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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 June 30, 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 August 1, 2000, there were 22,480,580 shares outstanding of the
Registrant's Common Stock, par value $2.00 per share.
TABLE OF CONTENTS
PAGE
GLOSSARY OF TERMS ............................................................ 1
PART I. FINANCIAL INFORMATION .............................................. 2
Item 1. Financial Statements
Consolidated Interim Statements of Income.................. 3
Consolidated Interim Balance Sheets........................ 5
Consolidated Interim Statements of Cash Flows.............. 7
Notes to Consolidated Financial Statements................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............16
Disclosure Regarding Forward-Looking Statements............16
Results of Operations......................................16
Financial Condition........................................22
Repowering Project.........................................24
New Power Plant............................................25
Constraints on Purchased Power.............................25
New Accounting Standard ...................................26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..............29
Item 5. Other Information................................................30
Item 6. Exhibits and Reports on Form 8-K.................................31
SIGNATURE ....................................................................33
GLOSSARY OF TERMS
THE FOLLOWING ABBREVIATIONS OR ACRONYMS USED IN THIS FORM 10-Q ARE DEFINED
BELOW:
ABBREVIATION OR ACRONYM DEFINITION
1999 Form 10-K..................... The Company's Annual Report on Form 10-K for the year
ended December 31, 1999
APB................................ Accounting Principals Board
APB No. 18......................... The Equity Method of Accounting for Investments in Common Stock
APB No. 25......................... Accounting for Stock Issued to Employees
APP................................ Acadia Power Partners LLC
CMT................................ Cleco Marketing & Trading LLC
Company............................ Cleco Corporation
COPS............................... Coughlin Power Station
DHMV............................... Dolet Hills Mining Venture
EITF............................... Emerging Issues Task Force
Energy............................. Cleco Energy, LLC
ESOP............................... The Company's Employee Stock Ownership Plan
Evangeline......................... Cleco Evangeline LLC
FASB............................... Financial Accounting Standards Board
Federal Court Suit ................ Suit filed by Utility Group 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
Four Square Gas.................... Four Square Gas Company, Inc.
Four Square Production............. Four Square Production, L.L.C.
KWH................................ Kilowatt-hour
LMA................................ Lignite Mining Agreement between Utility Group, SWEPCO aND DHMV
LPSC............................... Louisiana Public Service Commission
Midstream.......................... Cleco Midstream Resources LLC
MW................................. Megawatt
Rights Plan ....................... Shareholder Rights Plan
RTO................................ Regional Transmission Organization
SFAS............................... Statements of Financial Accounting Standards
SFAS No. 128 ...................... Earnings per Share
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
State Court Suit .................. Suit filed by Utility Group 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
Tolling Agreement.................. Capacity Sale and Tolling Agreement between Evangeline and Williams
UtiliTech.......................... Utility Construction & Technology Solutions LLC
Utility Group...................... Cleco Utility Group Inc.
Williams .......................... Williams Energy Marketing and Trading Company
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated interim 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 six
months ended June 30, 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, 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.
2
CLECO CORPORATION
CONSOLIDATED INTERIM STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30
(UNAUDITED)
(In thousands, except share and
per share amounts)
2000 1999
---- ----
OPERATING REVENUES
Retail electrical operations $ 145,709 $ 128,683
Energy marketing operations 39,387 98,691
Other operations 3,916 -
----------- ----------
Gross operating revenue 189,012 227,374
Less: retail electric customer credits 9 4,900
----------- -----------
Total operating revenue 189,003 222,474
----------- -----------
OPERATING EXPENSES
Fuel used for electric generation 41,821 28,317
Power purchased for utility customers 25,531 20,373
Purchases for energy marketing operations 33,744 97,450
Other operation 25,562 17,704
Maintenance 8,234 7,743
Depreciation 12,879 12,575
Taxes other than income taxes 9,484 8,793
----------- -----------
Total operating expenses 157,255 192,955
----------- -----------
OPERATING INCOME 31,748 29,519
Allowance for other funds used during construction 285 (71)
Other income and expenses, net 2,275 (317)
----------- -----------
INCOME BEFORE INTEREST CHARGES 34,308 29,131
Interest charges, including amortization of
debt expenses, premium and discount 9,066 6,888
Allowance for borrowed funds used during construction (114) 11
----------- -----------
NET INCOME BEFORE INCOME TAXES AND
PREFERRED DIVIDENDS 25,356 22,232
Federal and state income taxes 8,441 7,992
----------- -----------
NET INCOME BEFORE PREFERRED DIVIDENDS 16,915 14,240
Preferred dividend requirements, net 461 524
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 16,454 $ 13,716
============ ===========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic 22,468,867 22,531,141
Diluted 23,794,741 23,871,052
EARNINGS PER AVERAGE SHARE
Basic $ 0.73 $ 0.61
Diluted $ 0.71 $ 0.59
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.425 $ 0.415
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS.
