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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] COMBINED QUARTERLY REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-15759
CLECO CORPORATION
(Exact name of registrant as specified in its charter)
LOUISIANA 72-1445282
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 0-01272
CLECO POWER LLC
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0244480
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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
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 [X] No [_]
Indicate the number of shares outstanding at each of the issuer's classes of
Common Stock, as of the latest practicable date.
Description Shares Outstanding
Registrant Of Class At April 30, 2001
- ---------- ----------- ------------------
Cleco Corporation Common Stock,
$2.00 Par Value 22,527,655
CLECO POWER LLC MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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This Combined Form 10-Q is separately filed by Cleco Corporation and Cleco Power
LLC. Information contained herein relating to either individual Registrant is
filed by such Registrant on its own behalf. Each Registrant makes no
representation as to information relating to the other Registrant.
TABLE OF CONTENTS
Page
----
GLOSSARY OF TERMS.................................................... 1
Disclosure Regarding Forward Looking Statements...................... 3
PART I
ITEM 1 FINANCIAL STATEMENTS
Cleco Corporation Consolidated Financial Statements................. 4
Cleco Corporation -- Results of Operations.......................... 11
Cleco Power LLC Financial Statements................................ 16
Cleco Power LLC-- Narrative Analysis of the Results of Operations... 21
Notes To Financial Statements....................................... 25
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CLECO CORPORATION................ 34
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF
CLECO CORPORATION............................................. 39
PART II
ITEM 1 LEGAL PROCEEDINGS............................................. 42
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.............................. 43
GLOSSARY OF TERMS
References in this filing to "the Company" or "Cleco" mean Cleco
Corporation and its subsidiaries, including Cleco Power LLC, and references to
"Cleco Power" mean Cleco Power LLC, unless the context clearly indicates
otherwise. Additional abbreviations or acronyms used in this filing are defined
below:
Abbreviation or Acronym Definition
1935 Act Public Utility Holding Company Act of 1935
Acadia Aquila Tolling
Agreement................... Capacity Sale and Tolling Agreement between APP and Aquila Energy
APP.......................... Acadia Power Partners LLC
APP-related Petitioners...... Various citizens and environmental action groups
APB No. 18................... Accounting Principles Board Opinion No. 18 - The Equity Method of Accounting for Investments in
Common Stock
Cleco's 2000 Form 10-K....... The Company's Annual Report on Form 10-K for the year ended December 31, 2000
Cleco Power's 2000 Form 10-K. Cleco Power's Annual Report on Form 10-K for the year ended December 31, 2000
Cleco Power.................. Cleco Power LLC
Company...................... Cleco Corporation
CPS.......................... Coughlin Power Station
DIG.......................... Derivatives Implementation Group of the FASB
Dynegy....................... Dynegy Power Marketing, Inc.
DHMV......................... Dolet Hills Mining Venture
Dolet Hills.................. Dolet Hills Power Station
Dolet Hills Mine............. Lignite reserves located in the Dolet Hills area of northwestern Louisiana
EITF......................... Emerging Issues Task Force
EITF No. 98-10............... Accounting for Contracts Involved in Energy Trading and Risk Management Activities
Energy....................... Cleco Energy LLC
ESOP......................... Employee Stock Ownership Plan
Evangeline................... Cleco Evangeline LLC
Evangeline Tolling Agreement Capacity Sale and Tolling Agreement between Evangeline and Williams Energy
FASB......................... Financial Accounting Standards Board
Federal Court Suit........... Lawsuit filed by the Company and SWEPCO on April 15, 1997 against DHMV and its partners in the
United States District Court for the Western District of Louisiana
FERC......................... Federal Energy Regulatory Commission
kW .......................... Kilowatt
kWh.......................... Kilowatt-hour
LDEQ......................... Louisiana Department of Environmental Quality
LMA.......................... Lignite Mining Agreement
LPSC......................... Louisiana Public Service Commission
Marketing & Trading.......... Cleco Marketing & Trading LLC
Midstream.................... Cleco Midstream Resources LLC
Mirant....................... Mirant Corporation, formerly Southern Energy Inc.
Mirant Marketing............. Mirant Americas Energy Marketing, LP
MMBtu........................ Million British thermal units
MW........................... Megawatt
PEP.......................... Perryville Energy Partners LLC
PEP-related Petitioners...... Various citizens and community action groups
Quanta....................... Quanta Services, Inc.
RTO.......................... Regional Transmission Organization
Rodemacher................... Rodemacher Power Station
1
SFAS......................... Statement of Financial Accounting Standards
SFAS No. 58.................. Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by
the Equity Method
SFAS No. 128................. Earnings per Share (EPS)
SFAS No. 131................. Disclosures about Segments of an Enterprise and Related Information
SFAS No. 133................. Accounting for Derivative Instruments and Hedging Activities
SFAS No. 137................. Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133
SFAS No. 138................. Accounting for Certain Derivative Instruments and Certain Hedging Activities
SPP.......................... Southwest Power Pool
State Court Suit............. Lawsuit filed by the Company and SWEPCO on August 13, 1997 against the parent companies of DHMV in
the First Judicial District Court for Caddo Parish, Louisiana
SWEPCO....................... Southwestern Electric Power Company
UtiliTech.................... Utility Construction & Technology Solutions LLC
UTS.......................... UTS, LLC (successor entity to UtiliTech)
VAR.......................... Value-at-risk
Williams Energy.............. Williams Energy Marketing and Trading Company
2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Report are forward-looking
statements. Although the Company and Cleco Power 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 Company's and Cleco Power's
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 Company's and Cleco
Power's actual results to differ materially from those contemplated in any of
the Company's and Cleco Power's forward-looking statements:
. the effects of competition in the power industry,
. legislative and regulatory changes affecting electric utilities,
. the weather and other natural phenomena,
. the timing and extent of changes in commodity prices and interest rates,
. the operating performance of the facilities of Cleco Power and Evangeline,
and
. changes in general economic and business conditions, as well as other factors
discussed in this and the Company's and Cleco Power's other filings with the
Securities and Exchange Commission (Cautionary Statements).
All subsequent written and oral forward-looking statements attributable to the
Company or Cleco Power or persons acting on their behalf are expressly qualified
in their entirety by the Cautionary Statements.
3
CLECO CORPORATION
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The consolidated financial statements for the Company included herein are
unaudited but reflect, in management's opinion, all adjustments, consisting only
of normal recurring adjustments, that are necessary for a fair presentation of
the Company's financial position and the results of its operations for the
interim periods presented. Because of the seasonal nature of several of the
Company's subsidiaries, the results of operations for the three months ended
March 31, 2001, are not necessarily indicative of the results that may be
expected for the full fiscal year. The financial statements included herein
should be read in conjunction with the financial statements and notes thereto
included in Cleco's 2000 Form 10-K.
On April 27, 2001, the Cleco Corporation shareholders approved a charter
amendment to increase the amount of authorized common stock and to effect a two-
for-one stock split of the Company's common stock. The charter amendment became
effective at the close of business May 7, 2001, which was also the record date
for the stock split. Distribution of certificates representing the split shares
is expected to occur on or about May 21, 2001. After the split, the Company
will have approximately 45 million shares of common stock outstanding and have
authorization to issue up to an aggregate of 100 million shares (including the
shares currently outstanding). The effect of the stock split has been
recognized in all share and per share data in the accompanying consolidated
financial statements, notes to the financial statements and supplemental
financial data.
4
CLECO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
--------------- ----------------
(Thousands, except share and
per share amounts)
Operating revenue:
Retail electrical operations $ 155,986 $ 113,296
Energy marketing and tolling operations 97,029 24,883
Other operations 96 132
--------------- ----------------
Gross operating revenue 253,111 138,311
Less: retail electric customer credits - 1,216
--------------- ----------------
Total operating revenue 253,111 137,095
--------------- ----------------
Operating expenses:
Fuel used for electric generation 60,692 31,278
Power purchased for utility customers 27,654 14,513
Purchases for energy marketing operations 78,731 24,276
Other operations 23,749 13,799
Maintenance 7,310 7,569
Depreciation 15,400 12,395
Taxes other than income taxes 9,447 9,072
--------------- ----------------
Total operating expenses 222,983 112,902
--------------- ----------------
Operating income 30,128 24,193
Interest income 879 193
Allowance for other funds used during construction 173 369
Other income (expense), net (15) 205
--------------- ----------------
Income before interest charges 31,165 24,960
Interest charges:
Interest charges, including amortization of
debt expenses, premium and discount 13,138 9,426
Allowance for borrowed funds used during construction (197) (124)
--------------- ----------------
Total interest charges 12,941 9,302
--------------- ----------------
Net income from continuing operations before income taxes and preferred
dividends 18,224 15,658
Federal and state income taxes 6,124 4,869
--------------- ----------------
Net income from continuing operations 12,100 10,789
Discontinued operations:
Loss from operations, net of income taxes - 566
Loss on disposal of segment, net of income taxes 1,406 -
--------------- ----------------
Total discontinued operations 1,406 566
--------------- ----------------
Net income before extraordinary item 10,694 10,223
Extraordinary item, net of income taxes - 2,508
--------------- ----------------
Net income before preferred dividends 10,694 12,731
Preferred dividend requirements, net 473 473
--------------- ----------------
Net income applicable to common stock $ 10,221 $ 12,258
=============== ================
(Continued on next page)
5
CLECO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Continued)
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
---- ----
(Thousands, except share and
per share amounts)
Average shares of common stock outstanding:
Basic 45,005,892 44,884,258
Diluted 47,896,408 47,562,908
Basic earnings per share:
From continuing operations $ 0.26 $ 0.23
From discontinued operations $ (0.03) $ (0.01)
Extraordinary item - $ 0.05
Net income applicable to common stock $ 0.23 $ 0.27
Diluted earnings per share:
From continuing operations $ 0.25 $ 0.23
From discontinued operations $ (0.03) $ (0.01)
Extraordinary item - $ 0.05
Net income applicable to common stock $ 0.22 $ 0.27
Cash dividends paid per share of common stock $ 0.2125 $ 0.2075
The accompanying notes, as they relate to Cleco Corporation, are an integral
part of the consolidated financial statements.
