- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000 Commission file number 1-15759
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
CLECO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-1445282
(State or other jurisdiction of (I.R.S. Employer
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 Registrant: (1) has 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
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
As of May 1, 2000, there were 22,475,118 shares outstanding of the
Registrant's Common Stock, par value $2.00 per share.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 1
Consolidated Interim Statements of Income............... 2
Consolidated Balance Sheets............................. 3
Consolidated Statements of Cash Flows................... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11
Disclosure Regarding Forward-Looking Statements........ 11
Results of Operations.................................. 11
Financial Condition.................................... 14
Repowering Project..................................... 16
Constraints on Purchased Power......................... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 17
PART II. OTHER INFORMATION
Item 5. Other Information............................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................. 20
SIGNATURE................................................................ 21
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements for Cleco Corporation (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, 2000 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (1999 Form 10-K).
Effective July 1, 1999, Cleco Utility Group Inc. (Utility Group)
reorganized into a holding company structure. This reorganization resulted in
the creation of the Company as a new holding company. Pursuant to the
reorganization, the Company became the owner of all of Utility Group's
outstanding common stock. Holders of Utility Group's existing common stock and
two series of preferred stock exchanged their stock in Utility Group for stock
in the Company. Shares of preferred stock in three series that did not approve
the reorganization were redeemed for $5.7 million. The reorganization had no
impact on the Company's Consolidated Financial Statements because the
reorganization was accounted for similarly to a pooling of interest.
The consolidated financial statements included herein have been
subjected to a limited review by PricewaterhouseCoopers LLP, independent
accountants for the Company.
1
CLECO CORPORATION
CONSOLIDATED INTERIM STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(In thousands, except share and
per share amounts)
2000 1999
-------------- --------------
OPERATING REVENUES
Retail electrical operations $ 113,314 $ 102,656
Energy marketing operations 25,302 19,063
Other operations 3,626
----------- -----------
Gross operating revenue 142,242 121,719
Less retail electric customer credits (1,216)
----------- -----------
Total operating revenue 141,026 121,719
OPERATING EXPENSES
Fuel used for electric generation 30,639 25,565
Power purchased for utility customers 14,513 14,823
Purchases for energy marketing operations 24,546 18,574
Other operation 18,401 15,826
Maintenance 7,699 6,120
Depreciation 12,792 12,390
Taxes other than income taxes 9,333 8,940
----------- -----------
Total operating expenses 117,923 102,238
OPERATING INCOME 23,103 19,481
Allowance for other funds used during
construction 369 187
Other income and expenses, net 451 (315)
----------- -----------
INCOME BEFORE INTEREST CHARGES 23,923 19,353
Interest charges, including amortization of
debt expenses, premium and discount 9,306 6,988
Allowance for borrowed funds used during
construction (124) (195)
----------- -----------
NET INCOME BEFORE INCOME TAXES,
PREFERRED DIVIDENDS AND EXTRAORDINARY ITEM 14,741 12,560
Federal and state income taxes 4,518 4,020
----------- -----------
NET INCOME BEFORE PREFERRED DIVIDENDS AND
EXTRAORDINARY ITEM 10,223 8,540
Extraordinary item, net of income taxes 2,508
----------- -----------
NET INCOME BEFORE PREFERRED DIVIDENDS 12,731 8,540
Preferred dividend requirements, net 473 523
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 12,258 $ 8,017
=========== ===========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic 22,442,129 22,508,330
Diluted 23,781,454 23,877,305
EARNINGS PER AVERAGE SHARE
Basic
Income before extraordinary item $ 0.43 $ 0.36
Net income applicable to common stock $ 0.54 $ 0.36
Diluted
Income before extraordinary item $ 0.43 $ 0.35
Net income applicable to common stock $ 0.53 $ 0.35
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.415 $ 0.405
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
CLECO CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 19,319 $ 25,161
Accounts receivable, net 53,983 47,213
Unbilled revenues 19,385 20,816
Fuel inventory, at average cost 8,029 10,461
Materials and supplies inventory, at average cost 14,838 14,768
Assets for sale 8,653 2,466
Other current assets 13,187 4,475
---------- ----------
Total current assets 137,394 125,360
Property, plant and equipment
Property, plant and equipment 1,577,821 1,579,304
Accumulated depreciation (567,653) (555,675)
---------- ----------
Net property, plant and equipment 1,010,168 1,023,629
Construction work-in-progress 225,765 187,988
