-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MNiSMd64rsWM+ssaBcrLiqQAwLzKd9LNNxk1xApUC06udpdBxwaQh1Blm6WRHKMc CZ82oKUHjkxgIWwNT66GDg== 0000950129-98-003512.txt : 19980817 0000950129-98-003512.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950129-98-003512 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLECO CORP CENTRAL INDEX KEY: 0000018672 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 720244480 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05663 FILM NUMBER: 98689506 BUSINESS ADDRESS: STREET 1: 2030 DONAHUE FERRY RD CITY: PINEVILLE STATE: LA ZIP: 71360 BUSINESS PHONE: 3184847400 MAIL ADDRESS: STREET 1: P O BOX 5000 CITY: PINEVILLE STATE: LA ZIP: 71361-5000 FORMER COMPANY: FORMER CONFORMED NAME: CENTRAL LOUISIANA ELECTRIC CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 CLECO CORPORATION - 6/30/98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 1-5663 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 CLECO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) LOUISIANA 72-0244480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2030 DONAHUE FERRY ROAD, PINEVILLE, LOUISIANA 71360-5226 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (318) 484-7400 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ----- ---- As of August 1, 1998, there were 22,485,876 shares outstanding of the Registrant's Common Stock, par value $2.00 per share. ================================================================================ 2 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................................................... 1 Report of Independent Accountants................................................ 2 Consolidated Statements of Income................................................ 3 Consolidated Balance Sheets...................................................... 5 Consolidated Statements of Cash Flows............................................ 7 Notes to Consolidated Financial Statements....................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements.................................. 10 Results of Operations............................................................ 10 Financial Condition.............................................................. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 14 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................................ 15 Item 5. Other Information.................................................................. 15 Item 6. Exhibits and Reports on Form 8-K................................................... 19 SIGNATURE...................................................................................... 20
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements for Cleco Corporation (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 the Company's business, the results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the full fiscal year. The financial statements included herein should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (1997 Form 10-K). The consolidated financial statements included herein have been subjected to a limited review by PricewaterhouseCoopers LLP, independent accountants for the Company, whose report is included herein. 1 4 REPORT OF INDEPENDENT ACCOUNTANTS July 28, 1998 To the Board of Directors and Shareholders of Cleco Corporation: We have made a review of the consolidated balance sheet of Cleco Corporation as of June 30, 1998, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997, in accordance with standards established by the American Institute of Certified Public Accountants. These financial statements are the responsibility of the Company's management. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical review procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of income, cash flows and changes in common shareholders' equity for the year then ended (not presented herein); and in our report dated January 27, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the balance sheet from which it has been derived. PricewaterhouseCoopers LLP 2 5 CLECO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
(In thousands, except share and per share amounts) 1998 1997 ----------- ----------- OPERATING REVENUES $ 128,298 $ 105,324 ----------- ----------- OPERATING EXPENSES Fuel used for electric generation 34,402 27,887 Power purchased 12,885 8,696 Other operation 24,580 16,833 Restructuring charge 0 1,891 Maintenance 7,615 5,969 Depreciation 11,854 11,374 Taxes other than income taxes 8,639 8,369 Federal and state income taxes 7,377 5,846 ----------- ----------- 107,352 86,865 ----------- ----------- OPERATING INCOME 20,946 18,459 Allowance for other funds used during construction 301 124 Other income and expenses, net 625 (106) ----------- ----------- INCOME BEFORE INTEREST CHARGES 21,872 18,477 Interest charges, including amortization of debt expense, premium and discount 7,071 7,277 Allowance for borrowed funds used during construction (221) (69) ----------- ----------- NET INCOME 15,022 11,269 Preferred dividend requirements, net 531 525 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK $ 14,491 $ 10,744 =========== =========== WEIGHTED AVERAGE COMMON SHARES Basic 22,481,365 22,459,381 Diluted 23,866,067 23,864,412 EARNINGS PER SHARE Basic $ 0.64 $ 0.48 Diluted $ 0.63 $ 0.47 CASH DIVIDENDS PAID PER SHARE $ 0.405 $ 0.395
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 3 6 CLECO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30 (UNAUDITED)
(In thousands, except share and per share amounts) 1998 1997 ----------- ----------- OPERATING REVENUES $ 225,507 $ 202,992 ----------- ----------- OPERATING EXPENSES Fuel used for electric generation 62,099 54,967 Power purchased 24,443 21,606 Other operation 39,700 30,115 Restructuring charge 0 1,891 Maintenance 12,799 11,764 Depreciation 23,894 22,712 Taxes other than income taxes 17,389 16,991 Federal and state income taxes 10,408 9,689 ----------- ----------- 190,732 169,735 ----------- ----------- OPERATING INCOME 34,775 33,257 Allowance for other funds used during construction 582 126 Other income and expenses, net 478 28 ----------- ----------- INCOME BEFORE INTEREST CHARGES 35,835 33,411 Interest charges, including amortization of debt expense, premium and discount 14,248 14,526 Allowance for borrowed funds used during construction (429) 90 ----------- ----------- NET INCOME 22,016 18,795 Preferred dividend requirements, net 1,057 1,049 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK $ 20,959 $ 17,746 =========== =========== WEIGHTED AVERAGE COMMON SHARES Basic 22,475,719 22,458,173 Diluted 23,865,949 23,864,280 EARNINGS PER SHARE Basic $ 0.93 $ 0.79 Diluted $ 0.91 $ 0.78 CASH DIVIDENDS PAID PER SHARE $ 0.80 $ 0.78