6
CLECO CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AT AT
MARCH 31, 2001 December 31, 2000
-------------- -----------------
(Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,671 $ 29,407
Accounts receivable, net 55,014 74,620
Other accounts receivable 20,443 24,200
Unbilled revenues 30,187 37,547
Fuel inventory, at average cost 11,274 7,275
Materials and supplies inventory, at average cost 15,804 15,956
Margin deposits 8,198 21,657
Risk management assets 3,922 19,070
Accumulated deferred fuel 3,605 3,617
Other current assets 5,627 4,857
---------- ----------
Total current assets 163,745 238,206
---------- ----------
Property, plant and equipment:
Property, plant and equipment 1,808,151 1,799,161
Accumulated depreciation (618,623) (604,145)
---------- ----------
Net property, plant and equipment 1,189,528 1,195,016
Construction work-in-progress 46,377 37,742
---------- ----------
Total property, plant and equipment, net 1,235,905 1,232,758
---------- ----------
Equity investment in investee 136,305 98,204
Other assets - 2,642
Prepayments 17,059 16,766
Restricted cash 19,601 55,343
Regulatory assets - deferred taxes 100,101 100,267
Other deferred charges 48,860 45,010
Accumulated deferred federal and state income taxes 56,071 56,508
---------- ----------
TOTAL ASSETS $1,777,647 $1,845,704
========== ==========
The accompanying notes, as they relate to Cleco Corporation, are an integral
part of the consolidated financial statements.
(Continued on next page)
7
CLECO CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
At AT
March 31, 2001 December 31, 2000
-------------------- -----------------------
(Thousands)
Liabilities and shareholders' equity
Current liabilities:
Short-term debt $ 107,849 $ 95,957
Long-term debt due within one year 30,093 30,665
Accounts payable 57,963 102,838
Retainage 8,796 8,770
Customer deposits 20,660 20,447
Taxes accrued 16,088 17,286
Interest accrued 6,357 15,177
Risk management liabilities 6,697 21,118
Other current liabilities 7,053 12,997
---------- ----------
Total current liabilities 261,556 325,255
Deferred credits:
Accumulated deferred federal and state income taxes 270,281 270,118
Accumulated deferred investment tax credits 23,811 24,252
Regulatory liabilities - deferred taxes 38,840 38,840
Other deferred credits 43,536 48,089
---------- ----------
Total deferred credits 376,468 381,299
Long-term debt, net 657,695 659,135
---------- ----------
Total liabilities 1,295,719 1,365,689
---------- ----------
Shareholders' equity:
Preferred stock
Not subject to mandatory redemption 27,509 28,090
Deferred compensation related to preferred stock held by ESOP (11,638) (12,994)
---------- ----------
Total preferred stock not subject to mandatory redemption 15,871 15,096
Common shareholders' equity:
Common stock, $1 par value, authorized 100,000,000
Shares, issued 45,063,740 shares at March 31, 2001
and December 31, 2000 45,064 45,064
Premium on capital stock 112,102 112,502
Long-term debt payable in Company's common stock 519 519
Retained earnings 308,707 308,047
Other comprehensive income (93) -
Treasury stock, at cost, 16,642 and 73,072 shares at
March 31, 2001 and December 31, 2000, respectively (242) (1,213)
---------- ----------
Total common shareholders' equity 466,057 464,919
---------- ----------
Total shareholders' equity 481,928 480,015
---------- ----------
Total liabilities and shareholders' equity $1,777,647 $1,845,704
========== ==========
The accompanying notes, as they relate to Cleco Corporation, are an integral
part of the consolidated financial statements.
8
CLECO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
-------- --------
(Thousands)
OPERATING ACTIVITIES:
Net income before preferred dividends $ 10,694 $ 12,731
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on disposal of segment, net of tax 1,406 -
Loss from discontinued operation, net of tax - 566
Depreciation and amortization 15,586 13,019
Allowance for funds used during construction (173) (369)
Amortization of investment tax credits (441) (436)
Net deferred income taxes (1,771) (1,990)
Deferred fuel costs 12 (1,033)
Extraordinary gain, net of income tax - (2,508)
Changes in assets and liabilities:
Accounts receivable, net 17,576 (6,100)
Unbilled revenues 4,846 1,198
Fuel inventory, materials and supplies (3,815) 2,362
Accounts payable (44,313) (34,964)
Customer deposits 213 186
Other deferred accounts - 3,165
Taxes accrued 663 9,735
Interest accrued (8,820) (5,904)
Margin deposits 13,459 (1,917)
Risk management assets and liabilities, net 727 987
Other, net (9,961) (7,018)
-------- --------
Net cash used in operating activities (4,112) (18,290)
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (18,584) (37,915)
Allowance for funds used during construction 173 369
Proceeds from sale of property, plant and equipment 71 57
Equity investment in investee (32,878) -
Other - (40)
-------- --------
Net cash used in investing activities (51,218) (37,529)
-------- --------
FINANCING ACTIVITIES:
Cash transferred from restricted account 35,742 38,078
Increase in short-term debt, net 12,152 23,478
Retirement of long-term obligations (2,266) (2,100)
Issuance of long-term debt - 308
Dividends paid on common and preferred stock, net (10,034) (9,787)
-------- --------
Net cash provided by financing activities 35,594 49,977
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (19,736) (5,842)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29,407 25,161
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,671 $ 19,319
======== ========
Supplementary cash flow information
Interest paid (net of amount capitalized) $ 24,314 $ 15,225
======== ========
Income taxes paid $ 7,000 $ 1,000
======== ========
The accompanying notes, as they relate to Cleco Corporation, are an integral
part of the consolidated financial statements.
9
CLECO CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
------- -------
(Thousands)
Net income applicable to common stock $10,221 $12,258
Other comprehensive income (expense), net of tax
Transition adjustment (4,453) -
Net unrealized gains from available for sale securities 4,360 -
------- -------
Net other comprehensive expense (93) -
------- -------
Comprehensive income $10,128 $12,258
======= =======
The accompanying notes, as they relate to Cleco Corporation, are an integral
part of the consolidated financial statements.
10
CLECO CORPORATION - RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of Cleco Corporation for the three months ended March 31, 2001, and
March 31, 2000. The following discussion should be read in combination with the
Company's Financial Statements and the notes contained in this Form 10-Q.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001, AND 2000
For the three months ending
March 31,
--------------------------
2001 2000 Variance Change
---- ---- -------- ------
(Thousands)
Operating revenue $253,111 $137,095 $116,016 84.6 %
Operating expenses $222,983 $112,902 $110,081 97.5 %
Net income from continuing
Operations $ 12,100 $ 10,789 $ 1,311 12.2 %
Discontinued operations, net $ (1,406) $ (566) $ (840) (148.4)%
Extraordinary item, net $ - $ 2,508 $ (2,508) -
Net income applicable to
common stock $ 10,221 $ 12,258 $ (2,037) (16.6)%
Consolidated net income from continuing operations increased 12.2% in the
first quarter of 2001 as compared to the first quarter of 2000 due primarily to
increased earnings at Midstream, which were partially offset by decreased
earnings at Cleco Power. Net income from continuing operations from Midstream
increased $5.5 million in the first quarter of 2001 as compared to the first
quarter of 2000 largely due to higher margins on energy marketing and trading
functions at Marketing & Trading and the tolling operations of Evangeline which
commenced full commercial operations in July 2000. Offsetting the increase at
Midstream was a $3.9 million decrease in net income from continuing operations
from Cleco Power due primarily to higher capacity costs related to purchased
power agreements and mark-to-market losses on trading positions.
Increased operating revenues for the first quarter of 2001 as compared to
the first quarter of 2000 were due primarily to an $80.3 million increase in
energy marketing and tolling operations at Midstream and an increase of $34.3
million in revenues at Cleco Power. The increase of $80.3 million in revenues
at Midstream in the first quarter of 2001 as compared to the first quarter of
2000 is due primarily to a $47.1 million increase in energy trading revenues at
Marketing & Trading, a $22.2 million increase in energy trading revenues at
Energy and a $10.0 million increase in tolling revenues at Evangeline.
The 97.5% increase in operating expenses for the first quarter of 2001 as
compared to the first quarter 2000 was caused mainly by increased purchases for
energy marketing and depreciation at Midstream and increased fuel and purchased
power expenses at Cleco Power. Purchases for energy marketing at Midstream
increased $60.6 million in the first quarter of 2001 as compared to the first
quarter of 2000 due primarily to a $40.5 million increase in purchases for
energy marketing at Marketing & Trading and a $20.1 million increase in
purchases for energy marketing at Energy. Depreciation at Midstream
11
increased $3.0 million in the first quarter of 2001 as compared to the first
quarter of 2000 largely due to the commercial operation of Evangeline beginning
in July 2000. Fuel and purchase power expenses at Cleco Power increased $42.3
million in the first quarter of 2001 as compared to the first quarter of 2000
due primarily to an increase in natural gas prices.
The loss from discontinued operations, net, increased by $0.8 million in
the first quarter of 2001 as compared to the first quarter of 2000 due to the
closing of the sale of UtiliTech, which increased the loss on disposal of the
business.
There was no extraordinary item in the first quarter of 2001 as compared
to a $2.5 million extraordinary gain in the first quarter of 2000 which resulted
from the repurchase of debt within Midstream.
MIDSTREAM
Marketing & Trading
Marketing & Trading generally does not take physical delivery of
electricity or natural gas marketed, but settles the transactions through the
financial markets. The chart below presents a summary of electricity and
natural gas marketed.
For the three
months ending
March 31,
--------------
2001 2000 Change
---- ---- ------
Electricity marketed
(Million kWh) 321 216 48.6 %
Natural gas (MMBtu) 1,702,445 1,743,516 (2.4)%
The increase of $47.1 million in revenues in the first quarter of 2001 as
compared to the first quarter 2000 at Marketing & Trading was due primarily to
an increase in electricity marketed and an increase in the price of natural gas.
Purchases for energy marketing increased $40.5 million in the first quarter of
2001 as compared to the first quarter of 2000 due primarily to the same reasons
for the increase in revenues. Marketing & Trading experienced a 162.7%
increase in its average cost of natural gas in the first quarter of 2001 as
compared to the first quarter of 2000.
Energy
Energy generally takes physical delivery of natural gas marketed and
sells physical gas instead of settling the transactions through the financial
markets. The chart below presents a summary of natural gas marketed.
For the three months ending
March 31,
----------------------------
2001 2000 Change
---- ---- ------
Natural gas marketed (MMBtu) 3,503,683 2,166,363 61.7%
12
The increase of $22.2 million in revenues in the first quarter of 2001 as
compared to the first quarter of 2000 at Energy was due primarily to an increase
in natural gas marketed and an increase in the price of natural gas. The
increase in natural gas marketed was due primarily to Energy's acquisition of
two natural gas pipelines in the fourth quarter of 2000. Energy experienced a
321.6% increase in its average cost of natural gas in the first quarter of 2001
as compared to the first quarter of 2000.
Purchases for energy marketing increased $20.1 million in the first
quarter of 2001 as compared to the first quarter of 2000 due primarily to the
same reasons for the increase in revenues.
Power Plant Operations
Evangeline was in full commercial operations during the first quarter of
2001 and had tolling revenues of $10.0 million, as compared to the first quarter
of 2000, when Evangeline recorded no revenues during its construction phase.
