10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] COMBINED QUARTERLY REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 Or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-15759 CLECO CORPORATION (Exact name of registrant as specified in its charter) LOUISIANA 72-1445282 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2030 DONAHUE FERRY ROAD, PINEVILLE, LOUISIANA 71360-5226 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (318) 484-7400 Commission file number 0-01272 CLECO POWER LLC (Exact name of registrant as specified in its charter) LOUISIANA 72-0244480 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2030 DONAHUE FERRY ROAD, PINEVILLE, LOUISIANA 71360-5226 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (318) 484-7400 Indicate by check mark whether the Registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding at each of the issuer's classes of Common Stock, as of the latest practicable date. Description Shares Outstanding Registrant Of Class At April 30, 2001 ---------- ----------- ------------------ Cleco Corporation Common Stock, $2.00 Par Value 22,527,655 CLECO POWER LLC MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT. ================================================================================ This Combined Form 10-Q is separately filed by Cleco Corporation and Cleco Power LLC. Information contained herein relating to either individual Registrant is filed by such Registrant on its own behalf. Each Registrant makes no representation as to information relating to the other Registrant. TABLE OF CONTENTS Page ---- GLOSSARY OF TERMS.................................................... 1 Disclosure Regarding Forward Looking Statements...................... 3 PART I ITEM 1 FINANCIAL STATEMENTS Cleco Corporation Consolidated Financial Statements................. 4 Cleco Corporation -- Results of Operations.......................... 11 Cleco Power LLC Financial Statements................................ 16 Cleco Power LLC-- Narrative Analysis of the Results of Operations... 21 Notes To Financial Statements....................................... 25 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CLECO CORPORATION................ 34 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF CLECO CORPORATION............................................. 39 PART II ITEM 1 LEGAL PROCEEDINGS............................................. 42 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.............................. 43 GLOSSARY OF TERMS References in this filing to "the Company" or "Cleco" mean Cleco Corporation and its subsidiaries, including Cleco Power LLC, and references to "Cleco Power" mean Cleco Power LLC, unless the context clearly indicates otherwise. Additional abbreviations or acronyms used in this filing are defined below:
Abbreviation or Acronym Definition 1935 Act Public Utility Holding Company Act of 1935 Acadia Aquila Tolling Agreement................... Capacity Sale and Tolling Agreement between APP and Aquila Energy APP.......................... Acadia Power Partners LLC APP-related Petitioners...... Various citizens and environmental action groups APB No. 18................... Accounting Principles Board Opinion No. 18 - The Equity Method of Accounting for Investments in Common Stock Cleco's 2000 Form 10-K....... The Company's Annual Report on Form 10-K for the year ended December 31, 2000 Cleco Power's 2000 Form 10-K. Cleco Power's Annual Report on Form 10-K for the year ended December 31, 2000 Cleco Power.................. Cleco Power LLC Company...................... Cleco Corporation CPS.......................... Coughlin Power Station DIG.......................... Derivatives Implementation Group of the FASB Dynegy....................... Dynegy Power Marketing, Inc. DHMV......................... Dolet Hills Mining Venture Dolet Hills.................. Dolet Hills Power Station Dolet Hills Mine............. Lignite reserves located in the Dolet Hills area of northwestern Louisiana EITF......................... Emerging Issues Task Force EITF No. 98-10............... Accounting for Contracts Involved in Energy Trading and Risk Management Activities Energy....................... Cleco Energy LLC ESOP......................... Employee Stock Ownership Plan Evangeline................... Cleco Evangeline LLC Evangeline Tolling Agreement Capacity Sale and Tolling Agreement between Evangeline and Williams Energy FASB......................... Financial Accounting Standards Board Federal Court Suit........... Lawsuit filed by the Company and SWEPCO on April 15, 1997 against DHMV and its partners in the United States District Court for the Western District of Louisiana FERC......................... Federal Energy Regulatory Commission kW .......................... Kilowatt kWh.......................... Kilowatt-hour LDEQ......................... Louisiana Department of Environmental Quality LMA.......................... Lignite Mining Agreement LPSC......................... Louisiana Public Service Commission Marketing & Trading.......... Cleco Marketing & Trading LLC Midstream.................... Cleco Midstream Resources LLC Mirant....................... Mirant Corporation, formerly Southern Energy Inc. Mirant Marketing............. Mirant Americas Energy Marketing, LP MMBtu........................ Million British thermal units MW........................... Megawatt PEP.......................... Perryville Energy Partners LLC PEP-related Petitioners...... Various citizens and community action groups Quanta....................... Quanta Services, Inc. RTO.......................... Regional Transmission Organization Rodemacher................... Rodemacher Power Station
1 SFAS......................... Statement of Financial Accounting Standards SFAS No. 58.................. Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method SFAS No. 128................. Earnings per Share (EPS) SFAS No. 131................. Disclosures about Segments of an Enterprise and Related Information SFAS No. 133................. Accounting for Derivative Instruments and Hedging Activities SFAS No. 137................. Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 SFAS No. 138................. Accounting for Certain Derivative Instruments and Certain Hedging Activities SPP.......................... Southwest Power Pool State Court Suit............. Lawsuit filed by the Company and SWEPCO on August 13, 1997 against the parent companies of DHMV in the First Judicial District Court for Caddo Parish, Louisiana SWEPCO....................... Southwestern Electric Power Company UtiliTech.................... Utility Construction & Technology Solutions LLC UTS.......................... UTS, LLC (successor entity to UtiliTech) VAR.......................... Value-at-risk Williams Energy.............. Williams Energy Marketing and Trading Company
2 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Report are forward-looking statements. Although the Company and Cleco Power believe that the expectations reflected in such forward-looking statements are reasonable, such forward- looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties that could cause the actual results to differ materially from the Company's and Cleco Power's expectations. In addition to any assumptions and other factors referred to specifically in connection with these forward-looking statements, the following list identifies some of the factors that could cause the Company's and Cleco Power's actual results to differ materially from those contemplated in any of the Company's and Cleco Power's forward-looking statements: . the effects of competition in the power industry, . legislative and regulatory changes affecting electric utilities, . the weather and other natural phenomena, . the timing and extent of changes in commodity prices and interest rates, . the operating performance of the facilities of Cleco Power and Evangeline, and . changes in general economic and business conditions, as well as other factors discussed in this and the Company's and Cleco Power's other filings with the Securities and Exchange Commission (Cautionary Statements). All subsequent written and oral forward-looking statements attributable to the Company or Cleco Power or persons acting on their behalf are expressly qualified in their entirety by the Cautionary Statements. 3 CLECO CORPORATION PART I -- FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The consolidated financial statements for the Company included herein are unaudited but reflect, in management's opinion, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of the Company's financial position and the results of its operations for the interim periods presented. Because of the seasonal nature of several of the Company's subsidiaries, the results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results that may be expected for the full fiscal year. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in Cleco's 2000 Form 10-K. On April 27, 2001, the Cleco Corporation shareholders approved a charter amendment to increase the amount of authorized common stock and to effect a two- for-one stock split of the Company's common stock. The charter amendment became effective at the close of business May 7, 2001, which was also the record date for the stock split. Distribution of certificates representing the split shares is expected to occur on or about May 21, 2001. After the split, the Company will have approximately 45 million shares of common stock outstanding and have authorization to issue up to an aggregate of 100 million shares (including the shares currently outstanding). The effect of the stock split has been recognized in all share and per share data in the accompanying consolidated financial statements, notes to the financial statements and supplemental financial data. 4 CLECO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
2001 2000 --------------- ---------------- (Thousands, except share and per share amounts) Operating revenue: Retail electrical operations $ 155,986 $ 113,296 Energy marketing and tolling operations 97,029 24,883 Other operations 96 132 --------------- ---------------- Gross operating revenue 253,111 138,311 Less: retail electric customer credits - 1,216 --------------- ---------------- Total operating revenue 253,111 137,095 --------------- ---------------- Operating expenses: Fuel used for electric generation 60,692 31,278 Power purchased for utility customers 27,654 14,513 Purchases for energy marketing operations 78,731 24,276 Other operations 23,749 13,799 Maintenance 7,310 7,569 Depreciation 15,400 12,395 Taxes other than income taxes 9,447 9,072 --------------- ---------------- Total operating expenses 222,983 112,902 --------------- ---------------- Operating income 30,128 24,193 Interest income 879 193 Allowance for other funds used during construction 173 369 Other income (expense), net (15) 205 --------------- ---------------- Income before interest charges 31,165 24,960 Interest charges: Interest charges, including amortization of debt expenses, premium and discount 13,138 9,426 Allowance for borrowed funds used during construction (197) (124) --------------- ---------------- Total interest charges 12,941 9,302 --------------- ---------------- Net income from continuing operations before income taxes and preferred dividends 18,224 15,658 Federal and state income taxes 6,124 4,869 --------------- ---------------- Net income from continuing operations 12,100 10,789 Discontinued operations: Loss from operations, net of income taxes - 566 Loss on disposal of segment, net of income taxes 1,406 - --------------- ---------------- Total discontinued operations 1,406 566 --------------- ---------------- Net income before extraordinary item 10,694 10,223 Extraordinary item, net of income taxes - 2,508 --------------- ---------------- Net income before preferred dividends 10,694 12,731 Preferred dividend requirements, net 473 473 --------------- ---------------- Net income applicable to common stock $ 10,221 $ 12,258 =============== ================
(Continued on next page) 5 CLECO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Continued) FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