---------- ----------
Total property, plant and equipment, net 1,235,933 1,211,617
Other assets 4,225 4,225
Prepayments 6,774 6,427
Restricted cash 39,173 77,251
Regulatory assets - deferred taxes 115,974 115,918
Other deferred charges 38,200 38,213
Accumulated deferred federal and state income taxes 124,888 125,639
---------- ----------
TOTAL ASSETS $1,702,561 $1,704,650
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
(Continued on next page)
3
CLECO CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(In thousands, except share amounts)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 51,707 $ 25,989
Long-term debt due within one year 27,320 27,374
Accounts payable 38,245 74,700
Retainage 8,758 7,733
Customer deposits 20,512 20,326
Taxes accrued 16,203 4,786
Interest accrued 3,731 9,634
Accumulated deferred fuel 1,605 2,638
Other current liabilities 4,422 5,263
---------- ----------
Total current liabilities 172,503 178,443
Deferred credits
Accumulated deferred federal and state income taxes 320,874 321,197
Accumulated deferred investment tax credits 25,558 25,994
Regulatory liabilities - deferred taxes 118,136 97,154
Other deferred credits 30,924 49,722
---------- ----------
Total deferred credits 495,492 494,067
Long-term debt, net 577,765 579,595
---------- ----------
Total liabilities 1,245,760 1,252,105
Shareholders' equity
Preferred stock
Not subject to mandatory redemption 28,880 28,880
Deferred compensation related to preferred stock
held by ESOP (13,664) (14,991)
---------- ----------
Total preferred stock not subject to mandatory
redemption 15,216 13,889
Common shareholders' equity
Common stock, $2 par value, authorized 50,000,000
shares, issued 22,531,870 shares at March 31,
2000 and December 31, 1999 45,064 45,064
Premium on capital stock 112,733 112,733
Long-term debt payable in Company's common stock 1,036 1,036
Retained earnings 285,769 282,825
Treasury stock, at cost, 90,513 and 90,094 shares
at March 31, 2000 and December 31, 1999,
respectively (3,017) (3,002)
---------- ----------
Total common equity 441,585 438,656
---------- ----------
Total shareholders' equity 456,801 452,545
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,702,561 $1,704,650
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
CLECO CORPORATION
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(In thousands)
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before preferred dividends $ 12,731 $ 8,540
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 13,048 12,539
Allowance for funds used during construction (493) (382)
Amortization of investment tax credits (436) (448)
Deferred income taxes (2,044) (1,251)
Deferred fuel costs (1,033) 3,883
Extraordinary gain, net of income tax (2,508)
Gain on disposition of plant, net (108)
Changes in assets and liabilities
Accounts receivable, net (6,771) (8,074)
Unbilled revenues 1,431 1,165
Fuel inventory, materials and supplies 2,362 (6,944)
Accounts payable (35,430) (24,340)
Customer deposits 186 (8)
Other deferred accounts 2,961 (392)
Taxes accrued 9,949 9,621
Interest accrued (5,903) (5,215)
Other, net (6,588) 5,421
-------- --------
Net cash used in operating activities (18,538) (5,993)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to utility plant (37,879) (37,057)
Allowance for funds used during construction 493 382
Proceeds from sale of plant 57 44
Other (80)
-------- --------
Net cash used in investing activities (37,329) (36,711)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 239
Cash transferred from restricted account 38,078
Increase in short-term debt, net 23,478 51,852
Retirement of long-term obligations (2,100) (77)
Issuance of long-term debt 356
Redemption of preferred stock (711)
Dividends paid on common and preferred stock, net (9,787) (9,633)
-------- --------
Net cash provided by financing activities 50,025 41,670
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,842) (1,034)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,161 19,457
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,319 $ 18,423
======== ========
Supplementary cash flow information
Interest paid (net of amount capitalized) $ 15,225 $ 12,402
======== ========
Income taxes paid $ 1,000 $ 2,000
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
CLECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A. RECLASSIFICATION
Certain prior-period amounts have been reclassified to conform with the
presentation shown in the current year's consolidated financial statements of
Cleco Corporation (Company) and its subsidiaries. These reclassifications had no
effect on net income applicable to common stock or common shareholders' equity.
NOTE B. LEGAL PROCEEDING: FUEL SUPPLY - LIGNITE
Cleco Utility Group Inc. (Utility Group) and Southwestern Electric Power
Company (SWEPCO), each a 50% owner of Dolet Hills Unit 1, jointly own lignite
reserves in the Dolet Hills area of northwestern Louisiana. In 1982, Utility
Group and SWEPCO entered into a Lignite Mining Agreement (LMA) with the Dolet
Hills Mining Venture (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, Utility Group 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 1999, Utility Group and SWEPCO received deliveries which
approximated 25% of the annual lignite consumption at the Dolet Hills Unit 1
from the other lignite supplier.