CLECO POWER
For the three months ending
March 31,
(Thousands)
2001 2000 Variance Change
---- ---- -------- ------
Operating revenues:
Base $ 70,307 $ 69,070 $ 1,237 17.9 %
Fuel cost recovery 85,679 44,226 41,453 93.7 %
Affiliate revenue 1,109 2,553 (1,444) (56.6)%
Estimated customer credits - (1,216) 1,216 - %
Energy marketing (512) 7,685 (8,197) (106.7)%
-------- -------- -------
Total operating $156,583 $122,318 $34,265 28.0 %
revenues ======== ======== =======
For the three months ended March 31
2001 2000
MILLION Million
KWH kWh Change
------- ------- ------
Electric sales
Residential........................ 684 671 1.9 %
Commercial......................... 347 355 (2.2)%
Industrial......................... 679 748 (9.2)%
Other Retail....................... 129 129 -
----- -----
Total Retail 1,839 1,903 (3.4)%
Sales for resale................... 61 49 24.5 %
----- -----
Total sales to regular customers..... 1,900 1,952 (2.7)%
Short-term sales to other utilities.. 27 2 1,250.0 %
Sales from marketing activities...... 1 65 (98.5)%
----- -----
Total electric sales....... 1,928 2,019 (4.5)%
===== =====
Base revenues during the first quarter of 2001 show a slight increase
over the same period in 2000. Weather influences the demand for electricity,
especially among residential customers. Much of this demand is measured in
cooling degree days and heating degree days. A cooling degree day is an
13
indication of the likelihood of a consumer utilizing air conditioning, while a
heating degree day is an indication of the likelihood of a consumer utilizing
heating. An increase in the number of heating degree days in the first quarter
of 2001 as compared to the same period in 2000 was offset by a decrease in the
number of cooling degree days during these same periods. The following chart
indicates the percentage variance from normal and from the prior year for
combined cooling/heating degree days for the first quarters of 2001 and 2000.
Combined Cooling/Heating degree days
For the three months ended March 31
2001 2000
---- ----
Increase/(Decrease) From Normal (5.8)% (28.2)%
Increase/(Decrease) From Prior Year 30.2 % 9.8 %
Short-term sales to other utilities increased significantly during the
first quarter of 2001 as compared to the same period in 2000. This increase was
due primarily to sales to the City of Lafayette under a replacement energy
contract that began December 2000 and ends December 2001.
Fuel cost recovery revenues collected from customers increased primarily
as a result of an increase in the average per unit cost of fuel to $4.26 per
MMBtu in the first quarter of 2001 compared to $2.12 per MMBtu in the same
period in 2000. The increase in the average per unit cost of fuel is primarily
a result of a 130% increase in the per unit cost of natural gas for the first
quarter of 2001 as compared to 2000. Changes in fuel costs historically have
had no effect on net income, as fuel costs are generally recovered through fuel
costs adjustment clauses that enable Cleco Power to pass on to customers
substantially all changes in the cost of generating fuel and purchased power.
These adjustments are audited monthly and are regulated by the LPSC
(representing about 99% of the total fuel cost adjustment) and the FERC. Until
approval is received, the adjustments are subject to refund.
An earnings review settlement was reached with the LPSC in 1996 pursuant
to which accruals for estimated customer credits are sometimes required. The
Company determined that no such accrual was necessary for the first quarter of
2001, based on an analysis of earnings in that quarter, whereas $1.2 million was
accrued in the first quarter of 2000. The amount of credit due customers, if
any, is determined by the LPSC annually based on results for the 12-month
periods ending September 30 of each year.
Energy marketing revenues for the first quarter of 2001 decreased $8.2
million as compared to the same period in 2000. Marketing & Trading markets
excess electric capacity and excess natural gas at Cleco Power's power plants on
Cleco Power's behalf. The reduction in energy marketing revenues is due
primarily to excess natural gas marketed in the first quarter of 2000. Marketing
& Trading marketed excess natural gas in the first quarter of 2000 due to
outages at several of Cleco Power's gas fired power plants, as compared to the
first quarter of 2001, in which Cleco Power did not experience significant
outages at its gas fired power plants. Cleco Power's energy trading activity is
considered as "trading" under EITF No. 98-10. The mark-to-market related to
these positions was a loss of $1.4 million in the first quarter of 2001 compared
to a loss of $0.1 million in the same period of 2000.
14
Energy Marketing Operations
For the three months ended March 31
(Thousands)
2001 2000 Change
------- ------ ------
Energy trading revenue $ 925 $7,794 (88.1)%
Mark-to-market (1,437) (109) (1,218.3)%
------- ------
Total $ (512) $7,685 (106.7)%
======= ======
Operating expenses increased $39.7 million or 41.1% during the first
quarter of 2001 compared to the same period in 2000. The increase in operating
expenses is primarily the result of increased capacity charges and higher fuel
costs. Energy marketing expenses decreased $7.0 million in the first quarter of
2001 compared to the same period in 2000 due to the same factors noted above for
decreases in energy marketing revenues. Offsetting the decrease in energy
marketing expenses was an increase of $42.3 million in fuel and purchased power
for utility operations due to increased energy prices primarily driven by
increases in natural gas prices as compared to the same period in 2000. The
42.5% increase in the first quarter of 2001 as compared to the first quarter
2000 in other operations expense is due primarily to a $3.7 million increase in
capacity payments.
CONSOLIDATED
Interest expense in the first quarter of 2001 increased $6.3 million or
67.4% compared to the first quarter of 2000 due primarily to interest expense
associated with Evangeline. During the construction phase of Evangeline,
interest was capitalized and reflected as a component of plant, property and
equipment. With the commencement of commercial operations of Evangeline in July
2000, interest is reflected in interest expense. Interest charges related to
Evangeline in the first quarter of 2001 were $4.8 million.
Federal and state income taxes increased $1.3 million in the first
quarter of 2001 compared to the same period in 2000. This increase is mainly
attributable to higher earnings at Marketing & Trading and Evangeline.
Discontinued operations at UtiliTech reduced first quarter 2001 earnings
by $1.4 million or $0.03 per basic average common share. For additional
information, see Note I - Loss on Disposal of Segment in the Notes to the
Unaudited Financial Statements in this report.
15
CLECO POWER
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The financial statements for Cleco Power included herein are unaudited
but reflect, in management's opinion, all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair presentation of Cleco
Power's financial position and the results of its operations for the interim
periods presented. Because of the seasonal nature of Cleco Power's business, the
results of operations for the three months ended March 31, 2001, are not
necessarily indicative of the results that may be expected for the full fiscal
year. The financial statements included herein should be read in conjunction
with the financial statements and notes thereto included in Cleco Power's 2000
Form 10-K.
16
CLECO POWER LLC
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
---- ----
(Thousands)
Operating revenue:
Retail electric operations $ 155,986 $113,296
Energy marketing operations (512) 7,685
Affiliate revenues 1,109 2,553
-------------- --------
Gross operating revenue 156,583 123,534
Less: retail electric customer credits - 1,216
-------------- --------
Total operating revenue 156,583 122,318
-------------- --------
OPERATING EXPENSES:
Fuel used for electric generation 60,397 31,259
Power purchased for utility customer 27,654 14,513
Purchases for energy marketing operations 327 7,294
Other operations 18,692 13,116
Maintenance 6,417 7,138
Depreciation 12,684 12,277
Taxes other than income taxes 8,946 8,755
Affiliate costs 935 2,049
-------------- --------
Total operating expenses 136,052 96,401
-------------- --------
OPERATING INCOME 20,531 25,917
Interest income 14 -
Allowance for other funds used during construction 173 369
Other income (expense), net (114) (454)
-------------- --------
INCOME BEFORE INTEREST CHARGES 20,604 25,832
-------------- --------
INTEREST CHARGES:
Interest on debt and other, net of amount capitalized 7,303 6,930
Allowance for borrowed funds used during construction (197) (124)
Amortization of debt discount, premium and expense, net 225 257
-------------- --------
Total interest charges 7,331 7,063
-------------- --------
NET INCOME BEFORE INCOME TAXES 13,273 18,769
Federal and state income taxes 4,449 6,081
-------------- --------
NET INCOME APPLICABLE TO MEMBER'S EQUITY AND COMMON STOCK $ 8,824 $ 12,688
============== ========
The accompanying notes, as they relate to Cleco Power, are an integral
part of the financial statements.
17
CLECO POWER LLC
BALANCE SHEETS
(UNAUDITED)
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- ----------
(Thousands)
ASSETS
Utility plant and equipment:
Property, plant and equipment $1,558,676 $1,550,756
Accumulated depreciation (606,965) (595,136)
---------- ----------
Net property, plant and equipment 951,711 955,620
Construction work-in-progress 33,474 25,864
---------- ----------
Total utility plant, net 985,185 981,484
---------- ----------
Current assets:
Cash and cash equivalents 2,604 2,224
Accounts receivable, net
Customer accounts receivable (less allowance for
doubtful accounts of $677 in 2001 and $757 in 2000) 38,413 41,637
Other accounts receivable 17,385 19,878
Affiliates 1,120 1,457
Notes receivable - affiliates 4,590 2
Unbilled revenues 24,200 26,863
Fuel inventory, at average cost 11,274 7,275
Material and supplies inventory, at average cost 13,975 14,513
Risk management assets 1,167 525
Margin deposit 1,514 3,128
Accumulated deferred fuel 3,605 3,617
Other current assets 3,624 3,630
---------- ----------
Total current assets 123,471 124,749
---------- ----------
Prepayments 8,101 7,974
Regulatory assets - deferred taxes 100,101 100,267
Accumulated deferred federal and state income taxes 52,289 52,144
Other deferred charges 33,839 37,014
---------- ----------
Total Assets $1,302,986 $1,303,632
========== ==========
(Continued on next page)
The accompanying notes, as they relate to Cleco Power, are an integral part of
the financial statements.
18
CLECO POWER LLC
BALANCE SHEETS
(UNAUDITED)
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- ----------
(Thousands)
Capitalization And Liabilities
Member's equity:
Member's equity units $ 172,376 $ 172,376
Retained earnings 232,990 234,734
---------- ----------
Total member's equity 405,366 407,110
Long-term debt, net 335,412 335,282
---------- ----------
Total capitalization 740,778 742,392
---------- ----------
Current liabilities:
Short-term debt 72,620 41,397
Long-term debt due within one year 25,000 25,000
Accounts payable 37,826 67,919
Accounts payable - Affiliates 16,901 10,846
Customer deposits 20,611 20,447
Taxes accrued 8,363 8,679
Taxes accrued - payable to parent 7,164 8,161
Interest accrued 1,837 8,021
Risk management liabilities 2,726 1,562
Other current liabilities 3,808 4,933
---------- ----------
Total current liabilities 196,856 196,965
---------- ----------
Deferred credits
Accumulated deferred federal and state income taxes 268,311 268,311
Accumulated deferred investment tax credits 23,811 24,252
Regulatory liabilities - deferred taxes 38,840 38,840
Other deferred credits 34,390 32,872
---------- ----------
Total deferred credits 365,352 364,275
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $1,302,986 $1,303,632
========== ==========
The accompanying notes, as they relate to Cleco Power, are an integral
part of the financial statements.
