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, 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 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."

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 an energy-related holding company with four businesses consisting of regulated electric and gas utility operations in Florida, Tampa Electric and Peoples Gas System (PGS), respectively; TECO Coal, which owns and operates coal production facilities in the Central Appalachian coal production region; and TECO Guatemala, which is engaged in electric power generation and distribution and energy-related businesses in Guatemala.

Our regulated utility companies, Tampa Electric and PGS operate in the Florida market. Tampa Electric serves more than 667,000 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 4,477 megawatts. PGS, Florida's largest gas distribution utility, serves more than 335,000 residential, commercial, industrial and electric power generating customers in all of the major metropolitan areas of the state, with a total natural gas throughput of 1.4 billion therms in 2008.

We also have two unregulated companies. TECO Coal, through its subsidiaries, operates surface and underground mines and related coal processing facilities in eastern Kentucky, Tennessee and southwestern Virginia, producing metallurgical-grade and high-quality steam coals. Sales in 2008 were 9.3 million tons. TECO Guatemala, through its subsidiaries, owns a coal-fired generating facility and has a 96% ownership interest in an oil-fired peaking power generating plant, both under long-term contracts with a regulated distribution utility in Guatemala. It also has a 24% ownership interest in Guatemala's largest distribution utility, Empresa Eléctrica de Guatemala (EEGSA), and in affiliated companies (in combination called DECA II), which provide, among other things, electricity transmission services, telecommunication services, wholesale power sales to unregulated electric customers and engineering services.

In December 2007, we sold TECO Transport, a dry-bulk shipping company that had been a part of our business mix for many years. We used the cash from this sale to further our most important cash priorities to invest in our Florida utilities and to reduce parent company debt. The sale of TECO Transport allowed us to accelerate the retirement of parent debt, improve our balance sheet and credit ratings and reduce our business risk profile.

We have reduced parent and parent-guaranteed debt from a peak level of $2.7 billion in 2002 to $1.3 billion at the end of 2008. This debt was incurred in connection with a series of major investments in unregulated domestic power generation facilities outside Florida in anticipation of a movement toward competitive energy. The investments were ultimately unsuccessful and resulted in substantial losses when we exited this business segment in 2004 and 2005.

2008 PERFORMANCE

All amounts included in this Management's Discussion & Analysis are after tax, unless otherwise noted.

In 2008, our net income and earnings per share were $162.4 million or $0.77 per share, compared to $413.2 million or $1.98 per share in 2007. Net income in 2008 included a $21.6 million provision for taxes due to the repatriation of cash and investments from Guatemala, a $1.9 million charge associated with a regulatory settlement with the Florida Public Service Commission (FPSC) related to a dispute that arose in 2008 over the calculation of Tampa Electric's waterborne transportation disallowance over its five-year life, and $2.6 million of favorable adjustments to income taxes and working capital related to the sale of TECO Transport. Net income in 2007 included the $149.4 million gain from the sale of TECO Transport, $16.3 million of costs related to the sale of TECO Transport, and $20.2 million of charges related to debt extinguishment/exchange transactions. TECO Transport and the production of synthetic fuel contributed $34.0 million and $52.6 million, respectively, or $0.41 per share collectively, to 2007 net income. In 2007, net income reflected a $14.3 million tax benefit recorded in discontinued operations related to the 2005 disposition of the Union and Gila River merchant power plants.

Our non-GAAP results in 2008, which exclude the charges and gains discussed above, on a per share basis were $0.87 per share, compared to $1.07 in 2007 (see the 2008 and 2007 Reconciliation of GAAP net income from continuing operations to non-GAAP results tables). Our results in 2008 reflected the impact on Tampa Electric of lower customer and energy sales growth, and the impact on TECO Coal of higher production costs. Performance in 2008 benefited from improved results at PGS and TECO Guatemala (excluding the taxes on the repatriation of cash and investments), and lower parent interest expense as a result of our debt retirement actions.

