Regulatory

9 Months Ended

Sep. 30, 2014

3. Regulatory

Tampa Electric’s retail business and PGS are subject to regulation by the FPSC. Tampa Electric is also subject to regulation by the FERC under PUHCA 2005. However, pursuant to a waiver granted in accordance with the FERC’s regulations, TECO Energy is not subject to certain accounting, record-keeping and reporting requirements prescribed by the FERC’s regulations under PUHCA 2005. The operations of PGS are regulated by the FPSC separately from the operations of Tampa Electric. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates at a level that allows utilities such as Tampa Electric and PGS to collect total revenues (revenue requirements) 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 such as NMGC to collect total revenues (revenue requirement) equal to their cost of providing service, plus a reasonable return on invested capital.

2011 NMGC Base Rate Case

In March 2011, NMGC filed an application with the NMPRC seeking authority to increase NMGC’s base rates by approximately $34.5 million on a normalized annual basis. In September 2011, the parties to the base rate proceeding entered into a settlement. The parties filed an unopposed stipulation reflecting the terms of that settlement with the NMPRC and the unopposed stipulation was approved by the NMPRC on Jan. 31, 2012, revising, among other things, base rates for all service provided on or after Feb. 1, 2012. The revised rates contained in the NMPRC-approved settlement increased NMGC’s base rate revenue by approximately $21.5 million on a normalized annual basis. The monthly residential customer access fee increased from $9.59 to $11.50, with the remaining rate increase reflected in changes to volumetric delivery charges. The parties stipulated that the NMPRC-approved revised rates would not increase again prior to July 31, 2013. Subsequently, as part of the May 2014 Settlement and subsequent NMPRC order approving the TECO Energy acquisition of NMGC, the rates will be frozen at the approved 2012 levels until the end of 2017 as reported in Note 16.

NMGC’s PGAC

Comparable to the PGS accounting for gas costs, NMGC’s cost of gas sold generally consists of (i) the amount paid to purchase the gas itself, (ii) variable pipeline transportation charges, (iii) fixed pipeline demand charges, (iv) storage charges, (v) commodity hedging costs and gains, and (vi) other related items. Virtually all of NMGC’s cost of gas sold is accounted for through an NMPRC-approved mechanism referred to as the PGAC. The PGAC is a ratemaking mechanism that allows for the adjustment of the gas commodity charge component of rates charged to gas sales service customers (referred to as the GCBF rate) to reflect monthly increases and decreases in NMGC’s cost of gas sold. Under this mechanism, gas sales service customers are charged a GCBF rate that allows NMGC to recoup its actual cost of gas sold to those customers on a near real-time basis. On a monthly basis, NMGC estimates its cost of gas for the next month (taking into consideration the expected cost of gas to be purchased for the next month, expected demand and any prior month under-recovery or over-recovery of NMGC’s cost of gas) and sets the GCBF rate to be used in the next month to recover those estimated costs. For any increase or decrease in cost of gas sold, there is a corresponding increase or decrease in revenue collected through the PGAC. NMGC’s cost of gas sold is charged to customers with no mark-up and, therefore, NMGC does not earn any gross margin on the gas commodity charge component of customer bills. Despite the fact that NMGC does not earn any gross margin on the gas commodity charge component of customer bills, this portion of customer bills may generate significant increases or decreases in NMGC’s revenues, due to changes in the market price of natural gas.

At any point in time, NMGC typically will be in either an under-recovery or over-recovery position with respect to its cost of gas. An under-recovery or over-recovery occurs when there are differences between the cost of gas billed to customers through the PGAC and the actual cost of gas incurred by NMGC. The under-recovery or over-recovery is a cumulative continuous balance from month to month. An over-recovery of these costs is reflected in Regulatory Liabilities in the current liabilities section of the company’s Statements of Financial Position. An under-recovery of these costs is reflected in Regulatory Assets in the current assets section of the company’s Statements of Financial Position.