19
CLECO POWER LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
2001 2000
-------- --------
(Thousands)
OPERATING ACTIVITIES:
Net income $ 8,824 $ 12,688
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,909 12,194
Allowance for funds used during construction (173) (369)
Amortization of investment tax credits (441) (436)
Deferred income taxes (533) (1,409)
Deferred fuel costs 12 (1,033)
Changes in assets and liabilities:
Accounts receivable, net 5,717 (3,454)
Accounts and notes receivable, affiliate (4,251) 21,268
Unbilled revenues 2,663 1,132
Fuel, material and supplies inventories (3,461) 2,376
Accounts payable (30,093) (31,066)
Accounts payable, affiliate 6,055 9,077
Customer deposits 164 186
Other deferred accounts 4,071 2,460
Taxes accrued (872) (6,248)
Interest accrued (6,184) (6,667)
Risk management assets and liabilities, net 522 -
Margin deposits 1,614 -
Other, net (620) (1,823)
-------- --------
Net cash provided by (used in) operating activities (4,077) 8,876
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (16,372) (9,154)
Allowance for funds used during construction 173 369
Sale of utility plant, including associated land - 57
-------- --------
Net cash used in investing activities (16,199) (8,728)
-------- --------
FINANCING ACTIVITIES:
Increase in short-term debt, net 31,223 11,347
Distribution to member (10,567) (10,122)
-------- --------
Net cash provided by financing activities 20,656 1,225
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 380 1,373
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,224 547
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,604 $ 1,920
======== ========
Supplementary cash flow information
Interest paid (net of amount capitalized) $ 13,899 $ 13,857
======== ========
Income taxes paid $ 6,701 $ 20,630
======== ========
The accompanying notes, as they relate to Cleco Power, are an integral
part of the financial statements.
20
CLECO POWER - NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Set forth below is information concerning the results of operations of
Cleco Power for the three months ended March 31, 2001, and March 31, 2000. The
following narrative analysis should be read in combination with Cleco Power's
Financial Statements and notes contained in this Form 10-Q.
Cleco Power meets the conditions specified in General Instruction 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 3
(Quantitative and Qualitative Disclosure About Market Risk) of Part I and the
following Part II items from Form 10-Q: Item 2 (Changes in Securities and Use
of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of
Matters to a Vote of Security Holders). The following discussion explains
material changes in the amount of revenue and expense items of Cleco Power
between the first quarter of 2001 and the first quarter of 2000. Reference is
made to Management's Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 of Cleco Power's 2000 Form 10-K.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001, AND 2000
For the three months ending
March 31,
(Thousands)
2001 2000 Variance Change
---- ---- -------- ------
Operating revenues:
Base $ 70,307 $ 69,070 $ 1,237 17.9 %
Fuel cost recovery 85,679 44,226 41,453 93.7 %
Affiliate revenue 1,109 2,553 (1,444) (56.6)%
Estimated customer credits - (1,216) 1,216 - %
Energy marketing (512) 7,685 (8,197) (106.7)%
-------- -------- -------
Total operating revenues $156,583 $122,318 $34,265 28.0 %
======== ======== =======
21
For the three months ended March 31
2001 2000
MILLION Million
KWh KWh Change
------- ------- ------
Electric sales
Residential........................ 684 671 1.9 %
Commercial......................... 347 355 (2.2)%
Industrial......................... 679 748 (9.2)%
Other Retail....................... 129 129 -
----- -----
Total retail 1,839 1,903 (3.4)%
Sales for resale................... 61 49 24.5 %
----- -----
Total sales to regular customers..... 1,900 1,952 (2.7)%
Short-term sales to other utilities.. 27 2 1,250.0 %
Sales from marketing activities...... 1 65 (98.5)%
----- -----
Total electric sales....... 1,928 2,019 (4.5)%
===== =====
Base revenues during the first quarter of 2001 show a slight increase
over the same period in 2000. Weather influences the demand for electricity,
especially among residential customers. Much of this demand is measured in
cooling degree days and heating degree days. A cooling degree day is an
indication of the likelihood of a consumer utilizing air conditioning, while a
heating degree day is an indication of the likelihood of a consumer utilizing
heating. An increase in the number of heating degree days in the first quarter
of 2001 as compared to the same period in 2000 was offset by a decrease in the
number of cooling degree days during these same periods. The following chart
indicates the percentage variance from normal and from the prior year for
combined cooling/heating degree days for the first quarter of 2001 and 2000.
Combined Cooling/Heating degree days
For the three months ended March 31
2001 2000
---- ----
Increase/(Decrease) From Normal (5.8)% (28.2)%
Increase/(Decrease) From Prior Year 30.2 % 9.8 %
Short-term sales to other utilities increased significantly during the
first quarter of 2001 as compared to the same period in 2000. This increase was
due primarily to sales to the City of Lafayette under a replacement energy
contract that began December 2000 and ends December 2001.
Fuel cost recovery revenues collected from customers increased primarily
as a result of an increase in the average per unit cost of fuel to $4.26 per
MMBtu in the first quarter of 2001 compared to $2.12 per MMBtu in the same
period in 2000. The increase in the average per unit cost of fuel is primarily
a result of a 130% increase in the per unit cost of natural gas for the first
quarter of 2001 as compared to 2000. Changes in fuel costs historically have had
no effect on net income, as fuel costs are generally recovered through fuel
costs adjustment clauses that enable Cleco Power to pass on to customers
substantially all changes in the cost of generating fuel and purchased power.
These adjustments are audited monthly and are regulated by the LPSC
(representing about 99% of the total fuel cost adjustment) and the FERC. Until
approval is received, the adjustments are subject to refund.
22
An earnings review settlement was reached with the LPSC in 1996 pursuant
to which accruals for estimated customer credits are sometimes required. The
Company determined that no such accrual was necessary for the first quarter of
2001, based on an analysis of earnings in that quarter, whereas $1.2 million was
accrued in the first quarter of 2000. The amount of credit due customers, if
any, is determined by the LPSC annually based on results for the 12-month
periods ending September 30 of each year.
Energy marketing revenues for the first quarter of 2001 decreased $8.2
million as compared to the same period in 2000. Marketing & Trading markets
excess electricity capacity or excess natural gas at Cleco Power's power plants
on Cleco Power's behalf. The reduction in energy marketing revenues is due
primarily to excess natural gas marketed in the first quarter of 2000. Marketing
& Trading marketed excess natural gas in the first quarter of 2000 due to
outages at several of Cleco Power's gas fired power plants, as compared to the
first quarter of 2001, in which Cleco Power did not experience significant
outages at its gas fired power plants. Cleco Power's energy trading activity is
considered as "trading" under EITF No. 98-10. The mark-to-market related to
these positions was a loss of $1.4 million in the first quarter of 2001 compared
to a loss of $0.1 million in the same period of 2000.
Energy Marketing Operations
For the three months ending March 31
(Thousands)
2001 2000 Change
---- ---- ------
Energy trading revenue $ 925 $7,794 (88.1)%
Mark-to-market (1,437) (109) (1,218.3)%
------- ------
Total $ (512) $7,685 (106.7)%
======= ======
Operating expenses increased $39.7 million or 41.1% during the first
quarter of 2001 compared to the same period in 2000. The increase in operating
expenses is primarily the result of increased capacity charges and higher fuel
costs. Energy marketing expenses decreased $7.0 million compared to the same
period in 2000 due to the same factors noted above for decreases in energy
marketing revenues. Offsetting the decrease in energy marketing expenses was an
increase of $42.3 million in fuel and purchased power for utility operations due
to increased energy prices primarily driven by increases in natural gas prices
as compared to the same period in 2000. The 42.5% increase in the first
quarter of 2001 as compared to the first quarter 2000 in other operations
expense is due primarily to a $3.7 million increase in capacity payments.
Cleco Power purchases power from other electric power generators when the
price of the energy purchased is less than the cost to Cleco Power of generating
such energy from its own facilities, or when Cleco Power's generating units are
unable to provide electricity to satisfy its load. Approximately 40.2% of Cleco
Power's energy requirements during the first quarter of 2001 were met with
purchased power, compared to 25% for the corresponding period in 2000. The
increase was caused by the replacement of the CPS output with power purchase
contracts with Williams Energy and Dynegy. Additionally, due to unscheduled
outages at the Dolet Hills Power Station and Rodemacher Unit 2 for a period of
two weeks in February 2001, Cleco Power purchased more power in the first
quarter of 2001 than it did in the first quarter of 2000 to meet load
requirements. While Rodemacher Unit 2 was down in February, the major unit
inspection
23
outage originally scheduled for later that month was accelerated and work began
on the eight-week project. The unit is expected to return to service during the
second quarter of 2001.
Federal and state income tax expense decreased approximately $1.6 million
in the first quarter of 2001 as compared to the first quarter of 2000 due
primarily to a decrease in net income before income taxes in the first quarter
of 2001 as compared to the first quarter of 2000.
Net income applicable to member's equity and common stock decreased $3.9
million in the first quarter of 2001 as compared to the first quarter of 2000
due primarily to the $5.4 million decrease in operating income offset by the
$1.6 million decrease in federal and state income taxes as discussed above.
24
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
NOTE A Reclassification Cleco Corporation and Cleco Power
NOTE B Legal Proceeding: Fuel Supply - Lignite Cleco Corporation and Cleco Power
NOTE C Extraordinary Gain Cleco Corporation
NOTE D Disclosures About Segments Cleco Corporation
NOTE E Restricted Cash Cleco Corporation
NOTE F Equity Investment in Investee Cleco Corporation
NOTE G LDEQ Litigation Cleco Corporation
NOTE H New Accounting Standard Cleco Corporation and Cleco Power
NOTE I Loss on Disposal of Segment Cleco Corporation
NOTE J Subsequent Event - Stock Split Cleco Corporation
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. RECLASSIFICATION
Certain prior-period amounts have been reclassified to conform to the
presentation shown in the current year's financial statements. These
reclassifications had no effect on net income or shareholders' (member's)
equity.
