10-Q 1 cnl-6302012xq2.htm CLECO CORP. SEC FORM 10-Q CNL-6.30.2012-Q2

 
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, 2012
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
(State or other jurisdiction of incorporation or organization)
72-1445282
(I.R.S. Employer Identification No.)
 
 
2030 Donahue Ferry Road, Pineville, Louisiana
(Address of principal executive offices)
71360-5226
(Zip Code)
 
 
Registrant’s telephone number, including area code:  (318) 484-7400
 

Commission file number 1-05663
CLECO POWER LLC
(Exact name of registrant as specified in its charter)
Louisiana
(State or other jurisdiction of incorporation or organization)
72-0244480
(I.R.S. Employer Identification No.)
 
 
2030 Donahue Ferry Road, Pineville, Louisiana
(Address of principal executive offices)
71360-5226
(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 o
 
Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).  Yes x No o
 
Indicate by check mark whether Cleco Corporation is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  
Large accelerated filer x          Accelerated filer o                 Non-accelerated filer o  (Do not check if a smaller reporting company)      Smaller reporting company o
 
Indicate by check mark whether Cleco Power LLC is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer o           Accelerated filer o                Non-accelerated filer x  (Do not check if a smaller reporting company)      Smaller reporting company o
 
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act)  Yes o    No x

Number of shares outstanding of each of Cleco Corporation’s classes of Common Stock, as of the latest practicable date.
Registrant
Description of Class
Shares Outstanding at July 26, 2012
 
 
 
Cleco Corporation
Common Stock, $1.00 Par Value
60,714,810

Cleco Power LLC, a wholly owned subsidiary of Cleco Corporation, meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
 


CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

This Combined Quarterly Report on Form 10-Q is separately filed by Cleco Corporation and Cleco Power.  Information in this filing relating to Cleco Power is filed by Cleco Corporation and separately by Cleco Power on its own behalf.  Cleco Power makes no representation as to information relating to Cleco Corporation (except as it may relate to Cleco Power) or any other affiliate or subsidiary of Cleco Corporation.
This report should be read in its entirety as it pertains to each respective Registrant.  The Notes to the Unaudited Condensed Consolidated Financial Statements are combined.
 
TABLE OF CONTENTS

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CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

GLOSSARY OF TERMS
References in this filing, including all items in Parts I and II, to “Cleco” mean Cleco Corporation and its subsidiaries, including Cleco Power, and references to “Cleco Power” mean Cleco Power LLC and its subsidiaries, unless the context clearly indicates otherwise. Additional abbreviations or acronyms used in this filing, including all items in Parts I and II are defined below:
ABBREVIATION OR ACRONYM
DEFINITION
401(k) Plan
Cleco Power 401(k) Savings and Investment Plan
ABR
Alternate Base Rate
Acadia
Acadia Power Partners, LLC, a wholly owned subsidiary of APH.  Acadia no longer owns any materials and supply inventory, property, plant, and equipment, or land as a result of the disposition of Acadia Unit 2 to Entergy Louisiana on April 29, 2011.  From February 23, 2010 to April 29, 2011, Acadia was owned 100% by Cajun and consisted of Acadia Unit 2.  Prior to February 23, 2010, Acadia was 50% owned by APH and 50% owned by Cajun and consisted of Acadia Unit 1 and Acadia Unit 2.
Acadia Unit 1
Cleco Power’s 580-MW unit, combined cycle, natural gas-fired power plant located at the Acadia Power Station near Eunice, Louisiana. Prior to February 2010, Acadia Unit 1 was owned by Acadia.
Acadia Unit 2
Entergy Louisiana’s 580-MW unit, combined cycle, natural gas-fired power plant located at the Acadia Power Station near Eunice, Louisiana.  Prior to April 29, 2011, Acadia Unit 2 was owned by Acadia.
Acadiana Load Pocket
An area in south central Louisiana that has experienced transmission constraints caused by local load and lack of generation.  Transmission within the Acadiana Load Pocket is owned by several entities, including Cleco Power.
AFUDC
Allowance for Funds Used During Construction
Amended Lignite Mining Agreement
Amended and restated lignite mining agreement effective December 29, 2009
AMI
Advanced Metering Infrastructure
APH
Acadia Power Holdings LLC, a wholly owned subsidiary of Midstream
Attala
Attala Transmission LLC, a wholly owned subsidiary of Cleco Corporation
Cajun
Cajun Gas Energy L.L.C.  In conjunction with the disposition of Acadia Unit 2 on April 29, 2011, APH no longer has any ownership interest in Cajun.  From February 23, 2010 to April 29, 2011, Cajun was 50% owned by APH and 50% owned by third parties.  Prior to February 23, 2010, Cajun was 100% owned by third parties.
CSAPR
The Cross-State Air Pollution Rule
Cleco Innovations LLC
A wholly owned subsidiary of Cleco Corporation
Cleco Katrina/Rita
Cleco Katrina/Rita Hurricane Recovery Funding LLC, a wholly owned subsidiary of Cleco Power
Coughlin
Coughlin Power Station, a combined-cycle, natural gas-fired power plant located in Evangeline Parish, Louisiana.  
DHLC
Dolet Hills Lignite Company, LLC, a wholly owned subsidiary of SWEPCO
Diversified Lands
Diversified Lands LLC, a wholly owned subsidiary of Cleco Innovations LLC
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010.  
DOE
United States Department of Energy
Entergy Gulf States
Entergy Gulf States Louisiana, L.L.C., formerly Entergy Gulf States, Inc.
Entergy Louisiana
Entergy Louisiana, LLC
Entergy Mississippi
Entergy Mississippi, Inc.
Entergy Services
Entergy Services, Inc., as agent for Entergy Louisiana and Entergy Gulf States
EPA
United States Environmental Protection Agency
ESPP
Cleco Corporation Employee Stock Purchase Plan
Evangeline
Cleco Evangeline LLC, a wholly owned subsidiary of Midstream
Evangeline 2010 Tolling Agreement
Capacity Sale and Tolling Agreement between Evangeline and JPMVEC, which was executed in February 2010 and expired on December 31, 2011  
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FRP
Formula Rate Plan
GAAP
Generally Accepted Accounting Principles in the United States
GO Zone
Gulf Opportunity Zone Act of 2005 (Public Law 109-135)
ICT
Independent Coordinator of Transmission
Interconnection Agreement
One of two Interconnection Agreement and Real Estate Agreements, one between Attala and Entergy Mississippi, and the other between Perryville and Entergy Louisiana
IRP
Integrated Resource Planning
IRS
Internal Revenue Service
JPMVEC
J.P. Morgan Ventures Energy Corporation.  In September 2008, BE Louisiana LLC (an indirect wholly owned subsidiary of JPMorgan Chase & Co.) was merged into JPMVEC.
kWh
Kilowatt-hour(s) as applicable
LIBOR
London Inter-Bank Offer Rate
Lignite Mining Agreement
Dolet Hills Mine Lignite Mining Agreement, dated May 31, 2001


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CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

ABBREVIATION OR ACRONYM
DEFINITION
LPSC
Louisiana Public Service Commission
LTICP
Cleco Corporation Long-Term Incentive Compensation Plan
Madison Unit 3
A 600-MW solid-fuel generating unit at Cleco Power’s plant site in Boyce, Louisiana that commenced commercial operation on February 12, 2010.  
Midstream
Cleco Midstream Resources LLC, a wholly owned subsidiary of Cleco Corporation
MMBtu
Million British thermal units
Moody’s
Moody’s Investors Service
MW
Megawatt(s) as applicable
NERC
North American Electric Reliability Corporation
Not Meaningful
A percentage comparison of these items is not statistically meaningful because the percentage difference is greater than 1,000%
NOx
Nitrogen oxides
OCI
Other Comprehensive Income
Oxbow
Oxbow Lignite Company, LLC, 50% owned by Cleco Power and 50% owned by SWEPCO
PCAOB
Public Company Accounting Oversight Board
PCB
Polychlorinated biphenyl
Perryville
Perryville Energy Partners, L.L.C., a wholly owned subsidiary of Cleco Corporation
Power Purchase Agreement
Power Purchase Agreement, dated as of January 28, 2004, between Perryville and Entergy Services
PPACA
Patient Protection and Affordable Care Act (HR 3590)
Registrant(s)
Cleco Corporation and Cleco Power
RFP
Request for Proposal
RTO
Regional Transmission Organization
Sale Agreement
Purchase and Sale Agreement, dated as of January 28, 2004, between Perryville and Entergy Louisiana
SEC
Securities and Exchange Commission
SERP
Cleco Corporation Supplemental Executive Retirement Plan
SPP
Southwest Power Pool
Support Group
Cleco Support Group LLC, a wholly owned subsidiary of Cleco Corporation
SWEPCO
Southwestern Electric Power Company, a wholly owned subsidiary of American Electric Power Company, Inc.
USB NMTC Fund 2008-1 LLC
Fund formed to hold new markets tax credits and solar credits for the benefit of Cleco Corporation.
VaR
Value-at-risk
VIE
Variable Interest Entity


4

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Combined Quarterly Report on Form 10-Q includes “forward-looking statements” about future events, circumstances, and results. All statements other than statements of historical fact included in this Combined Quarterly Report are forward-looking statements, including, without limitation, future capital expenditures; projections, including with respect to base revenue; business strategies; goals, beliefs, plans, and objectives; competitive strengths; market developments; development and operation of facilities; growth in sales volume; meeting capacity requirements, including through RFPs; expansion of service to certain customers and service to new customers; future environmental regulations and remediation liabilities; electric customer credits; and the anticipated outcome of various regulatory and legal proceedings. Although the Registrants 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 Registrants’ 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 Registrants’ actual results to differ materially from those contemplated in any of the Registrants’ forward-looking statements:

factors affecting utility operations, such as unusual weather conditions or other natural phenomena, catastrophic weather-related damage (such as hurricanes and other storms or severe drought conditions), unscheduled generation outages, unanticipated maintenance or repairs, unanticipated changes to fuel costs, fuel supply costs or availability constraints due to higher demand, shortages, transportation problems, or other developments, fuel mix of Cleco’s generation facilities, decreased customer load, environmental incidents, environmental compliance costs, and power transmission system constraints,
Cleco Corporation’s holding company structure and its dependence on the earnings, dividends, or distributions from its subsidiaries to meet its debt obligations and pay dividends on its common stock,
Cleco Power’s ability to recover costs incurred on projects funded, in whole or in part, through government grants,
Cleco Power’s ability to maintain its right to sell wholesale generation at market-based rates within its control area,
dependence of Cleco Power for energy from sources other than its facilities and the uncertainty of future sources of such additional energy,
nonperformance by and creditworthiness of counterparties under power purchase agreements, or the restructuring of those agreements, including possible termination,
nonperformance by and creditworthiness of the guarantor counterparty of the USB NMTC Fund 2008-1 LLC,
regulatory factors such as changes in rate-setting policies, recovery of investments made under traditional regulation,
 
