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 nine months ended September 30, 2011, and September 30, 2010.
Cleco is a regional energy company that conducts substantially all of its business operations through its two primary subsidiaries:
| § | Cleco Power, a regulated electric utility company, which owns 10 generating units with a total nameplate capacity of 2,572 MWs and serves approximately 279,000 customers in Louisiana through its retail business and 10 communities across Louisiana and Mississippi through wholesale power contracts; and |
| § | Midstream, a wholesale energy business, which owns Evangeline (which operates Coughlin). |
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, the AMI project and power supply options for 2012 and beyond. These initiatives are discussed 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 September 30, 2011, Cleco Power had spent $86.3 million on the project and expects to incur an additional $9.6 million during 2011, including AFUDC. A return on and recovery of the costs associated with the completed portions of the Acadiana Load Pocket project are included in base revenue. The project is estimated to be 81% 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 “— Comparison of the Three Months Ended September 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 September 30, 2011, Cleco Power had incurred $6.9 million in project costs, of which $3.0 million has been submitted to the DOE for reimbursement. As of September 30, 2011, Cleco Power had received $2.8 million in payments from the DOE. The project is expected to be completed in the third 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.
Power Supply Options
Cleco Power is evaluating a range of power supply options for 2012 and beyond. Cleco Power is continuing to update its IRP to look at future sources of supply to meet its capacity and energy requirements and to comply with new environmental standards, primarily the Cross-State Air Pollution Rule. In August 2011, Cleco Power issued one RFP for resources to enhance reliability for January through April 2012. In October 2011, a second RFP, seeking up to approximately 750 MWs of capacity and energy, for a three- or five-year period was issued for supply starting May 1, 2012 to meet the Cross-State Air Pollution Rule. Cleco Power also plans to release an additional RFP in 2012 seeking long-term resources.
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
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. Evangeline was one of the successful bidders in Cleco Power’s RFP for short-term 2012 resources. Cleco Power has filed with the LPSC an application for a certificate of public convenience and necessity for this agreement. For additional information, see “— Financial Condition — Liquidity and Capital Resources — Regulatory Matters — Generation RFP.”
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 September 30, 2011, and 2010
Cleco Consolidated
| | | | | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue, net | | $ | 351,581 | | | $ | 343,892 | | | $ | 7,689 | | | | 2.2 | % |
| Operating expenses | | | 235,401 | | | | 243,905 | | | | 8,504 | | | | 3.5 | % |
| Operating income | | $ | 116,180 | | | $ | 99,987 | | | $ | 16,193 | | | | 16.2 | % |
| Equity (loss) income from investees, before tax | | $ | (1 | ) | | $ | 2,494 | | | $ | (2,495 | ) | | | (100.0 | )% |
| Other expense | | $ | 3,360 | | | $ | 1,416 | | | $ | (1,944 | ) | | | (137.3 | )% |
| Interest charges | | $ | 25,779 | | | $ | 25,068 | | | $ | (711 | ) | | | (2.8 | )% |
| Federal and state income taxes | | $ | 24,737 | | | $ | 30,155 | | | $ | 5,418 | | | | 18.0 | % |
| Net income applicable to common stock | | $ | 65,842 | | | $ | 49,600 | | | $ | 16,242 | | | | 32.7 | % |
| * Not meaningful | | | | | | | | | | | | | | | | |
Consolidated net income applicable to common stock increased $16.2 million, or 32.7%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to higher corporate earnings. Also contributing to the increase were higher earnings at Midstream and Cleco Power.
Operating revenue, net increased $7.7 million, or 2.2%, in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of lower electric customer credits and higher other operations revenue at Cleco Power.
Operating expenses decreased $8.5 million, or 3.5%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower maintenance expenses at Cleco Power and Evangeline.
Equity income from investees decreased $2.5 million, or 100.0%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to the absence in the third quarter of 2011 of equity earnings at APH resulting from the disposition of Acadia Unit 2 and the subsequent consolidation of Acadia effective April 29, 2011.
Other expense increased $1.9 million, or 137.3%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to decreases in the cash surrender value of life insurance policies at Cleco Corporation.
Interest charges increased $0.7 million, or 2.8%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to higher interest charges at Cleco Power. Partially offsetting this increase were lower corporate interest charges related to uncertain tax positions and the repayment of a bank term loan in April 2011.
Federal and state income taxes decreased $5.4 million, or 18.0%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to $7.8 million for tax benefits taken on the prior year income tax return and $3.0 million to record tax expense at the consolidated projected annual effective tax rate. These decreases were partially offset by $4.2 million for the change in pre-tax income excluding AFUDC, and $1.2 million for miscellaneous items.
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
| | | | | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Base | | $ | 178,159 | | | $ | 176,584 | | | $ | 1,575 | | | | 0.9 | % |
Fuel cost recovery | | | 146,373 | | | | 149,045 | | | | (2,672 | ) | | | (1.8 | )% |
Electric customer credits | | | 1,852 | | | | (6,314 | ) | | | 8,166 | | | | 129.3 | % |
Other operations | | | 15,565 | | | | 12,819 | | | | 2,746 | | | | 21.4 | % |
Affiliate revenue | | | 347 | | | | 343 | | | | 4 | | | | 1.2 | % |
Operating revenue, net | | | 342,296 | | | | 332,477 | | | | 9,819 | | | | 3.0 | % |
| Operating expenses | | | | | | | | | | | | | | | | |
Fuel used for electric generation – recoverable | | | 121,739 | | | | 97,870 | | | | (23,869 | ) | | | (24.4 | )% |
Power purchased for utility customers – recoverable | | | 24,627 | | | | 51,218 | | | | 26,591 | | | | 51.9 | % |
Non-recoverable fuel and power purchased | | | 1,147 | | | | 3,177 | | | | 2,030 | | | | 63.9 | % |
Other operations | | | 31,185 | | | | 28,650 | | | | (2,535 | ) | | | (8.8 | )% |
Maintenance | | | 15,768 | | | | 20,272 | | | | 4,504 | | | | 22.2 | % |
Depreciation | | | 28,859 | | | | 27,133 | | | | (1,726 | ) | | | (6.4 | )% |
Taxes other than income taxes | | | 8,802 | | | | 9,161 | | | | 359 | | | | 3.9 | % |
(Gain) loss on sale of assets | | | (6 | ) | | | 7 | | | | 13 | | | | 185.7 | % |
Total operating expenses | | | 232,121 | | | | 237,488 | | | | 5,367 | | | | 2.3 | % |
| Operating income | | $ | 110,175 | | | $ | 94,989 | | | $ | 15,186 | | | | 16.0 | % |
| Other income | | $ | 1,323 | | | $ | 293 | | | $ | 1,030 | | | | 351.5 | % |
| Interest charges | | $ | 25,306 | | | $ | 16,044 | | | $ | (9,262 | ) | | | (57.7 | )% |
| Federal and state income taxes | | $ | 31,656 | | | $ | 26,568 | | | $ | (5,088 | ) | | | (19.2 | )% |
| Net income | | $ | 53,833 | | | $ | 52,335 | | | $ | 1,498 | | | | 2.9 | % |
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
Cleco Power’s net income in the third quarter of 2011 increased $1.5 million, or 2.9%, compared to the third quarter of 2010. Contributing factors include:
| § | lower electric customer credits, |
| § | lower maintenance expense, |
| § | higher other operations revenue, |
| § | lower non-recoverable fuel and power purchased, |
| § | higher base revenue, and |
These were partially offset by:
| § | higher interest charges, |
| § | higher other operations expense, |
| § | higher depreciation, and |
| § | higher effective income tax rate. |
| | FOR THE THREE MONTHS ENDED SEPTEMBER 30, |
(MILLION kWh) |
2011
| |
2010
| | FAVORABLE/ (UNFAVORABLE) |
| Electric sales | | | | | |
Residential | 1,274 | | 1,263 | | 0.9 % |
Commercial | 796 | | 771 | | 3.2 % |
Industrial | 619 | | 592 | | 4.6 % |
Other retail | 36 | | 37 | | (2.7)% |
Total retail | 2,725 | | 2,663 | | 2.3 % |
Sales for resale | 652 | | 639 | | 2.0 % |
Unbilled | (129) | | (125) | | (3.2)% |
| Total retail and wholesale customer sales | 3,248 | | 3,177 | | 2.2 % |
| | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | $ | 99,144 | | | $ | 100,301 | | | | (1.2 | )% |
Commercial | | | 48,732 | | | | 48,193 | | | | 1.1 | % |
Industrial | | | 22,468 | | | | 22,563 | | | | (0.4 | )% |
Other retail | | | 2,600 | | | | 2,721 | | | | (4.4 | )% |
Surcharge | | | 2,983 | | | | 1,350 | | | | 121.0 | % |
Other | | | (1,578 | ) | | | (1,704 | ) | | | 7.4 | % |
Total retail | | | 174,349 | | | | 173,424 | | | | 0.5 | % |
Sales for resale | | | 11,455 | | | | 14,745 | | | | (22.3 | )% |
Unbilled | | | (7,645 | ) | | | (11,585 | ) | | | 34.0 | % |
| Total retail and wholesale customer sales | | $ | 178,159 | | | $ | 176,584 | | | | 0.9 | % |
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.
| | | | | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, |
| | | | | | | | 2011 CHANGE |
| | 2011 | | 2010 | | NORMAL | | PRIOR YEAR | | NORMAL |
| Cooling-degree days | 1,671 | | 1,728 | | 1,489 | | (3.3)% | | 12.2% |
Base
Base revenue increased $1.6 million, or 0.9%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to higher electric sales, generally resulting from favorable weather. Although cooling degree days for the quarter were slightly down, Cleco Power experienced warmer weather in August 2011 as compared to the same period last year. Cleco Power anticipates incremental base revenue over the remainder of 2011 of $1.8 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 $2.2 million during the remainder of 2011, an additional $2.9 million in 2012, and an additional $0.4 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 $2.7 million, or 1.8%, during the third quarter of 2011 compared to the third quarter of 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. 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 94% of Cleco Power’s total fuel cost during the third 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.”
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
Electric Customer Credits
Electric customer credits decreased $8.2 million, or 129.3%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower accruals for customer credits. 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 21.4%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to $1.6 million of higher mineral lease payments and $1.1 million related to the gain on sales of Cleco Power’s fuel oil supply.
Operating Expenses
Operating expenses decreased $5.4 million, or 2.3%, in the third quarter of 2011 compared to the third quarter of 2010. Fuel used for electric generation (recoverable) increased $23.9 million, or 24.4%, primarily due to higher volumes of fuel used for electric generation. Partially offsetting this increase were lower per unit costs of fuel used for electric generation as compared to the third quarter of 2010. Power purchased for utility customers (recoverable) decreased $26.6 million, or 51.9%, largely due to lower volumes and lower 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 $2.0 million, or 63.9%, primarily due to the absence of non-recoverable expenses related to fixed-price power that was provided to a wholesale customer in the third quarter of 2010. Other operations expense increased $2.5 million, or 8.8%, primarily due to higher transmission and generating station expenses, and higher employee benefit costs and administrative expenses. Maintenance expense decreased $4.5 million, or 22.2%, primarily due to lower generating station and distribution maintenance work performed during the third quarter of 2011. Depreciation expense increased $1.7 million, or 6.4%, primarily due to higher amortization expense as a result of a change in rates and the Teche Unit 4 Blackstart Project being placed in service in 2011.
Other Income
Other income increased $1.0 million, or 351.5%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to higher revenue from mutual assistance to other utilities for restoration efforts and higher royalty payments.
Interest Charges
Interest charges increased $9.3 million, or 57.7%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to $7.3 million related to uncertain tax positions and $3.8 million related to the November 2010 issuance of $250.0 million of senior notes. Partially offsetting this increase was a $1.8 million decrease 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 increased $5.1 million, or 19.2%, during the third quarter of 2011 compared to the third quarter of 2010. The increase is primarily due to a $2.5 million change in pre-tax income excluding AFUDC equity, $1.9 million for miscellaneous items, and $1.5 million to record tax expense at the projected annual effective tax rate. These increases were partially offset by $0.7 million for tax benefits taken on the prior year income tax return and $0.1 million to record tax expense at the projected annual effective tax rate.
Midstream
| | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Tolling operations | | $ | 9,133 | | | $ | 11,153 | | | $ | (2,020 | ) | | | (18.1 | )% |
Other operations | | | 1 | | | | 1 | | | | - | | | | - | |
Affiliate revenue | | | - | | | | 5 | | | | (5 | ) | | | (100.0 | )% |
Operating revenue | | | 9,134 | | | | 11,159 | | | | (2,025 | ) | | | (18.1 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Other operations | | | 2,121 | | | | 1,944 | | | | (177 | ) | | | (9.1 | )% |
Maintenance | | | (1,131 | ) | | | 2,987 | | | | 4,118 | | | | 137.9 | % |
Depreciation | | | 1,457 | | | | 1,446 | | | | (11 | ) | | | (0.8 | )% |
Taxes other than income taxes | | | 620 | | | | 76 | | | | (544 | ) | | | (715.8 | )% |
(Gain) loss on sale of assets | | | (62 | ) | | | 6 | | | | 68 | | | | * | |
Total operating expenses | | | 3,005 | | | | 6,459 | | | | 3,454 | | | | 53.5 | % |
| Operating income | | $ | 6,129 | | | $ | 4,700 | | | $ | 1,429 | | | | 30.4 | % |
| Equity income from investees, before tax | | $ | - | | | $ | 2,494 | | | $ | (2,494 | ) | | | (100.0 | )% |
| Other income | | $ | 1,012 | | | $ | 1,836 | | | $ | (824 | ) | | | (44.9 | )% |
| Federal and state income tax expenses | | $ | 444 | | | $ | 2,758 | | | $ | 2,314 | | | | 83.9 | % |
| Net income | | $ | 5,946 | | | $ | 5,156 | | | $ | 790 | | | | 15.3 | % |
| * Not meaningful | | | | | | | | | | | | | | | | |
Factors affecting Midstream during the third quarter of 2011 are described below.
Operating Revenue
Operating revenue decreased $2.0 million, or 18.1%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower tolling revenue at Evangeline resulting from lower plant run time.
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
Operating Expenses
Operating expenses decreased $3.5 million, or 53.5%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower maintenance expenses at Evangeline and $2.4 million of insurance recovery related to outage expenses incurred during the second quarter of 2011.
Equity Income from Investees
Equity income from investees decreased $2.5 million, or 100.0%, in the third quarter of 2011 compared to the third quarter of 2010 primarily due to the absence in the third quarter of 2011 of equity earnings at APH resulting from the disposition of Acadia Unit 2 and the subsequent consolidation of Acadia effective April 29, 2011. 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.”
