” line item on its Consolidated Condensed Balance Sheet. In accordance with ASU 2015-15 Interest: Imputation of Interest, the company continues to present debt issuance costs related to its letter of credit arrangements and related instruments in “Prepayments and other current assets” on its Consolidated Condensed Balance Sheets.

Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The standard clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship provided that all other hedge accounting criteria continue to be met. The company early adopted in the third quarter of 2016 as permitted.

Compensation – Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities, and presentation on the statement of cash flows. The company early adopted as permitted in the first quarter of 2016. Each aspect has an accounting impact and was implemented as follows:

•

Income tax consequences – The company will no longer recognize excess tax benefits and certain tax deficiencies in additional paid in capital. Instead, the company will recognize all excess tax benefits and tax deficiencies as income tax expense or benefit on the income statement. In addition, the guidance eliminates the requirement that excess tax benefits be realized before the company can recognize them. The company recorded a $2.6 million cumulative adjustment to retained earnings as of Jan. 1, 2016 for excess tax benefits related to prior periods.

•

Accounting for forfeitures – The company’s policy is to estimate the number of awards expected to be forfeited, which is consistent with prior periods.

•

Classification of awards - The company had no share-based payments classified as liability awards as of Sept. 30, 2016 or Dec. 31, 2015.

•

Presentation on the statement of cash flows – Excess tax benefits are required to be presented as an operating activity on the statement of cash flows rather than as a financing activity. The change may be applied retrospectively or prospectively. The company elected to apply it prospectively, and prior periods were not retrospectively adjusted. Additionally, employee taxes paid by an employer to a tax authority when shares are withheld for tax-withholding purposes are required to be presented as a financing activity on a retrospective basis for all periods presented. Therefore, the company reclassified $1.5 million from operating activities to financing activities for the nine months ended Sept. 30, 2015.

Future Accounting Pronouncements

The company considers the applicability and impact of all ASUs issued by FASB. The following updates have been issued by FASB but have not yet been adopted by TECO Energy. Any ASUs not included below were assessed and determined to be either not applicable to the company or are not expected to have a material impact on the consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which creates a new principle-based revenue recognition framework. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to. The guidance will require additional disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. This guidance will be effective beginning in 2018, with early adoption permitted in 2017, and will allow for either full retrospective adoption or modified retrospective adoption. The company will adopt this guidance effective Jan. 1, 2018. The company has developed an implementation plan and is continuing to evaluate the available adoption methods. While the company does not expect the impact to be significant, it is continuing to evaluate the impact of adoption of this standard on its consolidated financial statements and disclosures.

Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities. The standard provides guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The company does not have equity investments or available-for-sale debt securities and it does not record financial liabilities under the fair value option. However, it is evaluating the impact of the adoption of this guidance on its financial statement disclosures. This guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after Dec. 15, 2017.

Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases. The standard increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet for leases with terms of more than 12 months. Under the existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The effect of leases on the Consolidated Statements of Income and the Consolidated Statements of Cash Flows is largely unchanged. The guidance will require additional disclosures regarding key information about leasing arrangements. This guidance is effective for annual reporting periods including interim reporting within those periods, beginning after Dec. 15, 2018. Early adoption is permitted, and is required to be applied using a modified retrospective approach. The company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The standard provides guidance regarding the measurement of credit losses for financial assets and certain other instruments that are not accounted for at fair value through net income, including trade and other receivables, debt securities, net investment in leases, and off-balance sheet credit exposures. The new guidance requires companies to replace the current incurred loss impairment methodology with a methodology that measures all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance expands the disclosure requirements regarding credit losses, including the credit loss methodology and credit quality indicators. This guidance will be effective beginning in 2020, with early adoption permitted in 2019, and will be applied using a modified retrospective approach. The company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows. The standard provides guidance regarding the classification of certain cash receipts and cash payments on the statement of cash flows, where specific guidance is provided for issues not previously addressed. This guidance will be effective for the company beginning in 2018, with early adoption permitted, and is required to be applied on a retrospective approach. The company is currently evaluating the impact of adoption of this standard on its consolidated statement of cash flows.

3. Regulatory

Tampa Electric’s retail business and PGS are regulated separately by the FPSC. Tampa Electric is also subject to regulation by the FERC. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates based on a cost of service methodology which allows utilities to collect total revenues (revenue requirement) equal to their cost of providing service, plus a reasonable return on invested capital.

