Cleco Power 10Q 2020 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15759

CLECO CORPORATE HOLDINGS LLC

(Exact name of registrant as specified in its charter)


Louisiana			72-1445282
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2030 Donahue Ferry Road, Pineville, Louisiana 71360-5226

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (318) 484-7400

Commission file number 1-05663

CLECO POWER LLC

(Exact name of registrant as specified in its charter)


Louisiana			72-0244480
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2030 Donahue Ferry Road, Pineville, Louisiana 71360-5226

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (318) 484-7400


Securities registered pursuant to Section 12(b) of the Act:
Cleco Corporate Holdings LLC: None			Cleco Power LLC: None

Indicate by check mark whether the Registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit such files). Yes ☒ No ☐

Indicate by check mark whether Cleco Corporate Holdings LLC is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether Cleco Power LLC is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

Cleco Corporate Holdings LLC has 0 common stock outstanding. All of the outstanding equity of Cleco Corporate Holdings LLC is held by Cleco Group LLC, a wholly owned subsidiary of Cleco Partners L.P.

Cleco Power LLC, a wholly owned subsidiary of Cleco Corporate Holdings LLC, meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

This Combined Quarterly Report on Form 10-Q (this “Quarterly Report on Form 10-Q”) is separately filed by Cleco Corporate Holdings LLC and Cleco Power LLC. Information in this filing relating to Cleco Power LLC is filed by Cleco Corporate Holdings LLC and separately by Cleco Power LLC on its own behalf. Cleco Power LLC makes no representation as to information relating to Cleco Corporate Holdings LLC (except as it may relate to Cleco Power LLC) or any other affiliate or subsidiary of Cleco Corporate Holdings LLC.

This Quarterly Report on Form 10-Q should be read in its entirety as it pertains to each respective Registrant. The Notes to the Unaudited Condensed Consolidated Financial Statements for the Registrants and certain other sections of this Quarterly Report on Form 10-Q are combined.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


GLOSSARY OF TERMS

Abbreviations or acronyms used in this filing, including all items in Parts I and II, are defined below.


ABBREVIATION OR ACRONYM			DEFINITION
2016 Merger			Merger of Merger Sub with and into Cleco Corporation pursuant to the terms of the Merger Agreement which was completed on April 13, 2016
2016 Merger Commitments			Cleco Partners’, Cleco Group’s, Cleco Holdings’, and Cleco Power’s 77 commitments to the LPSC as defined in Docket No. U-33434 of which a performance report must be filed annually by October 31 for the 12 months ending June 30
401(k) Plan			Cleco Power 401(k) Savings and Investment Plan
ABR			Alternate Base Rate which is the greater of the prime rate, the federal funds effective rate plus 0.50%, or LIBOR plus 1.0%
Acadia			Acadia Power Partners, LLC, previously a wholly owned subsidiary of Midstream. Acadia Power Partners, LLC was dissolved effective August 29, 2014.
Acadia Unit 1			Cleco Power’s 580-MW, combined cycle power plant located at the Acadia Power Station in Eunice, Louisiana
Acadia Unit 2			Entergy Louisiana’s 580-MW, combined cycle power plant located at the Acadia Power Station in Eunice, Louisiana, which is operated by Cleco Power
ADIT			Accumulated Deferred Income Tax
AFUDC			Allowance for Funds Used During Construction

Amended Lignite Mining Agreement			Amended and restated lignite mining agreement effective December 29, 2009
AMI			Advanced Metering Infrastructure
AOCI			Accumulated Other Comprehensive Income (Loss)
ARO			Asset Retirement Obligation


BCI			British Columbia Investment Management Corporation


CARES Act			Coronavirus Aid, Relief, and Economic Security Act of March 2020
CCR			Coal combustion by-products or residual
CDC			Centers for Disease Control and Prevention
CECL			Current Expected Credit Losses
CEO			Chief Executive Officer
CFO			Chief Financial Officer

Cleco			Cleco Holdings and its subsidiaries
Cleco Cajun			Cleco Cajun LLC (formerly Cleco Energy LLC, a wholly owned subsidiary of Cleco Holdings) and its subsidiaries
Cleco Cajun Transaction			The transaction between Cleco Cajun and NRG Energy in which Cleco Cajun acquired all the membership interest in South Central Generating, which closed on February 4, 2019, pursuant to the Purchase and Sale Agreement, which includes the Cottonwood Sale Leaseback.
Cleco Corporation			Pre-2016 Merger entity that was converted to a limited liability company and changed its name to Cleco Corporate Holdings LLC on April 13, 2016

Cleco Group			Cleco Group LLC, a wholly owned subsidiary of Cleco Partners
Cleco Holdings			Cleco Corporate Holdings LLC, a wholly owned subsidiary of Cleco Group
Cleco Katrina/Rita			Cleco Katrina/Rita Hurricane Recovery Funding LLC, a wholly owned subsidiary of Cleco Power
Cleco Partners			Cleco Partners L.P., a Delaware limited partnership that is owned by a consortium of investors, including funds or investment vehicles managed by MIRA, BCI, John Hancock Financial, and other infrastructure investors
Cleco Power			Cleco Power LLC and its subsidiaries, a wholly owned subsidiary of Cleco Holdings

Como 1			Como 1, L.P., currently known as Cleco Partners

Cottonwood Energy			Cottonwood Energy Company LP, a wholly owned subsidiary of Cleco Cajun. Prior to the closing of the Cleco Cajun Transaction on February 4, 2019, Cottonwood Energy was an indirect subsidiary of South Central Generating.
Cottonwood Plant			Cleco Cajun’s 1,263-MW, natural-gas-fired generating station located in Deweyville, Texas
Cottonwood Sale Leaseback			A lease agreement executed and delivered between Cottonwood Energy and a special-purpose entity that is a subsidiary of NRG Energy pursuant to which NRG Energy will lease back the Cottonwood Plant and will operate it until no later than May 2025.
Coughlin			Cleco Power’s 775-MW, combined-cycle power plant located in St. Landry, Louisiana
COVID-19			Novel coronavirus disease 2019 and the related global outbreak that was subsequently declared a pandemic by WHO in March 2020.


DHLC			Dolet Hills Lignite Company, LLC, a wholly owned subsidiary of SWEPCO
Diversified Lands			Diversified Lands LLC, a wholly owned subsidiary of Cleco Holdings


Dolet Hills			A facility consisting of Dolet Hills Power Station, the Dolet Hills mine, and the Oxbow mine
Dolet Hills Power Station			A 650-MW generating unit at Cleco Power’s plant site in Mansfield, Louisiana. Cleco Power has a 50% ownership interest in the capacity of the Dolet Hills Power Station.
EAC			Environmental Adjustment Clause

EBITDA			Earnings before interest, income taxes, depreciation, and amortization



Entergy Gulf States			Entergy Gulf States Louisiana, LLC
Entergy Louisiana			Entergy Louisiana, LLC
EPA			U.S. Environmental Protection Agency


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


ABBREVIATION OR ACRONYM			DEFINITION
ERO			Electric Reliability Organization

Evangeline			Cleco Evangeline LLC, a wholly owned subsidiary of Midstream
FAC			Fuel Adjustment Clause
FASB			Financial Accounting Standards Board
FERC			Federal Energy Regulatory Commission
Fitch			Fitch Ratings, a credit rating agency
FTR			Financial Transmission Right
FRP			Formula Rate Plan
GAAP			Generally Accepted Accounting Principles in the U.S.
GO Zone			Gulf Opportunity Zone Act of 2005 (Public Law 109-135)


IRS			Internal Revenue Service

kWh			Kilowatt-hour(s)
LCFC			Lost Contribution to Fixed Cost
LDEQ			Louisiana Department of Environmental Quality

LIBOR			London Interbank Offered Rate
LMP			Locational Marginal Price
Louisiana Generating			Louisiana Generating, LLC, a wholly owned subsidiary of South Central Generating
LPSC			Louisiana Public Service Commission

LTSA			Long-Term Parts and Service Agreement between Cottonwood Energy and a third party, dated January 19, 2001, that Cleco Cajun assumed as a result of the Cleco Cajun Transaction to provide maintenance services related to the Cottonwood Plant


Merger Agreement			Agreement and Plan of Merger, dated as of October 17, 2014, by and among Cleco Partners, Merger Sub, and Cleco Corporation relating to the 2016 Merger
Merger Sub			Cleco MergerSub Inc., previously an indirect wholly owned subsidiary of Cleco Partners that was merged with and into Cleco Corporation, with Cleco Corporation surviving the 2016 Merger, and Cleco Corporation converting to a limited liability company and changing its name to Cleco Holdings
Midstream			Cleco Midstream Resources LLC, a wholly owned subsidiary of Cleco Holdings

MIRA			Macquarie Infrastructure and Real Assets Inc.
MISO			Midcontinent Independent System Operator, Inc.
MMBtu			One million British thermal units
Moody’s			Moody’s Investors Service, a credit rating agency
MW			Megawatt(s)
MWh			Megawatt-hour(s)


NERC			North American Electric Reliability Corporation



Not Meaningful			A percentage comparison of these items is not statistically meaningful because the percentage difference is greater than 1,000%


NRG Energy			NRG Energy, Inc.
NRG South Central			NRG South Central Generating LLC




Other Benefits			Includes medical, dental, vision, and life insurance for Cleco’s retirees
Oxbow			Oxbow Lignite Company, LLC, 50% owned by Cleco Power and 50% owned by SWEPCO

Perryville			Perryville Energy Partners, L.L.C., a wholly owned subsidiary of Cleco Holdings



Purchase and Sale Agreement			Purchase and Sale Agreement, dated as of February 6, 2018, by and among NRG Energy, South Central Generating, and Cleco Cajun

Registrant(s)			Cleco Holdings and/or Cleco Power


ROE			Return on Equity


RTO			Regional Transmission Organization
S&P			Standard & Poor’s Ratings Services, a credit rating agency

SEC			U.S. Securities and Exchange Commission

SERP			Supplemental Executive Retirement Plan

South Central Generating			South Central Generating LLC, formerly NRG South Central Generating LLC


SSR			System Support Resource
START			Strategic Alignment and Real-Time Transformation


Support Group			Cleco Support Group LLC, a wholly owned subsidiary of Cleco Holdings
SWEPCO			Southwestern Electric Power Company, an electric utility subsidiary of American Electric Power Company, Inc.
TCJA			Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
Teche Unit 3			A 359-MW generating unit at Cleco Power’s plant site in Baldwin, Louisiana
WHO			World Health Organization


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” about future events, circumstances, and results. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements, including, without limitation, future capital expenditures; business strategies; goals, beliefs, plans and objectives; competitive strengths; market developments; development and operation of facilities; growth in sales volume; meeting capacity requirements; expansion of service to existing customers and service to new customers; future environmental regulations and remediation liabilities; electric customer credits; and the anticipated outcome of various regulatory and legal proceedings. Although the Registrants believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties that could cause the actual results to differ materially from the Registrants’ expectations. In addition to any assumptions and other factors referred to specifically in connection with these forward-looking statements, the following list identifies some of the factors that could cause the Registrants’ actual results to differ materially from those contemplated in any of the Registrants’ forward-looking statements:

•the COVID-19 pandemic and its effect on Cleco, Cleco’s operations, business, and financial condition, and the communities it serves, U.S. and world financial markets and supply chains, potential regulatory actions, changes in customer and stakeholder behaviors, and impacts on and modifications to Cleco’s operations, business, and financial condition relating thereto,

•the effects of the Cleco Cajun Transaction and the 2016 Merger on Cleco’s business relationships, operating results, and business generally,

•the ability to successfully remediate underlying causes of identified material weaknesses in internal control over financial reporting,

•regulatory factors, such as changes in rate-setting practices or policies; political actions of governmental regulatory bodies; adverse regulatory ratemaking actions; recovery of investments made under traditional regulation; recovery of storm restoration costs; the frequency, timing, and amount of rate increases or decreases; the impact that rate cases or requests for FRP extensions may have on operating decisions of Cleco Power; the results of periodic NERC, LPSC, and FERC audits; participation in MISO and the related operating challenges and uncertainties, including increased wholesale competition relative to additional suppliers; and compliance with the ERO reliability standards for bulk power systems by Cleco Power and Cleco Cajun,

•Cleco Power’s ability to recover fuel costs through the FAC,

•factors affecting utility operations, such as unusual weather conditions or other natural phenomena; catastrophic weather-related damage caused by hurricanes and other storms or severe drought conditions; pandemic illnesses, specifically COVID-19; unexpected delays in capital

projects; unscheduled generation outages; unanticipated maintenance or repairs; unanticipated changes to fuel costs or fuel supply costs, shortages, solid fuel and natural gas transportation problems, or other developments; decreased customer load; environmental incidents and compliance costs; and power transmission system constraints,

•reliance on third parties for determination of Cleco’s commitments and obligations to markets for generation resources and reliance on third-party fuel transportation and transmission services,

•global and domestic economic conditions, including the negative impact of COVID-19, the ability of customers to continue paying their utility bills, related growth and/or down-sizing of businesses in Cleco’s service area, monetary fluctuations, and inflation rates,

•political uncertainty in the U.S., including uncertainty relating to the U.S. federal government budget and debt ceiling, and volatility and disruption in global capital and credit markets,

•the ability to consume the remaining fuel inventory at the Dolet Hills Power Station,

•the timing and costs associated with the early closure of Dolet Hills, including the ability to recover those costs,

•Cleco’s ability to maintain its right to sell wholesale power at market-based rates within its control area,

•Cleco’s dependence on energy from sources other than its facilities and future sources of such additional energy,

•reliability of Cleco’s generating facilities,

•the imposition of energy efficiency requirements or increased conservation efforts of customers,

•the impact of current or future environmental laws and regulations, including those related to CCRs, greenhouse gases, and energy efficiency that could limit or terminate the operation of Cleco’s generating units, increase costs, or reduce customer demand for electricity,

•the ability to recover costs of compliance with environmental laws and regulations, including those through Cleco Power’s EAC,

•financial or regulatory accounting principles or policies imposed by FASB, the SEC, FERC, the LPSC, or similar entities with regulatory or accounting oversight,

•changing market conditions and a variety of other factors associated with physical energy, financial transactions, COVID-19, and energy service activities, including, but not limited to, price, basis, credit, liquidity, volatility, capacity, transmission, interest rates, and warranty risks,

•changes in commodity prices and transportation costs,

•legal, environmental, and regulatory delays and other obstacles associated with acquisitions, reorganizations, investments in joint ventures, or other capital projects,

•costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters,


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

•the availability and use of alternative sources of energy and technologies, such as wind, solar, battery storage, and distributed generation,

•changes in federal, state, or local laws (including the TCJA and other tax laws), changes in tax rates, disallowances of tax positions, or changes in other regulatory policies that may result in a change to tax benefits or expenses,

•the restriction on the ability of Cleco Power to make distributions to Cleco Holdings in certain instances, as a result of the 2016 Merger Commitments,

•Cleco’s ability to remain in compliance with the commitments made to the LPSC in connection with the Cleco Cajun Transaction and the 2016 Merger,

•Cleco Holdings’ dependence on the earnings, dividends, or distributions from its subsidiaries to meet its debt obligations,

•acts of terrorism, cyber attacks, data security breaches or other attempts to disrupt Cleco’s business or the business of third parties, or other man-made disasters,

•the ability to successfully modify business processes around the new enterprise business applications,

•credit ratings of Cleco Holdings and Cleco Power,

•Cleco Holdings’ and Cleco Power’s ability to remain in compliance with their respective debt covenants,

•the availability or cost of capital resulting from changes in global markets, Cleco’s business or financial condition, interest rates, or market perceptions of the electric utility industry and energy-related industries, and

•workforce factors, including aging workforce, changes in management, impact of pandemic illnesses, specifically COVID-19, and unavailability of skilled employees.

For more discussion of these factors and other factors that could cause actual results to differ materially from those contemplated in the Registrants’ forward-looking statements, see Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

All subsequent written and oral forward-looking statements attributable to the Registrants, or persons acting on their behalf, are expressly qualified in their entirety by the factors identified above.

Any forward-looking statement is considered only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, the Registrants undertake no obligation to update any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


PART I — FINANCIAL INFORMATION


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cleco

These unaudited condensed consolidated financial statements should be read in conjunction with Cleco’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For more information on the basis of presentation, see “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Basis of Presentation.”


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Income (Unaudited)
	FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Operating revenue
Electric operations	$	321,956	$	365,466
Other operations	44,902		42,367

Gross operating revenue	366,858		407,833
Electric customer credits	(9,100)		(9,960)
Operating revenue, net	357,758		397,873
Operating expenses
Fuel used for electric generation	67,864		109,145
Purchased power	59,505		68,637
Other operations and maintenance	71,798		64,964
Depreciation and amortization	54,087		51,535
Taxes other than income taxes	14,036		15,600
Merger transaction and commitment costs	274		796

Total operating expenses	267,564		310,677
Operating income	90,194		87,196
Interest income	898		1,275
Allowance for equity funds used during construction	127		5,518


Other income (expense), net	257		(1,122)
Interest charges
Interest charges, net	35,023		37,898
Allowance for borrowed funds used during construction	(308)		(2,058)
Total interest charges	34,715		35,840
Income before income taxes	56,761		57,027
Federal and state income tax expense	13,593		12,281
Net income	$	43,168	$	44,746
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Net income	$	43,168	$	44,746
Other comprehensive income (loss), net of tax
Postretirement benefits gain (loss) (net of tax expense of $156 in 2020 and tax benefit of $52 in 2019)	442		(147)

Total other comprehensive income (loss), net of tax	442		(147)
Comprehensive income, net of tax	$	43,610	$	44,599
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Income (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Operating revenue
Electric operations	$	633,113	$	678,416
Other operations	89,810		81,764

Gross operating revenue	722,923		760,180
Electric customer credits	(17,593)		(18,120)
Operating revenue, net	705,330		742,060
Operating expenses
Fuel used for electric generation	144,501		213,199
Purchased power	125,825		128,736
Other operations and maintenance	146,564		125,697
Depreciation and amortization	109,960		101,391
Taxes other than income taxes	30,572		29,470
Merger transaction and commitment costs	3,049		5,786

Total operating expenses	560,471		604,279
Operating income	144,859		137,781
Interest income	2,054		2,767
Allowance for equity funds used during construction	53		11,206


Other (expense) income, net	(12,452)		1,655
Interest charges
Interest charges, net	70,350		74,014
Allowance for borrowed funds used during construction	(487)		(4,175)
Total interest charges	69,863		69,839
Income before income taxes	64,651		83,570
Federal and state income tax expense	15,155		18,267
Net income	$	49,496	$	65,303
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Net income	$	49,496	$	65,303
Other comprehensive income (loss), net of tax
Postretirement benefits gain (loss) (net of tax expense of $302 in 2020 and tax benefit of $100 in 2019)	856		(282)

Total other comprehensive income (loss), net of tax	856		(282)
Comprehensive income, net of tax	$	50,352	$	65,021
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Assets
Current assets
Cash and cash equivalents	$	309,012	$	116,292
Restricted cash and cash equivalents	4,702		11,100
Customer accounts receivable (less allowance for credit losses of $3,486 in 2020 and $3,005 in 2019)	85,019		83,591

Other accounts receivable	37,311		35,731

Unbilled revenue	40,132		33,207
Fuel inventory, at average cost	125,214		83,061
Materials and supplies, at average cost	123,613		118,858
Energy risk management assets	11,565		7,023
Accumulated deferred fuel	24,120		22,910
Cash surrender value of company-/trust-owned life insurance policies	80,307		86,096
Prepayments	13,788		7,711
Regulatory assets	18,871		19,807
Other current assets	13,208		12,688
Total current assets	886,862		638,075
Property, plant, and equipment
Property, plant, and equipment	5,103,887		4,982,255
Accumulated depreciation	(553,171)		(454,874)
Net property, plant, and equipment	4,550,716		4,527,381
Construction work in progress	120,259		117,630
Total property, plant, and equipment, net	4,670,975		4,645,011
Equity investment in investee	17,072		17,072
Goodwill	1,490,797		1,490,797
Prepayments	30,534		25,949
Operating lease right of use assets	27,947		28,791
Restricted cash and cash equivalents	9,170		15,203
Note receivable	14,860		15,198

Regulatory assets	416,896		422,431
Intangible assets	124,659		138,103

Other deferred charges	39,408		39,668
Total assets	$	7,729,180	$	7,476,298
The accompanying notes are an integral part of the condensed consolidated financial statements.

(Continued on next page)


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Liabilities and member’s equity
Liabilities
Current liabilities
Short-term debt	$	238,000	$	—
Long-term debt and finance leases due within one year	63,948		125,986
Accounts payable	131,012		158,863
Accounts payable - affiliate	33,780		33,780
Customer deposits	58,992		58,289
Provision for rate refund	20,428		38,903
Taxes payable, net	28,460		8,931
Interest accrued	16,291		19,001

Energy risk management liabilities	5,720		4,113
Regulatory liabilities - other	851		6,675
Deferred compensation	11,065		12,115

Other current liabilities	49,604		44,683
Total current liabilities	658,151		511,339
Long-term liabilities and deferred credits
Accumulated deferred federal and state income taxes, net	672,648		657,058

Postretirement benefit obligations	284,931		283,075

Regulatory liabilities - deferred taxes, net	147,779		146,948
Restricted storm reserve	8,328		12,285


Deferred lease revenue	45,259		49,862
Intangible liabilities	28,366		31,872
Asset retirement obligations	27,306		23,173
Operating lease liabilities	24,513		25,779
Other deferred credits	28,268		27,222
Total long-term liabilities and deferred credits	1,267,398		1,257,274
Long-term debt and finance leases, net	3,110,273		3,064,679
Total liabilities	5,035,822		4,833,292
Commitments and contingencies (Note 14)
Member’s equity	2,693,358		2,643,006
Total liabilities and member’s equity	$	7,729,180	$	7,476,298
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Cash Flows (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020			2019
Operating activities
Net income	$	49,496		$	65,303
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	124,797			115,408



Provision for credit losses	4,093			(289)
Unearned compensation expense	3,219			2,356
Allowance for equity funds used during construction	(53)			(11,206)
(Gain) loss on risk management assets and liabilities, net	(2,534)			8,032
Deferred lease revenue	(4,603)			(3,835)
Deferred income taxes	16,120			15,313
Deferred fuel costs	(2,137)			(3,531)
Cash surrender value of company-/trust-owned life insurance	5,790			(2,958)
Changes in assets and liabilities
Accounts receivable	(10,131)			(23,241)

Unbilled revenue	(6,924)			(7,907)
Fuel inventory and materials and supplies	(46,816)			560
Prepayments	(12,438)			(9,210)
Accounts payable	(38,532)			8,343
Accounts payable - affiliate	—			3,174
Customer deposits	3,699			3,367
Provision for merger commitments	858			(1,444)
Postretirement benefit obligations	3,013			722
Regulatory assets and liabilities, net	(3,580)			8,904
Other deferred accounts	(6,030)			(2,591)
Taxes accrued	17,407			16,028
Interest accrued	(2,709)			505

Deferred compensation	(1,050)			589
Other operating	4,874			3,868
Net cash provided by operating activities	95,829			186,260
Investing activities
Additions to property, plant, and equipment	(139,339)			(151,463)
Allowance for equity funds used during construction	53			11,206









Return of equity investment in tax credit fund	—			1,625
Return of investment in company-owned life insurance	—			1,891
Payment to acquire business, net of cash acquired	—			(814,969)
Other investing	572			716
Net cash used in investing activities	(138,714)			(950,994)
Financing activities
Draws on credit facilities	238,000			108,000
Payments on credit facilities	—			(108,000)
Issuances of long-term debt	—			400,000
Repayment of long-term debt	(11,055)			(10,382)

Payment of financing costs	(3,471)			(3,919)
Contributions from member	—			384,900

Other financing	(300)			(271)
Net cash provided by financing activities	223,174			770,328
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents	180,289			5,594
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period	142,595		⁽¹⁾	140,086
Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period	$	322,884	⁽²⁾	$	145,680
⁽¹⁾ Includes cash and cash equivalents of $116,292, current restricted cash and cash equivalents of $11,100, and non-current restricted cash and cash equivalents of $15,203. ⁽²⁾ Includes cash and cash equivalents of $309,012, current restricted cash and cash equivalents of $4,702, and non-current restricted cash and cash equivalents of $9,170.



The accompanying notes are an integral part of the condensed consolidated financial statements.

(Continued on next page)


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Cash Flows (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Supplementary cash flow information
Interest paid, net of amount capitalized	$	65,658	$	67,639

Supplementary non-cash investing and financing activities
Accrued additions to property, plant, and equipment	$	7,851	$	39,527





The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO

Condensed Consolidated Statements of Changes in Member’s Equity (Unaudited)
(THOUSANDS)	MEMBERSHIP INTEREST		RETAINED EARNINGS		AOCI		TOTAL MEMBER’S EQUITY
Balances, March 31, 2019	$	2,069,376	$	459,035	$	1,651	$	2,530,062


Net income	—		44,746		—		44,746
Other comprehensive loss, net of tax	—		—		(147)		(147)
Balances, June 30, 2019	$	2,069,376	$	503,781	$	1,504	$	2,574,661

Balances, March 31, 2020	$	2,069,376	$	597,471	$	(17,099)	$	2,649,748


Net income	—		43,168		—		43,168
Other comprehensive income, net of tax	—		—		442		442
Balances, June 30, 2020	$	2,069,376	$	640,639	$	(16,657)	$	2,693,358

Balances, Dec. 31, 2018	$	2,069,376	$	53,578	$	1,786	$	2,124,740
Contribution from member	—		384,900		—		384,900

Net income	—		65,303		—		65,303
Other comprehensive loss, net of tax	—		—		(282)		(282)
Balances, June 30, 2019	$	2,069,376	$	503,781	$	1,504	$	2,574,661

Balances, Dec. 31, 2019	$	2,069,376	$	591,143	$	(17,513)	$	2,643,006


Net income	—		49,496		—		49,496
Other comprehensive income, net of tax	—		—		856		856
Balances, June 30, 2020	$	2,069,376	$	640,639	$	(16,657)	$	2,693,358
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cleco Power

These unaudited condensed consolidated financial statements should be read in conjunction with Cleco Power’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For more information on the basis of presentation, see “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Basis of Presentation.”