Other Income
Other income decreased $0.8 million, or 44.9%, in the third quarter of 2011 compared to the third quarter of 2010 largely as a result of lower contractual expirations of underlying indemnifications related to Acadia Unit 1.
Income Taxes
Federal and state income taxes decreased $2.3 million, or 83.9%, during the third quarter of 2011 compared to the third quarter of 2010 primarily due to tax benefits taken in the prior year income tax return and a decrease in pre-tax income. The effective income tax rate is different than the federal statutory rate due to state tax expense.
Comparison of the Nine Months Ended September 30, 2011, and 2010
Cleco Consolidated
| | | | | | FOR THE NINE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue, net | | $ | 878,193 | | | $ | 892,081 | | | $ | (13,888 | ) | | | (1.6 | )% |
| Operating expenses | | | 626,489 | | | | 656,101 | | | | 29,612 | | | | 4.5 | % |
| Operating income | | $ | 251,704 | | | $ | 235,980 | | | $ | 15,724 | | | | 6.7 | % |
| Allowance for other funds used during construction | | $ | 3,757 | | | $ | 11,052 | | | $ | (7,295 | ) | | | (66.0 | )% |
| Equity income from investees, before tax | | $ | 62,051 | | | $ | 39,212 | | | $ | 22,839 | | | | 58.2 | % |
| Gain on toll settlement | | $ | - | | | $ | 148,402 | | | $ | (148,402 | ) | | | (100.0 | )% |
| Interest charges | | $ | 78,011 | | | $ | 72,020 | | | $ | (5,991 | ) | | | (8.3 | )% |
| Federal and state income taxes | | $ | 73,451 | | | $ | 127,411 | | | $ | 53,960 | | | | 42.4 | % |
| Net income applicable to common stock | | $ | 165,067 | | | $ | 234,733 | | | $ | (69,666 | ) | | | (29.7 | )% |
Consolidated net income applicable to common stock decreased $69.7 million, or 29.7%, in the first nine months of 2011 compared to the first nine months of 2010 primarily due to the absence of 2010 gains at Midstream related to the termination of the Evangeline Tolling Agreement and Acadia Unit 1 transaction, partially offset by the 2011 gain from the Acadia Unit 2 transaction. Also contributing to the decrease were lower Cleco Power earnings. Partially offsetting these decreases were higher corporate earnings.
Operating revenue, net decreased $13.9 million, or 1.6%, in the first nine months of 2011 compared to the first nine 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 and lower per unit costs and volumes of power purchased for utility customers.
Operating expenses decreased $29.6 million, or 4.5%, in the first nine months of 2011 compared to the first nine 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 66.0%, in the first nine months of 2011 compared to the first nine 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 $22.8 million, or 58.2%, in the first nine months of 2011 compared to the first nine 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. 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 nine 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.”
Interest charges increased $6.0 million, or 8.3%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to higher interest charges at Cleco Power. Partially offsetting this increase were lower corporate interest charges related to uncertain tax positions and the repayment of a bank term loan in April 2011.
Federal and state income taxes decreased $54.0 million, or 42.4%, during the first nine months of 2011 compared to the first nine months of 2010. Decreases include $44.7 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, $7.8 million for tax benefits taken on the prior year income tax return, and $0.2 million to record tax expense at the consolidated annual projected effective tax rate. 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.
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
| | | | | | FOR THE NINE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Base | | $ | 470,166 | | | $ | 448,589 | | | $ | 21,577 | | | | 4.8 | % |
Fuel cost recovery | | | 353,318 | | | | 390,939 | | | | (37,621 | ) | | | (9.6 | )% |
Electric customer credits | | | (3,405 | ) | | | (6,314 | ) | | | 2,909 | | | | 46.1 | % |
Other operations | | | 40,261 | | | | 32,959 | | | | 7,302 | | | | 22.2 | % |
Affiliate revenue | | | 1,041 | | | | 1,029 | | | | 12 | | | | 1.2 | % |
Operating revenue, net | | | 861,381 | | | | 867,202 | | | | (5,821 | ) | | | (0.7 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Fuel used for electric generation – recoverable | | | 295,160 | | | | 270,165 | | | | (24,995 | ) | | | (9.3 | )% |
Power purchased for utility customers – recoverable | | | 58,145 | | | | 120,812 | | | | 62,667 | | | | 51.9 | % |
Non-recoverable fuel and power purchased | | | 3,369 | | | | 10,154 | | | | 6,785 | | | | 66.8 | % |
Other operations | | | 87,086 | | | | 81,111 | | | | (5,975 | ) | | | (7.4 | )% |
Maintenance | | | 53,962 | | | | 51,697 | | | | (2,265 | ) | | | (4.4 | )% |
Depreciation | | | 84,543 | | | | 77,941 | | | | (6,602 | ) | | | (8.5 | )% |
Taxes other than income taxes | | | 25,585 | | | | 25,110 | | | | (475 | ) | | | (1.9 | )% |
(Gain) loss on sale of assets | | | (7 | ) | | | 47 | | | | 54 | | | | 114.9 | % |
Total operating expenses | | | 607,843 | | | | 637,037 | | | | 29,194 | | | | 4.6 | % |
| Operating income | | $ | 253,538 | | | $ | 230,165 | | | $ | 23,373 | | | | 10.2 | % |
| Allowance for other funds used during construction | | $ | 3,757 | | | $ | 11,052 | | | $ | (7,295 | ) | | | (66.0 | )% |
| Other income | | $ | 2,168 | | | $ | 1,038 | | | $ | 1,130 | | | | 108.9 | % |
| Other expense | | $ | 4,499 | | | $ | 3,619 | | | $ | (880 | ) | | | (24.3 | )% |
| Interest charges | | $ | 74,029 | | | $ | 57,104 | | | $ | (16,925 | ) | | | (29.6 | )% |
| Federal and state income taxes | | $ | 61,935 | | | $ | 58,299 | | | $ | (3,636 | ) | | | (6.2 | )% |
| Net income | | $ | 119,557 | | | $ | 123,584 | | | $ | (4,027 | ) | | | (3.3 | )% |
Cleco Power’s net income in the first nine months of 2011 decreased $4.0 million, or 3.3%, compared to the first nine months of 2010. Contributing factors include:
| § | higher interest charges, |
| § | higher other operations and maintenance expenses, |
| § | lower allowance for other funds used during construction, |
| § | higher depreciation expense, and |
| § | higher effective income tax rate. |
These were partially offset by:
| § | higher other operations revenue, |
| § | lower non-recoverable fuel and power purchased expenses, and |
| § | lower electric customer credits. |
| | FOR THE NINE MONTHS ENDED SEPTEMBER 30, |
(MILLION kWh) |
2011
| |
2010
| | FAVORABLE/ (UNFAVORABLE) |
| Electric sales | | | | | |
Residential | 3,105 | | 3,156 | | (1.6)% |
Commercial | 2,037 | | 1,990 | | 2.4 % |
Industrial | 1,770 | | 1,679 | | 5.4 % |
Other retail | 103 | | 106 | | (2.8)% |
Total retail | 7,015 | | 6,931 | | 1.2 % |
Sales for resale | 1,495 | | 1,541 | | (3.0)% |
Unbilled | (90) | | 2 | | * |
| Total retail and wholesale customer sales | 8,420 | | 8,474 | | (0.6)% |
| * Not meaningful | | | | | |
| | | FOR THE NINE MONTHS ENDED SEPTEMBER 30, | |
| (THOUSANDS) | | 2011 | | | 2010 | | | FAVORABLE/ (UNFAVORABLE) | |
| Electric sales | | | | | | | | | |
Residential | | $ | 235,672 | | | $ | 208,811 | | | | 12.9 | % |
Commercial | | | 137,133 | | | | 116,897 | | | | 17.3 | % |
Industrial | | | 64,323 | | | | 55,774 | | | | 15.3 | % |
Other retail | | | 7,484 | | | | 6,727 | | | | 11.3 | % |
Surcharge | | | 7,534 | | | | 7,205 | | | | 4.6 | % |
Other | | | (4,875 | ) | | | (4,383 | ) | | | (11.2 | )% |
Total retail | | | 447,271 | | | | 391,031 | | | | 14.4 | % |
Sales for resale | | | 34,433 | | | | 34,199 | | | | 0.7 | % |
Unbilled | | | (11,538 | ) | | | 23,359 | | | | (149.4 | )% |
| Total retail and wholesale customer sales | | $ | 470,166 | | | $ | 448,589 | | | | 4.8 | % |
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 NINE MONTHS ENDED SEPTEMBER 30, |
| | | | | | | | 2011 CHANGE |
| | 2011 | | 2010 | | NORMAL | | PRIOR YEAR | | NORMAL |
| Heating-degree days | 937 | | 1,317 | | 999 | | (28.9)% | | (6.2)% |
| Cooling-degree days | 3,016 | | 2,903 | | 2,453 | | 3.9 % | | 23.0 % |
Base
Base revenue increased $21.6 million, or 4.8%, during the first nine months of 2011 compared to the first nine 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 September 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 $37.6 million, or 9.6%, during the first nine months of 2011
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
compared to the first nine months in 2010 primarily due to decreases in the per-unit cost of fuel used for electric generation, power purchased for utility customers, and 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 September 30, 2011, and 2010 — Cleco Power — Fuel Cost Recovery.”