recovery of storm restoration costs, the frequency and timing of rate increases or decreases, the results of periodic NERC and LPSC audits, the formation of ICTs, including possible participation in an RTO and Cleco Power’s ability to recover related transmission upgrade costs, and the compliance with the Electric Reliability Organization reliability standards for bulk power systems by Cleco Power and Evangeline,
financial or regulatory accounting principles or policies imposed by FASB, the SEC, the PCAOB, FERC, the LPSC, or similar entities with regulatory or accounting oversight,
economic conditions, including the ability of customers to continue paying utility bills, related growth and/or down-sizing of businesses in Cleco’s service area, monetary fluctuations, changes in commodity prices, and inflation rates,
the current global and U.S. economic environment,
credit ratings of Cleco Corporation and Cleco Power,
ability to remain in compliance with debt covenants,
changing market conditions and a variety of other factors associated with physical energy, financial transactions, and energy service activities, including, but not limited to, price, basis, credit, liquidity, volatility, capacity, transmission, interest rates, and warranty risks,
the availability and use of alternative sources of energy and technologies,
the imposition of energy efficiency requirements or of increased conservation efforts of customers,
reliability of Cleco Power and Midstream generating facilities,
acts of terrorism or other man-made disasters,
availability or cost of capital resulting from changes in Cleco’s business or financial condition, interest rates, or market perceptions of the electric utility industry and energy-related industries,
changes in tax laws or disallowances of uncertain tax positions that may result in a change to tax benefits or expenses,
employee work force factors, including work stoppages and changes in key executives,
legal, environmental, and regulatory delays and other obstacles associated with mergers, acquisitions, reorganizations, investments in joint ventures, or other capital projects, including the joint project to upgrade the Acadiana Load Pocket transmission system and the AMI project,
costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters,
changes in federal, state, or local laws and changes in tax laws or rates, or regulating policies,
the impact of current or future environmental laws and


5

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

regulations, including those related to greenhouse gases and energy efficiency, which could limit or terminate the operation of certain generating units, increase costs, reduce customer demand for electricity, or otherwise materially adversely impact the Registrants’ financial condition or results of operations,
ability of Cleco Power to recover from its customers the costs of compliance with environmental laws and regulations, and
ability of Dolet Hills lignite reserve to provide sufficient fuel to the Dolet Hills Power Station until at least 2026. 

 
For more discussion of these factors and other factors that could cause actual results to differ materially from those contemplated in the Registrants’ forward-looking statements, please read "Risk Factors" in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011. All subsequent written and oral forward-looking statements attributable to the Registrants or persons acting on their behalf are expressly qualified in their entirety by the factors identified above.
The Registrants undertake no obligation to update any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements.


6

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

PART I — FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cleco Corporation
These unaudited condensed consolidated financial statements should be read in conjunction with Cleco Corporation’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011. For more information on the basis of presentation, see “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Basis of Presentation.”

7

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Income (Unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2012

 
2011

Operating revenue
 
 
 
Electric operations
$
228,293

 
$
260,485

Tolling operations

 
4,222

Other operations
12,111

 
12,983

Affiliate revenue

 
55

Gross operating revenue
240,404

 
277,745

Electric customer credits
(281
)
 
(4,822
)
Operating revenue, net
240,123

 
272,923

Operating expenses
 

 
 

Fuel used for electric generation
54,999

 
78,268

Power purchased for utility customers
16,068

 
26,068

Other operations
28,688

 
31,080

Maintenance
24,184

 
28,269

Depreciation
32,250

 
30,699

Taxes other than income taxes
9,713

 
9,464

Gain on sale of assets
(22
)
 
(506
)
Total operating expenses
165,880

 
203,342

Operating income
74,243

 
69,581

Interest income
(3
)
 
170

Allowance for other funds used during construction
1,399

 
876

Equity income from investees, before tax

 
61,440

Other income
13,014

 
1,050

Other expense
(831
)
 
(630
)
Interest charges
 

 
 

Interest charges, including amortization of debt expense, premium, and discount, net
21,094

 
25,935

Allowance for borrowed funds used during construction
(478
)
 
(316
)
Total interest charges
20,616

 
25,619

Income before income taxes
67,206

 
106,868

Federal and state income tax expense
20,520

 
36,520

Net income
46,686

 
70,348

Preferred dividends requirements

 
15

Preferred stock redemption costs

 
112

Net income applicable to common stock
$
46,686

 
$
70,221

 
 
 
 
Average number of basic common shares outstanding
60,421,028

 
60,655,538

Average number of diluted common shares outstanding
60,660,702

 
61,023,439

Basic earnings per share
 
 
 

Net income applicable to common stock
$
0.77

 
$
1.16

Diluted earnings per share
 

 
 

Net income applicable to common stock
$
0.77

 
$
1.15

Cash dividends paid per share of common stock
$
0.3125

 
$
0.28

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


8

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Net income
$
46,686

 
$
70,348

Other comprehensive (loss) income, net of tax:
 

 
 

Amortization of postretirement benefit net loss (net of tax expense of $266 in 2012 and $127 in 2011)
525

 
304

Cash flow hedges:
 

 
 

Net derivative loss (net of tax benefit of $2,382 in 2012)
(3,809
)
 

Reclassification of net loss (gain) to interest charges (net of tax expense of $22 in 2012 and tax benefit of $34 in 2011)
35

 
(55
)
Total other comprehensive (loss) income, net of tax
(3,249
)
 
249

Comprehensive income, net of tax
$
43,437

 
$
70,597

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


9

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Income (Unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2012

 
2011

Operating revenue
 
 
 
Electric operations
$
437,883

 
$
498,953

Tolling operations

 
7,003

Other operations
23,056

 
25,711

Affiliate revenue

 
202

Gross operating revenue
460,939

 
531,869

Electric customer credits
1,955

 
(5,256
)
Operating revenue, net
462,894

 
526,613

Operating expenses
 

 
 

Fuel used for electric generation
128,063

 
175,236

Power purchased for utility customers
24,705

 
35,116

Other operations
56,385

 
58,146

Maintenance
41,419

 
45,078

Depreciation
64,097

 
60,512

Taxes other than income taxes
19,743

 
18,924

Gain on sale of assets
(55
)
 
(496
)
Total operating expenses
334,357

 
392,516

Operating income
128,537

 
134,097

Interest income
31

 
285

Allowance for other funds used during construction
2,416

 
2,854

Equity income from investees, before tax
1

 
62,052

Other income
22,389

 
2,254

Other expense
(1,486
)
 
(1,233
)
Interest charges
 

 
 

Interest charges, including amortization of debt expense, premium, and discount, net
42,062

 
53,263

Allowance for borrowed funds used during construction
(822
)
 
(1,031
)
Total interest charges
41,240

 
52,232

Income before income taxes
110,648

 
148,077

Federal and state income tax expense
33,930

 
48,714

Net income
76,718

 
99,363

Preferred dividends requirements

 
26

Preferred stock redemption costs

 
112

Net income applicable to common stock
$
76,718

 
$
99,225

 
 
 
 
Average number of basic common shares outstanding
60,387,388

 
60,613,371

Average number of diluted common shares outstanding
60,625,377

 
60,797,545

Basic earnings per share
 

 
 

Net income applicable to common stock
$
1.27

 
$
1.64

Diluted earnings per share
 

 
 

Net income applicable to common stock
$
1.27

 
$
1.63

Cash dividends paid per share of common stock
$
0.625

 
$
0.53

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 

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CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Net income
$
76,718

 
$
99,363

Other comprehensive income, net of tax:
 

 
 

Amortization of postretirement benefit net loss (net of tax expense of $431 in 2012 and $276 in 2011)
888

 
640

Cash flow hedges:
 

 
 

Net derivative loss (net of tax benefit of $591 in 2012)
(944
)
 

Reclassification of net loss (gain) to interest charges (net of tax expense of $22 in 2012 and tax benefit of $68 in 2011)
35

 
(109
)
Reclassification of ineffectiveness to regulatory asset (net of tax expense of $982 in 2012)
1,570

 

Total other comprehensive income, net of tax
1,549

 
531

Comprehensive income, net of tax
$
78,267

 
$
99,894

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


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CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
23,693

 
$
93,576

Restricted cash
8,091

 
8,761

Customer accounts receivable (less allowance for doubtful accounts of $863 in 2012 and $1,128 in 2011)
36,614

 
37,813

Other accounts receivable (less allowance for doubtful accounts of $26 in 2012 and $8 in 2011)
37,530

 
42,051

Taxes receivable
13,308

 
44,584

Unbilled revenue
35,833

 
30,129

Fuel inventory, at average cost
50,336

 
41,845

Material and supplies inventory, at average cost
55,202

 
53,714

Energy risk management assets, net
152

 

Accumulated deferred federal and state income taxes, net
45,496

 
29,249

Accumulated deferred fuel
2,013

 
2,136

Cash surrender value of company-/trust-owned life insurance policies
54,248

 
51,073

Prepayments
5,325

 
5,384

Regulatory assets - other
12,961

 
13,028

Other current assets
437

 
3,442

Total current assets
381,239

 
456,785

Property, plant, and equipment
 

 
 

Property, plant, and equipment
4,059,455

 
4,023,655

Accumulated depreciation
(1,273,802
)
 
(1,230,783
)
Net property, plant, and equipment
2,785,653

 
2,792,872

Construction work in progress
149,739

 
101,027

Total property, plant, and equipment, net
2,935,392

 
2,893,899

Equity investment in investees
14,541

 
14,540

Prepayments
4,587

 
4,770

Restricted cash, less current portion
27,544

 
27,067

Regulatory assets and liabilities - deferred taxes, net
216,814

 
214,421

Regulatory assets - other
259,241

 
269,444

Net investment in direct financing lease
13,551

 
13,633

Intangible asset
127,223

 
133,595

Other deferred charges
23,376

 
22,048

Total assets
$
4,003,508

 
$
4,050,202

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 

(Continued on next page)

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CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Balance Sheets (Unaudited) (Continued)
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Liabilities and shareholders’ equity
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Long-term debt due within one year
$
88,540

 
$
24,258

Accounts payable
90,549

 
129,308

Customer deposits
44,690

 
43,091

Provision for rate refund
7,259

 
7,323

Interest accrued
14,524

 
22,642

Energy risk management liability, net

 
5,336

Interest rate risk management liability
4,866

 
3,330

Regulatory liabilities - other
25,995

 
33,019

Deferred compensation
9,254

 
8,302

Uncertain tax positions
11,000

 
27,239

Other current liabilities
14,902

 
17,154

Total current liabilities
311,579

 
321,002

Deferred credits
 

 
 

Accumulated deferred federal and state income taxes, net
705,970

 
649,926

Accumulated deferred investment tax credits
6,842

 
7,432

Postretirement benefit obligations
136,825

 
133,274

Regulatory liabilities - other
123

 
7,303

Restricted storm reserve
25,738

 
24,880

Uncertain tax positions
1,942

 
23,494

Tax credit fund investment, net
74,263

 
61,507

Contingent sale obligations
10,350

 
29,357

Other deferred credits
29,175

 
35,114

Total deferred credits
991,228

 
972,287

Long-term debt, net
1,244,434

 
1,337,056

Total liabilities
2,547,241

 
2,630,345

Commitments and Contingencies (Note 11)
 

