10-K 1 te-10k_20151231.htm 10-K te-10k_20151231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2015

OR

¨

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

  

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

TECO Energy, Inc.

 

 

Common Stock, $1.00 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if TECO Energy, Inc. is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  x    NO  ¨

Indicate by check mark if Tampa Electric Company is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  ¨    NO  x

Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

YES  ¨    NO  x

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  x    NO  ¨


Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, 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  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

x

  

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

 

x

  

Smaller reporting company

 

¨

Indicate by check mark whether TECO Energy, Inc. is a shell company (as defined in Rule 12b-2 of the Act).

YES  ¨    NO  x

Indicate by check mark whether Tampa Electric Company is a shell company (as defined in Rule 12b-2 of the Act).

YES  ¨    NO  x

The aggregate market value of TECO Energy, Inc.’s common stock held by non-affiliates of the registrant as of June 30, 2015 was approximately $4.10 billion based on the closing sale price as reported on the New York Stock Exchange.

The aggregate market value of Tampa Electric Company’s common stock held by non-affiliates of the registrant as of June 30, 2015 was zero.

The number of shares of TECO Energy, Inc.’s common stock outstanding as of Feb. 12, 2016 was 235,494,800. As of Feb. 12, 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 (I) (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.

This combined Form 10-K 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. Tampa Electric Company makes no representations as to the information relating to TECO Energy, Inc.’s other operations.

 

 

 

 

 


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

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 with and into TECO Energy, with TECO Energy as the surviving corporation

Merger Agreement

 

Agreement and Plan of Merger dated Sept. 4, 2015, by and among TECO Energy, Emera and Merger Sub

Merger Sub

 

Emera US Inc., a Florida corporation

MMA

 

The Medicare Prescription Drug, Improvement and Modernization Act of 2003

3


Term

  

Meaning

MMBTU

 

one million British Thermal Units

MRV

 

market-related value

MSHA

 

Mine Safety and Health Administration

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

NOx

 

nitrogen oxide

NPNS

 

normal purchase normal sale

NYMEX

 

New York Mercantile Exchange

O&M expenses

 

operations and maintenance expenses

OCI

 

other comprehensive income

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

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.

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

 

 

 

4


PART I

 

 

Item 1. BUSINESS.

TECO ENERGY

TECO Energy, Inc. was incorporated in Florida in 1981 as part of a restructuring in which it became the parent corporation of Tampa Electric Company. TECO Energy is a holding company for regulated utilities and other businesses. TECO Energy currently owns no operating assets but holds all of the common stock of TEC and, through its subsidiary, NMGI, owns NMGC. TECO Energy and its subsidiaries had approximately 3,713 employees as of Dec. 31, 2015.

TECO Energy’s Corporate Governance Guidelines, the charter of each committee of the Board of Directors, and the code of ethics applicable to all directors, officers and employees, the Code of Ethics and Business Conduct, are available on the Investors section of TECO Energy’s website, www.tecoenergy.com, or in print free of charge to any investor who requests the information. TECO Energy also makes its SEC (www.sec.gov) filings available free of charge on the Investors section of TECO Energy’s website as soon as reasonably practicable after they are filed with or furnished to the SEC. The public may read and copy any reports or other information that the company files with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Unless otherwise indicated by the context, “TECO Energy” or the “company” means the holding company, TECO Energy, Inc. and its subsidiaries, and references to individual subsidiaries of TECO Energy, Inc. refer to that company and its respective subsidiaries. TECO Energy’s business segments and revenues for those segments, for the years indicated, are identified below.

TEC, a Florida corporation and TECO Energy’s largest subsidiary, has two business segments. Its Tampa Electric division provides retail electric service to almost 719,000 customers in West Central Florida with a net winter system generating capacity of 4,730 MW. PGS, the gas division of TEC, is engaged in the purchase, distribution and sale of natural gas for residential, commercial, industrial and electric power generation customers in Florida. With approximately 361,000 customers, PGS has operations in Florida’s major metropolitan areas. Annual natural gas throughput (the amount of gas delivered to its customers, including transportation-only service) in 2015 was approximately 1.8 billion therms.

NMGC, a Delaware corporation and wholly owned subsidiary of NMGI, was acquired by the company on Sept. 2, 2014. NMGC is engaged in the purchase, distribution and sale of natural gas for residential, commercial and industrial customers in New Mexico. With more than 516,000 customers, NMGC serves approximately 60% of the state’s population in 23 of New Mexico’s 33 counties. NMGC’s largest concentration of customers (approximately 360,000) is in the region known as the Central Rio Grande Corridor, which includes the communities of Albuquerque, Belen, Rio Rancho and Santa Fe. NMGC’s 2014 results are included as of the acquisition date (see Note 21 to the TECO Energy Consolidated Financial Statements for additional information).

Revenues from Continuing Operations

 

(millions)

 

2015

 

 

2014

 

 

2013

 

Tampa Electric

 

$

2,018.3

 

 

$

2,021.0

 

 

$

1,950.5

 

PGS

 

 

407.5

 

 

 

399.6

 

 

 

393.5

 

NMGC

 

 

316.5

 

 

 

137.5

 

 

 

0.0

 

Total regulated businesses

 

 

2,742.3

 

 

 

2,558.1

 

 

 

2,344.0

 

Other

 

 

1.2

 

 

 

8.3

 

 

 

11.1

 

Total revenues from continuing operations

 

$

2,743.5

 

 

$

2,566.4

 

 

$

2,355.1

 

For additional financial information regarding TECO Energy’s significant business segments including geographic areas, see Note 14 to the TECO Energy Consolidated Financial Statements.

Pending Merger with Emera

On Sept. 4, 2015, TECO Energy and Emera entered into the Merger Agreement. Upon closing, which is expected to occur in the summer of 2016, TECO Energy will become a wholly owned indirect subsidiary of Emera. Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding share of TECO Energy common stock will be cancelled and converted automatically into the right to receive $27.55 in cash, without interest. This represents an aggregate purchase price of approximately $10.4 billion including assumption of approximately $3.9 billion of debt. See Note 21 to the TECO Energy Consolidated Financial Statements for further information regarding the pending Merger.

5


Acquisition of NMGI

On Sept. 2, 2014, the company completed the acquisition contemplated by the acquisition agreement dated May 25, 2013 by and among the company, NMGI and Continental Energy Systems LLC. As a result of that acquisition, the company acquired all of the capital stock of NMGI. NMGI, which was incorporated in the State of Delaware in 2008, is the parent company of NMGC. The aggregate purchase price was $950 million, which included the assumption of $200 million of senior secured notes at NMGC, plus certain working capital adjustments. See Note 21 to the TECO Energy Consolidated Financial Statements for more information regarding the acquisition.

Discontinued Operations/Asset Dispositions

TECO Guatemala, a Florida corporation, owned subsidiaries that participated in two contracted Guatemalan power plants, Alborada and San José. TECO Energy completed the sale of its generating and transmission assets in Guatemala during 2012 as part of a business strategy to focus on its domestic electric and gas utilities. While TECO Energy and its subsidiaries no longer have assets or operations in Guatemala, TECO Guatemala Holdings, a wholly owned subsidiary of TECO Energy, has retained its rights under an arbitration claim against the Republic of Guatemala under the DR-CAFTA.  

On Sept. 21, 2015, TECO Diversified entered into an agreement and completed the sale of all of its ownership interest in TECO Coal to Cambrian. TECO Coal, a Kentucky LLC and formerly wholly owned subsidiary of TECO Diversified, had subsidiaries which owned assets in Eastern Kentucky, Tennessee and Virginia. These entities owned mineral rights, owned or operated surface and underground mines and owned interests in coal processing and loading facilities.

See Notes 12 and 19 to the TECO Energy Consolidated Financial Statements for more information regarding these discontinued operations and asset dispositions.

TAMPA ELECTRIC – Electric Operations

TEC was incorporated in Florida in 1899 and was reincorporated in 1949. TEC is a public utility operating within the State of Florida. Its Tampa Electric division is engaged in the generation, purchase, transmission, distribution and sale of electric energy. The retail territory served comprises an area of about 2,000 square miles in West Central Florida, including Hillsborough County and parts of Polk, Pasco and Pinellas Counties. The principal communities served are Tampa, Temple Terrace, Winter Haven, Plant City and Dade City. In addition, Tampa Electric engages in wholesale sales to utilities and other resellers of electricity. It has two electric generating stations in or near Tampa and one electric generating station in southwestern Polk County, Florida.

Tampa Electric had 2,063 employees as of Dec. 31, 2015, of which 844 were represented by the International Brotherhood of Electrical Workers and 164 were represented by the Office and Professional Employees International Union.

In 2015, Tampa Electric’s total operating revenue was derived approximately 52% from residential sales, 30% from commercial sales, 8% from industrial sales and 10% from other sales, including bulk power sales for resale. The sources of operating revenue and MWH sales for the years indicated were as follows:

Operating Revenue

 

(millions)

 

2015

 

 

2014

 

 

2013

 

Residential

 

$

1,040.3

 

 

$

1,007.6

 

 

$

936.8

 

Commercial

 

 

608.0

 

 

 

602.0

 

 

 

581.2

 

Industrial – Phosphate

 

 

53.1

 

 

 

59.9

 

 

 

71.9

 

Industrial – Other

 

 

107.1

 

 

 

104.6

 

 

 

100.4

 

Other retail sales of electricity

 

 

177.2

 

 

 

181.9

 

 

 

177.4

 

Total retail

 

 

1,985.7

 

 

 

1,956.0

 

 

 

1,867.7

 

Sales for resale

 

 

3.7

 

 

 

13.0

 

 

 

8.5

 

Other

 

 

28.9

 

 

 

52.0

 

 

 

74.3

 

Total operating revenues

 

$

2,018.3

 

 

$

2,021.0

 

 

$

1,950.5

 

6


Megawatt- hour Sales

 

(thousands)

 

2015

 

 

2014

 

 

2013

 

Residential

 

 

9,045

 

 

 

8,656

 

 

 

8,470

 

Commercial

 

 

6,301

 

 

 

6,142

 

 

 

6,090

 

Industrial

 

 

1,870

 

 

 

1,901

 

 

 

2,026

 

Other retail sales of electricity

 

 

1,791

 

 

 

1,827

 

 

 

1,832

 

Total retail

 

 

19,007

 

 

 

18,526

 

 

 

18,418

 

Sales for resale

 

 

115

 

 

 

259

 

 

 

222

 

Total energy sold

 

 

19,122

 

 

 

18,785

 

 

 

18,640

 

No significant part of Tampa Electric’s business is dependent upon a single or limited number of customers where the loss of any one or more would have a significant adverse effect on Tampa Electric. Tampa Electric’s business is not highly seasonal, but winter peak loads are experienced due to electric space heating, fewer daylight hours and colder temperatures and summer peak loads are experienced due to the use of air conditioning and other cooling equipment.

Regulation

Tampa Electric’s retail operations are regulated by the FPSC, which has jurisdiction over retail rates, quality of service and reliability, issuances of securities, planning, siting and construction of facilities, accounting and depreciation practices and other matters.

In general, the FPSC’s pricing objective is to set rates at a level that provides an opportunity for the utility to collect total revenues (revenue requirements) equal to its cost to provide service, plus a reasonable return on invested capital.

The costs of owning, operating and maintaining the utility systems, excluding fuel and conservation costs as well as purchased power and certain environmental costs for the electric system, are recovered through base rates. These costs include O&M expenses, depreciation and taxes, as well as a return on investment in assets used and useful in providing electric service (rate base). The rate of return on rate base, which is intended to approximate the individual company’s weighted cost of capital, primarily includes its costs for debt, deferred income taxes (at a zero cost rate) and an allowed ROE. Base rates are determined in FPSC revenue requirement and rate setting hearings which occur at irregular intervals at the initiative of Tampa Electric, the FPSC or other interested parties.

Tampa Electric’s results for  2015, 2014 and the last two months of 2013 reflect the results of a Stipulation and Settlement Agreement entered on Sept. 6, 2013, between Tampa Electric and all of the intervenors in its Tampa Electric division base rate proceeding, which resolved all matters in Tampa Electric’s 2013 base rate proceeding. On Sept. 11, 2013, the FPSC unanimously voted to approve the stipulation and settlement agreement.

This agreement provided for the following revenue increases: $57.5 million effective Nov. 1, 2013, an additional $7.5 million effective Nov. 1, 2014, an additional $5.0 million effective Nov. 1, 2015, and an additional $110.0 million effective Jan. 1, 2017 or the date that an expansion of Tampa Electric’s Polk Power Station goes into service, whichever is later. The agreement provides that Tampa Electric’s allowed regulatory ROE would be a mid-point of 10.25% with a range of plus or minus 1%, with a potential increase to 10.50% if U.S. Treasury bond yields exceed a specified threshold. The agreement provides that Tampa Electric cannot file for additional rate increases until 2017 (to be effective no sooner than Jan. 1, 2018), unless its earned ROE were to fall below 9.25% (or 9.5% if the allowed ROE is increased as described above) before that time. If its earned ROE were to rise above 11.25% (or 11.5% if the allowed ROE is increased as described above) any party to the agreement other than Tampa Electric could seek a review of its base rates. Under the agreement, the allowed equity in the capital structure is 54% from investor sources of capital, and Tampa Electric also began using a 15-year amortization period for all computer software retroactive to Jan. 1, 2013. Effective Nov. 1, 2013, Tampa Electric ceased accruing $8.0 million annually to the FPSC-approved self-insured storm damage reserve.

Tampa Electric is also subject to regulation by the FERC in various respects, including wholesale power sales, certain wholesale power purchases, transmission and ancillary services and accounting practices.