NOTE B. LEGAL PROCEEDING: FUEL SUPPLY - LIGNITE
Cleco Power and SWEPCO, each a 50% owner of Dolet Hills Unit 1, jointly
own lignite reserves in the Dolet Hills area of northwestern Louisiana. In
1982, Cleco Power and SWEPCO entered into the LMA with the DHMV, a partnership
for the mining and delivery of lignite from a portion of these reserves (Dolet
Hills Mine). The LMA expires in 2011. The price of lignite delivered pursuant
to the LMA is a base price per ton, subject to escalation based on certain
inflation indices, plus specified "pass-through" costs.
Currently, Cleco Power is receiving annually a minimum delivery of
1,750,000 tons under the LMA. Since the late 1980s, additional spot lignite
deliveries have been obtained through competitive bidding from DHMV and another
lignite supplier. In 2000, Cleco Power and SWEPCO received deliveries that
approximated 25% of the annual lignite consumption at the Dolet Hills Unit 1
from the other lignite supplier.
In April 1997, Cleco Power and SWEPCO filed the Federal Court Suit
against DHMV and its partners seeking to enforce various obligations of DHMV to
Cleco Power and SWEPCO under the LMA, including provisions relating to the
quality of the delivered lignite, pricing, and mine reclamation practices. In
June 1997, DHMV filed an answer denying the allegations in the Federal Court
Suit and filed a counterclaim asserting various contract-related claims against
Cleco Power and SWEPCO. Cleco Power and SWEPCO have denied the allegations in
the counterclaims.
25
As a result of the counterclaims filed by DHMV in the Federal Court Suit,
in August 1997, Cleco Power and SWEPCO filed the State Court Suit against the
parent companies of DHMV, namely Jones Capital Corporation and Philipp Holzmann
USA, Inc. The State Court Suit seeks to enforce a separate 1995 agreement by
Jones Capital Corporation and Philipp Holzmann USA, Inc. related to the LMA.
Jones Capital Corporation and Philipp Holzmann USA, Inc. have asked the state
court to stay that proceeding until the Federal Court Suit is resolved.
In March 2000, the court in the Federal Court Suit ruled that DHMV was
not in breach of certain financial covenants under the LMA and denied Cleco
Power's and SWEPCO's claim to terminate the LMA on that basis. The ruling has no
material adverse effect on the operations of Cleco Power and does not affect the
other claims scheduled for trial. Cleco Power and SWEPCO have appealed the
federal court's ruling to the United States Court of Appeals for the Fifth
Circuit.
The civil, nonjury trial in the Federal Court Suit was to have commenced
in May 2000. However, in April 2000, all parties jointly requested that the
court postpone the trial date and grant a 120-day stay of all matters before the
trial court to give the parties an opportunity to attempt to reach an amicable
resolution of the litigation. A preliminary memorandum of understanding to
settle the litigation has been executed among Cleco Power, SWEPCO, and DHMV, the
retail ratemaking effects of which have been preliminarily authorized by the
LPSC for Cleco Power and SWEPCO. The memorandum of understanding is subject to
other regulatory approvals and to the execution of definitive contracts. The
federal court granted the motion, stayed the action at the trial court and
postponed the trial commencement date to October 23, 2000. At a status
conference held on July 12, 2000, the court extended the stay of the proceedings
and again postponed the trial date to January 16, 2001. Due to the need for
additional time to attempt to refine the settlement, the parties requested, and
on September 26, 2000, the court ordered that the stay be extended and the trial
date be postponed indefinitely. The Fifth Circuit appeal of the federal court's
March 1, 2000, ruling has also been stayed pending settlement. Settlement
negotiations are on-going during the pendency of the stay.
Should settlement discussions be unsuccessful, Cleco Power and SWEPCO
will resume aggressively the prosecution of their claims against DHMV and their
defense against the counterclaims that DHMV has asserted. Cleco Power and
SWEPCO continue to pay DHMV for lignite delivered pursuant to the LMA. Normal
day-to-day operations continue at the Dolet Hills Mine and Dolet Hills Unit 1.
Although the ultimate outcome of this litigation or the settlement negotiations
cannot be predicted at this time, based on information currently available to
the Company, management does not believe that the outcome of the Federal Court
Suit or any settlement in the Federal Court Suit will have a material adverse
effect on the Company's financial position or results of operations.
26
NOTE C. EXTRAORDINARY GAIN
In March 2000, Four Square Gas, a wholly owned subsidiary of Energy,
which is 100% owned by Midstream, paid a third party $2.1 million for a note
with a face value of approximately $6.0 million issued by Four Square
Production, another wholly owned subsidiary of Energy. As part of the
transaction, the third-party debtholder sold the note, associated mortgage, deed
of trust and pledge agreement and assigned a 5% overriding royalty interest in
the production assets to Four Square Gas. Four Square Gas paid, in addition to
the $2.1 million, a total of 4.5% in overriding royalty interest in the
production assets. Four Square Gas borrowed the $2.1 million from the Company.
The gain of approximately $3.9 million was offset against the income tax related
to the gain of approximately $1.4 million to arrive at the extraordinary gain,
net of income tax, of approximately $2.5 million.
NOTE D. DISCLOSURES ABOUT SEGMENTS
The Company has determined that its reportable segments are based on the
Company's method of internal reporting, which disaggregates its business units
by first-tier subsidiary. Reportable segments were determined by applying SFAS
No. 131. The Company's reportable segments are Cleco Power, Midstream, and UTS.
The Other segment consists of costs within the parent company, costs within a
shared services subsidiary, start-up costs associated with a retail services
subsidiary and revenue and expenses associated with an investment subsidiary.
The Other segment subsidiaries operate within Louisiana, Delaware and several
states bordering Louisiana. For additional information, see Note I - Loss on
Disposal of Segment in the Notes to the Unaudited Financial Statements in this
report.
Each reportable segment engages in business activities from which it
earns revenues and incurs expenses. Segment managers report at least monthly to
the Company's CEO (the chief decision maker) with discrete financial information
and present quarterly discrete financial information to the Company's Board of
Directors. Each reportable segment prepared budgets for 2001, which were
presented to, and approved by, the Company's Board of Directors. The reportable
segments exceeded the quantitative thresholds as defined in SFAS No. 131.
The financial results of the Company's segments are presented on an
accrual basis. Significant differences among the accounting policies of the
segments as compared to the Company's consolidated financial statements
principally involve the classification of revenue and expense between operating
and other. Management evaluates the performance of its segments and allocates
resources to them based on segment profit (loss) before income taxes and
preferred stock dividends. Material intersegment transactions occur on a
regular basis.
The tables below present information about the reported operating results
and net assets of the Company's reportable segments.
27
SEGMENT INFORMATION
FOR THE QUARTER ENDING MARCH 31
(THOUSANDS)
UNALLOCATED ITEMS,
2001 CLECO RECLASSIFICATIONS
POWER MIDSTREAM UTS OTHERS & ELIMINATIONS CONSOLIDATED
---------- --------- -------- --------- ---------------- ------------
Revenues
Retail electric operations $ 155,986 $ 155,986
Energy marketing operations (512) $ 97,541 97,029
Other operations - 71 $ - $ 25 $ - 96
---------- -------- ------- -------- --------- ----------
Total operating revenue $ 155,474 $ 97,612 $ - $ 25 $ - $ 253,111
========== ======== ======= ======== ========= ==========
Intersegment revenue $ 1,109 $ 3,072 $ - $ 21,155 $ (25,336) $ -
Segment profit from continuing
operations $ 13,273 $ 5,262 $ $ (311) $ 18,224
Loss on disposal of segment $ - $ - $(1,406) $ - $ - $ (1,406)
---------- -------- ------- -------- --------- ----------
Segment profit (loss) (1) $ 13,273 $ 5,262 $(1,406) $ (311) $ 16,818
========== ======== ======= ======== ==========
Segment assets $1,302,986 $458,834 $ 4,047 $397,016 $(385,236) $1,777,647
Segment profit $16,818
(1) RECONCILIATION OF SEGMENT PROFIT TO Unallocated items
CONSOLIDATED PROFIT Income taxes 6,124
Preferred dividends 473
-------
$10,221
=======
2000
Revenues
Retail electric operations $ 113,296 $ 113,296
Energy marketing operations 7,685 $ 17,198 24,883
Other operations - 115 $ 17 132
Customer credits (1,216) - - - $ - (1,216)
---------- -------- -------- -------- --------- ----------
Total operating revenue $ 119,765 $ 17,313 $ - $ 17 $ - $ 137,095
========== ======== ======== ======== ========== ==========
Intersegment revenue $ 2,553 $ 7,321 $ - $ 24,951 $ (34,825) $ -
Segment profit from continuing
operations $ 18,769 (3,308) $ - $ 197 $ $ 15,658
Loss from operations, net of
income taxes $ - $ - $ (566) $ - $ - $ (566)
Extraordinary item $ - $ 2,508 $ - $ - $ - $ 2,508
---------- -------- -------- -------- --------- ----------
Segment profit (loss) (1) $ 18,769 $ (800) $ (566) $ 197 $ 17,600
========== ======== ======== ======== ==========
Segment assets $1,392,423 $268,052 $ 4,641 $277,485 $(239,532) $1,703,069
Segment profit $17,600
(1) RECONCILIATION OF SEGMENT PROFIT TO Unallocated items
CONSOLIDATED PROFIT Income taxes 4,869
Preferred dividends 473
-------
$12,258
=======
28
NOTE E. RESTRICTED CASH
Restricted cash represents cash to be used for specific purposes.
Approximately $15 million in restricted cash at December 31, 2000, was replaced
with a letter of credit to be maintained as security for the performance of
certain obligations by Evangeline in regard to the Evangeline Tolling Agreement.
The $19.6 million of restricted cash remains restricted under the bond indenture
until certain of its provisions are met.
NOTE F. EQUITY INVESTMENT IN INVESTEE
Equity investment in investee represents Midstream's approximately $127.2
million investment in APP, Midstream's approximate $8.1 million investment in
PEP and Energy's approximate $1.0 million investment in Hudson SVD LLC.
APP is a joint venture 50% owned by Midstream and 50% owned by Calpine
Corporation. APP was formed in order to construct, own and operate a 1,000 MW,
natural gas-fired electric plant to be located near Eunice, Louisiana. The
Company reports its investment in APP on the equity method of accounting as
defined in APB No. 18. Midstream's member's equity as reported in the unaudited
balance sheet of APP at March 31, 2001, was $122.5 million. The majority of the
difference of $4.7 million between the equity investment in investee and the
member's equity was the interest capitalized on funds used to contribute to APP
as required by SFAS No. 58.
PEP is a joint venture with Mirant Corporation that is in the process of
constructing a 700 MW combined-cycle, natural gas-fired power plant in
Perryville, Louisiana. The Company reports its investment in PEP on the equity
method of accounting as defined in APB No. 18. Midstream's member's equity as
reported in the unaudited balance sheet of PEP at March 31, 2001 was $7.8
million. The majority of the difference of $0.3 million between the equity
investment in investee and the member's equity was the interest capitalized on
funds used to contribute to PEP as required by SFAS No. 58.