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 4 7 CLECO CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands) JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- ASSETS Utility plant Property, plant and equipment $ 1,522,578 $ 1,506,949 Accumulated depreciation (532,545) (518,664) ----------- ----------- 990,033 988,285 Construction work-in-progress 41,358 37,277 ----------- ----------- Total utility plant, net 1,031,391 1,025,562 ----------- ----------- Investments and other assets 3,741 3,479 ----------- ----------- Current assets Cash and cash equivalents 18,583 18,015 Accounts receivable, net 61,876 48,353 Unbilled revenues 11,693 11,090 Fuel inventory, at average cost 7,036 8,648 Materials and supplies, inventory, at average cost 13,434 14,413 Other current assets 4,767 1,894 ----------- ----------- Total current assets 117,389 102,413 ----------- ----------- Prepayments 8,325 8,331 Regulatory assets - deferred taxes 111,414 115,285 Other deferred charges 30,560 29,418 Accumulated deferred federal and state income taxes 77,618 76,556 ----------- ----------- TOTAL ASSETS $ 1,380,438 $ 1,361,044 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. (Continued on next page) 5 8 CLECO CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED)
(In thousands, except share amounts) JUNE 30, 1998 DECEMBER 31, 1997 ----------- ----------- CAPITALIZATION AND LIABILITIES Common shareholders' equity Common stock, $2 par value, authorized 50,000,000 shares, issued 22,764,754 and 22,762,754 shares at June 30,1998 and December 31, 1997, respectively $ 45,530 $ 45,525 Premium on capital stock 113,807 113,763 Retained earnings 258,528 255,549 Treasury stock, at cost, 282,642 and 299,842 shares at June 30, 1998 and December 31, 1997, respectively (5,744) (6,086) ----------- ----------- 412,121 408,751 ----------- ----------- Preferred stock, cumulative, $100 par value Not subject to mandatory redemption 29,723 30,102 Deferred compensation related to preferred stock held by ESOP (17,437) (18,766) ----------- ----------- 12,286 11,336 Subject to mandatory redemption 5,990 6,120 ----------- ----------- 18,276 17,456 ----------- ----------- Long-term debt, net 355,915 365,897 ----------- ----------- Total capitalization 786,312 792,104 ----------- ----------- Current liabilities Short-term debt 60,049 34,219 Long-term debt due within one year 10,000 15,000 Accounts payable 35,494 53,365 Customer deposits 20,333 20,172 Taxes accrued 31,533 12,211 Interest accrued 7,794 7,681 Accumulated deferred fuel (231) 2,965 Other current liabilities 9,882 5,102 ----------- ----------- Total current liabilities 174,854 150,715 ----------- ----------- Deferred credits Accumulated deferred federal and state income taxes 292,899 296,123 Accumulated deferred investment tax credits 28,679 29,574 Regulatory liabilities - deferred taxes 62,878 62,468 Other deferred credits 34,816 30,060 ----------- ----------- Total deferred credits 419,272 418,225 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,380,438 $ 1,361,044 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 6 9 CLECO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 (UNAUDITED)
(In thousands) 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 22,016 $ 18,795 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 24,880 23,607 Allowance for funds used during construction (1,011) 36 Amortization of investment tax credits (895) (895) Deferred income taxes 55 51 Deferred fuel costs (3,196) (418) Restructuring charges 0 1,891 (Gain) Loss on disposition of utility plant, net 2 (73) Changes in assets and liabilities Accounts receivable, net (13,523) (1,567) Unbilled revenues (603) (3,132) Fuel inventory, materials and supplies 2,591 1,434 Accounts payable (17,870) (23,252) Customer deposits 161 38 Other deferred accounts (376) (985) Taxes accrued 19,322 17,325 Interest accrued 113 168 Other, net 4,980 8,398 -------- -------- Net cash provided by operating activities 36,646 41,421 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to utility plant (28,720) (25,020) Allowance for funds used during construction 1,011 (36) Sale of utility plant 186 240 Purchase of investments (180) (130) Sale of investments 0 1 -------- -------- Net cash used in investing activities (27,703) (24,945) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 39 21 Issuance of long-term debt 0 15,000 Retirement of long-term debt (15,000) (15,000) Increase (Decrease) in short-term debt, net 25,830 (818) Issuance of preferred stock 0 125 Redemption of preferred stock (207) (237) Dividends paid on common and preferred stock, net (19,037) (18,571) -------- -------- Net cash used in financing activities (8,375) (19,480) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 568 (3,004) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,015 20,307 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,583 $ 17,303 ======== ======== Supplementary cash flow information Interest paid (net of amount capitalized) $ 13,742 $ 13,584 ======== ======== Income taxes paid $ 1,000 $ 2,391 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 7 10 CLECO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A. RECLASSIFICATION Certain prior-period amounts have been reclassified to conform with the presentation shown in the current year's financial statements. These reclassifications had no effect on net income applicable to common stock or common shareholders' equity. NOTE B. LEGAL PROCEEDING: FUEL SUPPLY - LIGNITE The Company and Southwestern Electric Power Company (SWEPCO), each a 50% owner of Dolet Hills Power Station Unit 1 (Dolet Hills Unit 1), jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982 the Company and SWEPCO entered into a Lignite Mining Agreement (LMA) with the Dolet Hills Mining Venture (DHMV), a partnership for the mining and delivery of lignite from a portion of these reserves (Dolet Hills Mine). The LMA expires in 2011. The price of lignite delivered pursuant to the LMA is a base price per ton, subject to escalation based on certain inflation indices, plus specified "pass-through" costs. Currently, the Company is receiving annually a minimum delivery of 1,187,500 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 1997 the Company and SWEPCO received deliveries which approximated 28% of the annual lignite consumption at Dolet Hills Unit 1 from the other lignite supplier. On April 15, 1997, the Company and SWEPCO filed suit against DHMV and its partners in the United States District Court for the Western District of Louisiana (Federal Court Suit) seeking to enforce various obligations of DHMV to the Company and SWEPCO under the LMA, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the Company's suit and filed a counterclaim asserting various contract-related claims against the Company and SWEPCO. The Company and SWEPCO have denied the allegations in the counterclaims on the grounds the counterclaims have no merit. The counterclaims filed by DHMV in the Federal Court Suit resulted in the Company and SWEPCO filing a separate lawsuit against the parent companies of DHMV, namely, Jones Capital Corporation and Philipp Holzmann USA, Inc., on August 13, 1997, in the First Judicial District Court for Caddo Parish, Louisiana (State Court Suit). The State Court Suit seeks to enforce a separate 1995 agreement by Jones Capital Corporation and Philipp Holzmann USA, Inc. related to the LMA. Jones Capital Corporation and Philipp Holzmann USA, Inc. have asked the State Court to stay that proceeding until the Federal Court Suit is resolved. The suits are currently in the discovery phase. At DHMV's request, negotiations among DHMV, SWEPCO and the Company have been terminated. A status conference was held on June 4, 1998, at which the Court established a partial discovery completion schedule. The next status conference 8 11 is currently scheduled for November 5, 1998. At this conference, a trial date is expected to be set. The Company and SWEPCO will aggressively prosecute the claims against DHMV and defend against the counterclaims which DHMV has asserted. The Company 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 cannot be predicted at this time, based on information currently available to the Company, management does not believe that the counterclaims asserted by the DHMV in the Federal Court Suit will have a significant adverse effect on the Company's financial position or results of operations. NOTE C. ACCRUAL FOR ESTIMATED CUSTOMER CREDITS The Company's reported second quarter earnings reflect a $4 million accrual for estimated customer credits which may be required under terms of an earnings review settlement reached with the Louisiana Public Service Commission (LPSC) in 1996. The settlement set the company's rates for a period of five years, and also provided for annual base rate tariff reductions of $3 million in 1997 and an additional $2 million in 1998. As part of the settlement, the Company is allowed to retain all regulated earnings up to a 12.25% return on equity, and to share equally with customers as credits on their bills all regulated earnings between 12.25% and 13% return on equity. All earnings above a 13% return on equity are credited to customers. The amount of credits due customers, if any, is determined by the LPSC annually based on 12-month-ending results as of September 30 of each year. The settlement provides for such credits to be made on customers' bills the following summer. NOTE D. REPOWERING PROJECT The Company has announced that its Board of Directors has approved the construction of a 750-megawatt repowering project (Project) to be implemented at the site of its existing Coughlin Power Station (CPS). The Project will use three natural gas-fueled combustion turbine generators to repower two existing units at CPS. It is anticipated that the Project's generation capacity and energy will be available to the Company at competitive market rates and that any excess will be available for sale to the regional wholesale market. It is Management's opinion that the additional generating capacity is needed to meet the Company's own needs and the needs of the region. The additional capacity will also further the Company's strategy to become a regional power supplier outside of the traditional service area and take advantage of emerging deregulated markets. One of the Company's unregulated subsidiaries will own and operate the Project. The total cost of the Project is expected to be $240 million and is scheduled to be completed by June 1, 2000. Implementation of the Project is subject to approval by the LPSC and the Federal Energy Regulatory Commission (FERC). 9 12 CLECO CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in combination with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the Company's 1997 Form 10-K, the financial statements and notes contained in Item 8 of the Company's 1997 Form 10-K and the interim financial statements and notes thereto contained elsewhere in this Report. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this Report, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties which could cause the actual results to differ materially from the Company's expectations. Such risks and uncertainties include, without limitation, the effects of competition in the power industry, legislative and regulatory changes affecting electric utilities, fluctuations in the weather and changes in general economic and business conditions, as well as other factors discussed in this and the Company's other filings with the Securities and Exchange Commission (Cautionary Statements). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. RESULTS OF OPERATIONS For the Three Months Ended June 30, 1998 Net income applicable to common stock totaled $14.5 million or $0.64 per share for the second quarter of 1998, as compared to $10.7 million or $0.48 per share for the corresponding period in 1997. The following principal factors contributed to these results: Operating revenues for the quarter increased $22.9 million, or 21.8%, compared to the same period in 1997, primarily due to an increase in fuel cost recovery revenues, increased activity of the Company's power marketing operations, and a weather-related increase in kilowatt-hour sales to residential customers. Fuel cost recovery revenues for the second quarter of 1998 were $10.0 million higher than the second quarter of 1997. This increase is primarily attributable to higher kilowatt-hour sales. Changes in fuel cost have historically had no effect on net income, as fuel costs are generally recovered through a fuel cost adjustment clause that enables the Company to pass on to customers substantially all changes in the cost of generating fuel and purchased power. These adjustments are 10 13 audited monthly and are regulated by the LPSC (representing about 99% of the total fuel cost adjustment) while the remaining portion, regulated by the FERC, is audited periodically for several years at a time. Until approval is received, the adjustments are subject to refund. Base revenues increased $13.3 million during the second quarter of 1998 compared to the corresponding period in 1997. The increase in base revenues is primarily attributable to an increase in kilowatt-hour sales to residential customers, the most weather-sensitive customer class, and efforts by the Company's power marketing operations. The increased consumption by residential customers was primarily due to a warmer-than-normal spring in 1998. Weather during the second quarter of 1998 was 43% warmer than the second quarter of 1997 and 25% warmer than normal as measured by degree day calculations. Kilowatt-hour sales to regular customers increased 14% from the second quarter of 1997. Base revenues were also affected by the Company's acquisition of residential and commercial customers from the former Teche Electric Cooperative (Teche). The Company acquired Teche on September 30, 1997. The acquisition resulted in the addition of 7,700 mostly residential customers to the Company's service area. Numerous events in the Midwest, such as extremely high temperatures, several power plants owned by other companies being out of operation, damages to transmission lines of other companies, and the default of a major power marketer, caused the wholesale price and demand of electricity in the Midwest to increase dramatically for a very short time frame in June. The Company's power marketing operations were able to capitalize on the situation and increase base revenues by $9.4 million during the second quarter of 1998 compared to the corresponding period in 1997. For a further description of the Company's power marketing operations, see Part II, Item 5, Other Information. Moderating the base revenue increase was a $4 million accrual for estimated customer credits which may be required under terms of an earnings review settlement reached with the Louisiana Public Service Commission (LPSC) in 1996. The amount of credits due customers, if any, is determined by the LPSC annually based on 12-month-ending results as of September 30 of each year. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Financial Condition - Retail Rates" in Item 7 of the 1997 Form 10-K for a discussion of the LPSC settlement. Operating expenses increased $20.5 million, or 23.5%, during the second quarter of 1998 compared to the same period in 1997. The increase in operating expenses for the quarter is primarily due to an increase in fuel and purchased power costs, other operation expenses, federal and state income taxes and an increase in maintenance expense. The changes in the cost of fuel used for electric generation and purchased power are attributable primarily to fluctuations in the Company's generation mix, fuel costs, availability of economy power and deferral of expenses for recovery from customers through fuel adjustment clauses in subsequent months, as compared to the same period in 1997. The Company purchases electric energy from other electric power generators when the price of the energy purchased is less than the cost to the Company of generating such energy from its own facilities. Twenty-two percent of the Company's energy requirements during the second quarter of 1998 were met with purchased power, compared to 20% for the corresponding period in 1997. Other operation expenses for the second quarter of 1998 increased $7.7 million, or 46.0%, compared to the same period in 1997, primarily due to purchases of power by the Company's power marketing operations for resale and an increase in the employee incentive plan expense. Federal and state income taxes increased $1.5 million compared to the same period in 1997 as a result of higher 11 14 taxable income in 1998. Maintenance expense increased $1.6 million, or 27.6%, compared to the same period in 1997, as a result of an increase in preventative measures taken at the power plants in order to reduce downtime during the peak production period of the summer. Depreciation expense increased $0.5 million compared to the same period in 1997, primarily due to the Teche assets being placed into service in late 1997. For the Six Months Ended June 30, 1998 Net income applicable to common stock totaled $20.9 million or $0.93 per share for the first six months of 1998, as compared to $17.7 million or $0.79 per share for the same period in 1997. The following principal factors contributed to these results: Operating revenues for the first six months of 1998 increased $22.5 million, or 11.1%, compared to the same period in 1997, primarily due to a rise in fuel cost recovery revenues, increased activity of the Company's power marketing operations, and a rise in kilowatt-hour sales to residential customers. Fuel cost recovery revenues for the first six months of 1998 were $7.8 million greater than the fuel cost recovery revenues for the same period in 1997 for the same reasons discussed above under results for the three months ended June 30, 1998. Base revenues