NMGC is subject to regulation by the NMPRC. The NMPRC has jurisdiction over the regulatory matters related, directly and indirectly, to NMGC providing service to its customers, including, among other things, rates, accounting procedures, securities issuances, and standards of service. NMGC must follow certain accounting guidance that pertains specifically to entities that are subject to such regulation. Comparable to the FPSC, the NMPRC sets rates at a level that allows utilities to collect total revenues (revenue requirement) equal to their cost of providing service, plus a reasonable return on invested capital.

Regulatory Assets and Liabilities

Tampa Electric, PGS and NMGC apply the accounting standards for regulated operations. Areas of applicability include: deferral of revenues under approved regulatory agreements; revenue recognition resulting from cost-recovery clauses that provide for monthly billing charges to reflect increases or decreases in fuel, purchased power, conservation and environmental costs; the deferral of costs as regulatory assets to the period in which the regulatory agency recognizes them when cost recovery is ordered over a period longer than a fiscal year; and the advance recovery of expenditures for approved costs such as future storm damage or the future removal of property. All regulatory assets are recovered through the regulatory process.

Details of the regulatory assets and liabilities are presented in the following table:

Regulatory Assets and Liabilities
(millions)	Sept. 30, 2016		Dec. 31, 2015
Regulatory assets:
Regulatory tax asset ⁽¹⁾	$	83.4	$	74.7
Cost-recovery clauses - deferred balances⁽²⁾		4.5		5.5
Cost-recovery clauses - offsets to derivative liabilities ⁽²⁾		2.1		26.5
Environmental remediation ⁽³⁾		54.8		54.0
Postretirement benefits ⁽⁴⁾		296.4		240.6
Deferred bond refinancing costs ⁽⁵⁾		7.1		6.5
Debt basis adjustment ⁽⁶⁾		14.9		17.5
Competitive rate adjustment ⁽²⁾		2.5		2.6
Other		14.8		12.1
Total regulatory assets		480.5		440.0
Less: Current portion		21.8		44.8
Long-term regulatory assets	$	458.7	$	395.2
Regulatory liabilities:
Regulatory tax liability	$	7.2	$	7.9
Cost-recovery clauses⁽²⁾		111.5		55.9
Transmission and delivery storm reserve		56.1		56.1
Accumulated reserve - cost of removal ⁽⁷⁾		670.6		679.9
Bill reduction credit⁽⁸⁾		8.0		0.3
Other		13.6		0.5
Total regulatory liabilities		867.0		800.6
Less: Current portion		148.2		84.8
Long-term regulatory liabilities	$	718.8	$	715.8

(1)

The regulatory tax asset is primarily associated with the depreciation and recovery of AFUDC-equity. This asset does not earn a return but rather is included in the capital structure, which is used in the calculation of the weighted cost of capital used to determine revenue requirements. It will be recovered over the expected life of the related assets.

(2)

These assets and liabilities are related to FPSC and NMPRC clauses and riders. They are recovered or refunded through cost-recovery mechanisms approved by the FPSC or NMPRC, as applicable, on a dollar-for-dollar basis in the next year. In the case of the regulatory asset related to derivative liabilities, recovery occurs in the year following the settlement of the derivative position.

(3)

This asset is related to costs associated with environmental remediation primarily at manufactured gas plant sites. The balance is included in rate base, partially offsetting the related liability, and earns a rate of return as permitted by the FPSC. The timing of recovery is impacted by the timing of the expenditures related to remediation.

(4)	This asset is related to the deferred costs of postretirement benefits. It is included in rate base and earns a rate of return as permitted by the FPSC or NMPRC, as applicable. It is amortized over the remaining service life of plan participants.

(5)

This asset represents the past costs associated with refinancing debt. It does not earn a return but rather is included in the capital structure, which is used in the calculation of the weighted cost of capital used to determine revenue requirements. It will be amortized over the term of the related debt instruments.

(6)	This asset represents the difference between the fair value and pre-merger carrying amounts for NMGC’s long-term debt on the acquisition date. It does not earn a return and is not included in the regulatory capital structure. It is amortized over the term of the related debt instrument.

(7)

This item represents the non-ARO cost of removal in the accumulated reserve for depreciation. AROs are costs for legally required removal of property, plant and equipment. Non-ARO cost of removal represent estimated funds received from customers through depreciation rates to cover future non-legally required cost of removal of property, plant and equipment, net of salvage value upon retirement, which reduces rate base for ratemaking purposes. This liability is reduced as costs of removal are incurred.

(8)	See Note 14 for information regarding NMGC’s stipulation agreement including a commitment to provide an annual bill reduction credit to customers. A minor portion of this balance is attributable to timing of bill reduction credits related to TECO Energy’s acquisition of NMGC in September 2014.