In 2008, we remained focused on supporting the growth of Tampa Electric and strengthening its capital structure through equity contributions from TECO Energy to Tampa Electric. Tampa Electric has capital requirements associated with its growing customer base, environmental compliance, peaking generation and future baseload generation. To accomplish our objectives of supporting Tampa Electric's growth and reducing parent debt, in 2007 we completed the sale of TECO Transport for $405 million of gross proceeds. The sale allowed us to accelerate the retirement in 2007 of almost $300 million of parent debt and $111 million of parent-guaranteed debt. The accelerated debt retirement allowed us to deploy 2008 cash generation that would otherwise have been applied to debt reduction to investment in Tampa Electric. In 2008, we made cash equity contributions totaling $292 million to Tampa Electric to strengthen its capital structure and to support its capital program.

OUTLOOK

We remain focused on our long-term goal of investing in and growing our Florida utility businesses, while generating significant cash and earnings from our other energy-related businesses, TECO Coal and TECO Guatemala. Continuing the process of paying down and restructuring the parent debt that remains from the failed merchant power investments that were made early in this decade, with portions of that debt maturing in 2010, 2011 and 2012, remains a priority as well.

Important factors in our 2009 results will be the decisions to be made by the FPSC in the base rate proceedings at Tampa Electric and PGS. Both utility companies expect that the FPSC will continue its long history of balanced regulatory decisions; however, the company believes that it would be inappropriate to provide an earnings guidance range until after these regulatory proceedings are concluded, which is expected to be in the spring of 2009. TECO Energy expects that its results in 2009 will be driven by the factors discussed below.

Assuming normal weather, Tampa Electric expects energy sales to be higher in 2009, after the very mild weather in 2008. Based on forecasts published by various investment banks and nationally recognized experts in early 2009, the weak economy was not expected to start to improve until at least the second half of 2009; however, continued deterioration of the national economy through February 2009 has raised new questions as to the timing of a start to an economic recovery. The Florida housing market is not expected to start to recover until after a general economic recovery begins. Until the economy and housing markets start to improve, it is difficult to forecast when customer and related energy sales growth will resume. Non-fuel operation and maintenance expense is expected to increase in 2009 compared to 2008 due to increased costs for subcontracted labor and materials; increased spending on coal-fired generating unit maintenance, tree trimming and shipping channel dredging; and higher bad debt expense. Depreciation expense is expected to increase from additions to facilities to serve customers; interest expense is expected to increase due to higher long-term debt balances associated with the construction program; and interest income is expected to decrease due to lower under-recovered FPSC-approved clause balances. Environmental Cost Recovery Clause-related earnings are expected to increase due to the completion of the third nitrogen oxide (NOx) control project, which is expected to enter service in May. In November 2008, the FPSC approved Tampa Electric's fuel cost recovery filing, which included full recovery of waterborne and rail transportation costs for the delivery of solid fuel under a new contract effective Jan. 1, 2009. This approval eliminates the approximately $10 million annual reduction in net income that has occurred over the past five years of the previous transportation contract.

In 2009, customer and therm sales growth at PGS will be impacted by the uncertain timing of economic and housing market recoveries. Operation and maintenance and depreciation expenses are expected to increase. Interim base rate relief was granted in 2008 which amounts to approximately $2.4 million on an annualized basis.

TECO Coal expects 2009 net income to increase over 2008 from higher contract selling prices. Total sales are expected to be in a range between 9.8 million and 10.3 million tons in 2009, compared to 9.3 million tons in 2008. This level of expected production, which is lower than previously projected, is in response to the current world-wide supply and demand equation for metallurgical coal. Approximately 9.6 million tons of expected sales are currently contracted at an average selling price of approximately $73 per ton. The unsold tons are metallurgical and pulverized coal injection (PCI) coal. As of February 2009, the metallurgical and PCI coal normally sold to European customers had not been contracted due to the significant slowdown in the world-wide steel industry in response to the economic slowdown. In a normal contract year, these contracts would be expected to be signed by the end of March with the new contracts initiating in April. The fully-loaded, all-in cost of production is expected to be in a range between $63 and $66 per ton in 2009. Diesel fuel prices have been hedged for those contracts that do not have diesel price adjustments in the contract.