2001 2000 ---- ---- (Thousands, except share and per share amounts) Average shares of common stock outstanding: Basic 45,005,892 44,884,258 Diluted 47,896,408 47,562,908 Basic earnings per share: From continuing operations $ 0.26 $ 0.23 From discontinued operations $ (0.03) $ (0.01) Extraordinary item - $ 0.05 Net income applicable to common stock $ 0.23 $ 0.27 Diluted earnings per share: From continuing operations $ 0.25 $ 0.23 From discontinued operations $ (0.03) $ (0.01) Extraordinary item - $ 0.05 Net income applicable to common stock $ 0.22 $ 0.27 Cash dividends paid per share of common stock $ 0.2125 $ 0.2075
The accompanying notes, as they relate to Cleco Corporation, are an integral part of the consolidated financial statements. 6 CLECO CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AT AT MARCH 31, 2001 December 31, 2000 -------------- ----------------- (Thousands) ASSETS Current assets: Cash and cash equivalents $ 9,671 $ 29,407 Accounts receivable, net 55,014 74,620 Other accounts receivable 20,443 24,200 Unbilled revenues 30,187 37,547 Fuel inventory, at average cost 11,274 7,275 Materials and supplies inventory, at average cost 15,804 15,956 Margin deposits 8,198 21,657 Risk management assets 3,922 19,070 Accumulated deferred fuel 3,605 3,617 Other current assets 5,627 4,857 ---------- ---------- Total current assets 163,745 238,206 ---------- ---------- Property, plant and equipment: Property, plant and equipment 1,808,151 1,799,161 Accumulated depreciation (618,623) (604,145) ---------- ---------- Net property, plant and equipment 1,189,528 1,195,016 Construction work-in-progress 46,377 37,742 ---------- ---------- Total property, plant and equipment, net 1,235,905 1,232,758 ---------- ---------- Equity investment in investee 136,305 98,204 Other assets - 2,642 Prepayments 17,059 16,766 Restricted cash 19,601 55,343 Regulatory assets - deferred taxes 100,101 100,267 Other deferred charges 48,860 45,010 Accumulated deferred federal and state income taxes 56,071 56,508 ---------- ---------- TOTAL ASSETS $1,777,647 $1,845,704 ========== ==========
The accompanying notes, as they relate to Cleco Corporation, are an integral part of the consolidated financial statements. (Continued on next page) 7 CLECO CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
At AT March 31, 2001 December 31, 2000 -------------------- ----------------------- (Thousands) Liabilities and shareholders' equity Current liabilities: Short-term debt $ 107,849 $ 95,957 Long-term debt due within one year 30,093 30,665 Accounts payable 57,963 102,838 Retainage 8,796 8,770 Customer deposits 20,660 20,447 Taxes accrued 16,088 17,286 Interest accrued 6,357 15,177 Risk management liabilities 6,697 21,118 Other current liabilities 7,053 12,997 ---------- ---------- Total current liabilities 261,556 325,255 Deferred credits: Accumulated deferred federal and state income taxes 270,281 270,118 Accumulated deferred investment tax credits 23,811 24,252 Regulatory liabilities - deferred taxes 38,840 38,840 Other deferred credits 43,536 48,089 ---------- ---------- Total deferred credits 376,468 381,299 Long-term debt, net 657,695 659,135 ---------- ---------- Total liabilities 1,295,719 1,365,689 ---------- ---------- Shareholders' equity: Preferred stock Not subject to mandatory redemption 27,509 28,090 Deferred compensation related to preferred stock held by ESOP (11,638) (12,994) ---------- ---------- Total preferred stock not subject to mandatory redemption 15,871 15,096 Common shareholders' equity: Common stock, $1 par value, authorized 100,000,000 Shares, issued 45,063,740 shares at March 31, 2001 and December 31, 2000 45,064 45,064 Premium on capital stock 112,102 112,502 Long-term debt payable in Company's common stock 519 519 Retained earnings 308,707 308,047 Other comprehensive income (93) - Treasury stock, at cost, 16,642 and 73,072 shares at March 31, 2001 and December 31, 2000, respectively (242) (1,213) ---------- ---------- Total common shareholders' equity 466,057 464,919 ---------- ---------- Total shareholders' equity 481,928 480,015 ---------- ---------- Total liabilities and shareholders' equity $1,777,647 $1,845,704 ========== ==========
The accompanying notes, as they relate to Cleco Corporation, are an integral part of the consolidated financial statements. 8 CLECO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2001 2000 -------- -------- (Thousands) OPERATING ACTIVITIES: Net income before preferred dividends $ 10,694 $ 12,731 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss on disposal of segment, net of tax 1,406 - Loss from discontinued operation, net of tax - 566 Depreciation and amortization 15,586 13,019 Allowance for funds used during construction (173) (369) Amortization of investment tax credits (441) (436) Net deferred income taxes (1,771) (1,990) Deferred fuel costs 12 (1,033) Extraordinary gain, net of income tax - (2,508) Changes in assets and liabilities: Accounts receivable, net 17,576 (6,100) Unbilled revenues 4,846 1,198 Fuel inventory, materials and supplies (3,815) 2,362 Accounts payable (44,313) (34,964) Customer deposits 213 186 Other deferred accounts - 3,165 Taxes accrued 663 9,735 Interest accrued (8,820) (5,904) Margin deposits 13,459 (1,917) Risk management assets and liabilities, net 727 987 Other, net (9,961) (7,018) -------- -------- Net cash used in operating activities (4,112) (18,290) -------- -------- INVESTING ACTIVITIES: Additions to property, plant and equipment (18,584) (37,915) Allowance for funds used during construction 173 369 Proceeds from sale of property, plant and equipment 71 57 Equity investment in investee (32,878) - Other - (40) -------- -------- Net cash used in investing activities (51,218) (37,529) -------- -------- FINANCING ACTIVITIES: Cash transferred from restricted account 35,742 38,078 Increase in short-term debt, net 12,152 23,478 Retirement of long-term obligations (2,266) (2,100) Issuance of long-term debt - 308 Dividends paid on common and preferred stock, net (10,034) (9,787) -------- -------- Net cash provided by financing activities 35,594 49,977 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (19,736) (5,842) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29,407 25,161 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,671 $ 19,319 ======== ======== Supplementary cash flow information Interest paid (net of amount capitalized) $ 24,314 $ 15,225 ======== ======== Income taxes paid $ 7,000 $ 1,000 ======== ========
The accompanying notes, as they relate to Cleco Corporation, are an integral part of the consolidated financial statements. 9 CLECO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
2001 2000 ------- ------- (Thousands) Net income applicable to common stock $10,221 $12,258 Other comprehensive income (expense), net of tax Transition adjustment (4,453) - Net unrealized gains from available for sale securities 4,360 - ------- ------- Net other comprehensive expense (93) - ------- ------- Comprehensive income $10,128 $12,258 ======= =======
The accompanying notes, as they relate to Cleco Corporation, are an integral part of the consolidated financial statements. 10 CLECO CORPORATION - RESULTS OF OPERATIONS Set forth below is information concerning the consolidated results of operations of Cleco Corporation for the three months ended March 31, 2001, and March 31, 2000. The following discussion should be read in combination with the Company's Financial Statements and the notes contained in this Form 10-Q. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001, AND 2000
For the three months ending March 31, -------------------------- 2001 2000 Variance Change ---- ---- -------- ------ (Thousands) Operating revenue $253,111 $137,095 $116,016 84.6 % Operating expenses $222,983 $112,902 $110,081 97.5 % Net income from continuing Operations $ 12,100 $ 10,789 $ 1,311 12.2 % Discontinued operations, net $ (1,406) $ (566) $ (840) (148.4)% Extraordinary item, net $ - $ 2,508 $ (2,508) - Net income applicable to common stock $ 10,221 $ 12,258 $ (2,037) (16.6)%
Consolidated net income from continuing operations increased 12.2% in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to increased earnings at Midstream, which were partially offset by decreased earnings at Cleco Power. Net income from continuing operations from Midstream increased $5.5 million in the first quarter of 2001 as compared to the first quarter of 2000 largely due to higher margins on energy marketing and trading functions at Marketing & Trading and the tolling operations of Evangeline which commenced full commercial operations in July 2000. Offsetting the increase at Midstream was a $3.9 million decrease in net income from continuing operations from Cleco Power due primarily to higher capacity costs related to purchased power agreements and mark-to-market losses on trading positions. Increased operating revenues for the first quarter of 2001 as compared to the first quarter of 2000 were due primarily to an $80.3 million increase in energy marketing and tolling operations at Midstream and an increase of $34.3 million in revenues at Cleco Power. The increase of $80.3 million in revenues at Midstream in the first quarter of 2001 as compared to the first quarter of 2000 is due primarily to a $47.1 million increase in energy trading revenues at Marketing & Trading, a $22.2 million increase in energy trading revenues at Energy and a $10.0 million increase in tolling revenues at Evangeline. The 97.5% increase in operating expenses for the first quarter of 2001 as compared to the first quarter 2000 was caused mainly by increased purchases for energy marketing and depreciation at Midstream and increased fuel and purchased power expenses at Cleco Power. Purchases for energy marketing at Midstream increased $60.6 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to a $40.5 million increase in purchases for energy marketing at Marketing & Trading and a $20.1 million increase in purchases for energy marketing at Energy. Depreciation at Midstream 11 increased $3.0 million in the first quarter of 2001 as compared to the first quarter of 2000 largely due to the commercial operation of Evangeline beginning in July 2000. Fuel and purchase power expenses at Cleco Power increased $42.3 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to an increase in natural gas prices. The loss from discontinued operations, net, increased by $0.8 million in the first quarter of 2001 as compared to the first quarter of 2000 due to the closing of the sale of UtiliTech, which increased the loss on disposal of the business. There was no extraordinary item in the first quarter of 2001 as compared to a $2.5 million extraordinary gain in the first quarter of 2000 which resulted from the repurchase of debt within Midstream. MIDSTREAM Marketing & Trading Marketing & Trading generally does not take physical delivery of electricity or natural gas marketed, but settles the transactions through the financial markets. The chart below presents a summary of electricity and natural gas marketed. For the three months ending March 31, -------------- 2001 2000 Change ---- ---- ------ Electricity marketed (Million kWh) 321 216 48.6 % Natural gas (MMBtu) 1,702,445 1,743,516 (2.4)% The increase of $47.1 million in revenues in the first quarter of 2001 as compared to the first quarter 2000 at Marketing & Trading was due primarily to an increase in electricity marketed and an increase in the price of natural gas. Purchases for energy marketing increased $40.5 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to the same reasons for the increase in revenues. Marketing & Trading experienced a 162.7% increase in its average cost of natural gas in the first quarter of 2001 as compared to the first quarter of 2000. Energy Energy generally takes physical delivery of natural gas marketed and sells physical gas instead of settling the transactions through the financial markets. The chart below presents a summary of natural gas marketed. For the three months ending March 31, ---------------------------- 2001 2000 Change ---- ---- ------ Natural gas marketed (MMBtu) 3,503,683 2,166,363 61.7% 12 The increase of $22.2 million in revenues in the first quarter of 2001 as compared to the first quarter of 2000 at Energy was due primarily to an increase in natural gas marketed and an increase in the price of natural gas. The increase in natural gas marketed was due primarily to Energy's acquisition of two natural gas pipelines in the fourth quarter of 2000. Energy experienced a 321.6% increase in its average cost of natural gas in the first quarter of 2001 as compared to the first quarter of 2000. Purchases for energy marketing increased $20.1 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to the same reasons for the increase in revenues. Power Plant Operations Evangeline was in full commercial operations during the first quarter of 2001 and had tolling revenues of $10.0 million, as compared to the first quarter of 2000, when Evangeline recorded no revenues during its construction phase. CLECO POWER