NMGC also has regulatory authority to include a simple interest charge or credit, termed the PGAC Carrying Charge, in the PGAC and thus the GCBF rate, based upon the month-end balance of the PGAC under-recovery or over-recovery of NMGC’s cost of gas. PGAC Carrying Charges are reflected in Other Income in the company’s Statements of Operations.

NMGC’s annual PGAC period runs from Sept. 1 to Aug. 31. NMGC’s objective is to complete each annual PGAC period with no significant under-recovery or over-recovery of its cost of gas. The NMPRC requires that NMGC file an independently-audited reconciliation of the PGAC period costs and recoveries, annually in December. Additionally, NMGC must file a PGAC Continuation Filing with the NMPRC every four years. The most recent PGAC Continuation Filing was submitted to the NMPRC in June 2012. The purpose of the PGAC Continuation Filing is to establish that the continued use of the PGAC is reasonable and necessary. In January 2013, the NMPRC approved the PGAC Continuation Filing, which essentially allows for the continued use of the PGAC for another four years.

TEC Storm Damage Cost Recovery

Prior to Nov. 1, 2013, Tampa Electric was accruing $8.0 million annually to a FERC-authorized and FPSC-approved self-insured storm damage reserve. This reserve was created after Florida’s IOUs were unable to obtain transmission and distribution insurance coverage due to destructive acts of nature. Effective Nov. 1, 2013, Tampa Electric ceased accruing for this storm damage reserve as a result of the 2013 rate case settlement. However, in the event of a named storm that results in damage to its system, Tampa Electric can petition the FPSC to seek recovery of those costs over a 12-month period or longer as determined by the FPSC, as well as replenish its reserve to $56.1 million; the level it was as of Oct. 31, 2013. Tampa Electric’s storm reserve remained $56.1 million at both Sept. 30, 2014 and Dec. 31, 2013.

Regulatory Assets and Liabilities

Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC, while NMGC maintains its books in accordance with recognized policies of the NMPRC. In addition, Tampa Electric and NMGC maintain their accounts in accordance with recognized policies prescribed or permitted by the FERC.

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; and 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.

Details of the regulatory assets and liabilities as of Sept. 30, 2014 and Dec. 31, 2013 are presented in the following table:

Regulatory Assets and Liabilities
(millions)	Sep 30, 2014		Dec 31, 2013
Regulatory assets:
Regulatory tax asset ⁽¹⁾	$	69.1	$	67.4
Other:
Cost-recovery clauses		9.3		6.1
Postretirement benefit asset ⁽²⁾		194.1		182.7
Deferred bond refinancing costs ⁽³⁾		9.2		8.0
Debt basis adjustment ⁽³⁾		21.7		0.0
Environmental remediation		52.3		51.4
Competitive rate adjustment		2.6		4.1
Other		8.2		7.7
Total other regulatory assets		297.4		260.0
Total regulatory assets		366.5		327.4
Less: Current portion		24.3		34.3
Long-term regulatory assets	$	342.2	$	293.1
Regulatory liabilities:
Regulatory tax liability ⁽¹⁾	$	6.7	$	9.8
Other:
Cost-recovery clauses		34.6		54.5
Transmission and delivery storm reserve		56.1		56.1
Deferred gain on property sales ⁽⁴⁾		1.1		2.0
Accumulated reserve - cost of removal		693.6		594.0
Other		0.9		0.8
Total other regulatory liabilities		786.3		707.4
Total regulatory liabilities		793.0		717.2
Less: Current portion		65.8		85.8
Long-term regulatory liabilities	$	727.2	$	631.4

(1)	Primarily related to plant life and derivative positions.

(2)	Amortized over remaining service life of plan participants.

(3)	Amortized over the term of the related debt instruments.

(4)	Amortized over a 5-year period with various ending dates.

All regulatory assets are recovered through the regulatory process. The following table further details the regulatory assets and the related recovery periods:

Regulatory Assets
	Sep 30,		Dec 31,
(millions)	2014		2013
Clause recoverable ⁽¹⁾	$	11.9	$	10.2
Components of rate base ⁽²⁾		199.3		185.6
Regulatory tax assets ⁽³⁾		69.1		67.4
Capital structure and other ⁽³⁾		86.2		64.2
Total	$	366.5	$	327.4

(1)	To be recovered through cost-recovery mechanisms approved by the FPSC on a dollar-for-dollar basis in the next year.

