These unaudited condensed consolidated financial statements should be read in conjunction with Cleco Power’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010. For additional information on the basis of presentation, see “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Basis of Presentation.”
The accompanying condensed consolidated financial statements of Cleco include the accounts of Cleco and its majority owned subsidiaries after elimination of intercompany accounts and transactions.
Prior to April 30, 2011, Cleco reported its investment in Cajun on the equity method of accounting. In conjunction with the disposition of Acadia Unit 2 to Entergy Louisiana, APH received 100% ownership in Acadia in exchange for its 50% ownership interest in Cajun, and Acadia became a consolidated subsidiary of APH. Following the disposition, Acadia’s assets, liabilities, revenues, expenses, and cash flows are presented on the corresponding line items of Cleco’s condensed consolidated financial statements, prospectively. For additional information on the Acadia Unit 2 transaction, see Note 15 — “Acadia Transactions — Acadia Unit 2.”
Cleco and Cleco Power report the investment in Oxbow on the equity method of accounting. Under the equity method, the assets and liabilities of this entity are reported as equity investment in investees on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. The revenue and expenses of this entity are netted and reported as equity income or loss from investees on Cleco and Cleco Power’s Condensed Consolidated Statements of Income. For additional information on the operations of these entities, see Note 10 — “Variable Interest Entities.”
The condensed consolidated financial statements of Cleco Corporation and Cleco Power have been prepared pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, Cleco believes that the disclosures are adequate to make the information presented not misleading.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The unaudited financial information included in the condensed consolidated financial statements of Cleco Corporation and Cleco Power reflects all adjustments of a normal recurring nature which are, in the opinion of the management of Cleco Corporation and Cleco Power, necessary for a fair statement of the financial position and the results of operations for the interim periods. Information for interim periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery, and other factors, and is not indicative necessarily of the results that may be expected for the full fiscal year. For additional information on recent authoritative guidance and its effect on financial results, see Note 2 — “Recent Authoritative Guidance.”
Property, plant and equipment consist primarily of regulated utility generation and energy transmission assets. Regulated assets, utilized primarily for retail operations and electric transmission and distribution, are stated at the cost of construction, which includes certain materials, labor, payroll taxes and benefits, administrative and general costs, and the estimated cost of funds used during construction. Jointly owned assets are reflected in property, plant and equipment at Cleco Power’s share of the cost to construct or purchase the assets. Property, plant and equipment consist of:
Various agreements to which Cleco is subject contain covenants that restrict its use of cash. As certain provisions under these agreements are met, cash is transferred out of related escrow accounts and becomes available for general corporate purposes. At June 30, 2011, and December 31, 2010, $35.2 million and $41.0 million of cash, respectively, were restricted. At June 30, 2011, restricted cash consisted of $0.1 million under the Diversified Lands mitigation escrow agreement, $26.4 million reserved at Cleco Power for future storm restoration costs, $8.1 million at Cleco Katrina/Rita restricted for payment of operating expenses, interest, and principal on storm recovery bonds and $0.6 million reserved at Cleco Power for a renewable energy grant received from the Louisiana Department of Natural Resources. The $5.8 million net decrease in restricted cash from December 31, 2010, to June 30, 2011, is primarily due to the use of Cleco Katrina/Rita funds for a scheduled storm recovery bond payment of $6.3 million and related interest of $3.8 million made in March 2011 and the use of $6.1 million of GO Zone bond funds during the six months ended June 30, 2011. These decreases were partially offset by $9.4 million of collections for Cleco Katrina/Rita funds, $0.6 million of a renewable energy grant received, and $0.4 million in collections of storm recovery costs.
Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power are required to disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes under GAAP. Other financial assets and liabilities, such as long-term debt, are reported at their carrying values at their date of issuance on the condensed consolidated balance sheets with their fair values disclosed without regard to the three levels. For additional information about fair value levels, see Note 4 — “Fair Value Accounting.”
Market risk inherent in Cleco Power’s market risk-sensitive instruments and positions includes potential changes arising from changes in interest rates and the commodity market prices of power and natural gas on different energy exchanges. Cleco’s Energy Market Risk Management Policy authorizes the use of various derivative instruments, including exchange traded futures and option contracts, forward purchase and sales contracts, and swap transactions to reduce exposure to fluctuations in the price of power and natural gas. Cleco applies the authoritative guidance as it relates to derivatives and hedging to determine whether the market risk-sensitive instruments and positions are required to be marked-to-market. Generally, Cleco Power’s market risk-sensitive instruments and positions qualify for the normal-purchase, normal-sale exception to mark-to-market accounting because Cleco Power takes physical delivery and the instruments and positions are used to satisfy customer requirements. Cleco Power entered into certain financial transactions it considered economic hedges to mitigate the risk associated with a contract for fixed-price power provided to a wholesale customer through December 2010. These transactions were marked-to-market with the resulting gain or loss recorded on the income statement as a component of operating revenue. The contract expired on December 31, 2010 along with the economic hedges; therefore, no gain or loss related to the economic hedges was recorded during the three and six months ended June 30, 2011. For the three and six months ended June 30, 2010, Cleco Power had realized losses of $0.3 million and $0.5 million, and mark-to-market gains of $0.4 million and less than $0.1 million, respectively, recorded in other operations revenue.
Cleco Power has entered into other positions to mitigate the volatility in customer fuel costs. These positions are marked-to-market with the resulting gain or loss recorded on the balance sheet as a component of risk management assets or liabilities. Such gain or loss is deferred as a component of deferred fuel assets or liabilities. When these positions close, actual gains or losses will be included in the fuel adjustment clause and reflected on customers’ bills as a component of the fuel cost adjustment. Based on market prices at June 30, 2011, and December 31, 2010, the net mark-to-market impact relating to these positions were losses of $7.7 million and $15.1 million, respectively. Deferred losses relating to closed natural gas positions totaled $2.1 million and $1.6 million at June 30, 2011, and December 31, 2010, respectively.
Cleco Power maintains margin accounts with commodity brokers used to partially fund the acquisition of natural gas futures, options, and swap contracts. These contracts/positions are used to mitigate the risks associated with the volatility in customer fuel costs noted above. At June 30, 2011, and December 31, 2010, Cleco Power had deposited net collateral of $1.8 million and $4.3 million, respectively, to cover requirements relating to open natural gas futures, options, and swap positions. The current and long-term portions of collateral are reported as a component of risk management assets or liabilities and other deferred credits, respectively.
Cleco and Cleco Power maintain a master netting agreement policy and monitor credit risk exposure through review of counterparty credit quality, counterparty credit exposure, and counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and by requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Cleco Power has agreements in place with various counterparties that authorize the netting of financial buys and sells and contract
payments to mitigate credit risk for transactions entered into for risk management purposes.
In August 2009, Cleco Power entered into a $50.0 million bank loan with variable interest, paid monthly, calculated at 3.00% plus the one-month LIBOR. The loan was set to mature on August 19, 2012. In order to mitigate the risk of future floating interest rates, Cleco Power entered into an interest rate swap in the third quarter of 2009. Based on the notional amount of the bank loan, the swap required a monthly net settlement between Cleco Power’s fixed payment of 1.84% and the swap counterparty’s floating payment of the one-month LIBOR. The swap was set to mature on May 31, 2012. Under the authoritative guidance for derivatives and hedging, the swap met the criteria of a cash flow hedge. Changes in the swap’s fair value related to the effective portion of cash flow hedges were recognized in other comprehensive income, whereas changes in the fair value related to the ineffective portion were recognized in earnings. As settlements were made, the swap’s other comprehensive income fair values were reclassified into earnings as a component of interest expense. In November 2010, Cleco Power terminated the interest rate swap and repaid in full the associated $50.0 million bank loan. At the time of the termination, the remaining $1.1 million of losses in accumulated other comprehensive income were reclassified to other expense. For the three and six months ended June 30, 2010, there were $0.2 million and $0.4 million, respectively, of reclassification adjustments from accumulated other comprehensive loss to interest expense as a result of monthly settlements. There was no impact to earnings due to ineffectiveness for the three and six months ended June 30, 2010. For additional information on accounting for derivatives, see Note 4 — “Fair Value Accounting.”
The Registrants determined that an error existed in the statement of cash flow methodology for determining non-cash transactions related to property, plant and equipment, specifically the dollar amount of property, plant and equipment acquisitions included in accounts payable for each period. This caused errors between the operating activities section and investing activities section for prior periods, including 2008, 2009, and 2010.
Cleco and Cleco Power’s Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Cash Flows have been adjusted for each of the reporting periods shown below to correct the presentation of cash flows related to accruals for property, plant and equipment. These corrections had no impact on the Registrants’ financial condition or results of operations. Management believes that these corrections did not have a material effect on the Registrants’ Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Cash Flows for each of the reporting periods. The corrections to the Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Cash Flows for each of the reporting periods are presented in the following tables.
The following table shows the calculation of basic and diluted earnings per share.
Stock option grants are excluded from the computation of diluted earnings per share if the exercise price is higher than the average market price. There were no stock option grants excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2011 and 2010, due to the average market price being higher than the exercise prices of the stock options.
On June 24, 2011, Cleco Corporation redeemed all 10,288 outstanding shares of its 4.5% preferred stock. The redemption price was $101 per share plus accrued and unpaid dividends to the redemption date, or $101.296 per share. As of the redemption date, no shares of 4.5% preferred stock were outstanding. Holders are no longer entitled to dividends and all rights of such holders as shareholders of Cleco Corporation by reason of their ownership of such 4.5% preferred stock have ceased.
At June 30, 2011, Cleco had two stock-based compensation plans: the ESPP and the LTICP. Substantially all employees, excluding officers and general managers, may choose to participate in the ESPP and purchase a limited amount of common stock at a discount through a stock option agreement. Options or restricted shares of stock, known as non-vested stock as defined by the authoritative guidance on stock-based compensation, common stock equivalents, and stock appreciation rights may be granted to certain officers, key employees, or directors of Cleco Corporation and its subsidiaries pursuant to the LTICP.
On January 28, 2011, Cleco granted 145,002 shares of non-vested stock to certain officers, key employees, and directors of Cleco Corporation and its subsidiaries pursuant to the LTICP.
Cleco and Cleco Power reported pre-tax compensation expense for their share-based compensation plans as shown in the following table:
Note 3 — Regulatory Assets and Liabilities
Cleco Power follows the authoritative guidance on regulated operations, which allows utilities to capitalize or defer certain costs based on regulatory approval and management’s ongoing assessment that it is probable these items will be recovered through the ratemaking process.
The following chart summarizes Cleco Power’s regulatory assets and liabilities at June 30, 2011, and December 31, 2010:
| | | AT JUNE 30, | | | AT DECEMBER 31, | |
| (THOUSANDS) | | 2011 | | | 2010 | |
| Regulatory assets and liabilities – deferred taxes, net | | $ | 208,247 | | | $ | 203,696 | |
| Deferred mining costs | | $ | 20,392 | | | $ | 21,666 | |
| Deferred interest costs | | | 6,850 | | | | 7,033 | |
| Deferred asset removal costs | | | 799 | | | | 768 | |
| Deferred postretirement plan costs | | | 114,909 | | | | 117,651 | |
| Deferred tree trimming costs | | | 9,729 | | | | 11,086 | |
| Deferred training costs | | | 7,564 | | | | 7,642 | |
| Deferred storm surcredits, net | | | 11,138 | | | | 10,633 | |
| Deferred construction carrying costs | | | 14,202 | | | | 18,830 | |
| Lignite mining agreement contingency | | | 3,781 | | | | 3,781 | |
| AFUDC equity gross-up | | | 74,753 | | | | 74,859 | |
| Deferred rate case costs | | | 1,385 | | | | 1,654 | |
| Deferred Acadia Unit 1 acquisition costs | | | 3,024 | | | | 3,076 | |
| Deferred IRP/RFP costs | | | 742 | | | | 977 | |
| Deferred AMI pilot costs | | | 218 | | | | 283 | |
Total regulatory assets – other | | $ | 269,486 | | | $ | 279,939 | |
| Deferred construction carrying costs | | | (65,405 | ) | | | (87,875 | ) |
| Deferred fuel and purchased power | | | 20,986 | | | | 10,348 | |
Total regulatory assets and liabilities, net | | $ | 433,314 | | | $ | 406,108 | |
Deferred Construction Carrying Costs
In February 2006, the LPSC approved Cleco Power’s plans to build Madison Unit 3. Terms of the approval included authorization for Cleco Power to collect from customers an amount equal to 75% of the LPSC-jurisdictional portion of the carrying costs of capital during the construction phase of the unit. In any calendar year during the construction period, the amount collected from customers was not to exceed 6.5% of Cleco Power’s projected retail revenues. Cleco Power began collection of the carrying costs and established a regulatory liability in May 2006. In October 2009, the LPSC voted unanimously to approve Cleco Power’s retail rate plan. The retail rate plan established that Cleco Power return $183.2 million of carrying costs to customers over a five-year period and record a regulatory asset for all carrying costs incurred by Cleco Power above the actual amount collected from customers. On February 12, 2010, Madison Unit 3 commenced commercial operation and the new rates became effective. At that time, Cleco Power began returning the construction carrying costs to customers and amortizing the regulatory asset over a five-year period. In March 2010, the LPSC issued an order changing the period of return from five years to four years and established that Cleco Power return approximately $167.0 million over the four-year period. At June 30, 2011, the regulatory liability and the related regulatory asset were $65.4 million and $14.2 million, respectively. As of June 30, 2011, Cleco Power had returned $101.2 million to customers. At June 30, 2011, $38.8 million was due to be returned to customers within one year.
Deferred Fuel and Purchased Power Costs
The cost of fuel used for electric generation and the cost of power purchased for utility customers are recovered through the LPSC-established fuel adjustment clause, which enables Cleco Power to pass on to its customers substantially all such charges. For the three months ended June 30, 2011, approximately 95% of Cleco Power’s total fuel cost was regulated by the LPSC, while the remainder was regulated by FERC.
The $10.6 million increase in the under-recovered costs was primarily due to the deferral of $17.6 million in additional fuel and purchased power costs and a $0.5 million increase in deferred losses related to closed natural gas positions. Partially offsetting these increases was a $7.4 million decrease in mark-to-market losses on natural gas positions, which was primarily due to the contractual expiration of certain positions.
Note 4 — Fair Value Accounting
The amounts reflected in Cleco Corporation and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2011, and December 31, 2010, for cash and cash equivalents, accounts receivable, other accounts receivable, accounts payable, and short-term debt approximate fair value because of their short-term nature. Estimates of the fair value of Cleco and Cleco Power’s long-term debt and Cleco’s nonconvertible preferred stock are based upon the quoted market price for the same or similar issues or by a discounted present value analysis of future cash flows using current rates obtained by Cleco and Cleco Power for debt and by Cleco for preferred stock with similar maturities. In June 2011, Cleco Corporation redeemed all of its outstanding preferred stock. For more information on the preferred stock redemption, see Note 1 — “Summary of Significant Accounting Policies — Preferred Stock Redemption.” The following charts summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments subject to fair value accounting.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
Cleco
| | | AT JUNE 30, 2011 | | | AT DECEMBER 31, 2010 | |
| (THOUSANDS) | | CARRYING VALUE | | | ESTIMATED FAIR VALUE | | | CARRYING VALUE | | | ESTIMATED FAIR VALUE | |
| Financial instruments not marked-to-market | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 162,126 | | | $ | 162,126 | | | $ | 191,128 | | | $ | 191,128 | |
Restricted cash | | $ | 35,199 | | | $ | 35,199 | | | $ | 41,048 | | | $ | 41,048 | |
Long-term debt, excluding debt issuance costs | | $ | 1,392,553 | | | $ | 1,496,438 | | | $ | 1,403,836 | | | $ | 1,462,063 | |
Preferred stock not subject to mandatory redemption | | $ | - | | | $ | - | | | $ | 1,029 | | | $ | 844 | |
Cleco Power
| | | AT JUNE 30, 2011 | | | AT DECEMBER 31, 2010 | |
| (THOUSANDS) | | CARRYING VALUE | | | ESTIMATED FAIR VALUE | | | CARRYING VALUE | | | ESTIMATED FAIR VALUE | |
| Financial instruments not marked-to-market | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 149,841 | | | $ | 149,841 | | | $ | 184,912 | | | $ | 184,912 | |
Restricted cash | | $ | 35,103 | | | $ | 35,103 | | | $ | 40,951 | | | $ | 40,951 | |
Long-term debt, excluding debt issuance costs | | $ | 1,382,553 | | | $ | 1,486,438 | | | $ | 1,388,836 | | | $ | 1,447,063 | |
At June 30, 2011, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash. Cleco had $192.6 million ($157.4 million of cash and $35.2 million of restricted cash) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investment, Cleco would be exposed to a loss of the invested amounts. Cleco Power had $180.8 million ($145.7 million of cash and $35.1 million of restricted cash) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investments, Cleco Power would be exposed to a loss of the invested amounts. Collateral on these types of investments is not required by either Cleco or Cleco Power. In order to mitigate potential credit risk, Cleco and Cleco Power have established guidelines for short-term investments. Money market funds must have at least $1.0 billion in assets under management; must have been in existence for not less than two years; must have portfolios not comprised of more than 50% of securities issued by foreign entities; and must be rated in the top two ratings categories by at least one nationally recognized rating agency. Commercial paper must be issued by a company with headquarters in the U.S. and rated not less than A1 by Standard & Poor’s or P1 by Moody’s. For split-rated issuers, the second rating must not be lower than either A2 or P2; the issuer’s long-term debt must be rated not lower than A by Standard & Poor’s or A2 by Moody’s; and the issuer cannot be on negative credit watch. Investments in commercial paper rated A2 by Standard & Poor’s or P2 by Moody’s may be made if approved by the appropriate level of management.