 
 

Shareholders’ equity
 

 
 

Common shareholders’ equity


 
 

Common stock, $1 par value, authorized 100,000,000 shares, issued 60,949,080 and 60,702,342 shares and outstanding 60,342,238 and 60,291,939 shares at June 30, 2012, and December 31, 2011, respectively
60,949

 
60,702

Premium on common stock
413,848

 
409,904

Retained earnings
1,029,160

 
990,605

Treasury stock, at cost, 606,842 and 410,403 shares at June 30, 2012, and December 31, 2011, respectively
(21,100
)
 
(13,215
)
Accumulated other comprehensive loss
(26,590
)
 
(28,139
)
Total shareholders’ equity
1,456,267

 
1,419,857

Total liabilities and shareholders’ equity
$
4,003,508

 
$
4,050,202

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


13

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Operating activities
 
 
 
Net income
$
76,718

 
$
99,363

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
72,963

 
96,217

Return on equity investment in investees

 
58,665

Income from equity investments
(1
)
 
(62,052
)
Unearned compensation expense
2,912

 
3,795

Allowance for other funds used during construction
(2,416
)
 
(2,854
)
Net deferred income taxes
(3,542
)
 
8,292

Deferred fuel costs
(4,670
)
 
(16,077
)
Cash surrender value of company-/trust-owned life insurance
(1,486
)
 
(1,343
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(1,620
)
 
(19,685
)
Unbilled revenue
(5,704
)
 
3,892

Fuel, materials and supplies inventory
(9,978
)
 
34,437

Prepayments
242

 
1,585

Accounts payable
(41,841
)
 
(8,005
)
Customer deposits
5,860

 
6,426

Postretirement benefit obligations
4,167

 
(57,640
)
Regulatory assets and liabilities, net
(8,207
)
 
(18,531
)
Contingent sale obligations

 
10,900

Other deferred accounts
(7,322
)
 
2

Taxes accrued
31,039

 
9,187

Interest accrued
(5,109
)
 
(637
)
Energy risk management assets and liabilities, net
(174
)
 
1,990

Other operating
1,480

 
872

Net cash provided by operating activities
103,311

 
148,799

Investing activities
 
 
 
Additions to property, plant, and equipment
(102,278
)
 
(67,050
)
Allowance for other funds used during construction
2,416

 
2,854

Property, plant, and equipment grants
4,603

 
760

Insurance reimbursement for casualty loss
5,454

 

Cash from reconsolidation of VIEs

 
3,879

Return of equity investment in investees

 
89,654

Return of equity investment in tax credit fund
22,210

 
244

Contributions to tax credit fund
(31,326
)
 
(18,479
)
Transfer of cash from restricted accounts
192

 
5,849

Other investing
(1,096
)
 
(431
)
Net cash (used in) provided by investing activities
(99,825
)
 
17,280


(Continued on next page)

14

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO CORPORATION
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Financing activities
 
 
 
Retirement of short-term debt

 
(150,000
)
Draws on credit facility

 
10,000

Payments on credit facility
(10,000
)
 
(15,000
)
Issuance of long-term debt
50,000

 

Retirement of long-term debt
(67,957
)
 
(6,283
)
Repurchase of common stock
(8,007
)
 

Dividends paid on common stock
(38,077
)
 
(32,168
)
Other financing
672

 
(1,630
)
Net cash used in financing activities
(73,369
)
 
(195,081
)
Net decrease in cash and cash equivalents
(69,883
)
 
(29,002
)
Cash and cash equivalents at beginning of period
93,576

 
191,128

Cash and cash equivalents at end of period
$
23,693

 
$
162,126

Supplementary cash flow information
 
 
 
Interest paid (net of amount capitalized)
$
40,320

 
$
44,170

Income taxes paid, net
$
13

 
$
13,486

Supplementary non-cash investing and financing activities
 
 
 
Accrued additions to property, plant, and equipment
$
6,816

 
$
15,604

Issuance of common stock – ESPP
$
86

 
$
157

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


15

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

PART I — FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cleco Power
These unaudited condensed consolidated financial statements should be read in conjunction with Cleco Power’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011. For more information on the basis of presentation, see “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Basis of Presentation.”



16

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Income (Unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2012

 
2011

Operating revenue
 
 
 
Electric operations
$
228,293

 
$
260,485

Other operations
11,613

 
12,453

Affiliate revenue
342

 
348

Gross operating revenue
240,248

 
273,286

Electric customer credits
(281
)
 
(4,822
)
Operating revenue, net
239,967

 
268,464

Operating expenses
 

 
 

Fuel used for electric generation
54,695

 
78,268

Power purchased for utility customers
22,367

 
26,068

Other operations
27,243

 
29,321

Maintenance
19,630

 
22,581

Depreciation
30,559

 
28,996

Taxes other than income taxes
8,682

 
8,396

Gain on sale of assets
(1
)
 

Total operating expenses
163,175

 
193,630

Operating income
76,792

 
74,834

Interest income
(6
)
 
168

Allowance for other funds used during construction
1,399

 
876

Other income
1,228

 
644

Other expense
(823
)
 
(627
)
Interest charges
 

 
 

Interest charges, including amortization of debt expense, premium, and discount, net
21,283

 
24,638

Allowance for borrowed funds used during construction
(478
)
 
(316
)
Total interest charges
20,805

 
24,322

Income before income taxes
57,785

 
51,573

Federal and state income tax expense
20,501

 
15,879

Net income
$
37,284

 
$
35,694

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


17

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Net income
$
37,284

 
$
35,694

Other comprehensive (loss) income, net of tax:
 

 
 

Amortization of postretirement benefit net loss (net of tax expense of $89 in 2012 and $65 in 2011)
226

 
188

Cash flow hedges:
 

 
 

Net derivative loss (net of tax benefit of $2,382 in 2012)
(3,809
)
 

Reclassification of net loss (gain) to interest charges (net of tax expense of $22 in 2012 and tax benefit of $34 in 2011)
35

 
(55
)
Total other comprehensive (loss) income, net of tax
(3,548
)
 
133

Comprehensive income, net of tax
$
33,736

 
$
35,827

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


18

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Operating revenue
 
 
 
Electric operations
$
437,883

 
$
498,953

Other operations
22,062

 
24,696

Affiliate revenue
687

 
694

Gross operating revenue
460,632

 
524,343

Electric customer credits
1,955

 
(5,256
)
Operating revenue, net
462,587

 
519,087

Operating expenses
 

 
 

Fuel used for electric generation
127,759

 
175,236

Power purchased for utility customers
32,239

 
35,116

Other operations
53,585

 
54,711

Maintenance
35,644

 
38,194

Depreciation
60,648

 
57,111

Taxes other than income taxes
17,614

 
16,783

Gain on sale of assets
(1
)
 
(1
)
Total operating expenses
327,488

 
377,150

Operating income
135,099

 
141,937

Interest income
23

 
281

Allowance for other funds used during construction
2,416

 
2,854

Other income
2,323

 
844

Other expense
(1,473
)
 
(1,190
)
Interest charges
 

 
 

Interest charges, including amortization of debt expense, premium, and discount, net
40,113

 
49,754

Allowance for borrowed funds used during construction
(822
)
 
(1,031
)
Total interest charges
39,291

 
48,723

Income before income taxes
99,097

 
96,003

Federal and state income tax expense
35,008

 
30,279

Net income
$
64,089

 
$
65,724

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


19

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Net income
$
64,089

 
$
65,724

Other comprehensive income, net of tax:
 

 
 

Amortization of postretirement benefit net loss (net of tax expense of $163 in 2012 and $128 in 2011)
430

 
373

Cash flow hedges:
 

 
 

Net derivative loss (net of tax benefit of $591 in 2012)
(944
)
 

Reclassification of net loss (gain) to interest charges (net of tax expense of $22 in 2012 and tax benefit of $68 in 2011)
35

 
(109
)
Reclassification of ineffectiveness to regulatory asset (net of tax expense of $982 in 2012)
1,570

 

Total other comprehensive income, net of tax
1,091

 
264

Comprehensive income, net of tax
$
65,180

 
$
65,988

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


20

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Assets
 
 
 
Utility plant and equipment
 
 
 
Property, plant, and equipment
$
3,792,113

 
$
3,759,541

Accumulated depreciation
(1,192,655
)
 
(1,153,004
)
Net property, plant, and equipment
2,599,458

 
2,606,537

Construction work in progress
148,185

 
97,595

Total utility plant, net
2,747,643

 
2,704,132

Current assets
 

 
 

Cash and cash equivalents
10,236

 
67,458

Restricted cash
8,091

 
8,761

Customer accounts receivable (less allowance for doubtful accounts of $863 in 2012 and $1,128 in 2011)
36,614

 
37,813

Accounts receivable - affiliate
4,051

 
2,405

Other accounts receivable (less allowance for doubtful accounts of $26 in 2012 and $8 in 2011)
37,448

 
35,618

Taxes receivable

 
3,197

Unbilled revenue
35,833

 
30,129

Fuel inventory, at average cost
50,336

 
41,845

Material and supplies inventory, at average cost
52,567

 
51,132

Energy risk management asset, net
152

 

Accumulated deferred federal and state income taxes, net
9,593

 
19,829

Accumulated deferred fuel
2,013

 
2,136

Cash surrender value of company-owned life insurance policies
20,642

 
20,433

Prepayments
4,233

 
4,155

Regulatory assets - other
12,961

 
13,028

Other current assets

 
375

Total current assets
284,770

 
338,314

Equity investment in investee
14,532

 
14,532

Prepayments
4,587

 
4,770

Restricted cash, less current portion
27,448

 
26,970

Regulatory assets and liabilities - deferred taxes, net
216,814

 
214,421

Regulatory assets - other
259,241

 
269,444

Intangible asset
127,223

 
133,595

Other deferred charges
22,528

 
20,293

Total assets
$
3,704,786

 
$
3,726,471

(Continued on next page)





21

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited) (Continued)
 
 
 
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Liabilities and member’s equity
 

 
 

Member’s equity
$
1,256,043

 
$
1,230,862

Long-term debt, net
1,244,434

 
1,327,056

Total capitalization
2,500,477

 
2,557,918

Current liabilities
 

 
 

Long-term debt due within one year
88,540

 
24,258

Accounts payable
83,299

 
115,091

Accounts payable - affiliate
11,172

 
9,311

Customer deposits
44,690

 
43,091

Provision for rate refund
7,259

 
7,323

Taxes payable
14,797

 

Interest accrued
16,133

 
22,540

Energy risk management liability, net

 
5,336

Interest rate risk management liability
4,866

 
3,330

Regulatory liabilities - other
25,995

 
33,019

Uncertain tax positions
11,262

 
27,465

Other current liabilities
10,667

 
11,193

Total current liabilities
318,680

 
301,957

Commitments and Contingencies (Note 11)
 
 
 

Deferred credits
 

 
 