Energy owns 50% of Hudson SVD LLC, which owns interests in several other
entities that own and operate natural gas pipelines in Texas and Louisiana. The
Company reports its investment in Hudson SVD LLC on the equity method of
accounting as defined in APB No. 18. The member's equity as reported in the
unaudited balance sheet was approximately $1.0 million, which equals the
investment at Energy.
NOTE G. LDEQ LITIGATION
Air and water permits issued on or about July 13, 2000, by the LDEQ to
APP were judicially appealed by APP-related Petitioners in early August 2000.
APP is constructing and will own and operate a new electric generating plant
near Eunice, Louisiana. APP-related Petitioners filed their appeals to the air
and water permits in the 19th Judicial District Court in Baton Rouge, Louisiana.
APP-related Petitioners asked the court to reverse the air and water permits
issued by the LDEQ and allege that LDEQ's decision to issue the permits was
arbitrary, capricious and procedurally inadequate. APP-related Petitioners have
also asked the court to stay
29
APP's power plant construction activities pending resolution of the litigation.
APP has denied APP-related Petitioners' allegations and is vigorously defending
the validity of the permits issued to it by the LDEQ. The permits could be
upheld, reversed, or remanded in whole or in part. If the permits were to be
reversed in material part by the court, APP may be required to cease its
construction of the generating plant temporarily or permanently, depending on
the nature and details of the reversal. If the court were to remand the permits,
without reversing them, to the LDEQ for further proceedings, APP's continuation
of construction of the generating plant may be jeopardized, depending upon the
nature and details of the remand. Oral arguments on the appeal of these permits
were held on February 5, 2001. In its order issued on February 23, 2001, the
Court ordered the matter remanded to the LDEQ but did not vacate the permits or
halt construction. The precise issues that LDEQ must take up on remand will not
be determined until the Court issues its judgement on its February 23, 2001,
ruling which has not yet occurred. Although the ultimate outcome of this action
cannot be predicted at this time, based on information currently available to
the Company, management does not believe the outcome of this action will have a
material adverse effect on the Company's financial condition or results of
operations.
An air permit issued by the LDEQ on August 25, 2000, to PEP, a joint
venture in which Midstream has a 50 percent interest with Mirant Corporation,
was judicially appealed by PEP-related Petitioners. PEP is constructing and will
own and operate a new electric generating plant near Perryville, Louisiana.
PEP-related Petitioners filed their appeal of the air permit in the 19th
Judicial District Court in Baton Rouge, Louisiana, alleging that the issuance of
the air permit violates the Louisiana Constitution, the public trustee doctrine
and state and federal environmental laws. PEP-related Petitioners have asked
that the district court reverse the permit decision or remand the permit
decision to require the LDEQ to address certain alleged deficiencies in its
issuance of the permit and have also requested that the court stay the air
permit. PEP denies PEP-related Petitioners' allegations and is vigorously
defending the validity of the permit issued to it by the LDEQ. The permit could
be upheld, reversed or remanded, in whole or in part. In the event of a
reversal or remand by the court, PEP's construction of the generating plant may
be delayed, depending upon the nature and details of the reversal or remand. On
or about March 29, 2001, as a result of an agreement by the parties, the Court
ordered that the matter be remanded to the LDEQ for the purpose of receiving
additional information from PEP, reopening the public comment period, and
issuing a revised decision for the issuance of the permits. Although the
ultimate outcome of this action cannot be predicted at this time, based on
information currently available to the Company, management does not believe the
outcome of this action will have a material adverse effect on the Company's
financial condition or results of operations.
NOTE H. NEW ACCOUNTING STANDARD
Periodically the FASB issues Statements of Financial Accounting
Standards. These statements reflect accounting, reporting and disclosure
requirements the Company should follow in the accumulation of financial data and
in the presentation of financial statements. The FASB,
30
a nongovernmental organization, is the primary source of generally accepted
accounting principles within the United States.
In 1998, the FASB issued SFAS No. 133, which established accounting and
reporting standards requiring that every derivative instrument (including
certain derivatives embedded in other contracts) be recorded on the balance
sheet as either an asset or liability measured at its fair value. This statement
requires that changes in the derivative's fair value be recognized in current
earnings, unless effective hedge accounting criteria are met, where changes in
the fair value of the derivative would be recorded in other comprehensive income
in the equity section of the balance sheet. In June of 1998, the FASB created
the DIG as a task force to assist the FASB in answering questions that companies
face when implementing SFAS No. 133. The DIG reaches tentative conclusions
about practice issues that arise when applying SFAS No. 133. The conclusions
remain tentative until they are formally cleared by the FASB and become part of
the FASB staff implementation guide. In June 1999, the FASB issued SFAS No.
137, which deferred the effective start date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which
amended SFAS No. 133. The Company implemented the requirements of these
accounting standards effective January 1, 2001.
Management continues to monitor the conclusions reached by the DIG and
formally cleared by the FASB. As conclusions clarify certain technical aspects
of SFAS No. 133, Management's assessment of contracts that are subject to SFAS
No. 133 and the implementation of SFAS No. 133 may change.
Cleco Power
Cleco Power has entered into futures and options contracts and forward
contracts for the purchase or sale of electricity and natural gas. Generally,
contracts for the future purchase of electricity and natural gas for consumption
are not subject to the fair market value requirements of SFAS No. 133, as these
transactions are considered normal purchases. These contracts not subject to
the requirements of SFAS No. 133 do not have the changes in fair market value
reflected in either current earnings or other comprehensive income. Certain of
Cleco Power's forward, futures and options contracts have changes in fair market
value recognized in current earnings as required by SFAS No. 133. Cleco Power
has from inception marked-to-market the open positions under these contracts
and, as such, implementation of SFAS No. 133, as amended, did not have an impact
on the current accounting procedures or results of Cleco Power. Changes in fair
market value are influenced by various market factors, including weather and the
availability of regional electric generation and transmission capacity.
Midstream
Marketing & Trading engages in activities that are considered "trading"
as defined by EITF No. 98-10. All of Marketing & Trading's positions are
currently being marked-to-market under the rules of EITF No. 98-10. As such,
implementation of SFAS No. 133, as amended, did not have an impact on the
current accounting procedures or results of Marketing & Trading.
31
Evangeline owns and operates the facility, yet tolls the power output of
the Evangeline Power Station to Williams under an operating lease. Accordingly,
the lease at Evangeline is not subject to the requirements of SFAS No. 133.
Energy engages in the wholesale marketing of natural gas and the
production, gathering and transmission of natural gas. Certain futures and
options contracts between Energy and outside parties, and swap agreements
between Energy and a trading affiliate, are considered derivatives. These
contracts are designated as cash flow hedges against fluctuations in the price
of natural gas. Changes in the fair market value of open positions with outside
parties are recognized in other comprehensive income. A transition adjustment
was recorded at January 1, 2001 in the statement of other comprehensive income
that reduced equity by approximately $4.5 million. For the three months ended
March 31, 2001, Energy's equity balance increased by approximately $4.4 million,
$2.2 million due to a reduction in the market price of natural gas and the
recognition in earnings from contracts related to underlying transactions that
were completed. The remaining $2.2 million increase resulted from the assignment
of several underlying gas purchase and sales transactions to an affiliated
trading company and the subsequent termination of related swap agreements with
that affiliate. These transactions were then accounted for by the affiliate
under mark-to-market accounting appropriate for a trading organization. The
remaining equity balance at March 31 is expected to be reclassified into
earnings within the next 3 months as the related financial positions are closed.
NOTE I. LOSS ON DISPOSAL OF SEGMENT
In December 2000, management decided to sell substantially all of
UtiliTech's assets and discontinue UtiliTech's operations after the sale. On
March 31, 2001, management signed an asset purchase agreement to sell UtiliTech
to Quanta for approximately $3.1 million in cash and assumption of an operating
lease for equipment of approximately $11.6 million. Quanta acquired the trade
names under which UtiliTech operated, crew tools, equipment under the operating
lease with an aggregate unamortized balance of approximately $11.6 million,
contracts, inventory relating to certain contracts and workforce in place.
UtiliTech (now known as UTS) retained approximately $2.2 million in accounts
receivable, net of allowance for uncollectibles, and equipment under the
operating lease with an aggregate unamortized balance of approximately $2.8
million. As of March 31, 2001, several contingent liabilities exist:
. UTS will auction the equipment retained under lease in order to pay off
the unamortized balance of the operating lease. UTS does not expect the
net auction proceeds to be sufficient to pay off the lease and will
record a loss on the difference between the $2.8 million unamortized
balance and the net auction proceeds. The amount of the expected loss
cannot yet be determined.
. The asset purchase agreement requires that within 45 days after the date
of sale, purchase price adjustment calculations will be made that could
adjust the purchase price for UtiliTech. Purchase price adjustment
calculations will be made on final amounts due at contract completion
versus amounts billed at sale date for fixed price contracts, quality and
quantity of acquired equipment and inventory. The purchase price
adjustment calculations could result in a positive or negative adjustment
to the purchase price. The amount of the adjustments cannot yet be
determined.
. Under the asset purchase agreement, UTS and its sole member have agreed
to indemnify Quanta for losses resulting from certain breaches or
failures by UTS and its sole member to fulfill their obligations under
the asset purchase agreement, for taxes on specific assets relating to
periods before the sale and other losses arising from events occurring
prior to the sale.
32
The indemnification amount is limited to approximately $14.9 million
until December 31, 2001 and $5.0 million until April 1, 2003. The
limitations do not apply to fraudulent misrepresentations.
Additional information about UTS is as follows:
For the three months ended
March 31,
---------------------------
2001 2000
---- ----
(Thousands)
Revenues $ 3,515 $3,609
Loss from operations, net $ - $ (566)
Income tax benefit associated with
loss from operations $ - $ 351
Loss on disposal of segment, net $(1,406) $ -
Income tax benefit associated with
loss on disposal of segment $ 875 $ -
During the first three months of 2001, the $1.4 million loss on disposal
of a segment, net, resulted primarily from actual operating losses and updated
estimated losses for 2001 in excess of estimated operating losses for 2001 that
were included in the loss on disposal of segment for the year ended December 31,
2000.