Electric Customer Credits
Electric customer credits decreased $2.9 million, or 46.1%, during the first nine months of 2011 compared to the first nine months of 2010 as a result of a lower estimated accrual for a rate refund. 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 $7.3 million, or 22.2%, in the first nine months of 2011 compared to the first nine months of 2010 primarily due to a $3.8 million gain on sale of Cleco Power’s fuel oil supply, $2.7 million of higher mineral lease payments, $0.6 million related to the absence of net unfavorable results 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 $29.2 million, or 4.6%, in the first nine months of 2011 compared to the first nine months of 2010. Fuel used for electric generation (recoverable) increased $25.0 million, or 9.3%, primarily due to higher volumes of fuel used as compared to the first nine 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 $62.7 million, or 51.9%, 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 $6.8 million, or 66.8%, 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 nine 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 $6.0 million, or 7.4%, primarily due to higher generating station and distribution expenses, higher employee benefit costs and administrative expenses and higher customer service expenses. Partially offsetting these increases were lower professional fees. Maintenance expense increased $2.3 million, or 4.4%, primarily due to higher generating station, distribution, and transmission maintenance work performed during the first nine months of 2011. Other operations and maintenance expenses were impacted during the first nine months of 2011 as a result of Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1. Depreciation expense increased $6.6 million, or 8.5%, largely due to Madison Unit 3 being placed in service and the acquisition of Acadia Unit 1.
Allowance for Other Funds Used During Construction
Allowance for other funds used during construction decreased $7.3 million, or 66.0%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to the cessation of AFUDC accruals related to the completion of construction activity at Madison Unit 3.
Other Income
Other income increased $1.1 million, or 108.9%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to higher royalty payments and higher revenue from mutual assistance to other utilities for restoration efforts.
Other Expense
Other expense increased $0.9 million, or 24.3%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to higher amortization of the plant acquisition adjustment related to Cleco Power’s acquisition of Acadia Unit 1 and higher expenses from mutual assistance to other utilities for restoration efforts.
Interest Charges
Interest charges increased $16.9 million, or 29.6%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to $11.3 million related to the November 2010 issuance of $250.0 million of senior notes, $7.6 million related to uncertain tax positions, and $2.7 million of lower interest charges capitalized in 2011 compared to 2010 associated with Madison Unit 3. Partially offsetting this increase was $2.9 million from the repayment of insured quarterly notes and a bank term loan in October 2010 and November 2010, respectively, and $1.8 million of other miscellaneous interest charges.
Income Taxes
Federal and state income taxes increased $3.6 million, or 6.2%, during the first nine months of 2011 compared to the first nine months of 2010. The increase includes $2.6 million for the change in pre-tax income excluding AFUDC equity, $3.0 million for the adjustment in 2010 related to the
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
implementation of new rates approved by the LPSC, $1.7 million for miscellaneous items, and $0.9 million to record tax expense at the 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, $1.5 million for a Medicare D adjustment resulting from new legislation enacted in 2010, and $0.7 million for tax benefits taken in the prior year income tax return.
Midstream
| | | FOR THE NINE MONTHS ENDED SEPTEMBER 30, | |
| | | | | | | | | FAVORABLE/(UNFAVORABLE) | |
| (THOUSANDS) | | 2011 | | | 2010 | | | VARIANCE | | | CHANGE | |
| Operating revenue | | | | | | | | | | | | |
Tolling operations | | $ | 16,137 | | | $ | 23,016 | | | $ | (6,879 | ) | | | (29.9 | )% |
Other operations | | | 8 | | | | 2 | | | | 6 | | | | 300.0 | % |
Affiliate revenue | | | 45 | | | | 924 | | | | (879 | ) | | | (95.1 | )% |
Operating revenue | | | 16,190 | | | | 23,942 | | | | (7,752 | ) | | | (32.4 | )% |
| Operating expenses | | | | | | | | | | | | | | | | |
Other operations | | | 5,999 | | | | 5,962 | | | | (37 | ) | | | (0.6 | )% |
Maintenance | | | 5,535 | | | | 6,902 | | | | 1,367 | | | | 19.8 | % |
Depreciation | | | 4,370 | | | | 4,334 | | | | (36 | ) | | | (0.8 | )% |
Taxes other than income taxes | | | 1,880 | | | | 261 | | | | (1,619 | ) | | | (620.3 | )% |
(Gain) loss on sale of assets | | | (556 | ) | | | 12 | | | | 568 | | | | * | |
Total operating expenses | | | 17,228 | | | | 17,471 | | | | 243 | | | | 1.4 | % |
| Operating (loss) income | | $ | (1,038 | ) | | $ | 6,471 | | | $ | (7,509 | ) | | | (116.0 | )% |
| Equity income from investees, before tax | | $ | 62,053 | | | $ | 39,211 | | | $ | 22,842 | | | | 58.3 | % |
| Gain on toll settlement | | $ | - | | | $ | 148,402 | | | $ | (148,402 | ) | | | (100.0 | )% |
| Interest charges | | $ | 1,963 | | | $ | 5,972 | | | $ | 4,009 | | | | 67.1 | % |
| Federal and state income tax expense | | $ | 21,296 | | | $ | 72,905 | | | $ | 51,609 | | | | 70.8 | % |
| Net income | | $ | 39,274 | | | $ | 117,176 | | | $ | (77,902 | ) | | | (66.5 | )% |
| * Not meaningful | | | | | | | | | | | | | | | | |
Factors affecting Midstream during the first nine months of 2011 are described below.