Non-power goods and services transactions between Tampa Electric and its affiliates are subject to regulation by the FPSC and FERC, and any charges deemed to be imprudently incurred may be disallowed for recovery from Tampa Electric’s retail and wholesale customers, respectively. Given TECO Energy’s acquisition of NMGC, Tampa Electric and TECO Energy jointly requested a waiver from FERC in order for Tampa Electric to continue to supply a de-minimis level of non-power goods and services to its affiliates. TECO Energy separately notified FERC that it would no longer qualify to be considered a single-state holding company under the Public Utility Holding Company Act of 2005 as of Jan. 1, 2015, and thus it had formed a centralized service company, TECO Services, Inc., which would provide other non-power goods and services to Tampa Electric and its affiliates. On Dec. 31, 2014, FERC granted Tampa Electric’s requested waiver without conditions, effective as of Jan. 1, 2015.

7


On June 30, 2014, the company filed its required triennial market-power analysis in support of the company’s continued ability to effect wholesale market-based rate transactions everywhere, except within Tampa Electric’s balancing-authority area. FERC accepted Tampa Electric’s triennial filing on Nov. 24, 2015.

Tampa Electric is also subject to federal, state and local environmental laws and regulations pertaining to air and water quality, land use, power plant, substation and transmission line siting, noise and aesthetics, solid waste and other environmental matters (see the Environmental Compliance section of the MD&A).

Competition

Tampa Electric’s retail electric business is substantially free from direct competition with other electric utilities, municipalities and public agencies. At the present time, the principal form of competition at the retail level consists of self-generation available to larger users of electric energy. Such users may seek to expand their alternatives through various initiatives, including legislative and/or regulatory changes that would permit competition at the retail level. Distributed generation could also be a source of competition in the future, but has not been a significant factor to date (see the Environmental Compliance section of the MD&A). Tampa Electric intends to retain and expand its retail business by managing costs and providing quality service to retail customers.

Unlike the retail electric business, Tampa Electric competes in the wholesale power market with other energy providers in Florida, including approximately 30 other investor-owned, municipal and other utilities, as well as co-generators and other unregulated power generators with uncontracted excess capacity. Entities compete to provide energy on a short-term basis (i.e., hourly or daily) and on a long-term basis. Competition in these markets is primarily based on having available energy to sell to the wholesale market and the price. In Florida, available energy for the wholesale markets is affected by the state’s PPSA, which sets the state’s electric energy and environmental policy, and governs the building of new generation involving steam capacity of 75 MW or more. The PPSA requires that applicants demonstrate that a plant is needed prior to receiving construction and operating permits. The effect of the PPSA has been to limit the number of unregulated generating units with excess capacity for sale in the wholesale power markets in Florida.

Tampa Electric is not a major participant in the wholesale market because it uses its lower-cost generation to serve its retail customers rather than the wholesale market.

FPSC rules promote cost-competitiveness in the building of new steam generating capacity by requiring IOUs, such as Tampa Electric, to issue RFPs prior to filing a petition for Determination of Need for construction of a power plant with a steam cycle greater than 75 MW. These rules, which allow independent power producers and others to bid to supply the new generating capacity, provide a mechanism for expedited dispute resolution, allow bidders to submit new bids whenever the IOU revises its cost estimates for its self-build option, require IOUs to disclose the methodology and criteria to be used to evaluate the bids and provide more stringent standards for the IOUs to recover cost overruns in the event that the self-build option is deemed the most cost-effective.

Fuel

Approximately 52% of Tampa Electric’s generation of electricity for 2015 was natural gas-fired, with coal representing approximately 48%. Tampa Electric used its generating units to meet approximately 94% of the total system load requirements, with the remaining 6% coming from purchased power. Tampa Electric’s average delivered fuel cost per MMBTU and average delivered cost per unit of fuel burned have been as follows:

 

Average cost per MMBTU

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Coal (1)

 

$

3.34

 

 

$

3.48

 

 

$

3.36

 

 

$

3.57

 

 

$

3.46

 

Natural Gas (2)

 

 

4.34

 

 

 

5.68

 

 

 

5.23

 

 

 

5.34

 

 

 

6.20

 

Oil

 

 

22.34

 

 

 

0.00

 

 

 

24.72

 

 

 

23.56

 

 

 

21.21

 

Composite

 

 

3.78

 

 

 

4.16

 

 

 

4.00

 

 

 

4.19

 

 

 

4.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average cost per ton of coal burned

 

$

79.76

 

 

$

83.70

 

 

$

77.79

 

 

$

84.59

 

 

$

83.17

 

(1)

Represents the cost of coal and the costs for transportation.

(2)

Represents the costs of natural gas, transportation, storage, balancing, hedges for the price of natural gas, and fuel losses for delivery to the energy center.

In 2015, Tampa Electric’s generating stations burned fuels as follows: Bayside Station burned natural gas; Big Bend Station, which has SO2 scrubber capabilities and NOx reduction systems, burned a combination of high-sulfur coal and petroleum coke, No. 2 fuel oil and natural gas; and Polk Power Station burned a blend of low-sulfur coal and petroleum coke (which was gasified and subject to sulfur and particulate matter removal prior to combustion), natural gas and oil.

8


Coal. Tampa Electric burned approximately 4.0 million tons of coal and petroleum coke during 2015 and estimates that its combined coal and petroleum coke consumption will be about 4.1 million tons in 2016. During 2015, Tampa Electric purchased approximately 67% of its coal under long-term contracts with five suppliers, and approximately 33% of its coal and petroleum coke in the spot market. Tampa Electric expects to obtain approximately 85% of its coal and petroleum coke requirements in 2016 under long-term contracts with five suppliers and the remaining 15% in the spot market. Tampa Electric has coal transportation agreements with trucking, rail, barge and ocean vessel companies.

Tampa Electric’s long-term contracts provide for revisions in the base price to reflect changes in several important cost factors and for suspension or reduction of deliveries if environmental regulations should prevent Tampa Electric from burning the coal supplied, provided that a good faith effort has been made to continue burning such coal.

In 2015, approximately 84% of Tampa Electric’s coal supply was deep-mined, approximately 7% was surface-mined and the remaining 9% was petroleum coke. Federal surface-mining laws and regulations have not had any material adverse impact on Tampa Electric’s coal supply or results of its operations. Tampa Electric cannot predict, however, the effect of any future mining laws and regulations.

Natural Gas. As of Dec. 31, 2015, approximately 63% of Tampa Electric’s 1,500,000 MMBTU gas storage capacity was full. Tampa Electric has contracted for 78% of its expected gas needs for the April 2016 through October 2016 period. In early March 2016, to meet its generation requirements, Tampa Electric expects to issue RFPs to meet its remaining 2016 gas needs and begin contracting for its 2017 gas needs. Additional volume requirements in excess of projected gas needs are purchased on the short-term spot market.

Oil. Tampa Electric has an agreement in place to purchase low sulfur No. 2 fuel oil for its Big Bend and Polk Power stations. The agreement has pricing that is based on spot indices.

Franchises and Other Rights

Tampa Electric holds franchises and other rights that, together with its charter powers, govern the placement of Tampa Electric’s facilities on the public rights-of-way as it carries for its retail business in the localities it serves. The franchises specify the negotiated terms and conditions governing Tampa Electric’s use of public rights-of-way and other public property within the municipalities it serves during the term of the franchise agreement. The franchises are irrevocable and not subject to amendment without the consent of Tampa Electric (except to the extent certain city ordinances relating to permitting and like matters are modified from time to time), although, in certain events, they are subject to forfeiture.

Florida municipalities are prohibited from granting any franchise for a term exceeding 30 years. The City of Temple Terrace reserved the right to purchase Tampa Electric’s property used in the exercise of its franchise if the franchise is not renewed. In the absence of such right to purchase caused by non-renewal, Tampa Electric would be able to continue to use public rights-of-way within the municipality based on judicial precedent, subject to reasonable rules and regulations imposed by the municipalities.

Tampa Electric has franchise agreements with 13 incorporated municipalities within its retail service area. These agreements have various expiration dates ranging from September 2017 through August 2043.

Franchise fees expense totaled $46.5 million in 2015. Franchise fees are calculated using a formula based primarily on electric revenues and are collected on customers’ bills.

Utility operations in Hillsborough, Pasco, Pinellas and Polk Counties outside of incorporated municipalities are conducted in each case under one or more permits to use state or county rights-of-way granted by the Florida Department of Transportation or the County Commissioners of such counties. There is no law limiting the time for which such permits may be granted by counties. There are no fixed expiration dates for the Hillsborough County, Pinellas County and Polk County agreements. The agreement covering electric operations in Pasco County expires in 2023.

Environmental Matters

Tampa Electric operates stationary sources with air emissions regulated by the Clean Air Act, and material Clean Water Act implications and impacts by federal and state legislative initiatives. TEC, through its Tampa Electric and PGS divisions, is a PRP for certain superfund sites and, through its PGS division, for certain former manufactured gas plant sites. See Environmental Compliance section of the MD&A for additional information.

9


Capital Expenditures

Tampa Electric’s 2015 capital expenditures included approximately $18 million related to environmental compliance and improvement programs, primarily for electrostatic precipitator and scrubber improvements, SCR catalyst replacements and modifications to coal combustion by-product storage areas at the Big Bend Power Station. See the Liquidity, Capital Expenditures section of MD&A for information on estimated future capital expenditures related to environmental compliance.

PEOPLES GAS SYSTEM – Gas Operations

PGS operates as the gas division of TEC. PGS is engaged in the purchase, distribution and sale of natural gas for residential, commercial, industrial and electric power generation customers in the state of Florida.

Gas is delivered to the PGS system through three interstate pipelines. PGS does not engage in the exploration for or production of natural gas. PGS operates a natural gas distribution system that serves approximately 361,000 customers. The system includes approximately 12,100 miles of mains and 6,900 miles of service lines (see PGS’s Franchises and Other Rights section below).

PGS had 533 employees as of Dec. 31, 2015. A total of 140 employees in five of PGS’s 14 operating divisions and call center are represented by various union organizations.

In 2015, the total throughput for PGS was approximately 1.8 billion therms. Of this total throughput, 6% was gas purchased and resold to retail customers by PGS, 85% was third-party supplied gas that was delivered for retail transportation-only customers and 9% was gas sold off-system. Industrial and power generation customers consumed approximately 60% of PGS’s annual therm volume, commercial customers consumed approximately 27%, off-system sales customers consumed 9% and the remaining balance was consumed by residential customers.

While the residential market represents only a small percentage of total therm volume, residential operations comprised about 35% of total revenues.

Natural gas has historically been used in many traditional industrial and commercial operations throughout Florida, including production of products such as steel, glass, ceramic tile and food products. Within the PGS operating territory, large cogeneration facilities utilize gas-fired technology in the production of electric power and steam. PGS has also seen increased interest and development in natural gas vehicles. There are 42 compressed natural gas filling stations connected to the PGS distribution system. See the Outlook and PGS Operating Results sections of the MD&A for information on the impact of natural gas vehicles on PGS’ operations.

Revenues and therms for PGS for the years ended Dec. 31 were as follows:

 

 

 

Revenues

 

 

Therms

 

(millions)

 

2015

 

 

2014

 

 

2013

 

 

2015

 

 

2014

 

 

2013

 

Residential

 

$

137.0

 

 

$

144.1

 

 

$

128.1

 

 

 

74.9

 

 

 

80.8

 

 

 

74.4

 

Commercial

 

 

138.8

 

 

 

139.1

 

 

 

133.4

 

 

 

470.8

 

 

 

460.5

 

 

 

438.1

 

Industrial

 

 

13.0

 

 

 

13.1

 

 

 

13.4

 

 

 

289.0

 

 

 

274.3

 

 

 

272.0

 

Off system sales

 

 

49.8

 

 

 

39.4

 

 

 

56.7

 

 

 

166.4

 

 

 

84.0

 

 

 

143.1

 

Power generation

 

 

7.2

 

 

 

6.8

 

 

 

9.9

 

 

 

758.3

 

 

 

643.5

 

 

 

744.4

 

Other revenues

 

 

50.5

 

 

 

48.5

 

 

 

42.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

396.3

 

 

$

391.0

 

 

$

383.7

 

 

 

1,759.4

 

 

 

1,543.1

 

 

 

1,672.0

 

No significant part of PGS’s business is dependent upon a single or limited number of customers where the loss of any one or more would have a significant adverse effect on PGS. PGS’s business is not highly seasonal, but winter peak throughputs are experienced due to colder temperatures.

Regulation

The operations of PGS are regulated by the FPSC separately from the regulation 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 seeks to set rates at a level that provides an opportunity for a utility such as PGS to collect total revenues (revenue requirements) equal to its cost of providing service, plus a reasonable return on invested capital.

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The basic costs of providing natural gas service, other than the costs of purchased gas and interstate pipeline capacity, are recovered through base rates. Base rates are designed to recover the costs of owning, operating and maintaining the utility system. The rate of return on rate base, which is intended to approximate PGS’s weighted cost of capital, primarily includes its cost for debt, deferred income taxes at a zero cost rate, and an allowed ROE. Base rates are determined in FPSC revenue requirements proceedings which occur at irregular intervals at the initiative of PGS, the FPSC or other parties. For a description of recent proceeding activity, see the Regulation-PGS Rates section of the MD&A.

PGS’s results reflect base rates established in May 2009, when the FPSC approved a base rate increase of $19.2 million which became effective on June 18, 2009 and reflects an ROE of 10.75%, which is the middle of a range between 9.75% and 11.75%. The allowed equity in capital structure is 54.7% from all investor sources of capital, on an allowed rate base of $560.8 million.

PGS recovers the costs it pays for gas supply and interstate transportation for system supply through the PGA clause. This charge is designed to recover the costs incurred by PGS for purchased gas, and for holding and using interstate pipeline capacity for the transportation of gas it delivers to its customers. These charges may be adjusted monthly based on a cap approved annually in an FPSC hearing. The cap is based on estimated costs of purchased gas and pipeline capacity, and estimated customer usage for a calendar year recovery period, with a true-up adjustment to reflect the variance of actual costs and usage from the projected charges for prior periods. In November 2015, the FPSC approved PGS’s 2016 PGA cap factor for the period January 2016 through December 2016.