increased $14.7 million for the first six months of 1998 compared to the corresponding period in 1997. The increase in base revenues is primarily attributable to a 12.5% increase in kilowatt-hour sales to residential customers, the most weather-sensitive of the Company's customers, a 10.2% increase in kilowatt-hour sales to commercial customers and the Company's power marketing operations as discussed above under the results for the three months ended June 30, 1998. The boost in consumption by residential customers is primarily due to a warmer-than-normal spring of 1998. Kilowatt-hour sales to regular customers increased 8.1% from the same period in 1997. Offsetting the increase in base revenues was the $2.0 million reduction of the Company's annual base rate tariff for electric service effective January 1998 as part of the Company's October 1996 LPSC earnings review settlement. A $4.0 million accrual for estimated customer credits in the second quarter of 1998, as discussed above under results for the three months ended June 30, 1998, also reduced base revenues. Operating expenses increased $21.0 million, or 12.4%, for the first six months of 1998 compared to the same period in 1997. The increase in operating expenses is primarily due to an increase in fuel and purchased power costs, other operation expenses and maintenance expense. The changes in the cost of fuel used for electric generation and purchased power are attributable primarily to fluctuations in the Company's generation mix, fuel costs, availability of economy power and deferral of expenses for recovery from customers through fuel adjustment clauses in subsequent months, as compared to the same period in 1997. Twenty-five percent of the Company's energy requirements during the first six months of 1998 were met with purchased power compared to 26% for the corresponding period in 1997. Other operation expenses for the first six months of 1998 increased $9.6 million, or 31.8%, compared to the same period in 1997, primarily due to the increase in power purchased by the Company's power marketing operations for resale and an increase in employee incentive plan expense. Maintenance expenses increased by $1.0 million, or 8.8%, for the same reasons discussed above under the results for the three months ended June 30, 1998. 12 15 FINANCIAL CONDITION Liquidity and Capital Resources At June 30, 1998 and 1997, the Company had $60.0 million and $64.3 million, respectively, of short-term debt outstanding in the form of commercial paper borrowing and bank loans. During March 1998, the Company renewed its 364-day, $25 million revolving credit facility with a scheduled termination date of December 31, 1998, extendable to March 19, 1999 upon satisfaction of certain conditions, although the Company is considering an earlier termination date. An existing $100 million revolving credit facility is scheduled to terminate on June 15, 2000. A new 364-day, $80 million revolving credit facility is expected to be finalized during August 1998. These facilities provide support for the issuance of commercial paper and working capital needs. Uncommitted lines of credit with banks totaling $20 million are also available to support working capital needs. At June 30, 1998, CLE Resources, Inc., an unregulated consolidated subsidiary of the Company, had $11.9 million of cash and temporary cash investments in securities with original maturities of 90 days or less. Of these funds, $10 million has been committed to provide credit support for working capital and electricity or natural gas commodity positions for CLECO Energy L.L.C. In addition, CLE Resources, Inc. has committed up to $25 million over a five-year period for acquisitions, strategic alliances, and investments in capital projects to be made by CLECO Energy L.L.C., subject to the satisfaction of certain conditions. The cost of the repowering project announced by the Company in July is estimated to be $240 million. The structure of permanent financing for the project has not yet been determined and is expected to be finalized by the first quarter of 1999. The Company will use its commercial paper program to fund the interim needs of the project, which are expected to total approximately $80 million. Regulatory Matters - Retail Electric Competition In December 1997, the LPSC Staff made a recommendation to the LPSC that restructuring of the retail electric market in Louisiana could be in the public interest if solutions for key issues were determined and properly implemented. This recommendation was based upon preliminary findings in the LPSC electric restructuring investigation in Docket U-21453. The LPSC accepted the recommendation and directed the Staff to further investigate the issues. The LPSC has scheduled a series of six separate hearings in Docket U-21453 during 1998 to receive input from interested parties, including the utilities that it regulates, and to investigate alternative courses of action in electric restructuring. Through the month of June 1998, hearings have been held on electric restructuring issues including tax implications; unbundling of functions and charges; and market structure, market power, and utilization of independent system operators. During the remainder of 1998, hearings are expected on the topics of stranded costs and benefits; consumer protection, public policy programs and environmental issues; and future regulatory structure and affiliate relationships. The Company has participated actively in these proceedings by offering alternative plans to implement electric restructuring and expects to continue to do so. 13 16 Wholesale power markets, as regulated by the FERC, involve sales of power between power suppliers, marketers, and brokers for subsequent resale to retail, or end-use, customers. Competition in this market has increased since the FERC mandated, through its Order number 888 and subsequent interpretations thereof, open access to transmission facilities that are necessary to complete these sales. The Company, under FERC rules, has an open access transmission tariff through which it offers wholesale transmission service to other parties that is comparable to the service