TECO Guatemala expects 2009 net income to decrease from 2008 levels, primarily due to the Value Added Distribution (VAD) tariff decision in 2008, which significantly lowered rates charged by EEGSA beginning in August 2008, and lower generation from the San José Power Station. The lower VAD is expected to put all of the earnings from EEGSA to TECO Guatemala, which had previously averaged about $10 million annually, at risk as long as the lower rates are in effect. In 2008, there was a five-month reduction in earnings from the VAD decision, but if the situation remains unresolved there would be a full year reduction in earnings in 2009. TECO Guatemala has served a Notice of Intent under DR-CAFTA indicating its intent to file an arbitration claim against the Republic of Guatemala for damages to its EEGSA partnership interest as a result of the VAD decision. The San José Power Station has been off-line since mid-January due to an equipment failure and is not expected to return to service until approximately mid-March. After its return to service, the economic dispatch of the San José Power Station will be dependent on the price of fuel for other generators. Currently, the dispatch price for some of the diesel generating resources in Guatemala, which use residual fuel oil, is below the dispatch price for the San José Power Station, which includes the cost of coal plus a non-fuel variable cost component. If this relationship persists, generation from the San José Power Station could continue to be limited, thus limiting non-fuel energy sales revenues. However, the station has a 65% minimum take provision under its power sales agreement, which could be reduced if the plant does not meet an 85% availability rating under the power sales agreement. Results in 2009 will also be impacted by the much lower spot energy sales and margins from the San José Power Station, driven by the same oil/coal price differential condition, lower interest income on lower cash balances after the repatriation of cash in 2008, lower operator fees associated with the DECA II companies, and the absence of the $3.1 million benefit related to an adjustment to previously estimated 2007 income and year-end equity balances at EEGSA that occurred in 2008.

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).

We are maintaining our priorities for the use of cash, which are investing in the utility companies, and restructuring and paying down parent debt as opportunities arise. We expect to make additional equity contributions to Tampa Electric in 2009 to support its continued capital spending for environmental controls and its capital investment program.

Capital expenditures increased in 2008, primarily at Tampa Electric for equipment to control NOx emissions, compliance with the FPSC-mandated transmission and distribution system storm hardening requirements, distribution system reliability improvement, and heat rate and capacity factor improvements to our coal-fired units. We also invested in new mining equipment and continued development of mines at TECO Coal. We forecast capital expenditures to increase further to more than $600 million in 2009 at Tampa Electric and to fluctuate between $370 million and more than $600 million per year through 2013 to meet the expected resumption of customer growth and generation plant maintenance, for peak load generating capacity expansion, for distribution system improvements to provide higher reliability, for its portion of transmission system expansion and for upgrades in the Central Florida area to meet the new National Electric Reliability Council (NERC) reliability standards. We also plan to invest in modest distribution system expansion at PGS, and for normal maintenance capital and regulatory compliance at TECO Coal in 2009 (see the Liquidity, Capital Resources section).

RESULTS SUMMARY

Since July 2006, we have provided two measures to allow comparison of our results with and without synthetic fuel. They are non-GAAP results from continuing operations including benefits from the production of synthetic fuel (Non-GAAP Results With Synthetic Fuel), which exclude certain charges and gains but include synthetic fuel benefits or costs, and non-GAAP results excluding synthetic fuel (Non-GAAP Results Excluding Synthetic Fuel), which exclude charges, gains and benefits associated with the production of synthetic fuel (see the Non-GAAP Information section). Although, with the expiration of the synthetic fuel tax credits at the end of 2007, we no longer produce synthetic fuel, we are continuing to provide both non-GAAP measures for historical comparison purposes.

The table below compares our GAAP net income to our non-GAAP measures. A reconciliation between GAAP net income and the two non-GAAP measures is contained in the Reconciliation of GAAP net income from continuing operations to non-GAAP results tables included for each year. 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 included or excluded from the most directly comparable GAAP measure (see the Non-GAAP Information section).