On April 15, 1997, Utility Group and SWEPCO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana (Federal Court Suit) seeking to enforce various obligations of DHMV to
Utility Group and SWEPCO under the LMA, including provisions relating to the
quality of the delivered lignite, pricing, and mine reclamation practices. On
June 15, 1997, DHMV filed an answer denying the allegations in Utility Group's
suit and filed a counterclaim asserting various contract-related claims against
Utility Group and SWEPCO. Utility Group and SWEPCO have denied the allegations
in the counterclaims on the grounds the counterclaims have no merit.
The counterclaims filed by DHMV in the Federal Court Suit resulted in
Utility Group and SWEPCO filing a separate lawsuit against the parent companies
of DHMV, namely, Jones Capital Corporation and Philipp Holzmann USA, Inc., on
August 13, 1997, in the First Judicial District Court for Caddo Parish,
Louisiana (State Court Suit). 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.
On March 1, 2000, the court in the Federal Court Suit ruled that DHMV was
not in breach of certain financial covenants under the LMA and denied Utility
Group's and SWEPCO's claim to terminate the LMA on that basis. The ruling has no
material adverse effect on the operations of Utility Group and does not affect
the other claims scheduled for trial in May 2000. Utility Group
6
and SWEPCO have appealed the federal court's ruling to the United States Court
of Appeals for the Fifth Circuit.
The civil, non-jury trial was to have commenced on May 22, 2000. However on
April 20, 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 a final settlement of the litigation.
On April 20, 2000, the federal court granted the motion, stayed the action at
the trial court and postponed the trial commencement date to October 23, 2000.
Should settlement discussions be unsuccessful, Utility Group and SWEPCO will
continue to aggressively prosecute the claims against DHMV and defend against
the counterclaims which DHMV has asserted. Utility Group 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 Utility Group, management
does not believe that the outcome of the Federal Court Suit or any settlement in
the Federal Court Suit will have a significant adverse effect on Utility Group's
financial position or results of operations.
NOTE C. EXTRAORDINARY GAIN
In March 2000, Four Square Gas Company, Inc. (Four Square Gas), a wholly
owned subsidiary of Cleco Energy, LLC (Energy), which is 98% owned by Cleco
Midstream Resources LLC (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, L.L.C. (Four Square Production), another wholly owned subsidiary of
Energy. The note relates to the production assets held by Four Square Production
classified as assets available for sale, described in Note D. As a 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. The extraordinary gain, net of
income tax, had a basic earnings per share impact of $0.11 and a diluted
earnings per share impact of $0.10.
NOTE D. ASSETS HELD FOR SALE
Certain oil and gas properties held by Energy have been identified as
"Assets Held for Sale" and are accounted for in accordance with the provisions
of Emerging Issues Task Force (EITF) Consensus No. 87-11, "Allocation of
Purchase Price to Assets to Be Sold." Oil and gas properties held for sale are
reflected net of working capital and debt specifically identified with the
purchase of the oil and gas properties. These properties are periodically
reviewed to determine if they have been impaired. The components of the assets
available for sale consist of assets with a book value of approximately $8.9
million offset by accumulated capitalized losses from the first 12 months of
ownership of the assets of $0.3 million, for a net of $8.6 million, which is
reported in other current assets. Long-term debt of approximately $6.1 million
relating to the oil and gas properties incurred was purchased by an affiliate as
described in Note C. Net
7
losses from the properties subsequent to September 1999 are reported in the
consolidated income statement because the one-year period for capitalizing such
losses ended in September 1999.
NOTE E. 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. The Company's reportable segments are Utility Group,
Midstream and Utility Construction & Technology Solutions LLC (UtiliTech).
Reportable segments were determined by applying SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." 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. Budgets were
prepared by each reportable segment for 2000, which were presented to, and
approved by, the Company's Board of Directors.
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. These subsidiaries operate within Louisiana and Delaware.
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. In the first six months of 1999, Midstream and
UtiliTech reported profit (loss) as other income (expense) within Utility Group.
For purposes of this footnote, gross amounts of revenue and expenses are
reported on the appropriate line. The Unallocated Items, Reclassifications &
Eliminations column reclassifies the items of revenue and expense recorded under
the equity method to other income (expense). Material intersegment transactions
occur on a regular basis.
The table below presents information about the reported operating
results and net assets of the Company's reportable segments.