Accumulated deferred federal and state income taxes, net
727,526

 
675,835

Accumulated deferred investment tax credits
6,842

 
7,432

Postretirement benefit obligations
97,197

 
94,147

Regulatory liabilities - other
123

 
7,303

Restricted storm reserve
25,738

 
24,880

Uncertain tax positions

 
19,906

Other deferred credits
28,203

 
37,093

Total deferred credits
885,629

 
866,596

Total liabilities and member’s equity
$
3,704,786

 
$
3,726,471

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 




22

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

Operating activities
 
 
 
Net income
$
64,089

 
$
65,724

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
66,482

 
62,768

Unearned compensation expense
688

 
1,108

Allowance for other funds used during construction
(2,416
)
 
(2,854
)
Net deferred income taxes
19,830

 
20,577

Deferred fuel costs
(4,670
)
 
(16,077
)
Cash surrender value of company-owned life insurance
(208
)
 
(88
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(2,468
)
 
(20,541
)
Accounts and notes receivable, affiliate
(1,439
)
 
333

Unbilled revenue
(5,704
)
 
3,892

Fuel, materials and supplies inventory
(9,926
)
 
34,660

Prepayments
104

 
1,379

Accounts payable
(36,382
)
 
(7,133
)
Accounts and notes payable, affiliate
1,351

 
(569
)
Customer deposits
5,860

 
6,426

Postretirement benefit obligations
3,103

 
(58,678
)
Regulatory assets and liabilities, net
(8,207
)
 
(18,531
)
Other deferred accounts
(10,363
)
 
(1,499
)
Taxes accrued
17,972

 
(2,834
)
Interest accrued
(3,191
)
 
(372
)
Energy risk management assets and liabilities, net
(174
)
 
1,990

Other operating
(819
)
 
2,076

Net cash provided by operating activities
93,512

 
71,757

Investing activities
 
 
 
Additions to property, plant, and equipment
(99,392
)
 
(59,422
)
Allowance for other funds used during construction
2,416

 
2,854

Property, plant, and equipment grants
4,603

 
760

Transfer of cash from restricted accounts
192

 
5,849

Other investing
597

 
400

Net cash used in investing activities
(91,584
)
 
(49,559
)
Financing activities
 

 
 

Issuance of long-term debt
50,000

 

Retirement of long-term debt
(67,957
)
 
(6,283
)
Distribution to parent
(40,000
)
 
(50,000
)
Other financing
(1,193
)
 
(986
)
Net cash used in financing activities
(59,150
)
 
(57,269
)
Net decrease in cash and cash equivalents
(57,222
)
 
(35,071
)
Cash and cash equivalents at beginning of period
67,458

 
184,912

Cash and cash equivalents at end of period
$
10,236

 
$
149,841

Supplementary cash flow information
 
 
 
Interest paid (net of amount capitalized)
$
40,248

 
$
42,473

Income taxes paid, net
$

 
$
2,233

Supplementary non-cash investing and financing activities
 
 
 
Accrued additions to property, plant, and equipment
$
6,609

 
$
21,337

The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
 


23

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Index to Applicable Notes to the Unaudited Condensed Consolidated Financial Statements of Registrants
 
 
 
Note 1
Summary of Significant Accounting Policies
Cleco Corporation and Cleco Power
Note 2
Recent Authoritative Guidance
Cleco Corporation and Cleco Power
Note 3
Regulatory Assets and Liabilities
Cleco Corporation and Cleco Power
Note 4
Fair Value Accounting
Cleco Corporation and Cleco Power
Note 5
Debt
Cleco Corporation and Cleco Power
Note 6
Pension Plan and Employee Benefits
Cleco Corporation and Cleco Power
Note 7
Income Taxes
Cleco Corporation and Cleco Power
Note 8
Disclosures about Segments
Cleco Corporation
Note 9
Electric Customer Credits
Cleco Corporation and Cleco Power
Note 10
Variable Interest Entities
Cleco Corporation and Cleco Power
Note 11
Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees
Cleco Corporation and Cleco Power
Note 12
Affiliate Transactions
Cleco Corporation and Cleco Power
Note 13
Acadia Unit 2 Transaction
Cleco Corporation and Cleco Power

Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation
The accompanying condensed consolidated financial statements of Cleco include the accounts of Cleco and its majority-owned subsidiaries after elimination of intercompany accounts and transactions.

Basis of Presentation
The condensed consolidated financial statements of Cleco Corporation and Cleco Power have been prepared pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, Cleco believes that the disclosures are adequate to make the information presented not misleading.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The unaudited financial information included in the condensed consolidated financial statements of Cleco Corporation and Cleco Power reflects all adjustments of a normal recurring nature which are, in the opinion of the management of Cleco Corporation and Cleco Power, necessary for a fair statement of the financial position and the results of operations for the interim periods. Information for interim periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery, and other factors, and is not indicative necessarily of the results that may be expected for the full fiscal year. For more information on recent authoritative guidance and its effect on financial results, see Note 2 — “Recent Authoritative Guidance.”

Property, Plant, and Equipment
Property, plant, and equipment consist primarily of regulated utility generation and energy transmission assets. Regulated assets, utilized primarily for retail operations and electric
 
transmission and distribution, are stated at the cost of construction, which includes certain materials, labor, payroll taxes and benefits, administrative and general costs, and the estimated cost of funds used during construction. Jointly owned assets are reflected in property, plant, and equipment at Cleco Power’s share of the cost to construct or purchase the assets. Property, plant, and equipment consisted of:
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Regulated utility plants
$
3,792,113

 
$
3,759,541

Other
267,342

 
264,114

Total property, plant, and equipment
4,059,455

 
4,023,655

Accumulated depreciation
(1,273,802
)
 
(1,230,783
)
Net property, plant, and equipment
$
2,785,653

 
$
2,792,872


Restricted Cash
Various agreements to which Cleco is subject contain covenants that restrict its use of cash. As certain provisions under these agreements are met, cash is transferred out of related escrow accounts and becomes available for its intended purposes and/or general corporate purposes. Cleco’s restricted cash consisted of:  
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Diversified Lands’ mitigation escrow
$
97

 
$
97

Cleco Katrina/Rita’s storm recovery bonds
8,091

 
8,761

Cleco Power’s future storm restoration costs
25,734

 
24,876

Cleco Power’s renewable energy grant

 
381

Cleco Power’s NOx allowance escrow
1,713

 
1,713

Total restricted cash
$
35,635

 
$
35,828

 
Cleco Katrina/Rita has the right to bill and collect storm restoration costs from Cleco Power’s customers. As cash is collected, it is restricted for payment of operating expenses, interest, and principal on storm recovery bonds. During the six months ended June 30, 2012, Cleco Katrina/Rita had collected $9.6 million net of operating expenses. In March 2012, Cleco Katrina/Rita used $6.7 million for scheduled storm recovery


24

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

bond principal payments and $3.6 million for related interest. 

Fair Value Measurements and Disclosures
Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power are required to disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes under GAAP. Other financial assets and liabilities, such as long-term debt, are reported at their carrying values at their date of issuance on the condensed consolidated balance sheets with their fair values as of the balance sheet date disclosed within the three levels. For more information about fair value levels, see Note 4 — “Fair Value Accounting.”

Risk Management
Market risk inherent in Cleco Power’s market risk-sensitive instruments and positions includes potential changes arising from changes in interest rates and the commodity market prices of power and natural gas on different energy exchanges. Cleco’s Energy Market Risk Management Policy authorizes the use of various derivative instruments, including exchange traded futures and option contracts, forward purchase and sales contracts, and swap transactions to reduce exposure to fluctuations in the price of power and natural gas. Cleco applies the authoritative guidance as it relates to derivatives and hedging to determine whether the market risk-sensitive instruments and positions are required to be marked-to-market. Generally, Cleco Power’s market risk-sensitive instruments and positions qualify for the normal-purchase, normal-sale exception to mark-to-market accounting because Cleco Power takes physical delivery and the instruments and positions are used to satisfy customer requirements.
Cleco Power may enter into positions to mitigate the volatility in customer fuel costs. These positions are marked-to-market with the resulting gain or loss recorded on the balance sheet as a component of energy risk management assets or liabilities. Such gain or loss is deferred as a component of deferred fuel assets or liabilities. When these positions close, actual gains or losses will be included in the fuel adjustment clause and reflected on customers’ bills as a component of the fuel cost adjustment.
Cleco Power maintains margin accounts with commodity brokers used to partially fund the acquisition of natural gas futures, options, and swap contracts. These contracts/positions are used to mitigate the risks associated with the volatility in customer fuel costs noted above. The current and long-term portions of collateral are reported as a component of energy risk management assets or liabilities and other deferred credits, respectively.
Cleco and Cleco Power maintain a master netting agreement policy and monitor credit risk exposure through review of counterparty credit quality, counterparty credit exposure, and counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and by requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Cleco Power has agreements in place with various
 
counterparties that authorize the netting of financial buys and sells and contract payments to mitigate credit risk for transactions entered into for risk management purposes.
Cleco has entered into various contracts to mitigate the volatility in interest rate risk. These contracts include, but are not limited to, interest rate swaps and treasury rate locks. For these contracts in which Cleco is hedging the variability of cash flows related to forecasted transactions that qualify as cash flow hedges, the changes in the fair value of such derivative instruments are reported in other comprehensive income. To qualify for hedge accounting, the relationship between the hedging instrument and the hedged item must be documented to include the risk management objective and strategy, and, at inception and on an ongoing basis, the effectiveness of the hedge in offsetting the changes in the cash flows of the item being hedged. Gains or losses accumulated in other comprehensive income are reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portions of hedges will be recognized in current-period earnings unless management determines that it is probable that the costs will be recovered through the rate-making process. If management determines that it is probable that the costs will be recovered, then they will be recognized as a regulatory asset or liability and amortized to earnings over the life of the related debt. For those contracts in which Cleco is hedging the variability of cash flows related to forecasted transactions that do not qualify as cash flow hedges, the changes in the fair value of such derivative instruments will be recognized in current period earnings unless management determines that it is probable that the costs will be recovered through the rate-making process. If management determines that it is probable that the costs will be recovered, then they will be recognized as a regulatory asset or liability and amortized to earnings over the life of the related debt. For more information on the interest rate risk contracts, see Note 4 — “Fair Value Accounting — Interest Rate Derivatives.”

Reclassifications
Certain reclassifications have been made to the 2011 financial statements to conform them to the presentation used in the 2012 financial statements. These reclassifications had no effect on Cleco Corporation’s net income applicable to common stock or total common shareholders’ equity or Cleco Power’s net income or total member’s equity.
During the second quarter of 2012, the Registrants began recording the LPSC allowable portion of the amortization of the plant acquisition adjustment related to Acadia Unit 1 as depreciation expense on the Registrants’ Condensed Consolidated Statements of Income. Previously, this amortization was recorded as other expense. The Registrants have reclassified prior year amounts to conform to this presentation. This change increased depreciation and decreased other expenses by $0.7 million and $1.4 million for the three and six months ended June 30, 2012, respectively. The change for the same periods in 2011 was also $0.7 million and $1.4 million, respectively.
The Registrants determined that an error existed in the statement of cash flow presentation of contributions received in aid of construction, specifically the impact that the accounting for these contributions had on the presentation of cash flows related to the additions of property, plant, and equipment. This caused errors between the operating activities section and


25

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

investing activities section for prior periods, including 2010, 2011, and the first quarter of 2012.
Cleco and Cleco Power’s Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Cash Flows have been adjusted for each of the reporting periods shown below to correct the presentation of cash flows related to additions to property, plant and equipment. These corrections had no impact on the Registrants’ cash and cash
 
equivalents, financial condition, or results of operations. Management believes that these corrections did not have a material effect on the Registrants’ Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Cash flows for each of the reporting periods. The correction to the Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Cash Flows for each of the reporting periods is presented in the following tables.