NOTE J. SUBSEQUENT EVENT - STOCK SPLIT
On April 27, 2001, the Cleco Corporation shareholders approved a charter
amendment to increase the amount of authorized common stock and to effect a two-
for-one stock split of the Company's common stock. The charter amendment became
effective at the close of business May 7, 2001, which was also the record date
for the stock split. Distribution of certificates representing the split shares
is expected to occur on or about May 21, 2001. After the split, the Company
will have approximately 45 million shares of common stock outstanding and have
authorization to issue up to an aggregate of 100 million shares (including the
shares currently outstanding). The effect of the stock split has been
recognized in all share and per share data in the accompanying consolidated
financial statements, notes to the financial statements and supplemental
financial data
33
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CLECO CORPORATION
The following discussion and analysis should be read in combination with
Cleco's 2000 Form 10-K and the Cleco Corporation Financial Statements contained
in this Form 10-Q. The information included therein is essential to
understanding the following discussion and analysis.
RESULTS OF OPERATIONS
"Item 1. Financial Statements -- Cleco Corporation -- Results of
Operations" of this Form 10-Q is incorporated herein by reference.
FINANCIAL CONDITION
Liquidity and Capital Resources
At March 31, 2001, and December 31, 2000, the Company had $107.8 million
and $96.0 million, respectively, of short-term debt outstanding in the form of
commercial paper borrowing and bank loans. The Company is a party to two
separate credit facilities, including a $120 million, 364-day credit facility
that is scheduled to be renewed in May 2001, and an $80 million facility that is
scheduled to terminate in August 2002. These facilities provide support for the
issuance of commercial paper and working capital needs. Guaranties issued by
the Company to third parties for certain types of transactions between those
parties and the Company's subsidiaries, other than Cleco Power, reduce the
amount of credit available to the Company. In addition, certain indebtedness
incurred by the Company outside of the credit facilities reduces the amount of
credit available to the Company under the facilities. The amount of credit
available to the Company under the facilities totaled $86.0 million at March 31,
2001. An uncommitted line of credit with a bank in the amount of $2.5 million
is also available to support working capital needs.
At March 31, 2001, and December 31, 2000, Cleco Power, a regulated
consolidated subsidiary of the Company, had $72.6 million and $41.4 million,
respectively, of short-term debt outstanding in the form of commercial paper
borrowing and bank loans. A $100 million Cleco Power revolving credit facility
is scheduled to be renewed by the end of the second quarter of 2001. This
facility provides support for the issuance of commercial paper and working
capital needs. The $2.5 million uncommitted line of credit described above is
also available to support working capital needs of Cleco Power.
At March 31, 2001, CLE Resources, Inc., an unregulated consolidated
subsidiary of the Company, had $2.1 million of cash and temporary cash
investments in securities with original maturities of 90 days or less.
On March 1, 2001, The Bank of New York issued a $15 million letter of
credit on behalf of Evangeline to Williams Energy. It expires on February 28,
2002, but is renewable
34
annually through the terms of the Williams Tolling Agreement between Williams
Energy and the Company that expires July 7, 2020. No compensating balances are
required. Letters of credit are issued through Cleco Corporation's revolving
credit agreements, with a fee of 5/8 of one percent, per the terms of the credit
agreements.
APP is a joint venture by Midstream and Calpine Corporation that is in
the process of constructing a 1,000 MW combined-cycle, natural gas-fired power
plant near Eunice, Louisiana. Total construction costs of the plant to be
incurred by APP are estimated at $564 million. As of March 31, 2001, Midstream
had contributed $127.2 million to APP. By the end of 2001, the Company expects
APP to receive interim non-recourse project financing and to reimburse the
Company for a large portion of the contributions to APP.
PEP is a joint venture by Midstream and Mirant Corporation that is in the
process of constructing a 700 MW combined-cycle, natural gas-fired power plant
in Perryville, Louisiana. Total construction costs of the plant to be incurred
by PEP are estimated at $340 million. As of March 31, 2001, Midstream had
contributed $8.1 million to PEP. A 150 MW combustion turbine operating in
simple cycle is expected to be operational by the summer of 2001. Full
commercial operation in combined cycle is expected for the summer of 2002.
Permanent non-recourse financing at PEP is expected to be received in the second
quarter of 2001.
Regulatory Matters - Retail Electric Competition
The LPSC has been continuing its investigation into whether retail choice
is in the best interest of Louisiana electric utility customers. Cleco Power
and a number of parties, including the other Louisiana electric utilities,
certain power marketing companies, and various associations representing
industry and consumers, have been participating in electric industry
restructuring proceedings before the LPSC since 1997. However, the troubled
electric supply situation in California has led many in the industry to
reexamine the restructuring process. While the competitive environment
continues to be espoused in many areas, several states have reduced or
eliminated their restructuring efforts or have asked for delays in implementing
already passed rules or legislation. Management believes that the situation in
California will continue to influence future decisions and plans at both the
federal and state levels, including Louisiana. Management expects the customer
choice debate and other related issues to continue in legislative and regulatory
bodies through 2001. At this time, the Company cannot predict whether any
legislation or regulation will be enacted or adopted during 2001 and, if
enacted, what form such legislation or regulation would take.
Currently, the LPSC does not provide exclusive service territories for
electric utilities under its jurisdiction. Instead, retail service is obtained
through the long-term nonexclusive franchises. The LPSC uses a "300 foot rule"
for determining the supplier for new customers. The application of this rule
has led to competition with neighboring utilities for retail customers at the
borders of our service areas. Cleco Power also competes in its service area
with suppliers of alternative forms of energy, some of which may be less costly
than electricity for certain applications. Cleco Power could experience some
competition for electric sales to industrial customers in the form of
cogeneration or from independent power producers. However, management believes
that its rates and the quality and reliability of their service place Cleco
35
Power in a favorable competitive position in current retail markets, as Cleco
Power has ranked number one in reliability among electric utility companies in
Louisiana for the past two years, based upon received annual filings in the LPSC
Reliability Order.
Regulatory Matters - Wholesale Electric Competition
In 1999, the FERC issued Order No. 2000, which, together with prior
orders issued by the FERC, defines the operation of utilities' transmission
systems. This order establishes a general framework for all transmission-owning
entities in the nation to voluntarily place their transmission facilities under
the control of an appropriate RTO. Although participation is voluntary, the FERC
has made it clear that any jurisdictional entity not participating in an RTO
will be subject to further regulatory directives. Current objectives state that
all electric utilities that own operate or control interstate transmission
facilities should participate in an RTO that will be operational no later than
December 15, 2001. On October 16, 2000, Cleco Power submitted a filing with the
FERC stating that it will join the SPP's RTO, either as a member of the SPP
Independent System Operator or as part of a transmission company proposed by
Entergy Corporation, by December 15, 2001. The decision will be made once the
details of the SPP and Entergy proposals are finalized.
The transfer of control of Cleco Power's transmission facilities to an
RTO has the potential to materially affect Cleco Power's results of operations
and financial condition. Additionally, Cleco Power cannot predict the possible
impact to financial earnings that may arise from the adoption of new
transmission rates resulting from Cleco Power's expected membership in an RTO.
On October 13, 2000, SPP and Entergy jointly submitted a filing with the
FERC outlining their plan to operate their hybrid RTO. On March 28, 2001, the
FERC released an order regarding the SPP/Entergy RTO filing. The FERC raised
concerns about the scope and configuration of the proposed RTO, saying it did
not completely accommodate the area's electricity market under guidelines the
FERC issued for RTOs last year. The FERC directed the SPP to file a report by
May 25, 2001, to outline how it expects to better meet these guidelines and was
urged to look for opportunities to expand the RTO. The SPP is actively working
toward a resolution of these concerns.
Wholesale energy markets, including the market for wholesale electric
power, have been competitive and are becoming even more so as the number of
participants in these markets increases as a result of enactment of the Energy
Policy Act and the regulatory activities of the FERC.
No federal legislation was passed during the 2000 legislative session,
although several bills were proposed that addressed both restructuring of the
industry and transmission reliability issues. Several of these bills in various
new forms, as well as several new proposals, have been introduced and are being
actively debated within Congress and the Senate. The Company cannot predict
what future legislation may be proposed and/or passed and what effect it may
have upon its results of operations or financial condition.
36
NEW POWER PLANTS
APP is a joint venture by Midstream and Calpine Corporation that is in
the process of constructing a new 1,000 MW, natural gas-fired power plant near
Eunice, Louisiana. Construction on the plant has begun, with a projected
completion date of mid-2002. Construction costs of the plant are estimated to
be approximately $564 million. As of March 31, 2001 APP has spent $248 million
on constructing the plant. Permanent non-recourse financing is expected to be
received by the end of 2001. APP is owned 50% by Midstream and 50% by Calpine
Corporation. The investment in APP is being accounted for using the equity
method of accounting by the Company. As of March 31, 2001, Midstream has
contributed $127.2 million in cash and land to APP.
APP has entered into a tolling agreement with Aquila Energy for 580 MW
of capacity starting on July 1, 2002, and continuing for 20 years. Under the
tolling agreement, Aquila will supply the natural gas required to generate 580
MW and will own the electricity. APP expects to toll the remaining capacity of
the facility before commercial operations commence in mid-2002.
PEP is a joint venture by Midstream and Mirant that is in the process of
constructing a 700 MW combined-cycle, natural gas-fired power plant in
Perryville, Louisiana. Total construction cost of the plant to be incurred by
PEP are estimated at $340 million. As of March 31, 2001, PEP has spent $77.5
million on constructing the plant. Permanent non-recourse financing at PEP is
expected to be received in the second quarter of 2001. The investment in PEP is
accounted for using the equity method of accounting by the Company. As of March
31, 2001, Midstream has contributed $8.1 million in cash to PEP.
On April 30, 2001, PEP announced the signing of a long-term power
purchase agreement for its 700-megawatt facility, the Perryville Power Station.
The 20-year contract is with Mirant Marketing, Mirant's risk management, trading
and marketing organization. Under the terms of the contract, Mirant Marketing
will supply the natural gas needed to fuel the plant and will own the plant's
output.
CONSTRAINTS ON PURCHASED POWER
In future years, Cleco Power's generating facilities may not supply
enough electric power to meet its customers' growing demand (native load demand)
and it may need to purchase additional generating capacity and/or purchase power
to satisfy these needs. In March 2000, following a competitive bid process,
Cleco Power entered into three contracts for firm electric capacity and energy
with Williams Energy and Dynegy for 605 MW of capacity in 2000, increasing to
760 MW of capacity in 2004. These contracts were approved by the LPSC in March
2000. Management expects to meet substantially all of its native load demand
through 2004 with Cleco Power's own generation capacity and the power purchase
agreements with Williams Energy and Dynegy. Because of its location on the
transmission grid, Cleco Power relies on one main supplier of electric
transmission and is sometimes constrained as to the amount of purchased power it
can bring into its system. The power contracts described above are not expected
to be affected by such transmission constraints.
37
NEW ACCOUNTING STANDARD
Periodically the FASB issues Statements of Financial Accounting
Standards. These statements reflect accounting, reporting and disclosure
requirements the Company should follow in the accumulation of financial data and
in the presentation of financial statements. The FASB, a nongovernmental
organization, is the primary source of generally accepted accounting principles
within the United States.