8
(In thousands)
============================================================================================================
UNALLOCATED
ITEMS,
RECLASSIFICATIONS
UTILITY &
2000 GROUP MIDSTREAM UTILITECH OTHERS ELIMINATIONS CONSOLIDATED
- -------------- ---------- --------- --------- -------- ------------ ------------
Revenues
Retail electric
operations $ 113,296 $ 18 $ 113,314
Energy marketing
operations 7,086 18,216 25,302
Other operations $3,609 $ 17 3,626
Customer credits (1,216) (1,216)
---------- -------- ------ ---------- ----------
Total operating revenue 119,166 18,234 3,609 17 141,026
Intersegment revenues 2,553 7,323 303 10,055 $ (20,234)
Segment profit (loss)
before Extraordinary
item (1) 18,769 (3,308) (917) 197 14,741
Segment profit (loss) (2) 18,769 (800) (917) 197 17,249
Segment assets $1,375,433 $270,298 $2,145 $277,430 $(222,730) $1,702,576
- ------------------------------------------------------------------------------------------------------------
(1) RECONCILIATION OF SEGMENT PROFIT TO
CONSOLIDATED PROFIT SEGMENT PROFIT $17,249
UNALLOCATED ITEMS
INCOME TAXES 4,518
PREFERRED DIVIDENDS 473
-------
$ 9,750
=======
(2) INCLUDES EXTRAORDINARY GAIN, NET OF INCOME TAX
============================================================================================================
1999
Revenues
Retail electric
operations $ 102,656 $ 102,656
Energy marketing
operations 19,063 $ 202 $ (202) 19,063
Other operations $ 744 $ 141 (885)
Customer credits
---------- ------- ------ ------- --------- ----------
Total operating revenues 202 744 (1,087) 121,719
Intersegment revenues 649 334 366 (1,349)
Segment profit (loss)
before extraordinary
item (1) 12,560 (801) (41) 506 336 12,560
Segment profit (loss) 12,560 (801) (41) 506 336 12,560
Segment assets $1,488,014 $89,818 $3,627 $27,983 $(109,244) $1,500,198
- ------------------------------------------------------------------------------------------------------------
(1) Reconciliation of segment profit to
consolidated profit Segment profit $12,560
Unallocated items
Income taxes 4,020
Preferred dividends 523
-------
$ 8,017
=======
NOTE F. EVANGELINE PROJECT CONSTRUCTION
During March 2000, a problem was found with the low pressure rotor in
one of the Cleco Evangeline LLC (Evangeline) power plant's turbines. As a
result, the running of one of the plant's two generating units in combined cycle
will be delayed, but it will still be able to run in simple cycle by June 2000.
The other unit is expected to be in operation in combined cycle by June 2000.
Management expects the second unit to be able to start running in combined cycle
sometime in July 2000. The inability to run the second unit in combined cycle
will reduce the
9
megawatt capacity of the plant during the month of June. Management does not
expect the delay to significantly affect the financial position or results of
operations of the Company.
NOTE G. DEBT
A wholly owned subsidiary of the Company, UtiliTech, has a $2 million
line of credit with a bank. At March 31, 2000, UtiliTech did not have $2 million
in tangible net worth as required by, and calculated in accordance with, the
line of credit agreement. UtiliTech cannot draw on the line of credit until it
meets that requirement. There were no amounts outstanding under the line of
credit at March 31, 2000. Management determined that the inability of UtiliTech
to meet the requirement of its line of credit agreement does not affect the
financial covenants to which the Company and certain of its other subsidiaries
are subject.
NOTE H. EARNINGS PER SHARE
During 1999 the Company granted two types of non-qualified stock options
under the incentive compensation plan -- basic and premium options. Basic
options have an exercise price approximately equal to the fair market value of
the stock at grant date. Premium options have three exercise prices that are
above the fair market value of the stock at grant date. Both types of options
granted in 1999 vest one-third each year beginning on the third anniversary of
the grant date. Both types of options granted in 1999 expire after ten years.
The 371,400 premium options outstanding were considered antidilutive during the
three months ended March 31, 2000, as defined by SFAS No. 128, "Earnings per
Share," and were excluded from the calculation of diluted earnings per share.
The basic options were included in the calculation of diluted earnings per
share.
NOTE I. RESTRICTED CASH
Restricted cash represents cash to be used for specific purposes.
Approximately $15 million in restricted cash represents deposits into an escrow
account for credit support as required by a provision of the Capacity Sale and
Tolling Agreement between Evangeline and Williams Energy Marketing & Trading
Company (Williams). The credit support is to be maintained as security for the
performance of certain obligations of Evangeline in regards to the Capacity Sale
and Tolling Agreement. Upon the fulfillment of certain conditions, the credit
support can be reduced to $13 million. The remaining restricted cash is the
proceeds from the sale of Evangeline senior secured bonds, which are to be used
for the construction of the Evangeline power plant.