4. Income Taxes

The effective tax rates for the three months ended Sept. 30, 2016 and 2015 were 19.86% and 39.12%, respectively. The effective tax rate decreased to 34.19% for the nine months ended Sept. 30, 2016 from 39.10% for the same period in 2015.

The decrease in the three-month effective tax rate of 19.26% in 2016 versus the same period in 2015 is primarily due to tax benefits recorded in the third quarter of 2016 for federal R&D credits, lower non-deductible Merger transaction costs and other permanent book-to-tax differences.

The effective tax rate for year-to-date 2016 differed from the U.S. statutory rate of 35% primarily due to the effects of federal R&D credits and the tax benefit related to long-term incentive compensation offset by non-deductible Merger transaction costs (see Notes 2 and 14 for further description). The effective tax rate for year-to-date 2015 differed from the U.S. statutory rate primarily due to tax expense related to long-term incentive compensation shares that vested below target levels.

Effective July 1, 2016 and due to the Merger with Emera, TECO Energy and its subsidiaries are included in a consolidated U.S federal income tax return with EUSHI and its subsidiaries. TECO Energy’s income tax expense is based upon a separate return method, modified for the benefits-for-loss allocation in accordance with EUSHI’s tax sharing agreement. To the extent that TECO Energy’s cash tax positions are settled differently than the amount reported as realized under the tax sharing agreement, the difference is accounted for as either a capital contribution or a distribution.

The IRS concluded its examination of TECO Energy’s 2014 consolidated federal income tax return in December 2015. The U.S. federal statute of limitations remains open for the year 2013 and forward. Years 2015 and the short tax year ending June 30, 2016 are currently under examination by the IRS under its Compliance Assurance Program (CAP). Due to the Merger with Emera, the company is only eligible to participate in the CAP through its short tax year ending June 30, 2016. U.S. state jurisdictions have statutes of limitations generally ranging from three to four years from the filing of an income tax return. Additionally, any state net operating losses that were generated in prior years and are still being utilized are subject to examination by state jurisdictions. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Years still open to examination by taxing authorities in major state jurisdictions and foreign jurisdictions include 2005 and forward.

Accounting for Uncertainty in Income Taxes

Authoritative guidance related to accounting for uncertainty in income taxes requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates that it is more likely than not, based solely on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals and litigation processes. As of Sept. 30, 2016 and Dec. 31, 2015, TECO Energy’s uncertain tax positions were $7.7 million and zero, respectively, all of which was recorded as a reduction of deferred income tax assets for net operating losses and tax credit carryforwards. The increase was primarily due to an uncertain tax position related to federal R&D tax credits. TECO Energy believes that the total unrecognized tax benefits will decrease within the next twelve months due to the expected audit examination of TECO Energy’s federal income tax return for the short tax year ending June 30, 2016. As of Sept. 30, 2016, if recognized, $7.7 million of the unrecognized tax benefits would reduce TECO Energy’s effective tax rate.

5. Employee Postretirement Benefits

Included in the table below is the periodic expense for pension and other postretirement benefits offered by the company. Amounts disclosed for pension benefits include the amounts related to the qualified pension plan and the non-qualified, non-contributory SERP.

Pension Expense
(millions)	Pension Benefits						Other Postretirement Benefits
Three months ended Sept. 30,	2016			2015			2016			2015
Components of net periodic benefit expense
Service cost	$	4.9		$	6.7		$	0.5		$	0.6
Interest cost		7.2			6.5			2.0			2.0
Expected return on assets		(11.5	)		(9.1	)		(0.3	)		(0.3	)
Amortization of:
Prior service (benefit) cost		0.0			(0.1	)		(0.6	)		(0.6	)
Actuarial loss		4.8			3.2			0.1			0.0
Regulatory asset		0.0			0.0			0.3			0.3
Curtailment cost		0.0			0.0			0.0			0.0
Settlement cost		0.0			0.0			0.0			0.0
Net pension expense recognized in the TECO Energy Consolidated Condensed Statements of Income	$	5.4		$	7.2		$	2.0		$	2.0
Nine months ended Sept. 30,
Components of net periodic benefit expense
Service cost	$	13.9		$	17.6		$	1.4		$	1.7
Interest cost		23.6			22.6			6.4			6.1
Expected return on assets		(34.2	)		(32.4	)		(0.9	)		(0.8	)
Amortization of:
Prior service (benefit) cost		0.2			(0.2	)		(1.9	)		(1.8	)
Actuarial loss		11.7			11.4			0.1			0.0
Regulatory asset		0.0			0.0			0.8			0.8
Curtailment cost		1.3			0.0			0.0			0.0
Settlement cost		0.6			0.0			0.0			0.0
Net pension expense recognized in the TECO Energy Consolidated Condensed Statements of Income	$	17.1		$	19.0		$	5.9		$	6.0

For the Jan. 1, 2016 measurement, TECO Energy used an assumed long-term EROA of 7.00% and a discount rate of 4.685% for pension benefits under its qualified pension plan. For the Jan. 1, 2016 measurement of TECO Energy’s other postretirement benefits, TECO Energy assumed a discount rate of 4.667% for the Florida-based plan and 4.687% for the NMGC plan.