In 1998, the FASB issued SFAS No. 133, which established accounting and
reporting standards requiring that every derivative instrument (including
certain derivatives embedded in other contracts) be recorded on the balance
sheet as either an asset or liability measured at its fair value. This statement
requires that changes in the derivative's fair value be recognized in current
earnings, unless effective hedge accounting criteria are met, where changes in
the fair value of the derivative would be recorded in other comprehensive income
in the equity section of the balance sheet. In June of 1998, the FASB created
the DIG as a task force to assist the FASB in answering questions that companies
face when implementing SFAS No. 133. The DIG reaches tentative conclusions about
practice issues that arise when applying SFAS No. 133. The conclusions remain
tentative until they are formally cleared by the FASB and become part of the
FASB staff implementation guide. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective start date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which
amended SFAS No. 133. The Company implemented the requirements of these
accounting standards effective January 1, 2001.
Management continues to monitor the conclusions reached by the DIG and
formally cleared by the FASB. As conclusions clarify certain technical aspects
of SFAS No. 133, Management's assessment of contracts that are subject to SFAS
No. 133 and the implementation of SFAS No. 133 may change.
Cleco Power
Cleco Power has entered into futures and options contracts and forward
contracts for the purchase or sale of electricity and natural gas. Generally,
contracts for the future purchase of electricity and natural gas for consumption
are not subject to the fair market value requirements of SFAS No. 133 as these
transactions are considered normal purchases. These contracts not subject to the
requirements of SFAS No. 133 do not have the changes in fair market value
reflected in either current earnings or other comprehensive income. Certain of
Cleco Power's forward, futures and options contracts have changes in fair market
value recognized in current earnings as required by SFAS No. 133. Cleco Power
has from inception marked-to-market the open positions under these contracts
and, as such, implementation of SFAS No. 133, as amended, did not have an impact
on the current accounting procedures or results of Cleco Power. Changes in fair
market value are influenced by various market factors, including weather and the
availability of regional electric generation and transmission capacity.
38
Midstream
Marketing & Trading engages in activities that are considered "trading"
as defined by EITF No. 98-10. All of Marketing & Trading's positions are
currently being marked-to-market under the rules of EITF No. 98-10. As such,
implementation of SFAS No. 133, as amended, did not have an impact on the
current accounting procedures or results of Marketing & Trading. Evangeline owns
and operates the facility, yet tolls the power output of the Evangeline Power
Station to Williams Energy under an operating lease. This operating lease
is not subject to the requirements of SFAS No. 133.
Energy engages in the wholesale marketing of natural gas and the
production, gathering and transmission of natural gas. Certain futures and
options contracts between Energy and outside parties, and swap agreements
between Energy and a trading affiliate, are considered derivatives. These
contracts are designated as cash flow hedges against fluctuations in the price
of natural gas. Changes in the fair market value of open positions with outside
parties are recognized in other comprehensive income. A transition adjustment
relating to these contracts was recorded at January 1, 2001 in the statement of
other comprehensive income, that reduced equity by approximately $4.5 million.
For the three months ended March 31, 2001, Energy's equity balance increased by
approximately $4.4 million. Approximately $2.2 million of this increase was due
to a reduction in the market price of natural gas and the recognition in
earnings from contracts related to underlying transactions that were completed.
The remaining $2.2 million increase resulted from the assignment of several
underlying gas purchase and sales transactions to an affiliated trading company
and the subsequent termination of related swap agreements with that affiliate.
These transactions were then accounted for by the affiliate under mark-to-market
accounting appropriate for a trading organization. The remaining equity balance
at March 31 is expected to be reclassified into earnings within the next 3
months as the underlying contracts are completed and the remaining financial
positions are closed.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK OF CLECO CORPORATION
The market risk inherent in the Company's market risk-sensitive
instruments and positions is the potential change arising from increases or
decreases in the short-, medium- and long-term interest rates, the commodity
price of electricity traded on the Into Entergy and the Into Cinergy exchanges,
and the commodity price of natural gas traded. Generally, Cleco Power's market
risk sensitive instruments and positions, such as instruments used to provide
fuel to its retail utility customers, are characterized as "other than trading"
as defined by EITF No. 98-10. However, Cleco Power does have positions that are
considered "trading" as defined by EITF No. 98-10, such as its positions in
energy marketing operations. All of Marketing & Trading's positions are
characterized as "trading" under EITF No. 98-10. The Company's exposure to
market risk, as discussed below, represents an estimate of possible changes in
the fair value or future earnings that would occur, assuming possible future
movements in the interest rates and commodity prices of electricity and natural
gas. Management's views on market risk are not necessarily indicative of actual
results, nor do they represent the maximum possible gains or losses. The views
do represent, within the parameters disclosed, what management estimates may
happen.
Interest Rate Risks
The Company has entered into various fixed- and variable-rate debt
obligations. The calculations of the changes in fair market value and interest
expense of the debt securities are made over a one-year period.
39
Sensitivity to changes in interest rates for fixed-rate obligations is
computed by calculating the current fair market value using a net present value
model based upon a 1% change in the average interest rate applicable to such
debt. Sensitivity to changes in interest rates for variable-rate obligations is
computed by assuming a 1% change in the current interest rate applicable to such
debt.
As of March 31, 2001, the carrying value of the Company's consolidated
short-term variable-rate debt was approximately $107.8 million, which
approximates the fair market value. Fair value was determined using quoted
market prices. Each 1.0% change in the average interest rates applicable to
such debt would result in a change of approximately $1.1 million in the
Company's pretax earnings.
As of March 31, 2001, the carrying value of Cleco Power's short-term
variable-rate debt was approximately $72.6 million, which approximates the fair
market value. Each 1.0% change in the average interest rates applicable to such
debt would result in a change of approximately $0.7 million in Cleco Power's
pretax earnings.
The Company 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
by, for example, refinancing balances outstanding under its variable-rate
commercial paper program with fixed-rate debt.
Commodity Price Risks
Management believes the Company has in place controls to help minimize
the risks involved in marketing and trading. Controls over marketing and
trading consist of a back office (accounting) and mid-office (risk management)
independent of the marketing and trading operations, oversight by a risk
management committee comprised of Company officers and a daily risk report which
shows value-at-risk (VAR) and current market conditions. The Company's Board of
Directors appoint the members of the Risk Management Committee. VAR limits are
set and monitored by the Risk Management Committee.
Marketing & Trading engages in marketing and trading of electricity and
natural gas. All of Marketing & Trading's trades are considered "trading" under
EITF No. 98-10 and are marked-to-market. Due to market price volatility, mark-
to-market reporting may introduce volatility to carrying values and hence to the
Company's financial statements. The mark-to-market of trading positions of
Marketing & Trading at March 31, 2001 was a gain of $2.0 million.
Most of Cleco Power's positions are considered "other than trading" under
EITF No. 98-10. However, Cleco Power does have financial positions that are
defined at "trading" under EITF No. 98-10. At March 31, 2001, the mark-to-
market for those positions was a loss of $1.4 million.
Both Marketing & Trading and Cleco Power utilize a VAR model to assess
the market risk of their trading portfolios including the derivative financial
instruments. VAR
40
represents the potential loss in fair values for an instrument from adverse
changes in market factors for a specified period of time and confidence level.
The VAR is estimated using a historical simulation calculated daily assuming a
holding period of one day, with a 95% confidence level for natural gas positions
and a 99.7% confidence level for electricity positions. Total volatility is
based on historical cash volatility, implied market volatility, current cash
volatility and option pricing. Based on these assumptions, the high, low and
average VAR during the three months and for the three months ended March 31,
2001, as well as the VAR at March 31, 2001, is summarized below:
AT
FOR THE THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2001
----------------------------------------- --------------
HIGH LOW AVERAGE
---- --- -------
(Thousands)
Marketing & Trading $4,056.8 $402.1 $1,790.9 $1,715.9
Cleco Power $ 321.8 $ 70.6 $ 145.1 $ 121.5
Consolidated $4,199.5 $546.7 $1,935.9 $1,837.4
All of Energy's positions are considered "other than trading" under EITF
No. 98-10. Energy does not record a gain/loss in the income statement and its
VAR for the three months ended and at March 31, 2001 is immaterial.
41
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
For a description of legal proceedings affecting the Company, please
review Note G - LDEQ Litigation, in the Notes to the Unaudited Financial
Statements in this report, which is incorporated herein by reference.
For a description of legal proceedings affecting the Company and Cleco
Power, please review Note B-Legal Proceeding: Fuel Supply - Lignite, in the
Notes to the Unaudited Financial Statements in this report, which is
incorporated herein by reference.
42
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Cleco Corporation:
11(a) Computation of Net Income Per Common Share for the three
months ended March 31, 2001
11(b) Computation of Net Income Before Extraordinary Item Per
Common Share for the three months ended March 31, 2001
12 Computation of Ratio of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends for the three and twelve month periods ended March
31, 2001, for Cleco Corporation
Cleco Power:
12 Computation of Ratio of Earnings to Fixed Charges for the
three and twelve month periods ended March 31, 2001, for
Cleco Power
(b) Reports on Form 8-K
Cleco Corporation:
On March 6, 2001, Cleco Corporation filed a report on Form 8-K dated
as of December 31, 2000 including as exhibits Management's Discussion and
Analysis of Financial Condition and Results of Operations and Audited
Financial Statements for the years ended December 31, 2000, 1999 and
1998.
On April 3, 2001, Cleco Corporation filed a report on Form 8-K dated as
of April 2, 2001 including as an exhibit a press release announcing the
sale of UtiliTech.
On April 30, 2001, Cleco Corporation filed a report on Form 8-K dated as
of April 27, 2001 including as an exhibit a press release describing the
Company's two-for-one stock split.
On May 7, 2001, Cleco Corporation filed a report on Form 8-K dated as of
May 7, 2001 in lieu of post-effective amendments to certain registration
statements listed in an exhibit thereto.
43
Cleco Power:
On January 4, 2001, Cleco Power filed a report on Form 8-K dated as of
December 31, 2000 reporting the conversion of Cleco Utility Group Inc.
into a limited liability company via a merger with and into Cleco Power.
On April 26, 2001, Cleco Power filed a report on Form 8-K dated as of
April 26, 2001 including as exhibits a Selling Agency Agreement, Third
Supplemental Indenture and Forms of Notes relating to Cleco Power's
offering from time to time of its Medium Term Notes, Series C.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLECO CORPORATION
(Registrant)
By: /s/ R. Russell Davis
-----------------------
R. Russell Davis
Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2001
45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLECO POWER LLC
(Registrant)
By: /s/ R. Russell Davis
-----------------------
R. Russell Davis
Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2001
46