In addition to its base rates and PGA clause charges, PGS customers (except interruptible customers) also pay a per-therm charge for energy conservation and pipeline replacement programs. The conservation charge is intended to permit PGS to recover, on a dollar-for-dollar basis, prudently incurred expenditures in developing and implementing cost effective energy conservation programs which are mandated by Florida law and approved and monitored by the FPSC. PGS is also permitted to earn a return, depreciation expenses and applicable taxes associated with the replacement of cast iron/bare steel infrastructure. PGS projects to have all cast iron and bare steel pipe removed from its system within seven years. Lastly, the FPSC requires natural gas utilities to offer transportation-only service to all non-residential customers.

In addition to economic regulation, PGS is subject to the FPSC’s safety jurisdiction, pursuant to which the FPSC regulates the construction, operation and maintenance of PGS’s distribution system. In general, the FPSC has implemented this by adopting the Minimum Federal Safety Standards and reporting requirements for pipeline facilities and transportation of gas prescribed by the U.S. Department of Transportation in Parts 191, 192 and 199, Title 49, of the Code of Federal Regulations.

PGS is also subject to federal, state and local environmental laws and regulations pertaining to air and water quality, land use, noise and aesthetics, solid waste and other environmental matters (see the Environmental Compliance section of the MD&A).

Competition

Although PGS is not in direct competition with any other regulated distributors of natural gas for customers within its service areas, there are other forms of competition. At the present time, the principal form of competition for residential and small commercial customers is from companies providing other sources of energy, including electricity, propane and fuel oil. PGS has taken actions to retain and expand its commodity and transportation business, including managing costs and providing high quality service to customers.

In Florida, gas service is unbundled for all non-residential customers. PGS has a “NaturalChoice” program, offering unbundled transportation service to all non-residential customers, as well as residential customers consuming in excess of 1,999 therms annually, allowing these customers to purchase commodity gas from a third party but continue to pay PGS for the transportation. As a result, PGS receives its base rate for distribution regardless of whether a customer decides to opt for transportation-only service or continue bundled service. PGS had approximately 23,300 transportation-only customers as of Dec. 31, 2015 out of approximately 37,600 eligible customers.

Competition is most prevalent in the large commercial and industrial markets. In recent years, these classes of customers have been targeted by companies seeking to sell gas directly by transporting gas through other facilities and thereby bypassing PGS facilities. In response to this competition, PGS has developed various programs, including the provision of transportation-only services at discounted rates.

Gas Supplies

PGS purchases gas from various suppliers depending on the needs of its customers. The gas is delivered to the PGS distribution system through three interstate pipelines on which PGS has reserved firm transportation capacity for delivery by PGS to its customers.

11


Gas is delivered by FGT through 69 interconnections (gate stations) serving PGS’s operating divisions. In addition, PGS’s Jacksonville division receives gas delivered by a pipeline company through two gate stations located northwest of Jacksonville. Another pipeline company provides delivery through six gate stations. PGS also has one interconnection with its affiliate pipeline company in Clay County, Florida.

Companies with firm pipeline capacity receive priority in scheduling deliveries during times when the pipeline is operating at its maximum capacity. PGS presently holds sufficient firm capacity to permit it to meet the gas requirements of its system commodity customers, except during localized emergencies affecting the PGS distribution system and on abnormally cold days.

Firm transportation rights on an interstate pipeline represent a right to use the amount of the capacity reserved for transportation of gas on any given day. PGS pays reservation charges on the full amount of the reserved capacity whether or not it actually uses such capacity on any given day. When the capacity is actually used, PGS pays a volumetrically-based usage charge for the amount of the capacity actually used. The levels of the reservation and usage charges are regulated by the FERC. PGS actively markets any excess capacity available on a day-to-day basis to partially offset costs recovered through the PGA clause.

PGS procures natural gas supplies using base-load and swing-supply contracts with various suppliers along with spot market purchases. Pricing generally takes the form of either a variable price based on published indices or a fixed price for the contract term.

Neither PGS nor any of the interconnected interstate pipelines have storage facilities in Florida. PGS occasionally faces situations when the demands of all of its customers for the delivery of gas cannot be met. In these instances, it is necessary that PGS interrupt or curtail deliveries to its interruptible customers. In general, the largest of PGS’s industrial customers are in the categories that are first curtailed in such situations. PGS’s tariff and transportation agreements with these customers give PGS the right to divert these customers’ gas to other higher priority users during the period of curtailment or interruption. PGS pays these customers for such gas at the price they paid their suppliers or at a published index price, and in either case pays the customer for charges incurred for interstate pipeline transportation to the PGS system.

Franchises and Other Rights

PGS holds franchise and other rights with 116 municipalities and districts throughout Florida. These franchises govern the placement of PGS’s facilities on the public rights-of-way as it carries on its retail business in the localities it serves. The franchises specify the negotiated terms and conditions governing PGS’s use of public rights-of-way and other public property within the municipalities it serves during the term of the franchise agreement. The franchises are irrevocable and are not subject to amendment without the consent of PGS, although in certain events they are subject to forfeiture.

Municipalities are prohibited from granting any franchise for a term exceeding 30 years. Several franchises contain purchase options with respect to the purchase of PGS’s property located in the franchise area, if the franchise is not renewed; otherwise, based on judicial precedent, PGS is able to keep its facilities in place subject to reasonable rules and regulations imposed by the municipalities.

PGS’s franchise agreements have various expiration dates ranging from the present through 2044. PGS expects to negotiate twelve franchises in 2016. Franchise fees expense totaled $8.8 million in 2015. Franchise fees are calculated using various formulas which are based principally on natural gas revenues. Franchise fees are collected from only those customers within each franchise area.

Utility operations in areas outside of incorporated municipalities and districts are conducted in each case under one or more permits to use state or county rights-of-way granted by the Florida Department of Transportation or the county commission of such counties. There is no law limiting the time for which such permits may be granted by counties. There are no fixed expiration dates, and these rights are, therefore, considered perpetual.

Environmental Matters

PGS’s operations are subject to federal, state and local statutes, rules and regulations relating to the discharge of materials into the environment and the protection of the environment that generally require monitoring, permitting and ongoing expenditures. TEC is one of several PRPs for certain superfund sites and, through PGS, for former manufactured gas plant sites. See Note 12 to the TECO Energy Consolidated Financial Statements and the Environmental Compliance section of the MD&A for additional information.

Capital Expenditures

During the year ended Dec. 31, 2015, PGS did not incur any material capital expenditures to meet environmental requirements, nor are any anticipated for the 2016 through 2020 period.

12


NEW MEXICO GAS COMPANY

NMGC is engaged in the purchase, distribution and sale of natural gas for residential, commercial and industrial customers in the state of New Mexico. NMGC had approximately 700 employees as of Dec. 31, 2015.

NMGC operates a natural gas distribution system that serves more than 516,000 customers. The system includes approximately 1,600 miles of transmission pipeline, 10,200 miles of mains and 521,400 service lines (see NMGC’s Franchises and Other Rights section below). NMGC’s system interconnects with five interstate pipelines.

For 2015, the total throughput for NMGC was over 775 million therms. Of this total throughput, 52% was gas purchased and resold to retail customers by NMGC, 42% was third-party supplied gas that was delivered for retail transportation-only customers and 6% was gas sold or transported off‑system. Industrial and power generation customers consumed approximately 26% of NMGC’s 2015 annual therm volume, commercial customers consumed approximately 30%, off-system transportation customers consumed 6% and the remaining balance was consumed by residential customers, which represents approximately 38% of total annual therm volume and 72% of NMGC’s total annual revenues.

Revenues and therms for NMGC for the years ended Dec. 31, 2015 and 2014 were as follows:

 

 

 

Revenues

 

 

Therms

 

(millions)

 

2015

 

 

2014 (1)

 

 

2015

 

 

2014 (1)

 

Residential

 

$

229.2

 

 

$

281.0

 

 

 

291.2

 

 

 

284.4

 

Commercial

 

 

59.6

 

 

 

83.0

 

 

 

104.4

 

 

 

108.9

 

Industrial

 

 

1.2

 

 

 

1.9

 

 

 

2.5

 

 

 

3.0

 

Off system sales

 

 

0.3

 

 

 

2.2

 

 

 

1.2

 

 

 

4.2

 

On system transportation

 

 

19.1

 

 

 

19.3

 

 

 

328.7

 

 

 

329.7

 

Off system transportation

 

 

0.9

 

 

 

0.9

 

 

 

47.2

 

 

 

47.0

 

Other revenues

 

 

6.2

 

 

 

6.5

 

 

 

 

 

 

 

 

 

Total

 

$

316.5

 

 

$

394.8

 

 

 

775.2

 

 

 

777.2

 

(1)

The full period information presented for 2014 is for comparative purposes only, as TECO Energy’s ownership began on the acquisition date of Sept. 2, 2014.

No significant part of NMGC’s business is dependent upon a single or limited number of customers where the loss of any one or more would have a significant adverse effect on NMGC. NMGC’s business is seasonal with much higher volumes and revenues experienced during colder winter months.

Regulation

The operations of NMGC are regulated by the NMPRC. The NMPRC has jurisdiction over rates, service, issuance of securities, safety, accounting and depreciation practices and other matters. In general, the NMPRC seeks to set rates at a level that provides an opportunity for a utility such as NMGC to collect total revenues (revenue requirements) equal to its cost of providing service, plus a reasonable return on invested capital.

The basic costs of providing natural gas service, other than the costs of purchased gas, gas storage services and interstate pipeline capacity, are recovered through base rates. Base rates are designed to recover the costs of owning, operating and maintaining the utility system. The rate of return on rate base, which is intended to approximate NMGC's weighted cost of capital, primarily includes its cost for long-term debt and an allowed ROE. Base rates are determined in NMPRC revenue requirements proceedings which occur at irregular intervals at the initiative of NMGC, the NMPRC or other parties. For a description of recent proceeding activity, see the Regulation-NMGC Rates section of MD&A.

13


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 a condition of the August 2014 NMPRC order approving the TECO Energy acquisition of NMGC, the rates were frozen at the approved 2012 levels until the end of 2017. In addition, under the order, NMGC provided $2.0 million of pretax credits on customer bills for the first 12-month period post-closing, effective Oct. 1, 2014, and will provide $4.0 million of pretax credits to customers in each subsequent 12-month period until new base rates are effective, as reported in Note 21 to the TECO Energy Consolidated Financial Statements.

NMGC recovers the costs it pays for gas supply and interstate transportation for system supply through the PGAC.  This charge is designed to recover the costs incurred by NMGC for purchased gas, gas storage services, interstate pipeline capacity, and other related items associated with the purchase, distribution, and sale of natural gas to its customers.  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 also has regulatory authority to include a simple interest charge or credit based upon the month-end balance of the PGAC under-recovery or over-recovery of NMGC’s cost of gas.  NMGC’s annual PGAC period runs from Sept. 1 to Aug. 31.  The NMPRC requires that NMGC file a 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 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 allowing for continued use of the PGAC for another four years. NMGC plans to file its next PGAC Continuation Filing in June 2016 for the four-year period ending December 2020.

In addition to its base rates and PGAC, NMGC’s residential customers and customers utilizing NMGC’s small and medium volume general services also pay a per-therm charge for energy conservation. The conservation charge is intended to permit NMGC to recover, on a dollar-for-dollar basis, prudently incurred expenditures in developing and implementing cost effective energy conservation programs which are approved and monitored by the NMPRC. The NMPRC requires natural gas utilities to offer transportation-only service to all customer classes.

In addition to economic regulation, NMGC is subject to the NMPRC's safety jurisdiction, pursuant to which the NMPRC regulates the construction, operation and maintenance of NMGC's distribution system. In general, the NMPRC has implemented this by adopting the Minimum Federal Safety Standards and reporting requirements for pipeline facilities and transportation of gas prescribed by the U.S. Department of Transportation in Parts 191, 192 and 199, Title 49, Code of Federal Regulations.

NMGC is also subject to federal, state and local environmental laws and regulations pertaining to air and water quality, land use, noise and aesthetics, solid waste and other environmental matters (see the Environmental Matters section).

Competition

Although NMGC is not in direct competition with any other regulated distributors of natural gas for customers within its service areas, there are other forms of competition. At the present time, the principal form of competition for residential and small commercial customers is from companies providing other sources of energy, including electricity, propane and fuel oil. NMGC has taken actions to retain and expand its commodity and transportation business, including managing costs and providing high quality service to customers.

Pursuant to New Mexico statutes and NMPRC rules and regulations, NMGC is required to provide transportation-only services for all customer classes. NMGC receives its base rates for distribution gas delivery services regardless of whether a customer decides to opt for transportation-only service or elect NMGC’s gas commodity sales service. During the year ended Dec. 31, 2015, NMGC had approximately 4,100 transportation-only end-use customers and approximately 512,000 gas commodity sales service customers.  Transportation-only throughput represented 48.5% of total system throughput and 6.3% of total revenue for the year ended Dec. 31, 2015.

Competition for natural gas services is most prevalent in the large commercial and industrial markets. In recent years, these classes of customers have been targeted by companies seeking to sell gas directly by transporting gas through other transmission and distribution providers and thereby bypassing NMGC transmission and distribution facilities. In response to this competition, NMGC has developed programs, including providing transportation-only services at discounted rates.

14


Gas Supplies

NMGC’s service territory is situated between two large natural gas production basins (the San Juan Basin to the northwest of NMGC’s service territory and the Permian Basin to the southeast of NMGC’s service territory).  Natural gas is transported from these production basins on major interstate pipelines to NMGC’s intrastate transmission system and then to customers using its distribution system.  The San Juan Basin typically supplies 85% of NMGC’s gas supply, with the Permian Basin supplying most of the remaining balance. NMGC also sources gas from the Piceance Basin in western Colorado and the Green River Basin in Wyoming.