As a result of the Merger, TECO Energy remeasured its employee postretirement benefit plans on the Merger effective date, July 1, 2016. As part of the remeasurement, TECO Energy used an above-mean yield curve to determine its discount rate. The above-mean yield curve technique matches the yields from high-quality (AA-rated, non-callable) corporate bonds to the company’s projected cash flows for the plans to develop a present value that is converted to a discount rate assumption, which is subject to change each year. TECO Energy previously used a bond model matching technique to determine its discount rate. The change in discount rate resulting from the different methodology used to select a discount rate did not have a material impact on the company’s financial statements and provides consistency with Emera’s method for selecting a discount rate. For the July 1, 2016 measurement, TECO Energy used an assumed long-term EROA of 7.00% and a discount rate of 3.72% for pension benefits under its qualified pension plan. For the July 1, 2016 measurement of TECO Energy’s other postretirement benefits, TECO Energy assumed a discount rate of 3.85%.

As a result of the remeasurement, TECO Energy’s net periodic benefit expense increased by $0.6 million for pension benefits and zero for other postretirement benefits for the three- and nine-months ended Sept. 30, 2016. TECO Energy’s liability for pension benefits increased by $61.7 million and $17.6 million for other postretirement benefits. The associated regulatory asset increased $54.0 million for pension benefits and $14.1 million for other postretirement benefits. Accumulated other comprehensive income decreased $7.7 million for pension benefits and $3.5 million for other postretirement benefits.

TECO Energy made contributions of $37.4 million and $55.0 million to its qualified pension plan for the nine months ended Sept. 30, 2016 and 2015, respectively. Additionally, NMGC made contributions of $2.7 million to its other postretirement benefits plan for the nine months ended Sept. 30, 2016 and 2015.

For the three and nine months ended Sept. 30, 2016, TECO Energy and its subsidiaries reclassified $0.8 million and $1.8 million, respectively, of pretax unamortized prior service benefit and actuarial losses from AOCI to net income as part of periodic benefit expense, compared with $0.2 million and $2.4 million for the three and nine months ended Sept. 30, 2015, respectively. In addition, during the three and nine months ended Sept. 30, 2016, the regulated companies reclassified $3.8 million and $9.1 million, respectively, of unamortized prior service benefit and actuarial losses from regulatory assets to net income as part of periodic benefit expense, compared with $2.6 million and $7.8 million for the three and nine months ended Sept. 30, 2015, respectively.

The settlement cost recognized relates to the settlement of the SERP liability for the TECO Coal participants. An estimated curtailment loss for the SERP of $1.3 million was recognized in the second quarter of 2016 as a result of retirements expected in the third quarter of 2016 as a result of the Merger, which expected retirements occurred in the third quarter of 2016.

The company’s postretirement benefit plans were not explicitly impacted by the Merger. However, TECO Energy expects to recognize a settlement charge related to the SERP of approximately $8.0 million in the first quarter of 2017 due to retirements that have occurred as a result of the Merger.

6. Short-Term Debt

Details of the credit facilities and related borrowings are presented in the following table:

Credit Facilities
	Sept. 30, 2016						Dec. 31, 2015
					Letters						Letters
	Credit		Borrowings		of Credit		Credit		Borrowings		of Credit
(millions)	Facilities		Outstanding ⁽¹⁾		Outstanding		Facilities		Outstanding ⁽¹⁾		Outstanding
Tampa Electric Company:
5-year facility ⁽²⁾	$	325.0	$	0.0	$	0.5	$	325.0	$	0.0	$	0.5
3-year accounts receivable facility ⁽³⁾		150.0		49.0		0.0		150.0		61.0		0.0
TECO Energy/TECO Finance:
5-year facility ⁽²⁾⁽⁴⁾		300.0		150.0		0.0		300.0		163.0		0.0
1-year term facility ⁽⁴⁾⁽⁵⁾		400.0		400.0		0.0		0.0		0.0		0.0
New Mexico Gas Company:
5-year facility⁽²⁾		125.0		11.5		1.4		125.0		23.0		1.7
Total	$	1,300.0	$	610.5	$	1.9	$	900.0	$	247.0	$	2.2

(1) Borrowings outstanding are reported as notes payable.
(2) This 5-year facility matures Dec. 17, 2018.
(3) This 3-year facility matures Mar. 23, 2018.
(4) TECO Finance is the borrower and TECO Energy is the guarantor of this facility.
(5) This 1-year facility matures Mar. 14, 2017.