Interest Rate Swap
In August 2009, Cleco Power entered into a $50.0 million bank loan with variable interest, paid monthly, and calculated at 3.00% plus the one-month LIBOR. In order to mitigate the risk of future floating interest rates, Cleco Power entered into an interest rate swap in the third quarter of 2009. Based on the notional amount of the bank loan, the swap required a monthly net settlement between Cleco Power’s fixed payment of 1.84% and the swap counterparty’s floating payment of the one-month LIBOR. Both the bank loan and the swap were effective the same day and required monthly payments on the same day near the end of the month. From the inception of the loan to the termination of the loan, Cleco Power recognized net interest expense equal to an annual rate of 4.84% on the bank loan. Since both the bank loan and the swap required payments on the same day near the end of the month, the cash payments were materially close to the interest expense recognized.
The swap met the criteria of a cash flow hedge under the authoritative guidance as it related to derivatives and hedging. Changes in the swap’s fair value related to the effective portion were recognized in other comprehensive income. As settlements were made, the swap’s other comprehensive income fair values were reclassified into earnings as a component of interest expense. In November 2010, Cleco Power terminated the interest rate swap and repaid in full the associated $50.0 million bank loan and all remaining losses in accumulated other comprehensive loss were reclassified to other expense. For the three and six months ended June 30, 2010, there were $0.2 million and $0.4 million, respectively, of reclassification adjustments from accumulated other comprehensive loss to interest expense as a result of monthly settlements. There was no impact to earnings due to ineffectiveness for the three and six months ended June 30, 2010.
Fair Value Measurements and Disclosures
The authoritative guidance on fair value measurements requires entities to classify assets and liabilities measured at their fair value according to three different levels depending on the inputs used in determining fair value.
The tables below disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured on a recurring basis and within the scope of the authoritative guidance for fair value measurements and disclosures.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
Cleco
| | | CLECO CONSOLIDATED FAIR VALUE MEASUREMENTS AT REPORTING DATE USING: | |
| (THOUSANDS) | | AT JUNE 30, 2011 | | | QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) | | | SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) | | | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | | | AT DECEMBER 31, 2010 | | | QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) | | | SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) | | | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | |
| Asset Description | | | | | | | | | | | | | | | | | | | | | | | | |
Energy market derivatives | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 97 | | | $ | - | | | $ | 97 | | | $ | - | |
Institutional money market funds | | | 192,599 | | | | - | | | | 192,599 | | | | - | | | | 229,748 | | | | - | | | | 229,748 | | | | - | |
Total assets | | $ | 192,599 | | | $ | - | | | $ | 192,599 | | | $ | - | | | $ | 229,845 | | | $ | - | | | $ | 229,845 | | | $ | - | |
| Liability Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Energy market derivatives | | $ | 7,665 | | | $ | 1,532 | | | $ | 6,133 | | | $ | - | | | $ | 15,245 | | | $ | 3,317 | | | $ | 11,928 | | | $ | - | |
Total liabilities | | $ | 7,665 | | | $ | 1,532 | | | $ | 6,133 | | | $ | - | | | $ | 15,245 | | | $ | 3,317 | | | $ | 11,928 | | | $ | - | |
Cleco Power
| | | CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING: | |
| (THOUSANDS) | | AT JUNE 30, 2011 | | | QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) | | | SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) | | | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | | | AT DECEMBER 31, 2010 | | | QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) | | | SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) | | | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) | |
| Asset Description | | | | | | | | | | | | | | | | | | | | | | | | |
Energy market derivatives | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 97 | | | $ | - | | | $ | 97 | | | $ | - | |
Institutional money market funds | | | 180,802 | | | | - | | | | 180,802 | | | | - | | | | 224,451 | | | | - | | | | 224,451 | | | | - | |
Total assets | | $ | 180,802 | | | $ | - | | | $ | 180,802 | | | $ | - | | | $ | 224,548 | | | $ | - | | | $ | 224,548 | | | $ | - | |
| Liability Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Energy market derivatives | | $ | 7,665 | | | $ | 1,532 | | | $ | 6,133 | | | $ | - | | | $ | 15,245 | | | $ | 3,317 | | | $ | 11,928 | | | $ | - | |
Total liabilities | | $ | 7,665 | | | $ | 1,532 | | | $ | 6,133 | | | $ | - | | | $ | 15,245 | | | $ | 3,317 | | | $ | 11,928 | | | $ | - | |
The derivative assets and liabilities are classified as either current or non-current depending on when the positions close. All energy market derivative current assets and current liabilities are reported as a net current risk management asset or liability. All energy market derivative non-current assets and non-current liabilities are reported net in other deferred charges or other deferred credits. Net presentation is appropriate due to the right of offset included in the master netting agreements. On the balance sheet, the net current and net non-current derivative positions are netted with the applicable margin deposits. At June 30, 2011, a net current risk management liability of $5.7 million represented the current derivative positions of $7.6 million reduced by current margin deposits of $1.8 million and option premiums that were less than $0.1 million. The non-current liability derivative positions of $0.1 million were recorded in other deferred credits. The institutional money market funds were reported on the Cleco Condensed Consolidated Balance Sheet in cash and cash equivalents, current restricted cash, and non-current restricted cash of $157.4 million, $8.1 million, and $27.1 million, respectively. At Cleco Power, cash and cash equivalents, current restricted cash, and non-current restricted cash were $145.7 million, $8.1 million, and $27.0 million, respectively, as of June 30, 2011.
Cleco utilizes different valuation techniques for fair value calculations. In order to measure the fair value for Level 1 assets and liabilities, Cleco obtains the closing price from published indices in active markets for the various instruments and multiplies this price by the appropriate number of instruments held. Level 2 fair values for assets and liabilities are determined by obtaining the closing price from published indices in active markets for instruments that are similar to Cleco’s assets and liabilities. The fair value obtained is then discounted to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. For some options, Cleco uses the Black-Scholes model using observable and available inputs to calculate the fair value, consistent with the income approach. These techniques have been applied consistently from fiscal period to fiscal period. Level 3 fair values allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Cleco had no Level 3 assets or liabilities at June 30, 2011, or December 31, 2010.
The assets and liabilities reported at fair value are grouped into classes based on the underlying nature and risks associated with the individual asset or liability. Level 1 of energy market derivative assets and liabilities consists of a single class that includes natural gas futures with quoted prices on a liquid, national exchange. As the future price of natural gas is affected by market expectations, such as the supply of natural gas relative to demand, the fair value of Cleco’s natural gas futures fluctuates.
Level 2 of energy market derivative assets and liabilities consists of two classes. The first class contains natural gas swaps which fluctuate in value as the underlying natural gas futures fair value changes, and as market interest rates change. Cleco records the natural gas swaps at the net present value. The second class consists of natural gas options. The fair value of natural gas options fluctuates with the volatility in the fair value of natural gas, the number of days until the options expire, the underlying natural gas futures price fluctuations, and market interest rates. Cleco records natural gas
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
options at the net present value. Both of these energy market derivative classes also contain counterparty execution risk because the transactions are entered into with a direct counterparty and are not traded through an exchange.
The Level 2 institutional money market funds asset consists of a single class. In order to capture interest income and minimize risk, cash is invested in money market funds that invest primarily in short-term securities issued by the U.S. Treasury in order to maintain liquidity and achieve the goal of a net asset value of a dollar. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the underlying securities of the fund.
Cleco has a policy which states that transfers between Levels 1, 2, and 3 are recognized at the end of a reporting period. During the six months ended June 30, 2011, and the year ended December 31, 2010, Cleco did not experience any transfers between levels.
Derivatives and Hedging
The authoritative guidance on derivatives and hedging requires entities to provide transparency disclosures about a company’s derivative activities and how the related hedged items affect a company’s financial position, financial performance, and cash flows. Cleco is required to provide qualitative disclosures about derivative fair value, gains and losses, and credit-risk-related contingent features in derivative agreements.
The following table presents the fair values of derivative instruments and their respective line items as recorded on Cleco Corporation and Cleco Power’s Condensed Consolidated Balance Sheets as of June 30, 2011, and December 31, 2010:
| | DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS | |
| | LIABILITY DERIVATIVES | |
(THOUSANDS) FAIR VALUE | BALANCE SHEET LINE ITEM | | AT JUNE 30, 2011 | | | DECEMBER 31, 2010 | |
| Commodity contracts | | | | | | | |
| Fuel cost hedges: | | | | | | | |
Current | Risk management liability, net | | $ | (7,576 | ) | | $ | (13,497 | ) |
Long-term | Other deferred credits | | | (89 | ) | | | (1,651 | ) |
| Total | | | $ | (7,665 | ) | | $ | (15,148 | ) |
The following table presents the effect of derivatives not designated as hedging instruments on Cleco Corporation and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, and 2010:
| | | | FOR THE THREE MONTHS ENDED | | | | FOR THE SIX MONTHS ENDED | |
| | | | JUNE 30, 2011 | | | JUNE 30, 2010 | | | | JUNE 30, 2011 | | | JUNE 30, 2010 | |
| (THOUSANDS) | GAIN (LOSS) IN INCOME OF DERIVATIVES LINE ITEM | | AMOUNT OF GAIN RECOGNIZED IN INCOME ON DERIVATIVES | | | AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES | | GAIN (LOSS) IN INCOME OF DERIVATIVES LINE ITEM | | AMOUNT OF GAIN RECOGNIZED IN INCOME ON DERIVATIVES | | | AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES | |
| Commodity contracts | | | | | | | | | | | | | | |
Economic hedges | Other operations revenue | | $ | - | | | $ | 112 | (1) | Other operations revenue | | $ | - | | | $ | (491 | ) (2) |
Fuel cost hedges(3) | Fuel used for electric generation | | | 5,203 | | | | (14,402 | ) | Fuel used for electric generation | | | 8,997 | | | | (22,215 | ) |
| Total | | | $ | 5,203 | | | $ | (14,290 | ) | | | $ | 8,997 | | | $ | (22,706 | ) |
(1)For the three months ended June 30, 2010, Cleco recognized $0.4 million of mark-to-market gains related to economic hedges. | |
(2)For the six months ended June 30, 2010, Cleco recognized less than $0.1 million of mark-to-market gains related to economic hedges. | |
(3)In accordance with the authoritative guidance for regulated operations, an additional $7.7 million of unrealized losses and $2.1 million of deferred losses associated with fuel cost hedges are reported in Accumulated Deferred Fuel on the balance sheet as of June 30, 2011, compared to $15.1 million of unrealized losses and $1.6 million of deferred losses associated with fuel cost hedges as of December 31, 2010. As gains and losses are realized in future periods, they will be recorded as Fuel Used for Electric Generation on the Income Statement. | |
At June 30, 2011, Cleco Power had 5.5 million MMBtus hedged for natural gas fuel costs, which is approximately 7% of the estimated natural gas requirements for a two-year period. At December 31, 2010, Cleco Power had 9.4 million MMBtus hedged or approximately 11% of gas requirements for a two-year period.
The following table presents the effect of derivatives designated as hedging instruments on Cleco Corporation and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, and 2010:
| | | FOR THE THREE MONTHS ENDED JUNE 30, 2011 | | | FOR THE THREE MONTHS ENDED JUNE 30, 2010 | |
| (THOUSANDS) | | AMOUNT RECOGNIZED IN OCI | | | AMOUNT OF GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION) | | | AMOUNT OF LOSS RECOGNIZED IN OCI | | | AMOUNT OF (LOSS) GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION) | |
Interest rate swap(1) | | $ | - | | | $ | - | | | $ | (60 | ) | | $ | (197 | )* |
| Treasury rate locks | | $ | - | | | $ | 89 | * | | $ | - | | | $ | 42 | * |
| * The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges. | | | | | | | | | | | | | |
(1) In November 2010, the interest rate swap was terminated. | | | | | | | | | | | | | |
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
| | | FOR THE SIX MONTHS ENDED JUNE 30, 2011 | | | FOR THE SIX MONTHS ENDED JUNE 30, 2010 | |
| (THOUSANDS) | | AMOUNT RECOGNIZED IN OCI | | | AMOUNT OF GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION) | | | AMOUNT OF LOSS RECOGNIZED IN OCI | | | AMOUNT OF (LOSS) GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION) | |
Interest rate swap(1) | | $ | - | | | $ | - | | | $ | (341 | ) | | $ | (399 | )* |
| Treasury rate locks | | $ | - | | | $ | 177 | * | | $ | - | | | $ | 83 | * |
| * The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges. | | | | | | | | | | | | | |
(1) In November 2010, the interest rate swap was terminated. | | | | | | | | | | | | | |
At June 30, 2011, Cleco Power expected $0.4 million of the effective portion of treasury rate locks cash flow hedges to be reclassed from accumulated OCI to a reduction in interest charges over the next 12 months.
At June 30, 2011, Cleco had no short-term debt outstanding compared to $150.0 million outstanding at December 31, 2010. The short-term debt outstanding at December 31, 2010, was a bank term loan Cleco Corporation entered into in February 2010. The bank term loan had an interest rate of LIBOR plus 2.75% and was set to mature in February 2011. In January 2011, Cleco extended the bank term loan to mature August 19, 2011 and lowered the interest rate to LIBOR plus 2.50% or ABR plus 1.50%. On April 29, 2011, Cleco repaid the $150.0 million bank term loan. As part of the repayment, Cleco paid $0.6 million for accrued interest on the term loan.
Cleco Power had no short-term debt outstanding at June 30, 2011, or December 31, 2010.
Long-term Debt
At June 30, 2011, Cleco’s long-term debt outstanding was $1.4 billion, of which $12.7 million was due within one year, compared to $1.4 billion outstanding at December 31, 2010, of which $12.3 million was due within one year. The long-term debt due within one year at June 30, 2011, represents principal payments for the Cleco Katrina/Rita storm recovery bonds scheduled to be paid in the next twelve months. For Cleco, long-term debt decreased $11.9 million primarily due to a $6.3 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2011 and a $5.0 million decrease in credit facility draws outstanding.
At June 30, 2011, Cleco Power’s long-term debt outstanding was $1.4 billion, of which $12.7 million was due within one year, compared to $1.4 billion outstanding at December 31, 2010, of which $12.3 million was due within one year. The long-term debt due within one year at June 30, 2011, represents principal payments for the Cleco Katrina/Rita storm recovery bonds scheduled to be paid in the next twelve months. For Cleco Power, long-term debt decreased $6.9 million primarily due to a $6.3 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2011.
Note 6 — Pension Plan and Employee Benefits
Pension Plan and Other Benefits Plan
Most employees hired before August 1, 2007 are covered by a non-contributory, defined benefit pension plan. Benefits under the plan reflect an employee’s years of service, age at retirement, and highest total average compensation for any consecutive five calendar years during the last 10 years of employment with Cleco Corporation. Cleco Corporation’s policy is to base its contributions to the employee pension plan upon actuarial computations utilizing the projected unit credit method, subject to the IRS’s full funding limitation. During January 2011, Cleco made $60.0 million in discretionary contributions to the pension plan, with $40.1 million designated for the 2010 plan year and the remaining $19.9 million designated for the 2011 plan year. Cleco Power expects to be required to make approximately $15.2 million in additional contributions to the pension plan over the next five years, none of which it expects will be required for the remainder of the 2011 or the 2012 plan year. The required contributions are driven by liability funding target percentages set by law which could cause the required contributions to be uneven among the years. The ultimate amount and timing of the contributions may be affected by changes in the discount rate, changes in the funding regulations, and actual returns on fund assets. Cleco Power is considered the plan sponsor, and Support Group is considered the plan administrator.