that it provides itself from its facilities. The Company, as a member of the Southwest Power Pool, may also provide certain specialized transmission services under an open access tariff administered by the pool, and as approved by the FERC. In recent years, the Company has purchased a part of its power requirements from the wholesale market when it is economical to do so. In this role, the Company has also been a purchaser of open access transmission service from other parties, and expects to continue to do so in the immediate future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 14 17 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information regarding matters voted upon by security holders at the Annual Meeting of Shareholders of the Company held on April 24, 1998 was previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. ITEM 5. OTHER INFORMATION NEW ACCOUNTING STANDARDS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards "SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management anticipates that, due to its present limited use of derivative instruments, the adoption of SFAS 133 will not have a significant effect on the Company's results of operations or its financial position. In early 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which will be effective for the Company in 1999. This SOP requires that computer software costs that are incurred in the preliminary project stage be expensed as incurred. Once the capitalization criteria of the SOP have been met, external direct cost of materials and services used in developing or obtaining internal use computer software, as well as payroll and payroll-related costs of employees (to the extent of time spent directly on internal use computer software projects), and interest costs incurred in developing such computer software should be capitalized. Training costs and data conversion costs should be expensed as incurred, with certain exceptions. The adoption of SOP 98-1 is not expected to have a material effect on the financial position, results of operations, or cash flow of the Company. FUEL SUPPLY - COAL The majority of the coal for Rodemacher Power Station Unit 2 (Rodemacher Unit 2) is purchased under a long-term contract with Jacobs Ranch Coal Company (formerly owned by Kerr-McGee Coal Corporation) from a mine in Wyoming. The Company has a 30% interest in the capacity of Rodemacher Unit 2. The coal is transported under a long-term rail transportation contract with the Union Pacific Railroad. Union Pacific is currently experiencing operating 15 18 problems resulting in reduced volumes delivered to Rodemacher Unit 2. The Company's coal inventory is currently near the Company's desired minimum level. Based on the anticipated delivery schedule of future coal shipments, management does not expect that Rodemacher Unit 2 operations will need to be curtailed due to insufficient fuel supply. The Company is closely monitoring this situation. Other regional utilities are experiencing similar delivery problems. REPOWERING PROJECT The Company has announced that its Board of Directors has approved the construction of a 750-megawatt repowering project (Project) to be implemented at the site of its existing Coughlin Power Station (CPS). The Project will use three natural gas-fueled combustion turbine generators to repower two existing units at CPS. It is anticipated that the Project's generation capacity and energy will be available to the Company at competitive market rates and that any excess will be available for sale to the regional wholesale market. It is Management's opinion that the additional generating capacity is needed to meet the Company's own needs and the needs of the region. The additional capacity will also further the Company's strategy to become a regional power supplier outside of the traditional service area and to take advantage of emerging deregulated markets. One of the Company's unregulated subsidiaries will own and operate the Project. The total cost of the Project is expected to be $240 million and is scheduled to be completed by June 1, 2000. Implementation of the Project is subject to approval by the LPSC and the FERC. YEAR 2000 SYSTEMS ISSUES The year 2000 (Y2K) problem occurs because many systems, both hardware and software, were designed to accept only two digits instead of four digits for the year in a date field. Having two digits instead of four digits may cause the system to read '00' as 1900 instead of 2000. This may cause calculations that are date sensitive to arrive at an incorrect or impossible solution. This may affect items such as delivery dates, interest calculations, pension benefit calculations, and a variety of other date dependent calculations. The Company is aware of the issues surrounding the year 2000 and the problems that may occur and has put into action a plan to address these issues. The Company has completed a survey of all internal information technology (IT) and non-IT systems. IT systems consist of software programs, such as the operating system, spreadsheets, accounting and other programs. Non-IT systems refer to embedded technology such as microcontrollers found in computers and other hardware systems. This survey has identified systems as Y2K compliant and those that are not compliant. Systems that the survey identified as non-compliant have been evaluated and solutions have been proposed and, to varying degrees, implemented. The following is a list of the major initiatives, the estimated completion date and the percentage completion of proposed solutions: 16 19
Major Initiative Completion Date % Completion ---------------- --------------- ------------ IT Systems/Hardware July 1999* 51% Transmission July 1999 50% Distribution July 1998 100% Generation April 1999 45%