Results Comparisons



         (millions)                                   2008      2007      2006
         Net income                                  $ 162.4   $ 413.2   $ 246.3
         Net income from continuing operations       $ 162.4   $ 398.9   $ 244.4
         Non-GAAP Results With Synthetic Fuel        $ 183.3   $ 276.3   $ 233.6
         Non-GAAP Results Excluding Synthetic Fuel   $ 183.3   $ 223.7   $ 201.5

In 2008, net income and earnings per share were $162.4 million or $0.77 per share, compared to $413.2 million or $1.98 per share in 2007, which included a gain on the December 2007 sale of TECO Transport. Our non-GAAP results in 2008, which exclude the charges and gains, on a per share basis were $0.87 per share, compared to $1.07 in 2007 (see the 2008 and 2007 Reconciliation of GAAP net income from continuing operations to non-GAAP results tables). TECO Transport and the production of synthetic fuel contributed $34.0 million and $52.6 million, respectively, or $0.41 per share collectively, to 2007 net income. Compared to 2007, our results in 2008 reflected higher earnings at PGS, lower interest expense at the TECO Energy parent level and lower earnings from both Tampa Electric and TECO Coal. Our net income and earnings per share were reduced by $21.6 million and $0.10 per share, respectively, for income taxes related to the repatriation of cash and investments from TECO Guatemala, of which $9.6 million was recognized by TECO Guatemala and $12.0 million by TECO Energy parent. Our 2008 results benefited from improved performance by TECO Guatemala, exclusive of the tax charge.

Compared to 2006, our results in 2007 reflected higher earnings from the production of synthetic fuel at TECO Coal, higher earnings at Tampa Electric and TECO Guatemala and lower parent-level interest expense partially offset by lower results at PGS. As a result of the sale transaction, results at TECO Transport are included only through Dec. 3, 2007. Net income and earnings per share were $413.2 million or $1.98 per share in 2007, compared to $246.3 million or $1.19 per share in 2006. Results in 2007 included the $149.4 million gain and the $16.3 million of costs related to the sale of TECO Transport, which closed in December, and $20.2 million of charges related to the debt extinguishment/exchange transactions completed in December. Net income and earnings per share from continuing operations were $398.9 million or $1.91 per share in 2007, compared to $244.4 million or $1.18 per share in 2006. In 2007, results reflected a $14.3 million tax benefit recorded in discontinued operations in the second quarter as a result of reaching a favorable conclusion with taxing authorities related to the 2005 disposition of the Union and Gila River merchant power plants. TECO Transport was not classified as a discontinued operation due to its ongoing contractual relationship with Tampa Electric for solid fuel waterborne transportation services.

Results in 2007 included a $52.6 million, or $0.25 per share, benefit to earnings from synthetic fuel production. The $52.6 million of benefits from the production of synthetic fuel in 2007 reflected a $91.1 million reduction in earnings benefits due to an estimated 67% phase-out of benefits as a result of high oil prices, compared to a $36.7 million reduction due to a 35% phase-out in 2006. The results for synthetic fuel production also reflected a $53.8 million benefit from adjusting to market the valuation of the oil price hedges placed to protect the 2007 synthetic fuel benefits against high oil prices. In 2006, full-year results included a $1.7 million mark-to-market charge (see the TECO Coal section).

In 2006, results from continuing operations also included an $8.1 million gain from the sale of the McAdams Power Station assets, $5.7 million of gains from the sale of two unused steam turbines, and $3.0 million of charges net of insurance recoveries related to Hurricane Katrina damage at TECO Transport. Results from discontinued operations in 2006 primarily included the recovery of amounts that had been previously written off and tax adjustments at the small energy services companies.

2008 Earnings Summary



(millions) Except per-share amounts                    2008        2007          2006
Consolidated revenues                                $ 3,375.3   $ 3,536.1     $ 3,448.1

Earnings per share-basic
Earnings per share                                   $    0.77   $    1.98     $    1.19
Discontinued operations                                     -         0.07          0.01

Earnings per share from continuing operations        $    0.77   $    1.91     $    1.18

Earnings per share-diluted
Earnings per share                                   $    0.77   $    1.97     $    1.18
Discontinued operations                                     -         0.07          0.01

Earnings per share from continuing operations        $    0.77   $    1.90     $    1.17

Net income                                           $   162.4   $   413.2     $   246.3
Net income from discontinued operations                     -        (14.3 )        (1.9 )
Charges and (gains) from continuing operations (1)        20.9      (122.6 )       (10.8 )

Non-GAAP results with synthetic fuel (2)                 183.3       276.3         233.6
Synthetic fuel impact (1)                                   -        (52.6 )       (32.1 )

Non-GAAP results excluding synthetic fuel (2)        $   183.3   $   223.7     $   201.5

Average common shares outstanding
Basic                                                    210.6       209.1         207.9
Diluted                                                  211.4       209.9         208.7

(1) See the GAAP to non-GAAP reconciliation tables that follow.