(2)	Primarily reflects allowed working capital, which is included in rate base and earns a rate of return as permitted by the FPSC.

(3)

“Regulatory tax assets” and “Capital structure and other” regulatory assets have a recoverable period longer than a fiscal year and are recognized over the period authorized by the regulatory agency. Also included are unamortized loan costs, which are amortized over the life of the related debt instruments. See footnotes 1 and 2 in the prior table for additional information.

Tampa Electric Company [Member]

Regulatory

3. Regulatory

Tampa Electric’s and PGS’s retail businesses are regulated by the FPSC. Tampa Electric is also subject to regulation by the FERC under PUHCA 2005. However, pursuant to a waiver granted in accordance with the FERC’s regulations, TECO Energy is not subject to certain accounting, record-keeping and reporting requirements prescribed by the FERC’s regulations under PUHCA 2005. The operations of PGS are regulated by the FPSC separately from the operations of Tampa Electric. The FPSC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the FPSC sets rates at a level that allows utilities such as Tampa Electric and PGS to collect total revenues (revenue requirements) equal to their cost of providing service, plus a reasonable return on invested capital.

Storm Damage Cost Recovery

Regulatory Assets and Liabilities

Tampa Electric and PGS maintain their accounts in accordance with recognized policies of the FPSC. In addition, Tampa Electric maintains its accounts in accordance with recognized policies prescribed or permitted by the FERC.

Tampa Electric and PGS 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; and 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.

Details of the regulatory assets and liabilities as of Sept. 30, 2014 and Dec. 31, 2013 are presented in the following table:

Regulatory Assets and Liabilities
(millions)	Sep 30, 2014		Dec 31, 2013
Regulatory assets:
Regulatory tax asset ⁽¹⁾	$	68.6	$	67.4
Other:
Cost-recovery clauses		8.0		6.1
Postretirement benefit asset ⁽²⁾		187.8		182.7
Deferred bond refinancing costs⁽³⁾		7.4		8.0
Environmental remediation		52.3		51.4
Competitive rate adjustment		2.6		4.1
Other		7.9		7.7
Total other regulatory assets		266.0		260.0
Total regulatory assets		334.6		327.4
Less: Current portion		22.9		34.3
Long-term regulatory assets	$	311.7	$	293.1
Regulatory liabilities:
Regulatory tax liability⁽¹⁾	$	5.3	$	9.8
Other:
Cost-recovery clauses		33.1		54.5
Transmission and delivery storm reserve		56.1		56.1
Deferred gain on property sales ⁽⁴⁾		1.1		2.0
Accumulated reserve - cost of removal		591.5		594.0
Other		0.9		0.8
Total other regulatory liabilities		682.7		707.4
Total regulatory liabilities		688.0		717.2
Less: Current portion		64.5		85.8
Long-term regulatory liabilities	$	623.5	$	631.4

(1)	Primarily related to plant life and derivative positions.

(2)	Amortized over the remaining service life of plan participants.

(3)	Amortized over the term of the related debt instruments.

(4)	Amortized over a 5-year period with various ending dates.

All regulatory assets are recovered through the regulatory process. The following table further details the regulatory assets and the related recovery periods:

Regulatory Assets
	Sep 30,		Dec 31,
(millions)	2014		2013
Clause recoverable ⁽¹⁾	$	10.6	$	10.2
Components of rate base ⁽²⁾		190.9		185.6
Regulatory tax assets ⁽³⁾		68.6		67.4
Capital structure and other ⁽³⁾		64.5		64.2
Total	$	334.6	$	327.4

(1)	To be recovered through cost-recovery mechanisms approved by the FPSC on a dollar-for-dollar basis in the next year.

(2)	Primarily reflects allowed working capital, which is included in rate base and earns a rate of return as permitted by the FPSC.

(3)