10
CLECO CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in combination with
Management's Discussion and Analysis of Results of Operations and Financial
Condition in Item 7 of the 1999 Form 10-K, the financial statements and notes
contained in Item 8 of the 1999 Form 10-K, and the interim financial statements
and notes thereto contained elsewhere in this Report.
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 believes 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 which could cause the actual results to
differ materially from the Company's expectations. Such risks and uncertainties
include, without limitation, the effects of competition in the power industry,
legislative and regulatory changes affecting electric utilities, the weather and
other natural phenomena, the operating performance of the facilities of Cleco
Utility Group Inc. (Utility Group) and Cleco Evangeline LLC (Evangeline), and
changes in general economic and business conditions, as well as other factors
discussed in this and the Company's other filings with the Securities and
Exchange Commission (Cautionary Statements). All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
EARNINGS
Net income before the extraordinary item discussed below totaled $9.7
million or $0.43 per basic average common share for the first quarter of 2000,
as compared to $8.0 million or $0.36 per basic average common share for the
corresponding period in 1999. Earnings before the extraordinary item increased
primarily due to increased earnings within Utility Group from increased
kilowatt-hour (KWH) sales as compared to the same period in 1999. The increased
earnings from Utility Group were partially offset by an increase in start-up
expenses at Cleco Midstream Resources LLC (Midstream) and at Utility
Construction & Technology Solutions LLC (UtiliTech).
Net income applicable to common stock totaled $12.3 million or $0.54 per
basic average common share for the first quarter of 2000, as compared to $8.0
million or $0.36 per basic average common share for the corresponding period in
1999. The increase in earnings primarily resulted from an extraordinary gain on
extinguishment of debt. In March 2000, Four Square Gas
11
Company, Inc. (Four Square Gas), a wholly-owned subsidiary of Cleco Energy, LLC
(Energy), which is 98% owned by Cleco Midstream Resources LLC (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, L.L.C. (Four Square Production),
another wholly owned subsidiary of Energy. The note relates to the production
assets held by Four Square Production classified as assets available for sale,
described in Note D. As a 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. The extraordinary gain, net of income tax, had a
basic earnings per share impact of $0.11 and a diluted earnings per share impact
of $0.10.
CONSOLIDATED REVENUES
Operating revenues for the first quarter of 2000 increased $19.3 million
or 15.8% compared to the same period in 1999. This increase was primarily due to
a $10.6 million increase in retail electric operations, partially offset by an
increase of $1.2 million in retail electric customer credits. Also contributing
to the increase in operating revenues were a $6.2 million increase in energy
marketing operations revenue and a $3.6 million increase in other operations
revenue. Changes in consolidated revenues are further explained in the
discussion of each major subsidiary of the Company below.
UTILITY GROUP
(In thousands)
Percent
Revenues: 2000 1999 Change
--------- --------- -------
Base $ 69,036 $ 63,978 7.9%
Fuel cost recovery 44,260 38,678 14.4%
Estimated customer credits (1,216)
Energy marketing 7,086 19,063 (62.8)%
-------- --------
Total revenues $119,166 $121,719 (2.1)%
======== ========
Base revenues for the first quarter of 2000 increased $5.1 million
compared to the same period in 1999. The increase in base revenues was primarily
due to an increase of KWH sales to residential customers of 10.9% over the first
quarter of 1999, which resulted in an increase of $3.1 million in base revenues.
KWH sales to industrial customers during the first quarter of 2000 increased
12.3% compared to the same period in 1999, increasing base revenues for the
first quarter of 2000 by $0.9 million as compared to the first quarter of 1999.
Moderating the increases in residential and industrial KWH sales were a decrease
in sales to public utilities of 20.2% and a decrease in sales to public
authorities of 17.6%. Overall KWH sales to regular customers during the first
quarter of 2000 increased 6.6% over the first quarter of 1999. The increase in
overall KWH sales was largely due to higher cooling degree-days in the first
quarter of 2000 when compared to the first quarter of 1999.
12
Fuel cost recovery revenues for the first quarter of 2000 increased $5.6
million, compared to the same period in 1999. Fuel cost recovery revenues
increased primarily from sales to residential customers, which increased $2.5
million, and sales to industrial customers, which increased $3.0 million in
relation to the same period in 1999. The increase in fuel cost recovery revenues
is related to higher KWH sales in the first quarter of 2000 compared to the
first quarter of 1999. Changes in fuel cost have historically had no effect on
net income, as fuel costs are generally recovered through a fuel costs
adjustment clause that enables Utility Group 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 Louisiana Public
Service Commission (LPSC) (representing about 99% of the total fuel cost
adjustment), while the remaining portion is regulated by the Federal Energy
Regulatory Commission (FERC). Until approval is received, the adjustments are
subject to refund.