Operating Revenue
Operating revenue decreased $7.8 million, or 32.4%, during the first nine months of 2011 compared to the first nine 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 nine months of 2011 compared to the first nine months of 2010 primarily due to a decrease in services provided by 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
Maintenance expenses decreased $1.4 million, or 19.8%, during the first nine months of 2011 compared to the first nine months of 2010, largely as a result of lower turbine maintenance expenses at Evangeline. Taxes other than income taxes increased $1.6 million, or 620.3%, primarily due to higher property taxes at Evangeline as a result of the expiration of a 10-year property tax exemption. Gain on sale of assets increased $0.6 million primarily due to insurance recovery related to outage expenses at Evangeline.
Equity Income from Investees
Equity income from investees increased $22.8 million, or 58.3%, during the first nine months of 2011 compared to the first nine 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. 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 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 nine 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 $4.0 million, or 67.1%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to the retirement of Evangeline’s debt in 2010 and lower interest charges related to uncertain tax positions. 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 $51.6 million, or 70.8%, during the first nine months of 2011 compared to the first nine months of 2010 primarily due to a decrease in pre-tax income and tax benefits taken in the prior year income tax return. 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
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
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 September 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 nine-month period ended September 30, 2011, there were no changes to Cleco or Cleco Power’s credit ratings or rating agency’s outlooks. At September 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. In May 2006, Cleco Power and Shaw entered into an Amended EPC Contract. 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, 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 September 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.
On October 7, 2011, Cleco Corporation amended its credit facility agreement. Under the amended agreement, Cleco Corporation’s maximum capacity was increased from $200.0 million to $250.0 million, the maturity date was extended to
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
October 7, 2016, and the borrowing costs were lowered to equal LIBOR plus 1.50%, plus facility fees of 0.25%. At September 30, 2011, Cleco Corporation had no borrowings outstanding under its original 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 level for its current amended $250.0 million credit facility.
On October 7, 2011, Cleco Power amended its credit facility agreement. Under the amended agreement, the maturity date was extended to October 7, 2016, and the borrowing costs were lowered to equal LIBOR plus 1.275%, plus facility fees of 0.225%. At September 30, 2011, Cleco Power had no borrowings outstanding under its original credit facility. If Cleco Power’s credit ratings were to be downgraded one level, Cleco Power would be required to pay fees and interest at a rate of 0.25% higher than the level on its current amended $300.0 million credit facility.
Cleco Consolidated
Cleco had no short-term debt outstanding at September 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 September 30, 2011, Cleco’s long-term debt outstanding was $1.38 billion, of which $13.1 million was due within one year, compared to $1.41 billion outstanding at December 31, 2010, which included $12.3 million due within one year. The long-term debt due within one year at September 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 $28.3 million primarily due to $12.3 million of scheduled Cleco Katrina/Rita storm recovery bond principal payments made in March and September 2011, a $15.0 million decrease in credit facility draws outstanding, and $1.3 million of capital lease payments. These decreases were partially offset by debt premium amortizations of $0.3 million.
Cash and cash equivalents available at September 30, 2011, were $158.2 million combined with $500.0 million facility capacity ($200.0 million from Cleco Corporation and $300.0 million from Cleco Power) for total liquidity of $658.2 million. Cash and cash equivalents available at September 30, 2011, decreased $32.9 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.
At September 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.”
At September 30, 2011, and December 31, 2010, Cleco had a working capital surplus of $179.6 million and $131.2 million, respectively. The $48.4 million increase in working capital is primarily due to:
| § | $150.0 million repayment of a bank term loan in April 2011, |
| § | $20.4 million net decrease related to changes in the recognition of current taxes and uncertain tax positions and related interest charges expected to be settled in the next 12 months, and |
| § | $10.3 million reduction in the deferred construction carrying costs owed to customers in the next 12 months. |
These increases in working capital were partially offset by:
| § | $44.7 million reduction of fuel inventories, |
| § | $32.9 million decrease in cash and cash equivalents as discussed above, |
| § | $30.0 million of mark-to-market losses on the treasury rate lock outstanding at September 30, 2011, and |
| § | $11.4 million net reduction of restricted cash used for GO Zone projects and Cleco Katrina/Rita debt service payments. |
Cleco Corporation (Holding Company Level)
Cleco Corporation had no short-term debt outstanding at September 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 September 30, 2011, Cleco Corporation had no draws outstanding under its $200.0 million credit facility compared to $15.0 million outstanding at December 31, 2010. This facility provides for working capital and other needs. Cleco Corporation and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
Cash and cash equivalents available at September 30, 2011, were $11.9 million. Cash and cash equivalents available at September 30, 2011, increased $6.6 million when compared to cash and cash equivalents available at
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
December 31, 2010, primarily due to routine working capital fluctuations.
Cleco Power
There was no short-term debt outstanding at Cleco Power at September 30, 2011, or December 31, 2010. At September 30, 2011, Cleco Power’s long-term debt outstanding was $1.38 billion, of which $13.1 million was due within one year, compared to $1.40 billion at December 31, 2010, of which $12.3 million was due within one year. The $13.1 million of long-term debt due within one year at September 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 $13.3 million primarily due to $12.3 million of scheduled Cleco Katrina/Rita storm recovery bond principal payments made in March and September 2011, and $1.3 million of capital lease payments. These decreases were partially offset by debt premium amortizations of $0.3 million.
At September 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 Corporation and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
Cash and cash equivalents available at September 30, 2011, were $143.0 million, combined with $300.0 million facility capacity for total liquidity of $443.0 million. Cash and cash equivalents decreased $41.9 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.
At September 30, 2011, and December 31, 2010, Cleco Power had a working capital surplus of $149.2 million and $259.1 million, respectively. The $109.9 million decrease in working capital is primarily due to:
| § | $44.7 million reduction of fuel inventories, |
| § | $41.9 million decrease in cash and cash equivalents as discussed above, |
| § | $30.0 million of mark-to-market losses on the treasury rate lock outstanding at September 30, 2011, and |
| § | $11.4 million net reduction of restricted cash used for GO Zone projects and Cleco Katrina/Rita debt service payments. |
These decreases in working capital were partially offset by:
| § | $10.3 million reduction in the deferred construction carrying costs owed to customers in the next 12 months, and |
| § | $3.9 million net increase related to changes in the recognition of current taxes and uncertain tax positions and related interest charges expected to be settled in the next 12 months. |
The $32.0 million solid waste disposal facility bonds due in 2038, which were issued by the Rapides Finance Authority for the benefit of Cleco Power in October 2008, were required to be mandatorily tendered by the bondholders for purchase on October 1, 2011, pursuant to the terms of the indenture. On October 3, 2011, Cleco Power purchased all $32.0 million outstanding bonds at face value plus $1.0 million of accrued interest. In connection with the purchase, the interest rate of the bonds was converted to a weekly mode and will reset each week based on the SIFMA (Securities Industry and Financial Markets Association) index. The initial interest rate of the bonds at October 3, 2011, was 0.16% per annum. The bonds were issued by the Rapides Finance Authority in connection with a loan agreement between the Rapides Finance Authority and Cleco Power. The bonds remain outstanding and Cleco Power will report the bonds as a $32.0 million long-term liability and a corresponding $32.0 million long-term asset. Interest expense will continue to be recorded with a corresponding amount recorded as interest income, excluding amortization of debt issuance costs. Cleco Power has the option to remarket the bonds for new terms and new interest rates, both to be determined by market conditions.
The $100.0 million GO Zone bonds due in 2038, which were issued by the Louisiana Public Facilities Authority for the benefit of Cleco Power, are required to be mandatorily tendered by the holders for purchase on December 1, 2011, pursuant to the terms of the indenture governing the bonds, at which time Cleco Power will have the option to either repay all $100.0 million of Cleco Power’s obligations under the loan agreement relating to the bonds and hold the bonds or cause the bonds to be retired, or cause the bonds to be remarketed. Cleco Power has the option to cause the bonds to be remarketed for new terms at new interest rates, both to be determined by market conditions.