NMGC’s transmission and distribution system interconnects with five interstate pipelines owned by various pipeline companies.  NMGC has firm pipeline capacity contracts with these pipeline companies.  To enhance gas supply and transportation availability, NMGC has an ownership interest in the Blanco Hub, one of the central supply and marketing points in the San Juan Basin.  The Blanco Hub interconnects with NMGC's transmission system as well as major nearby gathering systems and interstate pipelines.  To provide for system balancing and peak day supply requirements, NMGC contracts for 3.2 billion cubic feet (Bcf) of underground gas storage capacity and gas storage services in an underground facility in west Texas.  This storage facility is connected to two major interstate pipelines that, in turn, connect to NMGC’s transmission and distribution system.

Gas is purchased from various suppliers at market pools and processing plant tailgates from marketers and producers. NMGC has negotiated standard terms and conditions for the purchase of natural gas under the NAESB and the Gas Industry Standards Board forms of agreement.  NMGC purchases gas for resale to its jurisdictional gas sales customers in accordance with an annual gas supply plan filed with the NMPRC.

Gas price spikes, which can occur in high demand winter months, have the potential to significantly increase customer bills.  To provide a degree of price protection, NMGC utilizes a hedging plan for a portion of the winter gas supply.  The gas hedging activity is discussed in more detail in Note 16 of the TECO Energy Consolidated Financial Statements.  

Franchises and Other Rights

Many of NMGC’s transmission and distribution facilities are located on lands that require the grant of rights-of-way or franchises (collectively, ROW) from non-tribal governmental entities, Native American tribes and pueblos, or private landowners. In some cases, renewed ROWs must be submitted to the Federal Bureau of Indian Affairs (BIA) for approval.  For the year ended Dec. 31, 2015, NMGC incurred expenditures for ROW renewals on Native American tribal and pueblo lands that amounted to $0.3 million.

In 2011, the New Mexico legislature passed legislation confirming the validity and enforceability of agreements with public utilities that provide access to public rights of way, including expired agreements that have continued to be honored by both the public utility and the local government according to their terms, regardless of the expiration date of the agreements. Accordingly, some of NMGC’s expired ROWs remain in effect by statute, though NMGC expects to enter into negotiations to renew expired ROWs upon request.  Based on current renewal experience with ROWs on Native American tribal and pueblo lands, NMGC believes that it is likely those ROWs will be renewed at prices that are significantly higher than historical levels.  NMGC does not have condemnation rights on Native American tribal and pueblo lands, and, if it is unsuccessful in renewing some or all of these expiring or expired ROWs, it could be obligated to remove its facilities from, or abandon its facilities on, the property covered by the ROWs and seek alternative locations for its transmission or distribution facilities. With respect to land held by non-tribal governmental entities and privately-held land, however, NMGC may have condemnation rights and, thus, in the case where ROWs cannot be renewed by negotiation, NMGC would likely exercise such rights rather than remove or abandon facilities and find alternative locations for such facilities.  Historically, ROW costs have been recovered in rates charged to customers, and NMGC will continue to seek to recover ROW costs in future rates charged to customers.

Environmental Matters

NMGC’s operations are subject to federal, state and local statutes, rules and regulations relating to the discharge of materials into the environment and the protection of the environment that generally require monitoring, permitting and ongoing expenditures.

NMGC has no former MGP sites or material environmental liabilities. NMGC does not own any facilities or sites where investigation, material remediation, or monitoring of environmental conditions is ongoing or anticipated to be required. NMGC is unaware of any material soil or groundwater contamination for which it might be responsible under federal, state, or local laws or regulations. NMGC is a conditionally exempt small quantity generator with less than 100 kilograms of hazardous waste per month. Wastes are routinely characterized to determine whether or not they are subject to applicable hazardous waste regulations.

NMGC currently maintains two Title V (major source) air permits, for the Star Lake and Espejo Compressor Stations, and one minor source permit for the Cabezon Compressor Station. NMGC has submitted an application to the EPA for a synthetic minor source permit on Tribal lands for the Redonda Compressor Station. The remainder of its compressor stations are below the emission threshold for requiring a permit.

15


See Environmental Compliance section of the MD&A for additional information.

Capital Expenditures

During the year ended Dec. 31, 2015, NMGC did not incur any material capital expenditures to meet environmental requirements, nor are any anticipated for the 2016 through 2020 period.

TECO COAL

On Sept. 21, 2015, TECO Energy entered into an agreement and completed the sale of all of its ownership interest in TECO Coal to Cambrian. TECO Coal, formerly a wholly owned subsidiary of TECO Energy, had subsidiaries operating surface and underground mines as well as coal processing facilities in eastern Kentucky, Tennessee and southwestern Virginia.

TECO Coal owned no operating assets but held all of the common stock of Gatliff Coal Company, Rich Mountain Coal Company, Clintwood Elkhorn Mining Company, Pike-Letcher Land Company, Premier Elkhorn Coal Company, Perry County Coal Corporation and Bear Branch Coal Company. TECO Coal owned, controlled and operated, by lease or mineral rights, surface and underground mines and coal processing and loading facilities. TECO Coal produced, processed and sold bituminous, predominately low sulfur coal of metallurgical, PCI, steam and industrial grades.

TECO Coal is accounted for in TECO Energy’s financial statements as an asset held for sale and discontinued operation through the date of sale. See Note 19 to the TECO Energy Consolidated Financial Statements for more information.

TECO GUATEMALA

TECO Guatemala, a wholly owned subsidiary of TECO Energy, had subsidiaries with interests in independent power projects in Guatemala. In 2012, TECO Guatemala sold all of the equity interests in the Alborada and San José power stations, related facilities and operations in Guatemala for a total purchase price of $227.5 million in cash.

While TECO Energy and its subsidiaries no longer have assets or operations in Guatemala, TECO Guatemala Holdings, a wholly owned subsidiary of TECO Energy, has retained its rights under an arbitration claim against the Republic of Guatemala under the DR-CAFTA.  

See Notes 12 and 19 to the TECO Energy Consolidated Financial Statements for more information.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages, current positions and principal occupations during the last five years of the current executive officers of TECO Energy are described below.

 

 

  

 

  

Current Positions and Principal

Name

  

Age

  

Occupations During The Last Five Years

 

 

 

John B. Ramil

  

60

  

President and Chief Executive Officer, TECO Energy, Inc., and Chief Executive Officer, Tampa Electric Company, August 2010 to date.

 

 

 

Charles A. Attal, III

  

56

  

Senior Vice President-General Counsel, Chief Legal Officer and Chief  Ethics and Compliance Officer, TECO Energy, Inc. and General Counsel and Chief Ethics and Compliance Officer, Tampa Electric Company, June 2014 to date; and  Senior Vice President-General Counsel and Chief Legal Officer, TECO Energy, Inc. and General Counsel of Tampa Electric Company, February 2009 to June 2014.

 

 

 

Phil L. Barringer

  

62

  

Senior Vice President of Corporate Services and Chief Human Resources Officer, TECO Energy, Inc., Jan. 30, 2013 to date; Vice President of Corporate Services and Chief Human Resources Officer, TECO Energy, Inc., Jan. 1, 2013 to Jan. 30, 2013; Chief Human Resources Officer and Procurement Officer, Tampa Electric Company, January 2013 to date; Vice President-Human Resources of TECO Energy, Inc. and Tampa Electric Company, July 2009 to December 2012; and President, TECO Guatemala, July 2009 to date (operating companies sold December 2012).

 

 

 

Sandra W. Callahan

  

63

  

Senior Vice President-Finance and Accounting and Chief Financial Officer (Chief Accounting Officer), TECO Energy, Inc., February 2011 to date, and Vice President-Finance and Accounting and Chief Financial Officer (Chief Accounting Officer), Tampa Electric Company, October 2009 to date; and Vice President-Finance and Accounting and Chief Financial Officer (Chief Accounting Officer), TECO Energy, Inc., October 2009 to February 2011.

 

 

 

Gordon L. Gillette

  

56

  

President, Tampa Electric Company, July 2009 to date.

 

 

 

Ryan A. Shell

 

50

 

President, New Mexico Gas Company, Inc., Dec. 31, 2014 to date; Vice President of Finance and Shared Services, New Mexico Gas Company, Inc., September 2014 to Dec. 31, 2014; Vice President of Finance and Treasurer, New Mexico Gas Company, Inc., February 2013 to September 2014; and Vice President, Controller and Treasurer, New Mexico Gas Company, Inc., January 2009 to February 2013.

There is no family relationship between any of the persons named above or between executive officers and any director of the company. The term of office of each officer extends until such officer’s successor is elected and qualified.

 

 

Item 1A. RISK FACTORS.

 

Risks Associated with the Pending Acquisition by Emera 

TECO Energy and its subsidiaries are subject to business uncertainties and contractual restrictions while the Merger is pending that could adversely affect TECO Energy’s financial results.

Uncertainty about the effect of the Merger on employees or vendors and others, including contractors, may have an adverse effect on TECO Energy. Although TECO Energy intends to take steps designed to reduce any adverse effects, these uncertainties may impair TECO Energy’s and its subsidiaries’ ability to attract, retain and motivate key personnel until the Merger is completed, and could cause vendors and others, including contractors, that deal with TECO Energy to seek to change existing business relationships. Employee retention and recruitment may be particularly challenging prior to the completion of the Merger, as current employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite TECO Energy’s retention and recruiting efforts, key employees depart or fail to accept employment with TECO Energy or its subsidiaries due to the uncertainty of employment and difficulty of integration or a desire not to remain with the combined company, following completion of the Merger. TECO Energy may incur significant costs in identifying, hiring, and retaining replacements for departing employees, which could have a material adverse effect on TECO Energy’s business operations and financial results.

TECO Energy expects that matters relating to the Merger and integration-related issues will place a significant burden on management, employees and internal resources, which could otherwise have been devoted to other business opportunities. The diversion of management time on Merger-related issues could affect TECO Energy’s financial results.

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In addition, the Merger Agreement restricts TECO Energy and its subsidiaries, from taking specified actions until the Merger occurs or the Merger Agreement is terminated, without Emera’s prior written consent, including, without limitation: (i) making certain material acquisitions and dispositions of assets or businesses; (ii) making any capital expenditures in excess of specified amounts; (iii) incurring indebtedness, subject to certain exceptions; (iv) issuing equity or equity equivalents; and (v) paying quarterly cash dividends in excess of levels agreed upon in the Merger Agreement. These restrictions may prevent TECO Energy from pursuing otherwise attractive business opportunities and making other changes to its business prior to consummation of the Merger or termination of the Merger Agreement.

Failure to complete the Merger could negatively impact the market price of TECO Energy’s common stock.

There can be no assurance that the Merger will occur. Failure to complete the Merger may negatively impact the future trading price of TECO Energy’s common stock. If the Merger is not completed, the market price of TECO Energy’s common stock may decline to the extent that the current market price of TECO Energy’s stock reflects a market assumption that there is a high probability that the Merger will be completed.

Additionally, whether or not the Merger is completed, TECO Energy will have incurred significant costs, as well as the diversion of the time and attention of management. A failure to complete the Merger may also result in negative publicity, litigation against TECO Energy or its directors and officers, and a negative impression of TECO Energy in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on TECO Energy’s financial condition, results of operations and its stock price.

 

TECO Energy and Emera may be unable to obtain the required, governmental, regulatory, and other approvals required to complete the Merger.

 

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) receipt of the remaining required regulatory approvals, including from the NMPRC, and the Committee on Foreign Investment in the United States; (iii) the absence of any law or judgement that prevents, makes illegal or prohibits the closing of the Merger; (iv) the absence of any material adverse effect with respect to TECO Energy; (v) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Merger Agreement; and (vi) other customary closing conditions. The governmental, regulatory, and other approvals required to consummate the Merger may not be obtained at all, or may not be obtained on the proposed terms and schedules as contemplated by the parties.  Satisfaction of the closing conditions may delay the consummation of the Merger, such delay may cause uncertainty or other negative consequences that may have an adverse effect on TECO Energy’s business, financial condition and results of operations, cash flows and common stock price, and if certain closing conditions are not satisfied prior to the outside date specified in the Merger Agreement, Emera will not be obligated to consummate the Merger.

 

 

In the event that the Merger Agreement is terminated prior to the completion of the Merger, TECO Energy could incur significant transaction costs that could materially impact its financial performance and results of operations.

 

TECO Energy will incur significant transaction costs, including legal, accounting, financial advisory, filing, printing, and other costs relating to the Merger. The Merger Agreement provides that upon termination of the Merger Agreement under certain specified circumstances, TECO Energy will be required to pay Emera a termination fee of $212.5 million from cash on hand, short-term borrowings or a combination of those sources. Any fees due as a result of termination could have a material adverse effect on our results of operations, financial condition, and cash flows.

 

We have been and may continue to be the target of securities class action suits and derivative suits which could result in substantial costs and divert management attention and resources.

 

Securities class action suits and derivative suits are often brought against companies who have entered into mergers and acquisition transactions. Following the announcement of the execution of the Merger Agreement, 12 putative stockholder class actions were filed challenging the Merger. In November 2015, the defendants party to the litigation entered into a Memorandum of Understanding (the “MOU”) 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 MOU, TECO Energy made additional disclosures related to the proposed Merger in a proxy supplement filed on Nov. 18, 2015.  The MOU provides for the parties to enter into a formal settlement agreement which will be submitted to the Hillsborough Circuit Court Judge for approval after completion of the Merger. Additionally the judge will consider the award of attorneys’ fees to the plaintiffs’ lawyers. See Note 12 to the TECO Energy Consolidated Financial Statements. Defending against these claims, even if meritless, can result in substantial costs to us and could divert the attention of our management.