Revenues for the first quarter of 2000 were decreased by a $1.2 million
accrual for estimated customer credits, which may be required under terms of an
earnings review settlement reached with the LPSC in 1996. The amount of credits
due customers, if any, is determined by the LPSC annually based on 12-month
ending results as of September 30 of each year. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Financial Condition
- - Retail Rates of Utility Group" in Item 7 of the 1999 Form 10-K for a
discussion of the LPSC settlement.
Energy marketing revenues for the first quarter of 2000 decreased $11.9
million as compared to the same period in 1999. The decrease primarily resulted
from a reduced level of energy trading activity resulting from a refinement of
trading practice to target selective market opportunities.
Operating expenses decreased $8.7 million, or 8.5%, during the first
quarter of 2000 compared to the same period in 1999. The decrease in operating
expenses is primarily the result of a decrease in energy marketing expenses.
Energy marketing expenses decreased $12.1 million compared to the same period in
1999 due to the same factors noted above for decreases in energy marketing
revenues. Offsetting the decrease in energy marketing expenses was an increase
of $5.4 million in fuel and purchased power for retail utility operations.
Utility Group purchases power from other electric power generators when
the price of the energy purchased is less than the cost to Utility Group of
generating such energy from its own facilities, or when Utility Group's
generating units are unable to provide electricity to satisfy its load.
Twenty-five percent of Utility Group's energy requirements during the first
quarter of 2000 were met with purchased power compared to 42% for the
corresponding period in 1999. The decrease was caused by a scheduled major
maintenance at the Dolet Hills Power Station in 1999, requiring Utility Group to
purchase more power in the first quarter of 1999 than it did in the first
quarter of 2000 to meet load requirements.
13
MIDSTREAM
Midstream revenues for the first quarter of 2000 were approximately
$18.2 million, an increase of $18.0 million over the first quarter of 1999.
Revenues resulted primarily from energy marketing activities. Revenues increased
because Cleco Marketing & Trading LLC (CMT) began operations on July 1, 1999;
consequently, CMT did not market energy in the first quarter of 1999.
Midstream operating expenses for the first quarter of 2000 were
approximately $21.2 million and consisted primarily of energy marketing expenses
of $18.1 million and non-capitalizable start-up expenses relating to the
construction of the Evangeline Power Plant of $0.9 million. Compared to the same
period in 1999, operating expenses increased $20.6 million, primarily due to the
timing of the start-up of operations of CMT.
UTILITECH
UtiliTech revenues for the first quarter of 2000 were approximately $3.6
million, an increase of $2.8 million as compared to the first quarter of 1999.
The increase is primarily due to the employment of additional line crews and the
corresponding completion of more construction projects. As of March 31, 2000,
UtiliTech had 39 line crews operating compared to 4 on March 31, 1999.
UtiliTech operating expenses for the first quarter of 2000 were
approximately $4.3 million, an increase of $3.1 million as compared to the first
quarter of 1999. The increase is due to the increased activity and cost of
maintaining and equipping the increased number of line crews employed by
UtiliTech.
CONSOLIDATED INTEREST EXPENSE
Interest expense for the first quarter of 2000 increased $2.3 million
over the same period in 1999. The increase was primarily due to
non-capitalizable interest expense associated with the construction of the
Evangeline Power Plant of $1.1 million and interest costs associated with
financing at the Company of $0.6 million.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, and December 31, 1999, the Company had $51.7 million
and $25.9 million, respectively, of short-term debt outstanding in the form of
commercial paper borrowing and bank loans. An existing $100 million Utility
Group revolving credit facility is scheduled to terminate on June 15, 2000. The
Company is a party to two separate credit facilities. A $120 million credit
facility that is scheduled to expire in August 2000, and an $80 million credit
facility that is scheduled to terminate in August 2002. Guaranties issued by the
Company to third parties for certain types of transactions between those parties
and the Company's subsidiaries, other than Utility Group, will reduce the amount
of the credit facilities available to the Company
14
by an amount equal to the stated or determinable amount of the primary
obligation. In addition, certain indebtedness incurred by the Company outside of
the credit facilities will reduce the amount of the credit facilities available
to the Company. The amount of such guaranties and other indebtedness totaled
$43.4 million at March 31, 2000. Uncommitted lines of credit with banks totaling
$15.0 million are also available to support working capital needs. Additionally,
UtiliTech has a $2.0 million line of credit. At March 31, 2000, UtiliTech did
not have $2 million in tangible net worth as required by, and calculated in
accordance with, the line of credit agreement. UtiliTech cannot draw on the line
of credit until it meets that requirement. At March 31, 2000, there was no
outstanding debt under the UtiliTech facility. These facilities provide support
for the issuance of commercial paper and working capital needs.