Cleco
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE YEAR ENDED
 
 
 
 
2010

 
 
 
2011

(THOUSANDS)
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

Accounts receivable
$
(16,156
)
 
$
(12,503
)
 
$
(15,798
)
 
$
(19,146
)
Other deferred accounts
$
1,813

 
$
(114
)
 
$
(1,084
)
 
$
4,305

Net cash provided by operating activities
$
215,173
*
 
$
216,899

 
$
308,020

 
$
310,061

Additions to property, plant, and equipment
$
(305,157
)*
 
$
(306,883
)
 
$
(195,882
)
 
$
(197,923
)
Net cash used in investing activities
$
(306,905
)*
 
$
(308,631
)
 
$
(101,675
)
 
$
(103,716
)
Net increase (decrease) in cash and cash equivalents
$
45,935

 
$
45,935

 
$
(97,552
)
 
$
(97,552
)
Cash and cash equivalents at the beginning of the period
$
145,193

 
$
145,193

 
$
191,128

 
$
191,128

Cash and cash equivalents at the end of the period
$
191,128

 
$
191,128

 
$
93,576

 
$
93,576


 
FOR THE THREE MONTHS ENDED
 
 
FOR THE SIX MONTHS ENDED
 
 
FOR THE NINE MONTHS ENDED
 
 
FOR THE THREE MONTHS ENDED
 
 
 
MARCH 31, 2011
 
 
 
 
JUNE 30, 2011

 
SEPTEMBER 30, 2011
 
 
 
MARCH 31, 2012
 
(THOUSANDS)
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

Accounts receivable
$
(13,958
)
 
$
(17,458
)
 
$
(19,923
)
 
$
(19,685
)
 
$
(18,274
)
 
$
(21,691
)
 
$
6,253

 
$
6,408

Other deferred accounts
$
2,313

 
$
2,999

 
$
(729
)
 
$
2

 
$
(2,184
)
 
$
2,181

 
$
(5,835
)
 
$
(2,263
)
Net cash provided by (used in) operating activities
$
2,302
*
 
$
(512
)
 
$
147,830

 
$
148,799

 
$
262,642

 
$
263,590

 
$
41,373

 
$
45,100

Additions to property, plant, and equipment
$
(21,883
)*
 
$
(19,069
)
 
$
(66,081
)
 
$
(67,050
)
 
$
(145,669
)
 
$
(146,617
)
 
$
(39,380
)
 
$
(43,107
)
Net cash (used in) provided by investing activities
$
(19,537
)*
 
$
(16,723
)
 
$
18,249

 
$
17,280

 
$
(54,097
)
 
$
(55,045
)
 
$
(40,825
)
 
$
(44,552
)
Net decrease in cash and cash equivalents
$
(53,937
)
 
$
(53,937
)
 
$
(29,002
)
 
$
(29,002
)
 
$
(32,896
)
 
$
(32,896
)
 
$
(46,327
)
 
$
(46,327
)
Cash and cash equivalents at the beginning of the period
$
191,128

 
$
191,128

 
$
191,128

 
$
191,128

 
$
191,128

 
$
191,128

 
$
93,576

 
$
93,576

Cash and cash equivalents at the end of the period
$
137,191

 
$
137,191

 
$
162,126

 
$
162,126

 
$
158,232

 
$
158,232

 
$
47,249

 
$
47,249

*These amounts were previously revised in the Registrants’ Combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
 
 

Cleco Power
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE YEAR ENDED
 
 
 
 
2010

 
 
 
2011

(THOUSANDS)
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

Accounts receivable
$
(16,261
)
 
$
(12,608
)
 
$
(14,858
)
 
$
(18,206
)
Other deferred accounts
$
(8,082
)
 
$
(10,009
)
 
$
(7,788
)
 
$
(2,399
)
Net cash provided by operating activities
$
170,759
*
 
$
172,485

 
$
249,717

 
$
251,758

Additions to property, plant, and equipment
$
(149,211
)*
 
$
(150,937
)
 
$
(182,574
)
 
$
(184,615
)
Net cash used in investing activities
$
(134,672
)*
 
$
(136,398
)
 
$
(170,193
)
 
$
(172,234
)
Net increase (decrease) in cash and cash equivalents
$
46,799

 
$
46,799

 
$
(117,454
)
 
$
(117,454
)
Cash and cash equivalents at the beginning of the period
$
138,113

 
$
138,113

 
$
184,912

 
$
184,912

Cash and cash equivalents at the end of the period
$
184,912

 
$
184,912

 
$
67,458

 
$
67,458



26

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

 
FOR THE THREE MONTHS ENDED
 
 
FOR THE SIX MONTHS ENDED
 
 
FOR THE NINE MONTHS ENDED
 
 
FOR THE THREE MONTHS ENDED
 
 
 
MARCH 31, 2011
 
 
 
JUNE 30, 2011
 
 
SEPTEMBER 30, 2011
 
 
 
MARCH 31, 2012
 
(THOUSANDS)
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

 
AS REPORTED

 
AS ADJUSTED

Accounts receivable
$
(10,720
)
 
$
(14,220
)
 
$
(20,779
)
 
$
(20,541
)
 
$
(20,442
)
 
$
(23,859
)
 
$
5,767

 
$
5,922

Other deferred accounts
$
1,379

 
$
(2,065
)
 
$
(2,230
)
 
$
(1,499
)
 
$
(6,361
)
 
$
(1,996
)
 
$
(8,747
)
 
$
(5,175
)
Net cash provided by operating activities
$
5,299
*
 
$
2,485

 
$
70,788

 
$
71,757

 
$
184,688

 
$
185,636

 
$
47,513

 
$
51,240

Additions to property, plant, and equipment
$
(20,720
)*
 
$
(17,906
)
 
$
(58,453
)
 
$
(59,422
)
 
$
(131,014
)
 
$
(131,962
)
 
$
(38,507
)
 
$
(42,234
)
Net cash used in investing activities
$
(8,955
)*
 
$
(6,141
)
 
$
(48,590
)
 
$
(49,559
)
 
$
(112,856
)
 
$
(113,804
)
 
$
(30,759
)
 
$
(34,486
)
Net decrease in cash and cash equivalents
$
(60,472
)
 
$
(60,472
)
 
$
(35,071
)
 
$
(35,071
)
 
$
(41,897
)
 
$
(41,897
)
 
$
(31,573
)
 
$
(31,573
)
Cash and cash equivalents at the beginning of the period
$
184,912

 
$
184,912

 
$
184,912

 
$
184,912

 
$
184,912

 
$
184,912

 
$
67,458

 
$
67,458

Cash and cash equivalents at the end of the period
$
124,440

 
$
124,440

 
$
149,841

 
$
149,841

 
$
143,015

 
$
143,015

 
$
35,885

 
$
35,885

*These amounts were previously revised in the Registrants’ Combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.
 
 

Earnings per Average Common Share
The following tables show the calculation of basic and diluted earnings per share:
 



 
 
 
 
 
 

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 

 
 

 
2012

 
 

 
 

 
2011

(THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
INCOME

 
SHARES

 
PER SHARE
AMOUNT

 
INCOME

 
SHARES

 
PER SHARE
AMOUNT

Income from continuing operations
$
46,686

 
 
 
 
 
$
70,348

 
 
 
 
Deduct:  non-participating stock dividends (4.5% preferred stock)

 
 
 
 
 
15

 
 
 
 
Deduct:  non-participating stock redemption costs (4.5% preferred stock)

 
 
 
 
 
112

 
 
 
 
Basic net income applicable to common stock
$
46,686

 
60,421,028

 
$
0.77

 
$
70,221

 
60,655,538

 
$
1.16

Effect of dilutive securities
 

 
 

 
 

 
 

 
 

 
 

Add:  stock option grants
 

 
1,504

 
 

 
 

 
21,634

 
 

Add:  restricted stock (LTICP)
 

 
238,170

 
 

 
 

 
346,267

 
 

Diluted net income applicable to common stock
$
46,686

 
60,660,702

 
$
0.77

 
$
70,221

 
61,023,439

 
$
1.15


 
 
 
 

 
 

 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 

 
 

 
2012

 
 

 
 

 
2011

(THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
INCOME

 
SHARES

 
PER SHARE
AMOUNT

 
INCOME

 
SHARES

 
PER SHARE
AMOUNT

Income from continuing operations
$
76,718

 
 
 
 
 
$
99,363

 
 
 
 
Deduct:  non-participating stock dividends (4.5% preferred stock)

 
 
 
 
 
26

 
 
 
 
Deduct:  non-participating stock redemption costs (4.5% preferred stock)

 
 
 
 
 
112

 
 
 
 
Basic net income applicable to common stock
$
76,718

 
60,387,388

 
$
1.27

 
$
99,225

 
60,613,371

 
$
1.64

Effect of dilutive securities
 

 
 

 
 

 
 

 
 

 
 

Add:  stock option grants
 

 
4,455

 
 

 
 

 
21,067

 
 

Add:  restricted stock (LTICP)
 

 
233,534

 
 

 
 

 
163,107

 
 

Diluted net income applicable to common stock
$
76,718

 
60,625,377

 
$
1.27

 
$
99,225

 
60,797,545

 
$
1.63


Stock option grants are excluded from the computation of diluted earnings per share if the exercise price is higher than the average market price. There were no stock option grants excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2012, and 2011, due to the average market price being higher than the exercise prices of the stock options.

Stock-Based Compensation
At June 30, 2012, Cleco had two stock-based compensation plans: the ESPP and the LTICP. Substantially all employees, excluding officers and general managers, may choose to participate in the ESPP and purchase a limited amount of common stock at a discount through a stock option
 
agreement. Options or restricted shares of stock, known as non-vested stock as defined by the authoritative guidance on stock-based compensation, common stock equivalents, and stock appreciation rights may be granted to certain officers, key employees, or directors of Cleco Corporation and its subsidiaries pursuant to the LTICP.
During the first quarter of 2012, Cleco granted 140,186 shares of non-vested stock to certain officers, key employees, and directors of Cleco Corporation and its subsidiaries pursuant to the LTICP.
Cleco and Cleco Power reported pre-tax compensation expense for their share-based compensation plans as shown in the following table.