3
CLECO CORPORATION
CONSOLIDATED INTERIM STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(In thousands, except share and
per share amounts)
2000 1999
---- ----
OPERATING REVENUES
Retail electrical operations $ 259,023 $ 231,338
Energy marketing operations 64,689 117,755
Other operations 7,542 -
----------- -----------
Gross operating revenue 331,254 349,093
Less: retail electric customer credits 1,225 4,900
----------- -----------
Total operating revenue 330,029 344,193
----------- -----------
OPERATING EXPENSES
Fuel used for electric generation 72,460 53,882
Power purchased for utility customers 40,044 35,197
Purchases for energy marketing operations 58,290 116,024
Other operation 43,962 33,530
Maintenance 15,933 13,863
Depreciation 25,670 24,965
Taxes other than income taxes 18,820 17,733
----------- -----------
Total operating expenses 275,179 295,194
----------- -----------
OPERATING INCOME 54,850 48,999
Allowance for other funds used during construction 654 116
Other income and expenses, net 2,728 (631)
----------- -----------
INCOME BEFORE INTEREST CHARGES 58,232 48,484
Interest charges, including amortization of
debt expenses, premium and discount 18,373 13,877
Allowance for borrowed funds used during construction (238) (184)
----------- -----------
NET INCOME BEFORE INCOME TAXES,
PREFERRED DIVIDENDS AND EXTRAORDINARY ITEM 40,097 34,791
Federal and state income taxes 12,960 12,011
----------- -----------
NET INCOME BEFORE PREFERRED DIVIDENDS AND EXTRAORDINARY ITEM 27,137 22,780
Extraordinary item, net of income taxes 2,508 -
----------- -----------
NET INCOME BEFORE PREFERRED DIVIDENDS 29,645 22,780
Preferred dividend requirements, net 934 1,047
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 28,711 $ 21,733
=========== ===========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic 22,457,433 22,518,237
Diluted 23,788,762 23,874,293
EARNINGS PER AVERAGE SHARE
Basic
Income before extraordinary item $ 1.17 $ 0.97
Net income applicable to common stock $ 1.28 $ 0.97
Diluted
Income before extraordinary item $ 1.14 $ 0.95
Net income applicable to common stock $ 1.25 $ 0.95
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.84 $ 0.82
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
4
CLECO CORPORATION
CONSOLIDATED INTERIM BALANCE SHEETS
(UNAUDITED)
(In thousands)
JUNE 30, 2000 DECEMBER 31, 1999
ASSETS
Current assets
Cash and cash equivalents $ 37,529 $ 25,161
Accounts receivable, net 72,299 47,213
Unbilled revenues 33,316 20,816
Fuel inventory, at average cost 7,457 10,461
Materials and supplies inventory, at average cost 15,109 14,768
Assets for sale 8,666 2,466
Accumulated deferred fuel 6,831 -
Other current assets 13,053 4,475
----------- ----------
Total current assets 194,260 125,360
----------- ----------
Equity investment in investee 28,885 -
----------- ----------
Property, plant and equipment
Property, plant and equipment 1,656,680 1,579,304
Accumulated depreciation (579,021) (555,675)
----------- ----------
Net property, plant and equipment 1,077,659 1,023,629
Construction work-in-progress 177,517 187,988
----------- ----------
Total property, plant and equipment, net 1,255,176 1,211,617
Other assets 3,972 4,225
Prepayments 12,708 6,427
Restricted cash 57,711 77,251
Regulatory assets - deferred taxes 115,974 115,918
Other deferred charges 36,358 38,213
Accumulated deferred federal and state income taxes 123,088 125,639
----------- ----------
TOTAL ASSETS $ 1,828,132 $1,704,650
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED INTERIM
FINANCIAL STATEMENTS.
(Continued on next page)
5
CLECO CORPORATION
CONSOLIDATED INTERIM BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(In thousands, except share amounts)
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 46,332 $ 25,989
Long-term debt due within one year 19,854 27,374
Accounts payable 63,440 74,700
Retainage 8,736 7,733
Customer deposits 20,525 20,326
Taxes accrued 27,019 4,786
Interest accrued 15,888 9,634
Accumulated deferred fuel - 2,638
Other current liabilities 4,827 5,263
--------- ---------
Total current liabilities 206,621 178,443
Deferred credits
Accumulated deferred federal and state income taxes 320,646 321,197
Accumulated deferred investment tax credits 25,123 25,994
Regulatory liabilities - deferred taxes 109,128 97,154
Other deferred credits 39,617 49,722
--------- ---------
Total deferred credits 494,514 494,067
Long-term debt, net 662,770 579,595
--------- ---------
Total liabilities 1,363,905 1,252,105
Shareholders' equity
Preferred stock
Not subject to mandatory redemption 28,090 28,880
Deferred compensation related to preferred stock held by ESOP (13,299) (14,991)
--------- ---------
Total preferred stock not subject to mandatory redemption 14,791 13,889
Common shareholders' equity
Common stock, $2 par value, authorized 50,000,000 shares, issued
22,531,870 shares at June 30, 2000 and
December 31, 1999 45,064 45,064
Premium on capital stock 112,064 112,733
Long-term debt payable in Company's common stock 1,036 1,036
Retained earnings 292,977 282,825
Treasury stock, at cost, 51,888 and 90,094 shares at
June 30, 2000 and December 31, 1999, respectively (1,705) (3,002)
--------- ---------
Total common equity 449,436 438,656
--------- ---------
Total shareholders' equity 464,227 452,545
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,828,132 $1,704,650
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
6
CLECO CORPORATION
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(In thousands)
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before preferred dividends $ 29,645 $ 22,780
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 26,282 25,465
Allowance for funds used during construction (892) (300)
Amortization of investment tax credits (871) (895)
Deferred income taxes 1,278 (370)
Deferred fuel costs (9,469) (2,947)
Extraordinary gain, net of income tax (2,508) -
Gain on disposition of plant, net - (108)
Changes in assets and liabilities
Accounts receivable, net (25,086) (61,942)
Unbilled revenues (12,500) (11,885)
Fuel inventory, materials and supplies 2,663 (11,068)
Accounts payable (10,257) 27,599
Customer deposits 199 3
Taxes accrued 20,765 21,604
Interest accrued 6,254 738
Other, net (8,378) 7,856
-------- --------
Net cash provided by operating activities 17,125 16,530
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (70,613) (76,570)
Allowance for funds used during construction 892 300
Proceeds from sale of property, plant and equipment 208 165
Equity investment in investee (28,880) -
Other - (200)
-------- --------
Net cash used in investing activities (98,393) (76,305)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - 243
Cash transferred from restricted account 19,540 -
Increase in short-term debt, net (5,112) 50,621
Retirement of long-term obligations (2,100) (10,000)
Issuance of long-term debt 101,110 50,000
Redemption of preferred stock - (6,518)
Dividends paid on common and preferred stock, net (19,802) (19,507)
-------- --------
Net cash provided by financing activities 93,636 64,839
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,368 5,064
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,161 19,457
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,529 $ 24,521
========= =========
Supplementary cash flow information
Interest paid (net of amount capitalized) $ 16,534 $ 12,798
========= =========
Income taxes paid $ 1,000 $ 2,000
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
7
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
the 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
Utility Group 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,
Utility Group and SWEPCO entered into the LMA with 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 the Federal Court Suit
against DHMV and its partners 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.