At March 31, 2000, CLE Resources, Inc., an unregulated subsidiary of the
Company, had $13.3 million of cash and temporary cash investments in securities
with original maturities of 90 days or less. Commitments for asset development
projects for Energy will be made as they occur up to $5 million per year for
years 1998 through 2002. Amounts not advanced in any year are added to the
amount available for the remaining years. A total of $2.5 million was advanced
in 1998 for the acquisition of Sabine Texican Pipeline Company, Inc. No amounts
were advanced in 1999. Energy has drawn down $2.5 million of the $25 million.
The cost of the repowering project at the Evangeline Power Plant is
estimated to be $256 million. The construction is being financed with
non-recourse bonds and an equity infusion from the Company. As of March 31,
2000, approximately $199.1 million has been spent on the project.
REGULATORY MATTERS - RETAIL ELECTRIC COMPETITION
Forces driving increased competition in the electric utility industry
involve complex economic, technological, legislative and regulatory factors.
These factors have resulted in the introduction of federal and state legislation
and other regulatory initiatives that are likely to produce even greater
competition at both the wholesale and retail levels in the future. The LPSC has
been continuing its investigation into whether retail choice is in the best
interest of Louisiana electric utility customers. During 1999 the LPSC directed
its staff to develop a transition to competition plan to be presented on or
before January 1, 2001. Utility Group 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. Several neighboring states have taken steps to initiate retail
choice by 2002. At the federal level, several bills, some with conflicting
provisions, have been introduced this past year to promote a more competitive
environment in the electric utility industry. Management expects the debate
relating to customer choice and other related issues to continue in legislative
and regulatory bodies in 2000. At this time, the Company cannot predict whether
any legislation or regulation will be enacted or adopted during 2000 and, if
enacted, what form such legislation or regulation would take.
The regulatory requirement to serve customers and industry standards for
reliability of electric supply have resulted in the construction of facilities
sufficient, when combined with power purchased off-system, for Utility Group to
meet peak load conditions with a margin for reserve. With customer choice, costs
associated with utility assets specifically dedicated to, or
15
used by, departing customers, such as Utility Group's generating plants and
power purchase contracts, would have to be paid by the departing customers
(stranded costs), absorbed by the remaining and new customers, or written off by
Utility Group.
REGULATORY MATTERS - WHOLESALE ELECTRIC COMPETITION
In 1996 the FERC issued Orders No. 888 and 889 requiring open access to
utilities' transmission systems. The open access provisions require
FERC-regulated electric utilities to offer third parties access to transmission
under comparable terms and conditions as the utilities' use of their own
systems. Providing unbundled transmission service to firm-requirements customers
may have significant financial consequences to the utility industry. Providing
open access for non-firm sales may have significant effects on utility
operations. Currently, Utility Group has three wholesale full-requirements
customers representing about 0.9% of its total KWH sales to regular customers.
In 1999 the FERC issued Order No. 2000 that further 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 appropriate Regional
Transmission Organizations (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 which own, operate or control interstate transmission
facilities should participate in an RTO that will be operational by no later
than December 15, 2001. The transfer of control over Utility Group's
transmission facilities has the potential to significantly affect utility
operations and revenues.
REPOWERING PROJECT
In July 1998, Utility Group's Board of Directors approved the
construction of a 750-megawatt repowering project (Project) by its then
wholly-owned subsidiary, Evangeline to be implemented at CPS. The Project
installed three new natural gas-fueled combustion turbine generators and three
related heat recovery system generators to repower two existing turbine
generators at CPS. The units are now undergoing testing. During March 2000, a
problem was found with the low pressure rotor in one of the Evangeline power
plant's turbines. As a result, the running of one of the plant's two generating
units in combined cycle will be delayed, but it will still be able to run in
simple cycle by June 2000. The other unit is expected to be in operation in
combined cycle by June 2000. Management expects the second unit to be able to
start running in combined cycle sometime in July 2000. The inability to run the
second unit in combined cycle will reduce the megawatt capacity of the plant
during the month of June. Management does not expect the delay to significantly
affect the financial position or results of operations of the Company.