27

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

 
CLECO CORPORATION
 
 
CLECO POWER
 
 
CLECO CORPORATION
 
 
CLECO POWER
 
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

 
2012

 
2011

 
2012

 
2011

Equity classification
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-vested stock
$
1,076

 
$
796

 
$
277

 
$
201

 
$
2,132

 
$
1,947

 
$
491

 
$
522

Stock options
5

 
23

 

 

 
9

 
36

 

 

Total equity classification
$
1,081

 
$
819

 
$
277

 
$
201

 
$
2,141

 
$
1,983

 
$
491

 
$
522

Liability classification
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common stock equivalent units
$
518

 
$
364

 
$
210

 
$
154

 
$
706

 
$
1,559

 
$
294

 
$
586

Total pre-tax compensation expense
$
1,599

 
$
1,183

 
$
487

 
$
355

 
$
2,847

 
$
3,542

 
$
785

 
$
1,108

Tax benefit (excluding income tax gross-up)
$
615

 
$
455

 
$
187

 
$
137

 
$
1,095

 
$
1,363

 
$
302

 
$
426


Note 2 — Recent Authoritative Guidance
The Registrants adopted, or will adopt, the recent authoritative guidance listed below on their respective effective dates.
In April 2011, FASB issued guidance to improve the accounting for repurchase agreements and other similar agreements. Specifically, this guidance modifies the criteria for determining when these transactions would be accounted for as financings as opposed to sales or purchases with commitments to repurchase or resale. The adoption of this guidance is effective in the first interim or annual period beginning on or after December 15, 2011. The adoption of this guidance did not have a material impact on the financial condition or results of operations of the Registrants.
In May 2011, FASB issued guidance on fair value measurements. This guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS (International Financial Reporting Standards). The adoption of this guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the financial condition or results of operations of the Registrants.
In December 2011, FASB revised the disclosure requirements related to balance sheet offsetting. After the effective date, entities must disclose both the gross and net information about instruments and transactions eligible for offsetting on the balance sheet, including transactions under master netting agreements. The adoption of this revision is required for interim and annual periods beginning on or after January 1, 2013. The adoption of this revision will not have any effect on the financial condition or results of operations of the Registrants since it relates to disclosures.
Note 3 — Regulatory Assets and Liabilities
Cleco Power follows the authoritative guidance on regulated operations, which allows utilities to capitalize or defer certain costs based on regulatory approval and management’s ongoing assessment that it is probable these items will be recovered through the ratemaking process. The following table summarizes Cleco Power’s regulatory assets and liabilities at June 30, 2012, and December 31, 2011.
 
 
AT JUNE 30,

 
AT DECEMBER 31,

(THOUSANDS)
2012

 
2011

Regulatory assets – deferred taxes, net
$
216,814

 
$
214,421

Mining costs
$
17,843

 
$
19,117

Interest costs
6,484

 
6,667

Asset removal costs
834

 
829

Postretirement plan costs
128,418

 
132,556

Tree trimming costs
7,014

 
8,371

Training costs
7,410

 
7,486

Storm surcredits, net
5,595

 
9,254

Construction carrying costs
7,828

 
10,883

Lignite mining agreement contingency
3,781

 
3,781

Power purchase agreement capacity costs
1,924

 

AFUDC equity gross-up
73,896

 
74,346

Rate case costs
849

 
1,117

Acadia Unit 1 acquisition costs
2,918

 
2,971

IRP/RFP costs
273

 
508

AMI pilot costs
87

 
153

Financing costs
6,889

 
4,433

Biomass costs
159

 

Total regulatory assets – other
$
272,202

 
$
282,472

Construction carrying costs
(26,118
)
 
(40,322
)
Fuel and purchased power
2,013

 
2,136

Total regulatory assets, net
$
464,911

 
$
458,707

 
Power Purchase Agreement Capacity Costs
In March 2012, Cleco Power received approval from the LPSC for a three-year power purchase agreement with Evangeline providing 730 MW of capacity and energy beginning May 1, 2012, and ending April 30, 2015. The LPSC order allows Cleco Power to defer and recover a portion of capacity costs associated with the power purchase agreement. The deferred costs will be collected over the term of the contract.

Financing Costs
In 2011, Cleco Power entered into and settled two treasury rate locks. Of the $26.8 million in settlements, $7.0 million was recorded as a regulatory asset relating to ineffectiveness of the hedge relationship. As a result of management’s assessment that it is probable that the ineffectiveness will be recovered through the rate-making process, Cleco Power will amortize the regulatory asset over the 30-year term of the related debt issuance.

Biomass Test Burn Costs
In November 2011, the LPSC approved Cleco Power’s request to establish a regulatory asset for the non-fuel, non-capital portion of costs incurred to conduct a test burn of biomass fuel at Madison Unit 3. These costs will be amortized over a five-


28

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

year period.

Construction Carrying Costs
In February 2006, the LPSC approved Cleco Power’s plans to build Madison Unit 3. Terms of the approval included authorization for Cleco Power to collect from customers an amount equal to 75% of the LPSC-jurisdictional portion of the carrying costs of capital during the construction phase of the unit. Cleco Power’s retail rate plan, which was approved in October 2009, established that Cleco Power return carrying costs to customers and record a regulatory asset for all carrying costs incurred by Cleco Power above the actual amount collected from customers. On February 12, 2010, Madison Unit 3 commenced commercial operations and Cleco Power began returning the construction carrying costs to customers. These costs are being amortized over a four-year period. As of June 30, 2012, Cleco Power had returned
 
$140.3 million to customers. At June 30, 2012, $26.0 million was due to be returned to customers within one year.
Note 4 — Fair Value Accounting
The amounts reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2012, and December 31, 2011, for cash and cash equivalents, accounts receivable, other accounts receivable, accounts payable, and short-term debt approximate fair value because of their short-term nature.  Estimates of the fair value of Cleco and Cleco Power’s long-term debt are based upon the quoted market price for the same or similar issues or by a discounted present value analysis of future cash flows using current rates obtained by Cleco and Cleco Power for debt with similar maturities. The following tables summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments subject to fair value accounting.

Cleco
 
 
 
 
 
 
 
 
AT JUNE 30, 2012
 
 
AT DECEMBER 31, 2011
 
(THOUSANDS)
CARRYING
VALUE

 
ESTIMATED
FAIR VALUE

 
CARRYING
VALUE

 
ESTIMATED
FAIR VALUE

Financial instruments not marked-to-market
 
 
 
 
 
 
 
Cash and cash equivalents
$
23,693

 
$
23,693

 
$
93,576

 
$
93,576

Restricted cash
$
35,635

 
$
35,635

 
$
35,828

 
$
35,828

Long-term debt, excluding debt issuance costs
$
1,326,610

 
$
1,542,799

 
$
1,354,567

 
$
1,542,867

Cleco Power
 
 
 
 
 
 
 
 
AT JUNE 30, 2012
 
 
AT DECEMBER 31, 2011
 
(THOUSANDS)
CARRYING
VALUE

 
ESTIMATED
FAIR VALUE

 
CARRYING
VALUE

 
ESTIMATED
FAIR VALUE

Financial instruments not marked-to-market
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,236

 
$
10,236

 
$
67,458

 
$
67,458

Restricted cash
$
35,539

 
$
35,539

 
$
35,731

 
$
35,731

Long-term debt, excluding debt issuance costs
$
1,326,610

 
$
1,542,799

 
$
1,344,567

 
$
1,532,867

 
At June 30, 2012, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash. Cleco had $51.5 million ($15.9 million of cash and $35.6 million of restricted cash) in short-term investments in institutional money market funds. Cleco Power had $43.0 million ($7.5 million of cash and $35.5 million of restricted cash) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investments, Cleco and Cleco Power would be exposed to a loss of the invested amounts. Collateral on these types of investments is not required by either Cleco or Cleco Power.
In May 2012, Cleco and Cleco Power revised its guidelines for short-term investments in order to mitigate credit risk. Qualifying investments include U.S. Treasury securities; U.S. Federal Agency and U.S. Government-Sponsored Entity debt; tax-exempt short-term securities of a state, territory, or a possession of the U.S.; Certificates of Deposit, banker's acceptances, and time deposits; commercial paper; asset backed securities with a minimum long-term rating of AA by Standard & Poor's and Aaa by Moody's; U.S. Government mortgage securities with short average life with a minimum long-term rating of AA by Standard & Poor's and Aaa by Moody's; Repurchase Agreements with the primary government securities dealers or financial institutions in which Cleco deposits and/or concentrates cash; and money market funds which must have at least $15.0 billion in assets under
 
management; must have been in existence for not less than two years; must have a minimum rating of AAA by Standard & Poor's and Aaa by Moody's and must be compliant with the SEC rule 2a-7 which restricts the quality, maturity and diversity of investments by money market funds.
The minimum acceptable short-term credit rating must be A-1 by Standard & Poor's and P-1 by Moody's. The maximum maturity of any instrument must be thirty-six months, and the maximum portfolio duration must be twelve months.
Diversification of holdings must be stressed recognizing the total amount of the portfolio. Investments in securities of any one issuer will be limited to 5% at the time of purchase except for U.S. Treasury and Agency Securities and money market funds. No more than 50% of the portfolio at the time of purchase will be invested in any single Federal Agency/Government Sponsored Enterprise.

Interest Rate Derivatives

Forward Starting Interest Rate Swap
On November 14, 2011, Cleco Power entered into a pay fixed/receive variable forward starting interest rate swap contract in order to mitigate the interest rate exposure on coupon payments related to a $50.0 million fixed-rate forecasted debt issuance. The forward starting interest rate swap has a spot 30-year all-in swap rate of 3.05%, notional amount of $50.0 million, with the pricing date of May 14, 2013, or the issuance of the notes, whichever is earlier. The forward starting interest


29

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

rate swap meets the criteria of a cash flow hedge under the authoritative guidance as it relates to derivatives and hedging and is carried on the balance sheet at its fair value. The fair market value of the forward starting interest rate swap is the difference between the present value of the fixed payments to be paid by Cleco Power and the present value of the three-month LIBOR payments to be received by Cleco Power. Since future LIBOR rates are not available for each month until termination, quoted LIBOR rates from an active exchange for observable time periods were used to create a forward LIBOR curve for all months until termination. Because of the inputs and common techniques used to calculate fair value, the swap valuation was considered Level 2. Cleco Power recognized $6.2 million and $1.5 million of unrealized mark-to-market losses in other comprehensive income for the three and six months ended June 30, 2012, respectively. The fair market value of $4.9 million for the forward starting interest rate swap was recorded on Cleco and Cleco Power’s Condensed
 
Consolidated Balance Sheets as an interest rate risk management liability as of June 30, 2012. There was no impact to earnings due to ineffectiveness for the three and six months ended June 30, 2012.

Fair Value Measurements and Disclosures
The authoritative guidance on fair value measurements requires entities to classify assets and liabilities that are either measured or disclosed at their fair value according to three different levels depending on the inputs used in determining fair value.
The following tables disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured or disclosed on a recurring basis and within the scope of the authoritative guidance for fair value measurements and disclosures.