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Income (Unaudited)
	FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Operating revenue
Electric operations	$	239,643	$	265,924
Other operations	15,904		15,404
Affiliate revenue	1,240		337
Gross operating revenue	256,787		281,665
Electric customer credits	(9,100)		(8,693)
Operating revenue, net	247,687		272,972
Operating expenses
Fuel used for electric generation	64,064		86,235
Purchased power	19,179		18,486
Other operations and maintenance	54,667		42,914
Depreciation and amortization	41,596		39,330
Taxes other than income taxes	9,448		10,561


Total operating expenses	188,954		197,526
Operating income	58,733		75,446
Interest income	755		867
Allowance for equity funds used during construction	127		5,518

Other expense, net	(3,423)		(1,127)
Interest charges
Interest charges, net	18,911		19,428
Allowance for borrowed funds used during construction	(308)		(2,058)
Total interest charges	18,603		17,370
Income before income taxes	37,589		63,334
Federal and state income tax expense	9,356		13,978
Net income	$	28,233	$	49,356
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Net income	$	28,233	$	49,356
Other comprehensive income, net of tax
Postretirement benefits gain (net of tax expense of $148 in 2020 and $45 in 2019)	419		129
Amortization of interest rate derivatives to earnings (net of tax expense of $22 in 2020 and 2019)	64		64
Total other comprehensive income, net of tax	483		193
Comprehensive income, net of tax	$	28,716	$	49,549
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Income (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Operating revenue
Electric operations	$	464,073	$	523,100
Other operations	31,668		34,833
Affiliate revenue	2,346		637
Gross operating revenue	498,087		558,570
Electric customer credits	(17,440)		(16,853)
Operating revenue, net	480,647		541,717
Operating expenses
Fuel used for electric generation	125,129		180,366
Purchased power	42,641		48,140
Other operations and maintenance	111,608		90,614
Depreciation and amortization	85,273		81,707
Taxes other than income taxes	21,725		20,538


Total operating expenses	386,376		421,365
Operating income	94,271		120,352
Interest income	1,709		1,860
Allowance for equity funds used during construction	53		11,206

Other expense, net	(6,091)		(859)
Interest charges
Interest charges, net	37,671		38,690
Allowance for borrowed funds used during construction	(487)		(4,175)
Total interest charges	37,184		34,515
Income before income taxes	52,758		98,044
Federal and state income tax expense	12,694		21,976
Net income	$	40,064	$	76,068
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019
Net income	$	40,064	$	76,068
Other comprehensive income, net of tax
Postretirement benefits gain (net of tax expense of $299 in 2020 and $101 in 2019)	845		285
Amortization of interest rate derivatives to earnings (net of tax expense of $45 in 2020 and 2019)	128		128
Total other comprehensive income, net of tax	973		413
Comprehensive income, net of tax	$	41,037	$	76,481
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Assets
Utility plant and equipment
Property, plant, and equipment	$	5,604,177	$	5,489,457
Accumulated depreciation	(1,976,087)		(1,905,031)
Net property, plant, and equipment	3,628,090		3,584,426
Construction work in progress	112,034		111,687
Total utility plant and equipment, net	3,740,124		3,696,113
Current assets
Cash and cash equivalents	139,980		55,489
Restricted cash and cash equivalents	4,702		11,100
Customer accounts receivable (less allowance for credit losses of $3,486 in 2020 and $3,005 in 2019)	41,667		39,165
Accounts receivable - affiliate	13,697		14,481
Other accounts receivable	30,442		24,604

Unbilled revenue	40,132		33,207
Fuel inventory, at average cost	91,078		59,602
Materials and supplies, at average cost	96,196		91,941
Energy risk management assets	8,670		6,311
Accumulated deferred fuel	24,120		22,910
Cash surrender value of company-owned life insurance policies	16,129		17,574
Prepayments	6,555		4,786
Regulatory assets	11,135		10,973
Other current assets	661		655
Total current assets	525,164		392,798
Equity investment in investee	17,072		17,072
Prepayments	1,623		2,693
Operating lease right of use assets	27,492		28,633
Restricted cash and cash equivalents	8,327		14,363
Note receivable	14,860		15,198

Regulatory assets	271,788		272,289


Other deferred charges	38,114		37,371
Total assets	$	4,644,564	$	4,476,530
The accompanying notes are an integral part of the condensed consolidated financial statements.

(Continued on next page)


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Liabilities and member’s equity
Member’s equity	$	1,754,429	$	1,713,392
Long-term debt and finance leases, net	1,377,491		1,327,372
Total capitalization	3,131,920		3,040,764
Current liabilities
Short-term debt	150,000		—
Long-term debt and finance leases due within one year	648		61,587
Accounts payable	91,436		110,096
Accounts payable - affiliate	10,966		14,123
Customer deposits	58,992		58,289
Provision for rate refund	19,614		38,241

Taxes payable, net	63,223		38,888
Interest accrued	5,915		7,972

Energy risk management liabilities	1,159		586
Regulatory liabilities - other	851		6,675

Other current liabilities	25,788		22,802
Total current liabilities	428,592		359,259
Commitments and contingencies (Note 14)
Long-term liabilities and deferred credits
Accumulated deferred federal and state income taxes, net	663,438		657,834

Postretirement benefit obligations	208,662		206,270

Regulatory liabilities - deferred taxes, net	147,779		146,948
Restricted storm reserve	8,328		12,285



Asset retirement obligations	11,070		7,325
Operating lease liabilities	24,397		25,658
Other deferred credits	20,378		20,187
Total long-term liabilities and deferred credits	1,084,052		1,076,507
Total liabilities and member’s equity	$	4,644,564	$	4,476,530
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Cash Flows (Unaudited)
	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)		2020			2019
Operating activities
Net income		$	40,064		$	76,068
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		88,034			84,503

Provision for credit losses		3,705			(289)

Allowance for equity funds used during construction		(53)			(11,206)
Deferred income taxes		6,091			9,042
Deferred fuel costs		(2,137)			(3,531)
Cash surrender value of company-owned life insurance		1,445			3,002
Changes in assets and liabilities
Accounts receivable		(15,462)			(20,932)
Accounts receivable - affiliate		2,573			2,125
Unbilled revenue		(6,924)			(7,907)
Fuel inventory and materials and supplies		(35,639)			(1,560)

Accounts payable		(30,242)			12,974
Accounts payable - affiliate		(3,149)			(1,233)
Customer deposits		3,699			3,367
Provision for merger commitments		(1,455)			(1,444)
Postretirement benefit obligations		1,800			1,179
Regulatory assets and liabilities, net		(4,574)			7,911
Other deferred accounts		(5,778)			(1,836)
Taxes accrued		23,517			(15,280)
Interest accrued		(2,056)			354
Other operating		3,029			2,258
Net cash provided by operating activities		66,488			137,565
Investing activities
Additions to property, plant, and equipment		(132,578)			(147,696)
Allowance for equity funds used during construction		53			11,206




Return of investment in company-owned life insurance		—			1,891

Other investing		572			716
Net cash used in investing activities		(131,953)			(133,883)
Financing activities
Draws on credit facility		150,000			33,000
Payments on credit facility		—			(33,000)

Repayment of long-term debt		(11,055)			(10,382)

Payment of financing costs		(1,123)			(22)


Other financing		(300)			(271)
Net cash provided by (used in) financing activities		137,522			(10,675)
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents		72,057			(6,993)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period		80,952		⁽¹⁾	61,877
Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period		$	153,009	⁽²⁾	$	54,884
Supplementary cash flow information

Interest paid, net of amount capitalized		$	33,711		$	33,958

Supplementary non-cash investing and financing activities
Accrued additions to property, plant, and equipment		$	7,581		$	38,971



⁽¹⁾ Includes cash and cash equivalents of $55,489, current restricted cash and cash equivalents of $11,100, and non-current restricted cash and cash equivalents of $14,363. ⁽²⁾ Includes cash and cash equivalents of $139,980, current restricted cash and cash equivalents of $4,702, and non-current restricted cash and cash equivalents of $8,327.

The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


CLECO POWER

Condensed Consolidated Statements of Changes in Member’s Equity (Unaudited)
(THOUSANDS)	MEMBER’S EQUITY		AOCI		TOTAL MEMBER’S EQUITY
Balances, March 31, 2019	$	1,634,427	$	(12,962)	$	1,621,465


Net income	49,356		—		49,356
Other comprehensive income, net of tax	—		193		193
Balances, June 30, 2019	$	1,683,783	$	(12,769)	$	1,671,014

Balances, March 31, 2020	$	1,747,808	$	(22,095)	$	1,725,713


Net income	28,233		—		28,233
Other comprehensive income, net of tax	—		483		483
Balances, June 30, 2020	$	1,776,041	$	(21,612)	$	1,754,429

Balances, Dec. 31, 2018	$	1,607,715	$	(13,182)	$	1,594,533


Net income	76,068		—		76,068
Other comprehensive income, net of tax	—		413		413
Balances, June 30, 2019	$	1,683,783	$	(12,769)	$	1,671,014

Balances, Dec. 31, 2019	$	1,735,977	$	(22,585)	$	1,713,392


Net income	40,064		—		40,064
Other comprehensive income, net of tax	—		973		973
Balances, June 30, 2020	$	1,776,041	$	(21,612)	$	1,754,429
The accompanying notes are an integral part of the condensed consolidated financial statements.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Index to Applicable Notes to the Unaudited Condensed Consolidated Financial Statements of Registrants

Note 1

Summary of Significant Accounting Policies

Cleco and Cleco Power

Note 2

Business Combinations

Cleco

Note 3

Recent Authoritative Guidance

Cleco and Cleco Power

Note 4

Leases

Cleco and Cleco Power

Note 5

Revenue Recognition

Cleco and Cleco Power

Note 6

Regulatory Assets and Liabilities

Cleco and Cleco Power

Note 7

Fair Value Accounting

Cleco and Cleco Power

Note 8

Debt

Cleco and Cleco Power

Note 9

Pension Plan and Employee Benefits

Cleco and Cleco Power

Note 10

Income Taxes

Cleco and Cleco Power

Note 11

Disclosures about Segments

Cleco

Note 12

Regulation and Rates

Cleco and Cleco Power

Note 13

Variable Interest Entities

Cleco and Cleco Power

Note 14

Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees

Cleco and Cleco Power

Note 15

Affiliate Transactions

Cleco and Cleco Power

Note 16

Intangible Assets and Liabilities

Cleco and Cleco Power

Note 17

Accumulated Other Comprehensive Loss

Cleco and Cleco Power


Notes to the Unaudited Condensed Consolidated Financial Statements


Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements of Cleco include the accounts of Cleco and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Cleco’s condensed consolidated financial statements include the financial results of Cleco Cajun from the closing of the Cleco Cajun Transaction on February 4, 2019, through June 30, 2020. For more information about the Cleco Cajun Transaction, see Note 2 — “Business Combinations.”

Basis of Presentation

The condensed consolidated financial statements of Cleco and Cleco Power have been prepared in accordance with GAAP for interim financial information and with the instructions to the Form 10-Q and Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements. Because the interim condensed consolidated financial statements and the accompanying notes do not include all of the information and notes required by GAAP for annual financial statements, the condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to fairly state the financial position and results of operations of Cleco and Cleco Power. Amounts reported in Cleco and Cleco Power’s interim financial statements are not necessarily indicative of amounts expected for the annual periods due to the effects of seasonal

temperature variations on energy consumption, regulatory rulings, the timing of maintenance on electric generating units, changes in mark-to-market valuations, changing commodity prices, discrete income tax items, and other factors.

On March 11, 2020, WHO declared the outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the U.S. declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” orders and directives in Cleco’s service territory. State and local authorities have also implemented multistep policies with the goal of reopening various sectors of the economy such as retail establishments, health and personal care businesses, and restaurants, among others. However, certain jurisdictions have begun reopening only to delay these plans or return to restrictions in the face of increases in new COVID-19 cases. For example, the governor of the state of Louisiana issued orders in May 2020 to allow businesses to reopen at varying levels of capacity in May and June 2020. To address the June 2020 spike in COVID-19 cases, such reopening activities were temporarily paused or scaled back, and also included closing certain establishments.

Cleco has modified some of its business operations, as these restrictions have significantly impacted many sectors of the economy. Impacts include record levels of unemployment, with businesses, nonprofit organizations, and governmental entities modifying, curtailing, or ceasing normal operations. Cleco has also modified and continues to adjust certain business practices to conform to government restrictions and best practices encouraged by the CDC, WHO, and other governmental and regulatory authorities.

Cleco cannot predict the full impact that COVID-19, or the significant disruption and volatility currently being experienced in the markets, will have on its business, cash flows, liquidity, financial condition, and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

spread of COVID-19, the development of effective treatments, the duration of the pandemic, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. For information on recent authoritative guidance and its effect on financial results, see Note 3 — “Recent Authoritative Guidance.”

Restricted Cash and Cash Equivalents

Cleco and Cleco Power’s restricted cash and cash equivalents consisted of the following:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current
Cleco Katrina/Rita’s storm recovery bonds	$	2,628	$	9,632

Cleco Power’s charitable contributions	1,846		1,200
Cleco Power’s rate credit escrow	228		268
Total current	4,702		11,100
Non-current
Diversified Lands’ mitigation escrow	23		21
Cleco Cajun’s defense fund	720		719
Cleco Cajun’s margin deposits	100		100
Cleco Power’s future storm restoration costs	8,327		12,269
Cleco Power’s charitable contributions	—		2,094

Total non-current	9,170		15,203
Total restricted cash and cash equivalents	$	13,872	$	26,303


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current
Cleco Katrina/Rita’s storm recovery bonds	$	2,628	$	9,632

Charitable contributions	1,846		1,200
Rate credit escrow	228		268
Total current	4,702		11,100
Non-current
Future storm restoration costs	8,327		12,269
Charitable contributions	—		2,094

Total non-current	8,327		14,363
Total restricted cash and cash equivalents	$	13,029	$	25,463

Cleco Katrina/Rita had the right to bill and collect storm restoration costs from Cleco Power’s customers. As cash was collected, it was restricted for payment of administration fees, interest, and principal on storm recovery bonds. The change from December 31, 2019, to June 30, 2020, was due to Cleco Katrina/Rita using $11.1 million for the final storm recovery bond principal payment and $0.3 million for the related final interest payment, partially offset by collections of $4.4 million net of administration fees. At June 30, 2020, the remaining $2.6

million of restricted cash is expected to be used for final administrative and winding up activities of Cleco Katrina/Rita.

Reserves for Credit Losses

Customer accounts receivable are recorded at the invoiced amount and do not bear interest. Customer accounts receivables are generally considered to become past due 20 days after the billing date. Cleco recognizes write-offs within the allowance for credit losses once all recovery methods have been exhausted. It is the policy of management to review accounts receivable and unbilled revenue monthly using a reserve matrix based on historical bad debt write-offs as well as current and forecasted economic conditions to establish a credit loss estimate. Management’s historical credit loss analysis included periods of economic recessions, natural disasters, and temporary changes to collection policies. Due to the critical necessity of electricity, none of these past events have significantly impacted Cleco’s credit loss rates. Even though the LPSC issued an executive order prohibiting the disconnection of utilities for nonpayment in response to the COVID-19 pandemic from March 13, 2020, through July 16, 2020, and Cleco’s service territory experienced a recent decline in the economy related to the COVID-19 pandemic, the economic outlook of Cleco at June 30, 2020, was still within range of its historical credit loss analysis. As a result of the executive order from the LPSC, Cleco Power suspended the assessment of late fees, disconnections, and sending accounts to collection agencies, which resulted in no additions to charge-offs during the three months ended June 30, 2020. Cleco anticipates reinstating disconnections and late fees and utilizing collection agencies beginning September 1, 2020.

The table below presents the changes in the allowance for credit losses by receivable for Cleco and Cleco Power:


Cleco
(THOUSANDS)	ACCOUNTS RECEIVABLE		OTHER*		TOTAL
Balances, Mar. 31, 2020	$	2,123	$	1,638	$	3,761

Current period provision	1,137		—		1,137

Recovery	226		—		226
Balances, June 30, 2020	$	3,486	$	1,638	$	5,124

* Loan held at Diversified Lands that was fully reserved for at June 30, 2020.


(THOUSANDS)	ACCOUNTS RECEIVABLE		OTHER*		TOTAL
Balances, Dec. 31, 2019	$	3,005	$	1,250	$	4,255
CECL adoption	71		—		71
Current period provision	3,634		388		4,022
Charge-offs	(4,091)		—		(4,091)
Recovery	867		—		867
Balances, June 30, 2020	$	3,486	$	1,638	$	5,124

* Loan held at Diversified Lands that was fully reserved for at June 30, 2020.


Cleco Power
(THOUSANDS)	ACCOUNTS RECEIVABLE
Balances, Mar. 31, 2020	$	2,123

Current period provision	1,137

Recovery	226
Balances, June 30, 2020	$	3,486


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


(THOUSANDS)	ACCOUNTS RECEIVABLE
Balances, Dec. 31, 2019	$	3,005
CECL adoption	71
Current period provision	3,634
Charge-offs	(4,091)
Recovery	867
Balances, June 30, 2020	$	3,486

Fair Value Measurements and Disclosures

Note 2 — Business Combinations

On February 4, 2019, Cleco Cajun acquired from NRG Energy all of the outstanding membership interests in South Central Generating. This acquisition enabled Cleco to significantly increase the scale of its operations in Louisiana.

Accounting for the Cleco Cajun Transaction

As consideration for all of the outstanding membership interest in South Central Generating, Cleco paid cash of approximately $962.2 million, which represents the $1.0 billion acquisition price net of working capital and other adjustments of $37.8 million.

Cleco Cajun accounted for the Cleco Cajun Transaction as a business combination, and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition. Cleco made certain measurement period adjustments at June 30, 2019. The following chart presents Cleco’s purchase price allocation:


Purchase Price Allocation
(THOUSANDS)	AT FEB. 4, 2019
Current assets
Cash and cash equivalents	$	146,494
Customer and other accounts receivable	49,809
Fuel inventory	22,060
Materials and supplies	25,659
Energy risk management assets	4,193
Other current assets	10,056
Non-current assets
Property, plant, and equipment, net	741,203
Prepayments	36,166
Restricted cash and cash equivalents	707
Intangible assets	98,900
Other deferred charges	133
Total assets acquired	1,135,380
Current liabilities
Accounts payable	38,478
Taxes payable	723
Energy risk management liabilities	241
Other current liabilities	14,570
Non-current liabilities
Accumulated deferred federal and state income taxes, net	7,165
Deferred lease revenue	58,300
Intangible liabilities	38,300
Asset retirement obligations	15,323
Operating lease liabilities	110
Total liabilities assumed	173,210
Total purchase price consideration	$	962,170

During the second quarter of 2019, certain modifications were made to the preliminary valuations as of February 4, 2019, due to the refinement of valuation models, assumptions, and inputs. The measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.


Measurement Period Adjustments
(THOUSANDS)	AT JUNE 30, 2019
Current assets
Customer and other accounts receivable	$	1,408
Other current assets	$	56
Non-current assets
Property, plant, and equipment, net	$	13,297
Prepayments	$	(56)
Intangible assets	$	(3,600)
Other deferred charges	$	1

Current liabilities
Accounts payable	$	3,022
Energy risk management liabilities	$	(1)
Other current liabilities	$	327
Non-current liabilities
Accumulated deferred federal and state income taxes, net	$	421
Deferred lease revenue	$	(3,600)
Intangible liabilities	$	6,400
Asset retirement obligations	$	4,534
Operating lease liabilities	$	3


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

The measurement period adjustments resulted in an increase in electric operations revenue of $0.5 million, a decrease in other operations revenue of $0.1 million, and an increase in depreciation expense of $0.2 million recorded for the three months ended June 30, 2019.

As of December 31, 2019, Cleco completed its evaluation and determination of the fair value of assets acquired and liabilities assumed in the Cleco Cajun Transaction. There were no adjustments to those amounts during the third quarter of 2019, the fourth quarter of 2019, nor the six months ended June 30, 2020.

Pro forma Impact of the Cleco Cajun Transaction

The following table includes the unaudited pro forma financial information reflecting the consolidated results of operations of Cleco as if the Cleco Cajun Transaction had taken place on January 1, 2018. There were no nonrecurring transaction-related expenses to be excluded from the pro forma net income for the three months ended June 30, 2019. The pro forma net income for the six months ended June 30, 2019, was adjusted to exclude nonrecurring transaction-related expenses of $3.9 million.

The unaudited pro forma financial information presented in the following table is not necessarily indicative of the consolidated results of operations that would have been achieved had the transaction taken place on the date indicated, or the future consolidated results of operations of the combined companies.


Unaudited Pro Forma Financial Information
(THOUSANDS)	FOR THE THREE MONTHS ENDED JUNE 30, 2019		FOR THE SIX MONTHS ENDED JUNE 30, 2019
Operating revenue, net	$	397,873	$	762,817
Net income	$	44,746	$	66,873


Note 3 — Recent Authoritative Guidance

In June 2016, FASB amended the guidance for the measurement of credit losses on receivables and certain other assets. In-scope items for Cleco include unbilled revenue, trade receivables, notes receivables, other accounts receivables, and guarantees. The guidance requires use of a current expected loss model, which may result in earlier recognition of credit losses. Effective January 1, 2020, Cleco adopted the amended guidance using the prospective transition method. Adoption of this standard resulted in a $0.1 million increase in credit loss reserves related to unbilled revenue and trade receivables. The current expected credit loss model did not impact reserves related to any other in-scope items. For more information on Cleco’s accounting for credit losses, see Note 1 — “Summary of Significant Accounting Policies — Reserves for Credit Losses.”

In August 2018, FASB issued guidance that allows for the deferral of certain implementation costs incurred in a cloud computing arrangement. Effective January 1, 2020, Cleco adopted the guidance using the prospective transition method. Adoption of this guidance did not materially impact the Registrants’ results of operations, financial condition, or cash flows.

In March 2020, FASB issued optional guidance for a limited period of time that applies to entities meeting certain

criteria for the contract modifications or hedging relationships that are referencing LIBOR or another reference rate expected to be discontinued due to reference rate reform. The guidance includes a general principal that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The optional guidance may be applied from March 12, 2020, through December 31, 2022. Management is evaluating this guidance and the impact it may have on the Registrants’ results of operations, financial condition, or cash flows.

Note 4 — Leases

Cleco maintains operating and finance leases in its ordinary course of business activities.

Cottonwood Sale Leaseback Agreement

Upon closing the Cleco Cajun Transaction, the Cottonwood Sale Leaseback was executed. Under the terms of the lease, NRG Energy will operate the Cottonwood Plant, incur all costs, and receive all revenues from the operations of the plant. Cottonwood Energy will receive fixed lease payments of $40.0 million per year and variable lease payments for LTSA costs and property taxes paid by NRG Energy on behalf of Cleco. Cleco may terminate the lease contract under specific circumstances stated in the lease contract. The residual value under the Cottonwood Sale Leaseback is expected to be recovered through sales of power generation from the plant. The residual value of the Cottonwood Plant has been determined using the plant’s estimated economic life.

Cleco Cajun is Cleco’s only entity with lessor arrangements. Cleco Cajun’s lease income under the Cottonwood Sale Leaseback for the three and six months ended June 30, 2020, and 2019, was as follows:


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Fixed payments	$	10,000	$	10,000	$	20,000	$	16,667
Variable payments	5,194		5,087		10,760		8,239
Amortization of deferred lease liability^*	2,301		2,396		4,603		3,835
Total lease income	$	17,495	$	17,483	$	35,363	$	28,741

* Consists of amortization of the deferred lease revenue resulting from the fair value of the lease between Cottonwood Energy and a special-purpose entity that is a subsidiary of NRG Energy. For more information, see Note 2 — “Business Combinations.”


Note 5 — Revenue Recognition

Disaggregated Revenue

Upon the completion of the Cleco Cajun Transaction on February 4, 2019, Cleco Cajun became a reportable segment. For more information on the transaction, see Note 2 — “Business Combinations.”

Operating revenue, net for the three and six months ended June 30, 2020, and 2019, was as follows:


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


	FOR THE THREE MONTHS ENDED JUNE 30, 2020
(THOUSANDS)	CLECO POWER			CLECO CAJUN			OTHER			ELIMINATIONS		TOTAL
Revenue from contracts with customers
Retail revenue
Residential ⁽¹⁾	$	97,973		$	—		$	—		$	—	$	97,973
Commercial ⁽¹⁾	61,575			—			—			—		61,575
Industrial ⁽¹⁾	29,208			—			—			—		29,208
Other retail ⁽¹⁾	3,341			—			—			—		3,341

Electric customer credits	(8,423)			—			—			—		(8,423)
Total retail revenue	183,674			—			—			—		183,674
Wholesale, net	45,694		⁽¹⁾	84,733			(2,420)		⁽²⁾	—		128,007
Transmission, net	11,625		⁽³⁾	13,131			—			(1,639)		23,117
Other	3,601			—			—			—		3,601
Affiliate ⁽⁴⁾	1,240			43			29,138			(30,421)		—
Total revenue from contracts with customers	245,834			97,907			26,718			(32,060)		338,399
Revenue unrelated to contracts with customers
Other	1,853		⁽⁵⁾	17,505		⁽⁶⁾	1			—		19,359
Total revenue unrelated to contracts with customers	1,853			17,505			1			—		19,359
Operating revenue, net	$	247,687		$	115,412		$	26,719		$	(32,060)	$	357,758

⁽¹⁾Includes fuel recovery revenue.

⁽²⁾ Amortization of intangible assets related to Cleco Power’s wholesale power supply agreements.

⁽³⁾ Includes $0.7 million of electric customer credits.

⁽⁴⁾Includes interdepartmental rents and support services. This revenue is eliminated upon consolidation.

⁽⁵⁾ Includes realized gains associated with FTRs of $1.9 million.

⁽⁶⁾Includes $15.2 million in lease revenue related to the Cottonwood Sale Leaseback and $2.3 million of deferred lease revenue amortization.


	FOR THE THREE MONTHS ENDED JUNE 30, 2019
(THOUSANDS)	CLECO POWER			CLECO CAJUN			OTHER			ELIMINATIONS		TOTAL
Revenue from contracts with customers
Retail revenue
Residential ⁽¹⁾	$	97,927		$	—		$	—		$	—	$	97,927
Commercial ⁽¹⁾	68,013			—			—			—		68,013
Industrial ⁽¹⁾	34,845			—			—			—		34,845
Other retail ⁽¹⁾	3,476			—			—			—		3,476
Surcharge	2,201			—			—			—		2,201
Electric customer credits	(8,693)			—			—			—		(8,693)
Total retail revenue	197,769			—			—			—		197,769
Wholesale, net	54,529		⁽¹⁾	100,702			(2,420)		⁽²⁾	—		152,811
Transmission	12,067			12,462			—			(2,954)		21,575
Other	3,337		⁽³⁾	(38)			—			—		3,299
Affiliate ⁽⁴⁾	337			—			23,012			(23,349)		—
Total revenue from contracts with customers	268,039			113,126			20,592			(26,303)		375,454
Revenue unrelated to contracts with customers
Other	4,933		⁽⁵⁾	17,486		⁽⁶⁾	—			—		22,419
Total revenue unrelated to contracts with customers	4,933			17,486			—			—		22,419
Operating revenue, net	$	272,972		$	130,612		$	20,592		$	(26,303)	$	397,873

⁽¹⁾Includes fuel recovery revenue.

⁽²⁾ Amortization of intangible assets related to Cleco Power’s wholesale power supply agreements.

⁽³⁾ Includes $2.5 million of other miscellaneous fee revenue and $0.8 million of Teche Unit 3 SSR revenue at Cleco Power.

⁽⁴⁾ Includes interdepartmental rents and support services. This revenue is eliminated upon consolidation.

⁽⁵⁾ Includes realized gains associated with FTRs of $4.9 million.