As a result of the counterclaims filed by DHMV in the Federal Court Suit,
on August 13, 1997, Utility Group and SWEPCO filed the State Court Suit, a
separate lawsuit 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.
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. Utility Group and SWEPCO have appealed the
federal court's ruling to the United States Court of Appeals for the Fifth
Circuit.
8
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.
The federal court granted the motion, stayed the action at the trial court and
postponed the trial commencement date to October 23, 2000. Due to the complexity
of the ensuing negotiations, 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. Settlement negotiations are on-going during the pendency of
the stay.
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 material adverse
effect on Utility Group's financial position or results of operations.
NOTE C. EXTRAORDINARY GAIN
In March 2000, Four Square Gas, a wholly owned subsidiary of Energy, which
is 98% 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. The note relates to the production
assets held by Four Square Production classified as assets available for sale,
described in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, NOTE D. ASSETS
HELD FOR SALE. 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. For the six months ended June 30, 2000, the extraordinary gain, net of
income tax, had a basic and diluted earnings per share impact of $0.11.
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 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
9
been impaired. The components of the assets available for sale consist of assets
with a book value of approximately $8.9 million and accumulated capitalized
losses from the first 12 months of ownership of the assets of $0.3 million, for
a net book value of $8.6 million, which is reported in other current assets.
Long-term debt of approximately $6.0 million relating to the acquisition of the
oil and gas properties was purchased by an affiliate as described in NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS, NOTE C. EXTRAORDINARY GAIN. Net 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 UtiliTech. Reportable segments were determined by applying SFAS
No. 131. 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 tables below presents information about the reported operating results
and net assets of the Company's reportable segments.
10
SEGMENT INFORMATION
FOR THE QUARTER ENDING JUNE 30
(IN THOUSANDS)
=======================================================================================================================
UNALLOCATED ITEMS,
2000 RECLASSIFICATIONS
UTILITY &
GROUP MIDSTREAM UTILITECH OTHERS ELIMINATIONS CONSOLIDATED
----- --------- --------- ------ ------------ ------------
Revenues
Retail electric operations $ 145,727 $ (18) - - $ 145,709
Energy marketing operations 1,075 38,312 - - 39,387
Other operations - 392 $ 3,541 $ (17) 3,916
Customer credits (9) - - - (9)
---------- --------- ------- --------- --------- ----------
Total operating revenue $ 146,793 $ 38,686 $ 3,541 $ (17) - $ 189,003
========== ========= ====== ========= ========= ===========
Intersegment revenue $ 4,625 $ 12,240 $ 466 $ 38,422 $ (55,753) -
Segment profit (loss) (1) $ 25,473 $ 3,096 $(2,589) $ (624) $ 25,356
Segment assets $1,410,394 $ 354,693 $ 4,859 $ 352,703 $(294,517) $1,828,132
- ----------------------------------------------------------------------------------------------------------------------
Segment profit $25,356
(1) Reconciliation of segment profit to consolidated profit Unallocated items
Income taxes 8,441
Preferred dividends 461
-------
$16,454
=======================================================================================================================
1999
Revenues
Retail electric operations $ 128,683 - - - $ 128,683
Energy marketing operations 98,691 $ 740 - - $ (297) 98,691
Other operations - - $ 1,350 $ (141) (1,209) -
Customer credits (4,900) - - - (4,900)
---------- --------- ------- --------- --------- ----------
Total operating revenue $ 222,474 $ 740 $ 1,350 $ (141) $ (1,506) $ 222,474
========== ========= ======= ========= ========= ==========
Intersegment revenue - $ 940 $ 322 $ 384 $ (1,646) -
Segment profit (loss) (1) $22,231 $ 694 $ (276) $ 589 $ (1,006) $ 22,232
Segment assets at 12/31/1999 $1,414,579 $247,021 $ 2,848 $263,889 $(223,687) $1,704,650
- ----------------------------------------------------------------------------------------------------------------------
Segment profit $22,232
(1) Reconciliation of segment profit to consolidated profit Unallocated items
Income taxes 7,992
Preferred dividends 524
-------
$13,716
11
SEGMENT INFORMATION
FOR THE SIX MONTHS ENDING JUNE 30
(IN THOUSANDS)
=======================================================================================================================
UNALLOCATED ITEMS,
2000 RECLASSIFICATIONS
UTILITY &
GROUP MIDSTREAM UTILITECH OTHERS ELIMINATIONS CONSOLIDATED
----- --------- --------- ------ ------------ ------------
Revenues
Retail electric operations $259,023 - - - $259,023
Energy marketing operations 8,161 $56,528 - - 64,689
Other operations - 392 $ 7,150 - 7,542
-------- ------- ------- ------- -------- --------
Total operating revenue $265,959 $56,920 $ 7,150 - - $330,029
======== ======= ======= ======= ======== ========
Intersegment revenue $ 7,178 $19,563 $ 769 $48,477 $(75,987) -
Segment profit (loss) before
Extraordinary item (1) $ 44,243 $ (212) $(3,507) $ (427) $ 40,097
Segment profit (loss) (2) $ 44,243 $ 2,296 $(3,507) $ (427) $ 42,605
Segment profit $42,605
(1) Reconciliation of segment profit to consolidated profit Unallocated items
Income taxes 12,960
Preferred dividends 934
--------
$ 28,711
(2) Includes extraordinary gain, net of income tax