For the three months ending March 31, (Thousands) 2001 2000 Variance Change ---- ---- -------- ------ Operating revenues: Base $ 70,307 $ 69,070 $ 1,237 17.9 % Fuel cost recovery 85,679 44,226 41,453 93.7 % Affiliate revenue 1,109 2,553 (1,444) (56.6)% Estimated customer credits - (1,216) 1,216 - % Energy marketing (512) 7,685 (8,197) (106.7)% -------- -------- ------- Total operating $156,583 $122,318 $34,265 28.0 % revenues ======== ======== =======
For the three months ended March 31 2001 2000 MILLION Million KWH kWh Change ------- ------- ------ Electric sales Residential........................ 684 671 1.9 % Commercial......................... 347 355 (2.2)% Industrial......................... 679 748 (9.2)% Other Retail....................... 129 129 - ----- ----- Total Retail 1,839 1,903 (3.4)% Sales for resale................... 61 49 24.5 % ----- ----- Total sales to regular customers..... 1,900 1,952 (2.7)% Short-term sales to other utilities.. 27 2 1,250.0 % Sales from marketing activities...... 1 65 (98.5)% ----- ----- Total electric sales....... 1,928 2,019 (4.5)% ===== ===== Base revenues during the first quarter of 2001 show a slight increase over the same period in 2000. Weather influences the demand for electricity, especially among residential customers. Much of this demand is measured in cooling degree days and heating degree days. A cooling degree day is an 13 indication of the likelihood of a consumer utilizing air conditioning, while a heating degree day is an indication of the likelihood of a consumer utilizing heating. An increase in the number of heating degree days in the first quarter of 2001 as compared to the same period in 2000 was offset by a decrease in the number of cooling degree days during these same periods. The following chart indicates the percentage variance from normal and from the prior year for combined cooling/heating degree days for the first quarters of 2001 and 2000. Combined Cooling/Heating degree days For the three months ended March 31 2001 2000 ---- ---- Increase/(Decrease) From Normal (5.8)% (28.2)% Increase/(Decrease) From Prior Year 30.2 % 9.8 % Short-term sales to other utilities increased significantly during the first quarter of 2001 as compared to the same period in 2000. This increase was due primarily to sales to the City of Lafayette under a replacement energy contract that began December 2000 and ends December 2001. Fuel cost recovery revenues collected from customers increased primarily as a result of an increase in the average per unit cost of fuel to $4.26 per MMBtu in the first quarter of 2001 compared to $2.12 per MMBtu in the same period in 2000. The increase in the average per unit cost of fuel is primarily a result of a 130% increase in the per unit cost of natural gas for the first quarter of 2001 as compared to 2000. Changes in fuel costs historically have had no effect on net income, as fuel costs are generally recovered through fuel costs adjustment clauses that enable Cleco Power to pass on to customers substantially all changes in the cost of generating fuel and purchased power. These adjustments are audited monthly and are regulated by the LPSC (representing about 99% of the total fuel cost adjustment) and the FERC. Until approval is received, the adjustments are subject to refund. An earnings review settlement was reached with the LPSC in 1996 pursuant to which accruals for estimated customer credits are sometimes required. The Company determined that no such accrual was necessary for the first quarter of 2001, based on an analysis of earnings in that quarter, whereas $1.2 million was accrued in the first quarter of 2000. The amount of credit due customers, if any, is determined by the LPSC annually based on results for the 12-month periods ending September 30 of each year. Energy marketing revenues for the first quarter of 2001 decreased $8.2 million as compared to the same period in 2000. Marketing & Trading markets excess electric capacity and excess natural gas at Cleco Power's power plants on Cleco Power's behalf. The reduction in energy marketing revenues is due primarily to excess natural gas marketed in the first quarter of 2000. Marketing & Trading marketed excess natural gas in the first quarter of 2000 due to outages at several of Cleco Power's gas fired power plants, as compared to the first quarter of 2001, in which Cleco Power did not experience significant outages at its gas fired power plants. Cleco Power's energy trading activity is considered as "trading" under EITF No. 98-10. The mark-to-market related to these positions was a loss of $1.4 million in the first quarter of 2001 compared to a loss of $0.1 million in the same period of 2000. 14 Energy Marketing Operations For the three months ended March 31 (Thousands) 2001 2000 Change ------- ------ ------ Energy trading revenue $ 925 $7,794 (88.1)% Mark-to-market (1,437) (109) (1,218.3)% ------- ------ Total $ (512) $7,685 (106.7)% ======= ====== Operating expenses increased $39.7 million or 41.1% during the first quarter of 2001 compared to the same period in 2000. The increase in operating expenses is primarily the result of increased capacity charges and higher fuel costs. Energy marketing expenses decreased $7.0 million in the first quarter of 2001 compared to the same period in 2000 due to the same factors noted above for decreases in energy marketing revenues. Offsetting the decrease in energy marketing expenses was an increase of $42.3 million in fuel and purchased power for utility operations due to increased energy prices primarily driven by increases in natural gas prices as compared to the same period in 2000. The 42.5% increase in the first quarter of 2001 as compared to the first quarter 2000 in other operations expense is due primarily to a $3.7 million increase in capacity payments. CONSOLIDATED Interest expense in the first quarter of 2001 increased $6.3 million or 67.4% compared to the first quarter of 2000 due primarily to interest expense associated with Evangeline. During the construction phase of Evangeline, interest was capitalized and reflected as a component of plant, property and equipment. With the commencement of commercial operations of Evangeline in July 2000, interest is reflected in interest expense. Interest charges related to Evangeline in the first quarter of 2001 were $4.8 million. Federal and state income taxes increased $1.3 million in the first quarter of 2001 compared to the same period in 2000. This increase is mainly attributable to higher earnings at Marketing & Trading and Evangeline. Discontinued operations at UtiliTech reduced first quarter 2001 earnings by $1.4 million or $0.03 per basic average common share. For additional information, see Note I - Loss on Disposal of Segment in the Notes to the Unaudited Financial Statements in this report. 15 CLECO POWER PART I -- FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The financial statements for Cleco Power included herein are unaudited but reflect, in management's opinion, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of Cleco Power's financial position and the results of its operations for the interim periods presented. Because of the seasonal nature of Cleco Power's business, the results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results that may be expected for the full fiscal year. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in Cleco Power's 2000 Form 10-K. 16 CLECO POWER LLC STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
2001 2000 ---- ---- (Thousands) Operating revenue: Retail electric operations $ 155,986 $113,296 Energy marketing operations (512) 7,685 Affiliate revenues 1,109 2,553 -------------- -------- Gross operating revenue 156,583 123,534 Less: retail electric customer credits - 1,216 -------------- -------- Total operating revenue 156,583 122,318 -------------- -------- OPERATING EXPENSES: Fuel used for electric generation 60,397 31,259 Power purchased for utility customer 27,654 14,513 Purchases for energy marketing operations 327 7,294 Other operations 18,692 13,116 Maintenance 6,417 7,138 Depreciation 12,684 12,277 Taxes other than income taxes 8,946 8,755 Affiliate costs 935 2,049 -------------- -------- Total operating expenses 136,052 96,401 -------------- -------- OPERATING INCOME 20,531 25,917 Interest income 14 - Allowance for other funds used during construction 173 369 Other income (expense), net (114) (454) -------------- -------- INCOME BEFORE INTEREST CHARGES 20,604 25,832 -------------- -------- INTEREST CHARGES: Interest on debt and other, net of amount capitalized 7,303 6,930 Allowance for borrowed funds used during construction (197) (124) Amortization of debt discount, premium and expense, net 225 257 -------------- -------- Total interest charges 7,331 7,063 -------------- -------- NET INCOME BEFORE INCOME TAXES 13,273 18,769 Federal and state income taxes 4,449 6,081 -------------- -------- NET INCOME APPLICABLE TO MEMBER'S EQUITY AND COMMON STOCK $ 8,824 $ 12,688 ============== ========
The accompanying notes, as they relate to Cleco Power, are an integral part of the financial statements. 17 CLECO POWER LLC BALANCE SHEETS (UNAUDITED)
AT AT MARCH 31, DECEMBER 31, 2001 2000 ---------- ---------- (Thousands) ASSETS Utility plant and equipment: Property, plant and equipment $1,558,676 $1,550,756 Accumulated depreciation (606,965) (595,136) ---------- ---------- Net property, plant and equipment 951,711 955,620 Construction work-in-progress 33,474 25,864 ---------- ---------- Total utility plant, net 985,185 981,484 ---------- ---------- Current assets: Cash and cash equivalents 2,604 2,224 Accounts receivable, net Customer accounts receivable (less allowance for doubtful accounts of $677 in 2001 and $757 in 2000) 38,413 41,637 Other accounts receivable 17,385 19,878 Affiliates 1,120 1,457 Notes receivable - affiliates 4,590 2 Unbilled revenues 24,200 26,863 Fuel inventory, at average cost 11,274 7,275 Material and supplies inventory, at average cost 13,975 14,513 Risk management assets 1,167 525 Margin deposit 1,514 3,128 Accumulated deferred fuel 3,605 3,617 Other current assets 3,624 3,630 ---------- ---------- Total current assets 123,471 124,749 ---------- ---------- Prepayments 8,101 7,974 Regulatory assets - deferred taxes 100,101 100,267 Accumulated deferred federal and state income taxes 52,289 52,144 Other deferred charges 33,839 37,014 ---------- ---------- Total Assets $1,302,986 $1,303,632 ========== ==========
(Continued on next page) The accompanying notes, as they relate to Cleco Power, are an integral part of the financial statements. 18 CLECO POWER LLC BALANCE SHEETS (UNAUDITED)
AT AT MARCH 31, DECEMBER 31, 2001 2000 ---------- ---------- (Thousands) Capitalization And Liabilities Member's equity: Member's equity units $ 172,376 $ 172,376 Retained earnings 232,990 234,734 ---------- ---------- Total member's equity 405,366 407,110 Long-term debt, net 335,412 335,282 ---------- ---------- Total capitalization 740,778 742,392 ---------- ---------- Current liabilities: Short-term debt 72,620 41,397 Long-term debt due within one year 25,000 25,000 Accounts payable 37,826 67,919 Accounts payable - Affiliates 16,901 10,846 Customer deposits 20,611 20,447 Taxes accrued 8,363 8,679 Taxes accrued - payable to parent 7,164 8,161 Interest accrued 1,837 8,021 Risk management liabilities 2,726 1,562 Other current liabilities 3,808 4,933 ---------- ---------- Total current liabilities 196,856 196,965 ---------- ---------- Deferred credits Accumulated deferred federal and state income taxes 268,311 268,311 Accumulated deferred investment tax credits 23,811 24,252 Regulatory liabilities - deferred taxes 38,840 38,840 Other deferred credits 34,390 32,872 ---------- ---------- Total deferred credits 365,352 364,275 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES $1,302,986 $1,303,632 ========== ==========
The accompanying notes, as they relate to Cleco Power, are an integral part of the financial statements. 19 CLECO POWER LLC STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