Cleco Corporation’s retirees and their dependents are eligible to receive medical, dental, vision, and life insurance benefits (other benefits). Cleco Corporation recognizes the expected cost of these other benefits during the periods in which the benefits are earned.
The components of net periodic pension and other benefit cost for the three and six months ended June 30, 2011, and 2010, are as follows:
| | | PENSION BENEFITS | | | OTHER BENEFITS | |
| | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Components of periodic benefit costs: | | | | | | | | | | | | |
Service cost | | $ | 2,143 | | | $ | 1,973 | | | $ | 379 | | | $ | 383 | |
Interest cost | | | 4,422 | | | | 4,459 | | | | 460 | | | | 499 | |
Expected return on plan assets | | | (6,811 | ) | | | (5,248 | ) | | | - | | | | - | |
Amortizations: | | | | | | | | | | | | | | | | |
Transition obligation | | | - | | | | - | | | | 5 | | | | 5 | |
Prior period service cost | | | (18 | ) | | | (18 | ) | | | (51 | ) | | | (505 | ) |
Net loss | | | 1,376 | | | | 1,095 | | | | 256 | | | | 250 | |
| Net periodic benefit cost | | $ | 1,112 | | | $ | 2,261 | | | $ | 1,049 | | | $ | 632 | |
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
| | | PENSION BENEFITS | | | OTHER BENEFITS | |
| | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Components of periodic benefit costs: | | | | | | | | | | | | |
Service cost | | $ | 4,195 | | | $ | 3,725 | | | $ | 758 | | | $ | 766 | |
Interest cost | | | 8,815 | | | | 8,573 | | | | 921 | | | | 998 | |
Expected return on plan assets | | | (12,323 | ) | | | (10,114 | ) | | | - | | | | - | |
Amortizations: | | | | | | | | | | | | | | | | |
Transition obligation | | | - | | | | - | | | | 10 | | | | 10 | |
Prior period service cost | | | (36 | ) | | | (36 | ) | | | (103 | ) | | | (1,010 | ) |
Net loss | | | 2,778 | | | | 1,578 | | | | 513 | | | | 500 | |
| Net periodic benefit cost | | $ | 3,429 | | | $ | 3,726 | | | $ | 2,099 | | | $ | 1,264 | |
Since Cleco Power is the pension plan sponsor and the related trust holds the assets, the net unfunded status of the pension plan is reflected at Cleco Power. The liability of Cleco Corporation’s other subsidiaries is transferred, with a like amount of assets, to Cleco Power monthly. The expense of the pension plan related to Cleco Corporation’s other subsidiaries for the three and six months ended June 30, 2011, was $0.5 million and $1.1 million, respectively, compared to $0.5 million and $1.0 million for the same periods in 2010.
Cleco Corporation is the plan sponsor for the other benefit plans. There are no assets set aside in a trust, and the liabilities are reported on the individual subsidiaries’ financial statements. At both June 30, 2011, and December 31, 2010, the current portion of the other benefits liability for Cleco was $3.0 million. At both June 30, 2011, and December 31, 2010, the current portion of the other benefits liability for Cleco Power was $2.8 million. The expense related to other benefits reflected in Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, was $0.9 million and $1.8 million, respectively, compared to $0.5 million and $1.1 million for the same periods in 2010.
In March 2010, the President signed the PPACA, a comprehensive health care law. While the provisions of the PPACA are not effective immediately, the provisions could increase the Registrants’ retiree medical unfunded liability and related expenses before the effective date. Management will continue to monitor this law and its possible impact on the Registrants.
SERP
Certain Cleco executive officers are covered by the SERP. The SERP is a non-qualified, non-contributory, defined benefit pension plan. Benefits under the plan reflect an employee’s years of service, age at retirement, and the sum of the highest base salary paid out of the last five calendar years and the average of the three highest bonuses paid during the 60 months prior to retirement, reduced by benefits received from any other defined benefit pension plan, SERP Plan or Cleco contributions under the enhanced 401(k) Plan to the extent such contributions exceed the limits of the 401(k) Plan. Cleco Corporation does not fund the SERP liability, but instead pays for current benefits out of the general funds available. Cleco Power has formed a Rabbi Trust designated as the beneficiary for life insurance policies issued on the SERP participants. Proceeds from the life insurance policies are expected to be used to pay the SERP participants’ life insurance benefits, as well as future SERP payments. However, since SERP is a non-qualified plan, the assets of the trust could be used to satisfy general creditors of Cleco Power in the event of insolvency. All SERP benefits are paid out of the general cash available of the respective companies from which the officer retired. No contributions to the SERP were made during the six months ended June 30, 2011, or 2010. Cleco Power is considered the plan sponsor, and Support Group is considered the plan administrator.
The components of the net SERP cost are as follows:
| | | FOR THE THREE MONTHS ENDED JUNE 30, | | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Components of periodic benefit costs: | | | | | | | | | | | | |
Service cost | | $ | 333 | | | $ | 347 | | | $ | 783 | | | $ | 695 | |
Interest cost | | | 527 | | | | 525 | | | | 1,052 | | | | 1,050 | |
Amortizations: | | | | | | | | | | | | | | | | |
Prior period service cost | | | 13 | | | | 14 | | | | 27 | | | | 27 | |
Net loss | | | 208 | | | | 221 | | | | 470 | | | | 442 | |
| Net periodic benefit cost | | $ | 1,081 | | | $ | 1,107 | | | $ | 2,332 | | | $ | 2,214 | |
The SERP liabilities are reported on the individual subsidiaries’ financial statements. At June 30, 2011, and December 31, 2010, the current portion of the SERP liability for Cleco was $1.8 million and $2.0 million, respectively. At June 30, 2011, and December 31, 2010, the current portion of the SERP liability for Cleco Power was $0.7 million and $0.6 million, respectively. The expense related to the SERP reflected on Cleco Power’s Condensed Consolidated Statements of Income was $0.3 million and $0.6 million for the three and six months ended June 30, 2011, respectively, compared to $0.3 million and $0.5 million for the same periods in 2010.
401(k) Plan
Most employees are eligible to participate in the 401(k) Plan. Since January 2008, Cleco Corporation has made matching contributions and funded dividend reinvestments with cash. Cleco’s 401(k) Plan expense for the three and six months ended June 30, 2011, and 2010 is as follows:
| | FOR THE THREE MONTHS ENDED JUNE 30, | | FOR THE SIX MONTHS ENDED JUNE 30, |
| (THOUSANDS) | 2011 | | 2010 | | 2011 | | 2010 |
| 401(k) Plan expense | $852 | | $829 | | $2,053 | | $1,859 |
Cleco Power is the plan sponsor for the 401(k) Plan. The expense of the 401(k) Plan related to Cleco Corporation’s other subsidiaries for the three and six months ended June 30, 2011, was $0.2 million and $0.5 million, respectively, compared to $0.2 million and $0.4 million for the same periods in 2010.
The following table summarizes the effective income tax rates for Cleco Corporation and Cleco Power for the three- and six-month periods ended June 30, 2011, and 2010.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
| | | FOR THE THREE MONTHS ENDED JUNE 30, | | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Cleco Corporation | | | 34.2 | % | | | 33.1 | % | | | 32.9 | % | | | 34.4 | % |
| Cleco Power | | | 30.8 | % | | | 33.0 | % | | | 31.5 | % | | | 30.8 | % |
Effective Tax Rates
For the three and six months ended June 30, 2011, the effective income tax rates for Cleco Corporation and Cleco Power are different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a reversal of the valuation allowance on the deferred tax asset for a capital loss carryforward due to capital gains generated in 2011 as discussed below, and state tax expense.
For the three months ended June 30, 2010, the effective income tax rates for Cleco Corporation and Cleco Power were different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a valuation allowance on the deferred tax asset for a capital loss carryforward, and state tax expense.
For the six months ended June 30, 2010, the effective income tax rates for Cleco Corporation and Cleco Power were different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a valuation allowance on the deferred tax asset for a capital loss carryforward, an adjustment for Medicare Part D from health care legislation enacted in the first quarter of 2010, an adjustment for the implementation of new retail rates, and state tax expense.
Valuation Allowance
During 2010, a $1.2 million valuation allowance against the $2.7 million deferred tax asset on capital loss carryforwards was reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. This $1.2 million valuation allowance was reversed in the second quarter of 2011 due to capital gains generated in 2011 by the disposition of Acadia Unit 2.
Net Operating Losses
As of June 30, 2011, Cleco generated federal net operating losses and state net operating losses of $97.4 million and $90.0 million, respectively, which will begin to expire in 2031 and 2026. Cleco Power generated federal net operating losses and state net operating losses of $88.7 million and $81.3 million, respectively, which will begin to expire in 2031 and 2026. Cleco and Cleco Power consider it more likely than not that these losses will be utilized to reduce future income taxes. Cleco Power expects to utilize the entire net operating loss carryforward in 2012, while Cleco expects to utilize the entire net operating loss by the end of 2013.
Uncertain Tax Positions
Effective January 1, 2007, Cleco adopted the provisions of the authoritative guidance on accounting for uncertain tax positions. With this adoption, Cleco classified all interest related to uncertain tax positions as a component of interest payable and interest expense. The total amount of interest associated with uncertain tax positions at June 30, 2011, and December 31, 2010, recognized on Cleco Corporation’s Condensed Consolidated Balance Sheets was $43.9 million and $41.0 million, respectively. The total amount of interest associated with uncertain tax positions at June 30, 2011, and December 31, 2010, recognized on Cleco Power’s Condensed Consolidated Balance Sheets was $17.0 million and $15.2 million, respectively. The total amount of interest expense related to uncertain tax positions for the three months ended June 30, 2011 and 2010, recognized on Cleco Corporation’s Condensed Consolidated Statements of Income was $1.3 million and $2.1 million, respectively. The total amount of interest expense related to uncertain tax positions for the three months ended June 30, 2011 and 2010, recognized on Cleco Power’s Condensed Consolidated Statements of Income was $0.9 million and $1.3 million, respectively. The total amount of interest expense related to uncertain tax positions for the six months ended June 30, 2011, and 2010, recognized on Cleco Corporation’s Condensed Consolidated Statements of Income was $2.9 million and $4.0 million, respectively. The total amount of interest expense related to uncertain tax positions for the six months ended June 30, 2011, and 2010 recognized on Cleco Power’s Condensed Consolidated Statements of Income was $1.8 million and $2.5 million, respectively. The total liability for unrecognized tax benefits for Cleco Corporation and Cleco Power at June 30, 2011, and December 31, 2010, are shown in the following tables:
Cleco
| (THOUSANDS) | | LIABILITY FOR UNRECOGNIZED TAX BENEFITS | |
| Balance at December 31, 2010 | | $ | 102,785 | |
| Reduction for tax positions of current period | | | (1,813 | ) |
| Additions for tax positions of prior periods | | | 4,312 | |
| Reduction for tax positions of prior periods | | | (876 | ) |
| Reduction for settlement with taxing authority | | | - | |
| Reduction for lapse of statute of limitations | | | - | |
| Balance at June 30, 2011 | | $ | 104,408 | |
Cleco Power
| (THOUSANDS) | | LIABILITY FOR UNRECOGNIZED TAX BENEFITS | |
| Balance at December 31, 2010 | | $ | 60,975 | |
| Reduction for tax positions of current period | | | (1,774 | ) |
| Additions for tax positions of prior periods | | | - | |
| Reduction for tax positions of prior periods | | | - | |
| Reduction for settlement with taxing authority | | | - | |
| Reduction for lapse of statute of limitations | | | - | |
| Balance at June 30, 2011 | | $ | 59,201 | |
The federal income tax years that remain subject to examination by the IRS are 2001 through 2010. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2001 through 2010. In December 2010, Cleco deposited $52.2 million with the IRS associated with the years currently under audit, of which $45.9 million reduced accrued income taxes payable and $6.3 million reduced accrued interest payable. In February 2011, Cleco deposited an additional $8.2 million with the IRS
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
associated with the years currently under audit, which reduced income taxes payable.
Cleco is currently under audit by the IRS which has proposed adjustments to taxes for various issues, including but not limited to, depreciable tax lives, bonus depreciation, deductible storm costs, research and experimentation costs, and repair allowance deductions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2011, could decrease by a maximum of $33.5 million for Cleco Power and $73.3 million for Cleco in the next 12 months as a result of reaching a settlement with the IRS. The settlement could involve the payment of additional taxes, the adjustment of deferred taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in combination with the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and Cleco Corporation and Cleco Power’s Condensed Consolidated Financial Statements contained in this Combined Quarterly Report on Form 10-Q. The information included therein is essential to understanding the following discussion and analysis. Below is information concerning the consolidated results of operations of Cleco for the three and six months ended June 30, 2011, and June 30, 2010.
Cleco is a regional energy services holding company that conducts substantially all of its business operations through its two primary subsidiaries:
| § | Cleco Power, an integrated electric utility services company regulated by the LPSC, FERC, and other regulators, which serves approximately 279,000 customers across Louisiana and also engages in energy management activities; and |
| § | Midstream, a merchant energy company regulated by FERC, which owns Evangeline (which operates Coughlin). Prior to April 29, 2011, Midstream also owned a 50 percent indirect interest in Acadia. On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 to Entergy Louisiana. For additional information, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 15 — Acadia Transactions — Acadia Unit 2.” |
Cleco Power
Many factors affect Cleco Power’s primary business of selling electricity. These factors include the presence of a stable regulatory environment, which can impact cost recovery and return on equity, as well as the recovery of costs related to growing energy demand and rising fuel prices; the ability to increase energy sales while containing costs; and the ability to meet increasingly stringent regulatory and environmental standards. Key initiatives that Cleco Power is currently working on include the Acadiana Load Pocket project and the AMI project. Another key project, the Teche Unit 4 Blackstart project, was completed in April 2011. A brief discussion of these projects is included below.
Acadiana Load Pocket Project
In September 2008, Cleco Power entered into an agreement with two other utilities to upgrade and expand interconnected transmission systems in south central Louisiana in an area known as the Acadiana Load Pocket. The project received LPSC and SPP approval in February 2009. Cleco Power’s initial portion of the estimated cost was approximately $150.0 million, including AFUDC. Due to lower material and labor costs than initially expected, Cleco Power’s estimated costs for its portion of the project were reduced to $125.0 million, including AFUDC. At June 30, 2011, Cleco Power had spent $74.4 million on the project and expects to incur an additional $23.0 million during 2011, including AFUDC. The costs associated with the completed portions of the Acadiana Load Pocket project are included in base revenue. The project is estimated to be 77% complete with the final completion date expected in 2012. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Acadiana Load Pocket Project” in the Registrants’ Combined
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
Annual Report on Form 10-K for the fiscal year ended December 31, 2010. For information on the impact the Acadiana Load Pocket project is expected to have on base revenue, see “— Comparison of the Six Months Ended June 30, 2011, and 2010 — Cleco Power — Base.”
AMI Project
In May 2010, Cleco Power accepted the terms of a $20.0 million grant from the DOE under the DOE’s small-grant process to implement smart-grid technology for all of Cleco Power’s retail customers. Cleco Power estimates the project will cost $73.0 million, with the DOE grant providing $20.0 million toward the project and Cleco Power providing the remaining $53.0 million. The grant program is a part of the American Recovery and Reinvestment Act of 2009, an economic stimulus package passed by Congress in February 2009. Smart-grid technology includes the installation of electric meters that enable two-way communication capabilities between a home or business and a utility company. At June 30, 2011, Cleco Power had incurred $5.1 million in project costs, of which $2.3 million has been submitted to the DOE for reimbursement. As of June 30, 2011, Cleco Power had received $1.4 million in payments from the DOE. The project is expected to be completed in the second quarter of 2013. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Other Matters — AMI Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Teche Unit 4 Blackstart Project
In April 2011, Cleco Power completed work on its project to improve its “blackstart” process (the return of its generation system to service in the event of a total shutdown). The project was considered complete when a 33-MW gas turbine at Teche Power Station, which has been designated Teche Unit 4, was placed into commercial operation. At June 30, 2011, Cleco Power had spent $29.4 million on the project and expects to incur an additional $0.5 million during the remainder of 2011. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Other Matters — Teche Unit 4 Blackstart Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Cleco Midstream
Evangeline
In March 2010, Evangeline restructured its tolling agreement with JPMVEC and shortened the expiration of the prior long-term agreement from 2020 to December 31, 2011 (with a JPMVEC option to extend one year). JPMVEC did not exercise the option to extend the tolling agreement and as a result, Coughlin’s capacity and energy will be available to Midstream beginning January 1, 2012. Currently, Midstream is marketing Coughlin’s capacity for periods beginning on or after January 1, 2012, and is evaluating various options to optimize Coughlin’s value.