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General Risks

National and local economic conditions can have a significant impact on the results of operations, net income and cash flows at TECO Energy and its subsidiaries.

The business of TECO Energy is concentrated in Florida and New Mexico. While economic conditions in Florida and New Mexico have improved since the worst of the economic downturn in 2008, if they do not continue to improve or if they should worsen, retail customer growth rates may stagnate or decline, and customers’ energy usage may further decline, adversely affecting TECO Energy’s results of operations, net income and cash flows.

A factor in our customer growth in both Florida and New Mexico is net in migration of new residents, both domestic and non-U.S. A slowdown in the U. S. economy could reduce the number new residents and slow customer growth. In addition, New Mexico has significant oil and natural gas production from the San Juan and Permian production basins. The current low oil and natural gas-price environment has reduced drilling activity and oil and natural gas production in some producing regions, which has reduced employment in those industries and industries that serve them. A continuation of these conditions could slow growth in the New Mexico economy, which could reduce earnings and cash flow from NMGC.

Developments in technology could reduce demand for electricity and gas.

Research and development activities are ongoing for new technologies that produce power or reduce power consumption. These technologies include renewable energy, customer-oriented generation, energy storage, energy efficiency and more energy-efficient appliances and equipment. Advances in these or other technologies could reduce the cost of producing electricity or transporting gas, or otherwise make the existing generating facilities of Tampa Electric uneconomic. In addition, advances in such technologies could reduce demand for electricity or natural gas, which could negatively impact the results of operations, net income and cash flows of TECO Energy.

TECO Energy’s businesses are sensitive to variations in weather and the effects of extreme weather, and have seasonal variations.

TECO Energy’s utility businesses are affected by variations in general weather conditions and unusually severe weather. Energy sales by its electric and gas utilities are particularly sensitive to variations in weather conditions. Those companies forecast energy sales on the basis of normal weather, which represents a long-term historical average. If climate change or other factors cause significant variations from normal weather, this could have a material impact on energy sales.

PGS and NMGC, which typically have short but significant winter peak periods that are dependent on cold weather, are more weather-sensitive than Tampa Electric, which has both summer and winter peak periods. NMGC typically earns all of its net income in the first and fourth quarters, due to winter weather. Mild winter weather could negatively impact results at TECO Energy.

TECO Energy’s electric and gas utilities are highly regulated; changes in regulation or the regulatory environment could reduce revenues or increase costs or competition.

TECO Energy’s electric and gas utilities operate in highly regulated industries. Their retail operations, including the prices charged, are regulated by the FPSC in Florida and the NMPRC in New Mexico, and Tampa Electric’s wholesale power sales and transmission services are subject to regulation by the FERC. Changes in regulatory requirements or adverse regulatory actions could have an adverse effect on TECO Energy’s utilities’ financial performance by, for example, reducing revenues, increasing competition or costs, threatening investment recovery or impacting rate structure.

If Tampa Electric or PGS earn returns on equity above their respective allowed ranges, indicating an overearnings trend, those earnings could be subject to review by the FPSC. Ultimately, prolonged overearnings could result in credits or refunds to customers, which could reduce earnings and cash flow.

Various factors relating to the integration of NMGC could adversely affect TECO Energy’s business and operations.

The anticipated accretion to earnings from NMGC during the original three-year integration period was based on estimates of synergies from the transaction and growth in the New Mexico economy, which are dependent on local and global economic conditions, normal weather and other factors, which may materially change, including:

 

 

 

TECO Energy’s estimate of NMGC’s expected operating performance after the completion of the

integration may vary significantly from actual results.

 

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Over time, TECO Energy will be making significant capital investments to convert several

NMGC computer systems to the systems that TECO Energy uses in Florida. These conversions

may not be accomplished on time or on budget, which would increase costs for NMGC. In

addition, the time required to convert these systems will cause NMGC to operate the existing

systems past the end of their normal lives, which could reduce reliability.

 

 

 

The potential loss of key employees of TECO Energy or NMGC who may be uncertain

about their future roles in the TECO Energy/NMGC organization.

Negative impacts from these factors could have an adverse effect on TECO Energy’s business, financial condition, and results of operations. Accordingly, the synergies expected from the acquisition of NMGC may not be achievable in the anticipated amount or timeframe, or at all.

Changes in the environmental laws and regulations affecting its businesses could increase TECO Energy’s costs or curtail its activities.

TECO Energy’s businesses are subject to regulation by various governmental authorities dealing with air, water and other environmental matters. Changes in compliance requirements or the interpretation by governmental authorities of existing requirements may impose additional costs on TECO Energy, requiring cost-recovery proceedings and/or requiring it to curtail some of its businesses’ activities.

Regulations on the disposal and/or storage of CCRs could add to Tampa Electric’s operating costs.

The U.S. EPA published a new CCR rule in the U.S. Federal Register on April 17, 2015, setting federal standards for companies that dispose of CCRs in onsite landfills and impoundments. The rule went into effect on Oct. 19, 2015, and contains design and operating standards for CCR management units. Tampa Electric is currently evaluating various options for demonstrating compliance with the rule. The initial assessment is that activities in 2016 will consist primarily of monitoring and testing of the two existing CCR impoundments that are affected by this rule. Potential capital expenditures that may be required to comply with this rule are not expected to be significant. This rule is likely to face continued legal challenges by the utility industry and environmental groups, and legislation is required to fix certain portions of the rule. At this time, the ultimate outcome of any litigation or legislation is uncertain, so that it is not possible to predict the ultimate impact on Tampa Electric. While certain costs related to environmental compliance are currently recoverable from customers under Florida’s ECRC, TECO Energy cannot be assured that any increased costs associated with the new regulations will be eligible for such treatment.

Federal or state regulation of GHG emissions, depending on how they are enacted, could increase TECO Energy’s costs or the rates charged to TECO Energy customers, which could curtail sales.

Among TECO Energy’s companies, Tampa Electric has the most significant number of stationary sources with air emissions.

Current regulation in Florida allows utility companies to recover from customers prudently incurred costs for compliance with new state or federal environmental regulations. Tampa Electric would expect to recover from customers the costs of power plant modifications or other costs required to comply with new GHG emission regulation. If the regulation allowing cost recovery is changed and the cost of compliance is not recovered through the ECRC, Tampa Electric could seek to recover those costs through a base-rate proceeding, but TECO Energy cannot be assured that the FPSC would grant such recovery. Under the Clean Power Plan, each state is responsible for implementing its own regulations to accord to the federal standards. Accordingly, a change in Florida’s regulatory landscape could significantly increase Tampa Electric’s costs. Changes in compliance requirements or the interpretation by governmental authorities of existing requirements may impose additional costs on TECO Energy requiring FPSC cost recovery proceedings and/or requiring it to curtail some of its business activities.

The Clean Power Plan establishes state-specific emission rate and mass-based goals measured against a 2012 baseline. As Tampa Electric’s investments in lower-GHG production largely occurred before 2012 and are factored into Florida’s baseline generating capacity, Tampa Electric may encounter more difficulty than its competitors in achieving cost-effective GHG emission reductions. Because the ultimate form of Florida’s state plan remains unknown, the increased compliance costs that Tampa Electric may face as a result of the Clean Power Plan are currently uncertain.

On Feb. 9, 2016, the U.S. Supreme Court issued a stay against enforcement of the Clean Power Plan for the electricity sector pending resolution of the legal challenges before the U.S. Court of Appeals for the District of Columbia Circuit. The timing of the resolution of the legal challenges and the removal of the stay by the U.S. Supreme Court is uncertain, but it is likely to delay further actions by the states until 2018.

In 2015, there was a proposed constitutional ballot initiative for the 2016 election approved by the Florida Supreme Court to promote increased direct sale and use of solar energy to generate electricity which has now been delayed to the 2018 election.

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There is a corresponding legislative proposal for the current 2016 legislative session that could, if successful, promote increased direct sale and use of solar energy to generate electricity.

The potential amendment to the Florida constitution in 2018 and potential corresponding 2016 legislation would encourage the installation of solar arrays to generate electricity by retail customers and third parties, and to allow sales of electricity by non-utility generators. Increased use of solar generation and sales by third parties would reduce energy sales and revenues at Tampa Electric. In addition, Tampa Electric could make investments in facilities to serve customers during periods that solar energy is not available that would not be profitable.

NMGC operates high-pressure natural gas transmission pipelines, which involve risks that may result in accidents or otherwise affect its operations.

There are a variety of hazards and operating risks inherent in operating high-pressure natural gas transmission pipelines, such as leaks, explosions, mechanical problems, activities of third parties and damage to pipelines, facilities and equipment caused by floods, fires and other natural disasters that may cause substantial financial losses. In addition, these risks could result in significant injury, loss of life, significant damage to property, environmental pollution and impairment of operations, any of which could result in substantial losses. For pipeline assets located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, known as High Consequence Areas, the level of damage resulting from these risks could be greater. NMGC does not maintain insurance coverage against all of these risks and losses, and any insurance coverage it might maintain may not fully cover damages caused by those risks and losses. Therefore, should any of these risks materialize, it could have a material adverse effect on TECO Energy’s business, earnings, financial condition and cash flows.

NMGC’s high-pressure transmission pipeline operations are subject to pipeline safety laws and regulations, compliance with which may require significant capital expenditures, increase TECO Energy’s cost of operations and affect or limit its business plans.

TECO Energy’s pipeline operations are subject to pipeline safety regulation administered by the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) of the U.S. Department of Transportation. These laws and regulations require TECO Energy to comply with a significant set of requirements for the design, construction, maintenance and operation of its pipelines. These regulations, among other things, include requirements to monitor and maintain the integrity of its pipelines. The regulations determine the pressures at which its pipelines can operate.

PHMSA is designing an Integrity Verification Process intended to create standards to verify maximum allowable operating pressure, and to improve and expand pipeline integrity management processes. There remains uncertainty as to how these standards will be implemented, but it is expected that the changes will impose additional costs on new pipeline projects as well as on existing operations. Pipeline failures or failures to comply with applicable regulations could result in reduction of allowable operating pressures as authorized by PHMSA, which would reduce available capacity on TECO Energy’s pipelines. Should any of these risks materialize, it may have a material adverse effect on TECO Energy’s operations, earnings, financial condition and cash flows.

Results at TECO Energy’s utilities may be affected by changes in customer energy-usage patterns.

For the past several years, at Tampa Electric, and electric utilities across the United States, weather-normalized electricity consumption per residential customer has declined due to the combined effects of voluntary conservation efforts, economic conditions, and improvements in lighting and appliance efficiency.

Forecasts by TECO Energy’s utilities are based on normal weather patterns and historical trends in customer energy-usage patterns. The ability of TECO Energy’s utilities to increase energy sales and earnings could be negatively impacted if customers continue to use less energy in response to increased energy efficiency, economic conditions or other factors.

TECO Energy’s computer systems and the infrastructure of its utility companies are subject to cyber- (primarily electronic or internet-based) or physical attacks, which could disrupt operations, cause loss of important data or compromise customer-, employee-related or other critical information or systems, or otherwise adversely affect its business and financial results and condition.

There have been an increasing number of cyberattacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data. These attacks have occurred over the Internet, through malware, viruses, attachments to e-mails, through persons inside of the organization or through persons with access to systems inside of the organization.

TECO Energy has security systems and infrastructure in place that are designed to prevent such attacks, and these systems are subject to internal, external and regulatory audits to ensure adequacy. Despite these efforts, TECO Energy cannot be assured that a cyberattack will not cause electric or gas system operational problems, disruptions of service to customers, compromise important data or systems, or subject it to additional regulation, litigation or damage to its reputation.

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There have also been physical attacks on critical infrastructure at other utilities. While the transmission and distribution system infrastructure of TECO Energy’s utility companies are designed and operated in a manner intended to mitigate the impact of this type of attack, in the event of a physical attack that disrupts service to customers, revenues would be reduced and costs would be incurred to repair any damage. These types of events, either impacting TECO Energy’s facilities or the industry in general, could also cause TECO Energy to incur additional security- and insurance-related costs, and could have adverse effects on its business and financial results and condition.

Potential competitive changes may adversely affect TECO Energy’s regulated electric and gas businesses.

There is competition in wholesale power sales across the United States. Some states have mandated or encouraged competition at the retail level and, in some situations, required divestiture of generating assets. While there is active wholesale competition in Florida, the retail electric business has remained substantially free from direct competition. Although not expected in the foreseeable future, changes in the competitive environment occasioned by legislation, regulation, market conditions or initiatives of other electric power providers, particularly with respect to retail competition, could adversely affect Tampa Electric’s business and its expected performance.

The gas distribution industry has been subject to competitive forces for a number of years. Gas services provided by TECO Energy’s gas utilities are unbundled for all non-residential customers. Because its gas utilities earn margins on distribution of gas but not on the commodity itself, unbundling has not negatively impacted TECO Energy’s results. However, future structural changes could adversely affect PGS and NMGC.

Increased customer use of distributed generation could adversely affect TECO Energy’s regulated electric utility business.

In many areas of the United States, there is growing use of rooftop solar panels, small wind turbines and other small-scale methods of power generation, called distributed generation, by individual residential, commercial and industrial customers. Distributed generation is encouraged and supported by various special interest groups, tax incentives, renewable portfolio standards and special rates designed to support such generation. Additionally, the EPA’s Clean Power Plan could have the effect of providing greater incentives for distributed generation in order to meet state-based emission reduction targets under the proposed rule.

Increased usage of distributed generation, particularly in those states where solar or wind resources are the most abundant, is reducing utility electricity sales but not reducing the need for ongoing investment in infrastructure to maintain or expand the transmission and distribution grid to reliably serve customers. Continued utility investment that is not supported by increased energy sales causes rates to increase for customers, which could further reduce energy sales and reduce profitability.