2001 2000 -------- -------- (Thousands) OPERATING ACTIVITIES: Net income $ 8,824 $ 12,688 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 12,909 12,194 Allowance for funds used during construction (173) (369) Amortization of investment tax credits (441) (436) Deferred income taxes (533) (1,409) Deferred fuel costs 12 (1,033) Changes in assets and liabilities: Accounts receivable, net 5,717 (3,454) Accounts and notes receivable, affiliate (4,251) 21,268 Unbilled revenues 2,663 1,132 Fuel, material and supplies inventories (3,461) 2,376 Accounts payable (30,093) (31,066) Accounts payable, affiliate 6,055 9,077 Customer deposits 164 186 Other deferred accounts 4,071 2,460 Taxes accrued (872) (6,248) Interest accrued (6,184) (6,667) Risk management assets and liabilities, net 522 - Margin deposits 1,614 - Other, net (620) (1,823) -------- -------- Net cash provided by (used in) operating activities (4,077) 8,876 -------- -------- INVESTING ACTIVITIES: Additions to property, plant and equipment (16,372) (9,154) Allowance for funds used during construction 173 369 Sale of utility plant, including associated land - 57 -------- -------- Net cash used in investing activities (16,199) (8,728) -------- -------- FINANCING ACTIVITIES: Increase in short-term debt, net 31,223 11,347 Distribution to member (10,567) (10,122) -------- -------- Net cash provided by financing activities 20,656 1,225 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 380 1,373 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,224 547 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,604 $ 1,920 ======== ======== Supplementary cash flow information Interest paid (net of amount capitalized) $ 13,899 $ 13,857 ======== ======== Income taxes paid $ 6,701 $ 20,630 ======== ========
The accompanying notes, as they relate to Cleco Power, are an integral part of the financial statements. 20 CLECO POWER - NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS Set forth below is information concerning the results of operations of Cleco Power for the three months ended March 31, 2001, and March 31, 2000. The following narrative analysis should be read in combination with Cleco Power's Financial Statements and notes contained in this Form 10-Q. Cleco Power meets the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and is therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, Cleco Power has omitted from this report the information called for by Item 3 (Quantitative and Qualitative Disclosure About Market Risk) of Part I and the following Part II items from Form 10-Q: Item 2 (Changes in Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in the amount of revenue and expense items of Cleco Power between the first quarter of 2001 and the first quarter of 2000. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Cleco Power's 2000 Form 10-K. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001, AND 2000
For the three months ending March 31, (Thousands) 2001 2000 Variance Change ---- ---- -------- ------ Operating revenues: Base $ 70,307 $ 69,070 $ 1,237 17.9 % Fuel cost recovery 85,679 44,226 41,453 93.7 % Affiliate revenue 1,109 2,553 (1,444) (56.6)% Estimated customer credits - (1,216) 1,216 - % Energy marketing (512) 7,685 (8,197) (106.7)% -------- -------- ------- Total operating revenues $156,583 $122,318 $34,265 28.0 % ======== ======== =======
21 For the three months ended March 31 2001 2000 MILLION Million KWh KWh Change ------- ------- ------ Electric sales Residential........................ 684 671 1.9 % Commercial......................... 347 355 (2.2)% Industrial......................... 679 748 (9.2)% Other Retail....................... 129 129 - ----- ----- Total retail 1,839 1,903 (3.4)% Sales for resale................... 61 49 24.5 % ----- ----- Total sales to regular customers..... 1,900 1,952 (2.7)% Short-term sales to other utilities.. 27 2 1,250.0 % Sales from marketing activities...... 1 65 (98.5)% ----- ----- Total electric sales....... 1,928 2,019 (4.5)% ===== ===== Base revenues during the first quarter of 2001 show a slight increase over the same period in 2000. Weather influences the demand for electricity, especially among residential customers. Much of this demand is measured in cooling degree days and heating degree days. A cooling degree day is an indication of the likelihood of a consumer utilizing air conditioning, while a heating degree day is an indication of the likelihood of a consumer utilizing heating. An increase in the number of heating degree days in the first quarter of 2001 as compared to the same period in 2000 was offset by a decrease in the number of cooling degree days during these same periods. The following chart indicates the percentage variance from normal and from the prior year for combined cooling/heating degree days for the first quarter of 2001 and 2000. Combined Cooling/Heating degree days For the three months ended March 31 2001 2000 ---- ---- Increase/(Decrease) From Normal (5.8)% (28.2)% Increase/(Decrease) From Prior Year 30.2 % 9.8 % Short-term sales to other utilities increased significantly during the first quarter of 2001 as compared to the same period in 2000. This increase was due primarily to sales to the City of Lafayette under a replacement energy contract that began December 2000 and ends December 2001. Fuel cost recovery revenues collected from customers increased primarily as a result of an increase in the average per unit cost of fuel to $4.26 per MMBtu in the first quarter of 2001 compared to $2.12 per MMBtu in the same period in 2000. The increase in the average per unit cost of fuel is primarily a result of a 130% increase in the per unit cost of natural gas for the first quarter of 2001 as compared to 2000. Changes in fuel costs historically have had no effect on net income, as fuel costs are generally recovered through fuel costs adjustment clauses that enable Cleco Power to pass on to customers substantially all changes in the cost of generating fuel and purchased power. These adjustments are audited monthly and are regulated by the LPSC (representing about 99% of the total fuel cost adjustment) and the FERC. Until approval is received, the adjustments are subject to refund. 22 An earnings review settlement was reached with the LPSC in 1996 pursuant to which accruals for estimated customer credits are sometimes required. The Company determined that no such accrual was necessary for the first quarter of 2001, based on an analysis of earnings in that quarter, whereas $1.2 million was accrued in the first quarter of 2000. The amount of credit due customers, if any, is determined by the LPSC annually based on results for the 12-month periods ending September 30 of each year. Energy marketing revenues for the first quarter of 2001 decreased $8.2 million as compared to the same period in 2000. Marketing & Trading markets excess electricity capacity or excess natural gas at Cleco Power's power plants on Cleco Power's behalf. The reduction in energy marketing revenues is due primarily to excess natural gas marketed in the first quarter of 2000. Marketing & Trading marketed excess natural gas in the first quarter of 2000 due to outages at several of Cleco Power's gas fired power plants, as compared to the first quarter of 2001, in which Cleco Power did not experience significant outages at its gas fired power plants. Cleco Power's energy trading activity is considered as "trading" under EITF No. 98-10. The mark-to-market related to these positions was a loss of $1.4 million in the first quarter of 2001 compared to a loss of $0.1 million in the same period of 2000. Energy Marketing Operations For the three months ending March 31 (Thousands) 2001 2000 Change ---- ---- ------ Energy trading revenue $ 925 $7,794 (88.1)% Mark-to-market (1,437) (109) (1,218.3)% ------- ------ Total $ (512) $7,685 (106.7)% ======= ====== Operating expenses increased $39.7 million or 41.1% during the first quarter of 2001 compared to the same period in 2000. The increase in operating expenses is primarily the result of increased capacity charges and higher fuel costs. Energy marketing expenses decreased $7.0 million compared to the same period in 2000 due to the same factors noted above for decreases in energy marketing revenues. Offsetting the decrease in energy marketing expenses was an increase of $42.3 million in fuel and purchased power for utility operations due to increased energy prices primarily driven by increases in natural gas prices as compared to the same period in 2000. The 42.5% increase in the first quarter of 2001 as compared to the first quarter 2000 in other operations expense is due primarily to a $3.7 million increase in capacity payments. Cleco Power purchases power from other electric power generators when the price of the energy purchased is less than the cost to Cleco Power of generating such energy from its own facilities, or when Cleco Power's generating units are unable to provide electricity to satisfy its load. Approximately 40.2% of Cleco Power's energy requirements during the first quarter of 2001 were met with purchased power, compared to 25% for the corresponding period in 2000. The increase was caused by the replacement of the CPS output with power purchase contracts with Williams Energy and Dynegy. Additionally, due to unscheduled outages at the Dolet Hills Power Station and Rodemacher Unit 2 for a period of two weeks in February 2001, Cleco Power purchased more power in the first quarter of 2001 than it did in the first quarter of 2000 to meet load requirements. While Rodemacher Unit 2 was down in February, the major unit inspection 23 outage originally scheduled for later that month was accelerated and work began on the eight-week project. The unit is expected to return to service during the second quarter of 2001. Federal and state income tax expense decreased approximately $1.6 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to a decrease in net income before income taxes in the first quarter of 2001 as compared to the first quarter of 2000. Net income applicable to member's equity and common stock decreased $3.9 million in the first quarter of 2001 as compared to the first quarter of 2000 due primarily to the $5.4 million decrease in operating income offset by the $1.6 million decrease in federal and state income taxes as discussed above. 24 INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT NOTE A Reclassification Cleco Corporation and Cleco Power NOTE B Legal Proceeding: Fuel Supply - Lignite Cleco Corporation and Cleco Power NOTE C Extraordinary Gain Cleco Corporation NOTE D Disclosures About Segments Cleco Corporation NOTE E Restricted Cash Cleco Corporation NOTE F Equity Investment in Investee Cleco Corporation NOTE G LDEQ Litigation Cleco Corporation NOTE H New Accounting Standard Cleco Corporation and Cleco Power NOTE I Loss on Disposal of Segment Cleco Corporation NOTE J Subsequent Event - Stock Split Cleco Corporation