Acadia
In October 2009, Acadia and Entergy Louisiana executed definitive agreements whereby Entergy Louisiana would purchase Acadia Unit 2. On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 to Entergy Louisiana for $298.8 million. APH’s portion of the proceeds from the sale were used to repay Cleco Corporation’s $150.0 million bank term loan. For additional information on the Acadia Unit 2 transaction, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 15 — Acadia Transactions — Acadia Unit 2.”
Comparison of the Three Months Ended June 30, 2011, and 2010
Cleco Consolidated
| | | | | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue, net | | $ | 272,923 | | | $ | 275,903 | | | $ | (2,980 | ) | | | (1.1 | )% |
| Operating expenses | | | 202,628 | | | | 195,809 | | | | (6,819 | ) | | | (3.5 | )% |
| Operating income | | $ | 70,295 | | | $ | 80,094 | | | $ | (9,799 | ) | | | (12.2 | )% |
| Equity income (loss) from investees, before tax | | $ | 61,440 | | | $ | (1,129 | ) | | $ | 62,569 | | | | * | |
| Other income | | $ | 1,050 | | | $ | 266 | | | $ | 784 | | | | 294.7 | % |
| Other expense | | $ | 1,344 | | | $ | 2,577 | | | $ | 1,233 | | | | 47.8 | % |
| Interest charges | | $ | 25,619 | | | $ | 24,518 | | | $ | (1,101 | ) | | | (4.5 | )% |
| Federal and state income taxes | | $ | 36,520 | | | $ | 17,389 | | | $ | (19,131 | ) | | | (110.0 | )% |
| Net income applicable to common stock | | $ | 70,221 | | | $ | 35,174 | | | $ | 35,047 | | | | 99.6 | % |
| * Not meaningful | | | | | | | | | | | | | | | | |
Consolidated net income applicable to common stock increased $35.0 million, or 99.6%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the gain at Midstream related to the Acadia Unit 2 transaction and higher corporate earnings. Partially offsetting this increase were lower Cleco Power earnings.
Operating revenue, net decreased $3.0 million, or 1.1%, in the second quarter of 2011 compared to the second quarter of 2010 primarily as a result of higher electric customer credits at Cleco Power, partially offset by the gain related to sales of Cleco Power’s fuel oil supply.
Operating expenses increased $6.8 million, or 3.5%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher other operations and maintenance expenses at Cleco Power and Evangeline.
Equity income from investees increased $62.6 million in the second quarter of 2011 compared to the second quarter of 2010 primarily due to increased equity earnings at APH primarily from the recognition of a $62.0 million gain from the disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana.
Other income increased $0.8 million, or 294.7%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to increases in the cash surrender value of life insurance policies at Cleco Corporation.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
Other expense decreased $1.2 million, or 47.8%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to lower charitable donations and the absence in the second quarter of 2011 of decreases in the cash surrender value of life insurance policies at Cleco Corporation.
Interest charges increased $1.1 million, or 4.5%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher interest charges at Cleco Power. Partially offsetting this increase were lower interest charges related to uncertain tax positions at Evangeline.
Federal and state income taxes increased $19.1 million, or 110.0%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to an increase in pre-tax income, excluding equity AFUDC. Federal and state income taxes increased $20.6 million for the change in pre-tax income excluding AFUDC equity and $1.2 million to record tax expense at the consolidated projected annual effective tax rate. These increases were partially offset by $2.4 million for the tax impact of a valuation allowance for capital loss carryforwards recorded in 2010 and reversed in 2011 due to capital gains generated in 2011, and $0.3 million for miscellaneous items.
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
| | | | | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Base | | $ | 157,934 | | | $ | 157,057 | | | $ | 877 | | | | 0.6 | % |
Fuel cost recovery | | | 102,551 | | | | 104,044 | | | | (1,493 | ) | | | (1.4 | )% |
Electric customer credits | | | (4,822 | ) | | | - | | | | (4,822 | ) | | | - | |
Other operations | | | 12,453 | | | | 9,755 | | | | 2,698 | | | | 27.7 | % |
Affiliate revenue | | | 348 | | | | 344 | | | | 4 | | | | 1.2 | % |
Operating revenue, net | | | 268,464 | | | | 271,200 | | | | (2,736 | ) | | | (1.0 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Fuel used for electric generation – recoverable | | | 77,277 | | | | 79,676 | | | | 2,399 | | | | 3.0 | % |
Power purchased for utility customers – recoverable | | | 25,269 | | | | 24,331 | | | | (938 | ) | | | (3.9 | )% |
Non-recoverable fuel and power purchased | | | 1,199 | | | | 2,059 | | | | 860 | | | | 41.8 | % |
Other operations | | | 29,912 | | | | 28,051 | | | | (1,861 | ) | | | (6.6 | )% |
Maintenance | | | 22,581 | | | | 19,704 | | | | (2,877 | ) | | | (14.6 | )% |
Depreciation | | | 28,282 | | | | 28,162 | | | | (120 | ) | | | (0.4 | )% |
Taxes other than income taxes | | | 8,396 | | | | 7,909 | | | | (487 | ) | | | (6.2 | )% |
Total operating expenses | | | 192,916 | | | | 189,892 | | | | (3,024 | ) | | | (1.6 | )% |
| Operating income | | $ | 75,548 | | | $ | 81,308 | | | $ | (5,760 | ) | | | (7.1 | )% |
| Interest charges | | $ | 24,322 | | | $ | 22,318 | | | $ | (2,004 | ) | | | (9.0 | )% |
| Federal and state income taxes | | $ | 15,879 | | | $ | 19,236 | | | $ | 3,357 | | | | 17.5 | % |
| Net income | | $ | 35,694 | | | $ | 39,089 | | | $ | (3,395 | ) | | | (8.7 | )% |
Cleco Power’s net income in the second quarter of 2011 decreased $3.4 million, or 8.7%, compared to the second quarter of 2010. Contributing factors include:
| § | higher electric customer credits, |
| § | higher other operations and maintenance expenses, and |
| § | higher interest charges. |
These were partially offset by:
| § | higher other operations revenue, |
| § | lower non-recoverable fuel and power purchased, and |
| § | lower effective income tax rate. |
| | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| (MILLION kWh) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | | 871 | | | | 854 | | | | 2.0 | % |
Commercial | | | 648 | | | | 627 | | | | 3.3 | % |
Industrial | | | 597 | | | | 543 | | | | 9.9 | % |
Other retail | | | 33 | | | | 34 | | | | (2.9 | )% |
Total retail | | | 2,149 | | | | 2,058 | | | | 4.4 | % |
Sales for resale | | | 397 | | | | 426 | | | | (6.8 | )% |
Unbilled | | | 204 | | | | 251 | | | | (18.7 | )% |
| Total retail and wholesale customer sales | | | 2,750 | | | | 2,735 | | | | 0.5 | % |
| | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | $ | 69,338 | | | $ | 62,012 | | | | 11.8 | % |
Commercial | | | 44,309 | | | | 39,140 | | | | 13.2 | % |
Industrial | | | 21,205 | | | | 19,050 | | | | 11.3 | % |
Other retail | | | 2,418 | | | | 2,249 | | | | 7.5 | % |
Surcharge | | | 2,833 | | | | 1,660 | | | | 70.7 | % |
Other | | | (1,585 | ) | | | (1,704 | ) | | | 7.0 | % |
Total retail | | | 138,518 | | | | 122,407 | | | | 13.2 | % |
Sales for resale | | | 11,039 | | | | 10,673 | | | | 3.4 | % |
Unbilled | | | 8,377 | | | | 23,977 | | | | (65.1 | )% |
| Total retail and wholesale customer sales | | $ | 157,934 | | | $ | 157,057 | | | | 0.6 | % |
Cleco Power’s residential customers’ demand for electricity largely is affected by weather. Weather generally is measured in cooling-degree days and heating-degree days. A cooling-degree day is an indication of the likelihood that a consumer will use air conditioning, while a heating-degree day is an indication of the likelihood that a consumer will use heating. An increase in heating-degree days does not produce the same increase in revenue as an increase in cooling-degree days, because alternative heating sources are more available and because winter energy is priced below the rate charged for energy used in the summer. Normal heating-degree days and cooling-degree days are calculated for a month by separately calculating the average actual heating- and cooling-degree days for that month over a period of 30 years.
The following chart shows how cooling-degree days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree days.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
| | | | | | | | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| | | | | | | | | | | | 2011 CHANGE | |
| | | 2011 | | | 2010 | | | NORMAL | | | PRIOR YEAR | | | NORMAL | |
| Cooling-degree days | | | 1,206 | | | | 1,163 | | | | 898 | | | | 3.7 | % | | | 34.3 | % |
Base
Base revenue increased $0.9 million, or 0.6%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher electric sales, generally resulting from favorable weather. Cleco Power anticipates base revenue over the remainder of 2011 of $3.6 million and an additional $6.8 million for 2012 associated with the completed portions of the Acadiana Load Pocket transmission project.
Cleco Power expects new industrial load to be added during the remainder of 2011, 2012, and 2013, principally driven by expected development of Haynesville shale gas recently discovered in Northwestern Louisiana and the construction of a new gas storage facility. In addition, Cleco Power also expects to begin providing service to expansions of current customers’ operations, as well as service to a new customer. These expansions of service to current customers and service to a new customer are expected to contribute base revenue of $4.7 million during the remainder of 2011, an additional $2.4 million in 2012, and an additional $0.3 million in 2013. For information on the effects of future energy sales on Cleco Power’s financial condition, results of operations, and cash flows, see “Risk Factors — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Fuel Cost Recovery
Fuel cost recovery revenue billed to customers decreased $1.5 million, or 1.4%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to decreases in the per-unit cost of fuel used for electric generation. Partially offsetting the decrease were increases in the per-unit cost of power purchased for utility customers and higher volumes of fuel used for electric generation and power purchased for utility customers. Changes in fuel costs historically have not significantly affected Cleco Power’s net income. Generally, fuel and purchased power expenses are recovered through the LPSC-established fuel adjustment clause, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 95% of Cleco Power’s total fuel cost during the second quarter of 2011 was regulated by the LPSC, while the remainder was regulated by FERC. Recovery of fuel adjustment clause costs is subject to refund until approval is received from the LPSC. For information on Cleco Power’s current LPSC fuel audit, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — LPSC Fuel Audit.”
Electric Customer Credits
Electric customer credits increased $4.8 million during the second quarter of 2011 compared to the second quarter of 2010 as a result of recording an estimated accrual for a rate refund based on actual results for the 12 months ended June 30, 2011. For additional information on the accrual for electric customer credits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”
Other Operations
Other operations revenue increased $2.7 million, or 27.7%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the gain related to sales of Cleco Power’s fuel oil supply.
Operating Expenses
Operating expenses increased $3.0 million, or 1.6%, in the second quarter of 2011 compared to the second quarter of 2010. Fuel used for electric generation (recoverable) decreased $2.4 million, or 3.0%, primarily due to lower per unit costs of fuel used for electric generation. Partially offsetting this decrease were higher volumes of fuel used for electric generation as compared to the second quarter of 2010. Power purchased for utility customers (recoverable) increased $0.9 million, or 3.9%, largely due to higher volumes and higher per unit costs of purchased power. Fuel used for electric generation and power purchased for utility customers generally are influenced by natural gas prices, as well as availability of transmission. However, other factors such as scheduled and/or unscheduled outages, unusual maintenance or repairs, or other developments may affect fuel used for electric generation and power purchased for utility customers. Non-recoverable fuel and power purchased decreased $0.9 million, or 41.8%, primarily due to the absence of non-recoverable expenses related to fixed-price power that was provided to a wholesale customer in the second quarter of 2010. Other operations expense increased $1.9 million, or 6.6%, primarily due to higher transmission and generating station expenses, higher customer service expenses, and higher employee benefit costs and administrative expenses. Partially offsetting these increases were lower professional fees. Maintenance expense increased $2.9 million, or 14.6%, primarily due to higher transmission, distribution, and generating station maintenance work performed during the second quarter of 2011.
Interest Charges
Interest charges increased $2.0 million, or 9.0%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to $3.8 million related to the November 2010 issuance of $250.0 million of senior notes. Partially offsetting this increase were $1.8 million related to other miscellaneous interest charges and the repayment of insured quarterly notes and a bank term loan in October 2010 and November 2010, respectively.
Income Taxes
Federal and state income taxes decreased $3.4 million, or 17.5%, during the second quarter of 2011 compared to the second quarter of 2010. The decrease is primarily due to a $2.8 million change in pre-tax income excluding AFUDC equity and $2.4 million for the tax impact of a valuation allowance
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
for capital loss carryforwards recorded in 2010 and reversed in 2011 due to capital gains generated in 2011. These decreases were partially offset by $1.8 million to record tax expense at the projected annual effective tax rate.
Midstream
| | | FOR THE THREE MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Tolling operations | | $ | 4,222 | | | $ | 4,399 | | | $ | (177 | ) | | | (4.0 | )% |
Other operations | | | 7 | | | | 1 | | | | 6 | | | | 600.0 | % |
Affiliate revenue | | | 12 | | | | 13 | | | | (1 | ) | | | (7.7 | )% |
Operating revenue | | | 4,241 | | | | 4,413 | | | | (172 | ) | | | (3.9 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Other operations | | | 2,058 | | | | 1,822 | | | | (236 | ) | | | (13.0 | )% |
Maintenance | | | 5,534 | | | | 1,851 | | | | (3,683 | ) | | | (199.0 | )% |
Depreciation | | | 1,457 | | | | 1,444 | | | | (13 | ) | | | (0.9 | )% |
Taxes other than income taxes | | | 626 | | | | 75 | | | | (551 | ) | | | (734.7 | )% |
| (Gain) loss on sale of assets | | | (506 | ) | | | 6 | | | | 512 | | | | * | |
Total operating expenses | | | 9,169 | | | | 5,198 | | | | (3,971 | ) | | | (76.4 | )% |
| Operating loss | | $ | (4,928 | ) | | $ | (785 | ) | | $ | (4,143 | ) | | | (527.8 | )% |
| Equity income (loss) from investees, before tax | | $ | 61,440 | | | $ | (1,129 | ) | | $ | 62,569 | | | | * | |
| Interest charges | | $ | 628 | | | $ | 1,431 | | | $ | 803 | | | | 56.1 | % |
| Federal and state income tax expenses (benefit) | | $ | 21,536 | | | $ | (1,241 | ) | | $ | (22,777 | ) | | | * | |
| Net income (loss) | | $ | 34,425 | | | $ | (1,991 | ) | | $ | 36,416 | | | | * | |
| * Not meaningful | | | | | | | | | | | | | | | | |
Factors affecting Midstream during the second quarter of 2011 are described below.
Operating Revenue
Operating revenue decreased $0.2 million, or 3.9%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to lower tolling revenue at Evangeline resulting from lower plant run time.
Operating Expenses
Operating expenses increased $4.0 million, or 76.4%, in the second quarter of 2011 compared to the second quarter of 2010 primarily due to higher maintenance expenses at Evangeline resulting from an outage.
Equity Income from Investees
Equity income from investees increased $62.6 million during the second quarter of 2011 compared to the second quarter of 2010 primarily due to increased equity earnings at APH. The increased equity earnings were primarily from the recognition of a $62.0 million gain from the disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana. For additional information on the disposition of Acadia Unit 2, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 10 — Variable Interest Entities and Note 15 — Acadia Transactions — Acadia Unit 2.”
Interest Charges
Interest charges decreased $0.8 million, or 56.1%, during the second quarter of 2011 compared to the second quarter of 2010 primarily due to lower interest charges related to uncertain tax positions.
��
Income Taxes
Federal and state income taxes increased $22.8 million during the second quarter of 2011 compared to the second quarter of 2010 primarily due to the disposition of Acadia Unit 2 to Entergy Louisiana. The effective income tax rate is different than the federal statutory rate due to state tax expense.