⁽⁶⁾ Includes $15.1 million in lease revenue related to the Cottonwood Sale Leaseback and $2.4 million of deferred lease revenue amortization.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


	FOR THE SIX MONTHS ENDED JUNE 30, 2020
(THOUSANDS)	CLECO POWER			CLECO CAJUN			OTHER			ELIMINATIONS		TOTAL
Revenue from contracts with customers
Retail revenue
Residential ⁽¹⁾	$	179,544		$	—		$	—		$	—	$	179,544
Commercial ⁽¹⁾	122,685			—			—			—		122,685
Industrial ⁽¹⁾	61,418			—			—			—		61,418
Other retail ⁽¹⁾	6,802			—			—			—		6,802
Surcharge	2,443			—			—			—		2,443
Electric customer credits	(16,763)			—			—			—		(16,763)
Total retail revenue	356,129			—			—			—		356,129
Wholesale, net	87,923		⁽¹⁾	173,880			(4,840)		⁽²⁾	—		256,963
Transmission, net	23,694		⁽³⁾	26,062		⁽⁴⁾	—			(3,456)		46,300
Other	7,296			—			—			—		7,296
Affiliate ⁽⁵⁾	2,346			204			58,415			(60,965)		—
Total revenue from contracts with customers	477,388			200,146			53,575			(64,421)		666,688
Revenue unrelated to contracts with customers
Other	3,259		⁽⁶⁾	35,382		⁽⁷⁾	1			—		38,642
Total revenue unrelated to contracts with customers	3,259			35,382			1			—		38,642
Operating revenue, net	$	480,647		$	235,528		$	53,576		$	(64,421)	$	705,330

⁽¹⁾Includes fuel recovery revenue.

⁽²⁾ Amortization of intangible assets related to Cleco Power’s wholesale power supply agreements.

⁽³⁾ Includes $0.7 million of electric customer credits.

⁽⁴⁾ Includes $0.2 million of electric customer credits.

⁽⁵⁾ Includes interdepartmental rents and support services. This revenue is eliminated upon consolidation.

⁽⁶⁾ Includes realized gains associated with FTRs of $3.3 million.

⁽⁷⁾ Includes $30.8 million in lease revenue related to the Cottonwood Sale Leaseback and $4.6 million of deferred lease revenue amortization.


	FOR THE SIX MONTHS ENDED JUNE 30, 2019
(THOUSANDS)	CLECO POWER			CLECO CAJUN			OTHER			ELIMINATIONS		TOTAL
Revenue from contracts with customers
Retail revenue
Residential ⁽¹⁾	$	185,075		$	—		$	—		$	—	$	185,075
Commercial ⁽¹⁾	133,393			—			—			—		133,393
Industrial ⁽¹⁾	72,715			—			—			—		72,715
Other retail ⁽¹⁾	7,157			—			—			—		7,157
Surcharge	7,522			—			—			—		7,522
Electric customer credits	(16,853)			—			—			—		(16,853)
Total retail revenue	389,009			—			—			—		389,009
Wholesale, net	110,075		⁽¹⁾	158,893			(4,840)		⁽²⁾	—		264,128
Transmission	24,645			21,190			2			(2,954)		42,883
Other	10,189		⁽³⁾	(64)			—			—		10,125
Affiliate ⁽⁴⁾	637			—			49,547			(50,184)		—
Total revenue from contracts with customers	534,555			180,019			44,709			(53,138)		706,145
Revenue unrelated to contracts with customers
Other	7,162		⁽⁵⁾	28,753		⁽⁶⁾	—			—		35,915
Total revenue unrelated to contracts with customers	7,162			28,753			—			—		35,915
Operating revenue, net	$	541,717		$	208,772		$	44,709		$	(53,138)	$	742,060

⁽¹⁾Includes fuel recovery revenue.

⁽²⁾ Amortization of intangible assets related to Cleco Power’s wholesale power supply agreements.

⁽³⁾ Includes $6.9 million of other miscellaneous fee revenue and $3.2 million of Teche Unit 3 SSR revenue at Cleco Power.

⁽⁴⁾ Includes interdepartmental rents and support services. This revenue is eliminated upon consolidation.

⁽⁵⁾ Includes realized gains associated with FTRs of $9.8 million and the reversal of the Lost Contribution to Fixed Cost revenue of $(2.6) million.

⁽⁶⁾ Includes $24.9 million in lease revenue related to the Cottonwood Sale Leaseback and $3.8 million of deferred lease revenue amortization.

Cleco and Cleco Power have unsatisfied performance obligations with durations ranging between 1 and 15 years that primarily relate to stand-ready obligations as part of fixed capacity minimums. At June 30, 2020, Cleco and Cleco Power had $78.2 million of unsatisfied fixed performance obligations that will be recognized as revenue over the term of such contracts as the stand-ready obligation to provide energy is provided.


Note 6 — Regulatory Assets and Liabilities

Cleco Power capitalizes or defers certain costs for recovery from customers and recognizes a liability for amounts expected to be returned to customers based on regulatory approval and management’s ongoing assessment that it is probable these items will be recovered or refunded through the ratemaking process.

Under the current regulatory environment, Cleco Power believes these regulatory assets will be fully recoverable;


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

however, if in the future, as a result of regulatory changes or competition, Cleco Power’s ability to recover these regulatory assets would no longer be probable, then to the extent that such regulatory assets were determined not to be recoverable, Cleco Power would be required to write-down such assets. In addition, potential deregulation of the industry or possible future changes in the method of rate regulation of Cleco Power could require discontinuance of the application of the authoritative guidance on regulated operations.

The following table summarizes Cleco Power’s regulatory assets and liabilities:


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Regulatory assets (liabilities)
Acadia Unit 1 acquisition costs	$	2,072	$	2,124
Accumulated deferred fuel	24,120		22,910
AFUDC equity gross-up *	71,218		72,766
AMI deferred revenue requirement	2,863		3,136
AROs	3,964		3,668
Corporate franchise tax, net	(851)		(1,145)
Coughlin transaction costs	892		906
COVID-19 executive order	1,890		—
Deferred taxes, net	(147,779)		(146,948)
Dolet Hills accelerated depreciation	7,033		—
Emergency declarations	547		1,349


Energy efficiency	2,820		2,820
Financing costs	7,368		7,554
Interest costs	3,833		3,958
Non-service cost of postretirement benefits	8,243		6,739
Other, net	2,465		(4,543)
Postretirement costs	143,427		151,543
Production operations and maintenance expenses	5,451		7,985
Surcredits, net*	—		145
Training costs	6,163		6,241
Tree trimming costs	12,674		11,341
Total regulatory assets, net	$	158,413	$	152,549
*Represents regulatory assets for past expenditures that were not earning a return on investment at June 30, 2020, and December 31, 2019, respectively. All other assets are earning a return on investment.

The following table summarizes Cleco’s net regulatory assets and liabilities:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Total Cleco Power regulatory assets, net	$	158,413	$	152,549
2016 Merger adjustments *
Fair value of long-term debt	123,255		127,977
Postretirement costs	16,405		17,399
Financing costs	7,763		7,935
Debt issuance costs	5,421		5,665
Total Cleco regulatory assets, net	$	311,257	$	311,525

*Cleco regulatory assets include acquisition accounting adjustments as a result of the 2016 Merger.

COVID-19 Executive Order

On March 13, 2020, the LPSC issued an executive order prohibiting the disconnection of utilities for nonpayment. This order resulted in an increase of expenses for Cleco Power. On April 29, 2020, the LPSC issued an order allowing utilities to establish a regulatory asset for expenses incurred from the suspension of disconnections and collection of late fees imposed by the LPSC executive order. On July 1, 2020, the

LPSC issued an order terminating the moratorium on disconnections effective July 16, 2020. At June 30, 2020, Cleco Power recognized a regulatory asset of $1.9 million for expenses incurred.

Dolet Hills Accelerated Depreciation

In June 2020, Cleco Power revised depreciation rates for the Dolet Hills Power Station to utilize the December 2021 expected end-of-life and early closure of the Dolet Hills Power Station and defer depreciation expense to a regulatory asset for the amount in excess of the previously LPSC-approved depreciation rates. At June 30, 2020, Cleco Power had $7.0 million accrued as a regulatory asset. For more information on the Dolet Hills Power Station, see Note 14 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Risks and Uncertainties.”


Note 7 — Fair Value Accounting

The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2020, and December 31, 2019, for cash equivalents, restricted cash equivalents, accounts receivable, other accounts receivable, short-term debt, and accounts payable approximate fair value because of their short-term nature. Cleco applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including business combinations, as well as impairment related to goodwill and other long-lived assets.

The following tables summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments not measured at fair value on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets:


Cleco
	AT JUNE 30, 2020						AT DEC. 31, 2019
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	3,173,048	$	3,605,118	$	3,188,664	$	3,371,915

* The carrying value of long-term debt does not include deferred issuance costs of $14.2 million at June 30, 2020, and $13.7 million at December 31, 2019.


Cleco Power
	AT JUNE 30, 2020						AT DEC. 31, 2019
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,369,793	$	1,787,833	$	1,380,688	$	1,601,865

* The carrying value of long-term debt does not include deferred issuance costs of $7.0 million at June 30, 2020, and $7.4 million at December 31, 2019.

In order to fund capital requirements, Cleco issues fixed and variable rate long-term debt with various tenors. The fair value of this class fluctuates as the market interest rates for fixed and variable rate debt with similar tenors and credit ratings change. The fair value of the debt could also change from period to period due to changes in the credit rating of the Cleco entity by which the debt was issued. The fair value of long-term debt is classified as Level 2 in the fair value hierarchy.

Fair Value Measurements and Disclosures

Cleco classifies assets and liabilities that are measured at their fair value according to three different levels depending on the inputs used in determining fair value.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

The following tables disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured on a recurring basis:


Cleco
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT JUNE 30, 2020		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2019		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset description
Institutional money market funds	$	318,957	$	—	$	318,957	$	—	$	129,643	$	—	$	129,643	$	—
FTRs	10,006		—		—		10,006		6,822		—		—		6,822
Other commodity derivatives	1,642		—		1,642		—		201		—		201		—
Total assets	$	330,605	$	—	$	320,599	$	10,006	$	136,666	$	—	$	129,844	$	6,822
Liability description
FTRs	$	1,966	$	—	$	—	$	1,966	$	1,044	$	—	$	—	$	1,044
Other commodity derivatives	4,606		—		4,606		—		5,373		—		5,373		—
Total liabilities	$	6,572	$	—	$	4,606	$	1,966	$	6,417	$	—	$	5,373	$	1,044


Cleco Power
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT JUNE 30, 2020		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2019		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset description
Institutional money market funds	$	149,314	$	—	$	149,314	$	—	$	74,903	$	—	$	74,903	$	—
FTRs	8,670		—		—		8,670		6,311		—		—		6,311
Total assets	$	157,984	$	—	$	149,314	$	8,670	$	81,214	$	—	$	74,903	$	6,311
Liability description
FTRs	$	1,159	$	—	$	—	$	1,159	$	586	$	—	$	—	$	586
Total liabilities	$	1,159	$	—	$	—	$	1,159	$	586	$	—	$	—	$	586

The following tables summarize the net changes in the net fair value of FTR assets and liabilities classified as Level 3 in the fair value hierarchy for Cleco and Cleco Power:


Cleco
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Beginning balance	$	1,096	$	7,810	$	5,778	$	22,887
Unrealized losses*	(284)		(2,909)		(371)		(3,862)
Purchases	9,267		20,607		9,732		25,844
Settlements	(2,039)		(10,843)		(7,099)		(30,204)
Ending balance	$	8,040	$	14,665	$	8,040	$	14,665
* Cleco Power’s unrealized losses are reported through Accumulated deferred fuel on Cleco’s Condensed Consolidated Balance Sheet. Cleco Cajun’s unrealized (losses) gains are reported through Purchased power on Cleco’s Condensed Consolidated Income Statement.


Cleco Power
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Beginning balance	$	1,149	$	4,812	$	5,725	$	22,887
Unrealized gains (losses)*	1,298		(2,552)		1,298		(2,552)
Purchases	7,311		18,542		7,776		19,828
Settlements	(2,247)		(6,892)		(7,288)		(26,253)
Ending balance	$	7,511	$	13,910	$	7,511	$	13,910
* Unrealized gains (losses) are reported through Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheet.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for Cleco and Cleco Power as of June 30, 2020, and December 31, 2019:


Cleco
	FAIR VALUE					VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS		FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW		HIGH
FTRs at June 30, 2020	$	10,006	$	1,966	RTO auction pricing	FTR price - per MWh	$	(3.46)	$	3.97
FTRs at Dec. 31, 2019	$	6,822	$	1,044	RTO auction pricing	FTR price - per MWh	$	(2.57)	$	2.86


Cleco Power
	FAIR VALUE					VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS		FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW		HIGH
FTRs at June 30, 2020	$	8,670	$	1,159	RTO auction pricing	FTR price - per MWh	$	(1.93)	$	3.97
FTRs at Dec. 31, 2019	$	6,311	$	586	RTO auction pricing	FTR price - per MWh	$	(2.04)	$	2.86

Cleco utilizes different valuation techniques for fair value calculations. In order to measure the fair value for Level 1 assets and liabilities, Cleco obtains the closing price from published indices in active markets for the various instruments and multiplies this price by the appropriate number of instruments held. Level 2 fair values are determined by obtaining the closing price of similar assets and liabilities from published indices in active markets. Institutional money market funds assets are discounted to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. Level 3 fair values occur in situations in which there is little, if any, market activity for the asset or liability at the measurement date and prices are not observable. Cleco has consistently applied the Level 2 and Level 3 fair value techniques from fiscal period to fiscal period. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement. The assets and liabilities reported at fair value are grouped into classes based on the underlying nature and risks associated with the individual asset or liability.

At June 30, 2020, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash equivalents. The following tables present the institutional money market funds in cash and cash equivalents and restricted cash and cash equivalents as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2020, and December 31, 2019:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Cash and cash equivalents	$	305,212	$	103,409
Current restricted cash and cash equivalents	$	4,702	$	11,100
Non-current restricted cash and cash equivalents	$	9,043	$	15,134


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Cash and cash equivalents	$	136,312	$	49,509
Current restricted cash and cash equivalents	$	4,702	$	11,100
Non-current restricted cash and cash equivalents	$	8,300	$	14,294

If the money market funds failed to perform under the terms of the investments, Cleco and Cleco Power would be exposed to a loss of the invested amounts. Collateral on these types of investments is not required by either Cleco or Cleco Power. The Level 2 institutional money market funds asset consists of a single class. In order to capture interest income and minimize risk, cash is invested in money market funds that invest primarily in short-term securities issued by the U.S. Treasury to maintain liquidity and achieve the goal of a net asset value of a dollar. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the underlying securities of the fund.

Other commodity derivatives include fixed price physical forwards and swap transactions. These contracts contain counterparty credit risk because they are transacted directly with a counterparty and are not cleared on an exchange. With respect to any open trading contracts that Cleco has entered into or may enter into in the future, Cleco may be required to provide credit support or pay liquidated damages under such contracts. 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 contract, changes in the market price, changes in open contracts, and changes in the amounts counterparties owe to Cleco. Changes in any of these factors could cause the amount of requested credit support to increase or decrease. These other commodity derivatives are recorded at fair value and categorized as Level 2 because pricing is indexed to other contracts.

Cleco Power and Cleco Cajun’s FTRs were priced using MISO’s monthly auction prices. Forward seasonal periods are not included in every monthly auction; therefore, the average of the most recent seasonal auction prices is used for monthly valuation. FTRs are categorized as Level 3 fair value measurements because the only relevant pricing available comes from MISO auctions, which occur monthly in the Multi-Period Monthly Auction.

During the six months ended June 30, 2020, and the year ended December 31, 2019, Cleco did not experience any transfers between levels within the fair value hierarchy.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Commodity Contracts

The following tables present the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2020, and December 31, 2019:


Cleco
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT JUNE 30, 2020				AT DEC. 31, 2019
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	10,006			$	6,822
Current	Energy risk management liabilities	(1,966)				(1,044)
Other commodity derivatives
Current	Energy risk management assets	1,559				201
Non-current	Other deferred charges	83				—
Current	Energy risk management liabilities	(3,754)				(3,069)
Non-current	Other deferred credits	(852)				(2,304)
Commodity-related contracts, net				$	5,076			$	606


Cleco Power
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT JUNE 30, 2020				AT DEC. 31, 2019
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	8,670			$	6,311
Current	Energy risk management liabilities	(1,159)				(586)
Commodity-related contracts, net				$	7,511			$	5,725

The following tables present the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020, and 2019:


Cleco
	AMOUNT OF GAIN(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2020		2019		2020		2019
Commodity-related contracts
FTRs⁽¹⁾	Electric operations	$	1,852	$	5,204	$	3,248	$	10,413
FTRs⁽¹⁾	Purchased power	92		(7,013)		(289)		(10,337)
Other commodity derivatives	Fuel used for electric generation	9,316		(2,770)		2,208		(2,770)
Total		$	11,260	$	(4,579)	$	5,167	$	(2,694)

⁽¹⁾ For the three and six months ended June 30, 2020, unrealized losses associated with FTRs for Cleco Power of $1.3 million were reported through Accumulated deferred fuel on the balance sheet. For the three and six months ended June 30, 2019, unrealized losses associated with FTRs for Cleco Power of $2.6 million were reported through Accumulated deferred fuel on the balance sheet.


Cleco Power
	AMOUNT OF GAIN(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2020		2019		2020		2019
Commodity-related contracts
FTRs⁽¹⁾	Electric operations	$	1,852	$	5,197	$	3,249	$	10,403
FTRs⁽¹⁾	Purchased power	(1,319)		(989)		(2,070)		(2,972)
Total		$	533	$	4,208	$	1,179	$	7,431

⁽¹⁾ For the three and six months ended June 30, 2020, unrealized losses associated with FTRs of $1.3 million were reported through Accumulated deferred fuel on the balance sheet. For the three and six months ended June 30, 2019, unrealized losses associated with FTRs of $2.6 million were reported through Accumulated deferred fuel on the balance sheet.

The total volume of FTRs that Cleco Power had outstanding at June 30, 2020, and December 31, 2019, was 20.5 million MWh and 9.2 million MWh, respectively. The total volume of FTRs that Cleco had outstanding at June 30, 2020, and December 31, 2019, was 33.4 million MWh and 14.6 million MWh, respectively. The total volume of other commodity derivatives Cleco had outstanding at June 30, 2020, and December 31, 2019, was 45.7 million MMBtus and 58.5 million MMBtus, respectively.


Note 8 — Debt

On March 2, 2020, Cleco Power made the final $11.1 million principal payment and completed the repayment in full of its Cleco Katrina/Rita storm recovery bonds issued in March 2008.

On May 1, 2020, Cleco Power repriced at a mandatory tender date its $50.0 million 2008 series A GO Zone bonds and

entered into a new interest rate period with a mandatory tender date of May 1, 2025. The interest rate for the new interest rate period is fixed at 2.50% per annum.

On May 15, 2020, Cleco Holdings entered into amendments for its revolving credit agreement and its two outstanding term loan agreements. Also, on May 15, 2020, Cleco Power entered into an amendment for its revolving credit agreement. These amendments extend the terms of each agreement through June 28, 2022.

At June 30, 2020, Cleco Holdings had $88.0 million of borrowings outstanding under its $175.0 million credit facility at an all-in interest rate of 2.065%. The borrowing costs under the facility currently are equal to LIBOR plus 1.875% or ABR plus 0.875%, plus commitment fees of 0.30%.

At June 30, 2020, Cleco Holdings had $330.0 million long-term variable rate bank term loans outstanding. One bank term loan has a balance of $300.0 million outstanding, at an interest


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

rate of LIBOR plus 1.875%, for an all-in interest rate of 2.065% at June 30, 2020. Another bank term loan has a balance of $30.0 million outstanding, at an interest rate of LIBOR plus 1.875%, for an all-in interest rate of 2.065% at June 30, 2020. The weighted average rate on Cleco Holdings’ outstanding term loan debt for the six months ended June 30, 2020, was 2.539%.

At June 30, 2020, Cleco Power had $150.0 million of borrowings outstanding under its $300.0 million credit facility at an all-in interest rate of 1.44%. The borrowing costs under the facility currently are equal to LIBOR plus 1.25% or ABR plus 0.25%, plus commitment fees of 0.15%.

On September 11, 2019, Cleco Holdings completed the private placement of $300.0 million aggregate principal amount of its 3.375% senior notes due September 15, 2029. The proceeds from the issuance were used to repay the remaining amounts due under the $300.0 million bridge loan agreement and a portion of the $100.0 million term loan agreement, both entered into in connection with the Cleco Cajun Transaction. On July 14, 2020, Cleco Holdings completed an exchange offer for its outstanding 3.375% senior notes, which were not registered under the Securities Act of 1993, as amended, for an equal principal amount of newly issued 3.375% senior notes due September 15, 2029, that were so registered. Cleco Holdings did not receive any proceeds from the exchange offer.


Note 9 — Pension Plan and Employee Benefits

Pension Plan and Other Benefits Plan

Employees hired before August 1, 2007, are covered by a non-contributory, defined benefit pension plan. In September 2019,

Cleco made a $12.3 million discretionary contribution to the pension plan. Based on updated funding assumptions at December 31, 2019, management estimates that $66.5 million in pension contributions will be required through 2024. Cleco expects to make at least a $15.5 million minimum required contribution to the pension plan in 2020.

Cleco Power is the plan sponsor and Support Group is the plan administrator. The pension plan was amended on February 4, 2019, to include certain former NRG Energy employees who are now Cleco Cajun employees. The Cleco Cajun employees are eligible to participate as a cash balance participant and are credited with all service that was credited to them under the NRG Pension Plan as of February 4, 2019. Benefits under the plan amendment reflect an employee’s years of service, age at retirement, and accrued benefit at retirement.

Cleco’s retirees may be eligible to receive Other Benefits. Dependents of Cleco’s retirees may also be eligible to receive Other Benefits with the exception of life insurance benefits.

The non-service components of net periodic pension and Other Benefits cost are included in Other income (expense), net within Cleco and Cleco Power’s Condensed Consolidated Statements of Income. The components of net periodic pension and Other Benefits cost for the three and six months ended June 30, 2020, and 2019 were as follows:


	PENSION BENEFITS						OTHER BENEFITS
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Components of periodic benefit costs
Service cost	$	2,582	$	2,140	$	508	$	280
Interest cost	5,278		5,593		410		400
Expected return on plan assets	(6,242)		(6,629)		—		—
Amortizations
Prior period service credit	(15)		(18)		—		—
Net loss (gain)	4,477		2,050		340		(35)
Net periodic benefit cost	$	6,080	$	3,136	$	1,258	$	645


	PENSION BENEFITS						OTHER BENEFITS
	FOR THE SIX MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Components of periodic benefit costs
Service cost	$	4,910	$	4,207	$	1,015	$	568
Interest cost	10,408		11,243		820		800
Expected return on plan assets	(12,487)		(13,251)		—		—
Amortizations
Prior period service credit	(30)		(36)		—		—
Net loss (gain)	8,149		3,925		680		(80)
Net periodic benefit cost	$	10,950	$	6,088	$	2,515	$	1,288

Because Cleco Power is the pension plan sponsor and the related trust holds the assets, the net unfunded status of the pension plan is reflected at Cleco Power. The liability of Cleco’s other subsidiaries is transferred with a like amount of assets to Cleco Power monthly. The expense of the pension

plan related to Cleco’s other subsidiaries for the three and six months ended June 30, 2020, was $1.3 million and $1.7 million, respectively. The expense of the pension plan related to Cleco’s other subsidiaries for the three and six months


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

ended June 30, 2019, was $0.6 million and $1.1 million, respectively.

Cleco Holdings is the plan sponsor for the other benefit plans. There are 0 assets set aside in a trust, and the liabilities are reported on the individual subsidiaries’ financial statements. The expense related to other benefits reflected in Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020, was $1.2 million and $2.5 million, respectively. The expense related to other benefits reflected in Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019, was $0.7 million and $1.5 million, respectively. The current and non-current portions of the Other Benefits liability for Cleco and Cleco Power at June 30, 2020, and December 31, 2019, were as follows:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current	$	4,401	$	4,401
Non-current	$	47,941	$	48,321


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current	$	3,815	$	3,815
Non-current	$	41,837	$	42,080

SERP

Certain Cleco officers are covered by SERP. Cleco does not fund the SERP liability, but instead pays for current benefits out of the general funds available. Cleco Power has formed a rabbi trust. The life insurance policies issued on SERP participants designate the rabbi trust as the beneficiary. Market conditions could have a significant impact on the cash surrender value of the life insurance policies. Proceeds from the life insurance policies are expected to be used to pay the SERP participants’ death benefits, as well as future SERP payments. However, because SERP is a non-qualified plan, the assets of the trust could be used to satisfy general creditors of Cleco Power in the event of insolvency. All SERP benefits are paid out of the general cash available of the respective companies that employed the officer. Cleco Power is the plan sponsor and Support Group is the plan administrator.

The non-service components of net periodic benefit cost related to SERP are included in Other income (expense), net within Cleco and Cleco Power’s Condensed Consolidated Statements of Income. The components of the net periodic benefit cost related to SERP for the three and six months ended June 30, 2020, and 2019 were as follows:


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS  ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Components of periodic benefit costs
Service cost	$	105	$	52	$	200	$	165
Interest cost	734		838		1,466		1,663
Amortizations
Prior period service credit	(67)		(35)		(107)		(70)
Net loss	835		370		1,592		762
Net periodic benefit cost	$	1,607	$	1,225	$	3,151	$	2,520

The expense related to SERP reflected on Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020, was $0.2 million and $0.5 million, respectively. The expense related to SERP reflected on Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019, was $0.1 million and $0.4 million, respectively.

Liabilities relating to SERP are reported on the individual subsidiaries’ financial statements. The current and non-current portions of the SERP liability for Cleco and Cleco Power at June 30, 2020, and December 31, 2019, were as follows:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current	$	4,599	$	4,599
Non-current	$	83,933	$	84,529


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Current	$	760	$	760
Non-current	$	13,769	$	13,964

401(k) Plan

Cleco’s 401(k) Plan is intended to provide active, eligible employees with voluntary, long-term savings and investment opportunities. The 401(k) Plan is a defined contribution plan and is subject to the applicable provisions of the Employee Retirement Income Security Act of 1974. In accordance with the 401(k) Plan, employer contributions are made in the form of cash. Cash contributions are invested in proportion to the participant’s voluntary contribution investment choices. Participation in the Plan is voluntary, and active Cleco employees are eligible to participate. Cleco’s 401(k) Plan was amended upon the close of the Cleco Cajun Transaction to include Cleco Cajun employees. Cleco’s 401(k) Plan expense for the three and six months ended June 30, 2020, and 2019 was as follows:


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
401(k) Plan expense	$	1,898	$	1,792	$	5,154	$	4,059

Cleco Power is the plan sponsor for the 401(k) Plan. The expense of the 401(k) Plan related to Cleco’s other subsidiaries for the three and six months ended June 30, 2020, and 2019 was as follows:


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
401(k) Plan expense	$	832	$	821	$	2,495	$	1,752


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


Note 10 — Income Taxes

Effective Tax Rates

The following tables summarize the effective income tax rates for Cleco and Cleco Power for the three and six months ended June 30, 2020, and 2019:


Cleco
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
	2020		2019		2020		2019
Effective tax rate	23.9	%	21.5	%	23.4	%	21.9	%


Cleco Power
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
	2020		2019		2020		2019
Effective tax rate	24.9	%	22.1	%	24.1	%	22.4	%

For the three and six months ended June 30, 2020, and 2019, the effective income tax rates for both Cleco and Cleco Power were different than the federal statutory rate primarily due to permanent tax differences; the flowthrough of tax benefits, including AFUDC equity; and state tax expense.