=======================================================================================================================
1999
Revenues
Retail electric operations $231,338 - - - $231,338
Energy marketing operations 117,755 $ 942 - - $ (942) 117,755
Other operations - - $ 2,094 - (2,094) -
Customer credits (4,900) - - - (4,900)
---------- ------- ------- ------- --------
Total operating revenue $344,193 $ 942 $ 2,094 - $ (3,036) $344,193
======== ======= ======= ======= ======== ========
Intersegment revenue - $ 1,589 $ 656 $ 750 $ (2,995) -
Segment profit (loss) before
extraordinary item (1) $ 34,791 $ (107) $ (317) $ 1,095 $ (671) $ 34,791
Segment profit (loss) $ 34,791 $ (107) $ (317) $ 1,095 $ (671) $ 34,791
Segment profit $34,791
(1) Reconciliation of segment profit to consolidated profit Unallocated items
Income taxes 12,011
Preferred dividends 1,047
-------
$21,733
NOTE F. EVANGELINE PROJECT CONSTRUCTION
During March 2000, a problem was found with the low-pressure rotor in Unit
#7 of the Evangeline power plant's turbines. As a result, the operation of Unit
#7 in combined cycle was delayed, but it was able to operate in simple cycle for
a portion of June 2000 and underwent repairs at the end of that month. The
second unit, Unit #6, was operating commercially under an Interim Capacity Sale
12
and Tolling Agreement with Williams during June 2000. Revenues and operating
expenses associated with Unit #7 for the first six months of 2000 are reflected
in construction work in progress on the Company's consolidated balance sheet.
All assets associated with Unit #6 were placed in service on June 1, 2000,
because such assets were substantially ready for their intended use on such
date. Revenues and operating expenses relating to Unit #6 for the month of June
2000 are reported in the Company's consolidated interim statement of income. On
July 8, 2000, Unit #7 was declared in commercial operation.
NOTE G. DEBT
On May 25, 2000, the Company sold $100 million aggregate principal amount
of its five-year senior unsecured notes. These notes bear interest at 8.75% per
year and mature on June 1, 2005. Approximately $50 million of the proceeds from
the sale of the notes was used to pay down commercial paper financing, and the
remainder was invested in short-term institutional money market funds and in
commercial paper pending further disposition for future needs.
A $100 million revolving credit facility at Utility Group expired on June
15, 2000 and a new $100 million, 364-day revolving credit facility at Utility
Group was finalized concurrently with the expiration. A $120 million revolving
credit facility at the Company, scheduled to expire in August 2000, was
terminated on June 15, 2000 and a new $120 million, 364-day revolving credit
facility was finalized concurrently with the termination.
In April, 2000, a wholly owned subsidiary of the Company, UtiliTech,
terminated a line of credit with a bank in the amount of $2 million, effective
December 31, 1999. There were no amounts outstanding under the line of credit at
the date of termination.
NOTE H. OPTIONS ON COMMON STOCK
In April 2000, the Company granted two types of non-qualified stock options
under its 2000 Long-Term Incentive Compensation Plan - basic and premium options
to directors and key employees. 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 on April 28, 2000 vest
one-third each year beginning on the third anniversary of the grant date and
granted on April 28, 2000, expire after ten years. In accordance with APB No.
25, the Company has not recognized any compensation expense for the stock
options granted.
NOTE I. EARNINGS PER SHARE
During 1999 and in April 2000, the Company granted two types of
non-qualified stock options under the Company's incentive compensation plans --
basic and premium options. The 398,400 premium options outstanding granted in
1999 and in April 2000 were considered antidilutive during the three-month and
six-month periods ended June 30, 2000, as defined by SFAS No. 128, and were
excluded from the calculation of diluted earnings per share. The basic options
13
granted in 1999 were included in the calculation of diluted earnings per share.
The 14,000 basic options granted in April 2000 were considered antidilutive
during the three-month period ended June 30, 2000.
NOTE J. 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. The credit support is to be
maintained as security for the performance of certain obligations of Evangeline
in regard 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 consists of the remaining proceeds from the sale of
Evangeline senior secured bonds and a $38.6 million equity infusion from
Midstream. Both sources of remaining restricted cash are to be used to complete
construction of the Evangeline project. Midstream borrowed the funds for the
infusion from the Company.
NOTE K. EQUITY INVESTMENT IN INVESTEE
Equity investment in investee represents Midstream's approximately $28.9
million investment in APP. APP is a joint venture 50% owned by Midstream and 50%
owned by Calpine Corporation. This joint venture was formed in order to
construct a 1,000 MW, natural gas-fired electric plant to be located near
Eunice, Louisiana. The Company reports the investment in APP on the equity
method of accounting as defined in APB No. 18.
NOTE L. PROCEEDINGS BEFORE THE LPSC
Several Louisiana-based contractors providing utility line construction
services, instituted a proceeding via petition with the LPSC on April 9, 1999,
alleging subsidization by Utility Group to a non-regulated affiliate, Cleco
Services LLC, now operating as UtiliTech. The LPSC has assigned Docket No
U-24064 to the complaint. The complainants, LPSC staff and Utility Group have
conducted discovery, pre-filed testimony has been prepared and depositions
taken. A hearing before the administrative law judge is scheduled for late
September 2000.