Cleco
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLECO CONSOLIDATED FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
 
(THOUSANDS)
AT JUNE 30, 2012

 
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

 
AT DECEMBER 31, 2011

 
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

Asset Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institutional money market funds
$
51,535

 
$

 
$
51,535

 
$

 
$
119,327

 
$

 
$
119,327

 
$

Total assets
$
51,535

 
$

 
$
51,535

 
$

 
$
119,327

 
$

 
$
119,327

 
$

Liability Description
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Energy market derivatives
$
26

 
$

 
$
26

 
$

 
$
5,336

 
$

 
$
5,336

 
$

Interest rate derivatives
4,866

 

 
4,866

 

 
3,330

 

 
3,330

 

Long-term debt
1,542,799

 

 
1,542,799

 

 
1,542,867

 

 
1,542,867

 

Total liabilities
$
1,547,691

 
$

 
$
1,547,691

 
$

 
$
1,551,533

 
$

 
$
1,551,533

 
$

Cleco Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
 
(THOUSANDS)
AT JUNE 30, 2012

 
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

 
AT DECEMBER 31, 2011

 
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

Asset Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institutional money market funds
$
43,038

 
$

 
$
43,038

 
$

 
$
100,331

 
$

 
$
100,331

 
$

Total assets
$
43,038

 
$

 
$
43,038

 
$

 
$
100,331

 
$

 
$
100,331

 
$

Liability Description
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Energy market derivatives
$
26

 
$

 
$
26

 
$

 
$
5,336

 
$

 
$
5,336

 
$

Interest rate derivatives
4,866

 

 
4,866

 

 
3,330

 

 
3,330

 

Long-term debt
1,542,799

 

 
1,542,799

 

 
1,532,867

 

 
1,532,867

 

Total liabilities
$
1,547,691

 
$

 
$
1,547,691

 
$

 
$
1,541,533

 
$

 
$
1,541,533

 
$

 
The derivative assets and liabilities are classified as either current or non-current depending on when the positions close. All energy market derivative current assets and current liabilities are reported as a net current energy risk management asset or liability. All energy market derivative non-current assets and non-current liabilities are reported net in other deferred charges or other deferred credits. Net presentation is appropriate due to the right of offset included in the master netting agreements. On the balance sheet, the net current and net non-current derivative positions are netted with the applicable margin deposits. At June 30, 2012, a net current energy risk management asset of $0.2 million
 
represented net option premiums, partially offset by the current derivative positions.
The institutional money market funds were reported on the Cleco Condensed Consolidated Balance Sheet in cash and cash equivalents, current restricted cash, and non-current restricted cash in the amounts of $15.9 million, $8.1 million, and $27.5 million, respectively at June 30, 2012. At Cleco Power, the institutional money market funds were reported on the condensed consolidated balance sheet in cash and cash equivalents, current restricted cash, and non-current restricted cash and were $7.5 million, $8.1 million, and $27.4 million, respectively, as of June 30, 2012.


30

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

The forward starting interest rate swap was reported on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets as a current liability in the line item interest rate risk management liability as of June 30, 2012.
Cleco utilizes different valuation techniques for fair value calculations. In order to measure the fair value for Level 1 assets and liabilities, Cleco obtains the closing price from published indices in active markets for the various instruments and multiplies this price by the appropriate number of instruments held. Level 2 fair values for assets and liabilities are determined by obtaining the closing price from published indices in active markets for instruments that are similar to Cleco’s assets and liabilities. The fair value obtained is then discounted to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. For some options, Cleco uses the Black-Scholes model using observable and available inputs to calculate the fair value, consistent with the income approach. These techniques have been applied consistently from fiscal period to fiscal period. Level 3 fair values allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Cleco had no Level 3 assets or liabilities at June 30, 2012, or December 31, 2011.
The assets and liabilities reported at fair value are grouped into classes based on the underlying nature and risks associated with the individual asset or liability.
Level 2 of energy market derivative assets and liabilities consists of two classes. The first class contains natural gas swaps which fluctuate in value as the underlying natural gas futures fair value changes, and as market interest rates change. Cleco records the mark-to-market value of the natural gas swaps at the net present value. The second class consists of natural gas options. The fair value of natural gas options fluctuates with the volatility in the fair value of natural gas, the number of days until the options expire, the underlying natural gas futures price fluctuations, and market interest rates. Cleco records the mark-to-market value of the natural gas options at the net present value. Both of these energy market derivative classes also contain counterparty execution risk because the transactions are entered into with a direct counterparty and are not traded through an exchange.
The Level 2 institutional money market funds asset consists of a single class. In order to capture interest income and minimize risk, cash is invested in money market funds that invest primarily in short-term securities issued by the U.S. Treasury in order to maintain liquidity and achieve the goal of a net asset value of a dollar. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the underlying securities of the fund.
 
The Level 2 interest rate derivative was one forward starting interest rate swap liability that consisted of a single class that only contains one instrument. The risks are changes in the three-month LIBOR rate and counterparty risk. This instrument is with a direct counterparty and not traded through an exchange.
The Level 2 long-term debt liability consists of a single class. In order to fund capital requirements, Cleco issues long-term, fixed rate debt with various tenors. The fair value of this class fluctuates as the market interest rates for fixed rate debt with similar tenors and credit ratings changes. The fair value of the debt could also change from period to period due to changes in the credit rating of the Cleco entity that issued the debt.
Cleco has a policy which states that transfers between Levels 1, 2, and 3 are recognized at the end of a reporting period. During the six months ended June 30, 2012, and the year ended December 31, 2011, Cleco did not experience any transfers between levels.
 
Derivatives and Hedging
The authoritative guidance on derivatives and hedging requires entities to provide transparent disclosures about a company’s derivative activities and how the related hedged items affect a company’s financial position, financial performance, and cash flows. Cleco is required to provide qualitative and quantitative disclosures about derivative fair value, gains and losses, and credit-risk-related contingent features in derivative agreements.
The following table presents the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets as of June 30, 2012, and December 31, 2011.
 
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
 
 
LIABILITY DERIVATIVES
 
(THOUSANDS)
FAIR VALUE
BALANCE SHEET
 LINE ITEM
 
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Commodity contracts
 
 
 
 
 
Fuel cost hedges:
 
 
 
 
 
Current
Energy risk management liability, net
 
$
(26
)
 
$
(5,336
)
Total
 
 
$
(26
)
 
$
(5,336
)
 
The following table presents the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012, and 2011.

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 
 
2012

 
2011

 
 
 
2012

 
2011

(THOUSANDS)
LOSS IN
 INCOME OF
DERIVATIVES
 LINE ITEM
 
AMOUNT OF LOSS
RECOGNIZED IN
INCOME ON
DERIVATIVES

 
AMOUNT OF LOSS
RECOGNIZED IN
INCOME ON
DERIVATIVES

 
LOSS IN
 INCOME OF
DERIVATIVES
 LINE ITEM
 
AMOUNT OF LOSS
RECOGNIZED IN
INCOME ON
DERIVATIVES

 
AMOUNT OF LOSS RECOGNIZED IN
INCOME ON
DERIVATIVES

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Fuel cost hedges(1)
Fuel used for electric generation
 
$
(4,131
)
 
$
(5,203
)
 
Fuel used for electric generation
 
$
(7,615
)
 
$
(8,997
)
Total
 
 
$
(4,131
)
 
$
(5,203
)
 
 
 
$
(7,615
)
 
$
(8,997
)
(1)In accordance with the authoritative guidance for regulated operations, less than $0.1 million of unrealized losses and $0.5 million of deferred losses associated with fuel cost hedges are reported in Accumulated Deferred Fuel on the balance sheet as of June 30, 2012, compared to $5.3 million of unrealized losses and $1.2 million of deferred losses associated with fuel cost hedges as of December 31, 2011. As gains and losses are realized in future periods, they will be recorded as Fuel Used for Electric Generation on the income statement.


31

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

At June 30, 2012, Cleco Power had 0.7 million MMBtus hedged for natural gas fuel costs, which is approximately 1% of the estimated natural gas requirements for a two-year period. At December 31, 2011, Cleco Power had 2.2 million MMBtus hedged or approximately 3% of gas requirements for a two-year period.
 
The following tables present the effect of derivatives designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012, and 2011.


 
 
 
 
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
2012
 
 
2011
 
(THOUSANDS)
AMOUNT OF LOSS RECOGNIZED IN OCI

 
AMOUNT OF LOSS RECLASSIFIED
FROM ACCUMULATED
OCI INTO INCOME
(EFFECTIVE PORTION)

 
AMOUNT
RECOGNIZED IN OCI

 
AMOUNT OF GAIN RECLASSIFIED
FROM ACCUMULATED
OCI INTO INCOME
(EFFECTIVE PORTION)

Interest rate derivatives
$
(6,191
)
 
$
(57
)*
 
$

 
$
89
*
* The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges.
 
 

 



 
 
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
2012
 
 
2011
 
(THOUSANDS)
AMOUNT OF LOSS
 RECOGNIZED IN OCI

 
AMOUNT OF LOSS
RECLASSIFIED
FROM ACCUMULATED
OCI INTO INCOME
(EFFECTIVE PORTION)

 
AMOUNT
RECOGNIZED IN OCI

 
AMOUNT OF GAIN RECLASSIFIED
FROM ACCUMULATED
OCI INTO INCOME
(EFFECTIVE PORTION)

Interest rate derivatives(1)
$
(1,535
)
 
$
(57
)*
 
$

 
$
177
*
* The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges.
 
 

 
 

(1) During the six months ended June 30, 2012, Cleco recorded $2.6 million of ineffectiveness related to the interest rate derivatives as a regulatory asset.

At June 30, 2012, Cleco Power expected $0.4 million of the effective portion of deferred net losses related to interest rate derivatives to be reclassed from accumulated OCI to an increase in interest charges over the next 12 months.
Note 5 — Debt

Short-term Debt
At June 30, 2012, and December 31, 2011, Cleco and Cleco Power had no short-term debt outstanding.
 
Long-term Debt
At June 30, 2012, Cleco and Cleco Power's long-term debt outstanding was $1.33 billion, of which $88.5 million was due within one year. The long-term debt due within one year at June 30, 2012, represents $75.0 million in senior notes due May 1, 2013 and $13.5 million principal payments for the Cleco Katrina/Rita storm recovery bonds. For Cleco, long-term debt decreased $28.3 million from December 31, 2011, primarily due to Cleco Power redeeming $50.1 million of DeSoto Parish pollution control bonds in May 2012 and $11.2 million of Rapides Parish pollution control bonds in January 2012. Also contributing to the decrease was a $10.0 million reduction in Cleco Corporation's credit facility draws, a $6.7 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2012, and $0.9 million of capital lease payments. These decreases were partially offset by Cleco Power’s issuance of $50.0 million of senior notes in May 2012 and debt premium amortizations of $0.6 million.
On January 25, 2012, Cleco Power redeemed at par $11.2 million of 5.875% Rapides Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.3 million of accrued interest on the redeemed notes.
On May 8, 2012, Cleco Power issued $50.0 million senior unsecured private placement notes at an interest rate of 4.33%.  The maturity date of the notes is May 15, 2027.  The proceeds were used primarily for the early redemption of $50.1
 
million of 5.875% DeSoto Parish pollution control bonds.
On May 11, 2012, Cleco Power redeemed at par all $50.1 million of 5.875% DeSoto Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.6 million of accrued interest on the redeemed notes.