At Sept. 30, 2016, these credit facilities required commitment fees ranging from 12.5 to 30.0 basis points. The weighted-average interest rate on outstanding amounts payable under the credit facilities at Sept. 30, 2016 and Dec. 31, 2015 was 1.71% and 1.29%, respectively.

TECO Energy/TECO Finance Credit Facility

On Mar. 14, 2016, TECO Finance entered into a one-year, $400 million credit agreement. The credit agreement (i) has a maturity date of Mar. 14, 2017; (ii) contains customary representations and warranties, events of default, and financial and other covenants; and (iii) provides for interest to accrue at variable rates based on the London interbank deposit rate plus a margin, or, as an alternative to such interest rate, at an interest rate equal to a margin plus the higher of JPMorgan Chase Bank’s prime rate, the federal funds rate plus 50 basis points, or the one-month London interbank deposit rate plus 1.00%.

7. Long-Term Debt

Fair Value of Long-Term Debt

At Sept. 30, 2016, total long-term debt had a carrying amount of $3,490.3 million and an estimated fair market value of $3,911.2 million. At Dec. 31, 2015, total long-term debt had a carrying amount of $3,822.5 million and an estimated fair market value of $4,061.6 million. The company uses the market approach in determining fair value. The majority of the outstanding debt is valued using real-time financial market data obtained from Bloomberg Professional Service. The remaining securities are valued using prices

obtained from the Municipal Securities Rulemaking Board or by applying estimated credit spreads obtained from a third party to the par value of the security. The fair value of debt securities totaling $58.3 million is determined using Level 1 measurements; the fair value of the remaining debt securities is determined using Level 2 measurements (see Note 11 for information regarding the fair value hierarchy).

Purchase in Lieu of Redemption of Revenue Refunding Bonds

On Mar. 19, 2008, the HCIDA remarketed $86.0 million HCIDA Pollution Control Revenue Refunding Bonds, Series 2006 (Non-AMT) (the Series 2006 HCIDA Bonds) in a term rate mode pursuant to the terms of the Loan and Trust Agreement governing those bonds. The Series 2006 HCIDA Bonds bore interest at a term rate of 5.00% per annum from Mar. 19, 2008 to Mar. 15, 2012. On Mar. 15, 2012, TEC purchased in lieu of redemption the Series 2006 HCIDA Bonds. The Series 2006 HCIDA Bonds bore interest at a term rate of 1.875% per annum from Mar. 15, 2012 to Mar. 15, 2016. On Mar. 15, 2016, pursuant to the terms of the Loan and Trust Agreement governing the Series 2006 HCIDA Bonds, a mandatory tender occurred and a term rate of 2.00% per annum will apply from Mar. 15, 2016 to Mar. 15, 2020. The 2016 mandatory tender did not impact the Consolidated Condensed Balance Sheet. TEC is responsible for payment of the interest and principal associated with the Series 2006 HCIDA Bonds. Regularly scheduled principal and interest when due, are insured by Ambac Assurance Corporation.

As of Sept. 30, 2016, $232.6 million of bonds purchased in lieu of redemption, including the Series 2006 HCIDA Bonds described above, were held by the trustee at the direction of TEC to provide an opportunity to evaluate refinancing alternatives.

8. Commitments and Contingencies

Legal Contingencies

From time to time, TECO Energy and its subsidiaries are involved in various legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies in the ordinary course of its business. Where appropriate, accruals are made in accordance with accounting standards for contingencies to provide for matters that are probable of resulting in an estimable loss. The company believes the claims in which the company or a subsidiary of the company is a defendant in the pending actions described below are without merit and intends to defend the matters vigorously.