In connection with this proceeding, LPSC staff has engaged the services of
an outside consultant. The outside consultant has filed testimony on behalf of
the LPSC staff identifying several possible ratemaking adjustments to Utility
Group's previous and future Rate Stabilization Plan filings which could affect
Utility Group's customer credits. Utility Group is in the process of commenting
on the recommendations. Although management is unable to predict the outcome of
this proceeding, management believes it will not have a material adverse effect
on the Company's financial position or results of operations.
14
NOTE M. 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 June 1998 the FASB issued SFAS No. 133, 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 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.
15
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
the 1999 Form 10-K, the interim financial statements filed with the Company's
Form 10-Q for the quarter ended March 31, 2000 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 Utility
Group and 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 JUNE 30, 2000
EARNINGS
Net income applicable to common stock totaled $16.5 million or $0.73 per
basic average common share for the second quarter of 2000, as compared to $13.7
million or $0.61 per basic average common share for the corresponding period in
1999. Earnings increased due primarily to increased earnings within Utility
Group from increased KWH sales as compared to the same period in 1999 and
increased Midstream earnings due to higher energy marketing margins. The
increased earnings were partially offset by an increase in expansion expenses at
UtiliTech.
CONSOLIDATED REVENUES
Operating revenues for the second quarter of 2000 decreased $33.5 million
or 15.0% compared to the same period in 1999. This decrease was due primarily to
a $59.3 million decrease in energy marketing operations. Moderating such
decrease was a $17.0 million increase in retail electric operations, a $4.9
16
million decrease in retail electric customer credits and an increase in other
operating revenues of $3.9 million. Changes in consolidated revenues are further
explained in the discussion of each segment of the Company below.
UTILITY GROUP
For the three months ended
June 30,
(In thousands)
Revenues: 2000 1999 CHANGE
---- ---- ------
Base $ 80,446 $ 81,210 (0.9)%
Fuel cost recovery 65,281 47,473 37.5%
Estimated customer credits (9) (4,900) (99.8)%
Energy marketing 1,075 98,691 (98.9)%
--------- ---------
Total revenues $ 146,793 $ 222,474 (34.0)%
========= =========
Base revenues for the second quarter of 2000 decreased $0.8 million
compared to the same period in 1999. The decrease in base revenues was due
primarily to a decrease of KWH sales to residential customers of 5.7% as
compared to the second quarter of 1999, which resulted in a decrease of $1.7
million in base revenues. The decrease in KWH sales to residential customers
resulted from a decrease in cooling degree-days as compared to the same period
in 1999. Moderating the decrease in residential KWH sales was a 9.4% increase in
sales to industrial customers and an increase in sales to public utilities of
16.9% during the second quarter of 2000 as compared to the same period in 1999.
Overall KWH sales to regular customers during the second quarter of 2000
increased 0.8% over the second quarter of 1999.
Fuel cost recovery revenues for the second quarter of 2000 increased $17.8
million, compared to the same period in 1999. Fuel cost recovery revenues
increased due primarily to increased revenues from residential and industrial
customers. Fuel cost recovery revenues from residential customers increased $6.2
million in the second quarter of 2000 compared to the second quarter of 1999 due
primarily to increased natural gas and purchased power. Fuel cost recovery
revenues from industrial customers increased $6.3 million prices in the second
quarter of 2000 compared to the second quarter of 1999 due primarily to
increased KWH sales. Changes in fuel costs have historically had no effect on
net income, as fuel costs are generally recovered through fuel costs adjustment
clauses that enable 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 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. Based on
an analysis of second quarter 2000 earnings, no such accrual was found to be
necessary for the second quarter whereas $4.9 million was accrued in the second
quarter of 1999. Approximately $1.9 million of the $4.9 million difference
17
between second quarter 2000 and second quarter 1999 was due to a report issued
by the LPSC on July 23, 1999 which required an adjustment to the cycle ending
September 30, 1998 to be booked in the second quarter of 1999. The amount of
credit due customers, if any, is determined by the LPSC annually based on
12-month ending results as of September 30 of each year. The calculation of
previous and future customer credits may be affected by current proceedings
before the LPSC as discussed in NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS,
NOTE L. PROCEEDINGS BEFORE THE LPSC located elsewhere in this quarterly report.
Also see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - 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 second quarter of 2000 decreased $97.6
million as compared to the same period in 1999. The decrease was due primarily
to a reduced level of energy trading activity resulting from a refinement of
trading practice within Utility Group to target selective market opportunities.
Operating expenses decreased $76.7 million, or 39.8%, during the second
quarter of 2000 compared to the same period in 1999. The decrease in operating
expenses was primarily the result of a decrease in energy marketing expenses.
Energy marketing expenses decreased $97.3 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 $19.6 million in fuel and purchased power for retail utility operations due
to higher energy prices as compared to the same period in 1999.
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-eight percent of Utility Group's energy requirements during the second
quarter of 2000 were met with purchased power compared to 34% 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 second quarter of 1999 than it did in the second
quarter of 2000 to meet load requirements.
MIDSTREAM
Midstream revenues for the second quarter of 2000 were approximately $38.7
million, an increase of $37.6 million over the second quarter of 1999. This
increase in revenues resulted primarily from increased energy marketing
activities due to the fact that CMT began operations on July 1, 1999;
consequently, CMT did not market energy in the second quarter of 1999.
Midstream operating expenses for the second quarter of 2000 were
approximately $36.0 million and consisted primarily of energy marketing expenses
of $33.6 million and non-capitalizable start-up expenses relating to the
construction of the Evangeline power plant of $0.7 million. Compared to the same
period in 1999, operating expenses increased $34.0 million, due primarily to the
timing of the start-up of operations of CMT.