The value of TECO Energy’s existing deferred tax benefits are determined by existing tax laws and could be negatively impacted by changes in these laws.

“Comprehensive tax reform” remains a topic of discussion in the U.S. Congress. Such legislation could significantly alter the existing tax code, including a reduction in corporate income tax rates. Although a reduction in the corporate income tax rate could result in lower future tax expense and tax payments, it would reduce the value of TECO Energy’s existing deferred tax asset and could result in a charge to earnings from the write-down of that asset, and it would reduce future tax payments received by TECO Energy from its subsidiaries.

TECO Energy relies on some natural gas transmission assets that it does not own or control to deliver natural gas. If transmission is disrupted, or if capacity is inadequate, TECO Energy’s ability to sell and deliver natural gas and supply natural gas to its customers and its electric generating stations may be hindered.

TECO Energy depends on transmission facilities owned and operated by other utilities and energy companies to deliver the natural gas it sells to the wholesale and retail markets, as well as the natural gas it purchases for use in its electric generation facilities. If transmission is disrupted, or if capacity is inadequate, its ability to sell and deliver products and satisfy its contractual and service obligations could be adversely affected.

Disruption of fuel supply could have an adverse impact on the financial condition of TECO Energy.

Tampa Electric, PGS and NMGC depend on third parties to supply fuel, including natural gas and coal. As a result, there are risks of supply interruptions and fuel-price volatility. Disruption of fuel supplies or transportation services for fuel, whether because of weather-related problems, strikes, lock-outs, break-downs of locks and dams, pipeline failures or other events, could impair the ability to deliver electricity or gas or generate electricity and could adversely affect operations. Further, the loss of coal suppliers or the inability to renew existing coal and natural gas contracts at favorable terms could significantly affect the ability to serve customers and have an adverse impact on the financial condition and results of operations of TECO Energy.

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Commodity price changes may affect the operating costs and competitive positions of TECO Energy’s businesses.

TECO Energy’s businesses are sensitive to changes in coal, gas, oil and other commodity prices. Any changes in the availability of these commodities could affect the prices charged by suppliers as well as suppliers’ operating costs and the competitive positions of their products and services.

In the case of Tampa Electric, fuel costs used for generation are affected primarily by the cost of coal and natural gas. Tampa Electric is able to recover prudently incurred costs of fuel through retail customers’ bills, but increases in fuel costs affect electric prices and, therefore, the competitive position of electricity against other energy sources.

The ability to make sales of, and the margins earned on, wholesale power sales are affected by the cost of fuel to Tampa Electric, particularly as it compares to the costs of other power producers.

In the case of PGS and NMGC, costs for purchased gas and pipeline capacity are recovered through retail customers’ bills, but increases in gas costs affect total retail prices and, therefore, the competitive positions of PGS and NMGC as compared to electricity, other forms of energy and other gas suppliers.

The facilities and operations of TECO Energy could be affected by natural disasters or other catastrophic events.

TECO Energy’s facilities and operations are exposed to potential damage and partial or complete loss resulting from environmental disasters (e.g. floods, high winds, fires and earthquakes), equipment failures, vandalism, potentially catastrophic events such as the occurrence of a major accident or incident at one of the sites, and other events beyond the control of TECO Energy. The operation of transmission and distribution systems involves certain risks, including gas leaks, fires, explosions, pipeline ruptures and other hazards and risks that may cause unforeseen interruptions, personal injury or property damage. Any such incident could have an adverse effect on TECO Energy and any costs relating to such events may not be recoverable through insurance or recovered in rates. In certain cases, there is potential that such an event may not excuse TECO Energy’s utility companies from servicing customers as required by their respective tariffs.

The franchise rights held by TECO Energy’s utilities could be lost in the event of a breach by such TECO Energy utilities or could expire and not be renewed.

TECO Energy’s utilities hold franchise rights that are memorialized in agreements with selected counterparties throughout their service areas. In some cases these rights could be lost in the event of a breach of these agreements by the applicable TECO Energy utility. In addition, these agreements are for set periods and could expire and not be renewed upon expiration of the then-current terms. Some agreements also contain provisions allowing municipalities to purchase the portion of the applicable utility’s system located within a given municipality’s boundaries under certain conditions.

Tampa Electric, PGS and NMGC may not be able to secure adequate rights of way to construct transmission lines, gas interconnection lines and distribution-related facilities and could be required to find alternate ways to provide adequate sources of energy and maintain reliable service for their customers.

Tampa Electric, PGS and NMGC rely on federal, state and local governmental agencies and, in New Mexico, cooperation with local Native American tribes and councils, to secure rights of way and siting permits to construct transmission lines, gas interconnection lines and distribution-related facilities. If adequate rights of way and siting permits to build new transportation and transmission lines cannot be secured:

 

 

 

Tampa Electric, PGS and NMGC may need to remove or abandon its facilities

on the property covered by rights of way or franchises and seek alternative locations for its

transmission or distribution facilities;

 

 

 

Tampa Electric, PGS and NMGC may need to rely on more costly alternatives to provide

energy to their customers;

 

 

 

Tampa Electric, PGS and NMGC may not be able to maintain reliability in their service areas; and/or

 

 

 

Tampa Electric’s, PGS’s and NMGC’s ability to provide electric or gas service to new

customers may be negatively impacted.

Impairment testing of certain long-lived assets could result in impairment charges.

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TECO Energy assesses long-lived assets and goodwill for impairment annually or more frequently if events or circumstances occur that would more likely than not reduce the fair value of those assets below their carrying values. To the extent the value of goodwill or a long-lived asset becomes impaired, TECO Energy may be required to record non-cash impairment charges that could have a material adverse impact on TECO Energy’s financial condition and results from operations. In connection with the NMGC acquisition, TECO Energy recorded additional goodwill and long-lived assets that could become impaired.

TECO Energy has substantial indebtedness, which could adversely affect its financial condition and financial flexibility.

TECO Energy has substantial indebtedness, which has resulted in fixed charges it is obligated to pay. The level of TECO Energy’s indebtedness and restrictive covenants contained in its debt obligations could limit its ability to obtain additional financing (see Management’s Discussion & Analysis – Significant Financial Covenants section).

TECO Energy, TECO Finance, TEC, NMGC and NMGI must meet certain financial covenants as defined in the applicable agreements to borrow under their respective credit facilities. Also, TECO Energy and its subsidiaries have certain restrictive covenants in specific agreements and debt instruments.

Although TECO Energy was in compliance with all required financial covenants as of Dec. 31, 2015, it cannot assure compliance with these financial covenants in the future. TECO Energy’s failure to comply with any of these covenants or to meet its payment obligations could result in an event of default which, if not cured or waived, could result in the acceleration of other outstanding debt obligations. TECO Energy may not have sufficient working capital or liquidity to satisfy its debt obligations in the event of an acceleration of all or a portion of its outstanding obligations. If TECO Energy’s cash flows and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance its indebtedness. TECO Energy’s ability to restructure or refinance its debt will depend on the condition of the capital markets and TECO Energy’s financial condition at such time. Any refinancing of TECO Energy’s debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict TECO Energy from adopting some of these alternatives.

TECO Energy also incurs obligations in connection with the operations of its subsidiaries and affiliates that do not appear on its balance sheet. Such obligations include guarantees, letters of credit and certain other types of contractual commitments.

Financial market conditions could limit TECO Energy’s access to capital and increase TECO Energy’s costs of borrowing or refinancing, or have other adverse effects on its results.

TECO Finance and TEC have debt maturing in 2016 and subsequent years, which may need to be refinanced. Future financial market conditions could limit TECO Energy’s ability to raise the capital it needs and could increase its interest costs, which could reduce earnings. If TECO Energy is not able to issue new debt, or TECO Energy issues debt at interest rates higher than expected, its financial results or condition could be adversely affected.

TECO Energy enters into derivative transactions, primarily with financial institutions as counterparties. Financial market turmoil could lead to a sudden decline in credit quality among these counterparties, which could make in-the-money positions uncollectable.

TECO Energy enters into derivative transactions with counterparties, most of which are financial institutions, to hedge its exposure to commodity price and interest rate changes. Although TECO Energy believes it has appropriate credit policies in place to manage the non-performance risk associated with these transactions, turmoil in the financial markets could lead to a sudden decline in credit quality among these counterparties. If such a decline occurs for a counterparty with which TECO Energy has an in-the-money position, TECO Energy could be unable to collect from such counterparty.

Declines in the financial markets or in interest rates used to determine benefit obligations could increase TECO Energy’s pension expense or the required cash contributions to maintain required levels of funding for its plan.

Under calculation requirements of the Pension Protection Act, as of the Jan. 1, 2015, measurement date, TECO Energy’s pension plan was essentially fully funded. Under MAP 21, TECO Energy is not required to make additional cash contributions over the next five years; however, TECO Energy may make additional cash contributions from time to time. Any future declines in the financial markets or further declines in interest rates could increase the amount of contributions required to fund its pension plan in the future, and could cause pension expense to increase.

TECO Energy’s financial condition and results could be adversely affected if its capital expenditures are greater than forecast.

24


In 2016, TECO Energy is forecasting capital expenditures at Tampa Electric to support the current levels of customer growth, to comply with the design changes mandated by the FPSC to harden transmission and distribution facilities against hurricane damage, to maintain transmission and distribution system reliability, to maintain coal-fired generating unit reliability and efficiency, and to add generating capacity at the Polk Power Station. TECO Energy is forecasting capital expenditures at PGS to support customer growth, system reliability, conversion of customers from other fuels to natural gas and to replace bare steel and cast iron pipe. Forecasted capital expenditures at NMGC are expected to support customer and system reliability and expansion.

If TECO Energy’s capital expenditures exceed the forecasted levels, it may need to draw on credit facilities or access the capital markets on unfavorable terms. TECO Energy cannot be sure that it will be able to obtain additional financing, in which case its financial position could be adversely affected.

TECO Energy’s financial condition and ability to access capital may be materially adversely affected by multiple ratings downgrades to below investment grade, and TECO Energy cannot be assured of any rating improvements in the future.

TECO Energy’s senior unsecured debt is rated as investment grade by S&P at ‘BBB’, by Moody’s at ‘Baa1’, and by Fitch at ‘BBB’. The senior unsecured debt of TEC is rated by S&P at ‘BBB+’, by Moody’s at ‘A2’ and by Fitch at ‘A-’. The senior unsecured debt of NMGC is rated by S&P at BBB+. A downgrade to below investment grade by the rating agencies, which would require a two-notch downgrade by S&P and Fitch, and a three-notch downgrade by Moody’s, may affect TECO Energy’s ability to borrow, may change requirements for future collateral or margin postings, and may increase financing costs, which may decrease earnings. TECO Energy may also experience greater interest expense than it would have otherwise if, in future periods, it replaces maturing debt with new debt bearing higher interest rates due to any downgrades. In addition, downgrades could adversely affect TECO Energy’s relationships with customers and counterparties.

At current ratings, TEC and NMGC are able to purchase electricity and gas without providing collateral. If the ratings of TEC or NMGC decline to below investment grade, Tampa Electric, PGS or NMGC, as applicable, could be required to post collateral to support their purchases of electricity and gas.

TECO Energy is a holding company with no business operations of its own and depends on cash flow from its subsidiaries to meet its obligations.

TECO Energy is a holding company with no business operations of its own or material assets other than the stock of its subsidiaries. Accordingly, all of TECO Energy’s operations are conducted by its subsidiaries. As a holding company, TECO Energy requires dividends and other payments from its subsidiaries to meet its cash requirements. If TECO Energy’s subsidiaries are unable to pay it dividends or make other cash payments to it, TECO Energy may be unable to pay dividends or satisfy its obligations.

In connection with the sale of TECO Coal to Cambrian, TECO Energy temporarily retained obligations under letters of indemnity that guarantee payments on bonds posted for the reclamation of mines prior to the completion of the transfer of all permits to the purchaser by the Commonwealths of Kentucky and Virginia.

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 by TECO Energy to the surety companies would be triggered if the reclamation bonds are called upon by either of these states and the permit holder or TECO Coal or one of the affiliates transferred to Cambrian as part of the sale did not pay the surety company. Pursuant to the SPA, Cambrian is obligated to file applications required in connection with the change of ownership and control of TECO Coal and its affiliates with the appropriate governmental entities with respect to the coal mining permits.  Pursuant to the terms of the SPA, Cambrian is obligated to post a bond or other appropriate collateral necessary to obtain the release of the corresponding bond(s) 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. The company is working with Cambrian on the process of replacing the bonds and expects the process to be completed in 2016.

 

 

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

TECO Energy believes that the physical properties of its operating companies are adequate to carry on their businesses as currently conducted. The properties of Tampa Electric are subject to a first mortgage bond indenture under which no bonds are currently outstanding.

25


TAMPA ELECTRIC

Tampa Electric has three electric generating stations in service, with a December 2015 net winter generating capability of 4,730 MW. Tampa Electric assets include the Big Bend Power Station (1,632 MW capacity from four coal units and 61 MW from a CT), the Bayside Power Station (1,839 MW capacity from two natural gas combined cycle units and 244 MW from four CTs) and the Polk Power Station (220 MW capacity from the IGCC unit and 732 MW from four CTs). See the Tampa Electric – Polk Power Station Units 2-5 Combined Cycle Conversion section of the MD&A for information regarding the Polk conversion project. In addition, Tampa Electric installed a 1.6 MW solar array at Tampa International Airport in December 2015.

The Big Bend coal-fired units went into service from 1970 to 1985, and the CT was installed in 2009. The Polk IGCC unit began commercial operation in 1996, and the four CTs began commercial operation from 2000 to 2007. Bayside Unit 1 was completed in April 2003, Unit 2 was completed in January 2004 and Units 3 through 6 were completed in 2009. Both the Phillips Power Station and the City of Tampa Partnership Station were retired in November 2015.