Peoples Gas Legal Proceedings

In November 2010, heavy equipment operated at a road construction site being conducted by Posen Construction, Inc. struck a natural gas line causing a rupture and ignition of the gas and an outage in the natural gas service to Lee and Collier counties, Florida. PGS filed suit in April 2011 against Posen Construction, Inc. in Federal Court for the Middle District of Florida to recover damages for repair and restoration relating to the incident and Posen Construction, Inc. counter-claimed against PGS alleging negligence. In the first quarter of 2014, the parties entered into a settlement agreement that resolves the claims of the parties. In addition, a suit was filed in November 2011 by the Posen Construction, Inc. employee operating the heavy equipment involved in the incident in Lee County Circuit Court against PGS and a PGS contractor involved in the project, seeking damages for his injuries. The suit against PGS remains pending, with a trial currently expected in February 2017. The company is unable at this time to estimate the possible loss or range of loss with respect to this matter. While the outcome of such proceeding is uncertain, management does not believe that its ultimate resolution will have a material adverse effect on the company’s results of operations, financial condition or cash flows.

New Mexico Gas Company Legal Proceedings

In February 2011, NMGC experienced gas shortages due to weather-related interruptions of electric service, weather-related problems on the systems of various interstate pipelines and in gas fields that are the sources of gas supplied to NMGC, and high weather-driven usage. This gas supply disruption and high usage resulted in the declaration of system emergencies by NMGC causing involuntary curtailments of gas utility service to approximately 28,700 customers (residential and business).

In March 2011, a customer purporting to represent a class consisting of all “32,000 [sic] customers” who had their gas utility service curtailed during the early-February system emergencies filed a putative class action lawsuit against NMGC. In March 2011, the Town of Bernalillo, New Mexico, purporting to represent a class consisting of all “New Mexico municipalities and governmental entities who have suffered damages as a result of the natural gas utility shut off” also filed a putative class action lawsuit against NMGC, four of its officers, and John and Jane Does at NMGC. In July 2011, the plaintiff in the Bernalillo class action filed an amended complaint to add an additional plaintiff purporting to represent a class of all “similarly situated New Mexico private businesses and enterprises.”

In September 2015, a settlement was reached with all the named plaintiff class representatives in both of the class actions. The settlements were on an individual basis and not a class basis.

In addition to the two settled class actions described above, 18 insurance carriers have filed two subrogation lawsuits for monies

paid to their insureds as a result of the curtailment of natural gas service in February 2011. In January 2016, the judge entered summary judgment in favor of NMGC and all of the subrogation lawsuits were dismissed. The insurance carriers subsequently filed a timely appeal of the summary judgment. In late May 2016, a settlement was reached with all the named plaintiffs in the subrogation lawsuits. A motion to dismiss the appeal was granted by the court on Aug. 2, 2016.

The settlements were not material to the company.

Proceedings in connection with the Merger with Emera

Twelve securities class action lawsuits were filed against the company and its directors by holders of TECO Energy securities following the announcement of the Emera transaction. Eleven suits were filed in the Circuit Court for the 13th Judicial Circuit, in and for Hillsborough County, Florida. They alleged that TECO Energy’s board of directors breached its fiduciary duties in agreeing to the Merger Agreement and sought to enjoin the Merger. Several of these suits alleged that one or more of TECO Energy, Emera and an Emera affiliate aided and abetted such alleged breaches. The securities class action lawsuits were consolidated per court order. Since the consolidation, two of the complaints were amended. One of those complaints has added a claim against the individual defendants for breach of fiduciary duty to disclose. The twelfth suit was filed in the Middle District of Florida Federal Court and has subsequently been voluntarily dismissed.

The company also received two separate shareholder demand letters from purported shareholders of the company. Both of these letters demanded that the company maximize shareholder value and remove alleged conflicts of interest as well as eliminate allegedly preclusive deal protection devices. One of the letters also demanded that the company refrain from consummating the transaction with Emera. Both of these demand letters have subsequently been withdrawn.

In November 2015, the parties to the lawsuits entered into a Memorandum of Understanding with the various shareholder plaintiffs to settle, subject to court approval, all of the pending shareholder lawsuits challenging the proposed Merger. As a result of the Memorandum of Understanding, the company made additional disclosures related to the proposed Merger in a proxy supplement.

In September 2016, a hearing was held to gain preliminary approval of a negotiated stipulation of settlement. After that hearing, the judge entered an order granting preliminary approval of the class action settlement and scheduling a final approval hearing for December 2016.

There can be no assurance that the court will grant final approval of the settlement. However, while the outcome of such proceeding remains uncertain, management does not believe that its ultimate resolution will have a material adverse effect on the company’s results of operations, financial condition or cash flows.

Claim in connection with the Sale of TECO Coal

As discussed in Note 15, TECO Coal was sold on Sept. 21, 2015 to Cambrian. On Mar. 18, 2016, Cambrian delivered a notice of a purported claim to TECO Diversified asserting breach of certain representations, and fraud and willful misconduct in connection therewith, of the SPA. While the outcome of such matter is uncertain, management does not believe that its ultimate resolution will have a material adverse effect on the company’s results of operations, financial condition or cash flows.