Evangeline will own and operate, through a contract with Cleco
Generation Services LLC, the Project. The total cost of the Project is expected
to be $256 million, and the Project is scheduled to be completed and in full
service sometime in July 2000. As of March 31, 2000, the Company has spent
approximately $199.1 million on the Project, which is funded through
non-recourse debt and an equity infusion from the Company.
16
In November 1999, Evangeline executed a Capacity Sale and Tolling
Agreement (Tolling Agreement) with Williams Energy Marketing & Trading Company
(Williams). Under the terms of the Tolling Agreement, beginning on July 1, 2000,
for 20 years Williams has the right to own and market the electricity produced
by the plant and will supply the natural gas fuel required by the plant.
Evangeline will collect a fee from Williams for operating and maintaining the
Evangeline Plant. Williams has agreed to take the power produced by the plant in
June 2000, despite the reduced capacity; thus, Evangeline will not be subject to
liquidated damage provisions of the Tolling Agreement relating to reduced
capacity for the month of June 2000.
CONSTRAINTS ON PURCHASED POWER
In future years, the Utility Group's generating facilities may not
supply enough electric power to meet its growing native load demand. Following a
competitive bid process, Utility Group entered into contracts for firm electric
capacity and energy with two power marketing companies for 605 MW of capacity in
2000, increasing to 760 MW of capacity in 2004. These contracts were approved by
the LPSC on March 22, 2000. Management expects the contracts, combined with
Utility Group's own generation, to meet substantially all of its native load
demand through 2004. Because of its location on the transmission grid, Utility
Group 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.
These two contracts are not expected to be affected by such transmission
constraints.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's 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, the Utility Group's market risk
sensitive instruments and positions are characterized as "other than trading";
however, Utility Group does have positions that are considered "trading" as
defined by the Emerging Issues Task Force (EITF) 98-10. All of CMT's positions
are characterized as "trading" under EITF 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 the commodity price of electricity and
natural gas. The market risk estimates have materially changed from those
disclosed in Item 7A of the 1999 Form 10-K, which Item is incorporated herein by
reference. The material changes are presented below.
INTEREST RATE
The Company has entered into various fixed- and variable-rate debt
obligations. See the Notes to the Consolidated Financial Statements, Note G,
"Debt" for details. The calculations of the changes in fair market value and
interest expense of the debt securities are made over a one-year period.
17
As of March 31, 2000, the carrying value of the Company's short-term,
variable-rate debt was approximately $51.7 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 $0.5 million in the Company'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.
MARKET RISKS
Both CMT and Utility Group utilize a value-at-risk model to assess the
market risk of their derivative financial instruments. Value-at-risk represents
the potential loss for an instrument from adverse changes in market factors for
a specified period of time and confidence level. The value-at-risk was estimated
using historical simulation calculated daily assuming a one-day period with a
99.7% confidence level and a holding period of one day. Total volatility is
based on historical cash volatility, implied market volatility, cash volatility
and option pricing.
CMT engages in marketing and trading of power and natural gas. CMT has
trades that are marked-to-market. The mark-to-market procedures may introduce
volatility to carrying values and hence to the Company's financial statements.
The Company does have in place controls to help minimize the risks involved in
marketing and trading. The mark-to-market of trading positions of CMT at March
31, 2000 was a negative $143,084. The average VAR was immaterial to both CMT and
the Company.
Utility Group had financial positions that were defined as "trading" under
EITF 98-10. Controls similar to the ones in place for CMT are in place for
Utility Group to minimize risk. At March 31, 2000, the mark-to-market for those
positions was a negative $679,544. The average VAR was immaterial to both
Utility Group and the Company.
18
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Periodically the Financial Accounting Standards Board (FASB) issues
Statements of Financial Accounting Standards (SFAS). 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 June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. In June 1999 the FASB issued SFAS
No. 137, "Accounting for Derivatives Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which changed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company plans on adopting SFAS No. 133 for the year beginning January 1,
2001. The effect of adopting this statement has not been determined.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11(a) Computation of Net Income Before Extraordinary Item Per
Common Share for the three months ended March 31, 2000
11(b) Computation of Net Income Per Common Share for the three
months ended March 31, 2000
12 Computation of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends for
the twelve months ended March 31, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 1, 2000, the Company filed a report on Form 8-K/A dated
as of July 1, 1999, to amend the original Form 8-K filed on July
8, 1999 relating to the reorganization of Utility Group into a
holding company structure.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLECO CORPORATION
(Registrant)
By: /s/ Thomas J. Howlin
--------------------------------------
Thomas J. Howlin
Senior Vice President of Financial
Services Profit Center and
Chief Financial Officer
(Principal Accounting Officer)
Date: May 15, 2000
21