Net Operating Loss

For the 2019 tax year, Cleco is expected to create approximately $551.4 million and $82.6 million of federal and state net operating losses, respectively, primarily due to the Cleco Cajun Transaction.

The federal net operating loss may be carried forward indefinitely, and state net operating loss carryforwards will begin to expire in 2039.

Cleco considers it more likely than not that these income tax losses will be utilized to reduce future income tax payments and utilize the entire net operating loss carryforward within the statutory deadlines.

Uncertain Tax Positions

Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. At June 30, 2020, and December 31, 2019, Cleco and Cleco Power had 0 liability for uncertain tax positions or interest payable related to uncertain tax positions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2020, for Cleco and Cleco Power would be unchanged in the next 12 months. The settlement of open tax years could involve the payment of additional taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.

Income Tax Audits

Cleco participates in the IRS’s Compliance Assurance Process in which financial results are examined and agreed upon prior to filing the federal consolidated tax return. While the statute of limitations remains open for tax years 2016, 2017, and 2018, management believes the likelihood of further examination by the IRS is remote.

The state income tax years 2016, 2017, and 2018 remain subject to examination by the Louisiana Department of Revenue.

Cleco classifies income tax penalties as a component of other expense. For the three and six months ended June 30, 2020, and 2019, 0 penalties were recognized.

CARES Act

On March 27, 2020, the CARES Act was enacted and signed into law in response to the COVID-19 pandemic. Among other provisions, the CARES Act includes modifications on the limitations of business interest for the 2019 and 2020 tax years. The modifications increase the allowable business interest deduction from 30% to 50% of adjusted taxable income. The modification increased Cleco’s allowable interest expense deduction and, as a result, decreased taxable income, creating larger net operating loss carryforwards for the tax year ended December 31, 2019. As a result of the CARES Act, Cleco does not expect any disallowed interest for the 2019 and 2020 tax years.


Note 11 — Disclosures about Segments

Cleco’s reportable segments are based on its method of internal reporting, which disaggregates business units by its first-tier subsidiary. Cleco’s reportable segments are Cleco Power and Cleco Cajun.

Each reportable segment engages in business activities from which it earns revenue and incurs expenses. Segment managers report periodically to Cleco’s CEO, who is Cleco’s chief operating decision maker, with discrete financial information and, at least quarterly, present discrete financial information to Cleco and Cleco Power’s Boards of Managers. The reportable segment prepares budgets that are presented to and approved by Cleco and Cleco Power’s Boards of Managers. The column shown as Other in the following tables includes the holding company, a shared services subsidiary, and an investment subsidiary. Upon the completion of the Cleco Cajun Transaction on February 4, 2019, Cleco Cajun became a reportable segment. For more information on the transaction, see Note 2 — “Business Combinations.” There are no other changes to Cleco’s existing reportable segments.

The financial results in the following tables are presented on an accrual basis. EBITDA is a key non-GAAP financial measure used by the CEO to assess the operating performance of Cleco’s segments. Management evaluates the performance of Cleco’s segments and allocates resources to them based on segment profit and the requirements to implement strategic initiatives and projects to meet current business objectives. EBITDA is defined as net income adjusted for interest, income taxes, depreciation, and amortization. Depreciation and amortization in the following tables includes amortization of intangible assets and liabilities recorded for the fair value adjustment of wholesale power supply agreements as a result of the 2016 Merger and the Cleco Cajun Transaction, as well as amortization of deferred lease revenue resulting from the Cleco Cajun Transaction. Material intercompany transactions occur on a regular basis. These intercompany transactions relate primarily to joint and common administrative support services as well as transmission services provided by Cleco Power to Cleco Cajun.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


Segment Information For The Three Months Ended June 30,
2020 (THOUSANDS)	CLECO POWER		CLECO CAJUN			TOTAL SEGMENTS
Revenue
Electric operations	$	239,643	$	84,733		$	324,376
Other operations	15,904		30,636			46,540
Affiliate revenue	1,240		43			1,283
Electric customer credits	(9,100)		—			(9,100)
Operating revenue, net	$	247,687	$	115,412		$	363,099
Net income	$	28,233	$	26,762		$	54,995
Add: Depreciation and amortization	41,596		11,143		⁽¹⁾	52,739
Less: Interest income	755		103			858
Add: Interest charges	18,603		120			18,723
Add: Federal and state income tax expense	9,356		8,601			17,957



EBITDA	$	97,033	$	46,523		$	143,556
⁽¹⁾ Includes $3.1 million of amortization of intangible assets and liabilities related to wholesale power supply agreements and $2.3 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


2020 (THOUSANDS)	TOTAL SEGMENTS		OTHER			ELIMINATIONS		TOTAL
Revenue
Electric operations	$	324,376	$	(2,420)		$	—	$	321,956
Other operations	46,540		1			(1,639)		44,902
Affiliate revenue	1,283		29,138			(30,421)		—
Electric customer credits	(9,100)		—			—		(9,100)
Operating revenue, net	$	363,099	$	26,719		$	(32,060)	$	357,758
Depreciation and amortization	$	52,739	$	4,565	⁽¹⁾	$	—	$	57,304
Interest income	$	858	$	55		$	(15)	$	898
Interest charges	$	18,723	$	16,007		$	(15)	$	34,715

Federal and state income tax expense (benefit)	$	17,957	$	(4,364)		$	—	$	13,593
Net income (loss)	$	54,995	$	(11,826)		$	(1)	$	43,168
⁽¹⁾ Includes $2.4 million of amortization of intangible assets related to Cleco Power’s wholesale power supply agreements as a result of the 2016 Merger.


2019 (THOUSANDS)	CLECO POWER		CLECO CAJUN			TOTAL SEGMENTS
Revenue
Electric operations	$	265,924	$	101,962		$	367,886
Other operations	15,404		29,917			45,321
Affiliate revenue	337		—			337
Electric customer credits	(8,693)		(1,267)			(9,960)
Operating revenue, net	$	272,972	$	130,612		$	403,584
Net income	$	49,356	$	12,926		$	62,282

Add: Depreciation and amortization	39,330		10,269		⁽¹⁾	49,599

Less: Interest income	867		368			1,235
Add: Interest charges	17,370		—			17,370
Add: Federal and state income tax expense	13,978		4,028			18,006
EBITDA	$	119,167	$	26,855		$	146,022
⁽¹⁾ Includes $2.5 million of amortization of intangible assets and liabilities related to wholesale power supply agreements and $2.4 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


2019 (THOUSANDS)	TOTAL SEGMENTS		OTHER			ELIMINATIONS		TOTAL
Revenue
Electric operations	$	367,886	$	(2,420)		$	—	$	365,466
Other operations	45,321		—			(2,954)		42,367
Affiliate revenue	337		23,012			(23,349)		—
Electric customer credits	(9,960)		—			—		(9,960)
Operating revenue, net	$	403,584	$	20,592		$	(26,303)	$	397,873
Depreciation and amortization	$	49,599	$	4,490	⁽¹⁾	$	(1)	$	54,088
Interest income	$	1,235	$	197		$	(157)	$	1,275
Interest charges	$	17,370	$	18,626		$	(156)	$	35,840

Federal and state income tax expense (benefit)	$	18,006	$	(5,725)		$	—	$	12,281
Net income (loss)	$	62,282	$	(17,537)		$	1	$	44,746
⁽¹⁾ Includes $2.4 million of amortization of intangible assets related to Cleco Power’s wholesale power supply agreements as a result of the 2016 Merger.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q


Segment Information For The Six Months Ended June 30,
2020 (THOUSANDS)	CLECO POWER		CLECO CAJUN			TOTAL SEGMENTS
Revenue
Electric operations	$	464,073	$	173,880		$	637,953
Other operations	31,668		61,597			93,265
Affiliate revenue	2,346		204			2,550
Electric customer credits	(17,440)		(153)			(17,593)
Operating revenue, net	$	480,647	$	235,528		$	716,175
Net income	$	40,064	$	46,298		$	86,362

Add: Depreciation and amortization	85,273		22,041		⁽²⁾	107,314

Less: Interest income	1,709		258			1,967
Add: Interest charges	37,184		131			37,315
Add: Federal and state income tax expense	12,694		15,022			27,716
EBITDA	$	173,506	$	83,234		$	256,740
Additions to property, plant, and equipment	$	132,578	$	5,417		$	137,995
Equity investment in investees ⁽¹⁾	$	17,072	$	—		$	17,072
Goodwill ⁽¹⁾	$	1,490,797	$	—		$	1,490,797
Total segment assets ⁽¹⁾	$	6,135,361	$	1,028,970		$	7,164,331
⁽¹⁾ Balances as of June 30, 2020. ⁽²⁾Includes $6.2 million of amortization of intangible assets and liabilities related to wholesale power supply agreements and $4.6 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


2020 (THOUSANDS)	TOTAL SEGMENTS		OTHER			ELIMINATIONS		TOTAL
Revenue
Electric operations	$	637,953	$	(4,840)		$	—	$	633,113
Other operations	93,265		1			(3,456)		89,810
Affiliate revenue	2,550		58,415			(60,965)		—
Electric customer credits	(17,593)		—			—		(17,593)
Operating revenue, net	$	716,175	$	53,576		$	(64,421)	$	705,330
Depreciation and amortization	$	107,314	$	9,079	⁽²⁾	$	—	$	116,393

Interest income	$	1,967	$	155		$	(68)	$	2,054
Interest charges	$	37,315	$	32,617		$	(69)	$	69,863
Federal and state income tax expense (benefit)	$	27,716	$	(12,561)		$	—	$	15,155
Net income (loss)	$	86,362	$	(36,865)		$	(1)	$	49,496
Additions to property, plant, and equipment	$	137,995	$	1,344		$	—	$	139,339
Equity investment in investees ⁽¹⁾	$	17,072	$	—		$	—	$	17,072
Goodwill ⁽¹⁾	$	1,490,797	$	—		$	—	$	1,490,797
Total segment assets ⁽¹⁾	$	7,164,331	$	609,159		$	(44,310)	$	7,729,180
⁽¹⁾ Balances as of June 30, 2020. ⁽²⁾Includes $4.8 million of amortization of intangible assets related to Cleco Power’s wholesale power supply agreements as a result of the 2016 Merger.


2019 (THOUSANDS)	CLECO POWER		CLECO CAJUN			TOTAL SEGMENTS
Revenue
Electric operations	$	523,100	$	160,156		$	683,256
Other operations	34,833		49,883			84,716
Affiliate revenue	637		—			637
Electric customer credits	(16,853)		(1,267)			(18,120)
Operating revenue, net	$	541,717	$	208,772		$	750,489
Net income	$	76,068	$	23,982		$	100,050

Add: Depreciation and amortization	81,707		16,799		⁽²⁾	98,506

Less: Interest income	1,860		622			2,482
Add: Interest charges	34,515		—			34,515
Add: Federal and state income tax expense	21,976		7,557			29,533
EBITDA	$	212,406	$	47,716		$	260,122
Additions to property, plant, and equipment	$	147,696	$	2,672		$	150,368
Equity investment in investees ⁽¹⁾	$	17,072	$	—		$	17,072
Goodwill ⁽¹⁾	$	1,490,797	$	—		$	1,490,797
Total segment assets ⁽¹⁾	$	5,967,327	$	1,011,591		$	6,978,918
⁽¹⁾Balances as of December 31, 2019. ⁽²⁾Includes $5.1 million of amortization of intangible assets and liabilities related to wholesale power supply agreements and $3.8 million deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q


2019 (THOUSANDS)	TOTAL SEGMENTS		OTHER			ELIMINATIONS		TOTAL
Revenue
Electric operations	$	683,256	$	(4,840)		$	—	$	678,416
Other operations	84,716		2			(2,954)		81,764
Affiliate revenue	637		49,547			(50,184)		—
Electric customer credits	(18,120)		—			—		(18,120)
Operating revenue, net	$	750,489	$	44,709		$	(53,138)	$	742,060
Depreciation and amortization	$	98,506	$	8,979	⁽²⁾	$	(1)	$	107,484

Interest income	$	2,482	$	614		$	(329)	$	2,767
Interest charges	$	34,515	$	35,654		$	(330)	$	69,839
Federal and state income tax expense (benefit)	$	29,533	$	(11,265)		$	(1)	$	18,267
Net income (loss)	$	100,050	$	(34,747)		$	—	$	65,303
Additions to property, plant, and equipment	$	150,368	$	1,095		$	—	$	151,463
Equity investment in investees ⁽¹⁾	$	17,072	$	—		$	—	$	17,072
Goodwill ⁽¹⁾	$	1,490,797	$	—		$	—	$	1,490,797
Total segment assets ⁽¹⁾	$	6,978,918	$	546,096		$	(48,716)	$	7,476,298
⁽¹⁾Balances as of December 31, 2019. ⁽²⁾Includes $4.8 million of amortization of intangible assets related to Cleco Power’s wholesale power supply agreements as a result of the 2016 Merger.


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Net income	$	43,168	$	44,746	$	49,496	$	65,303
Add: Depreciation and amortization	57,304		54,088		116,393		107,484

Less: Interest income	898		1,275		2,054		2,767
Add: Interest charges	34,715		35,840		69,863		69,839
Add: Federal and state income tax expense	13,593		12,281		15,155		18,267
Add: Other corporate costs and noncash items ⁽¹⁾	(4,326)		342		7,887		1,996

Total segment EBITDA	$	143,556	$	146,022	$	256,740	$	260,122
⁽¹⁾ Adjustments made for Other and Elimination totals not allocated to total segment EBITDA.


Note 12 — Regulation and Rates

Provision for rate refund on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets consisted primarily of the following:


(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
TCJA tax-related benefits	$	10,000	$	28,700
FERC audit	$	3,700	$	3,500
Cost of service savings	$	2,500	$	1,900
Cleco Katrina/Rita storm recovery charges	$	1,600	$	—
Site-specific industrial customer	$	1,100	$	800
Change in transmission ROE	$	800	$	1,000

For more information about the FERC audit, see Note 14 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — FERC Audit.”

Cleco Katrina/Rita Storm Recovery Charges

Cleco Katrina/Rita had the right to bill and collect storm restoration costs from Cleco Power’s customers to pay administrative fees, interest, and principal on the Cleco Katrina/Rita storm recovery bonds. Amounts remaining after the final principal and interest payments on the storm recovery bonds, which was paid on March 2, 2020, and payments for final administrative and winding up activities are subject to refund. For more information on the storm recovery bonds, see Note 1 — “Summary of Significant Accounting Policies — Restricted Cash and Cash Equivalents” and Note 16 — “Intangible Assets and Liabilities.”

Transmission ROE

NaN complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. As of June 30, 2020, Cleco Power had $0.8 million accrued for the change in ROE. For more information on the ROE complaints, see Note 14 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE.”

FRP

Cleco Power’s annual retail earnings are subject to an FRP that was approved by the LPSC in June 2014. Under the terms of Cleco Power’s current FRP, Cleco Power is allowed to earn a target ROE of 10.0%, while providing the opportunity to earn up to 10.9%. Additionally, 60.0% of retail earnings between 10.9% and 11.75%, and all retail earnings over 11.75%, are required to be refunded to customers. The amount of credits due to customers, if any, is determined by Cleco Power and the LPSC, annually. Credits are typically included on customers’ bills the following summer, but the amount and timing of the refunds are ultimately subject to LPSC approval. Cleco Power’s FRP had a four-year term, which was set to expire in June 2018. As a result of the 2016 Merger, the FRP was extended an additional two years with an expiration of June 2020, and Cleco Power was required to file a new base rate case in June 2019 with any change in rates to be implemented in July 2020. On June 28, 2019, Cleco Power filed an application with the LPSC for a new FRP. Cleco Power has responded to multiple sets of data requests relating to the new FRP. However, due to COVID-19, there has been a delay in the current base rate case. Unless the 2014 FRP were to be extended by order of the LPSC, the FRP rates established in


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

July 2019 will remain in effect, and an FRP monitoring report for the 12-month period ending June 30, 2020, will not be required. Cleco Power anticipates new rates to be effective in the fourth quarter of 2020. However, management is unable to determine the outcome of the base rate case relating to the new FRP.

Under the 2014 FRP, Cleco Power must file annual monitoring reports no later than October 31 for the 12-month period ending June 30. In January 2020, Cleco Power reached an agreement with the LPSC Staff regarding the treatment and realignment of SSR revenue between base and fuel revenue that resulted in $2.3 million of refunds for the 2018 monitoring report and confirmed 0 refunds for the 2017 monitoring report. The settlement also applies to treatment of SSR revenues for the 2019 monitoring report. The 2017 monitoring report was approved by the LPSC on February 19, 2020. Cleco Power refunded the $2.3 million for the 2018 monitoring report in March 2020 as agreed to in the settlement of the 2017 monitoring report.

On April 30, 2020, the LPSC filed the uncontested Joint Report and Draft Order on Cleco Power’s FRP for the 12 months ended June 30, 2018. The conclusions were an earnings-related refund of $2.3 million, which was refunded on March 2020 bills, and no adjustments to rider FRP. The 2018 monitoring report was approved by the LPSC on May 27, 2020. Cleco Power has also responded to data requests relating to the 2019 FRP monitoring report.

Cleco Power’s monitoring reports also included a $1.2 million annual cost of service savings as a result of the 2016 Merger Commitments. The cost of service savings are not subject to the target ROE or any sharing mechanism. The cost of service savings are refunded annually in September and will continue until Cleco Power’s next FRP is in effect, which is expected in the fourth quarter of 2020. At June 30, 2020, Cleco Power had $2.5 million accrued for the estimated cost of service savings refunds.

TCJA

The provisions of the TCJA reduced the top federal statutory corporate income tax rate from 35% to 21%. As a result of the tax rate reduction, on January 1, 2018, Cleco Power began accruing an estimated reserve for the reduction in the federal statutory corporate income tax rate. In February 2018, the LPSC directed utilities, including Cleco Power, to provide considerations of the appropriate manner to flow through to ratepayers the benefits of the reduction in corporate income taxes as a result of the TCJA. In July 2019, the LPSC approved Cleco Power’s rate refund of $79.2 million, plus interest, for the reduction in the statutory federal tax rate for the period from January 2018 to June 2020. The refund is being credited to customers over 12 months beginning August 1, 2019. At June 30, 2020, Cleco Power had $10.0 million accrued for the estimated federal tax-related benefits from the TCJA and $0.4 million accrued in related interest.

In July 2019, the LPSC approved Cleco Power’s motion to address the rate redesign and the regulatory liability for excess ADIT, resulting from the enactment of the TCJA, in Cleco Power’s current base rate case.

remaining balance of the excess ADIT at the end of November 2020 will be determined in Cleco Power’s current LPSC rate case. Cleco Power’s current base rate case is ongoing and management is unable to determine its outcome.

SSR

In September 2016, Cleco Power filed an Attachment Y with MISO requesting retirement of Teche Unit 3 effective April 1, 2017. MISO conducted a study which determined the proposed retirement of Teche Unit 3 would result in violations of specific applicable reliability standards for which no mitigation is available. As a result, MISO designated Teche Unit 3 as an SSR unit until such time that an appropriate alternative solution could be implemented to mitigate reliability issues. One mitigating factor identified was Cleco Power’s Terrebonne to Bayou Vista Transmission project, which was completed in April 2019. Cleco Power received a termination notice, effective April 30, 2019, and filed paperwork to withdraw the filed Attachment Y. While operating as an SSR unit, Cleco Power received monthly payments that included recovery of expenses, including capital expenditures, related to the operations of Teche Unit 3. Additionally, MISO allocated SSR costs to the load serving entities that required the operation of the SSR unit, including Cleco Power. These payments and cost allocations were finalized as part of a MISO SSR settlement approved in December 2018. Cleco Power operated Teche Unit 3 as an SSR unit from April 2017 until April 2019.

Cleco Power expects Teche Unit 3 to be available to run until the estimated 2021 in-service date of the Bayou Vista to Segura Transmission project, at which time Cleco Power does not expect to offer the unit into MISO, barring any grid or customer reliability issues or other similar reasons. At June 30, 2020, Cleco Power had $6.1 million accrued for the net capital refund for capital expenditures paid for by third parties while operating under the SSR agreement. As part of the settlement, one of the load serving entities agreed to reimburse Cleco Power for their portion of the capital refund. Management is unable to determine the timing of the capital refund.


Note 13 — Variable Interest Entities

Cleco and Cleco Power apply the equity method of accounting to report the investment in Oxbow in the consolidated financial statements. Under the equity method, the assets and liabilities of this entity are reported as Equity investment in investee on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. The revenue and expenses (excluding income taxes) of this entity are netted and reported as equity income or loss from investees on Cleco and Cleco Power’s Condensed Consolidated Statements of Income.

Oxbow is owned 50% by Cleco Power and 50% by SWEPCO. Cleco Power is not the primary beneficiary because it shares the power to control Oxbow’s significant activities with SWEPCO. Cleco Power’s current assessment of its maximum exposure to loss related to Oxbow at June 30, 2020, consisted of its equity investment of $17.1 million.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

The following table presents the components of Cleco Power’s equity investment in Oxbow:


INCEPTION TO DATE (THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Purchase price	$	12,873	$	12,873
Cash contributions	6,399		6,399
Dividends	(2,200)		(2,200)
Total equity investment in investee	$	17,072	$	17,072

The following table compares the carrying amount of Oxbow’s assets and liabilities with Cleco Power’s maximum exposure to loss related to its investment in Oxbow:


(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Oxbow’s net assets/liabilities	$	34,145	$	34,145
Cleco Power’s 50% equity	$	17,072	$	17,072
Cleco Power’s maximum exposure to loss	$	17,072	$	17,072

The following table contains summarized financial information for Oxbow:


	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Operating revenue	$	29,110	$	2,381	$	30,991	$	4,339
Operating expenses	29,110		2,381		30,991		4,339
Income before taxes	$	—	$	—	$	—	$	—

DHLC mines lignite reserves at Oxbow through the Amended Lignite Mining Agreement. The lignite reserves are intended to be used to provide fuel to the Dolet Hills Power Station. Under the Amended Lignite Mining Agreement, DHLC bills Cleco Power its proportionate share of incurred lignite extraction and associated mining-related costs. Oxbow bills Cleco Power its proportionate share of incurred costs related to mineral rights and land leases. For more information on DHLC and the Oxbow mine, see Note 14 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Risks and Uncertainties.”

Oxbow has no third-party agreements, guarantees, or other third-party commitments that contain obligations affecting Cleco Power’s investment in Oxbow.


Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees

Litigation

2016 Merger

In connection with the 2016 Merger, 4 actions were filed in the Ninth Judicial District Court for Rapides Parish, Louisiana and 3 actions were filed in the Civil District Court for Orleans Parish, Louisiana. The petitions in each action generally alleged, among other things, that the members of Cleco Corporation’s Board of Directors breached their fiduciary duties by, among other things, conducting an allegedly inadequate sale process, agreeing to the 2016 Merger at a price that allegedly undervalued Cleco, and failing to disclose material information about the 2016 Merger. The petitions also alleged that Como 1, Cleco Corporation, Merger Sub, and, in some cases, certain of the investors in Como 1 either aided and abetted or entered into a civil conspiracy to advance those supposed breaches of duty. The petitions

sought various remedies, including monetary damages, which includes attorneys’ fees and expenses.

The 4 actions filed in the Ninth Judicial District Court for Rapides Parish are captioned as follows:

•Braunstein v. Cleco Corporation, No. 251,383B (filed October 27, 2014),

•Moore v. Macquarie Infrastructure and Real Assets, No. 251,417C (filed October 30, 2014),

•Trahan v. Williamson, No. 251,456C (filed November 5, 2014), and

•L’Herisson v. Macquarie Infrastructure and Real Assets, No. 251,515F (filed November 14, 2014).

In November 2014, the plaintiff in the Braunstein action moved for a dismissal of the action without prejudice, and that motion was granted in November 2014. In December 2014, the Court consolidated the remaining 3 actions and appointed interim co-lead counsel, and dismissed the investors in Cleco Partners as defendants, per agreement of the parties. Also, in December 2014, the plaintiffs in the consolidated action filed a Consolidated Amended Verified Derivative and Class Action Petition for Damages and Preliminary and Permanent Injunction.

The 3 actions filed in the Civil District Court for Orleans Parish were captioned as follows:

•Butler v. Cleco Corporation, No. 2014-10776 (filed November 7, 2014),

•Creative Life Services, Inc. v. Cleco Corporation, No. 2014-11098 (filed November 19, 2014), and

•Cashen v. Cleco Corporation, No. 2014-11236 (filed November 21, 2014).

In December 2014, the directors and Cleco filed declinatory exceptions in each action on the basis that each action was improperly brought in Orleans Parish and should either be transferred to the Ninth Judicial District Court for Rapides Parish or dismissed. Also, in December 2014, the plaintiffs in each action jointly filed a motion to consolidate the 3 actions pending in Orleans Parish and to appoint interim co-lead plaintiffs and co-lead counsel. In January 2015, the Court in the Creative Life Services case sustained the defendants’ declinatory exceptions and dismissed the case so that it could be transferred to the Ninth Judicial District Court for Rapides Parish. In February 2015, the plaintiffs in Butler and Cashen also consented to the dismissal of their cases from Orleans Parish so they could be transferred to the Ninth Judicial District Court for Rapides Parish. By operation of the December 2014 order of the Ninth Judicial District Court for Rapides Parish, the Butler, Cashen, and Creative Life Services actions were consolidated into the actions pending in Rapides Parish.

In February 2015, the Ninth Judicial District Court for Rapides Parish held a hearing on a motion for preliminary injunction filed by plaintiffs in the consolidated action seeking to enjoin the shareholder vote for approval of the Merger Agreement. The District Court heard and denied the plaintiffs’ motion. In June 2015, the plaintiffs filed their Second Consolidated Amended Verified Derivative and Class Action Petition. Cleco filed exceptions seeking dismissal of the second amended petition in July 2015. The LPSC voted to approve the 2016 Merger before the Court could consider the plaintiffs’ peremptory exceptions.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

In March 2016 and May 2016, the plaintiffs filed their Third Consolidated Amended Verified Derivative Petition for Damages and Preliminary and Permanent Injunction and their Fourth Verified Consolidated Amended Class Action Petition, respectively. The fourth amended petition, which remains the operative petition and was filed after the 2016 Merger closed, eliminated the request for preliminary and permanent injunction and also named an additional executive officer as a defendant. The defendants filed exceptions seeking dismissal of the fourth amended Petition. In September 2016, the District Court granted the exceptions of no cause of action and no right of action and dismissed all claims asserted by the former shareholders. The plaintiffs appealed the District Court’s ruling to the Louisiana Third Circuit Court of Appeal. In December 2017, the Third Circuit Court of Appeal issued an order reversing and remanding the case to the District Court for further proceedings. In January 2018, Cleco filed a writ with the Louisiana Supreme Court seeking review of the Third Circuit Court of Appeal’s decision. The writ was denied in March 2018 and the parties are engaged in discovery in the District Court. In November 2018, Cleco filed renewed exceptions of no cause of action and res judicata, seeking to dismiss all claims. On December 21, 2018, the court dismissed Cleco Partners and Cleco Holdings as defendants per the agreement of the parties, leaving as the only remaining defendants certain former executive officers and independent directors. The District Court denied the defendants’ exceptions on January 14, 2019. A hearing on the plaintiffs’ motion for certification of a class was scheduled for August 26, 2019; however, prior to the hearing, the parties reached an agreement to certify a limited class. On September 7, 2019, the District Court certified a class limited to shareholders who voted against, abstained from voting, or did not vote on the 2016 Merger. Cleco believes that the allegations of the petitions in each action are without merit and that it has substantial meritorious defenses to the claims set forth in each of the petitions.