TECO Guatemala Holdings, LLC v. The Republic of Guatemala

On Dec. 19, 2013, the ICSID Tribunal hearing the arbitration claim of TGH, a wholly owned subsidiary of TECO Energy, against the Republic of Guatemala (Guatemala) under the DR – CAFTA, issued an award in the case (the Award). The ICSID Tribunal unanimously found in favor of TGH and awarded damages to TGH of approximately U.S. $21.1 million, plus interest from Oct. 21, 2010 at a rate equal to the U.S. prime rate plus 2%. In addition, the ICSID Tribunal ruled that Guatemala must reimburse TGH for approximately U.S. $7.5 million of the costs that it incurred in pursuing the arbitration.

On Apr. 18, 2014, Guatemala filed an application for annulment of the entire Award (or, alternatively, certain parts of the Award) pursuant to applicable ICSID rules.

Also on Apr. 18, 2014, TGH separately filed an application for partial annulment of the Award on the basis of certain deficiencies in the ICSID Tribunal’s determination of the amount of TGH’s damages.

On Apr. 5, 2016, an ICSID ad hoc Committee issued a decision in favor of TGH in the annulment proceedings. In its decision, the ad hoc Committee unanimously dismissed Guatemala’s application for annulment of the award and upheld the original $21.1 million award, plus interest. In addition, the ad hoc Committee granted TGH’s application for partial annulment of the award, and ordered Guatemala to pay certain costs relating to the annulment proceedings. Because the Tribunal’s award of costs to TGH in its original arbitration was based on the Tribunal’s assessment that TGH had prevailed on liability and Guatemala had partially prevailed on damages, and the latter finding was annulled by the ad hoc Committee, the Committee also annulled the Tribunal’s award of costs to TGH. As a result, TGH had the right to resubmit its arbitration claim against Guatemala to seek additional damages (in addition to the previously awarded $21.1 million), as well as additional interest on the $21.1 million, and its full costs relating to the original arbitration and the new arbitration proceeding. Results to date do not reflect any benefit of this decision.

On Sept. 23, 2016, TGH filed a request for resubmission to arbitration. On Oct. 3, 2016, ICSID issued a notice of registration for TGH’s request for resubmission, officially commencing the new arbitration and starting the time periods for constitution of the new tribunal.

Superfund and Former Manufactured Gas Plant Sites

TEC, through its Tampa Electric and Peoples Gas divisions, is a PRP for certain superfund sites and, through its Peoples Gas division, for certain former manufactured gas plant sites. While the joint and several liability associated with these sites presents the potential for significant response costs, as of Sept. 30, 2016, TEC has estimated its ultimate financial liability to be $33.9 million, primarily at PGS. This amount has been accrued and is primarily reflected in the long-term liability section under “Deferred credits and other liabilities” on the Consolidated Condensed Balance Sheets. The environmental remediation costs associated with these sites, which are expected to be paid over many years, are not expected to have a significant impact on customer rates.

The estimated amounts represent only the portion of the cleanup costs attributable to TEC. The estimates to perform the work are based on TEC’s experience with similar work, adjusted for site-specific conditions and agreements with the respective governmental agencies. The estimates are made in current dollars, are not discounted and do not assume any insurance recoveries.

In instances where other PRPs are involved, most of those PRPs are creditworthy and are likely to continue to be creditworthy for the duration of the remediation work. However, in those instances that they are not, TEC could be liable for more than TEC’s actual percentage of the remediation costs.

Factors that could impact these estimates include the ability of other PRPs to pay their pro-rata portion of the cleanup costs, additional testing and investigation which could expand the scope of the cleanup activities, additional liability that might arise from the cleanup activities themselves or changes in laws or regulations that could require additional remediation. Under current regulations, these costs are recoverable through customer rates established in subsequent base rate proceedings.

Merger Commitments

In connection with the Merger with Emera, TECO Energy made certain commitments approved by the NMPRC. See Note 14 for additional information.