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 its intended purposes and/or general corporate purposes. Cleco’s restricted cash consisted of:
| (THOUSANDS) | | AT SEPTEMBER 30, 2011 | | | AT DECEMBER 31, 2010 | |
| Diversified Lands’ mitigation escrow | | $ | 97 | | | $ | 97 | |
| Cleco Power’s future storm restoration costs | | | 24,652 | | | | 25,992 | |
| Cleco Power’s renewable energy grant | | | 600 | | | | - | |
| Cleco Katrina/Rita’s storm recovery bonds | | | 3,554 | | | | 8,822 | |
| Cleco Power’s GO Zone bonds | | | - | | | | 6,137 | |
| Total restricted cash | | $ | 28,903 | | | $ | 41,048 | |
Cleco Katrina/Rita has the right to bill and collect storm restoration costs from Cleco Power’s customers. As cash is collected, it is restricted for payment of operating expenses, interest, and principal on storm recovery bonds. During 2011, Cleco Katrina/Rita has collected $14.5 million net of operating
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expenses. In March and September 2011, Cleco Katrina/Rita used $6.3 million and $6.0 million, respectively for scheduled storm recovery bond principal payments and $3.8 million and $3.7 million, respectively for related interest. In 2011, Cleco Power received a renewable energy grant from the Louisiana Department of Natural Resources.
Cleco Cash Flows
Net Operating Cash Flow
Net cash provided by operating activities was $262.6 million during the first nine months of 2011, compared to $192.4 million during the first nine months of 2010. Cash provided by operating activities during the first nine months of 2011 increased $70.2 million from the first nine months of 2010, primarily due to the following items:
| § | return on equity investment in Acadia of $58.7 million, |
| § | higher collection of receivables of $47.0 million, |
| § | sales of fuel oil inventory of $35.2 million, |
| § | absence of 2010 Madison Unit 3 construction carrying costs, Acadia Unit 1 acquisition costs, rate case costs, and IRP/FRP costs of $30.3 million, and |
| § | lower petroleum coke inventory purchases of $26.2 million due to the build-up of inventory in 2010. |
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, |
| § | higher vendor payments of $21.7 million, and |
| § | absence of the 2010 cash portion of the gain related to the Evangeline Restructuring Agreement for $18.5 million. |
Net Investing Cash Flow
Net cash used in investing activities was $54.1 million during the first nine months of 2011, compared to $234.8 million during the first nine months of 2010. Net cash used in investing activities during the first nine months of 2011 was lower than the first nine months of 2010 primarily due to lower additions to property, plant and equipment, the return of equity investment in Acadia, and lower contributions to the tax credit fund, partially offset by lower transfers of cash from restricted accounts.
During the first nine months of 2011, Cleco had additions to property, plant and equipment, net of AFUDC, of $141.9 million and an $18.5 million investment in New Markets Tax Credits. This was partially offset by an $89.7 million return of equity investment in Acadia and the transfer of $12.1 million of cash from restricted accounts, primarily related to GO Zone bonds and cash restricted for storm costs.
During the first nine months of 2010, Cleco had additions to property, plant and equipment, net of AFUDC of $241.7 million, a $28.8 million investment in New Markets Tax Credits, an $8.5 million investment in Acadia, and a $0.2 million investment in Oxbow. This was partially offset by the transfer of $45.2 million of cash from restricted accounts, primarily related to Evangeline, GO Zone bonds, and cash restricted for storm costs.
Net Financing Cash Flow
Net cash used in financing activities was $241.4 million during the first nine months of 2011, compared to $34.9 million during the first nine months of 2010. Net cash used in financing activities during the first nine months of 2011 was higher than the first nine months of 2010 primarily due to lower draws on the revolving credit facility, higher repayments of short-term debt, the absence of short-term debt issuances, repurchase of common stock, and higher dividends paid on common stock. This was partially offset by lower payments on the credit facility and lower retirements of long-term debt.
During the first nine months of 2011, Cleco repaid a $150.0 million bank term loan and $37.3 million of long-term debt, consisting of $25.0 million of credit facility draws and $12.3 million of long-term bonds. Cleco also used $49.2 million for the payment of common stock dividends and $13.0 million for the repurchase of common stock. This was partially offset by $10.0 million in credit facility draws.
During the first nine months of 2010, Cleco retired $396.7 million of long-term debt, consisting of $350.0 million of credit facility draws, $35.2 million of Evangeline debt, and $11.5 million of long-term bonds. Cleco also used $43.8 million for the payment of common stock dividends. This was partially offset by $255.0 million of credit facility draws and 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 $184.7 million during the first nine months of 2011, compared to $99.7 million during the first nine months of 2010.
Cash provided by operating activities during the first nine months of 2011 increased $85.0 million from the first nine months of 2010 primarily due to the following items:
| § | higher collection of receivables of $46.0 million, |
| § | sales of fuel oil inventory of $35.2 million, |
| § | absence of 2010 Madison 3 construction carrying costs, Acadia Unit 1 acquisition costs, rate case costs, and IRP/FRP costs of $30.3 million, |
| § | lower petroleum coke inventory purchases of $26.2 million due to the build-up of inventory in 2010, |
| § | lower payments to affiliates of $17.1 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 vendor payments of $18.2 million. |
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Net Investing Cash Flow
Net cash used in investing activities was $112.9 million during the first nine months of 2011, compared to $72.5 million during the first nine months of 2010. Net cash used in investing activities during the first nine months of 2011 was higher than the first nine months of 2010 primarily due to higher additions to property, plant and equipment.
During the first nine months of 2011, Cleco Power had additions to property, plant and equipment, net of AFUDC of $127.3 million. This was partially offset by the transfer of $12.1 million of cash from restricted accounts, primarily related to GO Zone bonds and cash restricted for storm costs.
During the first nine months of 2010, Cleco Power had additions to property, plant and equipment, net of AFUDC of $87.3 million. This was partially offset by the transfer of $15.1 million of cash from restricted accounts, primarily related to solid waste disposal and GO Zone bonds.
Net Financing Cash Flow
Net cash used in financing activities was $113.7 million during the first nine months of 2011, compared to $137.9 million during the first nine months of 2010. Net cash used in financing activities during the first nine months of 2011 was lower than the first nine months of 2010 primarily due to $25.0 million of lower distributions made to Cleco Corporation.
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 through privately negotiated transactions. In August 2011, 400,000 shares of Cleco Corporation’s common stock were repurchased under this program. For additional information, see “Part II — Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds — Common Stock Repurchases.”
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
Electric Reliability Organization
In February 2010, the SPP Regional Entity notified Cleco that an audit would be conducted to determine Cleco’s compliance with the NERC Reliability Standard Requirements. The audit began in April 2010. Cleco has submitted mitigation plans and evidence of remedial efforts in connection with the SPP’s findings from the April 2010 audit. Cleco and SPP have agreed to a financial settlement totaling less than $0.1 million, which has been approved by NERC. Cleco’s next scheduled audit will begin in 2013. For more information on regulatory
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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 an 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 an RFP for biomass fuel along with identifying the costs to co-fire biomass fuel in Madison Unit 3. As part of this process, during October 2011, Cleco Power performed a biomass test burn at Madison Unit 3. To date, results of the test burn are incomplete. Cleco Power plans to initiate another test burn in the fourth quarter of 2011. In October 2011, Cleco Power received LPSC approval for recovery of the test burn costs. 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 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.