Tampa Electric owns 180 substations having an aggregate transformer capacity of 22,351 Mega Volts Amps. The transmission system consists of approximately 1,302 pole miles (including underground and double-circuit) of high voltage transmission lines, and the distribution system consists of 6,209 pole miles of overhead lines and 5,060 trench miles of underground lines. As of Dec. 31, 2015, there were 747,660 meters in service. All of this property is located in Florida.

All plants and important fixed assets are held in fee simple except that titles to some of the properties are subject to easements, leases, contracts, covenants and similar encumbrances and minor defects of a nature common to properties of the size and character of those of Tampa Electric.

Tampa Electric has easements or other property rights for rights-of-way adequate for the maintenance and operation of its electrical transmission and distribution lines that are not constructed upon public highways, roads and streets. It has the power of eminent domain under Florida law for the acquisition of any such ROW for the operation of transmission and distribution lines. Transmission and distribution lines located in public ways are maintained under franchises or permits.

TEC has a long-term lease for the office building in downtown Tampa, which serves as headquarters for TECO Energy, Tampa Electric and PGS.

PEOPLES GAS SYSTEM

PGS’s distribution system extends throughout the areas it serves in Florida and consists of approximately 19,000 miles of pipe, including approximately 12,100 miles of mains and 6,900 miles of service lines. Mains and service lines are maintained under ROW, franchises or permits.

PGS’s operations are located in 14 operating divisions throughout Florida. While most of the operations and administrative facilities are owned, a small number are leased.

NEW MEXICO GAS COMPANY

NMGC’s distribution system extends throughout the areas it serves in New Mexico and consists of approximately 11,800 miles of pipe, including approximately 1,600 miles of transmission pipeline and 10,200 miles of distribution lines. Mains and service lines are maintained under ROW, franchises or permits.

NMGC’s operations are located in six operating areas throughout New Mexico. While most of the operations and administrative facilities are owned, a small number are leased.

Item 3. LEGAL PROCEEDINGS.

From time to time, TECO Energy and its subsidiaries are involved in 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. While the outcome of such proceedings is uncertain, management does not believe that their ultimate resolution will have a material adverse effect on the company’s results of operations, financial condition, or cash flows.

For a discussion of certain legal proceedings and environmental matters, including an update of previously disclosed legal proceedings and environmental matters, see Notes 12 and 9, Commitments and Contingencies, of the TECO Energy and Tampa Electric Company Consolidated Financial Statements, respectively.

26


Item 4. MINE SAFETY DISCLOSURES.

During the time that it was a TECO Energy subsidiary, TECO Coal was subject to regulation by the MSHA under the Federal Mine Safety and Health Act of 1977 (the Mine Act). Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this annual report.

 

 

 

27


PART II

 

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table shows the high and low sale prices for shares of TECO Energy common stock, which is listed on the New York Stock Exchange, and dividends paid per share, per quarter.

 

 

 

1st Quarter

 

 

2nd Quarter

 

 

3rd Quarter

 

 

4th Quarter

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

22.02

 

 

$

19.94

 

 

$

26.87

 

 

$

27.23

 

Low

 

 

18.55

 

 

 

17.60

 

 

 

17.61

 

 

 

26.08

 

Close

 

 

19.40

 

 

 

17.66

 

 

 

26.26

 

 

 

26.65

 

Dividend

 

$

0.225

 

 

$

0.225

 

 

$

0.225

 

 

$

0.225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

17.31

 

 

$

18.53

 

 

$

18.48

 

 

$

21.29

 

Low

 

 

16.12

 

 

 

16.90

 

 

 

16.91

 

 

 

17.35

 

Close

 

 

17.15

 

 

 

18.48

 

 

 

17.38

 

 

 

20.49

 

Dividend

 

$

0.22

 

 

$

0.22

 

 

$

0.22

 

 

$

0.22

 

The approximate number of shareholders of record of common stock of TECO Energy as of Feb. 12, 2016 was 10,164.

The primary sources of funds to pay dividends to TECO Energy’s common shareholders are dividends and other distributions from its operating companies. Dividends on TECO Energy’s common stock are declared and paid at the discretion of its Board of Directors. The Merger Agreement with Emera restricts TECO Energy and its subsidiaries, without Emera’s prior written consent, from issuing equity or equity equivalents and from paying quarterly cash dividends in excess of levels agreed upon in the Merger Agreement until the Merger occurs or the Merger Agreement is terminated.

See Liquidity, Capital Resources – Covenants in Financing Agreements section of MD&A, and Notes 6, 7 and 12 to the TECO Energy Consolidated Financial Statements for additional information regarding significant financial covenants. See Note 21 to the TECO Energy Consolidated Financial Statements for additional information regarding the pending Merger.

All of TEC’s common stock is owned by TECO Energy and, therefore, there is no market for such stock. TEC pays dividends on its common stock substantially equal to its net income. Such dividends totaled $268.4 million in 2015, $262.6 million in 2014 and $222.1 million in 2013.

Set forth below is a table showing shares of TECO Energy common stock deemed repurchased by the issuer.

 

 

 

Total Number of

Shares (or Units)

Purchased (1)

 

 

Average Price

Paid per Share

(or Unit)

 

 

Total Number of

Shares (or Units)

Purchased as Part

of Publicly

Announced Plans or

Programs

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares (or Units) that

May Yet Be

Purchased Under the

Plans or Programs

 

Oct. 1, 2015 – Oct. 31, 2015

 

 

32,763

 

 

$

26.27

 

 

 

0.0

 

 

 

0.0

 

Nov. 1, 2015 – Nov. 30, 2015

 

 

8,272

 

 

$

26.59

 

 

 

0.0

 

 

 

0.0

 

Dec. 1, 2015 – Dec. 31, 2015

 

 

636

 

 

$

26.60

 

 

 

0.0

 

 

 

0.0

 

Total 4th Quarter 2015

 

 

41,671

 

 

$

26.34

 

 

 

0.0

 

 

 

0.0

 

(1)

These shares were not repurchased through a publicly announced plan or program, but rather relate to compensation or retirement plans of the company. Specifically, these shares represent shares delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options who exercised options (granted under TECO Energy’s incentive compensation plans), shares delivered or withheld (under the terms of grants under TECO Energy’s incentive compensation plans) to offset tax withholding obligations associated with the vesting of restricted shares and shares purchased by the TECO Energy Group Retirement Savings Plan pursuant to directions from plan participants or dividend reinvestment.

28


Shareholder Return Performance Graph

The following graph shows the cumulative total shareholder return on TECO Energy’s common stock on a yearly basis over the five-year period ended Dec. 31, 2015, and compares this return with that of the S&P 500 Index and the S&P Multi Utility Index. The graph assumes that the value of the investment in TECO Energy’s common stock and each index was $100 on Dec. 31, 2010 and that all dividends were reinvested.

 

 

 

Item 6. SELECTED FINANCIAL DATA OF TECO ENERGY

 

(millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended Dec. 31,

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Revenues (1)

 

$

2,743.5

 

 

$

2,566.4

 

 

$

2,355.1

 

 

$

2,387.7

 

 

$

2,476.9

 

Net income from continuing operations (1)

 

 

241.2

 

 

 

206.4

 

 

 

188.7

 

 

 

197.0

 

 

 

200.6

 

Net income from discontinued operations (1)

 

 

(67.7

)

 

 

(76.0

)

 

 

9.0

 

 

 

15.7

 

 

 

72.0

 

Net income

 

 

173.5

 

 

 

130.4

 

 

 

197.7

 

 

 

212.7

 

 

 

272.6

 

Total assets

 

 

8,961.1

 

 

 

8,726.2

 

 

 

7,448.0

 

 

 

7,334.9

 

 

 

7,307.2

 

Long-term debt, including current portion

 

 

3,850.2

 

 

 

3,628.5

 

 

 

2,921.1

 

 

 

2,972.7

 

 

 

3,073.4

 

EPS - Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations (1)

 

$

1.03

 

 

$

0.92

 

 

$

0.88

 

 

$

0.92

 

 

$

0.93

 

From discontinued operations (1)

 

 

(0.29

)

 

 

(0.34

)

 

 

0.04

 

 

 

0.07

 

 

 

0.34

 

 

 

$

0.74

 

 

$

0.58

 

 

$

0.92

 

 

$

0.99

 

 

$

1.27

 

EPS - Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations (1)

 

$

1.03

 

 

$

0.92

 

 

$

0.88

 

 

$

0.92

 

 

$

0.93

 

From discontinued operations (1)

 

 

(0.29

)

 

 

(0.34

)

 

 

0.04

 

 

 

0.07

 

 

 

0.34

 

 

 

$

0.74

 

 

$

0.58

 

 

$

0.92

 

 

$

0.99

 

 

$

1.27

 

Dividends paid per common share outstanding

 

$

0.900

 

 

$

0.880

 

 

$

0.880

 

 

$

0.880

 

 

$

0.850

 

(1)

Amounts shown include reclassifications to reflect discontinued operations as discussed in Note 19 to the TECO Energy Consolidated Financial Statements.

 

29


Item 7.

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS

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. Such statements are based on our current expectations as of the date we filed this report, and we do not undertake to update or revise such forward-looking statements, except as may be required by law. These forward-looking statements include references to our pending acquisition by Emera, Inc., anticipated capital expenditures, liquidity and financing requirements, projected operating results, future environmental matters, and regulatory and other plans. Important factors that could cause actual results to differ materially from those projected in these forward-looking statements are discussed under “Risk Factors, and elsewhere in this MD&A.”

TECO Energy, Inc. is a holding company, and all of its business is conducted through its subsidiaries. In this Management’s Discussion & Analysis, “we,” “our,” “ours” and “us” refer to TECO Energy, Inc. and its consolidated group of companies, unless the context otherwise requires.

OVERVIEW

We are a utility holding company with regulated electric and gas utility operations in Florida and New Mexico.

Our largest subsidiary, Tampa Electric Company, includes regulated electric and gas utility operations in Florida. Tampa Electric serves almost 720,000 retail customers in a 2,000-square-mile service area in West Central Florida and has electric generating plants with a winter peak generating capacity of 4,730 MW. PGS, Florida’s largest gas distribution utility, serves more than 360,000 residential, commercial, industrial and electric power generating customers in all major metropolitan areas of the state, with a total natural gas throughput of almost 1.8 billion therms in 2015.

Our NMGC utility subsidiary is New Mexico’s largest regulated natural gas distribution utility and serves more than 516,000, primarily residential customers in 23 of New Mexico’s 33 counties, with total natural gas throughput of 775 million therms in 2015.

 

PENDING ACQUISITION BY EMERA

As previously announced, on Sept. 4, 2015, we entered into an Agreement and Plan of Merger with Emera and Emera US Inc., a Florida corporation (“Merger Sub”).

Upon the terms and subject to the conditions set forth in the Merger Agreement, which was unanimously approved and adopted by the board of directors of TECO Energy, at the effective time, Merger Sub will merge with and into TECO Energy (the “Merger”) with TECO Energy continuing as the surviving corporation.

Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding share of TECO Energy common stock will be cancelled and converted automatically into the right to receive $27.55 in cash, without interest.

On Dec. 3, 2015, our shareholders representing a majority of the outstanding shares of TECO Energy common stock approved the Merger. On Jan. 20, 2016, the FERC approved the acquisition, finding the transaction is consistent with the public interest, and on Feb. 5, 2016, the applicable Hart-Scott-Rodino Act waiting period expired. On Jan. 6, 2016, TECO Energy and Emera made the initial filings required to obtain approval of the Merger with CFIUS. The closing of the Merger remains subject to, (i) receipt of remaining regulatory approvals, including the approval of the NMPRC, (ii) the absence of any law or judgment that prevents, makes illegal or prohibits the closing of the Merger, (iii) the absence of any material adverse effect with respect to TECO Energy and (iv) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Merger Agreement.

The Merger Agreement contains customary representations, warranties and covenants of TECO Energy, Emera and Merger Sub. The Merger Agreement contains covenants by TECO Energy, among others, that (i) TECO Energy will conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the closing of the Merger and (ii) TECO Energy will not engage in certain transactions during such interim period. The Merger Agreement contains covenants by Emera, including that Emera will use its reasonable best efforts to take all actions necessary to obtain all governmental and regulatory approvals.

In addition, the Merger Agreement requires Emera (i) to maintain TECO Energy’s historic levels of community involvement and charitable contributions and support in TECO Energy’s existing service territories, (ii) to maintain TECO Energy’s headquarters in Tampa, FL, (iii) to honor current union contracts in accordance with their terms and (iv) to provide each continuing non-union

30


employee, for a period of two years following the closing of the Merger, with a base salary or wage rate no less favorable than, and incentive compensation and employee benefits, respectively, substantially comparable in the aggregate to those that they received as of the time immediately prior to the closing.

TECO Energy is also subject to a “no-shop” restriction that limits its ability to solicit alternative acquisition proposals or provide nonpublic information to, and engage in discussion with, third parties.

The Merger Agreement contains certain termination rights for both TECO Energy and Emera. Either party may terminate the Merger Agreement if (i) the closing of the Merger has not occurred by Sept. 30, 2016, (subject to a 6-month extension if required to obtain necessary regulatory approvals), (ii) a law or judgment preventing or prohibiting the closing of the Merger has become final, (iii) TECO Energy’s shareholders do not approve the Merger (which approval was received on Dec. 3, 2015) or (iv) TECO Energy’s board of directors changes its recommendation so that it is no longer in favor of the Merger. If either party terminates the Merger Agreement because TECO Energy’s board of directors changes its recommendation, TECO Energy must pay Emera a termination fee of $212.5 million. If the Merger Agreement is terminated under certain other circumstances, including the failure to obtain required regulatory approvals, Emera must pay TECO Energy a termination fee of $326.9 million.