*(The majority of the IT Systems/Hardware initiative's estimated completion date is December, 1998. The telephone switches and voice mail systems are estimated to be complete by July, 1999) Internal systems are not the only ones that may have a material effect on the Company. Institutions external to the Company, such as vendors and customers, may also impact the Company's operations if their systems are not Y2K compliant. Vendors could impact the Company by the inability to deliver goods and services required by the Company to operate. Customers could impact the Company by their inability to operate, reducing the sale of power, or their inability to pay the Company for the power consumed. The Company has decided to address this issue by identifying major vendors and customers and sending surveys to discover their level of Y2K compliance. Major vendors are defined as those that either provide a large dollar volume of goods or services to the Company, or those that provide critical components to the Company, or that fall into both categories (such as fuel suppliers and financial institutions). Major customers are identified as those customers that are at the greatest risk of being impacted by the Y2K problem and are large consumers of power (mainly industrial and commercial customers). To date, the surveys to the major vendors have been sent out, but response has been sparse. The surveys to major customers are in the process of being sent out. The projected date of completion of system surveys of external parties is expected to be September, 1998. The risks of not addressing the Y2K problem include the failure to bill customers, collect payments, pay invoices, operate generation facilities, operate substations, and order and receive critical materials. Each of these risks, should they materialize, could have a material, negative impact on the operations, liquidity and financial condition of the Company. However, it is the opinion of Management that the action plan outlined above will adequately address the risks and reduce them to a manageable level so that Y2K issues will not materially impact the Company. At present, the Company does not have a contingency plan in place to specifically cover the YK2 issues. However, Management is continually monitoring the progress of each initiative, In the first quarter of 1999, Management will evaluate the reasonableness of the projected completion dates and at that time determine if a contingency plan is required. As of the date of this filing, Management reasonably expects the completion of the initiatives in a timely manner; thus, a contingency plan is not required. POWER MARKETING OPERATIONS Historically, the Company's power marketing operations focused solely upon purchasing economic power from other utilities to meet the Company's native load needs and, where economically feasible, selling any excess generation capacity to other utilities. In January 1997, the 17 20 scope of the Company's power marketing operations was expanded to include trading of electric commodity products in the wholesale energy market. Activities include back-to-back sales of third party electric energy in short term (next day) or hourly transactions along with the sale of municipal generation under partnership agreements. The Company generally enters into longer term sales or trades, greater than a month, but less than one year when backed by physical assets and fixed fuel prices or forward purchases. Risk management controls are in place to minimize risk. Such controls include risk management hardware/software, mid-office risk management personnel, and an experienced corporate risk manager. 18 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(i) Amendment to the Company's Restated Articles of Incorporation 11 Computation of Net Income Per Common Share for the three and six months ended June 30, 1998 and June 30, 1997 12 Computation of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends for the twelve months ended June 30, 1998 15 Awareness letter, dated August 12, 1998, from PricewaterhouseCoopers LLP regarding review of the unaudited interim financial statements 27 Financial Data Schedule (b) Reports on Form 8-K During the three-month period ended June 30, 1998, the Company filed no Current Reports on Form 8-K. 19 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLECO CORPORATION (Registrant) BY: /s/ Thomas J. Howlin --------------------------------- Thomas J. Howlin Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer) Date: August 14, 1998 20 EX-3.I 2 CHANGE TO ARTICLES OF INCORPORATION 1 UNITED STATES OF AMERICA : AMENDMENT TO RESTATED STATE OF LOUISIANA : ARTICLES OF INCORPORATION PARISH OF RAPIDES : OF CENTRAL LOUISIANA CITY OF PINEVILLE : ELECTRIC COMPANY, INC. BE IT KNOWN AND REMEMBERED, that on this 24th day of April, 1998, before me, the undersigned Notary Public, duly commissioned and qualified in and for the Parish of Rapides, State of Louisiana, therein residing, and in the presence of the undersigned two competent witnesses, personally came and appeared Gregory L. Nesbitt, President, and Michael P. Prudhomme, Secretary - Treasurer, respectively, of Central Louisiana Electric Company, Inc., a corporation organized and existing under the laws of the State of Louisiana (the "Corporation"), with its registered office at 2030 Donahue Ferry Road in the City of Pineville, Rapides Parish, Louisiana, both being above the full age of majority, who declared unto me, Notary, in the presence of the undersigned competent witnesses, that: At the annual meeting of shareholders of the Corporation, duly convened and held, pursuant to due and legal notice, on the 24th day of April, 1998, at 9:00 a.m., Central Daylight Savings Time, at the Pineville High School Auditorium at 1511 Line Street, in the City of Pineville, Rapides Parish, Louisiana, and after all legal prerequisites had been observed, of the 22,835,904 shares of the capital stock of the Corporation outstanding as of the record date for the meeting, there were 19,192,980 shares of common stock and 323,444 shares of preferred stock represented at the meeting. The vote on the amendment to the Corporation's Restated Articles of Incorporation to change the name of the Corporation was as follows: 18,783,364 shares of common stock and 320,103 shares of preferred stock voted for the amendment, 244,666 shares of common stock and 1,656 shares of preferred stock voted against and 164,950 shares of common stock and 1,685 shares of preferred stock abstained. Pursuant to such vote, the Restated Articles of Incorporation are amended as follows: "Article 1. The name of the Corporation is hereby declared to be CLECO CORPORATION." Said appearers further declared that this authentic act is executed by them so that Article 1 of the Restated Articles of Incorporation of Central Louisiana Electric Company, Inc. shall stand as amended in the particulars and to the extent herein recited. 