Gulf Coast Spinning

In September 2015, a potential customer sued Cleco for failure to fully perform an alleged verbal agreement to lend or otherwise fund its startup costs to the extent of $6.5 million. Gulf Coast Spinning Company, LLC (Gulf Coast), the primary plaintiff, alleges that Cleco promised to assist it in raising approximately $60.0 million, which Gulf Coast needed to construct a cotton spinning facility near Bunkie, Louisiana. According to the petition filed by Gulf Coast in the 12^th Judicial District Court for Avoyelles Parish, Louisiana (the “District Court”), Cleco made such promises of funding assistance in order to cultivate a new industrial electric customer which would increase its revenues under a power supply agreement that it executed with Gulf Coast. Gulf Coast seeks unspecified damages arising from its inability to raise sufficient funds to complete the project, including lost profits.

Cleco filed an Exception of No Cause of Action arguing that the case should be dismissed. The District Court denied Cleco’s exception in December 2015, after considering briefs and arguments. In January 2016, Cleco appealed the District Court’s denial of its exception by filing with the Third Circuit Court of Appeal. In June 2016, the Third Circuit Court of Appeal denied the request to have the case dismissed. In July 2016, Cleco filed a writ to the Louisiana Supreme Court seeking a review of the District Court’s denial of Cleco’s

exception. In November 2016, the Louisiana Supreme Court denied Cleco’s writ application.

In February 2016, the parties agreed to a stay of all proceedings pending discussions concerning settlement. In May 2016, the District Court lifted the stay at the request of Gulf Coast. The parties are currently participating in discovery. Cleco believes the allegations of the petition are contradicted by the written documents executed by Gulf Coast, are otherwise without merit, and that it has substantial meritorious defenses to the claims alleged by Gulf Coast.

Sabine River Flood

In March 2017, Cleco was served with a summons in Perry Bonin, Ace Chandler, and Michael Manuel, et al v. Sabine River Authority of Texas and Sabine River Authority of Louisiana, No. B-160173-C. The action was filed in the 163rd Judicial District Court for Orange County, Texas, and relates to flooding that occurred in Texas and Louisiana in March 2016. The plaintiffs have alleged that the flooding was the result of the release of water from the Toledo Bend spillway gates into the Sabine River. While the plaintiffs have made numerous allegations, they have specifically alleged that Cleco Power, included as one of several companies and governmental bodies, failed to repair 1 of the 2 hydroelectric generators at the Toledo Bend Dam, which in turn contributed to the flooding. Cleco Power does not operate the hydroelectric generator.

The suit was removed to federal court in Texas. The new federal case is Perry Bonin, et al. v. Sabine River Authority of Texas et al., No. 17-cv-134, U.S. District Court for the Eastern District of Texas (Bonin Case). The plaintiffs moved to remand the case to state court, but the district court found that the case raises a substantial federal question and denied the motion to remand. Cleco Power, along with its co-defendants, filed a motion to dismiss on various grounds, primarily arguing that the plaintiffs’ claims are preempted because they infringe on FERC’s exclusive control of dam operations. The district court granted the motion to dismiss in part, declining to rule on some of the arguments raised by the defendants, and granted the plaintiffs leave to amend their complaint. The plaintiffs filed a Fifth Amended Complaint in March 2018. Cleco Power filed a new motion to dismiss the plaintiffs’ claims.

In March 2018, approximately 26 other individual plaintiffs filed a petition against Cleco Power and other defendants in Larry Addison, et al. v. Sabine River Authority of Texas, et al., No. D180096-C. The action was filed in the 260th Judicial District Court for Orange County, Texas. The defendants removed the case to federal court in April 2018. The new federal case is Larry Addison, et al. v. Sabine River Authority of Texas, et al., No. 18-cv-153, U.S. District Court for the Eastern District of Texas. The allegations are essentially identical to those in the Bonin Case. Also, in April 2018, Cleco Power filed a motion to dismiss on the same grounds that previously were successful in the Bonin Case. In July 2018, the district court entered an order consolidating the Addison Case with the Bonin Case. Management believes that both cases, as they relate to Cleco Power, have no merit. In August 2018, the Judge entered an order requiring the plaintiffs to file a more definitive statement to clarify the plaintiffs’ claims. In response thereto, the plaintiffs filed a Sixth Amended Petition in September 2018. Cleco Power filed a response in October 2018. All claims were dismissed against Cleco Power by ruling of the Judge on March 18, 2019. The plaintiffs appealed the dismissal with the United States Court of Appeals for the Fifth


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

Circuit. On June 4, 2020, the Fifth Circuit Court of Appeals affirmed the dismissal of all claims against Cleco Power.

Dispute with Saulsbury Industries

In October 2018, Cleco Power sued Saulsbury Industries, Inc., the former general contractor for the St. Mary Clean Energy Center project, seeking damages for Saulsbury Industries, Inc.’s failure to complete the St. Mary Clean Energy Center project on time and for costs incurred by Cleco Power in hiring a replacement general contractor. The action was filed in the Ninth Judicial District Court for Rapides Parish, No. 263339. Saulsbury Industries, Inc. removed the case to the U.S. District Court for the Western District of Louisiana, on March 1, 2019.

In January 2019, Cleco Power was served with a summons in Saulsbury Industries, Inc. v. Cabot Corporation and Cleco Power LLC, in the U.S. District Court for the Western District of Louisiana. Saulsbury Industries, Inc. alleged that Cleco Power and Cabot Corporation caused delays in the St. Mary Clean Energy Center project, resulting in alleged impacts to Saulsbury Industries, Inc.’s direct and indirect costs. On June 5, 2019, Cleco Power and Cabot Corporation each filed separate motions to dismiss. On October 24, 2019, the District Court denied Cleco’s motion as premature and ruled that Saulsbury Industries, Inc. had six weeks to conduct discovery on specified jurisdictional issues. The current procedural posture of the Western District of Louisiana case reflects a recognition by Cleco Power and Saulsbury Industries, Inc. that subject matter jurisdiction has not been established in relation to Cleco Power and Saulsbury Industries, Inc. and that this action, insofar as it relates to Cleco Power and Saulsbury Industries, Inc., will not proceed in federal court. The Magistrate Judge presiding over the Western District of Louisiana consolidated cases issued a report and recommendation to the District Judge that the case instituted by Saulsbury Industries, Inc. be dismissed without prejudice and the case initiated by Cleco Power be remanded to the Ninth Judicial District Court for Rapides Parish. Saulsbury Industries, Inc. did not oppose the Magistrate Judge’s report and recommendation, and the District Judge issued a ruling that adopted the Magistrate Judge’s report and recommendation, which included reasoning consistent with Cleco Power’s arguments. Thus, the federal consolidated cases are now closed.

On October 10, 2019, Cleco Power was served with a summons in Saulsbury Industries, Inc. v. Cabot Corporation and Cleco Power LLC in the 16th Judicial District Court for St. Mary Parish, No. 133910-A. Saulsbury Industries, Inc. asserted the same claim as the Western District Litigation and further asserts claims for payment on an open account. On December 9, 2019, Cleco moved to stay the case, arguing that the Rapides Parish suit should proceed. On February 14, 2020, the court granted Cleco’s motion, which stay order remains in place until lifted.

LPSC Audits

Fuel Audit

Generally, Cleco Power’s cost of fuel used for electric generation and the cost of purchased power are recovered through the LPSC-established FAC that enables Cleco Power to pass on to its customers substantially all such charges. Recovery of FAC costs is subject to periodic fuel audits by the LPSC. The LPSC FAC General Order issued in November 1997, in Docket No. U-21497 provides that an audit of FAC filings will be performed at least every other year. Cleco Power has FAC filings for January 2018 and thereafter that remain

subject to audit. On March 31, 2020, Cleco Power received a notice of audit from the LPSC for the period of January 2018 to December 2019. The total amount of fuel expense expected to be included in the audit is $565.8 million. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings. Historically, the disallowances have not been material. If a disallowance of fuel cost is ordered resulting in a refund, any such refund could have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.

Environmental Audit

In 2009, the LPSC issued Docket No. U-29380 Subdocket A, which provides Cleco Power an EAC to recover from its customers certain costs of environmental compliance. The costs eligible for recovery are prudently incurred air emissions credits associated with complying with federal, state, and local air emission regulations that apply to the generation of electricity reduced by the sale of such allowances. Also eligible for recovery are variable emission mitigation costs, which are the costs of reagents such as ammonia and limestone that are a part of the fuel mix used to reduce air emissions, among other things. Cleco Power has EAC filings for January 2018 and thereafter that remain subject to audit. On March 3, 2020, Cleco Power received notice of audit from the LPSC of the EAC audit for the period of January 2018 to December 2019. The total amount of environmental expense expected to be included in the audit is $26.2 million. On July 31, 2020, Cleco Power responded to its first set of data requests. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings. Historically, the disallowances have not been material. If a disallowance of environmental cost is ordered resulting in a refund to Cleco Power’s customers, any such refund could have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.

Cleco Power incurs environmental compliance expenses for reagents associated with the compliance standards of Mercury and Air Toxics Standards (MATS). These expenses are also eligible for recovery through Cleco Power’s EAC and are subject to periodic review by the LPSC. In June 2015, the U.S. Supreme Court remanded the MATS rule to the D.C. Circuit Court of Appeals. In December 2015, the D.C. Circuit Court of Appeals remanded the rule to the EPA; however, the D.C. Circuit Court of Appeals did not vacate this rule. In April 2016, the EPA released a final supplemental finding that, even considering costs, it is appropriate and necessary to regulate hazardous air pollutants. By the June 2016 deadline, 6 petitions were filed with the U.S. Court of Appeals for the D.C. Circuit Court of Appeals for review of the EPA’s findings. At the request of the EPA, in April 2017, the court issued an order holding the cases in abeyance pending the EPA’s review of its supplemental finding. In February 2019, the EPA issued a proposed rule reversing its previous finding regarding the cost of compliance with the MATS rule. The proposed rule states that it is not appropriate and necessary to regulate hazardous air pollutants. However, the EPA concluded that under the proposed rule coal- and oil-fired units would not be removed from the list of regulated sources. The EPA also proposed that the results of its risk and technology review did not require any revisions to the emissions standards. The proposed rule was finalized in May 2020 and several petitions for review of the rule were filed between May and July 2020 in the D.C. Circuit


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

Court of Appeals. Management is unable to determine the outcome of the D.C. Circuit Court of Appeals review.

FERC Audit

Generally, Cleco Power records wholesale transmission revenue through approved formula rates, Attachment O of the MISO tariff and certain grandfathered agreements. The calculation of the rate formulas, as well as FERC accounting and reporting requirements, are subject to periodic audits by FERC. In March 2018, the Division of Audits and Accounting, within the Office of Enforcement of FERC, initiated an audit of Cleco Power for the period of January 1, 2014, through June 30, 2019. On September 27, 2019, Cleco Power received the final audit report, which indicated 12 findings of noncompliance with a combination of FERC accounting and reporting requirements and computation of revenue requirements along with 59 recommendations associated with the audit period. Cleco Power submitted a plan for implementing the audit recommendations on October 28, 2019. Cleco Power also submitted the refund analysis on November 7, 2019, which resulted in a refund related to the FERC audit findings, pending final assessment by the FERC Division of Audits and Accounting. At June 30, 2020, Cleco Power had $3.7 million recorded in Provision for rate refund on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets for the estimated refund. This amount is being refunded to Cleco Power’s wholesale transmission customers as a reduction in Attachment O and grandfathered agreement rates over 12 months beginning June 1, 2020.

Transmission ROE

The complaints covered the period December 2013 through May 2016. In June 2016, an administrative law judge issued an initial decision in the second rate case docket recommending a 9.70% base ROE. In September 2016, FERC issued a Final Order in response to the first complaint establishing a 10.32% ROE. However, on November 21, 2019, FERC voted to adopt a new methodology for evaluating base ROE for public utilities under the Federal Power Act. In addition, FERC set the MISO transmission owners’ region-wide base ROE at 9.88% for the refund period covered in the first complaint and going forward. The draft FERC order further found that complainants in the second complaint proceeding failed to show that the 9.88% base ROE was unjust and unreasonable and thus dismissed the second complaint. On May 21, 2020, FERC issued Opinion No. 569-A, which granted rehearing in part of Opinion No. 569, which had revised FERC’s methodology for analyzing the base ROE component of public utility rates under section 206 of the Federal Power Act. Opinion No. 569-A further refines FERC’s ROE methodology and finds that the MISO Transmission Owners’ base ROE should be set at 10.02% instead of 9.88%. Cleco Power is unable to determine when a final FERC Order will be issued. As of June 30, 2020, Cleco Power had $0.8 million accrued for the change in the ROE.

In November 2014, the MISO transmission owners committee, of which Cleco is a member, filed a request with FERC for an incentive to increase the new ROE by 50 basis points for RTO participation as allowed by the MISO tariff. In

January 2015, FERC granted the request. Beginning January 1, 2020, the collection of the adder is being included in MISO’s transmission rates for a total ROE of 10.38%.

South Central Generating

In 2017, Louisiana Generating received insurance settlement proceeds for costs incurred to resolve a lawsuit which was brought by the EPA and the LDEQ against Louisiana Generating related to Big Cajun II, Unit 3. Entergy Gulf States, as co-owner of Big Cajun II, Unit 3, is expected to be allocated a portion of the insurance settlement proceeds. Any amount allocated to Entergy Gulf States will be determined by ongoing litigation and negotiations. South Central Generating estimated this amount to be $10.0 million. As part of the Cleco Cajun Transaction, Cleco Cajun assumed the $10.0 million contingent liability and NRG Energy indemnified Cleco for losses associated with this litigation matter. As a result, Cleco also recorded a $10.0 million indemnification asset, which was included in the purchase price allocation.

Prior to the Cleco Cajun Transaction, South Central Generating was involved in various litigation matters, including environmental and contract proceedings, before various courts regarding matters arising out of the ordinary course of business. Management is unable to estimate any potential losses that Cleco Cajun may ultimately be responsible for with respect to any one of these matters. As part of the Cleco Cajun Transaction, NRG Energy indemnified Cleco for losses as of the closing date associated with matters that existed as of the closing date, including pending litigation.

Other

Cleco is involved in various litigation matters, including regulatory, environmental, and administrative proceedings before various courts, regulatory commissions, arbitrators, and governmental agencies regarding matters arising in the ordinary course of business. The liability Cleco may ultimately incur with respect to any one of these matters may be in excess of amounts currently accrued. Management regularly analyzes current information and, as of June 30, 2020, believes the probable and reasonably estimable liabilities based on the eventual disposition of these matters are $5.4 million and has accrued this amount.

Off-Balance Sheet Commitments and Guarantees

Cleco Holdings 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 Holdings’ subsidiaries and equity investees (affiliates). Cleco Holdings and Cleco Power have also agreed to contractual terms that require the Registrants to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees.

Cleco Holdings entered into these off-balance sheet commitments in order to entice desired counterparties to contract with its affiliates by providing some measure of credit assurance to the counterparty in the event Cleco’s affiliates do not fulfill certain contractual obligations. If Cleco Holdings had not provided the off-balance sheet commitments, the desired counterparties may not have contracted with Cleco’s affiliates, or may have contracted with them at terms less favorable to its affiliates.

The off-balance sheet commitments are not recognized on Cleco and Cleco Power’s Consolidated Balance Sheets because management has determined that Cleco and Cleco


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

Power’s affiliates are able to perform the obligations under their contracts and that it is not probable that payments by Cleco or Cleco Power will be required.

Cleco Holdings provided guarantees and indemnities to Entergy Louisiana and Entergy Gulf States as a result of the sale of the Perryville generation facility in 2005. The remaining indemnifications relate to environmental matters that may have been present prior to closing. These remaining indemnifications have no time limitations. The maximum amount of the potential payment to Entergy Louisiana and Entergy Gulf States is $42.4 million. Management does not expect to be required to pay Entergy Louisiana and Entergy Gulf States under these guarantees.

On behalf of Acadia, Cleco Holdings provided guarantees and indemnifications as a result of the sales of Acadia Unit 1 to Cleco Power and Acadia Unit 2 to Entergy Louisiana in 2010 and 2011, respectively. The remaining indemnifications relate to the fundamental organizational structure of Acadia. These remaining indemnifications have no time limitations or maximum potential future payments. Management does not expect to be required to pay Cleco Power or Entergy Louisiana under these guarantees.

Cleco Holdings provided indemnifications to Cleco Power as a result of the transfer of Coughlin to Cleco Power in March 2014. Cleco Power also provided indemnifications to Cleco Holdings and Evangeline as a result of the transfer of Coughlin to Cleco Power. The maximum amount of the potential payment to Cleco Power, Cleco Holdings, and Evangeline for their respective indemnifications is $40.0 million, except for indemnifications relating to the fundamental organizational structure of each respective entity, of which the maximum amount is $400.0 million. Management does not expect to be required to make any payments under these indemnifications.

As part of the Amended Lignite Mining Agreement, Cleco Power and SWEPCO, joint owners of Dolet Hills Power Station, have agreed to pay the loan and lease principal obligations of the lignite miner, DHLC, when due if DHLC does not have sufficient funds or credit to pay. Any amounts paid on behalf of the miner would be credited by the lignite miner against future invoices for lignite delivered. The maximum projected payment by Cleco Power under this guarantee is estimated to be $83.0 million; however, the Amended Lignite Mining Agreement does not contain a cap. The projection is based on the forecasted loan and lease obligations to be incurred by DHLC, primarily for purchases of equipment. Cleco Power has the right to dispute the incurrence of loan and lease obligations through the review of the mining plan before the incurrence of such loan and lease obligations. In April 2020, Cleco Power and SWEPCO mutually agreed to not develop additional mining areas for future lignite extraction and subsequently provided notice to the LPSC of the intent to cease mining at the Dolet Hills and Oxbow mines by June 2020. The mine closure is subject to LPSC review and approval. As of June 30, 2020, all lignite reserves intended to be extracted from the Oxbow mine had been mined. The Amended Lignite Mining Agreement does not affect the amount the Registrants can borrow under their credit facilities. Currently, management does not expect to be required to pay DHLC under this guarantee.

Cleco Holdings, in relation to Cleco Cajun’s participation in MISO, and Cleco Power have letters of credit to MISO pursuant to energy market requirements. In June 2020, Cleco Holdings decreased its MISO letter of credit from $34.5 million to $1.3 million. The letters of credit automatically renew each

year and have no impact on Cleco Holdings’ or Cleco Power’s credit facility.

Generally, neither Cleco Holdings nor Cleco Power has recourse that would enable them to recover amounts paid under their guarantee or indemnification obligations. There are 0 assets held as collateral for third parties that either Cleco Holdings or Cleco Power could obtain and liquidate to recover amounts paid pursuant to the guarantees or indemnification obligations.

Other Commitments

Cleco has accrued for liabilities related to third parties, employee medical benefits, and AROs.

Risks and Uncertainties

Cleco could be subject to possible adverse consequences if Cleco’s counterparties fail to perform their obligations or if Cleco or its affiliates are not in compliance with loan agreements or bond indentures.

Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows.

Changes in the regulatory environment or market forces could cause Cleco to determine its assets have suffered an other-than-temporary decline in value, whereby an impairment would be required and Cleco’s financial condition could be materially adversely affected.

Cleco Power and Cleco Cajun are participants in the MISO market. Energy prices in the MISO market are based on LMP, which includes a component directly related to congestion on the transmission system. Pricing zones with greater transmission congestion may have higher LMPs. Physical transmission constraints present in the MISO market could increase energy costs within pricing zones. Cleco Power and Cleco Cajun use FTRs to mitigate transmission congestion price risks. Changes to anticipated transmission paths may result in an unexpected increase in energy costs.

On March 1, 2019, Cleco Power began to operate Dolet Hills Power Station from June through September of each year; however, Dolet Hills Power Station will continue to be available to operate in other months, if needed. In January 2020, Cleco Power’s joint owner in Dolet Hills Power Station unilaterally entered into a settlement with the Arkansas Public Service Commission to seek regulatory approval to retire the Dolet Hills Power Station by the end of 2026. This settlement did not bind Cleco Power to agree to retire the Dolet Hills Power Station by 2026.

In April 2020, Cleco Power and SWEPCO mutually agreed to not develop additional mining areas for future lignite extraction and subsequently provided notice to the LPSC of the intent to cease mining at the Dolet Hills and Oxbow mines by June 2020, subject to LPSC review and approval. As of June 30, 2020, all lignite reserves intended to be extracted from the Oxbow mine had been mined. Early closure of the mines has resulted in increased costs that will be billed through fuel, which management currently believes are recoverable. Management does not believe the early closure of the mines will have an adverse impact on the recovery value of the Dolet Hills Power Station. Cleco Power expects to have sufficient lignite fuel available to continue seasonal operations of the Dolet Hills Power Station through the 2020 and 2021 seasonal operations periods.

Also in April 2020, Cleco Power announced its intent to seek regulatory approval to retire the Dolet Hills Power Station


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

at the end of 2021, subject to recovery mechanisms. This announcement did not bind Cleco Power to a specific retirement plan and Cleco Power continued to evaluate the cost of operating the Dolet Hills Power Station compared with other alternatives to decide the best course of action for the Dolet Hills Power Station within the LPSC regulatory requirements and recovery mechanisms. In June 2020, based on management’s continued evaluations, Cleco Power determined the shutdown of operations and abandonment of the Dolet Hills Power Station was probable by December 2021. In June 2020, due to the expected abandonment of Dolet Hills Power Station, Cleco recorded a revision to increase estimated ARO liabilities by $3.5 million. As of June 30, 2020, Cleco Power’s undivided interest in the Dolet Hills Power Station is $155.6 million and was included in base rates.

Fuel costs incurred by Dolet Hills Power Station are recoverable by Cleco Power through active fuel clauses. Under the Amended Lignite Mining Agreement, DHLC bills Cleco Power its proportionate share of incurred lignite extraction and associated mining-related costs as fuel is delivered. As of June 30, 2020, DHLC estimates $170.4 million of costs will be billed to Cleco Power prior to the closure of the Dolet Hills Power Station. In 2009, Cleco Power acquired an interest in Oxbow, which owns mineral rights and land leases. Under a joint operating agreement pertaining to the Oxbow mineral rights and land leases, Oxbow bills Cleco Power its proportionate share of incurred costs. As of June 30, 2020, Oxbow estimates approximately $12.9 million of costs will be billed to Cleco Power prior to the closure of the Dolet Hills Power Station. If any of these costs are not recoverable, it could materially impact the Registrants’ results of operations, financial condition, or cash flows.


Note 15 — Affiliate Transactions

At June 30, 2020, Cleco had an affiliate payable of $33.8 million to Cleco Group primarily for affiliate settlement of taxes payable.

Cleco Power has balances that are payable to or due from its affiliates. The following table is a summary of those balances:


	AT JUNE 30, 2020						AT DEC. 31, 2019
(THOUSANDS)	ACCOUNTS RECEIVABLE		ACCOUNTS PAYABLE		ACCOUNTS RECEIVABLE		ACCOUNTS PAYABLE
Cleco Holdings	$	10,368	$	163	$	10,351	$	194
Support Group	2,462		10,798		3,172		13,890
Cleco Cajun	867		5		958		39
Total	$	13,697	$	10,966	$	14,481	$	14,123

Oxbow bills Cleco Power its proportionate share of incurred costs related to mineral rights and land leases. These costs are included in fuel inventory and are recoverable from Cleco Power customers through the LPSC-established FAC or related wholesale contract provisions. During the three and six months ended June 30, 2020, Cleco Power recorded $14.6 million and $15.5 million, respectively, of its proportionate share of incurred costs. During the three and six months ended June 30, 2019, Cleco Power recorded $1.2 million and $2.2 million, respectively, of its proportionate share of incurred costs. At June 30, 2020, and December 31, 2019, Cleco Power had $3.7 million and $0.2 million, respectively, payable to Oxbow. For more information on Cleco

Power’s variable interest in Oxbow, see Note 13 — “Variable Interest Entities.”

Note 16 — Intangible Assets and Liabilities

During 2008, Cleco Katrina/Rita acquired a $177.5 million intangible asset which includes $176.0 million for the right to bill and collect storm recovery charges from customers of Cleco Power and $1.5 million of financing costs. This intangible asset was fully amortized in March 2020 and had 0 residual value at the end of its life.

As a result of the 2016 Merger, fair value adjustments were recorded on Cleco’s Condensed Consolidated Balance Sheet for the valuation of the Cleco trade name and long-term wholesale power supply agreements. At the end of their lives, these intangible assets will have 0 residual value. The trade name intangible asset is being amortized over its estimated economic useful life of 20 years. The intangible assets related to the power supply agreements are amortized over the estimated life of each applicable contract ranging between 7 and 19 years, and the amortization is included in Electric operations on Cleco’s Condensed Consolidated Statements of Income.

As a result of the Cleco Cajun Transaction, fair value adjustments were recorded on Cleco’s Condensed Consolidated Balance Sheet for the difference between the contract and market price of acquired long-term wholesale power agreements. The fair value of intangible assets of $98.9 million and intangible liabilities of $14.2 million was reflected in the purchase price allocation. At the end of their lives, these intangible assets and liabilities will have 0 residual value. These intangibles are amortized over the estimated life of each applicable contract ranging between 2 and 8 years. The amortization is included in Electric operations on Cleco’s Condensed Consolidated Statements of Income.

As part of the Cleco Cajun Transaction, Cleco assumed an LTSA for maintenance services related to the Cottonwood Plant. An intangible liability of $24.1 million was reflected in the purchase price allocation and is being amortized using the straight-line method over the estimated life of the LTSA of seven years. The amortization is included as a reduction to the LTSA prepayments on Cleco’s Condensed Consolidated Balance Sheet. For more information on the fair value adjustments of intangible assets and liabilities related to the Cleco Cajun Transaction, see Note 2 — “Business Combinations.”