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE A. RECLASSIFICATION Certain prior-period amounts have been reclassified to conform to the presentation shown in the current year's financial statements. These reclassifications had no effect on net income or shareholders' (member's) equity. NOTE B. LEGAL PROCEEDING: FUEL SUPPLY - LIGNITE Cleco Power and SWEPCO, each a 50% owner of Dolet Hills Unit 1, jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, Cleco Power and SWEPCO entered into the LMA with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves (Dolet Hills Mine). The LMA expires in 2011. The price of lignite delivered pursuant to the LMA is a base price per ton, subject to escalation based on certain inflation indices, plus specified "pass-through" costs. Currently, Cleco Power is receiving annually a minimum delivery of 1,750,000 tons under the LMA. Since the late 1980s, additional spot lignite deliveries have been obtained through competitive bidding from DHMV and another lignite supplier. In 2000, Cleco Power and SWEPCO received deliveries that approximated 25% of the annual lignite consumption at the Dolet Hills Unit 1 from the other lignite supplier. In April 1997, Cleco Power and SWEPCO filed the Federal Court Suit against DHMV and its partners seeking to enforce various obligations of DHMV to Cleco Power and SWEPCO under the LMA, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. In June 1997, DHMV filed an answer denying the allegations in the Federal Court Suit and filed a counterclaim asserting various contract-related claims against Cleco Power and SWEPCO. Cleco Power and SWEPCO have denied the allegations in the counterclaims. 25 As a result of the counterclaims filed by DHMV in the Federal Court Suit, in August 1997, Cleco Power and SWEPCO filed the State Court Suit against the parent companies of DHMV, namely Jones Capital Corporation and Philipp Holzmann USA, Inc. The State Court Suit seeks to enforce a separate 1995 agreement by Jones Capital Corporation and Philipp Holzmann USA, Inc. related to the LMA. Jones Capital Corporation and Philipp Holzmann USA, Inc. have asked the state court to stay that proceeding until the Federal Court Suit is resolved. In March 2000, the court in the Federal Court Suit ruled that DHMV was not in breach of certain financial covenants under the LMA and denied Cleco Power's and SWEPCO's claim to terminate the LMA on that basis. The ruling has no material adverse effect on the operations of Cleco Power and does not affect the other claims scheduled for trial. Cleco Power and SWEPCO have appealed the federal court's ruling to the United States Court of Appeals for the Fifth Circuit. The civil, nonjury trial in the Federal Court Suit was to have commenced in May 2000. However, in April 2000, all parties jointly requested that the court postpone the trial date and grant a 120-day stay of all matters before the trial court to give the parties an opportunity to attempt to reach an amicable resolution of the litigation. A preliminary memorandum of understanding to settle the litigation has been executed among Cleco Power, SWEPCO, and DHMV, the retail ratemaking effects of which have been preliminarily authorized by the LPSC for Cleco Power and SWEPCO. The memorandum of understanding is subject to other regulatory approvals and to the execution of definitive contracts. The federal court granted the motion, stayed the action at the trial court and postponed the trial commencement date to October 23, 2000. At a status conference held on July 12, 2000, the court extended the stay of the proceedings and again postponed the trial date to January 16, 2001. Due to the need for additional time to attempt to refine the settlement, the parties requested, and on September 26, 2000, the court ordered that the stay be extended and the trial date be postponed indefinitely. The Fifth Circuit appeal of the federal court's March 1, 2000, ruling has also been stayed pending settlement. Settlement negotiations are on-going during the pendency of the stay. Should settlement discussions be unsuccessful, Cleco Power and SWEPCO will resume aggressively the prosecution of their claims against DHMV and their defense against the counterclaims that DHMV has asserted. Cleco Power and SWEPCO continue to pay DHMV for lignite delivered pursuant to the LMA. Normal day-to-day operations continue at the Dolet Hills Mine and Dolet Hills Unit 1. Although the ultimate outcome of this litigation or the settlement negotiations cannot be predicted at this time, based on information currently available to the Company, management does not believe that the outcome of the Federal Court Suit or any settlement in the Federal Court Suit will have a material adverse effect on the Company's financial position or results of operations. 26 NOTE C. EXTRAORDINARY GAIN In March 2000, Four Square Gas, a wholly owned subsidiary of Energy, which is 100% owned by Midstream, paid a third party $2.1 million for a note with a face value of approximately $6.0 million issued by Four Square Production, another wholly owned subsidiary of Energy. As part of the transaction, the third-party debtholder sold the note, associated mortgage, deed of trust and pledge agreement and assigned a 5% overriding royalty interest in the production assets to Four Square Gas. Four Square Gas paid, in addition to the $2.1 million, a total of 4.5% in overriding royalty interest in the production assets. Four Square Gas borrowed the $2.1 million from the Company. The gain of approximately $3.9 million was offset against the income tax related to the gain of approximately $1.4 million to arrive at the extraordinary gain, net of income tax, of approximately $2.5 million. NOTE D. DISCLOSURES ABOUT SEGMENTS The Company has determined that its reportable segments are based on the Company's method of internal reporting, which disaggregates its business units by first-tier subsidiary. Reportable segments were determined by applying SFAS No. 131. The Company's reportable segments are Cleco Power, Midstream, and UTS. The Other segment consists of costs within the parent company, costs within a shared services subsidiary, start-up costs associated with a retail services subsidiary and revenue and expenses associated with an investment subsidiary. The Other segment subsidiaries operate within Louisiana, Delaware and several states bordering Louisiana. For additional information, see Note I - Loss on Disposal of Segment in the Notes to the Unaudited Financial Statements in this report. Each reportable segment engages in business activities from which it earns revenues and incurs expenses. Segment managers report at least monthly to the Company's CEO (the chief decision maker) with discrete financial information and present quarterly discrete financial information to the Company's Board of Directors. Each reportable segment prepared budgets for 2001, which were presented to, and approved by, the Company's Board of Directors. The reportable segments exceeded the quantitative thresholds as defined in SFAS No. 131. The financial results of the Company's segments are presented on an accrual basis. Significant differences among the accounting policies of the segments as compared to the Company's consolidated financial statements principally involve the classification of revenue and expense between operating and other. Management evaluates the performance of its segments and allocates resources to them based on segment profit (loss) before income taxes and preferred stock dividends. Material intersegment transactions occur on a regular basis. The tables below present information about the reported operating results and net assets of the Company's reportable segments. 27 SEGMENT INFORMATION FOR THE QUARTER ENDING MARCH 31 (THOUSANDS)
UNALLOCATED ITEMS, 2001 CLECO RECLASSIFICATIONS POWER MIDSTREAM UTS OTHERS & ELIMINATIONS CONSOLIDATED ---------- --------- -------- --------- ---------------- ------------ Revenues Retail electric operations $ 155,986 $ 155,986 Energy marketing operations (512) $ 97,541 97,029 Other operations - 71 $ - $ 25 $ - 96 ---------- -------- ------- -------- --------- ---------- Total operating revenue $ 155,474 $ 97,612 $ - $ 25 $ - $ 253,111 ========== ======== ======= ======== ========= ========== Intersegment revenue $ 1,109 $ 3,072 $ - $ 21,155 $ (25,336) $ - Segment profit from continuing operations $ 13,273 $ 5,262 $ $ (311) $ 18,224 Loss on disposal of segment $ - $ - $(1,406) $ - $ - $ (1,406) ---------- -------- ------- -------- --------- ---------- Segment profit (loss) (1) $ 13,273 $ 5,262 $(1,406) $ (311) $ 16,818 ========== ======== ======= ======== ========== Segment assets $1,302,986 $458,834 $ 4,047 $397,016 $(385,236) $1,777,647
Segment profit $16,818 (1) RECONCILIATION OF SEGMENT PROFIT TO Unallocated items CONSOLIDATED PROFIT Income taxes 6,124 Preferred dividends 473 ------- $10,221 =======
2000 Revenues Retail electric operations $ 113,296 $ 113,296 Energy marketing operations 7,685 $ 17,198 24,883 Other operations - 115 $ 17 132 Customer credits (1,216) - - - $ - (1,216) ---------- -------- -------- -------- --------- ---------- Total operating revenue $ 119,765 $ 17,313 $ - $ 17 $ - $ 137,095 ========== ======== ======== ======== ========== ========== Intersegment revenue $ 2,553 $ 7,321 $ - $ 24,951 $ (34,825) $ - Segment profit from continuing operations $ 18,769 (3,308) $ - $ 197 $ $ 15,658 Loss from operations, net of income taxes $ - $ - $ (566) $ - $ - $ (566) Extraordinary item $ - $ 2,508 $ - $ - $ - $ 2,508 ---------- -------- -------- -------- --------- ---------- Segment profit (loss) (1) $ 18,769 $ (800) $ (566) $ 197 $ 17,600 ========== ======== ======== ======== ========== Segment assets $1,392,423 $268,052 $ 4,641 $277,485 $(239,532) $1,703,069
Segment profit $17,600 (1) RECONCILIATION OF SEGMENT PROFIT TO Unallocated items CONSOLIDATED PROFIT Income taxes 4,869 Preferred dividends 473 ------- $12,258 ======= 28 NOTE E. RESTRICTED CASH Restricted cash represents cash to be used for specific purposes. Approximately $15 million in restricted cash at December 31, 2000, was replaced with a letter of credit to be maintained as security for the performance of certain obligations by Evangeline in regard to the Evangeline Tolling Agreement. The $19.6 million of restricted cash remains restricted under the bond indenture until certain of its provisions are met. NOTE F. EQUITY INVESTMENT IN INVESTEE Equity investment in investee represents Midstream's approximately $127.2 million investment in APP, Midstream's approximate $8.1 million investment in PEP and Energy's approximate $1.0 million investment in Hudson SVD LLC. APP is a joint venture 50% owned by Midstream and 50% owned by Calpine Corporation. APP was formed in order to construct, own and operate a 1,000 MW, natural gas-fired electric plant to be located near Eunice, Louisiana. The Company reports its investment in APP on the equity method of accounting as defined in APB No. 18. Midstream's member's equity as reported in the unaudited balance sheet of APP at March 31, 2001, was $122.5 million. The majority of the difference of $4.7 million between the equity investment in investee and the member's equity was the interest capitalized on funds used to contribute to APP as required by SFAS No. 58. PEP is a joint venture with Mirant Corporation that is in the process of constructing a 700 MW combined-cycle, natural gas-fired power plant in Perryville, Louisiana. The Company reports its investment in PEP on the equity method of accounting as defined in APB No. 18. Midstream's member's equity as reported in the unaudited balance sheet of PEP at March 31, 2001 was $7.8 million. The majority of the difference of $0.3 million between the equity investment in investee and the member's equity was the interest capitalized on funds used to contribute to PEP as required by SFAS No. 58. Energy owns 50% of Hudson SVD LLC, which owns interests in several other entities that own and operate natural gas pipelines in Texas and Louisiana. The Company reports its investment in Hudson SVD LLC on the equity method of accounting as defined in APB No. 18. The member's equity as reported in the unaudited balance sheet was approximately $1.0 million, which equals the investment at Energy. NOTE G. LDEQ LITIGATION Air and water permits issued on or about July 13, 2000, by the LDEQ to APP were judicially appealed by APP-related Petitioners in early August 2000. APP is constructing and will own and operate a new electric generating plant near Eunice, Louisiana. APP-related Petitioners filed their appeals to the air and water permits in the 19th Judicial District Court in Baton Rouge, Louisiana. APP-related Petitioners asked the court to reverse the air and water permits issued by the LDEQ and allege that LDEQ's decision to issue the permits was arbitrary, capricious and procedurally inadequate. APP-related Petitioners have also asked the court to stay 29 APP's power plant construction activities pending resolution of the litigation. APP has denied APP-related Petitioners' allegations and is vigorously defending the validity of the permits issued to it by the LDEQ. The permits could be upheld, reversed, or remanded in whole or in part. If the permits were to be reversed in material part by the court, APP may be required to cease its construction of the generating plant temporarily or permanently, depending on the nature and details of the reversal. If the court were to remand the permits, without reversing them, to the LDEQ for further proceedings, APP's continuation of construction of the generating plant may be jeopardized, depending upon the nature and details of the remand. Oral arguments on the appeal of these permits were held on February 5, 2001. In its order issued on February 23, 2001, the Court ordered the matter remanded to the LDEQ but did not vacate the permits or halt construction. The precise issues that LDEQ must