RFP for Short-Term 2012 Resources
In August 2011, Cleco Power issued an RFP for short-term 2012 resources to enhance reliability for the period January through April 2012. Cleco Power selected and negotiated two agreements from the RFP, a power purchase agreement with NRG Power Marketing LLC, and a tolling agreement with Evangeline. In September 2011, Cleco Power filed with the LPSC an application for a certificate of public convenience and necessity for the two agreements. Because Evangeline is a subsidiary of Cleco, Cleco Power also filed an application with the FERC for authorization to make power sales between affiliates pursuant to Section 205 of the Federal Power Act.
RFP for Contractual Resources to Meet the Cross-State Air Pollution Rule Beginning in May 2012
In September 2011, Cleco Power issued a draft RFP for resources to meet the Cross-State Air Pollution Rule. A bidders conference was conducted on October 13, 2011, and the final RFP was published on October 21, 2011. Cleco Power is seeking up to approximately 750 MW of capacity and energy for a three- or five-year term. An additional RFP is expected to be issued by Cleco Power in 2012 seeking long-term access to resources. That RFP shall be closely coordinated with the RFP for resources to meet the Cross-State Air Pollution Rule.
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, whereby Cleco Power accepted care, custody, and control of the unit. The Madison Unit 3 budget including AFUDC, Amended EPC Contract costs, and other development expenses remains within 1.6% of its estimated projection of $1.0 billion. Madison Unit 3 is capable of burning various solid fuels, but initially began operation with consumption of petroleum coke produced by several refineries throughout the Gulf Coast region. Due to operational and economic reasons, Cleco Power purchased various amounts of Illinois basin coal from several suppliers and blended such fuels with petroleum coke throughout 2011 and is anticipated to continue consumption of a blended fuel throughout 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 as of September 30, 2011, the lump-sum price for construction of Madison Unit 3 by Shaw was $805.9 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. 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 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. Certain of these matters were argued in arbitration hearings which concluded on June 8, 2011. On August 5, 2011, the arbitrator announced his decision in favor of Shaw’s claims of Cleco Power owing Shaw
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$32.5 million (including the return of the amounts drawn on Shaw’s letter of credit). Cleco Power paid this amount on August 22, 2011, which was included as a cost of Madison Unit 3 and reflected as property, plant and equipment.
Shaw has not reached project completion as defined in the Amended EPC Contract, as various performance tests, the reliability test, and specified boiler performance criteria have not been met. Under the Amended EPC Contract, Shaw must correct the identified items, complete the performance guarantee tests, meet a 30-day reliability performance test, and correct certain warranty issues to meet final acceptance, or pay certain liquidated damages and financially settle incomplete work. The disputed items relating to the liquidated damages for Shaw’s inability to meet performance guarantees, as well as for completion of minor or warranty work, were bifurcated from the arbitration proceedings and remains outstanding. These matters may be resolved through a second arbitration proceeding or potentially settled.
Lignite Deferral
At September 30, 2011, and December 31, 2010, Cleco Power had $19.8 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.
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 September 30, 2011, Cleco Power had spent $86.3 million on the project and expects to incur an additional $9.6 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 81% 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 September 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 September 30, 2011, Cleco Power had incurred $6.9 million in project costs, of which $3.0 million has been submitted to the DOE for reimbursement. As of September 30, 2011, Cleco Power had received $2.8 million in payments from the DOE. The project is expected to be completed in the third 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 September 30, 2011, Cleco Power had spent $29.5 million on the project and expects to incur less than $0.1 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 RFP 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
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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 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.
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 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.
In January 2010, the EPA published a proposed rule to reconsider the 2008 national ambient air quality standards (NAAQS) for ozone. The EPA had proposed to significantly lower the primary ozone standard of 75 parts per billion (ppb) and establish a cumulative, seasonal secondary standard. This proposed rule was widely criticized by industry which cited flaws in the scientific data used by the EPA to justify a reconsideration of the 2008 NAAQS. On September 2, 2011, the EPA withdrew its proposed rule to reconsider the 2008 NAAQS for ozone. Now that the EPA has withdrawn its proposed reconsideration, the 2008 NAAQS of 75 ppb is reinstated and the EPA is moving ahead with states, including Louisiana, to implement the 2008 standard. The EPA now expects to finalize initial area designations for the 2008 ozone NAAQS by mid-2012 using the most up-to-date monitoring data and then will require states to submit formal implementation plans to them, likely by 2015. This could result in more stringent NOx controls imposed on power plants located in or near these newly designated non-attainment areas. Since NOx emissions are a precursor to ozone formation, existing fossil fuel-fired units located in or near ozone non-attainment areas could be targeted for installation of additional NOx emission controls. Cleco cannot determine the potential impact of this rule on its generating units until Louisiana finalizes its attainment designations and develops a state implementation plan for this rule.
On October 6, 2011, the EPA proposed technical adjustments to the final Cross-State Air Pollution Rule (CSAPR). The proposal addresses discrepancies affecting state budgets in Florida, Louisiana, Michigan, Mississippi, Nebraska, New Jersey, New York, Texas, and Wisconsin. The proposal would also amend the effective date of the assurance penalty by delaying the 3-for-1 penalty provisions from 2012 to 2014. For Louisiana, the EPA has proposed to increase the state ozone season NOx allowance budget from 13,432 to 17,663 allowances. The EPA cites as the basis for the proposed rule that it had not accounted for twelve (12) generating units in Louisiana that require significant non-economic dispatch. As a result, if finalized as proposed, Cleco will receive 464 additional allowances which represent a nearly 30% increase from the current rule. Even with the proposed additional allowances, Cleco must still consider other compliance options such as the installation of additional emission controls, the purchase of allowances, alternate dispatch schedules for generating units, and the acquisition of alternate generation resources to meet the NOx allocation required for Cleco’s units. 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.
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.
In August 2011, Cleco Power entered into a treasury rate lock contract in order to mitigate the interest rate exposure on coupon payments related to a forecasted debt issuance. The notional amount of the treasury rate lock is $150.0 million, with a pricing date of November 14, 2011, or the date of issuance of the debt, whichever is earlier. The treasury rate lock meets the criteria of a cash flow hedge under the authoritative guidance as it relates to derivatives and hedging. The 3.77% rate lock was based on the 30-year treasury note yield as of August 12, 2011. At September 30, 2011, the 30-year treasury note yield was 2.89%, which resulted in Cleco Power recognizing a $30.0 million unrealized mark-to-market loss in other comprehensive income for the three and nine months ended September 30, 2011. The offsetting liability was recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets as an interest rate risk management liability. There was no impact to earnings due to ineffectiveness for the three and nine months ended September 30, 2011. At September 30, 2011, this derivative qualified as a cash flow hedge because management determined that the interest payments related to the forecasted debt instrument were probable of occurring and the hedge was highly effective. Events could occur subsequent to September 30, 2011, that could cause the interest payments related to the forecasted debt issuance not to occur, the debt issuance to occur for an amount less than $150.0 million, or to result in ineffectiveness in the hedging relationship. If the interest payments related to the forecasted debt issuance do not occur, the debt issuance occurs for an amount less than $150.0 million, or results in ineffectiveness, then all, or a portion of the then current mark-to-market loss, or gain, is required to be reclassified from accumulated other comprehensive income to earnings. For more information about the treasury rate lock contract, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies” and “Note 4 — Fair Value Accounting — Treasury Rate Lock.”