The following tables present Cleco and Cleco Power’s amortization of intangible assets and liabilities:


Cleco
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Intangible assets
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	—	$	5,172	$	517	$	10,042
Trade name	$	64	$	64	$	128	$	127
Power supply agreements	$	6,400	$	6,208	$	12,800	$	11,399
Intangible liabilities
LTSA	$	882	$	871	$	1,764	$	1,452
Power supply agreements	$	871	$	1,259	$	1,742	$	1,470


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


Cleco Power
	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		2020		2019
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	—	$	5,172	$	517	$	10,042

The following tables summarize the balances for intangible assets and liabilities subject to amortization for Cleco and Cleco Power:


Cleco
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Intangible assets
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	70,594	$	70,594
Trade name	5,100		5,100
Power supply agreements	184,004		184,004
Total intangible assets carrying amount	259,698		259,698
Intangible liabilities
LTSA	24,100		24,100
Power supply agreements	14,200		14,200
Total intangible liability carrying amount	38,300		38,300
Net intangible assets carrying amount	221,398		221,398
Accumulated amortization	(125,105)		(115,167)
Net intangible assets subject to amortization	$	96,293	$	106,231


Cleco Power
(THOUSANDS)	AT JUNE 30, 2020		AT DEC. 31, 2019
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	177,537	$	177,537
Accumulated amortization	(177,537)		(177,020)
Net intangible assets subject to amortization	$	—	$	517

Note 17 — Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are summarized in the following tables for Cleco and Cleco Power. All amounts are reported net of income taxes. Amounts in parentheses indicate debits.


Cleco
	FOR THE THREE MONTHS ENDED JUNE 30, 2020		FOR THE SIX MONTHS ENDED JUNE 30, 2020
(THOUSANDS)	POSTRETIREMENT BENEFIT NET LOSS
Balances, beginning of period	$	(17,099)	$	(17,513)


Amounts reclassified from AOCI
Amortization of postretirement benefit net gain	442		856


Balances, June 30, 2020	$	(16,657)	$	(16,657)


	FOR THE THREE MONTHS ENDED JUNE 30, 2019		FOR THE SIX MONTHS ENDED JUNE 30, 2019
(THOUSANDS)	POSTRETIREMENT BENEFIT NET GAIN
Balances, beginning of period	$	1,651	$	1,786



Amounts reclassified from AOCI
Amortization of postretirement benefit net gain	(147)		(282)


Balances, June 30, 2019	$	1,504	$	1,504


Cleco Power
	FOR THE THREE MONTHS ENDED JUNE 30, 2020										FOR THE SIX MONTHS ENDED JUNE 30, 2020
(THOUSANDS)	POSTRETIREMENT BENEFIT NET LOSS		NET LOSS ON CASH FLOW HEDGES		TOTAL AOCI		POSTRETIREMENT BENEFIT NET LOSS		NET LOSS ON CASH FLOW HEDGES		TOTAL AOCI
Balances, beginning of period	$	(16,291)	$	(5,804)	$	(22,095)	$	(16,717)	$	(5,868)	$	(22,585)



Amounts reclassified from AOCI
Amortization of postretirement benefit net loss	419		—		419		845		—		845
Reclassification of net loss to interest charges	—		64		64		—		128		128

Balances, June 30, 2020	$	(15,872)	$	(5,740)	$	(21,612)	$	(15,872)	$	(5,740)	$	(21,612)


	FOR THE THREE MONTHS ENDED JUNE 30, 2019										FOR THE SIX MONTHS ENDED JUNE 30, 2019
(THOUSANDS)	POSTRETIREMENT BENEFIT NET LOSS		NET LOSS ON CASH FLOW HEDGES		TOTAL AOCI		POSTRETIREMENT BENEFIT NET LOSS		NET LOSS ON CASH FLOW HEDGES		TOTAL AOCI
Balances, beginning of period	$	(6,904)	$	(6,058)	$	(12,962)	$	(7,060)	$	(6,122)	$	(13,182)


Amounts reclassified from AOCI
Amortization of postretirement benefit net loss	129		—		129		285		—		285
Reclassification of net loss to interest charges	—		64		64		—		128		128

Balances, June 30, 2019	$	(6,775)	$	(5,994)	$	(12,769)	$	(6,775)	$	(5,994)	$	(12,769)


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CLECO POWER						2020 2ND QUARTER FORM 10-Q


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cleco uses its website, https://www.cleco.com, as a routine channel for distribution of important information, including news releases and financial information. Cleco’s website is the primary source of publicly disclosed news about Cleco. Cleco is providing the address to its website solely for informational purposes and does not intend for the address to be an active link. The contents of the website are not incorporated into this Quarterly Report on Form 10-Q.

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, 2019, and Cleco and Cleco Power’s Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. The information included therein is essential to understanding the following discussion and analysis. Below is information concerning the consolidated results of operations of Cleco for the three and six months ended June 30, 2020, and 2019.


OVERVIEW

Cleco is a regional energy company that, prior to the close of the Cleco Cajun Transaction, conducted substantially all of its business operations through its primary subsidiary, Cleco Power. As a result of the Cleco Cajun Transaction, Cleco now conducts substantially all of its business operations through its two primary subsidiaries:

•Cleco Power, a regulated electric utility company that owns 10 generating units with a total nameplate capacity of 3,360 MW and serves approximately 288,000 customers in Louisiana through its retail business and supplies wholesale power in Louisiana and Mississippi; and

•Cleco Cajun, an unregulated electric utility company that owns eight generating assets with a rated capacity of 3,555 MW and supplies wholesale power and capacity in Arkansas, Louisiana, and Texas. Upon the closing of the Cleco Cajun Transaction, Cottonwood Energy entered into the Cottonwood Sale Leaseback.

COVID-19

On March 11, 2020, WHO declared the COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the U.S. declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” orders and directives in Cleco’s service territory. State and local authorities have also implemented multistep policies with the goal of reopening various sectors of the economy such as retail establishments, health and personal care businesses, and restaurants, among others. However, certain jurisdictions have begun reopening only to delay these plans or return to restrictions in the face of increases in new COVID-19 cases. For example, the governor of the state of Louisiana issued orders in May 2020 to allow businesses to reopen at varying levels of capacity in May and June 2020. To address the June 2020 spike in COVID-19 cases, such reopening activities were temporarily paused or scaled back, and also included closing certain establishments. Cleco has modified and continues to modify some of its business operations, as these restrictions have significantly impacted many sectors of the economy. Impacts include

record levels of unemployment, with businesses, nonprofit organizations, and governmental entities modifying, curtailing, or ceasing normal operations. Cleco has also modified certain business practices to conform to government restrictions and best practices encouraged by the CDC, WHO, and other governmental and regulatory authorities. For example, on March 13, 2020, Cleco temporarily closed all customer service offices, temporarily suspended disconnections and late fees, restricted access to its administrative offices, implemented remote work arrangements, prohibited all non-critical travel for Cleco business, prohibited in-person gatherings of more than 10 people at Cleco work locations, and required all meetings to be held virtually or via telephone. Cleco continues to adjust some of its business practices as government restrictions and best practices encouraged by the CDC, WHO, and other governmental and regulatory authorities are updated. On May 18, 2020, Cleco reopened customer service offices implementing precautionary protective measures and protocols to allow in-person meetings with restrictions in size and mandatory protective gear. Cleco has also implemented precautionary measures for employees or contractors testing positive for COVID-19, exhibiting COVID-19 symptoms, or awaiting COVID-19 test results.

Cleco provides a critical service to its customers which means that it is paramount that it keeps its employees safe and informed. Cleco has taken and continues to take and update precautions for that purpose. In addition, Cleco assessed and updated its existing business continuity plans for its business units in the context of the COVID-19 pandemic. On March 13, 2020, in response to the COVID-19 pandemic state of emergency, the LPSC issued an executive order prohibiting disconnections of utilities for non-payment. On July 1, 2020, the LPSC issued an order ending the moratorium on disconnections effective July 16, 2020. Cleco anticipates reinstating disconnections and late fees beginning September 1, 2020. On July 16, 2020, Cleco began setting up payment plan arrangements for up to 18 months for customers with past due balances. Cleco is also working with its suppliers to understand the potential impacts to its supply chain. This is a rapidly evolving situation and could lead to extended disruption of economic activity in Cleco’s service territory. Cleco will continue to monitor developments affecting its workforce, customers, and suppliers and take additional precautions as Cleco deems warranted.

The first priority in Cleco’s response to this crisis has been the health and safety of its employees and those of its customers and other business counterparties. Cleco has implemented preventative measures and developed corporate response plans to minimize unnecessary risk of exposure and prevent infection, while supporting its customers’ operations to the best of its ability in current circumstances. Cleco has an Emergency (Crisis) Response Team for health, safety, and environmental matters and personnel issues, and has established a Pandemic Plan Team to address various impacts of COVID-19 as they have been developing. This team provides leadership and guidance for planning, risk management, and any policy changes. The team ensures that Cleco plans, manages, and safely executes the pandemic plan set forth by management. Cleco employees are required to report to their manager or supervisor any changes to their health, their family’s health, and travel plans, which is reported to the Pandemic Plan Team. The results are then communicated on a weekly update call to all employees.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Proper measures are taken for any employee at risk of having COVID-19, and measures are taken to protect any employees with which the at-risk employee had been in contact. Cleco also has modified and continues to modify certain business practices, including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events, and conferences, to conform to government restrictions and best practices encouraged by the CDC, WHO, and other federal, state, and local governmental and regulatory authorities. Cleco continues to address concerns to protect the health and safety of its employees and those of its customers and other business counterparties. This includes changes to comply with health-related guidelines as they are modified and supplemented. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, Cleco, its suppliers, and other business counterparties to experience operational delays.

Cleco has implemented certain measures that it believes will provide financial flexibility and help Cleco maintain liquidity. On March 23, 2020, Cleco Holdings made an $88.0 million draw on its credit facility, and Cleco Power made a $150.0 million draw on its credit facility. While Cleco continues to assess the COVID-19 situation, Cleco cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the markets will have on its business, cash flows, liquidity, financial condition, and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19; the consequences of governmental and other measures designed to prevent the spread of COVID-19; the development of effective treatments; the duration of the pandemic, actions taken by governmental authorities, including the LPSC and FERC, Cleco’s customers and suppliers, and other third parties; workforce availability; and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding certain risks associated with the COVID-19 pandemic, see Part II, Item 1A, “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q.

Cleco Cajun Transaction

Upon completion of the Cleco Cajun Transaction on February 4, 2019, Cleco Cajun became a reportable segment and is reflected as such in this Quarterly Report on Form 10-Q. For more information on the Cleco Cajun Transaction, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 2 — Business Combinations.” Cleco’s condensed consolidated financial statements for the quarter ended March 31, 2019, include the financial results of Cleco Cajun from the closing of the Cleco Cajun Transaction on February 4, 2019, until March 31, 2019.

Cleco Power

Many factors affect Cleco Power’s primary business of generating, delivering, and selling electricity. These factors include weather and the presence of a stable regulatory environment, which impacts cost recovery, the ROE, and the

current rate case, 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; the ability to reliably deliver power to its jurisdictional customers; the ability to comply with increasingly stringent regulatory and environmental standards; and the ability to successfully perform in MISO while subject to the related operating challenges and uncertainties, including increased wholesale competition. Cleco Power’s current key initiatives are continuing construction on the Bayou Vista to Segura Transmission project; continuing the DSMART project; and maintaining and growing its wholesale and retail business. These initiatives are discussed below.

Bayou Vista to Segura Transmission Project

The Bayou Vista to Segura Transmission project includes the construction of 48 miles of 230kV transmission line, a 230/138kV substation, and three substation expansions in south Louisiana. The project is expected to cost approximately $129.9 million. The project is expected to increase reliability, provide transmission system redundancy, and provide hurricane hardening for customers in south Louisiana. Cleco Power received MISO approval for the project in December 2017. Construction has begun on expansions to existing substations, with the northern phase expected to be completed in the first quarter of 2021 and the southern phase expected to be completed in the fourth quarter of 2021. As of June 30, 2020, Cleco Power had spent $28.3 million on the project.

DSMART Project

The DSMART project includes modernization of Cleco Power’s distribution system by replacing or upgrading distribution line equipment utilizing new and emerging technologies to facilitate automatic fault isolation, service restoration, and fault location. The project is expected to provide savings through a reduction in outage restoration time, time to locate faults, and improved operational efficiencies. The project is also expected to improve safety and reliability of Cleco Power’s distribution assets by minimizing outage patrols and improving situational awareness in the distribution operations center. The total estimated project cost is $90.2 million. The project implementation will be completed in phases and management expects the total project will be completed by the end of 2025. In January 2019, Cleco Power began the first phase of the project. As of June 30, 2020, Cleco Power had spent $7.0 million on the project.

Other

Cleco Power is working to secure load growth opportunities that include renewing existing franchises and wholesale contracts, pursuing new wholesale contracts and franchises, and adding new retail load opportunities with large industrial, commercial, and residential load. The retail opportunities include sectors such as agriculture, oil and gas, chemicals, metals, national accounts, government and military, wood and paper, health care, information technology, transportation, and other manufacturing.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2020, and 2019


Cleco
	FOR THE THREE MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019		VARIANCE		CHANGE
Operating revenue, net	$	357,758	$	397,873	$	(40,115)	(10.1)	%
Operating expenses	267,564		310,677		43,113		13.9	%
Operating income	90,194		87,196		2,998		3.4	%
Interest income	898		1,275		(377)		(29.6)	%
Allowance for equity funds used during construction	127		5,518		(5,391)		(97.7)	%

Other income (expense), net	257		(1,122)		1,379		122.9	%
Interest charges	34,715		35,840		1,125		3.1	%
Federal and state income tax expense	13,593		12,281		(1,312)		(10.7)	%
Net income	$	43,168	$	44,746	$	(1,578)	(3.5)	%

COVID-19 Impacts

The rapid spread of COVID-19 and the varying degrees of restrictions on business and social activities imposed by federal, state, and local governments to contain COVID-19, including quarantine and “stay-at-home” orders and directives in Cleco’s service territory, have caused Cleco to experience increasingly adverse business conditions. While Cleco continues to assess the COVID-19 situation, at this time Cleco cannot estimate with any degree of certainty the full impact of the COVID-19 pandemic on its financial condition and future results of operations, although Cleco expects the COVID-19 situation to adversely impact future quarters. For additional discussion regarding certain risks associated with the COVID-19 pandemic, see Part II, Item 1A, “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q.

Operating Revenue, Net

Operating revenue, net decreased $40.1 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $22.1 million of lower fuel cost recovery revenue at Cleco Power and $17.2 million of lower electric operations revenue at Cleco Cajun.

Operating Expenses

Operating expenses decreased $43.1 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $21.9 million of lower recoverable fuel and purchased power at Cleco Power. Also contributing to this decrease were $19.1 million of lower fuel used for electric generation expense and $11.1 million of lower purchased power at Cleco Cajun. These decreases were partially offset by $11.8 million of higher other operations and maintenance expenses at Cleco Power.

Allowance for equity funds used during construction

Allowance for equity funds used during construction decreased $5.4 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $4.2 million related to lower Cleco Power construction costs as a result of various projects being placed in service in 2019 and $1.2 million due to lower AFUDC rates driven by the impact of

Cleco Power’s $150.0 million short-term debt borrowings outstanding under its credit facility.

Other Income (Expense), Net

Other income (expense), net increased $1.4 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $4.0 million for the increase in cash surrender value of certain trust-owned life insurance policies as a result of favorable market conditions at Cleco Holdings, partially offset by $2.9 million of higher pension non-service costs at Cleco Power.

Interest Charges

Interest charges decreased $1.1 million during the second quarter of 2020 compared to the second quarter of 2019. Lower rates on Cleco Holding’s variable rate debt associated with the Cleco Cajun Transaction and the 2016 Merger contributed $3.2 million and $1.6 million, respectively, of the decrease. Partially offsetting these decreases were $2.4 million of higher interest associated with Cleco Holding’s senior notes issued in September 2019 and $1.8 million of lower allowance for borrowed funds used during construction at Cleco Power.

Income Taxes

Federal and state income tax expense increased $1.3 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $3.8 million for the flowthrough of state tax benefits and $1.2 million for the change in pretax income, excluding AFUDC equity, partially offset by $3.8 million to record tax expense at the projected annual effective tax rate.

The effective income tax rates for the second quarter of 2020 and 2019 were 23.9% and 21.5%, respectively. The estimated annual effective income tax rates used during the second quarter of 2020 and 2019 for Cleco may not be indicative of the full-year income tax rates.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Results of operations for Cleco Power and Cleco Cajun are more fully described below.


Cleco Power
			FOR THE THREE MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019			VARIANCE		CHANGE
Operating revenue
Base	$	163,994	$	168,167		$	(4,173)	(2.5)	%
Fuel cost recovery	75,649		97,757			(22,108)		(22.6)	%
Electric customer credits	(9,100)		(8,693)			(407)		(4.7)	%
Other operations	15,904		15,404			500		3.2	%
Affiliate revenue	1,240		337			903		268.0	%
Operating revenue, net	247,687		272,972			(25,285)		(9.3)	%
Operating expenses
Recoverable fuel and purchased power	75,756		97,668			21,912		22.4	%
Non-recoverable fuel and purchased power	7,487		7,053			(434)		(6.2)	%
Other operations and maintenance	54,667		42,914			(11,753)		(27.4)	%
Depreciation and amortization	41,596		39,330			(2,266)		(5.8)	%
Taxes other than income taxes	9,448		10,561			1,113		10.5	%


Total operating expenses	188,954		197,526			8,572		4.3	%
Operating income	58,733		75,446			(16,713)		(22.2)	%
Interest income	755		867			(112)		(12.9)	%
Allowance for equity funds used during construction	127		5,518			(5,391)		(97.7)	%
Other expense, net	(3,423)		(1,127)			(2,296)		*
Interest charges	18,603		17,370			(1,233)		(7.1)	%
Federal and state income tax expense	9,356		13,978			4,622		33.1	%
Net income	$	28,233	$	49,356		$	(21,123)	(42.8)	%
* Not meaningful

The following table shows the components of Cleco Power’s retail and wholesale customer sales related to base revenue:


	FOR THE THREE MONTHS ENDED JUNE 30,
(MILLION kWh)	2020	2019	FAVORABLE/ (UNFAVORABLE)
Electric sales
Residential	904	890		1.6	%
Commercial	636	699		(9.0)	%
Industrial	453	517		(12.4)	%
Other retail	30	31		(3.2)	%
Total retail	2,023	2,137		(5.3)	%
Sales for resale	722	697		3.6	%
Total retail and wholesale customer sales	2,745	2,834		(3.1)	%

The following table shows the components of Cleco Power’s base revenue:


	FOR THE THREE MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		FAVORABLE/ (UNFAVORABLE)
Electric sales
Residential	$	79,069	$	74,190		6.6	%
Commercial	47,921		48,948			(2.1)	%
Industrial	19,170		21,598			(11.2)	%
Other retail	2,670		2,544			5.0	%
Surcharge	—		5,602			(100.0)	%
Total retail	148,830		152,882			(2.7)	%
Sales for resale	15,164		15,285			(0.8)	%
Total base revenue	$	163,994	$	168,167		(2.5)	%

Cleco Power’s residential customers’ demand for electricity is largely 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 readily available, and winter energy is typically 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 JUNE 30,
				CHANGE
	2020	2019	NORMAL	PRIOR YEAR		NORMAL

Cooling degree-days	998	1,046	942	(4.6)	%	5.9	%

Base

Base revenue decreased $4.2 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $5.6 million of lower Cleco Katrina/Rita storm restoration surcharge revenue as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in March 2020, $5.4 million of lower revenue due to the impacts of COVID-19, and $2.2 million of lower usage from milder summer weather. These decreases were partially offset by the absence of $4.5 million of deferrals to a regulatory liability for over collections of revenue related to the delay in the commercial operational date of the St. Mary Clean Energy Center, $3.5 million of higher rates, and the absence of a $1.0 million reversal of accumulated LCFC revenue. For information on the effects of future energy sales on the results of operations, financial condition, or cash flows of Cleco Power, see Part I, Item 1A, “Risk Factors — Operational Risks — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For more information on the implications of COVID-19, see “— Overview — COVID-19” and Part II, Item 1A, “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Fuel Cost Recovery/Recoverable Fuel and Purchased Power

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 FAC, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 77% of Cleco Power’s total fuel cost during the second quarter of 2020 was regulated by the LPSC. Recovery of FAC costs is subject to periodic fuel audits by the LPSC which may result in a refund to customers. Generally, fuel and purchased power expenses are impacted by customer usage, the per unit cost of fuel used for electric generation, and the dispatch of Cleco Power’s generating facilities by MISO. For more information on Cleco Power’s most current fuel audit, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Fuel Audit.”

Other Operations and Maintenance Expense

Other operations and maintenance expense increased $11.8 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $6.2 million of higher fees for outside services mostly relating to information technology services and START expenses and $3.1 million of higher generation operation expenses largely due to fewer outages and the St. Mary Clean Energy Center project becoming operational in August 2019. Also contributing to the increase was $1.3 million of higher customer service expenses largely the result of the LPSC issued executive order prohibiting disconnections of utilities.

Depreciation and Amortization

Depreciation and amortization increased $2.3 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $3.2 million of higher depreciation on normal recurring additions to fixed assets, the absence of $2.9 million of deferrals of the retail jurisdictional portion of state franchise taxes to a regulatory asset, and $2.1 million of higher amortization of intangible property due to the implementation of the START project. These increases were partially offset by $5.2 million of lower amortization of storm damages as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds.

Allowance for Equity Funds Used During Construction

Allowance for equity funds used during construction decreased $5.4 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $4.2 million related to lower construction costs as a result of the St. Mary Clean Energy Center project, the Coughlin Pipeline project, the Terrebonne to Bayou Vista Transmission project, and the START project being placed in service in 2019. Also contributing to the decrease was $1.2 million due to lower AFUDC rates driven by the impact of Cleco Power’s $150.0 million short-term debt borrowings outstanding under its credit facility.

Other Expense, Net

Other expense, net increased $2.3 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to higher pension non-service costs as a result of a lower discount rate.

Interest Charges

Interest charges increased $1.2 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $1.8 million of lower allowance for borrowed funds used during construction primarily due to the St. Mary Clean Energy Center project, the Coughlin Pipeline project, the Terrebonne to Bayou Vista Transmission project, and the START project being placed in service in 2019, partially offset by $0.8 million of lower interest on tax rate refunds.

Income Taxes

Federal and state income tax expense decreased $4.6 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $4.2 million for the change in pretax income, excluding AFUDC equity, $3.0 million to record tax expense at the projected annual effective tax rate, and $0.8 million for state tax expenses, partially offset by $3.8 million for the flowthrough of state tax benefits.

The effective income tax rates for the second quarter of 2020 and 2019 were 24.9% and 22.1%, respectively. The estimated annual effective income tax rates used during the second quarter of 2020 and 2019 for Cleco Power may not be indicative of the full-year income tax rates.


Cleco Cajun
			FOR THE THREE MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019			VARIANCE		CHANGE
Operating revenue
Electric operations	$	84,733	$	101,962		$	(17,229)	(16.9)	%
Electric customer credits	—		(1,267)			1,267		100.0	%
Other operations	30,636		29,917			719		2.4	%
Affiliate revenue	43		—			43		100.0	%
Operating revenue, net	115,412		130,612			(15,200)		(11.6)	%
Operating expenses
Fuel used for electric generation	3,798		22,910			19,112		83.4	%
Purchased power	41,966		53,105			11,139		21.0	%
Other operations and maintenance	20,175		23,682			3,507		14.8	%
Depreciation and amortization	10,346		10,136			(210)		(2.1)	%
Taxes other than income taxes	3,791		4,199			408		9.7	%

Total operating expenses	80,076		114,032			33,956		29.8	%
Operating income	35,336		16,580			18,756		113.1	%
Interest income	103		368			(265)		(72.0)	%
Other income, net	44		6			38		633.3	%
Interest charges	120		—			(120)		(100.0)	%
Federal and state income tax expense	8,601		4,028			(4,573)		(113.5)	%
Net income	$	26,762	$	12,926		$	13,836	107.0	%

Electric Operations

Electric operations revenue decreased $17.2 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to lower wholesale revenue as a result of $7.0 million of lower fuel rates, $4.6 million of lower MISO make whole payments, $2.7 million for a one-time demand rate adjustment, $1.3 million for a one-time fuel adjustment, and $1.0 million for a change in MISO’s monthly netting methodology.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Fuel Used for Electric Generation

Fuel used for electric generation decreased $19.1 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $12.1 million of higher mark-to-market gains for gas related derivative contracts and $5.6 million of lower coal consumption.

Purchased Power

Purchased power decreased $11.1 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $7.9 million of lower volume of purchased power from MISO and $4.0 million of lower mark-to-market losses on FTRs.

Other Operations and Maintenance Expense

Other operations and maintenance expense decreased $3.5 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $4.5 million of lower generating station outage maintenance expenses, partially offset by $0.8 million of higher administrative and general expenses.

Income Taxes

Federal and state income tax expense increased $4.6 million during the second quarter of 2020 compared to the second quarter of 2019 primarily due to $3.9 million for the change in pretax income, excluding AFUDC equity and $0.7 million for state tax expenses.

The effective income tax rates for the second quarter of 2020 and 2019 were 24.3% and 23.8%, respectively. The estimated annual effective income tax rates used during the second quarter of 2020 and 2019 for Cleco Cajun may not be indicative of the full-year income tax rates.

Comparison of the Six Months Ended June 30, 2020, and 2019


Cleco
	FOR THE SIX MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019		VARIANCE		CHANGE
Operating revenue, net	$	705,330	$	742,060	$	(36,730)	(4.9)	%
Operating expenses	560,471		604,279		43,808		7.2	%
Operating income	144,859		137,781		7,078		5.1	%
Interest income	2,054		2,767		(713)		(25.8)	%
Allowance for equity funds used during construction	53		11,206		(11,153)		(99.5)	%
Other (expense) income, net	(12,452)		1,655		(14,107)		(852.4)	%
Interest charges	69,863		69,839		(24)		—	%
Federal and state income tax expense	15,155		18,267		3,112		17.0	%
Net income	$	49,496	$	65,303	$	(15,807)	(24.2)	%

COVID-19 Impacts

on its financial condition and future results of operations, Cleco expects the COVID-19 situation to adversely impact future quarters. For additional discussion regarding certain risks associated with the COVID-19 pandemic, see Part II, Item 1A, “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q.

Operating Revenue, Net

Operating revenue, net decreased $36.7 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $60.5 million of lower fuel cost recovery revenue at Cleco Power, partially offset by of $13.7 million of higher electric operations revenue and $11.7 million of higher other operations revenue at Cleco Cajun, which is partially the result of the Cleco Cajun Transaction closing in February 2019.

Operating Expenses

Operating expenses decreased $43.8 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $59.9 million of lower recoverable fuel and purchased power expenses, partially offset by $21.0 million of higher other operations and maintenance expenses and $3.6 million of higher depreciation expense at Cleco Power. Also contributing to this decrease was $13.4 million of lower fuel expense, partially offset by $4.9 million of higher depreciation expense at Cleco Cajun.

Allowance for equity funds used during construction

Allowance for equity funds used during construction decreased $11.2 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $9.2 million related to lower Cleco Power construction costs as a result of various projects being placed in service in 2019 and $1.7 million due to lower AFUDC rates driven by the impact of Cleco Power’s $150.0 million short-term debt borrowings outstanding under its credit facility.