Comparison of the Six Months Ended June 30, 2011, and 2010
Cleco Consolidated
| | | | | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue, net | | $ | 526,613 | | | $ | 548,188 | | | $ | (21,575 | ) | | | (3.9 | )% |
| Operating expenses | | | 391,088 | | | | 412,197 | | | | 21,109 | | | | 5.1 | % |
| Operating income | | $ | 135,525 | | | $ | 135,991 | | | $ | (466 | ) | | | (0.3 | )% |
| Allowance for other funds used during construction | | $ | 2,854 | | | $ | 10,165 | | | $ | (7,311 | ) | | | (71.9 | )% |
| Equity income from investees, before tax | | $ | 62,052 | | | $ | 36,718 | | | $ | 25,334 | | | | 69.0 | % |
| Gain on toll settlement | | $ | - | | | $ | 148,402 | | | $ | (148,402 | ) | | | - | |
| Other income | | $ | 2,254 | | | $ | 807 | | | $ | 1,447 | | | | 179.3 | % |
| Interest charges | | $ | 52,232 | | | $ | 46,952 | | | $ | (5,280 | ) | | | (11.2 | )% |
| Federal and state income taxes | | $ | 48,714 | | | $ | 97,256 | | | $ | 48,542 | | | | 49.9 | % |
| Net income applicable to common stock | | $ | 99,225 | | | $ | 185,132 | | | $ | (85,907 | ) | | | (46.4 | )% |
Consolidated net income applicable to common stock decreased $85.9 million, or 46.4%, in the first six months of 2011 compared to the first six months of 2010 primarily due to gains at Midstream related to the termination of the Evangeline Tolling Agreement and Acadia Unit 1 transaction in the first half of 2010, partially offset by the 2011 gain from the Acadia Unit 2 transaction. Also contributing to the decrease were lower Cleco Power and corporate earnings.
Operating revenue, net decreased $21.6 million, or 3.9%, in the first six months of 2011 compared to the first six months of 2010 largely as a result of lower fuel cost recovery revenue at Cleco Power due to lower per unit costs of fuel used for electric generation. Also contributing to the decrease were lower per unit costs and volumes of power purchased for utility customers.
Operating expenses decreased $21.1 million, or 5.1%, in the first six months of 2011 compared to the first six months of 2010 primarily due to lower per unit costs and volumes of power purchased for utility customers.
Allowance for other funds used during construction decreased $7.3 million, or 71.9%, in the first six months of 2011 compared to the first six months of 2010 primarily due to the cessation of AFUDC accruals related to the completion of construction activity at Madison Unit 3.
Equity income from investees increased $25.3 million, or 69.0%, in the first six months of 2011 compared to the first six months of 2010 primarily due to increased equity earnings at
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
APH primarily from the recognition of a $62.0 million gain from the disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana and lower maintenance expenses on Acadia Unit 2. Partially offsetting this increase was the absence of the gain from Cleco Power’s acquisition of Acadia Unit 1 and half of Acadia Power Station’s related common facilities during 2010. For additional information on the Acadia Unit 1 and 2 transactions, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 10 — Variable Interest Entities and Note 15 — Acadia Transactions.”
Gain on toll settlement was $148.4 million in the first six months of 2010 due to transactions related to the termination of the existing Evangeline Tolling Agreement and the execution of the Evangeline 2010 Tolling Agreement. For additional information, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Evangeline Transactions.”
Other income increased $1.4 million, or 179.3%, in the first six months of 2011 compared to the first six months of 2010 primarily due to higher gains on the cash surrender value of life insurance policies at Cleco Corporation.
Interest charges increased $5.3 million, or 11.2%, during the first six months of 2011 compared to the first six months of 2010 primarily due to higher interest charges at Cleco Power.
Federal and state income taxes decreased $48.5 million, or 49.9%, during the first six months of 2011 compared to the first six months of 2010. Decreases include $49.0 million for the change in pre-tax income excluding AFUDC equity, $2.4 million for the tax impact of a valuation allowance for capital loss carryforwards recorded in 2010 and reversed in 2011 due to capital gains generated in 2011, $1.9 million for a Medicare D adjustment resulting from new legislation enacted in 2010, and $1.0 million for other miscellaneous items. These decreases were partially offset by $3.0 million for the adjustment in 2010 related to the implementation of the new rates approved by the LPSC and $2.8 million to record tax expense at the consolidated projected annual effective tax rate.
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
| | | | | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Base | | $ | 292,007 | | | $ | 272,005 | | | $ | 20,002 | | | | 7.4 | % |
Fuel cost recovery | | | 206,946 | | | | 241,894 | | | | (34,948 | ) | | | (14.4 | )% |
Electric customer credits | | | (5,256 | ) | | | - | | | | (5,256 | ) | | | - | |
Other operations | | | 24,696 | | | | 20,140 | | | | 4,556 | | | | 22.6 | % |
Affiliate revenue | | | 694 | | | | 686 | | | | 8 | | | | 1.2 | % |
Operating revenue, net | | | 519,087 | | | | 534,725 | | | | (15,638 | ) | | | (2.9 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Fuel used for electric generation – recoverable | | | 173,421 | | | | 172,295 | | | | (1,126 | ) | | | (0.7 | )% |
Power purchased for utility customers – recoverable | | | 33,519 | | | | 69,594 | | | | 36,075 | | | | 51.8 | % |
Non-recoverable fuel and power purchased | | | 2,222 | | | | 6,978 | | | | 4,756 | | | | 68.2 | % |
Other operations | | | 55,901 | | | | 52,460 | | | | (3,441 | ) | | | (6.6 | )% |
Maintenance | | | 38,194 | | | | 31,426 | | | | (6,768 | ) | | | (21.5 | )% |
Depreciation | | | 55,683 | | | | 50,808 | | | | (4,875 | ) | | | (9.6 | )% |
Taxes other than income taxes | | | 16,783 | | | | 15,949 | | | | (834 | ) | | | (5.2 | )% |
Gain (loss) on sale of assets | | | (1 | ) | | | 39 | | | | 40 | | | | 102.6 | % |
Total operating expenses | | | 375,722 | | | | 399,549 | | | | 23,827 | | | | 6.0 | % |
| Operating income | | $ | 143,365 | | | $ | 135,176 | | | $ | 8,189 | | | | 6.1 | % |
| Allowance for other funds used during construction | | $ | 2,854 | | | $ | 10,165 | | | $ | (7,311 | ) | | | (71.9 | )% |
| Interest charges | | $ | 48,723 | | | $ | 41,060 | | | $ | (7,663 | ) | | | (18.7 | )% |
| Federal and state income taxes | | $ | 30,279 | | | $ | 31,731 | | | $ | 1,452 | | | | 4.6 | % |
| Net income | | $ | 65,724 | | | $ | 71,249 | | | $ | (5,525 | ) | | | (7.8 | )% |
Cleco Power’s net income in the first six months of 2011 decreased $5.5 million, or 7.8%, compared to the first six months of 2010. Contributing factors include:
| § | higher other operations and maintenance expenses, |
| § | higher interest charges, |
| § | lower allowance for other funds used during construction, |
| § | higher electric customer credits, |
| § | higher depreciation expense, and |
| § | higher effective income tax rate. |
These were partially offset by:
| § | lower non-recoverable fuel and power purchased expenses, and |
| § | higher other operations revenue. |
| | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| (MILLION kWh) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | | 1,831 | | | | 1,893 | | | | (3.3 | )% |
Commercial | | | 1,242 | | | | 1,219 | | | | 1.9 | % |
Industrial | | | 1,151 | | | | 1,087 | | | | 5.9 | % |
Other retail | | | 66 | | | | 69 | | | | (4.3 | )% |
Total retail | | | 4,290 | | | | 4,268 | | | | 0.5 | % |
Sales for resale | | | 843 | | | | 902 | | | | (6.5 | )% |
Unbilled | | | 39 | | | | 127 | | | | (69.3 | )% |
| Total retail and wholesale customer sales | | | 5,172 | | | | 5,297 | | | | (2.4 | )% |
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
| | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | $ | 136,527 | | | $ | 108,509 | | | | 25.8 | % |
Commercial | | | 88,401 | | | | 68,703 | | | | 28.7 | % |
Industrial | | | 41,855 | | | | 33,211 | | | | 26.0 | % |
Other retail | | | 4,884 | | | | 4,006 | | | | 21.9 | % |
Surcharge | | | 4,550 | | | | 5,855 | | | | (22.3 | )% |
Other | | | (3,295 | ) | | | (2,679 | ) | | | (23.0 | )% |
Total retail | | | 272,922 | | | | 217,605 | | | | 25.4 | % |
Sales for resale | | | 22,978 | | | | 19,456 | | | | 18.1 | % |
Unbilled | | | (3,893 | ) | | | 34,944 | | | | (111.1 | )% |
| Total retail and wholesale customer sales | | $ | 292,007 | | | $ | 272,005 | | | | 7.4 | % |
The following chart shows how cooling- and heating–degree days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree days.
| | | | | | | | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| | | | | | | | | | | | 2011 CHANGE | |
| | | 2011 | | | 2010 | | | NORMAL | | | PRIOR YEAR | | | NORMAL | |
| Heating-degree days | | | 937 | | | | 1,317 | | | | 999 | | | | (28.9 | )% | | | (6.2 | )% |
| Cooling-degree days | | | 1,345 | | | | 1,175 | | | | 964 | | | | 14.5 | % | | | 39.5 | % |
Base
Base revenue increased $20.0 million, or 7.4%, during the first six months of 2011 compared to the first six months of 2010 primarily due to the base rate increase that became effective in February 2010, which included Madison Unit 3 and the investment in Acadia Unit 1. Also included in base revenue were amounts related to the completed portions of the Acadiana Load Pocket transmission project. Partially offsetting these increases were lower kWh electric sales, primarily related to milder winter weather in the first quarter of 2011. For information on the anticipated effects of changes in base revenue in future periods, see “— Comparison of the Three Months Ended June 30, 2011, and 2010 — Cleco Power — Base.” For information on the effects of future energy sales on Cleco Power’s financial condition, results of operations, and cash flows, see “Risk Factors — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Fuel Cost Recovery
Fuel cost recovery revenue billed to customers decreased $34.9 million, or 14.4%, during the first six months of 2011 compared to the first six months in 2010 primarily due to decreases in the per-unit cost of fuel used for electric generation and power purchased for utility customers. Also contributing to the decrease were lower volumes of power purchased for utility customers. Partially offsetting the decrease were higher volumes of fuel used for electric generation. Lower volumes of power purchased were primarily due to Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1 during 2010. For information on Cleco Power’s ability to recover fuel and purchase power costs, see “— Comparison of the Three Months Ended June 30, 2011, and 2010 — Cleco Power — Fuel Cost Recovery.”
Electric Customer Credits
Electric customer credits increased $5.3 million during the first six months of 2011 compared to the first six months of 2010 as a result of recording an estimated accrual for a rate refund based on actual results for the 12 months ended June 30, 2011. For additional information on the accrual of electric customer credits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”
Other Operations
Other operations revenue increased $4.6 million, or 22.6%, in the first six months of 2011 compared to the first six months of 2010 primarily due to $2.7 million related to the gain on sales of Cleco Power’s fuel oil supply, $1.1 million of higher mineral lease payments, $0.5 million related to the absence of unfavorable results in the first half of 2010 relating to economic hedge transactions associated with fixed-price power that was provided to a wholesale customer, and $0.3 million of higher customer fees.
Operating Expenses
Operating expenses decreased $23.8 million, or 6.0%, in the first six months of 2011 compared to the first six months of 2010. Fuel used for electric generation (recoverable) increased $1.1 million, or 0.7%, primarily due to higher volumes of fuel used as compared to the first six months of 2010. Partially offsetting this increase were lower per unit costs of fuel used for electric generation. Power purchased for utility customers (recoverable) decreased $36.1 million, or 51.8%, largely due to lower volumes and lower per-unit costs of purchased power. Lower volumes of power purchased were primarily due to Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1. Fuel used for electric generation and power purchased for utility customers generally are influenced by natural gas prices, as well as availability of transmission. However, other factors such as scheduled and/or unscheduled outages, unusual maintenance or repairs, or other developments may affect fuel used for electric generation and power purchased for utility customers. Non-recoverable fuel and purchased power decreased $4.8 million, or 68.2%, primarily due to the absence of non-recoverable expenses related to fixed-price power that was provided to a wholesale customer during 2010 and lower capacity payments made during the first six months of 2011 primarily due to the commencement of commercial operations of Madison Unit 3 and the acquisition of Acadia Unit 1. Other operations expense increased $3.4 million, or 6.6%, primarily due to higher transmission and generating station expenses, higher employee benefit costs and administrative expenses, higher customer service expenses, and higher general liability expense. Partially offsetting these increases were lower professional fees. Maintenance expense increased $6.8 million, or 21.5%, primarily due to higher generating station,
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| 2011 2ND QUARTER FORM 10-Q |
distribution, and transmission maintenance work performed during the first six months of 2011. Other operations and maintenance expenses were impacted during the first six months of 2011 as a result of Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1. Depreciation expense increased $4.9 million, or 9.6%, largely due to Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1. Taxes other than income taxes increased $0.8 million, or 5.2%, primarily due to higher property taxes, payroll taxes, and state franchise taxes.
Allowance for Other Funds Used During Construction
Allowance for other funds used during construction decreased $7.3 million, or 71.9%, during the first six months of 2011 compared to the first six months of 2010 primarily due to the cessation of AFUDC accruals related to the completion of construction activity at Madison Unit 3.
Interest Charges
Interest charges increased $7.7 million, or 18.7%, during the first six months of 2011 compared to the first six months of 2010 primarily due to $7.5 million related to the November 2010 issuance of $250.0 million of senior notes and $2.7 million of lower interest charges capitalized in 2011 compared to 2010 (allowance for borrowed funds used during construction) associated with Madison Unit 3. Partially offsetting this increase was $1.9 million from the repayment of insured quarterly notes and a bank term loan in October 2010 and November 2010, respectively, and $0.6 million of other miscellaneous interest charges.
Income Taxes
Federal and state income taxes decreased $1.5 million, or 4.6%, during the first six months of 2011 compared to the first six months of 2010. The decrease is primarily due to $2.4 million for the tax impact of a valuation allowance for capital loss carryforwards recorded in 2010 and reversed in 2011 due to capital gains generated in 2011, $1.5 million for a Medicare D adjustment resulting from new legislation enacted in 2010, $0.6 million to record tax expense at the projected annual effective tax rate, and $0.1 for other miscellaneous items. These decreases were partially offset by $3.0 million for the adjustment in 2010 related to the implementation of new rates approved by the LPSC and $0.1 million for the change in pre-tax income including AFUDC equity.
Midstream
| | | FOR THE SIX MONTHS ENDED JUNE 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Tolling operations | | $ | 7,003 | | | $ | 11,863 | | | $ | (4,860 | ) | | | (41.0 | )% |
Other operations | | | 7 | | | | 1 | | | | 6 | | | | 600.0 | % |
Affiliate revenue | | | 45 | | | | 918 | | | | (873 | ) | | | (95.1 | )% |
Operating revenue | | | 7,055 | | | | 12,782 | | | | (5,727 | ) | | | (44.8 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Other operations | | | 3,874 | | | | 4,016 | | | | 142 | | | | 3.5 | % |
Maintenance | | | 6,666 | | | | 3,916 | | | | (2,750 | ) | | | (70.2 | )% |
Depreciation | | | 2,913 | | | | 2,887 | | | | (26 | ) | | | (0.9 | )% |
Taxes other than income taxes | | | 1,260 | | | | 185 | | | | (1,075 | ) | | | (581.1 | )% |
(Gain) loss on sale of assets | | | (494 | ) | | | 7 | | | | 501 | | | | * | |
Total operating expenses | | | 14,219 | | | | 11,011 | | | | (3,208 | ) | | | (29.1 | )% |
| Operating (loss) income | | $ | (7,164 | ) | | $ | 1,771 | | | $ | (8,935 | ) | | | (504.5 | )% |
| Equity income from investees, before tax | | $ | 62,053 | | | $ | 36,717 | | | $ | 25,336 | | | | 69.0 | % |
| Gain on toll settlement | | $ | - | | | $ | 148,402 | | | $ | (148,402 | ) | | | * | |
| Interest charges | | $ | 1,211 | | | $ | 4,863 | | | $ | 3,652 | | | | 75.1 | % |
| Federal and state income tax expense | | $ | 20,853 | | | $ | 70,147 | | | $ | 49,294 | | | | 70.3 | % |
| Net income | | $ | 33,328 | | | $ | 112,020 | | | $ | (78,692 | ) | | | (70.2 | )% |
| * Not meaningful | | | | | | | | | | | | | | | | |
Factors affecting Midstream during the first six months of 2011 are described below.