18
On June 1, 2000, Evangeline Unit #6 began operating commercially. On July
8, 2000, Unit #7 was declared in commercial operation. Management expects the
revenues and expenses of Midstream to increase due to the operation of the
Evangeline power plant.
UTILITECH
UtiliTech revenues for the second quarter of 2000 were approximately $3.5
million, an increase of $1.8 million as compared to the second quarter of 1999.
The increase is due primarily to the employment of additional line crews and the
corresponding completion of more construction projects.
UtiliTech operating expenses for the second quarter of 2000 were
approximately $6.1 million, an increase of $4.6 million as compared to the
second quarter of 1999. The increase is due to the increased activity and cost
of maintaining and equipping the increased number of line crews.
The management of the Company is currently evaluating the continuing
significance of UtiliTech as a component of the Company's activities. If
management concludes that UtiliTech will not significantly contribute to overall
growth as compared to other activities, UtiliTech may cease to be reported as a
separate segment reportable and may instead be aggregated into the "Other"
segment.
CONSOLIDATED INTEREST EXPENSE
Interest expense for the second quarter of 2000 increased $2.1 million over
the same period in 1999. The increase was due primarily to non-capitalizable
interest expense associated with the construction of the Evangeline power plant
of $0.6 million and an increase in short-term interest rates as compared to the
second quarter of 1999.
FOR THE SIX MONTHS ENDED JUNE 30, 2000
EARNINGS
Net income before the extraordinary item discussed below, totaled $26.2
million or $1.17 per basic average common share for the six months ended June
30, 2000, as compared to $21.7 million or $0.97 per basic average common share
for the corresponding period in 1999. Earnings before the extraordinary item
increased due primarily to an increase in earnings within Utility Group from
increased 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 Midstream and expansion expenses at UtiliTech.
Net income applicable to common stock totaled $28.7 million or $1.28 per
basic average common share for the six months ended June 30, 2000, as compared
to $21.7 million or $0.97 per basic average common share for the corresponding
period in 1999. The increase in earnings resulted primarily from an
extraordinary gain on extinguishment of debt. In March 2000,
19
Four Square Gas, a wholly-owned subsidiary of Energy, which is 98% 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. The note relates to the production assets held by
Four Square Production classified as assets available for sale. 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 and diluted earnings per share impact of $0.11.
CONSOLIDATED REVENUES
Operating revenues for the six months ended June 30, 2000 decreased $14.2
million or 4.1% compared to the same period in 1999. This decrease was due
primarily to a $53.1 million decrease in energy marketing operations. The
decrease in operating revenues was moderated by a $27.7 million increase in
retail electric operations, a $3.7 million decrease in retail electric customer
credits and an increase of $7.5 million in other operations. Changes in
consolidated revenues are further explained in the discussion of each segment of
the Company below.
UTILITY GROUP
For the six months ended
June 30,
(In thousands)
Percent
Revenues: 2000 1999 Change
---- ---- ------
Base $ 149,482 $ 145,187 3.0%
Fuel cost recovery 109,541 86,151 27.2%
Estimated customer credits (1,225) (4,900) (75.0)%
Energy marketing 8,161 117,755 (93.1)%
--------- ---------
Total revenues $ 265,959 $ 344,193 (22.7)%
========= =========
Base revenues for the six months ended June 30, 2000 increased $4.3 million
compared to the same period in 1999. The increase in base revenues was due
primarily to an increase of KWH sales to industrial customers of 10.8% over the
same period in 1999, which resulted in an increase of $1.5 million in base
revenues. KWH sales to residential customers increased 1.2% compared to the same
period in 1999, increasing base revenues for the six months ended June 30, 2000
by $1.4 million as compared to the same period in 1999. Moderating the increases
in residential and industrial KWH was a decrease in sales to public authorities
of 18.9% during the six months ended June 30, 2000 as compared to the same
period in 1999. Overall KWH sales to regular customers during the first six
months of 2000 increased 1.4% over the same period in 1999.
20
Fuel cost recovery revenues for the six months ended June 30, 2000
increased primarily from sales to industrial customers, which increased $9.4
million, and sales to residential customers, which increased $8.7 million in
relation to the same period in 1999. The increase in fuel cost recovery revenues
is related to higher KWH sales and increased natural gas prices for the six
months ended June 30, 2000 compared to the same period in 1999.
Revenues for the six months ended June 30, 2000 were decreased by a $1.2
million accrual for estimated customer credits which was a $3.7 million decrease
from the $4.9 million accrual recognized for the same period in 1999. Accruals
for estimated customer credits may be required under terms of an earnings review
settlement reached with the LPSC in 1996.
Energy marketing revenues for the six months ended June 30, 2000 decreased
$109.6 million as compared to the same period in 1999. The decrease is primarily
due to a reduced level of energy trading activity resulting from a refinement of
trading practice within Utility Group to target selective market opportunities.
Operating expenses decreased $79.8 million or 27.0% during the six months
ended June 30, 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 $109.4 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 $25.0 million in fuel and purchased power for retail utility
operations due to the increased KWH sales and increased energy prices.
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-eight percent of Utility Group's energy requirements during the six
months ended June 30, 2000 were met with purchased power compared to 35% 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 six months of 1999 than it did in the first six
months of 2000 to meet load requirements.
MIDSTREAM
Midstream revenues for the six months ended June 30, 2000 were
approximately $56.9 million, an increase of $55.9 million over the same period
in 1999. The increase in revenues resulted primarily from increased energy
marketing activities due to the fact that CMT began operations on July 1, 1999;
consequently, CMT did not market energy in the first six months of 1999.