For an additional 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 nine months ended September 30, 2011, and September 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 nine months of 2011 and the first nine 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 third quarter of 2011 and the third quarter of 2010, see “— Results of Operations — Comparison of the Three Months Ended September 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 nine months of 2011 and the first nine months of 2010, see “— Results of Operations — Comparison of the Nine Months Ended September 30, 2011, and 2010 — Cleco Power” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
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| 2011 3RD QUARTER FORM 10-Q |
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 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 September 30, 2011, Cleco had no short- or long-term variable rate debt outstanding.
The $100.0 million GO Zone bonds due in 2038, which were issued by the Louisiana Public Facilities Authority for the benefit of Cleco Power, are required to be mandatorily tendered by the holders for purchase on December 1, 2011, pursuant to the terms of the indenture governing the bonds, at which time Cleco Power will have the option to either repay all $100.0 million of Cleco Power’s obligations under the loan agreement relating to the bonds and hold the bonds or cause the bonds to be retired, or cause the bonds to be remarketed. Cleco Power has the option to cause the bonds to be remarketed for new terms at new interest rates, both to be determined by market conditions. Each 1% increase in the interest rate applicable to such debt would result in a $1.0 million decrease in pre-tax earnings.
In August 2011, Cleco Power entered into a treasury rate lock contract in order to mitigate the interest rate exposure on coupon payments related to a forecasted debt issuance. The notional amount of the treasury rate lock is $150.0 million, with a pricing date of November 14, 2011, or the date issuance of the debt, whichever is earlier. The treasury rate lock meets the criteria of a cash flow hedge under the authoritative guidance as it relates to derivatives and hedging. The 3.77% rate lock was based on the 30-year treasury note yield as of August 12, 2011. At September 30, 2011, the 30-year treasury note yield was 2.89%, which resulted in Cleco Power recognizing a $30.0 million unrealized mark-to-market loss in other comprehensive income for the three and nine months ended September 30, 2011. The offsetting liability was recorded on
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
Cleco and Cleco Power’s Condensed Consolidated Balance Sheets as an interest rate risk management liability. There was no impact to earnings due to ineffectiveness for the three and nine months ended September 30, 2011. For every one basis point change in the reference rate, the value of the treasury rate lock changes by approximately $0.3 million.
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 energy 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 September 30, 2011, the net mark-to-market impact related to open natural gas positions at September 30, 2011, was a loss of $5.7 million. All of these natural gas positions will close over the next twelve months. Deferred losses relating to closed natural gas positions at September 30, 2011, and December 31, 2010, totaled $1.3 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.
Based on these assumptions, the VaR relating to Cleco Power’s hedge transactions for the three and nine months ended September 30, 2011, as well as the VaR at December 31, 2010, is summarized below.
| | | FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 | |
| (THOUSANDS) | | HIGH | | | LOW | | | AVERAGE | |
| Fuel cost hedges | | $ | 820.4 | | | $ | 379.4 | | | $ | 580.2 | |
| | | FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 | | | AT SEPTEMBER 30, | | | AT DECEMBER 31, | |
| (THOUSANDS) | | HIGH | | | LOW | | | AVERAGE | | | 2011 | | | 2010 | |
| Fuel cost hedges | | $ | 1,458.3 | | | $ | 379.4 | | | $ | 946.3 | | | $ | 379.4 | | | $ | 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 September 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.
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| 2011 3RD QUARTER FORM 10-Q |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 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 September 30, 2011, and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
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| 2011 3RD 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.”
There have been no material changes from the risk factors disclosed under the heading “Risk Factors” in Item 1A of the Registrants’ Combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (the “Second Quarter 2011 Form 10-Q”) and 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 Second Quarter 2011 Form 10-Q and the 2010 Annual Report on Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Repurchases
In January 2011, Cleco Corporation’s Board of Directors approved the implementation of a new common stock repurchase program. This program authorizes management to repurchase, from time to time, shares of common stock so that Cleco’s diluted average shares of common stock outstanding remain approximately equal to its diluted average shares of common stock outstanding for 2010. Under this program, 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. Purchases under the program will not be announced in advance and may be made in the open market or through privately negotiated transactions.
The following table summarizes the common stock repurchases by Cleco Corporation during the quarter ended September 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 | |
| July 2011 | | | - | | | $ | - | | | | - | | | | 400,000 | |
| August 2011 | | | 400,000 | | | $ | 32.49 | | | | 400,000 | | | | - | * |
| September 2011 | | | - | | | $ | - | | | | - | | | | - | |
*Management does not anticipate repurchasing any shares of common stock during the fourth quarter of 2011. Pursuant to the objectives of the program, repurchases under the program should resume in 2012. | |
ITEM 5. OTHER INFORMATION
On October 28, 2011, the Board of Directors (Board) of Cleco Corporation adopted the Cleco Corporation Executive Severance Plan (Executive Plan) to be effective as of such date. As an alternative to benefits previously provided by employment agreements, the Executive Plan provides severance and change in control benefits to senior officers, officers, and general managers in the event of a change in control, provided that a qualifying termination has occurred and certain additional conditions are satisfied. Since Cleco Corporation’s general managers currently are covered by the Cleco Corporation Severance Pay Plan, which was adopted by Cleco Corporation in 2009, a conforming amendment to that plan removing general managers as covered employees also was approved by the Board on October 28, 2011, effective as of that date.
In addition, the Board adopted amendments to the SERP, the LTICP, and the Cleco Corporation Deferred Compensation Plan (Deferred Compensation Plan) effective October 28, 2011. These amendments eliminate the business transaction benefit in the SERP and LTICP. The SERP amendment also prospectively reduces the eligibility period during which change in control benefits can be triggered to conform to the period in the Executive Plan and eliminates the requirement that a participant also be a party to an employment agreement to receive change in control benefits. The Deferred Compensation Plan amendment adds a definition of business transaction which previously was included only by reference to the LTICP.
| CLECO CORPORATION | |
| 2011 3RD QUARTER FORM 10-Q |
ITEM 6. EXHIBITS
| CLECO CORPORATION | |
| 3.1 | Bylaws of Cleco Corporation, revised effective October 29, 2011 |
| 10.1 | Cleco Corporation Executive Severance Plan, effective October 28, 2011 |
| 10.2 | Cleco Corporation Supplemental Executive Retirement Plan Amendment, effective October 28, 2011 |
| 10.3 | Summary of Director Compensation, Benefits and Policies, Last Revised on July 29, 2011 |
| 10.4 | Cleco Corporation 2010 Long-Term Incentive Compensation Plan Amendment, effective October 28, 2011 |
| 10.5 | Cleco Corporation Deferred Compensation Plan Amendment, effective October 28, 2011 |
| 10.6 | First Amendment dated as of October 7, 2011 to the Credit Agreement dated as of November 23, 2010 among Cleco Corporation, various financial institutions, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of Cleco Corporation Form 8-K (file no. 001-15759), filed with the SEC on October 14, 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-, nine-, and twelve-month periods ended September 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 | |
| 10.7 | First Amendment dated as of October 7, 2011 to the Credit Agreement dated as of November 23, 2010 among Cleco Power LLC, various financial institutions, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Cleco Power LLC Form 8-K (file no. 001-05663), filed with the SEC on October 14, 2011) |
| 12(b) | Computation of Ratios of Earnings to Fixed Charges for the three-, nine-, and twelve-month periods ended September 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 3RD 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: November 2, 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 |