Operating Revenue
Operating revenue decreased $5.7 million, or 44.8%, during the first six months of 2011 compared to the first six months of 2010, largely as a result of lower tolling revenue resulting from the Evangeline restructuring and pricing of the Evangeline 2010 Tolling Agreement. Affiliate revenue decreased $0.9 million, or 95.1%, in the first six months of 2011 compared to the first six months of 2010 primarily due to Generation Services employees who were transferred to Cleco Power during 2010 as a result of Cleco Power’s acquisition of Acadia Unit 1.
Operating Expenses
Operating expenses increased $3.2 million, or 29.1%, primarily due to higher maintenance expenses resulting from an outage and higher property taxes at Evangeline.
Equity Income from Investees
Equity income from investees increased $25.3 million, or 69.0%, during the first six months of 2011 compared to the first six months of 2010 primarily due to increased equity earnings at APH primarily from the recognition of a $62.0 million gain from the disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana and lower maintenance expenses on Acadia Unit 2. Partially offsetting this increase was the absence of the gain from Cleco Power’s acquisition of Acadia Unit 1 and half of Acadia Power Station’s related common facilities during the first half of 2010. For additional information on the Acadia Unit 1 and 2 transactions, see Item 1, “Notes to the Unaudited Condensed
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| 2011 2ND QUARTER FORM 10-Q |
Consolidated Financial Statements — Note 10 — Variable Interest Entities and Note 15 — Acadia Transactions.”
Gain on Toll Settlement
Gain on toll settlement was $148.4 million in the first six months of 2010 due to transactions related to the termination of the Evangeline Tolling Agreement and the execution of the Evangeline 2010 Tolling Agreement. For additional information, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Evangeline Transactions.”
Interest Charges
Interest charges decreased $3.7 million, or 75.1%, during the first six months of 2011 compared to the first six months of 2010 primarily due to the retirement of Evangeline’s debt in 2010. For additional information, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Evangeline Transactions.”
Income Taxes
Federal and state income taxes decreased $49.3 million, or 70.3%, during the first six months of 2011 compared to the first six months of 2010 primarily due to a decrease in pre-tax income. The effective income tax rate is different than the federal statutory rate due to state tax expense.
Liquidity and Capital Resources
General Considerations and Credit-Related Risks
Credit Ratings and Counterparties
Financing for operational needs and capital expenditure requirements not satisfied by operating cash flows depends upon the cost and availability of external funds through both short- and long-term financing. The inability to raise capital on favorable terms could negatively affect Cleco’s or Cleco Power’s ability to maintain or expand its businesses. Access to funds is dependent upon factors such as general economic and capital market conditions, regulatory authorizations and policies, Cleco Corporation’s and Cleco Power’s credit ratings, the cash flows from routine operations, and the credit ratings of project counterparties. After assessing the current operating performance, liquidity, and credit ratings of Cleco and Cleco Power, management believes that Cleco and Cleco Power will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. The following table presents the credit ratings of Cleco Corporation and Cleco Power at June 30, 2011:
| | SENIOR UNSECURED DEBT |
| | MOODY’S | STANDARD & POOR’S |
| Cleco Corporation | Baa3 | BBB- |
| Cleco Power | Baa2 | BBB |
Cleco notes that credit ratings are not recommendations to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
For the six-month period ended June 30, 2011, there were no changes to Cleco or Cleco Power’s credit ratings or rating agency’s outlooks. At June 30, 2011, Moody’s and Standard & Poor’s outlooks for both Cleco Corporation and Cleco Power were stable. Cleco Corporation and Cleco Power pay fees and interest under their bank credit agreements based on the highest rating held. If Cleco Corporation or Cleco Power’s credit rating were to be downgraded by Moody’s and Standard & Poor’s, Cleco Corporation and/or Cleco Power would be required to post additional fees and incur higher interest rates under their bank credit agreements. Cleco Power’s collateral for derivatives is based on the lowest rating held. If Cleco Power’s credit ratings were to be downgraded by Standard & Poor’s or Moody’s, Cleco Power would be required to post additional collateral for derivatives.
In August 2005, Cleco Power entered into an EPC contract with Shaw to construct Madison Unit 3. Under the terms of the Amended EPC Contract, until the final acceptance of Madison Unit 3, in the event Cleco Power does not maintain a senior unsecured credit rating of either: (i) Baa3 or better from Moody’s or (ii) BBB- or better from Standard & Poor’s, Cleco Power will be required to provide a letter of credit to Shaw in the amount of $20.0 million. In the event of further downgrade to both of its credit ratings to: (i) Ba2 or below from Moody’s, and (ii) BB or below from Standard & Poor’s, Cleco Power will be required to provide an additional $15.0 million letter of credit to Shaw.
With respect to any open power or natural gas trading positions that Cleco may initiate in the future, Cleco may be required to provide credit support or pay liquidated damages. The amount of credit support that Cleco may be required to provide at any point in the future is dependent on the amount of the initial transaction, changes in the market price of power and natural gas, the changes in open power and gas positions, and changes in the amount counterparties owe Cleco. Changes in any of these factors could cause the amount of requested credit support to increase or decrease.
Global and U.S. Economic Environment
The current economic environment and uncertainty may have an impact on Cleco’s business and financial condition. Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Market conditions during the past few years have limited the availability and have increased the costs of capital for many companies. Although the Registrants have not experienced restrictions in the financial markets, their ability to access the capital markets may be restricted at a time when the Registrants would like, or need, to do so. Any restrictions could have a material impact on the Registrants’ ability to fund capital expenditures or debt service, or on their flexibility to react to changing economic and business conditions. Credit constraints could have a material negative impact on the Registrants’ lenders or customers,
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| 2011 2ND QUARTER FORM 10-Q |
causing them to fail to meet their obligations to the Registrants or to delay payment of such obligations. The lower interest rates that the Registrants have been exposed to have been beneficial to recent debt issuances; however, these rates have negatively affected interest income for the Registrants’ short-term investments.
Fair Value Measurements
Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power are required to disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes under GAAP. Other financial assets and liabilities, such as long-term debt, are reported at their carrying values at their date of issuance on the consolidated balance sheets with their fair values disclosed without regard to the three levels. For additional information about fair value levels, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 4 — Fair Value Accounting.”
Debt
At June 30, 2011, Cleco Corporation and Cleco Power were in compliance with the covenants in their credit facilities. If Cleco Corporation were to default under the covenants in its credit facility or other debt agreements, it would be unable to borrow additional funds under the facility, and the lenders could accelerate all principal and interest outstanding. Further, if Cleco Power were to default under its credit facility or other debt agreements, Cleco Corporation would be considered in default under its credit facility.
If Cleco Corporation’s credit ratings were to be downgraded one level, Cleco Corporation would be required to pay fees and interest at a rate of 0.25% higher than the current level for its $200.0 million credit facility. A similar downgrade to the credit ratings of Cleco Power would require Cleco Power to pay fees and interest at a rate of 0.25% higher than the current level on its $300.0 million credit facility.
Cleco Consolidated
Cleco had no short-term debt outstanding at June 30, 2011, compared to $150.0 million outstanding at December 31, 2010. The short-term debt outstanding at December 31, 2010, was a bank term loan Cleco Corporation entered into in February 2010. The bank term loan had an interest rate of LIBOR plus 2.75% and was set to mature in February 2011. In January 2011, Cleco extended the bank term loan to mature August 19, 2011, and lowered the interest rate to LIBOR plus 2.50% or ABR plus 1.50%. In April 2011, Cleco repaid the $150.0 million bank term loan. As part of the repayment, Cleco paid $0.6 million for accrued interest on the term loan.
At June 30, 2011, Cleco’s long-term debt outstanding was $1.4 billion, of which $12.7 million was due within one year, compared to $1.4 billion outstanding at December 31, 2010, which included $12.3 million due within one year. The long-term debt due within one year at June 30, 2011, represents principal payments for the Cleco Katrina/Rita storm recovery bonds scheduled to be paid in the next twelve months.
For Cleco, long-term debt at June 30, 2011, decreased $11.9 million compared to December 31, 2010, primarily due to a $6.3 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2011 and a $5.0 million decrease in Cleco’s credit facility draws outstanding.
At June 30, 2011, Cleco had a working capital surplus of $185.7 million compared to a working capital surplus of $131.2 million at December 31, 2010. Included in working capital at June 30, 2011, and December 31, 2010, were $8.1 million and $15.0 million, respectively, which were restricted for the use of debt payments. The $54.5 million increase in working capital is primarily due to the repayment of the $150.0 million bank term loan and other debt, partially offset by the recognition of uncertain tax positions and related interest charges expected to be settled in the next 12 months as a current liability, and the reduction of fuel inventories.
Cash and cash equivalents available at June 30, 2011, were $162.1 million combined with $490.0 million facility capacity ($190.0 million from Cleco Corporation and $300.0 million from Cleco Power) for total liquidity of $652.1 million. Cash and cash equivalents available at June 30, 2011, decreased $29.0 million when compared to cash and cash equivalents available at December 31, 2010. This decrease is primarily due to the repayment of debt, a contribution to the pension plan, additions to property, plant and equipment, routine working capital fluctuations, and the payment of common dividends. These decreases were partially offset by a $19.0 million increase from a draw on Shaw’s letter of credit.
At June 30, 2011, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents. In order to mitigate potential credit risk, Cleco and Cleco Power have established guidelines for short-term investments. For additional information on the concentration of credit risk through short-term investments classified as cash equivalents, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 4 — Fair Value Accounting.”
Cleco Corporation (Holding Company Level)
Cleco Corporation had no short-term debt outstanding at June 30, 2011, compared to $150.0 million outstanding at December 31, 2010. The short-term debt outstanding at December 31, 2010, was a bank term loan entered into in February 2010. The bank term loan had an interest rate of LIBOR plus 2.75% and was set to mature in February 2011. In January 2011, Cleco extended the bank term loan to mature August 19, 2011, and lowered the interest rate to LIBOR plus 2.50% or ABR plus 1.50%. In April 2011, Cleco repaid the $150.0 million bank term loan. As part of the repayment, Cleco paid $0.6 million for accrued interest on the term loan.
At June 30, 2011, Cleco Corporation had $10.0 million of draws under its $200.0 million credit facility compared to $15.0 million outstanding at December 31, 2010. This credit
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| 2011 2ND QUARTER FORM 10-Q |
facility matures on November 23, 2014. This facility provides for working capital and other needs. Cleco Corporation’s borrowing costs under the facility are equal to LIBOR plus 2.05%, plus facility fees of 0.45%. The interest rate on outstanding borrowings under the credit facility at June 30, 2011, was 2.24%. The existing borrowing had 30-day terms and matured on July 29, 2011, at which time the borrowings were repaid. An additional line of credit, with a bank, up to $10.0 million is available to support Cleco Corporation’s working capital needs.
Cash and cash equivalents available at June 30, 2011, were $9.0 million. Cash and cash equivalents available at June 30, 2011, increased $3.6 million when compared to cash and cash equivalents available at December 31, 2010, primarily due to routine working capital fluctuations. At June 30, 2011, credit facility draws reduced available borrowings by $10.0 million, leaving an available borrowing capacity of $190.0 million.
Cleco Power
There was no short-term debt outstanding at Cleco Power at June 30, 2011, or December 31, 2010. At June 30, 2011, Cleco Power’s long-term debt outstanding was $1.4 billion, of which $12.7 million was due within one year, compared to $1.4 billion at December 31, 2010, of which $12.3 million was due within one year. The $12.7 million of long-term debt due within one year at June 30, 2011, represents principal payments for the Cleco Katrina/Rita storm recovery bonds scheduled to be paid in the next twelve months. For Cleco Power, long-term debt decreased $6.9 million primarily due to a $6.3 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2011.
At June 30, 2011, no borrowings were outstanding under Cleco Power’s $300.0 million credit facility. This facility provides for working capital and other needs. Cleco Power’s borrowing costs under the facility are equal to LIBOR plus 1.90%, plus facility fees of 0.35%. An additional line of credit, with a bank, up to $10.0 million also is available to support Cleco Power’s working capital needs.
At June 30, 2011, and December 31, 2010, Cleco Power had a working capital surplus of $192.6 million and $259.1 million, respectively. Included in working capital at June 30, 2011, and December 31, 2010, were $8.1 million and $15.0 million, respectively, which were restricted for the use of debt payments. The $66.5 million decrease in working capital is primarily due to a decrease in cash and cash equivalents, the recognition of uncertain tax positions and related interest charges expected to be settled in the next 12 months as a current liability, and the reduction of fuel inventories. Cash and cash equivalents decreased $35.1 million, as discussed below.
Cash and cash equivalents available at June 30, 2011, were $149.8 million, combined with $300.0 million facility capacity for total liquidity of $449.8 million. Cash and cash equivalents decreased $35.1 million, when compared to cash and cash equivalents at December 31, 2010, primarily due to the repayment of debt, a contribution to the pension plan, and additions to property, plant and equipment.
Cleco Power’s solid waste disposal facility bonds due 2038 and Cleco Power’s GO Zone bonds due 2038, are required to be mandatorily tendered by the holders for purchase on October 1, 2011, and December 1, 2011, respectively, pursuant to the terms of the respective indentures, at which time Cleco Power will have the option to either repay all of Cleco Power’s obligations under the respective loan agreements relating to the bonds or cause the bonds to be remarketed. Cleco Power expects to cause the bonds to be remarketed for new terms at new interest rates, both to be determined by market conditions.
Midstream
Midstream had no short- or long-term debt outstanding at June 30, 2011, or December 31, 2010.
Cash Generation and Cash Requirements
Restricted Cash
Various agreements to which Cleco is subject contain covenants that restrict its use of cash. As certain provisions under these agreements are met, cash is transferred out of related escrow accounts and becomes available for general corporate purposes. At June 30, 2011, and December 31, 2010, $35.2 million and $41.0 million of cash, respectively, were restricted on Cleco Corporation’s Condensed Consolidated Balance Sheets. At June 30, 2011, restricted cash consisted of $0.1 million under the Diversified Lands mitigation escrow agreement, $26.4 million reserved at Cleco Power for future storm restoration costs, $8.1 million at Cleco Katrina/Rita restricted for payment of operating expenses and interest, and principal on storm recovery bonds and $0.6 million reserved at Cleco Power for a renewable energy grant received from the Louisiana Department of Natural Resources. The $5.8 million net decrease in restricted cash from December 31, 2010, to June 30, 2011, is primarily due to the use of Cleco Katrina/Rita funds for a scheduled storm recovery bond payment of $6.3 million and related interest of $3.8 million made in March 2011 and the use of $6.1 million GO Zone bond funds during the six months ended June 30, 2011. These decreases were partially offset by $9.4 million of collections for Cleco Katrina/Rita funds, $0.6 million of a renewable energy grant received, and $0.4 million in collections of storm recovery costs.
Cleco Cash Flows
Net Operating Cash Flow
Net cash provided by operating activities was $147.8 million during the first six months of 2011, compared to $108.0 million during the first six months of 2010.
Cash provided by operating activities during the first six months of 2011 increased $39.8 million from the first six months of 2010, primarily due to the following items:
| § | return on equity investment in Acadia of $58.7 million, |
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| 2011 2ND QUARTER FORM 10-Q |
| § | higher collection of receivables of $38.8 million, |
| § | sales of fuel oil inventory of $28.0 million, |
| § | absence of 2010 Madison Unit 3 construction costs, Acadia Unit 1 acquisition costs, rate case costs, and IRP/FRP costs of $19.9 million, |
| § | lower vendor payments of $16.3 million, and |
| § | lower petroleum coke inventory purchases of $10.5 million. |
These were partially offset by:
| § | higher pension plan contributions of $55.0 million, |
| § | absence of the 2010 collection of a $28.0 million receivable related to the Evangeline transactions, |
| § | absence of the 2010 cash portion of the gain related to the Evangeline Restructuring Agreement for $18.5 million, |
| § | higher income tax payments of $10.6 million, and |
| § | higher maintenance expenses of $9.6 million. |
Net Investing Cash Flow
Net cash provided by investing activities was $18.2 million during the first six months of 2011, compared to net cash used of $196.9 million during the first six months of 2010. Net cash related to investing activities during the first six months of 2011 was higher than 2010 primarily due to the return of equity investment in Acadia, partially offset by lower additions to property, plant and equipment.
During the first six months of 2011, Cleco had an $89.7 million return of equity investment in Acadia and transferred $5.8 million from restricted accounts, primarily related to GO Zone bonds. This was partially offset by additions to property, plant and equipment, net of AFUDC of $63.2 million and an $18.5 million investment in New Markets Tax Credits.