(2) A non-GAAP financial measure is a numerical measure that includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable GAAP measure (see the Non-GAAP Information section).

The following tables show the specific adjustments made to GAAP net income for each segment to develop our non-GAAP results:

2008 Reconciliation of GAAP net income from continuing operations to non-GAAP results

                                            Tampa       Peoples     TECO       TECO       Parent/
Net income impact (millions)               Electric       Gas       Coal     Guatemala     Other        Total
GAAP Net income from continuing
operations                                $    135.6   $    27.1   $ 18.0   $      36.9   $  (55.2 )   $ 162.4

Waterborne transportation dispute
settlement                                       1.9          -        -             -          -          1.9
Final adjustments associated with the
sale of TECO Transport recorded at
Parent                                            -           -        -             -        (2.6 )      (2.6 )
Taxes on repatriation of cash and
investments from Guatemala                        -           -        -            9.6       12.0        21.6

Total charges and (gains)                        1.9          -        -            9.6        9.4        20.9

Non-GAAP results                          $    137.5   $    27.1   $ 18.0   $      46.5   $  (45.8 )   $ 183.3

2007 Reconciliation of GAAP net income from continuing operations to non-GAAP results

                                           Tampa        Peoples      TECO           TECO             TECO        Parent/
Net income impact (millions)              Electric        Gas        Coal        Transport*        Guatemala      Other         Total
GAAP Net income from continuing
operations                               $    150.3    $    26.5    $  90.9      $      34.0      $      44.7    $   52.5      $  398.9

Gain on sale of TECO Transport                   -            -          -                -                -       (149.4 )      (149.4 )
Asset held for sale-depreciation                 -            -          -              (9.7 )             -           -           (9.7 )
Costs associated with the sale of
TECO Transport recorded at Parent                -            -          -                -                -         16.3          16.3
Debt extinguishment/exchange                     -            -          -                -                -         20.2          20.2

Total charges and (gains)                        -            -          -              (9.7 )             -       (112.9 )      (122.6 )

Non-GAAP results with synthetic fuel*         150.3         26.5       90.9             24.3             44.7       (60.4 )       276.3
Synthetic fuel impact                            -            -       (52.6 )             -                -           -          (52.6 )

Non-GAAP results excluding synthetic
fuel*                                    $    150.3    $    26.5    $  38.3      $      24.3      $      44.7    $  (60.4 )    $  223.7

*Results for TECO Transport include activity through Dec. 3, 2007.

2006 Reconciliation of GAAP net income from continuing operations to non-GAAP results

                                          Tampa        Peoples      TECO           TECO             TECO        Parent/
Net income impact (millions)             Electric        Gas        Coal         Transport        Guatemala      Other         Total
GAAP Net income (loss) from
continuing operations                   $    135.9    $    29.7    $  78.8      $      22.8      $      37.6    $  (60.4 )    $ 244.4

Hurricane costs                                 -            -          -               4.5               -           -           4.5
Hurricane insurance cost recoveries             -            -          -              (1.5 )             -           -          (1.5 )
Dell and McAdams valuation
adjustment and gain on sale, net                -            -          -                -                -         (8.1 )       (8.1 )
Gain on sale of unused steam
turbines                                        -            -          -                -                -         (5.7 )       (5.7 )

Total charges and (gains)                       -            -          -               3.0               -        (13.8 )      (10.8 )

Non-GAAP results with synthetic fuel         135.9         29.7       78.8             25.8             37.6       (74.2 )      233.6
Synthetic fuel impact                           -            -       (32.1 )             -                -           -         (32.1 )

Non-GAAP results excluding synthetic
fuel                                    $    135.9    $    29.7    $  46.7      $      25.8      $      37.6    $  (74.2 )    $ 201.5

Non-GAAP Information

From time to time, in this Management's Discussion & Analysis of Financial Condition and Results of Operations, we present non-GAAP results, which present . . .