take up on remand will not be determined until the Court issues its judgement on its February 23, 2001, ruling which has not yet occurred. Although the ultimate outcome of this action cannot be predicted at this time, based on information currently available to the Company, management does not believe the outcome of this action will have a material adverse effect on the Company's financial condition or results of operations. An air permit issued by the LDEQ on August 25, 2000, to PEP, a joint venture in which Midstream has a 50 percent interest with Mirant Corporation, was judicially appealed by PEP-related Petitioners. PEP is constructing and will own and operate a new electric generating plant near Perryville, Louisiana. PEP-related Petitioners filed their appeal of the air permit in the 19th Judicial District Court in Baton Rouge, Louisiana, alleging that the issuance of the air permit violates the Louisiana Constitution, the public trustee doctrine and state and federal environmental laws. PEP-related Petitioners have asked that the district court reverse the permit decision or remand the permit decision to require the LDEQ to address certain alleged deficiencies in its issuance of the permit and have also requested that the court stay the air permit. PEP denies PEP-related Petitioners' allegations and is vigorously defending the validity of the permit issued to it by the LDEQ. The permit could be upheld, reversed or remanded, in whole or in part. In the event of a reversal or remand by the court, PEP's construction of the generating plant may be delayed, depending upon the nature and details of the reversal or remand. On or about March 29, 2001, as a result of an agreement by the parties, the Court ordered that the matter be remanded to the LDEQ for the purpose of receiving additional information from PEP, reopening the public comment period, and issuing a revised decision for the issuance of the permits. Although the ultimate outcome of this action cannot be predicted at this time, based on information currently available to the Company, management does not believe the outcome of this action will have a material adverse effect on the Company's financial condition or results of operations. NOTE H. NEW ACCOUNTING STANDARD Periodically the FASB issues Statements of Financial Accounting Standards. These statements reflect accounting, reporting and disclosure requirements the Company should follow in the accumulation of financial data and in the presentation of financial statements. The FASB, 30 a nongovernmental organization, is the primary source of generally accepted accounting principles within the United States. In 1998, the FASB issued SFAS No. 133, which established accounting and reporting standards requiring that every derivative instrument (including certain derivatives embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized in current earnings, unless effective hedge accounting criteria are met, where changes in the fair value of the derivative would be recorded in other comprehensive income in the equity section of the balance sheet. In June of 1998, the FASB created the DIG as a task force to assist the FASB in answering questions that companies face when implementing SFAS No. 133. The DIG reaches tentative conclusions about practice issues that arise when applying SFAS No. 133. The conclusions remain tentative until they are formally cleared by the FASB and become part of the FASB staff implementation guide. In June 1999, the FASB issued SFAS No. 137, which deferred the effective start date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amended SFAS No. 133. The Company implemented the requirements of these accounting standards effective January 1, 2001. Management continues to monitor the conclusions reached by the DIG and formally cleared by the FASB. As conclusions clarify certain technical aspects of SFAS No. 133, Management's assessment of contracts that are subject to SFAS No. 133 and the implementation of SFAS No. 133 may change. Cleco Power Cleco Power has entered into futures and options contracts and forward contracts for the purchase or sale of electricity and natural gas. Generally, contracts for the future purchase of electricity and natural gas for consumption are not subject to the fair market value requirements of SFAS No. 133, as these transactions are considered normal purchases. These contracts not subject to the requirements of SFAS No. 133 do not have the changes in fair market value reflected in either current earnings or other comprehensive income. Certain of Cleco Power's forward, futures and options contracts have changes in fair market value recognized in current earnings as required by SFAS No. 133. Cleco Power has from inception marked-to-market the open positions under these contracts and, as such, implementation of SFAS No. 133, as amended, did not have an impact on the current accounting procedures or results of Cleco Power. Changes in fair market value are influenced by various market factors, including weather and the availability of regional electric generation and transmission capacity. Midstream Marketing & Trading engages in activities that are considered "trading" as defined by EITF No. 98-10. All of Marketing & Trading's positions are currently being marked-to-market under the rules of EITF No. 98-10. As such, implementation of SFAS No. 133, as amended, did not have an impact on the current accounting procedures or results of Marketing & Trading. 31 Evangeline owns and operates the facility, yet tolls the power output of the Evangeline Power Station to Williams under an operating lease. Accordingly, the lease at Evangeline is not subject to the requirements of SFAS No. 133. Energy engages in the wholesale marketing of natural gas and the production, gathering and transmission of natural gas. Certain futures and options contracts between Energy and outside parties, and swap agreements between Energy and a trading affiliate, are considered derivatives. These contracts are designated as cash flow hedges against fluctuations in the price of natural gas. Changes in the fair market value of open positions with outside parties are recognized in other comprehensive income. A transition adjustment was recorded at January 1, 2001 in the statement of other comprehensive income that reduced equity by approximately $4.5 million. For the three months ended March 31, 2001, Energy's equity balance increased by approximately $4.4 million, $2.2 million due to a reduction in the market price of natural gas and the recognition in earnings from contracts related to underlying transactions that were completed. The remaining $2.2 million increase resulted from the assignment of several underlying gas purchase and sales transactions to an affiliated trading company and the subsequent termination of related swap agreements with that affiliate. These transactions were then accounted for by the affiliate under mark-to-market accounting appropriate for a trading organization. The remaining equity balance at March 31 is expected to be reclassified into earnings within the next 3 months as the related financial positions are closed. NOTE I. LOSS ON DISPOSAL OF SEGMENT In December 2000, management decided to sell substantially all of UtiliTech's assets and discontinue UtiliTech's operations after the sale. On March 31, 2001, management signed an asset purchase agreement to sell UtiliTech to Quanta for approximately $3.1 million in cash and assumption of an operating lease for equipment of approximately $11.6 million. Quanta acquired the trade names under which UtiliTech operated, crew tools, equipment under the operating lease with an aggregate unamortized balance of approximately $11.6 million, contracts, inventory relating to certain contracts and workforce in place. UtiliTech (now known as UTS) retained approximately $2.2 million in accounts receivable, net of allowance for uncollectibles, and equipment under the operating lease with an aggregate unamortized balance of approximately $2.8 million. As of March 31, 2001, several contingent liabilities exist: . UTS will auction the equipment retained under lease in order to pay off the unamortized balance of the operating lease. UTS does not expect the net auction proceeds to be sufficient to pay off the lease and will record a loss on the difference between the $2.8 million unamortized balance and the net auction proceeds. The amount of the expected loss cannot yet be determined. . The asset purchase agreement requires that within 45 days after the date of sale, purchase price adjustment calculations will be made that could adjust the purchase price for UtiliTech. Purchase price adjustment calculations will be made on final amounts due at contract completion versus amounts billed at sale date for fixed price contracts, quality and quantity of acquired equipment and inventory. The purchase price adjustment calculations could result in a positive or negative adjustment to the purchase price. The amount of the adjustments cannot yet be determined. . Under the asset purchase agreement, UTS and its sole member have agreed to indemnify Quanta for losses resulting from certain breaches or failures by UTS and its sole member to fulfill their obligations under the asset purchase agreement, for taxes on specific assets relating to periods before the sale and other losses arising from events occurring prior to the sale. 32 The indemnification amount is limited to approximately $14.9 million until December 31, 2001 and $5.0 million until April 1, 2003. The limitations do not apply to fraudulent misrepresentations. Additional information about UTS is as follows: For the three months ended March 31, --------------------------- 2001 2000 ---- ---- (Thousands) Revenues $ 3,515 $3,609 Loss from operations, net $ - $ (566) Income tax benefit associated with loss from operations $ - $ 351 Loss on disposal of segment, net $(1,406) $ - Income tax benefit associated with loss on disposal of segment $ 875 $ - During the first three months of 2001, the $1.4 million loss on disposal of a segment, net, resulted primarily from actual operating losses and updated estimated losses for 2001 in excess of estimated operating losses for 2001 that were included in the loss on disposal of segment for the year ended December 31, 2000. NOTE J. SUBSEQUENT EVENT - STOCK SPLIT On April 27, 2001, the Cleco Corporation shareholders approved a charter amendment to increase the amount of authorized common stock and to effect a two- for-one stock split of the Company's common stock. The charter amendment became effective at the close of business May 7, 2001, which was also the record date for the stock split. Distribution of certificates representing the split shares is expected to occur on or about May 21, 2001. After the split, the Company will have approximately 45 million shares of common stock outstanding and have authorization to issue up to an aggregate of 100 million shares (including the shares currently outstanding). The effect of the stock split has been recognized in all share and per share data in the accompanying consolidated financial statements, notes to the financial statements and supplemental financial data 33 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CLECO CORPORATION The following discussion and analysis should be read in combination with Cleco's 2000 Form 10-K and the Cleco Corporation Financial Statements contained in this Form 10-Q. The information included therein is essential to understanding the following discussion and analysis. RESULTS OF OPERATIONS "Item 1. Financial Statements -- Cleco Corporation -- Results of Operations" of this Form 10-Q is incorporated herein by reference. FINANCIAL CONDITION Liquidity and Capital Resources At March 31, 2001, and December 31, 2000, the Company had $107.8 million and $96.0 million, respectively, of short-term debt outstanding in the form of commercial paper borrowing and bank loans. The Company is a party to two separate credit facilities, including a $120 million, 364-day credit facility that is scheduled to be renewed in May 2001, and an $80 million facility that is scheduled to terminate in August 2002. These facilities provide support for the issuance of commercial paper and working capital needs. Guaranties issued by the Company to third parties for certain types of transactions between those parties and the Company's subsidiaries, other than Cleco Power, reduce the