Midstream operating expenses for the six months ended June 30, 2000 were
approximately $57.3 million and consisted primarily of energy marketing expenses
of $51.6 million and non-capitalizable start-up expenses relating to the
construction of the Evangeline power plant of $2.2 million. Operating expenses
increased $52.9 million during the six months ended June 30, 2000 as compared to
21
the same period in 1999, due primarily to the timing of the start-up of
operations of CMT.
UTILITECH
UtiliTech revenues for the six months ended June 30, 2000 were
approximately $7.2 million, an increase of $5.1 million as compared to the same
period in 1999. The increase is due primarily to the employment of additional
line crews and the corresponding completion of more construction projects.
UtiliTech operating expenses for the six months ended June 30, 2000 were
approximately $10.6 million, an increase of $3.1 million as compared to the same
period in 1999. The increase is due to the increased activity and cost of
maintaining and equipping the increased number of line crews employed.
CONSOLIDATED INTEREST EXPENSE
Interest expense for the six months ended June 30, 2000 increased $4.4
million over the same period in 1999. The increase was due primarily to
non-capitalizable interest expense associated with the construction of the
Evangeline power plant of $1.7 million and an increase in short-term interest
rates.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 and December 31, 1999, there was $46.3 million and $26.0
million, respectively, of short-term debt outstanding in the form of commercial
paper borrowings and bank loans. A $100 million revolving credit facility at
Utility Group expired on June 15, 2000 and a new $100 million, 364-day revolving
credit facility at Utility Group was finalized concurrently with the expiration.
A $120 million revolving credit facility at the Company, scheduled to expire in
August 2000, was terminated on June 15, 2000 and a new $120 million, 364-day
revolving credit facility was finalized concurrently with the termination. The
$120 million facility supports the issuance of commercial paper by the Company
and other general corporate purposes of the Company whereas the $100 million
facility supports general corporate purposes of Utility Group. 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 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 $16.3 million at June
30, 2000. Uncommitted lines of credit with a bank totaling $5 million also are
available to meet short-term working capital needs.
22
During the second quarter, UtiliTech terminated a line of credit with a
bank in the amount of $2 million, effective December 31, 1999. There was no
outstanding debt under this facility at the date of termination.
On May 25, 2000, the Company issued $100 million aggregate principal amount
of its five-year senior unsecured notes. The new notes bear interest at 8.75%
per year and mature on June 1, 2005. Approximately $50 million in proceeds were
used to pay down commercial paper financing, and the remainder was invested in
short-term institutional money market funds and in commercial paper pending
further disposition for future needs.
At June 30, 2000, CLE Resources, Inc., an unregulated subsidiary of the
Company, held approximately $13.5 million of cash and temporary cash investments
in securities with original maturities of 90 days of 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 the first six months of 2000 or in the year ended
December 31, 1999.
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 Midstream. As of June 30, 2000,
approximately $217.6 has been capitalized on the project. The Company has
deposited $15 million into escrow as credit support for Evangeline's activities.
A separate escrow totaling approximately $42.3 million is restricted for the
completion of the Evangeline 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
23
meet peak load conditions with a margin for reserve. With customer choice, costs
associated with utility assets specifically dedicated to, or 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 four wholesale full-requirements
customers representing about 1% 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 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 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.
Legislation (SB2071) has been introduced and passed in the U.S. Senate that
addresses reliability issues. This legislation would charge the FERC with
increased oversight and powers to ensure the availability of safe and reliable
service. The Company cannot predict if similar legislation may be passed by the
House of Representatives and what effect it may have upon its results of
operations or financial condition.
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.
During testing in March 2000, a problem was found with the low-pressure rotor in
Unit #7 of the Evangeline power plant's turbines. As a result, the operation of
Unit #7 in combined cycle was delayed, but the unit was able to run in simple
cycle for a portion of June 2000 and underwent repairs at the end of that month.
The second unit, Unit #6, was operating commercially under an Interim Capacity
Sale and Tolling Agreement with Williams during June 2000. Revenues and expenses
associated with Unit #7 for the first six months of 2000 are recorded in
construction work in progress on the Company's consolidated balance sheet. All
24
assets associated with Unit #6 were placed in service June 1, 2000, since such
assets were substantially ready for their intended use on such date. Revenues
and operating expenses relating to Unit #6 for the month of June 2000 are
reported in the Company's consolidated interim statement of income. Unit #7 was
declared in commercial operation on July 8, 2000.
Evangeline owns and operates, through a contract with Cleco Generation
Services LLC, the Evangline Project. The total cost of the Project is expected
to be $256 million. As of June 30, 2000, the Company had capitalized
approximately $217.6 million on the Project, which is funded through
non-recourse debt and an equity infusion from Midstream.
In November 1999, Evangeline executed the Tolling Agreement with Williams.
Under the terms of the Tolling Agreement, beginning on July 8, 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.
NEW POWER PLANT
Midstream and Calpine Corporation have formed a new company, APP, in order
to construct, own and operate a 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 at
$500 million. Permanent financing has not been obtained, but several options are
being investigated. APP is 50% owned by Midstream and is being accounted for on
the equity method. As of June 30, 2000, Midstream has contributed $28.9 million
in cash and land to APP.
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 in March 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.
25
NEW ACCOUNTING STANDARD
Periodically the FASB issues Statements of Financial Accounting Standards.
These statements relect accounting, reporting and disclosure requirements the
company should follow in the accumaltion 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, 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 which changed the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. The company plans on adopting this
statement has not been determined.
26
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 Energy and the Into Cinergy exchanges, and the commodity
price of natural gas traded. Generally, 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 EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." 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 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.
As of June 30, 2000, the carrying value of the Company's short-term,
variable-rate debt was approximately $46.3 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.