Other (Expense) Income, Net

Other (expense) income, net increased $14.1 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $8.7 million for the decrease in the cash surrender value of certain trust-owned life insurance policies as a result of unfavorable market conditions at Cleco Holdings and $4.9 million of higher pension non-service costs at Cleco Power.

Income Taxes

Federal and state income tax expense decreased $3.1 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $3.2 million to record tax expense at the projected annual effective tax rate, $1.4 million for the change in pretax income, excluding AFUDC equity, and $1.2 million for state tax expense, net of federal benefits, partially offset by $3.0 million for the flowthrough of state tax benefits.

The effective income tax rates for the six months ended June 30, 2020, and 2019 were 23.4% and 21.9%, respectively. The estimated annual effective income tax rates used during the six months ended June 30, 2020, and 2019 for Cleco might not be indicative of the full-year income tax rates.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Results of operations for Cleco Power are more fully described below.


Cleco Power
			FOR THE SIX MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019		VARIANCE		CHANGE
Operating revenue
Base	$	311,993	$	310,553	$	1,440	0.5	%
Fuel cost recovery	152,080		212,547		(60,467)		(28.4)	%
Electric customer credits	(17,440)		(16,853)		(587)		(3.5)	%
Other operations	31,668		34,833		(3,165)		(9.1)	%
Affiliate revenue	2,346		637		1,709		268.3	%
Operating revenue, net	480,647		541,717		(61,070)		(11.3)	%
Operating expenses
Recoverable fuel and purchased power	152,591		212,462		59,871		28.2	%
Non-recoverable fuel and purchased power	15,179		16,044		865		5.4	%
Other operations and maintenance	111,608		90,614		(20,994)		(23.2)	%
Depreciation and amortization	85,273		81,707		(3,566)		(4.4)	%
Taxes other than income taxes	21,725		20,538		(1,187)		(5.8)	%


Total operating expenses	386,376		421,365		34,989		8.3	%
Operating income	94,271		120,352		(26,081)		(21.7)	%
Interest income	1,709		1,860		(151)		(8.1)	%
Allowance for equity funds used during construction	53		11,206		(11,153)		(99.5)	%
Other expense, net	(6,091)		(859)		(5,232)		(609.1)	%
Interest charges	37,184		34,515		(2,669)		(7.7)	%
Federal and state income tax expense	12,694		21,976		9,282		42.2	%
Net income	$	40,064	$	76,068	$	(36,004)	(47.3)	%

The following table shows the components of Cleco Power’s retail and wholesale customer sales related to base revenue:


	FOR THE SIX MONTHS ENDED JUNE 30,
(Million kWh)	2020	2019	FAVORABLE/ (UNFAVORABLE)
Electric sales
Residential	1,684	1,678		0.4	%
Commercial	1,218	1,281		(4.9)	%
Industrial	936	1,006		(7.0)	%
Other retail	62	62		—	%
Total retail	3,900	4,027		(3.2)	%
Sales for resale	1,372	1,316		4.3	%
Total retail and wholesale customer sales	5,272	5,343		(1.3)	%

The following table shows the components of Cleco Power’s base revenue:


	FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2020		2019		FAVORABLE/ (UNFAVORABLE)
Electric sales
Residential	$	140,959	$	130,295		8.2	%
Commercial	94,978		93,811			1.2	%
Industrial	39,750		42,247			(5.9)	%
Other retail	5,348		5,101			4.8	%
Surcharge	2,442		10,924			(77.6)	%
Total retail	283,477		282,378			0.4	%
Sales for resale	28,516		28,175			1.2	%
Total base revenue	$	311,993	$	310,553		0.5	%

The following chart shows how cooling and heating degree-days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree-days.


			FOR THE SIX MONTHS ENDED JUNE 30,
				2019 CHANGE
	2020	2019	NORMAL	PRIOR YEAR		NORMAL
Heating degree-days	615	778	941	(21.0)	%	(34.6)	%
Cooling degree-days	1,262	1,154	1,020	9.4	%	23.7	%

Base

Base revenue increased $1.4 million during the first six months of 2020 compared to the first six months of 2019 primarily due to the absence of $9.1 million of deferrals to a regulatory liability for over collections of revenue related to the delay in the commercial operational date of the St. Mary Clean Energy Center project, $5.0 million of higher rates, and the absence of a $3.8 million reversal of accumulated LCFC revenue. These increases were partially offset by $7.3 million of lower Cleco Katrina/Rita storm restoration surcharge revenue as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in March 2020, $5.4 million of lower revenue due to the impacts of COVID-19, and $3.8 million related to lower usage due to milder weather. For information on the effects of future energy sales on the results of operations, financial condition, or cash flows of Cleco Power, see Part I, Item 1A, “Risk Factors — Operational Risks — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For more information on the implications of COVID-19, see “— Overview — COVID-19” and Part II, Item 1A, “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q.

Fuel Cost Recovery/Recoverable Fuel and Purchased Power

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 FAC, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 77% of Cleco Power’s total fuel cost during the first six months of 2020 was regulated by the LPSC. Recovery of FAC costs is subject to periodic fuel audits by the LPSC which may result in a refund to customers. Generally, fuel and purchased power expenses are impacted by customer usage, the per unit cost of fuel used for electric generation, and the dispatch of Cleco Power’s generating facilities by MISO. For more information on


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

fuel audits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Fuel Audit.”

Other Operations Revenue

Other operations revenue decreased $3.2 million during the first six months of 2020 compared to the first six months of 2019 primarily related to lower net generation revenue as a result of the Teche Unit 3 SSR ending in April 2019. For more information on the SSR, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Regulation and Rates — SSR.”

Other Operations and Maintenance Expense

Other operations and maintenance expense increased $21.0 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $9.6 million of higher fees for outside services mostly relating to information technology services and START expenses and $4.4 million of higher generation operation expenses largely due to fewer outages and the St. Mary Clean Energy Center project becoming operational in August 2019. Also contributing to the increase was $2.7 million of higher uncollectible accounts expense due to an increase in collection efforts, $2.6 million of higher generating station outage maintenance expenses, and $1.7 million of higher customer service expenses largely the result of the LPSC issued executive order prohibiting disconnections of utilities.

Depreciation and Amortization

Depreciation and amortization expense increased $3.6 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $6.2 million of higher normal recurring additions to fixed assets, $4.1 million of higher amortization of intangible property due to the installation of the START project, and the absence of $2.9 million of deferrals of the retail jurisdictional portion of state franchise taxes to a regulatory asset. These increases were partially offset by $7.9 million of lower amortization of storm damages as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds and the absence of $1.4 million of deferrals of corporate franchise taxes to a regulatory asset.

Allowance for Equity Funds Used During Construction

Allowance for equity funds used during construction decreased $11.2 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $9.2 million related to lower construction costs as a result of the St. Mary Clean Energy Center project, the Coughlin Pipeline project, the Terrebonne to Bayou Vista Transmission project, and the START project being placed in service in 2019. Also contributing to this decrease was $1.7 million due to lower AFUDC rates driven by the impact of Cleco Power’s $150.0 million short-term debt borrowings outstanding under its credit facility.

Other Expense, Net

Other expense, net increased $5.2 million during the first six months of 2020 compared to the first six months of 2019 primarily due to higher pension non-service costs as a result of a lower discount rate.

Interest Charges

Interest charges increased $2.7 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $3.7 million of lower allowance for borrowed funds used during construction primarily due to the St. Mary Clean Energy Center project, the Coughlin Pipeline project, the Terrebonne to Bayou Vista Transmission project, and the START project being placed in service in 2019, partially offset by $1.0 million of lower interest on tax rate refunds.

Income Taxes

Federal and state income tax expense decreased $9.3 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $7.0 million for the change in pretax income, excluding AFUDC equity, $2.8 million to record tax expense at the projected annual effective tax rate, and $2.4 million of state tax expense, net of federal benefits, partially offset by $3.0 million for flowthrough of state tax benefits.

The effective income tax rates for the six months ended June 30, 2020, and 2019 were 24.1% and 22.4%, respectively. The estimated annual effective income tax rates used during the six months ended June 30, 2020, and 2019 for Cleco Power may not be indicative of the full-year income tax rates.


Cleco Cajun
	FOR THE SIX MONTHS ENDED JUNE 30,
					FAVORABLE/(UNFAVORABLE)
(THOUSANDS)	2020		2019		VARIANCE		CHANGE
Operating revenue
Electric operations	$	173,880	$	160,156	$	13,724	8.6	%
Other operations	61,597		49,883		11,714		23.5	%
Electric customer credits	(153)		(1,267)		1,114		87.9	%
Affiliate revenue	204		—		204		100.0	%
Operating revenue, net	235,528		208,772		26,756		12.8	%
Operating expenses
Fuel used for electric generation	19,371		32,833		13,462		41.0	%
Purchased power	86,640		83,550		(3,090)		(3.7)	%
Other operations and maintenance	40,689		38,091		(2,598)		(6.8)	%
Depreciation and amortization	20,448		15,546		(4,902)		(31.5)	%
Taxes other than income taxes	7,265		7,344		79		1.1	%

Total operating expenses	174,413		177,364		2,951		1.7	%
Operating income	61,115		31,408		29,707		94.6	%
Interest income	258		622		(364)		(58.5)	%
Other income, net	78		(491)		569		115.9	%
Interest charges	131		—		(131)		(100.0)	%
Federal and state income tax expense	15,022		7,557		(7,465)		(98.8)	%
Net income	$	46,298	$	23,982	$	22,316	93.1	%

Electric Operations

Electric operations revenue increased $13.7 million during the first six months of 2020 compared to the first six months of 2019 primarily due to higher wholesale revenue as a result of the Cleco Cajun Transaction closing in February 2019. This increase was partially offset by $8.0 million of lower fuel rates, $4.0 million of lower MISO make whole payments, $2.7 million for a one-time demand rate adjustment, $1.7 million for a change in MISO’s monthly netting methodology, and $1.3 million for a one-time fuel adjustment.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Other Operations Revenue

Other operations revenue increased $11.7 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $6.7 million of higher lease revenue, including variable lease revenue, as a result of the Cottonwood Sale Leaseback and $5.0 million of higher transmission revenue from wholesale customers. These increases were partially the result of the Cleco Cajun Transaction closing in February 2019. For more information on the Cottonwood Sale Leaseback agreement, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 4 — Leases — Cottonwood Sale Leaseback Agreement.”

Fuel Used for Electric Generation

Fuel used for electric generation decreased $13.5 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $13.3 million of lower coal consumption and $5.0 million of higher mark-to-market gains for gas related derivative contracts, partially offset by $5.5 million of higher gas consumption.

Purchased Power

Purchased power increased $3.1 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $5.0 million of higher transmission costs and $3.8 million of higher volume of purchased power from MISO, which is the result of the Cleco Cajun Transaction closing in February 2019. These increases were partially offset by $5.6 million of higher mark-to-market gains on FTRs.

Other Operations and Maintenance Expense

Other operations and maintenance expense increased $2.6 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $3.7 million of higher generation operations expenses, $3.1 million of higher administrative and general expenses, and $0.8 million of higher transmission operations expense, partially offset by $5.0 million of lower generating station outage maintenance

expense. These increases were partially the result of the Cleco Cajun Transaction closing in February 2019.

Depreciation and Amortization

Depreciation and amortization increased $4.9 million during the first six months of 2020 compared to the first six months of 2019 primarily due to normal recurring additions to fixed assets. This increase was partially the result of the Cleco Cajun Transaction closing in February 2019.

Income Taxes

Federal and state income tax expense increased $7.5 million during the first six months of 2020 compared to the first six months of 2019 primarily due to $6.3 million for the change in pretax income and $1.7 million for state tax expenses. These increases were partially offset by $0.5 million of miscellaneous tax items.

The effective income tax rates for the six months ended June 30, 2020, and 2019 were 24.5% and 24.0%, respectively. The estimated annual effective income tax rates used during the six months ended June 30, 2020, and 2019 for Cleco Cajun may not be indicative of the full-year income tax rates.

Non-GAAP Measures

The following tables set forth a reconciliation of net income, the nearest comparable GAAP financial performance measure, to EBITDA for the three and six months ended June 30, 2020, and 2019:


	FOR THE THREE MONTHS ENDED JUNE 30,
	2020							2019
(THOUSANDS)	CLECO POWER		CLECO CAJUN			CLECO POWER		CLECO CAJUN
Net income	$	28,233	$	26,762		$	49,356	$	12,926
Add: Depreciation and amortization	41,596		11,143		⁽¹⁾	39,330		10,269		⁽²⁾
Less: Interest income	755		103			867		368
Add: Interest charges	18,603		120			17,370		—
Add: Federal and state income tax expense	9,356		8,601			13,978		4,028
EBITDA	$	97,033	$	46,523		$	119,167	$	26,855
⁽¹⁾Includes $3.1 million of amortization of intangible assets and liabilities related to wholesale power supply agreements as a result of the Cleco Cajun Transaction and $2.3 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction. ⁽²⁾Includes $2.5 million of amortization of intangible assets and liabilities related to wholesale power supply agreements as a result of the Cleco Cajun Transaction and $2.4 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


	FOR THE SIX MONTHS ENDED JUNE 30,
	2020							2019
(THOUSANDS)	CLECO POWER		CLECO CAJUN			CLECO POWER		CLECO CAJUN
Net income	$	40,064	$	46,298		$	76,068	$	23,982
Add: Depreciation and amortization	85,273		22,041		⁽¹⁾	81,707		16,799		⁽²⁾
Less: Interest income	1,709		258			1,860		622
Add: Interest charges	37,184		131			34,515		—
Add: Federal and state income tax expense	12,694		15,022			21,976		7,557
EBITDA	$	173,506	$	83,234		$	212,406	$	47,716
⁽¹⁾Includes $6.2 million of amortization of intangible assets and liabilities related to wholesale power supply agreements as a result of the Cleco Cajun Transaction and $4.6 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction. ⁽²⁾Includes $5.1 million of amortization of intangible assets and liabilities related to wholesale power supply agreements as a result of the Cleco Cajun Transaction and $3.8 million of deferred lease revenue amortization as a result of the Cleco Cajun Transaction.


FINANCIAL CONDITION

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 ability to maintain or expand its businesses. Access to funds is dependent upon factors such as general economic and capital market conditions, including the impact of COVID-19, regulatory authorizations and policies, Cleco Holdings’ and Cleco Power’s credit ratings, cash flows from routine operations, and credit ratings of project counterparties. After assessing the current operating performance, liquidity, and credit ratings of Cleco Holdings and Cleco Power, management believes that Cleco 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 Holdings and Cleco Power at June 30, 2020:

SENIOR UNSECURED DEBT

CORPORATE/LONG-TERM ISSUER

S&P

MOODY’S

FITCH

S&P

MOODY’S

FITCH

Cleco Holdings

BBB-

Baa3

BBB-

Baa3

BBB-

Cleco Power

BBB+

BBB

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.

Cleco Holdings and Cleco Power pay fees and interest under their bank credit agreements based on the highest rating held. Savings are dependent upon the level of borrowings. If Cleco Holdings’ or Cleco Power’s credit ratings were to be downgraded, Cleco Holdings or Cleco Power, respectively, could be required to pay additional fees and incur higher interest rates for borrowings under their respective credit facilities.

With respect to any open trading contracts that Cleco has or 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 contract, changes in the market price, changes in open contracts, 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.

Cleco Power and Cleco Cajun participate in the MISO market. MISO requires Cleco Power and Cleco Cajun to provide credit support which may increase or decrease due to the timing of the settlement schedules. For more information about MISO, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Transmission Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019. For more information about credit support see Item 1, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 14 — Litigation — Off-Balance Sheet Commitments and Guarantees.”

Global and U.S. Economic Environment

Global and domestic economic conditions 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. During periods of capital market volatility, the availability of capital could be limited and the costs of capital may increase 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 to which the Registrants have been exposed have been beneficial to debt issuances; however, these rates have negatively affected interest income for the Registrants’ short-term investments.

TCJA

The provisions of the TCJA reduced the top federal statutory corporate income tax rate from 35% to 21%. As a result of the tax rate reduction, on January 1, 2018, Cleco Power began accruing an estimated reduction in reserve for the federal statutory corporate income tax rate. In February 2018, the LPSC directed utilities, including Cleco Power, to provide considerations of the appropriate manner to flowthrough to ratepayers the benefits of the reduction in corporate income taxes as a result of the TCJA. After various filings and settlement discussions, on July 10, 2019, the LPSC approved for Cleco Power to accrue rate refunds of $79.2 million, plus interest, for the reduction in the statutory federal tax rate for the


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

period from January 2018 to June 2020. The refund was credited to customers over 12 months beginning August 1, 2019. At June 30, 2020, Cleco Power had $10.0 million accrued for the estimated tax-related benefits from the TCJA and $0.4 million accrued for related interest.

On July 15, 2020, the LPSC approved Cleco Power’s application to extend the TCJA bill credits resulting from the reduction in the statutory federal tax rate for the period of August 2020 through November 2020. Cleco Power expects to utilize the current balance of the excess ADIT to fund the continued TCJA bill credit. The mechanism to refund the remaining balance of the excess ADIT at the end of November 2020 will be determined in Cleco Power’s current LPSC rate case. Cleco Power’s current base rate case is ongoing and management is unable to determine its outcome.

At June 30, 2020, Cleco Power had a regulatory liability of $375.0 million for the portion of the net reduction to ADIT subject to regulatory treatment. Due to the uncertainty around the regulatory treatment, the entire regulatory liability is reflected in non-current liabilities.

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. Other financial assets and liabilities are reported at their carrying values at their date of issuance on the consolidated balance sheets with their fair values as of the balance sheet date disclosed within the three levels. For more information about fair value levels, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 7 — Fair Value Accounting.”

Cash Generation and Cash Requirements

Restricted Cash and Cash Equivalents

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. For more information on Cleco and Cleco Power’s restricted cash and cash equivalents, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Restricted Cash and Cash Equivalents.”

Debt

Cleco

At June 30, 2020, Cleco had $238.0 million of short-term debt outstanding under its $475.0 million credit facilities, at an average all-in interest rate of 1.67%. As a result of the COVID-19 pandemic, Cleco has implemented certain measures that it believes will provide financial flexibility and help Cleco maintain liquidity. For additional discussion

regarding certain risks associated with the COVID-19 pandemic, see Part II, Item 1A “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q. Cleco had no short-term debt at December 31, 2019.

At June 30, 2020, Cleco’s long-term debt and finance leases outstanding was $3.17 billion, of which $63.9 million was due within one year. The long-term debt due within one year at June 30, 2020, primarily represents $63.3 million of principal payments on Cleco Holdings’ debt as required by the Cleco Cajun Transaction commitments to the LPSC. Long-term debt decreased by $16.4 million from December 31, 2019, primarily due to the $11.1 million final principal payment made on the Cleco Katrina/Rita storm recovery bonds on March 2, 2020. For more information on Cleco’s debt, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 8 — Debt.”

Cash and cash equivalents available at June 30, 2020, were $309.0 million combined with $237.0 million available credit facility capacity ($87.0 million from Cleco Holdings and $150.0 million from Cleco Power) for total liquidity of $546.0 million. For more information on the credit facility capacity, see “— Credit Facilities.” Cleco Holdings and Cleco Power have uncommitted lines of credit that allow up to $10.0 million each in short-term borrowings, but no more than $10.0 million in the aggregate, to support their working capital needs.

At June 30, 2020, 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 more 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 7 — Fair Value Accounting.”

At June 30, 2020, and December 31, 2019, Cleco had a working capital surplus of $228.7 million and $126.7 million, respectively. The $102.0 million increase in working capital is primarily due to:

•a $192.7 million increase in cash and cash equivalents, primarily due to the draws on Cleco’s credit facilities,

•a $62.0 million decrease in long-term debt due within one year primarily due to the long-term refinancing of $50.0 million 2008 series A GO Zone bonds and the $11.1 million final principal payment on the Cleco Katrina/Rita storm recovery bonds on March 2, 2020,

•a $42.2 million increase in fuel inventory primarily due to higher purchases of coal and higher deliveries of lignite at a higher per unit cost at Cleco Power,

•a $27.4 million decrease in accounts payable, excluding Cleco Power FTR purchases, primarily due to the timing of property tax payments for Cleco Power, the short-term incentive plan payments in March 2020, a decrease in accruals at Cleco Cajun, lower MISO power purchases and load charges, partially offset by an increase in outstanding payables for solid fuel purchases,

•an $18.5 million decrease in provision for rate refund primarily due to the credits to Cleco Power customers for tax-related benefits of the TCJA, and

•a $5.8 million decrease in regulatory liabilities primarily due to the amounts being credited to Cleco Power’s retail customers as a result of the overcollection of revenue from the delay of the St. Mary Clean Energy Center project.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

These increases in working capital were partially offset by:

•a $238.0 million increase in short-term debt due to draws on Cleco’s $475.0 million credit facilities and

•a $19.5 million increase in taxes payable primarily due to accruals of property taxes.

Cleco Holdings

At June 30, 2020, Cleco Holdings had $88.0 million of short-term debt outstanding under its $175.0 million credit facility, at an all-in interest rate of 2.065%. For more information on Cleco Holding’s credit facility, see “— Credit Facilities.” Cleco Holdings has an uncommitted line of credit that allows up to $10.0 million in short-term borrowings, but no more than $10.0 million in the aggregate with Cleco Power’s similar line of credit, to support its working capital needs. There were no amounts outstanding under the uncommitted line of credit at June 30, 2020. Cleco Holdings had no short-term debt outstanding at December 31, 2019.

At June 30, 2020, Cleco Holding’s long-term debt outstanding was $1.67 billion, of which $63.3 million was due within one year. The long-term debt due within one year at June 30, 2020, represents principal payments on Cleco Holdings’ debt as required by the Cleco Cajun Transaction commitments to the LPSC.

Cash and cash equivalents available at Cleco Holdings at June 30, 2020, were $99.3 million, combined with $87.0 million credit facility capacity for total liquidity of $186.3 million.

Cleco Power

At June 30, 2020, Cleco Power had $150.0 million of short-term debt outstanding under its $300.0 million credit facility, at an all-in interest rate of 1.44%. For more information on Cleco Power’s credit facility, see “— Credit Facilities.” As a result of the COVID-19 pandemic, Cleco has implemented certain measures that it believes will provide financial flexibility and help Cleco maintain liquidity. For additional discussion regarding certain risks associated with the COVID-19 pandemic, see Part II, Item 1A “Risk Factors — COVID-19” in this Quarterly Report on Form 10-Q. Cleco Power has an uncommitted line of credit that allows up to $10.0 million in short-term borrowings, but no more than $10.0 million in the aggregate with Cleco Holdings’ similar line of credit, to support their working capital needs. There were no amounts outstanding under the uncommitted line of credit at June 30, 2020. Cleco Power had no short-term debt outstanding at December 31, 2019.

At June 30, 2020, Cleco Power’s long-term debt outstanding was $1.38 billion, of which $0.6 million was due within one year. For Cleco Power, long-term debt decreased $10.8 million from December 31, 2019, primarily due to the final principal payment made on the Cleco Katrina/Rita storm recovery bonds on March 2, 2020.

Cash and cash equivalents available at June 30, 2020, were $140.0 million, combined with $150.0 million credit facility capacity for total liquidity of $290.0 million.

At June 30, 2020, and December 31, 2019, Cleco Power had a working capital surplus of $96.6 million and $33.5 million, respectively. The $63.0 million increase in working capital is primarily due to:

•an $84.5 million increase in cash and cash equivalents, primarily due to the draw on the Cleco Power credit facility,

•a $60.9 million decrease in long-term debt due within one year primarily due to the long-term refinancing of $50.0 million 2008 series A GO Zone bonds and the $11.1 million final principal payment on the Cleco Katrina/Rita storm recovery bonds on March 2, 2020,

•a $31.5 million increase in fuel inventory primarily due to higher purchases of coal and higher deliveries of lignite at a higher per unit cost,

•an $18.6 million decrease in provision for rate refund primarily due to the credits to customers for tax-related benefits of the TCJA,

•an $18.2 million decrease in accounts payable, excluding FTR purchases, primarily due to the timing of property tax payments, the short-term incentive plan payments in March 2020, lower accruals for gas costs, lower MISO power purchases and load charges, partially offset by an increase in outstanding payables for solid fuel purchases,

•a $6.9 million increase in unbilled revenue primarily due to higher usage as a result of warmer weather,

•a $5.8 million decrease in regulatory liabilities primarily due to the amounts being credited to retail customers as a result of the overcollection of revenue from the delay of the St. Mary Clean Energy Center project, and

•a $5.8 million increase in other accounts receivable primarily due to an increase in receivables for company-owned life insurance benefits and the timing of pole attachment billings.

These increases in working capital were partially offset by:

•a $150.0 million increase in short-term debt due to a draw on the Cleco Power credit facility and

•a $24.3 million increase in taxes payable primarily due to accruals of property taxes and higher provisions for income taxes, partially offset by a decrease in federal income tax accrued as a result of the CARES Act. 

Credit Facilities

At June 30, 2020, Cleco had two separate revolving credit facilities, one for Cleco Holdings in the amount of $175.0 million with outstanding borrowings of $88.0 million and one for Cleco Power in the amount of $300.0 million with outstanding borrowings of $150.0 million. The total of all revolving credit facilities creates a maximum aggregate capacity of $475.0 million with outstanding borrowings of $238.0 million.

Cleco Holdings’ credit facility provides for working capital and other financing needs. The credit facility includes restrictive financial covenants and expires in 2022. Under covenants contained in Cleco Holdings’ credit facility, Cleco is required to maintain total indebtedness less than or equal to 65% of total capitalization. At June 30, 2020, Cleco Holdings was in compliance with the covenants of its credit facility. The borrowing costs under the facility currently are equal to LIBOR plus 1.875% or ABR plus 0.875%, plus commitment fees of 0.3%. If Cleco Holdings’ credit ratings were to be downgraded one level by the credit rating agencies, Cleco Holdings may be required to pay higher fees and additional interest of 0.50% under the pricing levels of its credit facility.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

Cleco Power’s credit facility provides for working capital and other financing needs. The credit facility includes restrictive financial covenants and expires in 2022. Under covenants contained in Cleco Power’s credit facility, Cleco Power is required to maintain total indebtedness less than or equal to 65% of total capitalization. At June 30, 2020, Cleco Power was in compliance with the covenants of its credit facility. The borrowing costs under the facility currently are equal to LIBOR plus 1.25% or ABR plus 0.25%, plus commitment fees of 0.15%. If Cleco Power’s credit ratings were to be downgraded one level by the credit rating agencies, Cleco Power may be required to pay higher fees and additional interest of 0.125% under the pricing levels of its credit facility.

If Cleco Holdings or Cleco Power were to default under the covenants in their respective credit facilities or other debt agreements, they would be unable to borrow additional funds under the facilities, 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 Holdings would be considered in default under its credit facility.