amount of credit available to the Company. In addition, certain indebtedness incurred by the Company outside of the credit facilities reduces the amount of credit available to the Company under the facilities. The amount of credit available to the Company under the facilities totaled $86.0 million at March 31, 2001. An uncommitted line of credit with a bank in the amount of $2.5 million is also available to support working capital needs. At March 31, 2001, and December 31, 2000, Cleco Power, a regulated consolidated subsidiary of the Company, had $72.6 million and $41.4 million, respectively, of short-term debt outstanding in the form of commercial paper borrowing and bank loans. A $100 million Cleco Power revolving credit facility is scheduled to be renewed by the end of the second quarter of 2001. This facility provides support for the issuance of commercial paper and working capital needs. The $2.5 million uncommitted line of credit described above is also available to support working capital needs of Cleco Power. At March 31, 2001, CLE Resources, Inc., an unregulated consolidated subsidiary of the Company, had $2.1 million of cash and temporary cash investments in securities with original maturities of 90 days or less. On March 1, 2001, The Bank of New York issued a $15 million letter of credit on behalf of Evangeline to Williams Energy. It expires on February 28, 2002, but is renewable 34 annually through the terms of the Williams Tolling Agreement between Williams Energy and the Company that expires July 7, 2020. No compensating balances are required. Letters of credit are issued through Cleco Corporation's revolving credit agreements, with a fee of 5/8 of one percent, per the terms of the credit agreements. APP is a joint venture by Midstream and Calpine Corporation that is in the process of constructing a 1,000 MW combined-cycle, natural gas-fired power plant near Eunice, Louisiana. Total construction costs of the plant to be incurred by APP are estimated at $564 million. As of March 31, 2001, Midstream had contributed $127.2 million to APP. By the end of 2001, the Company expects APP to receive interim non-recourse project financing and to reimburse the Company for a large portion of the contributions to APP. PEP is a joint venture by Midstream and Mirant Corporation that is in the process of constructing a 700 MW combined-cycle, natural gas-fired power plant in Perryville, Louisiana. Total construction costs of the plant to be incurred by PEP are estimated at $340 million. As of March 31, 2001, Midstream had contributed $8.1 million to PEP. A 150 MW combustion turbine operating in simple cycle is expected to be operational by the summer of 2001. Full commercial operation in combined cycle is expected for the summer of 2002. Permanent non-recourse financing at PEP is expected to be received in the second quarter of 2001. Regulatory Matters - Retail Electric Competition The LPSC has been continuing its investigation into whether retail choice is in the best interest of Louisiana electric utility customers. Cleco Power and a number of parties, including the other Louisiana electric utilities, certain power marketing companies, and various associations representing industry and consumers, have been participating in electric industry restructuring proceedings before the LPSC since 1997. However, the troubled electric supply situation in California has led many in the industry to reexamine the restructuring process. While the competitive environment continues to be espoused in many areas, several states have reduced or eliminated their restructuring efforts or have asked for delays in implementing already passed rules or legislation. Management believes that the situation in California will continue to influence future decisions and plans at both the federal and state levels, including Louisiana. Management expects the customer choice debate and other related issues to continue in legislative and regulatory bodies through 2001. At this time, the Company cannot predict whether any legislation or regulation will be enacted or adopted during 2001 and, if enacted, what form such legislation or regulation would take. Currently, the LPSC does not provide exclusive service territories for electric utilities under its jurisdiction. Instead, retail service is obtained through the long-term nonexclusive franchises. The LPSC uses a "300 foot rule" for determining the supplier for new customers. The application of this rule has led to competition with neighboring utilities for retail customers at the borders of our service areas. Cleco Power also competes in its service area with suppliers of alternative forms of energy, some of which may be less costly than electricity for certain applications. Cleco Power could experience some competition for electric sales to industrial customers in the form of cogeneration or from independent power producers. However, management believes that its rates and the quality and reliability of their service place Cleco 35 Power in a favorable competitive position in current retail markets, as Cleco Power has ranked number one in reliability among electric utility companies in Louisiana for the past two years, based upon received annual filings in the LPSC Reliability Order. Regulatory Matters - Wholesale Electric Competition In 1999, the FERC issued Order No. 2000, which, together with prior orders issued by the FERC, defines the operation of utilities' transmission systems. This order establishes a general framework for all transmission-owning entities in the nation to voluntarily place their transmission facilities under the control of an appropriate RTO. Although participation is voluntary, the FERC has made it clear that any jurisdictional entity not participating in an RTO will be subject to further regulatory directives. Current objectives state that all electric utilities that own operate or control interstate transmission facilities should participate in an RTO that will be operational no later than December 15, 2001. On October 16, 2000, Cleco Power submitted a filing with the FERC stating that it will join the SPP's RTO, either as a member of the SPP Independent System Operator or as part of a transmission company proposed by Entergy Corporation, by December 15, 2001. The decision will be made once the details of the SPP and Entergy proposals are finalized. The transfer of control of Cleco Power's transmission facilities to an RTO has the potential to materially affect Cleco Power's results of operations and financial condition. Additionally, Cleco Power cannot predict the possible impact to financial earnings that may arise from the adoption of new transmission rates resulting from Cleco Power's expected membership in an RTO. On October 13, 2000, SPP and Entergy jointly submitted a filing with the FERC outlining their plan to operate their hybrid RTO. On March 28, 2001, the FERC released an order regarding the SPP/Entergy RTO filing. The FERC raised concerns about the scope and configuration of the proposed RTO, saying it did not completely accommodate the area's electricity market under guidelines the FERC issued for RTOs last year. The FERC directed the SPP to file a report by May 25, 2001, to outline how it expects to better meet these guidelines and was urged to look for opportunities to expand the RTO. The SPP is actively working toward a resolution of these concerns. Wholesale energy markets, including the market for wholesale electric power, have been competitive and are becoming even more so as the number of participants in these markets increases as a result of enactment of the Energy Policy Act and the regulatory activities of the FERC. No federal legislation was passed during the 2000 legislative session, although several bills were proposed that addressed both restructuring of the industry and transmission reliability issues. Several of these bills in various new forms, as well as several new proposals, have been introduced and are being actively debated within Congress and the Senate. The Company cannot predict what future legislation may be proposed and/or passed and what effect it may have upon its results of operations or financial condition. 36 NEW POWER PLANTS APP is a joint venture by Midstream and Calpine Corporation that is in the process of constructing a new 1,000 MW, natural gas-fired power plant near Eunice, Louisiana. Construction on the plant has begun, with a projected completion date of mid-2002. Construction costs of the plant are estimated to be approximately $564 million. As of March 31, 2001 APP has spent $248 million on constructing the plant. Permanent non-recourse financing is expected to be received by the end of 2001. APP is owned 50% by Midstream and 50% by Calpine Corporation. The investment in APP is being accounted for using the equity method of accounting by the Company. As of March 31, 2001, Midstream has contributed $127.2 million in cash and land to APP. APP has entered into a tolling agreement with Aquila Energy for 580 MW of capacity starting on July 1, 2002, and continuing for 20 years. Under the tolling agreement, Aquila will supply the natural gas required to generate 580 MW and will own the electricity. APP expects to toll the remaining capacity of the facility before commercial operations commence in mid-2002. PEP is a joint venture by Midstream and Mirant that is in the process of constructing a 700 MW combined-cycle, natural gas-fired power plant in Perryville, Louisiana. Total construction cost of the plant to be incurred by PEP are estimated at $340 million. As of March 31, 2001, PEP has spent $77.5 million on constructing the plant. Permanent non-recourse financing at PEP is expected to be received in the second quarter of 2001. The investment in PEP is accounted for using the equity method of accounting by the Company. As of March 31, 2001, Midstream has contributed $8.1 million in cash to PEP. On April 30, 2001, PEP announced the signing of a long-term power purchase agreement for its 700-megawatt facility, the Perryville Power Station. The 20-year contract is with Mirant Marketing, Mirant's risk management, trading and marketing organization. Under the terms of the contract, Mirant Marketing will supply the natural gas needed to fuel the plant and will own the plant's output. CONSTRAINTS ON PURCHASED POWER In future years, Cleco Power's generating facilities may not supply enough electric power to meet its customers' growing demand (native load demand) and it may need to purchase additional generating capacity and/or purchase power to satisfy these needs. In March 2000, following a competitive bid process, Cleco Power entered into three contracts for firm electric capacity and energy with Williams Energy and Dynegy for 605 MW of capacity in 2000, increasing to 760 MW of capacity in 2004. These contracts were approved by the LPSC in March 2000. Management expects to meet substantially all of its native load demand through 2004 with Cleco Power's own generation capacity and the power purchase agreements with Williams Energy and Dynegy. Because of its location on the transmission grid, Cleco Power relies on one main supplier of electric transmission and is sometimes constrained as to the amount of purchased power it can bring into its system. The power contracts described above are not expected to be affected by such transmission constraints. 