Guarantees

A summary of the face amount or maximum theoretical obligation and the year of expiration under guarantees as of Sept. 30, 2016 is as follows:

(millions)												Maximum
										After ⁽¹⁾			Theoretical			Liabilities Recognized
Guarantees for the Benefit of:	2016		2017			2018-2020			2020			Obligation			at Sept. 30, 2016
TECO Energy
Fuel sales and transportation ⁽²⁾	$	0.0		$	0.0		$	0.0		$	93.9		$	93.9		$	0.0
Letters of indemnity - coal mining permits ⁽³⁾		0.0			84.5			0.0			0.0			84.5			0.0
	$	0.0		$	84.5		$	0.0		$	93.9		$	178.4		$	0.0

(1) These guarantees renew annually and are shown on the basis that they will continue to renew beyond 2020.
(2) The amounts shown represent the maximum theoretical amounts of cash collateral that TECO Energy would be required to post in the event of a downgrade below investment grade of its long-term debt ratings by the major credit rating agencies. Liabilities recognized represent the associated potential obligation related to net derivative liabilities under these agreements at Sept. 30, 2016. See Note 10 for additional information.
(3) These letters of indemnity guarantee payments to certain surety companies that issued reclamation bonds to the Commonwealths of Kentucky and Virginia in connection with TECO Coal's mining operations. Payments to the surety companies would be triggered if the reclamation bonds are called upon by either of these states and the permit holder, TECO Coal, does not pay the surety. The amounts shown represent the maximum theoretical amounts that TECO Energy would be required to pay to the surety companies. As discussed in Note 15, TECO Coal was sold on Sept. 21, 2015 to Cambrian. Pursuant to the SPA, Cambrian is obligated to file applications required in connection with the change of control with the appropriate governmental entities. Once the applicable governmental agency deems each application to be acceptable, Cambrian is obligated to post a bond or other appropriate collateral necessary to obtain the release of the corresponding bond secured by the TECO Energy indemnity for that permit. Until the bonds secured by TECO Energy's indemnity are released, TECO Energy's indemnity will remain effective. At the date of sale in September 2015, the letters of indemnity guaranteed $93.8 million. The company is working with Cambrian on the process to replace the bonds. Pursuant to the SPA, Cambrian has the obligation to indemnify and hold TECO Energy harmless from any losses incurred that arise out of the coal mining permits during the period commencing on the closing date through the date all permit approvals are obtained.

Financial Covenants

TECO Energy and its subsidiaries must meet certain financial tests, including a debt to capital ratio, as defined in the applicable banking agreements. 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 applicable financial covenants.

9. Segment Information

TECO Energy is an electric and gas utility holding company with diversified activities. Segments are determined based on how management evaluates, measures and makes decisions with respect to the operations of the entity. The management of TECO Energy reports segments based on each subsidiary’s contribution of revenues, net income and total assets as required by the accounting guidance for disclosures about segments of an enterprise and related information. Intercompany transactions are eliminated in the Consolidated Condensed Financial Statements of TECO Energy, but are included in determining reportable segments.

Segment Information ⁽¹⁾
(millions)	Tampa		Peoples		New Mexico				TECO										TECO
Three months ended Sept. 30,	Electric		Gas		Gas Co. ⁽²⁾				Coal ⁽¹⁾			Other ⁽²⁾				Eliminations			Energy
2016
Revenues - external	$	585.1	$	103.3	$	35.7			$	0.0		$	2.6			$	0.0		$	726.7
Sales to affiliates		0.8		0.4		0.0				0.0			0.1				(1.3	)		0.0
Total revenues		585.9		103.7		35.7				0.0			2.7				(1.3	)		726.7
Total interest charges		22.4		3.7		2.8				0.0			15.2				(0.2	)		43.9
Net income (loss) from continuing operations		94.1		6.5		(19.8	)	⁽⁵⁾		0.0			(11.4	)	⁽⁵⁾		0.0			69.4
Income (loss) from discontinued operations, net ⁽¹⁾		0.0		0.0		0.0				0.0			0.0				0.0			0.0
Net income (loss)	$	94.1	$	6.5	$	(19.8	)		$	0.0		$	(11.4	)		$	0.0		$	69.4
2015
Revenues - external	$	559.4	$	88.1	$	43.7			$	0.0		$	2.6			$	0.0		$	693.8
Sales to affiliates		0.8		2.0		0.0				0.0			0.0				(2.8	)		0.0
Total revenues		560.2		90.1		43.7				0.0			2.6				(2.8	)		693.8
Total interest charges		24.1		3.7		3.2				0.0			15.4				(0.3	)		46.1
Net income (loss) from continuing operations		82.1		6.2		(2.8	)			0.0			(20.6	)			0.0			64.9
Income (loss) from discontinued operations, net ⁽¹⁾		0.0		0.0		0.0				(12.1	)		0.4				0.0			(11.7	)
Net income (loss)	$	82.1	$	6.2	$	(2.8	)		$	(12.1	)	$	(20.2	)		$	0.0		$	53.2

(millions)

Tampa

Peoples

TECO ENERGY INC 10-Q