The Merger Agreement contains representations and warranties by each of the parties to the Merger Agreement, which are made solely for the benefit of the other parties to the Merger Agreement. The representations and warranties in the Merger Agreement (i) are not intended to be treated as categorical statements of fact but rather as a way of allocating risk to one of the parties if any such representation or warranty proves to be inaccurate, (ii) may have been qualified in the Merger Agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, (iii) may be subject to standards of materiality applicable to the parties to the Merger Agreement that differ from what might be viewed as material to shareholders of such party and (iv) were made only as of the date of the Merger Agreement or such other date or dates as may be specified in the Merger Agreement. TECO Energy’s shareholders should not rely on the representations, warranties and covenants, or any descriptions thereof, as characterizations of the actual state of facts or condition of TECO Energy, Emera or Merger Sub.

Following the announcement of the Emera transaction, there were 12 securities class-action lawsuits filed against us and our directors, alleging that the members of the board breached their fiduciary duties in agreeing to the Merger agreement. In November 2015, the parties to the lawsuits entered into a Memorandum of Understanding (MOU) 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 MOU, we made additional disclosures related to the proposed Merger in a proxy supplement.  The MOU provides for the parties to enter into a formal settlement agreement which will be submitted to the Hillsborough Circuit Court Judge for approval after completion of the Merger. Additionally, the judge will consider the award of attorneys’ fees to the plaintiffs’ lawyers (see Note 12 to the TECO Energy Consolidated Financial Statements).

ACQUISITION OF NEW MEXICO GAS CO.

We acquired NMGC in September 2014. With the addition of NMGC‘s more than 516,000 gas customers, TECO Energy utility subsidiaries now serve almost 890,000 gas distribution customers in two states, and almost 1.6 million regulated electric and gas customers in Florida and New Mexico.

The aggregate purchase price for the acquisition was $950 million, which included the assumption of $200 million of existing debt. The transaction was financed through cash on hand at TECO Energy parent, proceeds from the issuance of $292 million of TECO Energy common stock, the issuance of $270 million of private placement debt at NMGI and NMGC, which was used to retire $219 million of existing NMGC and NMGI debt, and short-term borrowings at TECO Finance.

Strategic benefits of the acquisition include:

 

·

A transformative transaction that immediately added almost 513,000 customers in a single state.

 

·

Provides an opportunity for TECO Energy’s experienced management team to share marketing expertise in a growing service territory, and for both companies to share best practices to support growth.

 

·

Diversifies TECO Energy’s operating footprint.

 

·

Provides immediate to near-term shareholder and customer benefits through organic growth opportunities.

 

·

Accretive to full-year earnings in 2015.

 

SALE OF TECO COAL

31


On Sept. 21, 2015, TECO Diversified, a wholly-owned subsidiary of TECO Energy, entered into a Securities Purchase Agreement (the “SPA”) for the sale of TECO Coal LLC to Cambrian Coal Corp. The SPA did not provide for an up-front purchase payment, but provides for contingent payments of up to $60 million that may be paid in the years up to 2019 depending on specified coal benchmark prices. TECO Energy retains certain personnel related liabilities, but all other TECO Coal liabilities were transferred in the transaction. The retained liabilities included pension liability, which was fully funded at June 30, 2015, and severance agreements, which were paid in 2015. In addition, we retained obligations under letters of indemnity that guarantee payments on bonds posted for the reclamation of mines prior to the transfer of all permits to the purchaser by the Commonwealths of Kentucky and Virginia. We are working with the purchaser and the respective permitting agencies to have all permits transferred to the purchaser by the end of 2016 (see the Risk Factors section).

The SPA called for a simultaneous signing and closing, which occurred on Sept. 21, 2015. The closing of this sale completed the process of exiting unregulated operations to focus on regulated utility businesses.   

As a result of our Board of Directors authorizing us to enter into negotiations for the sale of TECO Coal, effective in the third quarter of 2014 it was classified as asset held for sale and its results for all periods presented are classified as discontinued operations. TECO Energy recorded a non-cash valuation adjustment of approximately $76 million, after tax, to the carrying value of TECO Coal to reflect the sales price specified under a sales agreement entered into in October 2014, and an additional $51 million impairment charge, including a $7.7 million charge related to black lung liabilities was recorded in 2015. (See the Discontinued Operations section later in this MD&A.)

2015 PERFORMANCE

All amounts included in this MD&A are after tax, unless otherwise noted.

In 2015, our net income was $173.5 million, or $0.74 per share, compared with $130.4 million, or $0.58 per share, in 2014. In 2015, net income from continuing operations was $241.2 million, or $1.03 per share, compared with $206.4 million, or $0.92 per share, in 2014. The $67.7 million loss from discontinued operations in 2015 includes the operating results from TECO Coal, impairment charges totaling $50.8 million, and the $7.7 million charge related to black lung liabilities. The $76.0 million loss from discontinued operations in 2014 included the operating results from TECO Coal, impairment charges of $76.4 million and items related to the 2012 sale of TECO Guatemala.

In 2015 and 2014, non-GAAP results from continuing operations, which exclude $15.0 million and $23.3 million of acquisition-related charges, respectively, were $256.2 million, or $1.10 on a per-share basis, compared with $229.7 million, or $1.03 on a per-share basis. See the 2015 and 2014 GAAP – Non-GAAP Reconciliation Table below.

The most significant factors impacting the year-over-year-comparison of net income and non-GAAP results were the $37 million of higher pretax base revenue at Tampa Electric as a result of its 2013 rate case settlement and higher energy sales due to more favorable weather in 2015 than in 2014, and the addition of NMGC for the full year. Tampa Electric and PGS benefited from customer growth of 1.8% and 2.1%, respectively.

OUTLOOK

Our outlook for 2016 reflects our expectation that our Florida utilities will deliver strong earnings growth, earning returns above the mid-point of their allowed ROE ranges, and that all of the utilities will continue to experience customer growth at levels similar to or better than 2015 levels and will continue to focus on cost control. The drivers impacting 2016 are summarized below and discussed in further detail in the individual operating company sections.

Tampa Electric expects to earn in the upper half of its allowed ROE range of 9.25% to 11.25%, driven by $5.0 million of higher base revenues that were effective Nov. 1, 2015 as a result of its September 2013 rate case settlement agreement, average customer growth trends similar to or slightly better than those experienced in 2015 and higher AFUDC primarily related to the Polk Power Station conversion project. Weather-normalized retail energy sales are expected to increase at a rate about 0.3% to 0.5% below the rate of customer growth. These sales forecasts reflect the impact of improved lighting and appliance efficiency and customer energy conservation. Full-year O&M expense is expected to be lower than 2015 due to lower employee-related costs, a focus on cost control and the impact of synergies in Florida due to the NMGC integration. Depreciation expense is expected to be higher due to normal additions to facilities to serve customers.

PGS expects to continue to earn in the upper half of its allowed ROE range of 9.75% to 11.75% from average customer growth trends similar to or slightly better than those experienced in 2015 and continued interest from customers utilizing petroleum and other fuel sources to convert to natural gas. O&M expense and depreciation trends are expected to be similar to Tampa Electric.

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NMGC expects 2016 average customer growth of more than 0.7% and volume growth at about the same level as experienced in 2015. Consistent with the terms of the NMPRC approval of the acquisition, NMGC will continue to credit $4.0 million to customer bills in each 12-month period until new base rates are established.

These forecasts are based on our current assumptions described in each operating company discussion, which are subject to risks and uncertainties (see the Risk Factors section).

Our priority for the use of cash is investment in our utilities to support their capital spending programs while maintaining their capital structures and financial integrity, and reduction of parent debt over time. In 2016, we expect to make additional equity contributions to Tampa Electric of approximately $150 million. We anticipate capital spending at the Florida utilities in 2016 to be at comparable levels to 2015 at approximately $685 million, including the investments in generating capacity additions at Tampa Electric and opportunities to grow the PGS system described below. We expect NMGC capital expenditures of approximately $80 million to support modest customer growth and system reliability (see the Liquidity, Capital Resources section).

We have evaluated trends, strategies and opportunities affecting our regulated utilities, to sharpen the focus on developing longer-range plans to take advantage of emerging growth opportunities and some fundamental changes in our industry. Over time, we expect these initiatives to contribute to organic earnings growth. Some of the areas that we are currently focused on include:

 

·

We believe there are opportunities to grow the use of CNG for fleet vehicles. In 2013, the Florida legislature enacted legislation supportive of CNG vehicle conversions through rebates and tax incentives. To date, we have had success working with fleet owners to install 42 CNG filling stations with completed conversions of more than 1,400 vehicles of various sizes to CNG. In 2016, the number of vehicles already converted or committed to conversion will consume almost 22 million therms annually, the equivalent consumption of more than 94,000 typical Florida residential customers. Such conversions offer compelling economics to customers, and expand PGS therm sales without significant capital investment by PGS. The interest in converting vehicle fleets to natural gas remains strong even in the low oil-price environment, due to the lower emissions profile of CNG fueled vehicles and the outlook for continued low natural gas prices. In January 2016, we placed the first CNG filling station owned by PGS in service. The cost of this station will be recovered over time through a special rate approved by the FPSC.  We expect to open other stations owned by PGS in the future.

 

·

There are opportunities to expand the use of CNG for vehicle fleets in New Mexico over the longer-term.  Current rates to provide CNG service in New Mexico were established many years ago as an experiment to encourage the growth in CNG vehicles. It is currently not profitable to provide CNG service at the existing rates, which cannot be adjusted until new rates are established after the end of 2017 (see the Regulation Section – NMGC Base Rates). When new rates are established, NMGC expects to promote the conversion of vehicle fleets to CNG as PGS has done in Florida.

 

·

We are taking the first steps necessary, through our Customer Relationship Management software project, to implement Smart Grid applications that use proven technology and offer operating and financial benefits to our customers and overall operations. These include, among other opportunities, transitioning automatic meter reading technology to advanced metering infrastructure, which would include a significant investment in our communications infrastructure but would result in O&M savings.

 

·

We recognize that there is a growing demand for natural-gas-fired power generation in Florida over the next decade. We project that Florida may need between 0.8 billion and 1.25 billion cubic feet per day (Bcf/day). Given PGS’ expertise in this area, we continue to evaluate opportunities to partner with transmission and end-use natural gas customers for the construction of laterals to connect the transmission provider to the end users.

 

·

In 2015, we announced plans for a 23 MW utility-scale solar photo-voltaic project to be installed and completed in 2016 at Tampa Electric’s Big Bend Station.  In 2015, we completed the construction of a 2 MW solar photo voltaic energy installation at Tampa International Airport, which we own and operate.  We anticipate developing additional solar photo voltaic installations in the future.

In addition, at PGS, the business model for system expansion evolved over the past several years to focus on extending the system to serve large commercial and industrial customers that are currently using petroleum and propane as fuel under multi-year contracts. The current low natural gas prices and the projections that natural gas prices are going to remain low into the future make it attractive for these customers to convert from fuels that are currently more expensive on a cost per MMBTU basis.

Previously, during periods of robust residential growth, PGS extended its system to serve large residential housing developments, and commercial growth followed the residential development.  During the financial crisis, there were few large active residential projects, which caused PGS to focus on converting the larger commercial and industrial customers to natural gas. Commercial and industrial-led expansion during the economic downturn allowed PGS to continue to provide clean and economical natural gas to areas of the state previously unserved and to be positioned to serve future growth. With 1,000 new residents currently moving to Florida daily, residential construction in Florida has rebounded in a number of key markets across the state, which has resulted in higher demand for natural gas use by residential customers. The combination of renewed residential construction,

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continued interest by commercial and industrial customers in converting to natural gas, and the growing interest in the conversion of vehicle fleets to CNG is contributing to strong growth at PGS.

We are expanding marketing activities at NMGC by deploying the marketing skills developed by PGS in Florida to New Mexico to grow that business.  Areas of focus include conversion of large commercial or industrial customers using petroleum-based fuels to natural gas, developing the CNG market for vehicle fleets in New Mexico, as PGS has successfully done in Florida, and support of economic development in New Mexico.

RESULTS SUMMARY

The table below compares our GAAP net income to our non-GAAP results. A reconciliation between GAAP net income and non-GAAP results is contained in the Reconciliation of GAAP net income from continuing operations to non-GAAP results tables for 2015, 2014 and 2013. A non-GAAP financial measure is a numerical measure that includes or excludes amounts, or is subject to adjustments that have the effect of including or excluding amounts that are excluded or included from the most directly comparable GAAP measure (see the Non-GAAP Information section).

Results Comparisons

 

(millions)

 

2015

 

 

2014

 

 

2013

 

Net income

 

$

173.5

 

 

$

130.4

 

 

$

197.7

 

Net income from continuing operations

 

$

241.2

 

 

$

206.4

 

 

$

188.7

 

Non-GAAP results from continuing operations

 

$

256.2

 

 

$

229.7

 

 

$

194.9

 

The table below provides a summary of revenues, earnings per share, net income and shares outstanding for the 2015-2013 period.

Earnings Summary

 

(millions) Except per-share amounts

 

2015

 

 

2014

 

 

2013

 

Consolidated revenues

 

$

2,743.5

 

 

$

2,566.4

 

 

$

2,355.1

 

Earnings per share – basic

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.74

 

 

$

0.58

 

 

$

0.92

 

Earnings (loss) per share from discontinued operations

 

 

(0.29

)

 

 

(0.34

)

 

 

0.04

 

Earnings per share before discontinued operations

 

$

1.03

 

 

$

0.92

 

 

$

0.88

 

Earnings per share – diluted

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.74

 

 

$

0.58

 

 

$

0.92

 

Earnings (loss) per share from discontinued operations

 

 

(0.29

)

 

 

(0.34

)

 

 

0.04