37 NEW ACCOUNTING STANDARD Periodically the FASB issues Statements of Financial Accounting Standards. These statements reflect accounting, reporting and disclosure requirements the Company should follow in the accumulation of financial data and in the presentation of financial statements. The FASB, a nongovernmental organization, is the primary source of generally accepted accounting principles within the United States. In 1998, the FASB issued SFAS No. 133, which established accounting and reporting standards requiring that every derivative instrument (including certain derivatives embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized in current earnings, unless effective hedge accounting criteria are met, where changes in the fair value of the derivative would be recorded in other comprehensive income in the equity section of the balance sheet. In June of 1998, the FASB created the DIG as a task force to assist the FASB in answering questions that companies face when implementing SFAS No. 133. The DIG reaches tentative conclusions about practice issues that arise when applying SFAS No. 133. The conclusions remain tentative until they are formally cleared by the FASB and become part of the FASB staff implementation guide. In June 1999, the FASB issued SFAS No. 137, which deferred the effective start date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amended SFAS No. 133. The Company implemented the requirements of these accounting standards effective January 1, 2001. Management continues to monitor the conclusions reached by the DIG and formally cleared by the FASB. As conclusions clarify certain technical aspects of SFAS No. 133, Management's assessment of contracts that are subject to SFAS No. 133 and the implementation of SFAS No. 133 may change. Cleco Power Cleco Power has entered into futures and options contracts and forward contracts for the purchase or sale of electricity and natural gas. Generally, contracts for the future purchase of electricity and natural gas for consumption are not subject to the fair market value requirements of SFAS No. 133 as these transactions are considered normal purchases. These contracts not subject to the requirements of SFAS No. 133 do not have the changes in fair market value reflected in either current earnings or other comprehensive income. Certain of Cleco Power's forward, futures and options contracts have changes in fair market value recognized in current earnings as required by SFAS No. 133. Cleco Power has from inception marked-to-market the open positions under these contracts and, as such, implementation of SFAS No. 133, as amended, did not have an impact on the current accounting procedures or results of Cleco Power. Changes in fair market value are influenced by various market factors, including weather and the availability of regional electric generation and transmission capacity. 38 Midstream Marketing & Trading engages in activities that are considered "trading" as defined by EITF No. 98-10. All of Marketing & Trading's positions are currently being marked-to-market under the rules of EITF No. 98-10. As such, implementation of SFAS No. 133, as amended, did not have an impact on the current accounting procedures or results of Marketing & Trading. Evangeline owns and operates the facility, yet tolls the power output of the Evangeline Power Station to Williams Energy under an operating lease. This operating lease is not subject to the requirements of SFAS No. 133. Energy engages in the wholesale marketing of natural gas and the production, gathering and transmission of natural gas. Certain futures and options contracts between Energy and outside parties, and swap agreements between Energy and a trading affiliate, are considered derivatives. These contracts are designated as cash flow hedges against fluctuations in the price of natural gas. Changes in the fair market value of open positions with outside parties are recognized in other comprehensive income. A transition adjustment relating to these contracts was recorded at January 1, 2001 in the statement of other comprehensive income, that reduced equity by approximately $4.5 million. For the three months ended March 31, 2001, Energy's equity balance increased by approximately $4.4 million. Approximately $2.2 million of this increase was due to a reduction in the market price of natural gas and the recognition in earnings from contracts related to underlying transactions that were completed. The remaining $2.2 million increase resulted from the assignment of several underlying gas purchase and sales transactions to an affiliated trading company and the subsequent termination of related swap agreements with that affiliate. These transactions were then accounted for by the affiliate under mark-to-market accounting appropriate for a trading organization. The remaining equity balance at March 31 is expected to be reclassified into earnings within the next 3 months as the underlying contracts are completed and the remaining financial positions are closed. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF CLECO CORPORATION The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential change arising from increases or decreases in the short-, medium- and long-term interest rates, the commodity price of electricity traded on the Into Entergy and the Into Cinergy exchanges, and the commodity price of natural gas traded. Generally, Cleco Power's market risk sensitive instruments and positions, such as instruments used to provide fuel to its retail utility customers, are characterized as "other than trading" as defined by EITF No. 98-10. However, Cleco Power does have positions that are considered "trading" as defined by EITF No. 98-10, such as its positions in energy marketing operations. All of Marketing & Trading's positions are characterized as "trading" under EITF No. 98-10. The Company's exposure to market risk, as discussed below, represents an estimate of possible changes in the fair value or future earnings that would occur, assuming possible future movements in the interest rates and commodity prices of electricity and natural gas. Management's views on market risk are not necessarily indicative of actual results, nor do they represent the maximum possible gains or losses. The views do represent, within the parameters disclosed, what management estimates may happen. Interest Rate Risks The Company has entered into various fixed- and variable-rate debt obligations. The calculations of the changes in fair market value and interest expense of the debt securities are made over a one-year period. 39 Sensitivity to changes in interest rates for fixed-rate obligations is computed by calculating the current fair market value using a net present value model based upon a 1% change in the average interest rate applicable to such debt. Sensitivity to changes in interest rates for variable-rate obligations is computed by assuming a 1% change in the current interest rate applicable to such debt. As of March 31, 2001, the carrying value of the Company's consolidated short-term variable-rate debt was approximately $107.8 million, which approximates the fair market value. Fair value was determined using quoted market prices. Each 1.0% change in the average interest rates applicable to such debt would result in a change of approximately $1.1 million in the Company's pretax earnings. As of March 31, 2001, the carrying value of Cleco Power's short-term variable-rate debt was approximately $72.6 million, which approximates the fair market value. Each 1.0% change in the average interest rates applicable to such debt would result in a change of approximately $0.7 million in Cleco Power's pretax earnings. The Company monitors its mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix by, for example, refinancing balances outstanding under its variable-rate commercial paper program with fixed-rate debt. Commodity Price Risks Management believes the Company has in place controls to help minimize the risks involved in marketing and trading. Controls over marketing and trading consist of a back office (accounting) and mid-office (risk management) independent of the marketing and trading operations, oversight by a risk management committee comprised of Company officers and a daily risk report which shows value-at-risk (VAR) and current market conditions. The Company's Board of Directors appoint the members of the Risk Management Committee. VAR limits are set and monitored by the Risk Management Committee. Marketing & Trading engages in marketing and trading of electricity and natural gas. All of Marketing & Trading's trades are considered "trading" under EITF No. 98-10 and are marked-to-market. Due to market price volatility, mark- to-market reporting may introduce volatility to carrying values and hence to the Company's financial statements. The mark-to-market of trading positions of Marketing & Trading at March 31, 2001 was a gain of $2.0 million. Most of Cleco Power's positions are considered "other than trading" under EITF No. 98-10. However, Cleco Power does have financial positions that are defined at "trading" under EITF No. 98-10. At March 31, 2001, the mark-to- market for those positions was a loss of $1.4 million. Both Marketing & Trading and Cleco Power utilize a VAR model to assess the market risk of their trading portfolios including the derivative financial instruments. VAR 40 represents the potential loss in fair values for an instrument from adverse changes in market factors for a specified period of time and confidence level. The VAR is estimated using a historical simulation calculated daily assuming a holding period of one day, with a 95% confidence level for natural gas positions and a 99.7% confidence level for electricity positions. Total volatility is based on historical cash volatility, implied market volatility, current cash volatility and option pricing. Based on these assumptions, the high, low and average VAR during the three months and for the three months ended March 31, 2001, as well as the VAR at March 31, 2001, is summarized below:
AT FOR THE THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2001 ----------------------------------------- -------------- HIGH LOW AVERAGE ---- --- ------- (Thousands) Marketing & Trading $4,056.8 $402.1 $1,790.9 $1,715.9 Cleco Power $ 321.8 $ 70.6 $ 145.1 $ 121.5 Consolidated $4,199.5 $546.7 $1,935.9 $1,837.4
All of Energy's positions are considered "other than trading" under EITF No. 98-10. Energy does not record a gain/loss in the income statement and its VAR for the three months ended and at March 31, 2001 is immaterial. 41 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS For a description of legal proceedings affecting the Company, please review Note G - LDEQ Litigation, in the Notes to the Unaudited Financial Statements in this report, which is incorporated herein by reference. For a description of legal proceedings affecting the Company and Cleco Power, please review Note B-Legal Proceeding: Fuel Supply - Lignite, in the Notes to the Unaudited Financial Statements in this report, which is incorporated herein by reference. 42 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Cleco Corporation: 11(a) Computation of Net Income Per Common Share for the three months ended March 31, 2001 11(b) Computation of Net Income Before Extraordinary Item Per Common Share for the three months ended March 31, 2001 12 Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends for the three and twelve month periods ended March 31, 2001, for Cleco Corporation Cleco Power: 12 Computation of Ratio of Earnings to Fixed Charges for the three and twelve month periods ended March 31, 2001, for Cleco Power (b) Reports on Form 8-K Cleco Corporation: On March 6, 2001, Cleco Corporation filed a report on Form 8-K dated as of December 31, 2000 including as exhibits Management's Discussion and Analysis of Financial Condition and Results of Operations and Audited Financial Statements for the years ended December 31, 2000, 1999 and 1998. On April 3, 2001, Cleco Corporation filed a report on Form 8-K dated as of April 2, 2001 including as an exhibit a press release announcing the sale of UtiliTech. On April 30, 2001, Cleco Corporation filed a report on Form 8-K dated as of April 27, 2001 including as an exhibit a press release describing the Company's two-for-one stock split. On May 7, 2001, Cleco Corporation filed a report on Form 8-K dated as of May 7, 2001 in lieu of post-effective amendments to certain registration statements listed in an exhibit thereto. 43 Cleco Power: On January 4, 2001, Cleco Power filed a report on Form 8-K dated as of December 31, 2000 reporting the conversion of Cleco Utility Group Inc. into a limited liability company via a merger with and into Cleco Power. On April 26, 2001, Cleco Power filed a report on Form 8-K dated as of April 26, 2001 including as exhibits a Selling Agency Agreement, Third Supplemental Indenture and Forms of Notes relating to Cleco Power's offering from time to time of its Medium Term Notes, Series C. 44 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLECO CORPORATION (Registrant) By: /s/ R. Russell Davis ----------------------- R. Russell Davis Vice President and Controller (Principal Accounting Officer) Date: May 15, 2001 45 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLECO POWER LLC (Registrant) By: /s/ R. Russell Davis ----------------------- R. Russell Davis Vice President and Controller (Principal Accounting Officer) Date: May 15, 2001 46