During the first six months of 2010, Cleco had additions to property, plant and equipment, net of AFUDC of $207.5 million, a $17.6 million investment in New Markets Tax Credits, and an $8.5 million investment in Acadia. This was partially offset by the transfer of $37.7 million of cash from restricted accounts, primarily related to Evangeline and GO Zone bonds.
Net Financing Cash Flow
Net cash used in financing activities was $195.1 million during the first six months of 2011, compared to $4.1 million during the first six months of 2010. Net cash used in financing activities during the first six months of 2011 was more than the first six months of 2010 primarily due to lower draws on the revolving credit facility, higher repayments of short-term debt, and the absence of short-term debt issuances. This was partially offset by lower payments on the revolving credit facility and lower retirements of long-term debt.
During the first six months of 2011, Cleco repaid a $150.0 million bank term loan, $15.0 million of credit facility draws, and $6.3 million of long-term bonds. Cleco also used $32.2 million for the payment of common stock dividends. This was partially offset by $10.0 million in credit facility draws.
During the first six months of 2010, Cleco retired $366.1 million of long-term debt, consisting of $325.0 million of credit facility draws, $35.2 million of Evangeline debt, and $5.9 million of long-term bonds. Cleco also used $28.7 million for the payment of common stock dividends. This was partially offset by draws on the revolving credit facility of $240.0 million and by the issuance of a $150.0 million bank term loan, which was used to facilitate the acquisition of Acadia Unit 1.
Cleco Power Cash Flows
Net Operating Cash Flow
Net cash provided by operating activities was $70.8 million during the first six months of 2011, compared to $34.9 million during the first six months of 2010.
Cash provided by operating activities during the first six months of 2011 increased $35.9 million from the first six months of 2010, primarily due to the following items:
| § | sales of fuel oil inventory of $28.0 million, |
| § | absence of 2010 Madison 3 construction costs, Acadia Unit 1 acquisition costs, rate case costs, and IRP/FRP costs of $19.9 million, |
| § | lower vendor payments of $12.2 million, |
| § | lower payments to affiliates of $18.2 million, |
| § | lower petroleum coke purchases of $10.5 million, and |
| § | lower income taxes paid of $7.7 million. |
These were partially offset by:
| § | higher pension plan contributions of $55.0 million, and |
| § | higher maintenance expenses of $6.8 million, primarily at Brame Energy Center and Acadia Unit 1. |
Net Investing Cash Flow
Net cash used in investing activities was $48.6 million during the first six months of 2011, compared to $46.4 million during the first six months of 2010. Net cash used in investing activities during 2011 was comparable to the first six months of 2010.
During the first six months of 2011, Cleco Power had additions to property, plant and equipment, net of AFUDC of $55.6 million. This was partially offset by the transfer of $5.8 million of cash from restricted accounts, primarily related to GO Zone bonds.
During the first six months of 2010, Cleco Power had additions to property, plant and equipment, net of AFUDC of $53.6 million. This was partially offset by the transfer of $7.5 million of cash from restricted accounts, primarily related to GO Zone bonds.
Net Financing Cash Flow
Net cash used in financing activities was $57.3 million during the first six months of 2011, compared to $81.9 million during the first six months of 2010. Net cash used in financing activities during the first six months of 2011 was lower than the first six months of 2010 primarily due to $25.0 million of lower distributions made to Cleco Corporation.
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Common Stock Repurchase Program
In January 2011, Cleco Corporation’s Board of Directors approved the implementation of a new common stock repurchase program authorizing management, on behalf of Cleco Corporation, to repurchase, from time to time, shares of common stock so that Cleco Corporation’s diluted average shares of common stock outstanding remain approximately equal to its diluted average shares of common stock outstanding for 2010. Purchases may be made on a discretionary basis at times and in amounts as determined by management, subject to market conditions, legal requirements, and other factors. The purchases will not be announced in advance and may be made in the open market or in privately negotiated transactions.
Contractual Obligations and Other Commitments
Cleco, in the normal course of business activities, enters into a variety of contractual obligations. Some of these result in direct obligations that are reflected in the Condensed Consolidated Balance Sheets while other commitments, some firm and some based on uncertainties, are not reflected in the consolidated financial statements.
For additional information regarding Cleco’s Contractual Obligations and Other Commitments, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Cash Generation and Cash Requirements — Contractual Obligations and Other Commitments” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Off-Balance Sheet Commitments and Disclosures about Guarantees
Cleco Corporation and Cleco Power have entered into various off-balance sheet commitments, in the form of guarantees and standby letters of credit, in order to facilitate their activities and the activities of Cleco Corporation’s subsidiaries and equity investees (affiliates). Cleco Corporation and Cleco Power have also agreed to contractual terms that require them to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees in the authoritative guidance. For additional information on off-balance sheet commitments, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Off-Balance Sheet Commitments” and “— Disclosures about Guarantees.”
Regulatory Matters
Wholesale Rates of Cleco
For information on the wholesale rates of Cleco, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Wholesale Rates of Cleco” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Retail Rates of Cleco Power
For information concerning amounts accrued and refunded by Cleco Power as a result of the FRP and information on the LPSC Staff’s FRP reviews, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”
For information on certain other regulatory aspects of retail rates concerning Cleco Power, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Retail Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Wholesale Electric Markets
For information on regulatory aspects of wholesale electric markets affecting Cleco, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Market Restructuring — Wholesale Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Retail Electric Markets
For a discussion of the regulatory aspects of retail electric markets affecting Cleco Power, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Retail Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Generation RFP
Renewable Energy Pilot Program
In November 2010, the LPSC established a two-part renewable energy pilot program implementation plan consisting of a research component and a RFP component. Cleco Power is meeting the requirements of the research component with research into solar projects, a wind project, and various other renewable projects. The RFP component of the program requires utilities, collectively, to issue RFPs for 350 MW of renewable energy, with Cleco Power’s share being 43 MW. However, because Madison Unit 3 is designed to burn biomass fuel, with minor modifications, in addition to its primary fuel, Cleco Power has been given an exception allowing it to conduct a RFP for biomass fuel along with identifying the costs to co-fire biomass fuel in Madison Unit 3. As part of this process, during the fourth quarter of 2011, Cleco Power expects to perform a biomass test burn at Madison Unit 3. The projected cost of the test burn is approximately $3.0 million, consisting of $2.0 million of capital modifications, $0.7 million of non-fuel start-up costs, and $0.3 million of biomass fuel. Cleco Power’s final RFP for biomass fuel along with its written report to the LPSC regarding the cost of co-firing biomass fuel in Madison Unit 3 is expected to be completed in 2012. After the LPSC reviews the results of Cleco Power’s RFP, the LPSC
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may authorize Cleco Power to pursue co-firing biomass fuel in Madison Unit 3 or require Cleco Power to conduct an additional RFP for 43 MW of renewable energy as discussed above. For additional information on Cleco’s renewable energy pilot program, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Generation RFP” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Madison Unit 3
In May 2006, Cleco Power began construction of Madison Unit 3, a 600-MW solid fuel power plant. The unit commenced commercial operations on February 12, 2010. Madison Unit 3 is capable of burning various solid fuels, but initially began with consumption of petroleum coke produced by several refineries throughout the Gulf Coast region. Cleco Power had contracted with three refineries to supply various amounts of the Madison Unit 3 fuel requirements though 2014. Due to pricing and lower than anticipated consumption at Madison 3 in 2010, Cleco terminated one of the three petroleum coke supply contracts effective December 31, 2010. Due to operational and economic reasons, in March 2011, Cleco Power purchased various amounts of Illinois basin coal from several suppliers and is assessing the need for additional purchases for the year 2012.
In May 2006, Cleco Power and Shaw entered into an Amended EPC Contract to construct the unit, which contract has subsequently been amended by the parties. Under the amended contract, the lump-sum price for construction of Madison Unit 3 by Shaw was $795.6 million. In support of Shaw’s performance obligations, Cleco Power, as of December 31, 2010, retained a letter of credit in the amount of $58.9 million, as well as a $200.0 million payment and performance bond in favor of Cleco Power as specified under the Amended EPC Contract. In February 2011, Cleco drew on Shaw’s letter of credit in an amount of $19.0 million due to Shaw’s voidance of a fuel related amendment. Shaw has yet to replenish the letter of credit on this draw amount as provided under the Amended EPC Contract. The outstanding amounts on the letter of credit are provided in support of Shaw’s potential payment of liquidated damages, or other payment performance obligations.
As of June 30, 2011, Cleco Power had incurred approximately $986.4 million in total project costs, including amounts paid under the Amended EPC Contract, AFUDC, and the recovery of $19.0 million from Shaw’s letter of credit. The Madison Unit 3 budget forecast includes AFUDC, Amended EPC Contract costs, and other development expenses and remains within 1% of its estimated projection of $1.0 billion. The project achieved commercial operations on February 12, 2010, whereby Cleco Power accepted care, custody, and control of the unit. Shaw has not reached project completion under the contract, as various performance tests, the reliability test, and specified boiler performance criteria have not been met. Shaw must correct identified items, complete performance guarantee tests, meet a 30-day reliability performance test, and correct warranty issues by August 11, 2011 or pay certain liquidated damages or financially settle incomplete work. Cleco Power and Shaw have submitted various claims, relating to the Amended EPC Contract, to arbitration. On April 30, 2010, Shaw filed a demand for arbitration asserting claims of $32.0 million including impacts due to the 2008 hurricane force majeure, alleged excess fuel moisture, intake water quality and a river embankment slope failure, and the associated recovery of schedule related liquidated damages withheld by Cleco Power. In May 2010, Cleco Power issued to Shaw a notice of default relating to Shaw’s inability to meet certain material obligations under the Amended EPC Contract. Furthermore, as a result of Shaw filing the demand for arbitration, certain claims exceeded a $1.0 million threshold, triggering an unwind of certain fuel related matters included in a prior settlement between the parties, Amendment No. 4, and Cleco demanded an associated payment of $19.0 million. As discussed above, in February 2011, Cleco drew on the Shaw letter of credit in an amount of $19.0 million for amounts relating to the unwind. Shaw has also amended its demand for arbitration to contest the fuel amendment unwind noted above, and is seeking recovery of such amounts in the arbitration proceedings. Under the arbitration proceedings, Cleco has also filed compulsory counterclaims for liquidated damages associated with Shaw’s inability to meet various guarantees or remedy warranty claims associated with boiler performance burning petroleum coke. Certain of these matters were argued in arbitration hearings which concluded on June 8, 2011. On June 24, 2011, Cleco and Shaw each submitted their proposed resolutions to all of the matters in dispute in this arbitration proceeding. Shaw submitted that Cleco owes $32.5 million in satisfaction of all of such matters. Cleco submitted that it only owes Shaw $4.0 million. Under the EPC Contract, the arbitrator is required to select one of these two amounts and is expected to announce his decision by August 8, 2011.
Other disputed matters relating to completion of minor or warranty related work, as well as liquidated damages for Shaw’s inability to meet performance guarantees, were bifurcated from the current arbitration proceeding and may be resolved through a second arbitration proceeding or potentially settled.
Lignite Deferral
At June 30, 2011, and December 31, 2010, Cleco Power had $20.4 million and $21.7 million, respectively, in deferred lignite mining costs remaining uncollected.
For additional information on Cleco Power’s deferred lignite mining expenditures, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Other Matters — Lignite Deferral” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
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Acadiana Load Pocket Project
In September 2008, Cleco Power entered into an agreement with two other utilities to upgrade and expand interconnected transmission systems in south central Louisiana in an area known as the Acadiana Load Pocket. The project received LPSC and SPP approval in February 2009. Cleco Power’s initial portion of the estimated cost was approximately $150.0 million, including AFUDC. Due to lower material and labor costs than initially expected, Cleco Power’s estimated costs for its portion of the project were reduced to $125.0 million, including AFUDC. At June 30, 2011, Cleco Power had spent $74.4 million on the project and expects to incur an additional $23.0 million during 2011, including AFUDC. The costs associated with the completed portions of the Acadiana Load Pocket project are included in base revenue. The project is estimated to be 77% complete with the final completion date expected in 2012. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Acadiana Load Pocket Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010. For information on the impact the Acadiana Load Pocket project is expected to have on base revenue, see “Results of Operations — Comparison of the Three Months Ended June 30, 2011, and 2010 — Cleco Power — Base.”
AMI Project
In May 2010, Cleco Power accepted the terms of a $20.0 million grant from the DOE under the DOE’s small-grant process to implement smart-grid technology for all of Cleco Power’s retail customers. Cleco Power estimates the project will cost $73.0 million, with the DOE grant providing $20.0 million toward the project and Cleco Power providing the remaining $53.0 million. The grant program is a part of the American Recovery and Reinvestment Act of 2009, an economic stimulus package passed by Congress in February 2009. Smart-grid technology includes the installation of electric meters that enable two-way communication capabilities between a home or business and a utility company. At June 30, 2011, Cleco Power had incurred $5.1 million in project costs, of which $2.3 million has been submitted to the DOE for reimbursement. As of June 30, 2011, Cleco Power had received $1.4 million in payments from the DOE. The project is expected to be completed in the second quarter of 2013. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Other Matters — AMI Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Teche Unit 4 Blackstart Project
In April 2011, Cleco Power completed work on its project to improve its “blackstart” process (the return of its generation system to service in the event of a total shutdown). The project was considered complete when a 33-MW gas turbine at Teche Power Station, which has been designated Teche Unit 4, was placed into commercial operation. At June 30, 2011, Cleco Power had spent $29.4 million on the project and expects to incur an additional $0.5 million during the remainder of 2011. For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition ��� Liquidity and Capital Resources — Other Matters — Teche Unit 4 Blackstart Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Franchises
In 2009, the City of Opelousas conducted a request for proposals from other power companies to potentially replace Cleco Power’s franchise, which was set to expire on August 11, 2011. The process did not result in successful bids, and subsequently the Mayor formed a citizens committee to determine if the City of Opelousas should operate its own electricity distribution system or continue the operating and franchise agreement with Cleco Power. In December 2009, the City of Opelousas requested an extension under the operating and franchise agreement to perform the review. Cleco Power granted extensions until July 15, 2011 and continued to provide service based on the terms of the existing operating and franchise agreement. On July 14, 2011, the City of Opelousas approved the renewal of its franchise agreement with Cleco Power. The renewal extends the agreement for 10 years until August 11, 2021. Approximately 10,000 Cleco Power customers are located in Opelousas.
On July 12, 2011, the Town of Colfax voted to accept the early renewal of its franchise agreement with Cleco Power. The Colfax agreement was set to expire in February 2013. The renewal extends the agreement for 30 years until July 2043. Approximately 800 Cleco Power customers are located in Colfax.
Other Franchise Matters
On March 9, 2010, a complaint was filed in the 27th Judicial District Court of St. Landry Parish, State of Louisiana on behalf of three Cleco Power customers in Opelousas, Louisiana. The complaint alleges that Cleco Power overcharged the plaintiffs by applying to customers in Opelousas the same retail rates as Cleco Power applies to all of its retail customers. In addition, on May 11, 2010, a second complaint repeating the allegations of the first was filed on behalf of a number of Opelousas residents. For additional information regarding these complaints, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — City of Opelousas.”
For additional information on Cleco Power’s electric service franchises, please read “Business — Regulatory Matters, Industry Developments, and Franchises — Franchises” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
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Environmental Matters
Cleco is subject to extensive environmental regulation by federal, state, and local authorities and is required to comply with numerous environmental laws and regulations, and to obtain and to comply with numerous governmental permits, in operating its facilities. In addition, existing environmental laws, regulations, and permits could be revised or reinterpreted; new laws and regulations could be adopted or become applicable to Cleco or its facilities; and future changes in environmental laws and regulations could occur, including potential regulatory and enforcement developments related to air emissions. Cleco may incur significant additional costs to comply with these revisions, reinterpretations, and requirements. Cleco Power would then seek recovery of additional environmental compliance costs as riders through the LPSC’s environmental adjustment clause or its FRP, or as a base rate adjustment as appropriate. If Cleco fails to comply with these revisions, reinterpretations, and requirements, it could be subject to civil or criminal liabilities and fines.