COMMODITY PRICE RISKS
CMT engages in marketing and trading of electricity 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 has controls in place to help minimize the risks
involved in marketing and trading. The mark-to-market of trading positions of
CMT at June 30, 2000 was a positive $0.7 million.
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 June 30, 2000, the mark-to-market for those
positions was a positive $0.4 million.
27
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, a
holding period of one day and 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,
cash volatility and option pricing. Based on these assumptions, the high, low
and average value-at-risk during the three months and six months ended June 30,
2000, as well as the value-at-risk at June 30, 2000, is summarized below:
(in thousands)
FOR THE THREE MONTHS ENDED JUNE 30, 2000
------------------------------------------ At
HIGH LOW AVERAGE 6/30/2000
---- --- ------- ---------
CMT $ 3,490.76 $ 62.01 $ 1,386.45 $ 3,309.76
Utility Group $ 1,148.26 $ 23.35 $ 349.24 $ 359.78
Consolidated $ 4,196.54 $ 176.66 $ 1,735.69 $ 3,669.54
(in thousands)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------
HIGH LOW AVERAGE
---- --- -------
CMT $3,490.76 $0.00 $793.77
Utility Group $1,148.26 $0.00 $186.36
Consolidated $4,196.54 $0.00 $980.12
The changes in value-at-risk at June 30, 2000 as compared to December 31,
1999 were due primarily to increased volatility in natural gas and electricity
market prices as compared to the same price volatility at December 31, 1999.
28
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on April 28,
2000 in Alexandria, Louisiana.
(b) Proxies for the election of directors were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees, and all nominees
listed in the Proxy Statement were elected.
(c) The following is a tabulation of the votes cast upon each of the proposals
presented at the Annual Meeting of Shareholders of the Company on April 28,
2000.
(1) Election of Directors:
BROKERS
CLASS III DIRECTORS FOR WITHHELD NON-VOTES
------------------- --- -------- ---------
J. Patrick Garrett 18,931,696 111,646 0
F. Ben James, Jr. 18,923,534 119,808 0
Elton R. King 18,923,513 119,829 0
A. Deloach Martin, Jr. 18,817,942 225,400 0
The term of office as a director of each of Messrs. Richard B.
Crowell, David M. Eppler, Robert T. Ratcliff, Edward M. Simmons and
William H Walker, and Ms. Sherian G. Cadoria continued after the
meeting.
(2) Appointment of PricewaterhouseCoopers LLP as the Company's auditors
for 2000:
BROKERS
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
18,854,198 100,577 88,567 0
(3) Approval of the Cleco Corporation 2000 Long-Term Incentive
Compensation Plan:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
15,507,492 3,252,959 282,891 0
(4) Approval of the Cleco Corporation Employee Stock Purchase Plan:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
18,466,141 360,052 217,148 0
29
ITEM 5. OTHER INFORMATION
On July 28, 2000, the Company's board of directors adopted the Rights Plan.
Under this Plan, the holders of common stock as of August 14, 2000, will receive
a dividend of one Right for each share of common stock held on such date. In the
event an acquiring party accumulates 15% or more of the Company's common stock,
the Rights would, in essence, allow the holder to purchase the Company's common
stock at half the current fair market value. The Company would generally be
entitled to redeem the Rights at $0.01 per Right at any time until the tenth day
following the time the Rights become exercisable. The Rights will expire on July
30, 2010. For more information about the Rights Plan, please see the Company's
Current Report on Form 8-K dated July 28, 2000, which information is
incorporated by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4(a) Senior Indenture, dated as of May 1, 2000, between the
Company and Bank One, N.A., as trustee (incorporated by
reference to Exhibit 4(a) to the Company's Registration
Statement on Form S-3, as amended (Registration no.
333-33098))
4(b) Supplemental Indenture No. 1, dated as of May 25, 2000, to
Senior Indenture providing for the issuance of the Company's
8 3/4% Senior Notes due 2005 (incorporated by reference to
Exhibit 4(a) to the Company's Current Report on Form 8-K
filed on May 24, 2000)
4(c) Form of 8 3/4% Senior Notes due 2005 (included in Exhibit
4(b) above)
10(a) Form of Notice and Acceptance of Directors' Grant of
Nonqualified Stock Options under the Company's 2000
Long-Term Incentive Compensation Plan
10(b) Form of Notice and Acceptance of Grant of Restricted Stock
under the Company's 2000 Long-Term Incentive Compensation
Plan
10(c) Form of Notice and Acceptance of Grant of Nonqualified Stock
Options, with fixed option price under the Company's 2000
Long-Term Incentive Compensation Plan
10(d) Form of Notice and Acceptance of Grant of Nonqualified Stock
Options, with variable option price under the Company's 2000
Long-Term Incentive Compensation Plan
11(a) Computation of Net Income Per Common Share for the three
months ended June 30, 2000
11(b) Computation of Net Income Before Extraordinary Item Per
Common Share for the six months ended June 30, 2000
11(c) Computation of Net Income Per Common Share for the six
months ended June 30, 2000
12 Computation of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends for the
twelve months ended June 30, 2000
27 Financial Data Schedule
31
(b) Reports on Form 8-K
On May 24, 2000, the Company filed a Current Report on Form 8-K
reporting under Item 5 thereof the completion of the Company's public
offering of $100 million, 8.75% senior notes due 2005 under its
Registration Statement Form S-3 (Registration no. 333-33098) and
reporting under Item 7 thereof exhibits relating thereto.
On July 28, 2000, the Company filed a Current Report on Form 8-K
reporting under Item 5 thereof the adoption of a shareholder rights
plan by the Company's board of directors.
32
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/ R. Russell Davis
-------------------------------
R. Russell Davis
Vice President and
Corporate Controller
(Principal Accounting Officer)
Date: August 14, 2000
33