2 THUS DONE AND PASSED, in multiple originals, on the day, month and year herein first above written, in the presence of the undersigned competent witnesses, of lawful age and domiciled in the State and Parish aforesaid, who hereunto sign their names with the said appearers and me, Notary, after due reading of the whole. WITNESSES: /s/ Janice B. Mount /s/ Gregory L. Nesbitt - ------------------------------ ------------------------------ GREGORY L. NESBITT, PRESIDENT /s/ Judy P. Miller /s/ Michael P. Prudhomme - ------------------------------ ------------------------------ MICHAEL P. PRUDHOMME, SECRETARY- TREASURER /s/ Cynthia A. McBerry ------------------------------ NOTARY PUBLIC EX-11 3 COMPUTATION OF NET INCOME PER COMMON SHARE 1 CLECO CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE FOR THE THREE MONTHS ENDED JUNE 30, (Unaudited)
(In thousands, except share and per share amounts) 1998 1997 ----------- ----------- BASIC Net income applicable to common stock $ 14,491 $ 10,744 =========== =========== Weighted average number of shares of common stock outstanding during the period 22,481,365 22,459,381 =========== =========== Basic net income per common share $ 0.64 $ 0.48 =========== =========== DILUTED Net income applicable to common stock $ 14,491 $ 10,744 Adjustments to net income related to Employee Stock Ownership Plan (ESOP) under the "if-converted" method: Add loss of deduction from net income for actual dividends paid on convertible preferred stock, net of tax 359 364 Deduct additional cash contribution required which is equal to dividends on preferred stock less dividends paid at the common dividend rate, net of tax (24) (25) Add tax benefit associated with dividends paid on allocated common shares 87 73 ----------- ----------- Adjusted income applicable to common stock $ 14,913 $ 11,156 =========== =========== Weighted average number of shares of common stock outstanding during the period 22,481,365 22,459,381 Number of equivalent common shares attributable to ESOP 1,378,250 1,398,053 Common stock under stock option grants 6,452 6,978 ----------- ----------- Average shares 23,866,067 23,864,412 =========== =========== Diluted net income per common share $ 0.63 $ 0.47 =========== ===========
2 CLECO CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE FOR THE SIX MONTHS ENDED JUNE 30, (Unaudited)
(In thousands, except share and per share amounts) 1998 1997 ----------- ----------- BASIC Net income applicable to common stock $ 20,959 $ 17,746 =========== =========== Weighted average number of shares of common stock outstanding during the period 22,475,719 22,458,173 =========== =========== Basic net income per common share $ 0.93 $ 0.79 =========== =========== DILUTED Net income applicable to common stock $ 20,959 $ 17,746 Adjustments to net income related to Employee Stock Ownership Plan (ESOP) under the "if-converted" method: Add loss of deduction from net income for actual dividends paid on convertible preferred stock, net of tax 718 728 Deduct additional cash contribution required which is equal to dividends on preferred stock less dividends paid at the common dividend rate, net of tax (47) (58) Add tax benefit associated with dividends paid on allocated common shares 171 140 ----------- ----------- Adjusted income applicable to common stock $ 21,801 $ 18,556 =========== =========== Weighted average number of shares of common stock outstanding during the period 22,475,719 22,458,173 Number of equivalent common shares attributable to ESOP 1,383,575 1,398,907 Common stock under stock option grants 6,655 7,200 ----------- ----------- Average shares 23,865,949 23,864,280 =========== =========== Diluted net income per common share $ 0.91 $ 0.78 =========== ===========
EX-12 4 COMPUTATION OF EARNINGS TO FIXED CHARGES 1 CLECO CORPORATION COMPUTATION OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 (Unaudited)
(In thousands, except ratios) Earnings $ 55,742 Income taxes 28,448 -------- Earnings from continuing operations before income taxes $ 84,190 -------- Fixed charges: Interest, long-term debt $ 23,500 Interest, other (including interest on short-term debt) 3,736 Amortization of debt expense, premium, net 1,239 Portion of rentals representative of an interest factor 502 -------- Total fixed charges $ 28,977 -------- Earnings from continuing operations before income taxes and fixed charges $113,167 ======== Ratio of earnings to fixed charges 3.91x ======== Fixed charges from above $ 28,977 Preferred stock dividends* 2,851 -------- Total fixed charges and preferred stock dividends $ 31,828 ======== Ratio of earnings to combined fixed charges and preferred stock dividends 3.56x ========
* Preferred stock dividends multiplied by the ratio of pretax income to net income. EX-15 5 PRICEWATERHOUSECOOPERS AWARENESS LETTER-08/12/98 1 August 12, 1998 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Cleco Corporation Registrations on Form S-8 (Registration Nos. 2-79671, 33-10169, 33-38362 and 33-44663) and Form S-3 (Nos. 33-24895, 33-62950 and 333-02895) We are aware that our report dated July 28, 1998 on our review of the interim financial information of Cleco Corporation as of June 30, 1998 and for the three-month and six-month periods ended June 30, 1998 and 1997 included in this Form 10-Q is incorporated by reference in the above mentioned registration statements. Pursuant to Rule 43 (C) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. PricewaterhouseCoopers LLP EX-27 6 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 1,031,391 3,741 117,389 219,592 8,325 1,380,438 45,530 108,063 258,528 412,121 5,990 12,286 120,915 0 235,000 60,049 10,000 0 0 0 524,077 1,380,438 225,507 10,408 180,324 190,732 34,775 1,060 35,835 13,819 22,016 1,057 20,959 17,979 4,543 36,647 0.93 0.91
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