On July 7, 2011, the EPA released a final rule titled “Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone in 27 States,” which is now referred to as the Cross-State Air Pollution Rule (CSAPR). As finalized by the EPA, the CSAPR requires more stringent reductions in NOx emissions from covered sources in Louisiana during the ozone season (May to September) starting in 2012 as compared to the proposed rule that was issued by the EPA on July 6, 2010. The CSAPR does not require reductions in NOx emissions on an annual basis or in SO2 emissions from sources in Louisiana as had been proposed by the EPA. The CSAPR will require Cleco’s generation units to reduce NOx emissions during the ozone season and institute an ozone season trading program that may be available to Cleco to meet a portion of the required reductions. Cleco is evaluating compliance strategies to meet the requirements of the final rule, including but not limited to the installation of additional emission controls, the use of different fuels, the implementation of alternate dispatch schedules for its generating units, and the utilization of alternate generation resources to meet its load requirements. In addition to these compliance options, Cleco is considering the purchase of allowances to help meet the stringent level of NOx reductions imposed on covered sources in Louisiana. At this time, Cleco cannot be certain that any combination of these compliance options will be sufficient to ensure compliance with the final rule’s required NOx reduction levels. More detailed analyses are required for each of the options to enable management to definitively determine a compliance path. Moreover, the availability of and cost to purchase allowances to meet the NOx reduction requirements is uncertain at this time and is beyond Cleco’s control. If Cleco cannot obtain sufficient ozone season allowances to cover its ozone season emissions, then Cleco could face significant fines and penalties and/or it may not be able to meet its customer’s demand. While the capital costs, other expenditures, or operational restrictions necessary to comply with the CSAPR cannot be specified at this time, compliance with the CSAPR could require significant capital investments or operational changes in Cleco’s generation fleet.
On March 28, 2011, the EPA proposed regulations which would establish standards for cooling water intake structures at existing power plants and other facilities pursuant to section 316(b) of the Clean Water Act (CWA). The proposed standards respond to decisions by appellate courts remanding earlier EPA efforts to establish section 316(b) standards. The standards are intended to protect fish and other aquatic wildlife by minimizing capture both in screens attached to intake structures (impingement mortality), and in the actual intake structures themselves (entrainment mortality). The proposed standards would not impose a uniform requirement to install a closed-cycle cooling system, or cooling towers. For existing facilities that are designed to draw at least two million gallons per day of water from waters of the United States and use at least twenty-five (25) percent of the water they withdraw exclusively for cooling, the proposed standards would (1) set a performance standard, measured as a fish mortality rate due to impingement, or reduce the flow velocity at cooling water intakes to less than 0.5 feet per second, and (2) require entrainment standards to be determined on a case-by-case basis by state delegated permitting authorities. As proposed, the rule would require the installation of cooling towers (or a technology of comparable effectiveness) at new units installed at existing facilities. Facilities subject to the proposed standards would have a maximum of eight years to comply with the impingement requirements, although state permitting authorities would have discretion to set a shorter deadline. Compliance with entrainment standards would be required “as soon as possible,” by a date to be determined by the same permitting authorities. As proposed, portions of the rule would apply to all Cleco fossil fuel steam electric generating stations rather than just the Teche and Coughlin facilities as reported in the Registrants’ Combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011. However, until more thorough studies are conducted, including technical and economic evaluations of the control options available, Cleco remains uncertain which technology option or retrofit would be required to be installed on its cooling water intake structures and the associated costs of those modifications assuming that the rule is finalized as proposed; however, the costs of required technology options and retrofits could be significant.
For a discussion of other Cleco environmental matters, please read “Business — Environmental Matters” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Recent Authoritative Guidance
For a discussion of recent authoritative guidance, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 2 — Recent Authoritative Guidance” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
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CRITICAL ACCOUNTING POLICIES
Cleco’s critical accounting policies include those accounting policies that are both important to Cleco’s financial condition and results of operations and those that require management to make difficult, subjective, or complex judgments about future events, which could result in a material impact to the financial statements of Cleco Corporation’s segments or to Cleco as a consolidated entity. The financial statements contained in this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require Cleco to make estimates and assumptions. Estimates and assumptions about future events and their effects cannot be made with certainty. Management bases its current estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. On an ongoing basis, these estimates and assumptions are evaluated and, if necessary, adjustments are made when warranted by new or updated information or by a change in circumstances or environment. Actual results may differ significantly from these estimates under different assumptions or conditions. For a discussion of Cleco’s critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in the Registrant’s Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
CLECO POWER — NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Set forth below is information concerning the results of operations of Cleco Power for the three and six months ended June 30, 2011, and June 30, 2010. The following narrative analysis should be read in combination with Cleco Power’s Unaudited Condensed Consolidated Financial Statements and the Notes contained in this Combined Quarterly Report on Form 10-Q.
Cleco Power meets the conditions specified in General Instructions H(1)(a) and (b) to Form 10-Q and is therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, Cleco Power has omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures about Market Risk) of Part I of Form 10-Q and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds) and Item 3 (Defaults upon Senior Securities). Pursuant to the General Instructions, Cleco Power has included an explanation of the reasons for material changes in the amount of revenue and expense items of Cleco Power between the first six months of 2011 and the first six months of 2010. Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
For an explanation of material changes in the amount of revenue and expense items of Cleco Power between the second quarter of 2011 and the second quarter of 2010, see “— Results of Operations — Comparison of the Three Months Ended June 30, 2011, and 2010 — Cleco Power” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
For an explanation of material changes in the amount of revenue and expense items of Cleco Power between the first six months of 2011 and the first six months of 2010, see “— Results of Operations — Comparison of the Six Months Ended June 30, 2011, and 2010 — Cleco Power” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk inherent in Cleco’s market risk-sensitive instruments and positions includes potential changes arising from changes in interest rates and the commodity market prices of power and natural gas in the industry on different energy exchanges. Cleco also is subject to market risk associated with its tolling agreement counterparty. For additional information concerning Cleco’s market risk associated with its counterparty, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — General Considerations and Credit-Related Risks.”
Cleco applies the authoritative guidance as it relates to derivatives and hedging to determine whether the market risk-sensitive instruments and positions are required to be marked-to-market. Generally, Cleco Power’s market risk-sensitive instruments and positions qualify for the normal-purchase, normal-sale exception to mark-to-market accounting since Cleco Power takes physical delivery and the instruments and positions are used to satisfy customer requirements.
Cleco’s exposure to market risk, as discussed below, represents an estimate of possible changes in the fair value or future earnings that would occur, assuming possible future movements in the interest rates and commodity prices of power and natural gas. Management’s views on market risk are not necessarily indicative of actual results, nor do they represent the maximum possible gains or losses. The views do represent, within the parameters disclosed, what management estimates may happen.
Cleco monitors credit risk exposure through reviews of counterparty credit quality, aggregate counterparty credit exposure, and aggregate counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed
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necessary. Cleco Power has agreements in place with various counterparties that authorize the netting of financial transactions and contract payments to mitigate credit risk for transactions entered into for risk management purposes.
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Market conditions during the past few years have limited the availability and have increased the costs of capital for many companies. The inability to raise capital on favorable terms could negatively affect Cleco’s ability to maintain and expand its businesses. After assessing the current operating performance, liquidity, and credit ratings of Cleco, management believes that it will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. Cleco Corporation and Cleco Power pay fees and interest under their respective credit facilities based on the highest rating held. If Cleco Corporation or Cleco Power’s credit ratings were to be downgraded by Moody’s and Standard & Poor’s, Cleco Corporation or Cleco Power, as the case may be, would be required to pay additional fees and higher interest rates under their respective credit facilities. Cleco Power’s collateral for derivatives is based on the lowest rating held. If Cleco Power’s credit ratings were to be downgraded by Standard & Poor’s or Moody’s, Cleco Power would be required to pay additional collateral for derivatives.
Interest Rate Risks
Cleco monitors its mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix, for example, refinancing balances outstanding under its variable-rate credit facility with fixed-rate debt. For details, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 5 — Debt.” Calculations of the changes in fair market value and interest expense of the debt securities are made over a one-year period.
Sensitivity to changes in interest rates for fixed-rate obligations is computed by calculating the current fair market value using a net present value model based upon a 1% change in the average interest rate applicable to such debt. Sensitivity to changes in interest rates for variable-rate obligations is computed by assuming a 1% change in the current interest rate applicable to such debt.
At June 30, 2011, Cleco had no short-term variable rate debt outstanding. At June 30, 2011, Cleco Corporation had long-term variable rate debt outstanding of $10.0 million in the form of borrowings under its $200.0 million four-year credit facility at an interest rate of 2.24%. The borrowings under the credit facility are considered to be long-term as the credit facility does not expire until 2014. The borrowing costs under the facility are equal to one-month LIBOR plus 2.05%, plus facility fees of 0.45%. The existing borrowing had 30-day terms and matured on July 29, 2011, at which time the borrowings were repaid. Each 1% increase in the interest rate applicable to such debt would have resulted in a $0.1 million decrease in pre-tax earnings.
Cleco Power’s solid waste disposal facility bonds due 2038 and Cleco Power’s GO Zone bonds due 2038, are required to be mandatorily tendered by the holders for purchase on October 1, 2011, and December 1, 2011, respectively, pursuant to the terms of the respective indentures, at which time Cleco Power will have the option to either repay all of Cleco Power’s obligations under the respective loan agreements relating to the bonds or cause the bonds to be remarketed. Cleco Power expects to cause the bonds to be remarketed for new terms at new interest rates, both to be determined by market conditions.
Commodity Price Risks
Management believes Cleco has controls in place to minimize the risks involved in its financial and energy commodity activities. Independent controls over energy commodity functions consist of a middle office (risk management), a back office (accounting), and regulatory compliance staff, as well as monitoring by a risk management committee comprised of officers and the General Manager – Internal Audit, who are approved by Cleco Corporation’s Board of Directors. Risk limits are recommended by the Risk Management Committee and monitored through a daily risk report that identifies the current VaR, current market conditions, and concentration of energy market positions.
Cleco Power provides fuel for generation and purchases power to meet the power demands of customers. Cleco Power has entered into positions to mitigate the volatility in customer fuel costs, as encouraged by an LPSC order. Cleco Power’s fuel stabilization policy targets higher levels of minimum hedging percentages and mitigates the volatility in customer fuel costs. The change in positions could result in increased volatility in the marked-to-market amounts for the financial positions. These positions are marked-to-market with the resulting gain or loss recorded on the balance sheet as a component of the accumulated deferred fuel asset or liability and a component of the risk management assets or liabilities. When these positions close, actual gains or losses are deferred and included in the fuel adjustment clause in the month the physical contract settles. Based on market prices at June 30, 2011, the net mark-to-market impact related to open natural gas positions at June 30, 2011, were losses of $7.7 million. The majority of these natural gas positions will close over the next twelve months. Deferred losses relating to closed natural gas positions at June 30, 2011, and December 31, 2010, totaled $2.1 million and $1.6 million, respectively.
Cleco utilizes a VaR model to assess the market risk of its hedging portfolios, including derivative financial instruments. VaR represents the potential loss in fair value for an instrument from adverse changes in market factors over a defined period of time with a specified confidence level. VaR is calculated daily, using the variance/covariance method with delta approximation, assuming a holding period of one day, and a 95% confidence level for natural gas and power positions. Volatility is calculated daily from historical forward prices using the exponentially weighted moving average method.
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Based on these assumptions, the VaR relating to Cleco Power’s hedge transactions for the three and six months ended June 30, 2011, as well as the VaR at December 31, 2010, is summarized below.
| | | FOR THE THREE MONTHS ENDED JUNE 30, 2011 | |
| (THOUSANDS) | | HIGH | | | LOW | | | AVERAGE | |
| Fuel cost hedges | | $ | 1,374.4 | | | $ | 756.4 | | | $ | 1,084.6 | |
| | | FOR THE SIX MONTHS ENDED JUNE 30, 2011 | | |
AT JUNE 30,
| | |
AT DECEMBER 31,
| |
| (THOUSANDS) | | HIGH | | | LOW | | | AVERAGE | | | 2011 | | | 2010 | |
| Fuel cost hedges | | $ | 1,458.3 | | | $ | 756.4 | | | $ | 1,133.8 | | | $ | 756.4 | | | $ | 1,346.0 | |
Please refer to “— Risk Overview” above for a discussion of market risk inherent in Cleco Power’s market risk-sensitive instruments.
Cleco Power has entered into various fixed- and variable-rate debt obligations. Please refer to “— Interest Rate Risks” above for a discussion of how Cleco Power monitors its mix of fixed- and variable-rate debt obligations and the manner of calculating changes in fair market value and interest expense of its debt obligations.
Cleco Power had no short- or long-term variable-rate debt as of June 30, 2011.
Please refer to “— Commodity Price Risks” above for a discussion of controls, transactions, VaR, and market value maturities associated with Cleco Power’s energy commodity activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2011, evaluations were performed under the supervision and with the participation of Cleco Corporation and Cleco Power LLC (individually, “Registrant” and collectively, the “Registrants”) management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The evaluations assessed the effectiveness of the Registrants’ disclosure controls and procedures. Based on the evaluations, the CEO and CFO have concluded that the Registrants’ disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms; and that the Registrants’ disclosure controls and procedures are also effective in ensuring that such information is accumulated and communicated to the Registrants’ management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
Under the supervision and with the participation of the Registrants’ management, including the CEO and CFO, the Registrants evaluated changes in internal control over financial reporting that occurred during the quarter ended June 30, 2011, and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on legal proceedings affecting Cleco, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”
For information on legal proceedings affecting Cleco Power, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”
Other than the update to the risk factor below, there have been no material changes from the risk factors disclosed under the heading “Risk Factors” in Item 1A of the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report on Form 10-K”). For risks that could affect actual results and cause results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Registrants, see the risk factors disclosed under “Risk Factors” in Item 1A of the 2010 Annual Report on Form 10-K. The risk factor below should be read in conjunction with the risk factors disclosed in the 2010 Annual Report on Form 10-K.
Weather Sensitivity
The operating results of Cleco Power are affected by weather conditions and may fluctuate on a seasonal and quarterly basis.
Weather conditions directly influence the demand for electricity, particularly kWh sales to residential customers. In Cleco Power’s service territory, demand for power typically peaks during the hot summer months. As a result, Cleco Power’s financial results may fluctuate on a seasonal basis. In addition, Cleco Power has sold less power, and consequently earned less income, when weather conditions were milder. Unusually mild weather in the future could have a material adverse impact on the Registrants’ results of operations, financial condition, and cash flows.
Severe weather, including hurricanes and winter storms, can be destructive, causing outages and property damage that can potentially result in additional expenses and lower revenue. Extreme drought conditions can impact the availability of cooling water to support the operations of generating plants, which can also result in additional expenses and lower revenue.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities
On June 24, 2011, Cleco Corporation redeemed all 10,288 outstanding shares of its 4.5% preferred stock. The redemption price was $101 per share, plus accrued and unpaid dividends to the redemption date, or $101.296 per share. As of June 30, 2011, no shares of 4.5% preferred stock were outstanding.
The following table summarizes the 4.5% preferred stock redeemed by Cleco Corporation during the quarter ended June 30, 2011:
| PERIOD | | TOTAL NUMBER OF SHARES PURCHASED | | | AVERAGE PRICE PAID PER SHARE* | | | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS | | | MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS | |
| April 2011 | | | - | | | $ | - | | | $ | - | | | $ | - | |
| May 2011 | | | - | | | $ | - | | | $ | - | | | $ | 10,288 | |
| June 2011 | | | 10,288 | | | $ | 101.00 | | | $ | 10,288 | | | $ | - | |
* Accrued and unpaid dividends of $0.296 per share were paid in addition to the redemption price of $101 per share. | | | | | | | | | |
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
ITEM 6. EXHIBITS
CLECO CORPORATION | |
| 3.1 | Bylaws of Cleco Corporation, revised effective July 5, 2011 |
| 12(a) | Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the three-, six-, and twelve-month periods ended June 30, 2011, for Cleco Corporation |
| 31.1 | CEO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | CFO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
CLECO POWER | |
| 12(b) | Computation of Ratios of Earnings to Fixed Charges for the three-, six-, and twelve-month periods ended June 30, 2011, for Cleco Power |
| 31.3 | CEO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.4 | CFO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.3 | CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.4 | CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
| | |
| *XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. |
| CLECO CORPORATION | |
| 2011 2ND QUARTER FORM 10-Q |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | CLECO CORPORATION |
| | (Registrant) |
| | |
| | |
| | |
| | |
| | By: /s/ R. Russell Davis |
| | R. Russell Davis |
| | Vice President - Investor Relations & Chief Accounting Officer |
Date: August 3, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | CLECO POWER LLC |
| | (Registrant) |
| | |
| | |
| | |
| | |
| | By: /s/ R. Russell Davis |
| | R. Russell Davis |
| | Vice President - Investor Relations & Chief Accounting Officer |
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