Debt and Distribution Limitations

The 2016 Merger Commitments include provisions for limiting the amount of distributions that can be made from Cleco Holdings to Cleco Group, depending on Cleco Holdings’ debt to EBITDA ratio and its corporate credit ratings. Cleco Holdings may not make any distribution unless, after giving effect to such distribution, Cleco Holdings’ debt to EBITDA ratio is equal to or less than 6.50 to 1.00 and Cleco Holdings’ corporate credit rating is investment grade with one or more of the three credit rating agencies. At June 30, 2020, Cleco Holdings was in compliance with the provisions of the 2016 Merger Commitments that would restrict the amount of distributions available. Additionally, in accordance with the 2016 Merger Commitments, Cleco Power is subject to certain provisions limiting the amount of distributions that may be paid to Cleco Holdings, depending on Cleco Power’s common equity ratio and its corporate credit ratings. Cleco Power may not make any distribution unless, after giving effect to such distribution, Cleco Power’s common equity ratio would not be less than 48% and Cleco Power’s corporate credit rating is investment grade with two of the three credit rating agencies. At June 30, 2020, Cleco Power was in compliance with the provisions of the 2016 Merger Commitments that would restrict the amount of distributions available. The 2016 Merger Commitments also prohibit Cleco from incurring additional long-term debt, excluding non-recourse debt, unless certain financial ratios are achieved. For more information on the 2016 Merger Commitments, see Part I, Item 1A, “Risk Factors — Regulatory Compliance” and “— Holding Company” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December, 31, 2019.

Cleco Consolidated Cash Flows

Net Operating Cash Flow

Net cash provided by operating activities was $95.8 million and $186.3 million during the six months ended June 30, 2020, and 2019, respectively. Net cash provided by operating activities decreased $90.5 million primarily due to:

•lower collections from Cleco Power customers of $34.6 million due to the rate refund for the tax-related benefits from the TCJA, which began being credited to customers in August 2019,

•higher payments for fuel inventory of $29.1 million primarily due to higher gas purchases, higher solid fuel purchases and higher per unit lignite costs,

•higher payments for purchased power of $18.3 million primarily due to the closing of the Cleco Cajun Transaction in February 2019.

•higher payments to vendors of $16.3 million primarily due to timing of property tax payments and other vendor payments related to other operations and maintenance,

•lower Cleco Katrina/Rita storm restoration surcharge collections from Cleco Power customers of $7.3 million as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in March 2020, and

•higher payout for employee benefits of $7.1 million.

These decreases were partially offset by $32.3 million of higher collections for electric and other operations revenue at Cleco Cajun partially the result of the Cleco Cajun transaction closing in February 2019.

Net Investing Cash Flow

Net cash used in investing activities was $138.7 million and $951.0 million during the six months ended June 30, 2020, and 2019, respectively. Net cash used in investing activities decreased $812.3 million primarily due to the absence of payment for the acquisition of all the membership interest in South Central Generating of $962.2 million, partially offset by the absence of cash received of $147.2 million during the Cleco Cajun Transaction.

Net Financing Cash Flow

Net cash provided by financing activities was $223.2 million and $770.3 million during the six months ended June 30, 2020, and 2019, respectively. Net cash provided by financing activities decreased $547.1 million primarily due to:

•the absence of borrowings of $400.0 million related to the financing of the Cleco Cajun Transaction in February 2019 and

•lower contributions from Cleco Group of $384.9 million.

These decreases were partially offset by:

•higher draws on credit facilities of $130.0 million and

•lower payments on credit facilities of $108.0 million.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Cleco Power Cash Flows

Net Operating Cash Flow

Net cash provided by operating activities was $66.5 million and $137.6 million during the six months ended June 30, 2020, and 2019, respectively. Net cash provided by operating activities decreased $71.1 million primarily due to:

•higher payments to vendors of $42.8 million primarily due to timing of property tax payments and other vendor payments related to other operations and maintenance,

•lower collections from customers of $34.6 million due to the rate refund for the tax-related benefits from the TCJA, which began being credited to customers in August 2019,

•higher payments for fuel inventory of $13.7 million primarily due to higher gas purchases and higher per unit lignite costs,

•lower Cleco Katrina/Rita storm restoration surcharge collections from customers of $7.3 million as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in March 2020, and

•higher payout for employee benefits of $3.3 million.

These decreases were partially offset by lower payments for affiliate settlements of $40.0 million.

Net Investing Cash Flow

Net cash used in investing activities was $132.0 million and $133.9 million during the six months ended June 30, 2020, and 2019, respectively. Net cash used in investing activities decreased $1.9 million primarily due to higher additions to property, plant, and equipment, net of AFUDC, of $4.0 million, partially offset by the absence of life insurance proceeds of $1.9 million.

Net Financing Cash Flow

Net cash provided by financing activities was $137.5 million during the six months ended June 30, 2020. Net cash used in financing activities was $10.7 million during the six months ended June 30, 2019. Net cash provided by financing activities increased $148.2 million primarily due to:

•higher draws on credit facilities of $117.0 million and

•lower payments on credit facilities of $33.0 million.

Contractual Obligations

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 Cleco’s Condensed Consolidated Balance Sheets while others are commitments, some firm and some based on uncertainties, that are not reflected in the Condensed Consolidated Financial Statements. For more information regarding Cleco’s Contractual Obligations, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Contractual Obligations” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Off-Balance Sheet Commitments and Guarantees

investees (affiliates). Cleco Holdings 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. For more information about off-balance sheet commitments and on-balance sheet guarantees, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Off-Balance Sheet Commitments and Guarantees.”

Cybersecurity

The operation of Cleco’s electrical systems relies on evolving operational and information technology systems and network infrastructures that are complex. The failure of Cleco or its vendors’ operational and information technology systems and networks due to a physical or cyber attack or other event could significantly disrupt operations; cause harm to the public or employees; result in outages or reduced generating output; result in damage to Cleco’s assets or operations, or those of third parties; result in damage to Cleco’s reputation; and subject Cleco to claims by customers or third parties, any of which could have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants. Cleco continues to assess its cybersecurity tools and processes and has taken a variety of actions to monitor and address cyber-related risks. Cleco’s Chief Digital and Information Officer leads Cleco’s cybersecurity team and oversees Cleco’s cybersecurity maturity plan. Each quarter, management provides cybersecurity updates to Cleco’s Board of Managers. For more information on risks related to Cleco’s cybersecurity, see Part I, Item 1A, “Risk Factors — Operational Risks — Technology and Terrorism Threats” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Regulatory and Other Matters

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, water and/or waste management. Cleco may incur significant additional costs to comply with these revisions, reinterpretations, and requirements. Cleco Power could then seek recovery of additional environmental compliance costs as riders through the LPSC’s EAC or FRP. If Cleco fails to comply with these revisions, reinterpretations, and requirements, it could be subject to civil or criminal liabilities and fines. For a discussion of other Cleco environmental matters, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Environmental Audit” in this Quarterly Report on Form 10-Q and Part I, Item 1, “Business — Environmental Matters” in the Registrants’ Combined Annual


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

Report on Form 10-K for the fiscal year ended December 31, 2019.

Retail Rates of Cleco Power

Fuel Rates

Generally, Cleco Power’s cost of fuel used for electric generation and the cost of purchased power are recovered through the LPSC-established FAC that enables Cleco Power to pass on to its customers substantially all such charges. Recovery of FAC costs is subject to periodic fuel audits by the LPSC. For more information on the FAC and the most recent fuel audit, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Fuel Audit.”

Environmental Rates

In July 2009, the LPSC issued Docket No. U-29380 Subdocket A, which provides Cleco Power an EAC to recover from customers certain costs of environmental compliance. These expenses are eligible for recovery through Cleco Power’s EAC and are subject to periodic review by the LPSC. For more information on the EAC and the most recent environmental audit, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Environmental Audit.”

Energy Efficiency

In 2013, the LPSC issued a General Order adopting rules promoting energy efficiency programs. Cleco Power began participating in energy efficiency programs in November 2014. Cleco Power has recovered approximately $3.3 million annually for each of the program years through an approved rate tariff. In January 2018, Cleco began recovering an additional $3.3 million annually for estimated costs related to programs specific to political subdivisions.

On December 17, 2019, the LPSC initiated an audit on program years three and four to consider all program costs. Cleco Power has responded to several sets of data request regarding the audit. Cleco Power has program year 2019 and thereafter subject to audit. Management is unable to predict or give a reasonable estimate of the outcome of the audit.

Generally, utility companies are allowed to recover from customers the accumulated decrease in revenues associated with the energy efficiency programs. On October 21, 2019, Cleco Power received notice of approval from the LPSC allowing recovery of the accumulated LCFC revenues until such a time that base rates reset, which is expected in the fourth quarter of 2020.

Wholesale Rates

The rates Cleco, through Cleco Power and Cleco Cajun, charges its wholesale customers are subject to FERC’s triennial market power analysis. FERC requires a utility to pass a screening test as a condition for securing and/or retaining approval to sell electricity in wholesale markets at market-based rates. An updated market power analysis must be filed with FERC every three years or upon the occurrence of a change in status as defined by FERC regulation. Cleco’s next triennial market power analysis is expected to be filed during the fourth quarter of 2020.

Transmission Rates

Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. For more information about the ROE complaints, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE.”

For information about the risks associated with Cleco’s participation in MISO, see Part II, Item 1A, “Risk Factors — Regulatory Risks — MISO” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

For information on transmission rates of Cleco, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Transmission Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Transmission, Distribution, and Generation Projects

Cleco Power’s significant ongoing projects include the Bayou Vista to Segura transmission project and the DSMART distribution project. For information on these projects, see “— Overview — Cleco Power.”

Market Restructuring

Wholesale Electric Markets

RTO

For information on Cleco Power’s operations within MISO and for information on regulatory aspects of wholesale electric markets affecting Cleco, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Wholesale Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

ERO

The Energy Policy Act of 2005 added Section 215 to the Federal Power Act, which provides for a uniform system of mandatory, enforceable reliability standards. In 2006, FERC named NERC as the ERO that will be required to develop and enforce the mandatory reliability standards.

A NERC Reliability Standards audit is conducted every three years for Cleco Power and Cleco Cajun. On October 17, 2019, Cleco Power’s NERC Reliability Standards audit was completed. The final report was issued on October 31, 2019. Cleco Power is unable to determine the timing of NERC’s approval of the audit report due to the impact of the COVID-19 pandemic. The Cleco Cajun NERC Reliability Standards audit occurred during April 2019. There were no violations or areas of concern discovered during the Cleco Cajun audit.

A NERC Critical Infrastructure Protection (CIP) audit is also conducted every three years. Cleco Power’s current NERC CIP audit began in the second quarter of 2020. The timing of completion of the audit is unknown due to the impact of the COVID-19 pandemic; however, it is expected to be complete by the end of the third quarter of 2020. Cleco Cajun’s most recent CIP audit occurred during June 2019. The final report was issued on June 27, 2019.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

Management is unable to predict the final financial outcome of the current Cleco Power NERC Reliability Standards audit, the most recent Cleco Cajun CIP audit, the current Cleco Power CIP audit or any future audits, or whether any findings will have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants. For a discussion of risks associated with FERC’s regulation of Cleco Power’s transmission system, see Part II, Item 1A, “Risk Factors — Regulatory Compliance — Reliability and CIP Standards Compliance” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Retail Electric Markets

For information on the regulatory aspects of retail electric markets affecting Cleco Power, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Retail Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Franchises

Cleco Power operates under nonexclusive franchise rights granted by governmental units, such as municipalities and parishes (counties), and enforced by state law. These franchises are for fixed terms, which vary from 10 years to more than 50 years. Historically, Cleco Power has been substantially successful in the timely renewal of franchises as each neared the end of its term. Cleco Power’s next municipal franchise expires in April 2022.

For more information on franchises, see Part I, Item 1, “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, 2019.

Recent Authoritative Guidance

For a discussion of recent authoritative guidance, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 3 — Recent Authoritative Guidance.”


CRITICAL ACCOUNTING POLICIES

Cleco’s critical accounting policies include accounting policies that are important to Cleco’s financial condition and results of operations and 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. The preparation of financial statements contained in this report requires management to make estimates and assumptions. Estimates and assumptions about future events and their effects cannot be made with certainty. These estimates involve judgments regarding many factors that in and of themselves could materially affect the financial statements and disclosures. On an ongoing basis, these estimates and assumptions are evaluated and, if necessary, adjustments are made when warranted by new or updated information or by a change in circumstances or environment. Actual results may differ significantly from these estimates under different assumptions or conditions.

For more information on Cleco’s critical accounting policies, see Part II, Item 7, “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, 2019.


CLECO POWER — NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

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).


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


RISK OVERVIEW

Cleco is exposed to counterparty credit risk, liquidity risk, interest rate risk, and commodity price risk. Cleco has implemented a governance framework, inclusive of risk policies and procedures to manage these and other risks.

Counterparty Credit Risk

When Cleco enters into bilateral commodity derivative or physical commodity transactions, Cleco may be exposed to counterparty credit risk. Cleco is exposed to counterparty credit risk when a counterparty fails to meet their financial obligations causing Cleco to incur replacement losses.

Cleco monitors and manages its credit risk exposure through credit risk management policies and procedures that include:

•routine review of counterparty credit quality and credit exposure,

•entering into standard industry master agreements with specific terms and conditions for credit exposure and non-performance, and

•exchanging guarantees or forms of cash equivalent collateral for financial assurance.

For more information, 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.”

Liquidity Risk

Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Future actions or inactions of the federal government, including a failure to increase the government debt limit, could increase the actual or perceived risk that the U.S. may not pay its obligations when due and may disrupt financial markets, including capital markets, potentially limiting


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

availability and increasing costs of capital. 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 Holdings and Cleco Power, management believes that Cleco will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. Cleco Holdings and Cleco Power pay fees and interest under their respective credit facilities based on the highest rating held. For more information, 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.”

Interest Rate Risk

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. 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 variable-rate obligations is computed by assuming a 1% change in the current interest rate applicable to such debt.

At June 30, 2020, Cleco Holdings had $88.0 million of short-term debt outstanding under its $175.0 million credit facility at an all-in interest rate of 2.065%. The borrowing costs under Cleco Holdings’ credit facility currently are equal to LIBOR plus 1.875% or ABR plus 0.875%, plus commitment fees of 0.30%.

At June 30, 2020, Cleco Holdings had $330.0 million long-term variable rate bank term loans outstanding. One bank term loan had a balance of $300.0 million outstanding, at an interest rate of LIBOR plus 1.875%, for an all-in interest rate of 2.065% at June 30, 2020. Another bank term loan had a balance of $30.0 million outstanding, at an interest rate of LIBOR plus 1.875%, for an all-in interest rate of 2.065% at June 30, 2020. The weighted average rate for all outstanding term loan debt for the six months ended June 30, 2020, was 2.539%. Each 1% increase in the interest rate applicable to Cleco’s short- and long-term variable rate debt would result in a decrease in Cleco Holdings’ pretax earnings of $4.2 million on an annualized basis.

At June 30, 2020, Cleco Power had $150.0 million of short-term debt outstanding under its $300.0 million credit facility at an all-in interest rate of 1.44%. Cleco Power’s borrowing costs under its $300.0 million credit facility currently are equal to LIBOR plus 1.25% or ABR plus 0.25%, plus commitment fees of 0.15%. Each 1% increase in the interest rate applicable to Cleco Power’s short-term debt would result in a decrease in Cleco Power’s pretax earnings of $1.5 million on an annualized basis.

Cleco may enter into contracts to mitigate the volatility in interest rate risk. These contracts include, but are not limited to, interest rate swaps and treasury rate locks. For each reporting period presented, the Registrants did not enter into any contracts to mitigate the volatility in interest rate risk.

Commodity Price Risk

Cleco Power and Cleco Cajun’s financial performance can be impacted by changes in commodity prices that impact fuel costs, generation revenues, and customer supply and

revenue. Cleco’s Energy Market Risk Management Policy authorizes hedging commodity price risk with physical or financially settled derivative instruments within approved guidelines and limits of authority. Some of these transactions may qualify for the normal purchase, normal sale (NPNS) exception under derivative accounting guidance. Contracts that do not qualify for NPNS accounting treatment or are not elected for NPNS accounting treatment are marked-to-market and recorded on the balance sheet at their fair value.

Cleco Power and Cleco Cajun, individually, may be exposed to transmission congestion price risk as a result of physical transmission constraints present between MISO LMP nodes when serving customer load. Cleco Power and Cleco Cajun are awarded and/or purchase FTRs in auctions facilitated by MISO. FTRs are accounted for as derivatives not designated as hedging instruments for accounting purposes.

During the three and six months ended June 30, 2020, Cleco Cajun entered into other commodity derivative contracts including fixed price physical forwards and financially settled swap transactions.

The following tables present the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Consolidated Balance Sheets at June 30, 2020:

Cleco

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS

(THOUSANDS)

BALANCE SHEET LINE ITEM

AT JUNE 30, 2020

Commodity-related contracts

FTRs

Current

Energy risk management assets

10,006

Current

Energy risk management liabilities

(1,966)

Other commodity derivatives

Current

Energy risk management assets

1,559

Non-current

Other deferred charges

Current

Energy risk management liabilities

(3,754)

Non-current

Other deferred credits

(852)

Commodity-related contracts, net

5,076

Cleco Power

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS

(THOUSANDS)

BALANCE SHEET LINE ITEM

AT JUNE 30, 2020

Commodity-related contracts

FTRs

Current

Energy risk management assets

8,670

Current

Energy risk management liabilities

(1,159)

Commodity-related contracts, net

7,511

Cleco monitors the Value at Risk (VaR) of its other commodity derivative contracts requiring derivative accounting treatment. Cleco applies a parametric VaR covariance analytical approach within a 5-day holding period at a 95% confidence interval. VaR is defined as the minimum expected loss over a given holding period at a given confidence level based on observable market price volatilities.


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CLECO POWER						2020 2ND QUARTER FORM 10-Q

The following table presents the VaR of other commodity derivative contracts for the three and six months ended June

30, 2020, as well as the VaR at June 30, 2020, based on these assumptions:


			FOR THE THREE MONTHS ENDED JUNE 30, 2020										FOR THE SIX MONTHS ENDED JUNE 30, 2020
(THOUSANDS)	AT JUNE 30, 2020		HIGH		LOW		AVERAGE		HIGH		LOW		AVERAGE
Cleco	$	4,249	$	6,507	$	4,190	$	4,763	$	6,507	$	2,087	$	4,520

For more information on the accounting treatment and fair value of FTRs and other commodity derivatives, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting

Policies — Derivatives and Other Risk Management Activity” and “Note 7 — Fair Value Accounting — Commodity Contracts.”


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of Cleco Holdings and Cleco Power (individually, “Registrant” and collectively, the “Registrants”) management, including the CEO and CFO, the Registrants have evaluated the effectiveness of their disclosure controls and procedures as of June 30, 2020. Based on the evaluations, the CEO and CFO have concluded that the Registrants’ disclosure controls and procedures are ineffective as of June 30, 2020, due to the material weaknesses in internal control over financial reporting as previously disclosed in Part II, Item 9A, “Controls and Procedures” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

In light of the foregoing conclusion, the Registrants undertook additional procedures to allow the Registrants’ management to conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. Accordingly, the Registrants’ management concluded that the Registrants’ condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended June 30, 2020, fairly present, in all material respects, the Registrants’ financial position, results of operations, and cash flows for the periods presented in such financial statements.

Remediation Plan

The Registrants began taking steps to remediate the underlying cause of these material weaknesses and improve the design and operating effectiveness of its internal control over financial reporting during the three month period ending September 30, 2019, and has continued this effort through June 30, 2020.

As the management of the Registrants continues to evaluate and work to improve the Registrants’ internal control over financial reporting, the Registrants may take additional measures to address these control deficiencies, or the

Registrants may modify some of the remediation measures to improve the design and/or operating effectiveness of those measures. Management of the Registrants has made significant progress in its remediation efforts, including but not limited to the following:

•Replacement of failed meters.

•Development and implementation of a plan to monitor meter failures.

•Proposed automation and configurations to allow for automated exception identification in key processes.

•Implementation of estimation monitoring with the ability to pause the billing process and request new reads.

•Development of analytics for comparison of the number of bills estimated and the estimation amount.

•Designed and implemented new controls (both preventive and detective) to address gaps in relevant risks.

•Completed assessment of the newly implemented ERP system to identify opportunities for more comprehensive control coverage over identified risks and is in the process of implementing enhanced system automation.

However, the material weakness in IT general controls and the material weakness over revenue will not be considered remediated until the applicable new controls operate for a sufficient period of time where management is able to conclude, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

There have been no changes in the Registrants’ internal control over financial reporting that occurred during the three months ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Registrants’ internal control over financial reporting, with the exception of the remediation efforts discussed above.


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


PART II — OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


CLECO

For information on legal proceedings affecting Cleco, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”


CLECO POWER

For information on legal proceedings affecting Cleco Power, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 14 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”


ITEM 1A. RISK FACTORS

The following risk factor, which supplements the risk factors disclosed in Part I, Item 1A, “Risk Factors” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and updates the risk factor disclosed in Part II, Item 1A, “Risk Factors” in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, could have a material adverse effect on results and cause results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Registrants.

COVID-19

The Registrants face risks related to COVID-19 and other health epidemics and outbreaks, including economic, regulatory, legal, workforce, and cyber-security risks, which could have a material adverse impact on the results of operations, financial condition, cash flows or liquidity of the Registrants.

The outbreak of COVID-19 is a rapidly evolving situation that is adversely affecting current global economic activities and conditions. An extended slowdown of economic growth, decreased demand for commodities, and/or material changes in governmental or regulatory policy in the U.S. could result in lower growth and reduced demand for and usage of electricity in Cleco’s service territory, and those of its wholesale customers, as businesses and facilities continue to close, remain closed, or implement reduced working hours. The ability of Cleco’s customers, contractors, and suppliers to meet their obligations to Cleco, including payment obligations, could also be negatively affected under the current economic conditions.

On March 13, 2020, in response to the COVID-19 pandemic state of emergency, the LPSC issued an executive order prohibiting disconnections of utilities for non-payment. On July 1, 2020, the LPSC issued an order ending the moratorium on disconnections effective July 16, 2020. Cleco anticipates reinstating disconnections and late fees beginning September 1, 2020. On July 16, 2020, Cleco began setting up payment plan arrangements for up to 18 months for customers with past due balances. Failure to collect these balances could negatively impact Cleco’s cash flow. The LPSC, in response to a federal mandate or otherwise, could impose restrictions on the rates Cleco charges to provide its services, including the inability to implement approved rates, or delay actions with respect to Cleco’s rate cases and filings. For example, on June 28, 2019, Cleco Power filed an application with the LPSC for a new FRP, with anticipated new rates being effective July 1, 2020. However, due to COVID-19, there has been a delay in the current base rate case and Cleco Power now anticipates

new rates to be effective in the fourth quarter of 2020. In addition, the COVID-19 pandemic may affect Cleco’s ability to timely satisfy regulatory requirements such as recordkeeping and/or timely reporting requirements. Additionally, as the EPA and many state environmental agencies have issued enforcement discretion policies for such issues, it is unclear whether the effect of any possible noncompliance due to COVID-19 will be material.

On May 18, 2020, Cleco reopened customer service offices implementing precautionary protective measures and protocols to allow in-person meetings with restrictions in size and mandatory protective gear. Cleco has also implemented precautionary measures for employees or contractors testing positive for COVID-19, exhibiting COVID-19 symptoms, or awaiting COVID-19 test results. In the event a substantial portion of Cleco’s workforce were to be impacted by COVID-19 for an extended period of time, Cleco may face challenges with respect to its services or operations, and it may not be able to execute its capital plan as anticipated. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders, and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, Cleco, its suppliers, and other business counterparties to experience operational delays. Cleco has modified and continues to modify certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. However, the quarantine of personnel or the inability to access Cleco’s facilities or customer sites could adversely affect its operations. Also, Cleco has a limited number of highly skilled employees for some of its operations. If a large proportion of Cleco’s employees in those critical positions were to contract COVID-19 at the same time, Cleco would rely upon its business continuity plans in an effort to continue operations at its facilities, but there is no certainty that such measures will be sufficient to mitigate the adverse impact to Cleco’s operations that could result from shortages of highly skilled employees.

As many of Cleco’s employees and third-party service providers work remotely in accordance with government mandates, Cleco faces heightened cyber-security risks related to unauthorized system access, aggressive social engineering tactics, and adversaries attacking the information technology


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q

systems, network infrastructure, technology and facilities used to conduct its businesses. Cleco will continue to monitor developments affecting its employees, customers, and operations.

While the full impact on Cleco’s business from the outbreak of COVID-19 is unknown at this time and difficult to predict, various aspects of its business could be adversely affected by COVID-19. While there are many unknowns as to the duration and severity of the COVID-19 pandemic, as of the date of this Quarterly Report on Form 10-Q, it has caused significant volatility in global markets and has had an adverse impact on the operations of some of Cleco’s customers and suppliers, which could affect Cleco’s operations and its ability to access capital. The continued spread of COVID-19 and

efforts to contain COVID-19, such as the imposition of additional quarantines or closures or reduced operations of businesses and other institutions, could result in an economic slowdown, which could adversely affect customer demand and consumption, cause delayed payments or uncollectible accounts, disrupt supply chains and markets, cause potential delays in the timing of completion of capital projects, or cause other unpredictable events. These impacts could ultimately result in a downgrade of Cleco’s credit ratings. Any of the foregoing events or other unforeseen consequences of COVID-19 could have a material adverse effect on the results of operations, financial condition, cash flows, or liquidity of the Registrants.


ITEM 6. EXHIBITS

CLECO
10.1			Amendment No. 1, dated as of May 15, 2020, to the Term Loan Agreement, dated as of February 1, 2019, by and among Cleco Corporate Holdings LLC (f/k/a Cleco Corporation), the Lenders party thereto and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on May 21, 2020)
10.2			Amendment No. 3, dated as of May 15, 2020, to the Term Loan Credit Agreement, dated as of June 28, 2016, by and among Cleco Corporate Holdings LLC (f/k/a Cleco Corporation), the Lenders party thereto and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on May 21, 2020)
10.3			Amendment No. 3, dated as of May 15, 2020, to the Credit Agreement, dated as of April 13, 2016, by and among Cleco Corporate Holdings LLC (f/k/a Cleco Corporation), the Lenders party thereto and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on May 21, 2020)
31.1			CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2			CFO Certification pursuant to 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			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			Inline XBRL Taxonomy Extension Schema
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

CLECO POWER
10.4			Amendment No. 1, dated as of May 15, 2020, to the Credit Agreement, dated as of April 13, 2016, by and among Cleco Power LLC, the Lenders party thereto and Mizuho Bank, Ltd., as administrative agent (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on May 21, 2020)
31.3			CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.4			CFO Certification pursuant to 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			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			Inline XBRL Taxonomy Extension Schema
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


CLECO
CLECO POWER						2020 2ND QUARTER FORM 10-Q


SIGNATURES

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 CORPORATE HOLDINGS LLC
			(Registrant)

			By:			/s/ F. Tonita Laprarie
						F. Tonita Laprarie
						Controller and Chief Accounting Officer

Date: August 11, 2020

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/ F. Tonita Laprarie
						F. Tonita Laprarie
						Controller and Chief Accounting Officer

Date: August 11, 2020

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