Credit Facilities
At June 30, 2012, Cleco Corporation and Cleco Power had no borrowings outstanding under their respective existing credit facilities.
Note 6 — Pension Plan and Employee Benefits

Pension Plan and Other Benefits Plan
Most employees hired before August 1, 2007, are covered by a non-contributory, defined benefit pension plan. Benefits under the plan reflect an employee’s years of service, age at retirement, and highest total average compensation for any consecutive five calendar years during the last 10 years of employment with Cleco. Cleco’s policy is to base its contributions to the employee pension plan upon actuarial computations utilizing the projected unit credit method, subject to the IRS’s full funding limitation. During the first six months of 2012, Cleco made no discretionary or required contributions to the pension plan and does not expect to make required or discretionary contributions to the pension plan for the remainder of the year. During 2011, Cleco made $60.0 million in discretionary contributions to the pension plan, with $40.1 million designated for the 2010 plan year and the remaining $19.9 million designated for the 2011 plan year. The required contributions are driven by liability funding target percentages set by law which could cause the required contributions to be uneven among the years. The ultimate amount and timing of the contributions may be affected by changes in the discount rate, changes in the funding regulations, and actual returns on fund assets. Cleco Power is considered the plan sponsor, and Support Group is considered the plan administrator.


32

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Cleco’s retirees and their dependents are eligible to receive medical, dental, vision, and life insurance benefits (other benefits). Cleco recognizes the expected cost of these other benefits during the periods in which the benefits are earned.
The components of net periodic pension and other benefit cost for the three and six months ended June 30, 2012, and 2011 are as follows:
 
PENSION BENEFITS
 
 
OTHER BENEFITS
 
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Components of periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,007

 
$
2,143

 
$
397

 
$
379

Interest cost
4,697

 
4,422

 
476

 
460

Expected return on plan assets
(5,209
)
 
(6,811
)
 

 

Amortizations:
 
 
 
 
 
 
 
Transition obligation

 

 
5

 
5

Prior period service cost
(18
)
 
(18
)
 

 
(51
)
Net loss
2,390

 
1,376

 
200

 
256

Net periodic benefit cost
$
3,867

 
$
1,112

 
$
1,078

 
$
1,049


 
PENSION BENEFITS
 
 
OTHER BENEFITS
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Components of periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
4,156

 
$
4,195

 
$
793

 
$
758

Interest cost
9,127

 
8,815

 
953

 
921

Expected return on plan assets
(10,403
)
 
(12,323
)
 

 

Amortizations:
 
 
 
 
 
 
 
Transition obligation

 

 
10

 
10

Prior period service cost
(36
)
 
(36
)
 

 
(103
)
Net loss
4,173

 
2,778

 
400

 
513

Net periodic benefit cost
$
7,017

 
$
3,429

 
$
2,156

 
$
2,099

 
Since Cleco Power is the pension plan sponsor and the related trust holds the assets, the net unfunded status of the pension plan is reflected at Cleco Power. The liability of Cleco’s other subsidiaries is transferred, with a like amount of assets, to Cleco Power monthly. The expense of the pension plan related to Cleco’s other subsidiaries for the three and six months ended June 30, 2012, was $0.5 million and $1.1 million, respectively. Amounts for the same periods in 2011 were also $0.5 million and $1.1 million, respectively.
Cleco Corporation is the plan sponsor for the other benefit plans. There are no assets set aside in a trust, and the liabilities are reported on the individual subsidiaries’ financial statements. The current portion of the other benefits liability for Cleco was $3.1 million at June 30, 2012. The amount at December 31, 2011, was also $3.1 million. The current portion of the other benefits liability for Cleco Power was $2.9 million at June 30, 2012. The amount at December 31, 2011, was also $2.9 million. The expense related to other benefits reflected in Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012, was $0.9 million and $1.8 million, respectively. Amounts for the same periods in 2011 were also $0.9 million and $1.8 million, respectively.
In March 2010, the President signed the PPACA, a comprehensive health care law, which was upheld by the U.S.
 
Supreme Court on June 28, 2012. While all provisions of the PPACA are not effective immediately, the provisions could increase the Registrants’ retiree medical unfunded liability and related expenses before the effective date. Management will continue to monitor this law and its possible impact on the Registrants.  

SERP
Certain Cleco executive officers are covered by the SERP. The SERP is a non-qualified, non-contributory, defined benefit pension plan. Benefits under the plan reflect an employee’s years of service, age at retirement, and the sum of the highest base salary paid out of the last five calendar years and the average of the three highest bonuses paid during the 60 months prior to retirement, reduced by benefits received from any other defined benefit pension plan, SERP Plan, or Cleco contributions under the enhanced 401(k) Plan to the extent such contributions exceed the limits of the 401(k) Plan. Cleco does not fund the SERP liability but instead pays for current benefits out of the general funds available. Cleco Power has formed a Rabbi Trust designated as the beneficiary for life insurance policies issued on the SERP participants. Proceeds from the life insurance policies are expected to be used to pay the SERP participants’ life insurance benefits, as well as future SERP payments. However, since SERP is a non-qualified plan, the assets of the trust could be used to satisfy general creditors of Cleco in the event of insolvency. All SERP benefits are paid out of the general cash available of the respective companies from which the officer retired. No contributions to the SERP were made during the three and six months ended June 30, 2012, or 2011. Cleco Power is considered the plan sponsor, and Support Group is considered the plan administrator.
 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Components of periodic benefit cost:
 
 
 
 
 
 
 
Service (credit) cost
$
(258
)
 
$
333

 
$
744

 
$
783

Interest cost
690

 
527

 
1,263

 
1,052

Amortizations:
 
 
 
 
 
 
 
Prior period service cost
13

 
13

 
27

 
27

Net loss
573

 
208

 
882

 
470

Net periodic benefit cost
$
1,018

 
$
1,081

 
$
2,916

 
$
2,332

 
The SERP liabilities are reported on the individual subsidiaries’ financial statements. At June 30, 2012, and December 31, 2011, the current portion of the SERP liability for Cleco was $2.8 million and $2.2 million, respectively. The current portion of the SERP liability for Cleco Power was $0.8 million at June 30, 2012. The amount at December 31, 2011, was also $0.8 million. The expense related to the SERP reflected on Cleco Power’s Condensed Consolidated Statements of Income was $0.4 million and $0.7 million for the three and six months ended June 30, 2012, respectively, compared to $0.3 million and $0.6 million for the same periods in 2011.

401(k) Plan
Most employees are eligible to participate in the 401(k) Plan. Under the 401(k) Plan, Cleco makes matching contributions and funds dividend reinvestments with cash. Cleco’s 401(k) Plan expense for the three and six months ended June 30,


33

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

2012, and 2011 is as follows:
 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

401(k) Plan expense
$
847

 
$
852

 
$
2,341

 
$
2,053


Cleco Power is the plan sponsor for the 401(k) Plan. The expense of the 401(k) Plan related to Cleco’s other subsidiaries for the three and six months ended June 30, 2012, was $0.2 million and $0.6 million, respectively. Amounts for the same periods in 2011 were $0.2 million and $0.5 million, respectively.
Note 7 — Income Taxes
The following table summarizes the effective income tax rates for Cleco and Cleco Power for the three and six month periods ended June 30, 2012, and 2011.
 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
 
2012

 
2011

 
2012

 
2011

Cleco
30.5
%
 
34.2
%
 
30.7
%
 
32.9
%
Cleco Power
35.5
%
 
30.8
%
 
35.3
%
 
31.5
%
 
Effective Tax Rates
For the three and six months ended June 30, 2012, and 2011, the effective income tax rate for Cleco was different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, benefits associated with tax credits primarily delivered from Cleco’s investment in USB NMTC Fund 2008-1 LLC, and state tax expense.
For the three and six months ended June 30, 2012 and 2011, the effective income tax rate for Cleco Power was different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, and state tax expense.

Valuation Allowance
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In 2010, a $1.2 million valuation allowance against the $2.7 million deferred tax asset on capital loss carryforwards was reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. The previously recorded $1.2 million valuation allowance was reversed in the second quarter of 2011 due to capital gains generated by the disposition of Acadia Unit 2. In addition, as of June 30, 2012, Cleco had a deferred tax asset resulting from new markets tax credit carryforwards of $68.5 million. If the new markets tax credit carryforwards are not utilized, they will begin to expire in 2029. Management considers it more likely than not that all deferred tax assets related to new markets tax credit carryforwards will be realized; therefore, no valuation allowance has been recorded.
 
Net Operating Losses
As of June 30, 2012, Cleco generated cumulative federal net operating losses and state net operating losses of $60.3 million and $53.4 million, respectively, which will begin to expire in 2031 and 2026. Cleco Power generated cumulative federal net operating losses and state net operating losses of $16.9 million and $9.6 million, respectively, which will begin to expire in 2031 and 2026. Cleco and Cleco Power consider it more
 
likely than not that these losses will be utilized to reduce future income taxes. Cleco and Cleco Power expect to utilize the entire net operating loss carryforward in 2012.

Uncertain Tax Positions
Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. The total amounts of uncertain tax positions and related interest payable and interest expense, as reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets and Statements of Income, are shown in the following tables.
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Interest payable
 
 
 
Cleco
$
2,287

 
$
13,843

Cleco Power
$
5,369

 
$
17,327


 
FOR THE THREE MONTHS
ENDED JUNE 30,
 
 
FOR THE SIX MONTHS
ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Interest charges
 
 
 
 
 
 
 
Cleco
$
(2,716
)
 
$
1,326

 
$
(8,355
)
 
$
2,861

Cleco Power
$
(2,271
)
 
$
938

 
$
(9,636
)
 
$
1,776


The total liability for unrecognized tax benefits for Cleco and Cleco Power at June 30, 2012, and December 31, 2011, are shown in the following tables.
Cleco
 
LIABILITY FOR UNRECOGNIZED
 
(THOUSANDS)
TAX BENEFITS

Balance at December 31, 2011
$
56,235

Additions for tax positions of current period
480

Reductions for tax positions of current period

Additions for tax positions of prior periods
1,946

Reduction for tax positions of prior periods
(44,475
)
Reduction for settlement with tax authority

Reduction for lapse of statute of limitations

Balance at June 30, 2012
$
14,186


Cleco Power
 
LIABILITY FOR UNRECOGNIZED
 
(THOUSANDS)
TAX BENEFITS

Balance at December 31, 2011
$
52,558

Additions for tax positions of current period
480

Reductions for tax positions of current period

Additions for tax positions of prior periods
1,946

Reduction for tax positions of prior periods
(43,384
)
Reduction for settlement with tax authority

Reduction for lapse of statute of limitations

Balance at June 30, 2012
$
11,600


The federal income tax years that remain subject to examination by the IRS are 2001 through 2011. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2001 through 2011. In December 2010, Cleco deposited $52.2 million with the IRS associated with the years under audit. In February 2011, Cleco deposited an additional $8.2 million with the IRS associated with the years currently under audit. Of the $60.4


34

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

million deposited, $43.2 million remains to offset tax and interest liabilities for tax years subsequent to 2003.
Cleco is currently under audit by the IRS for the years 2001 through 2009 which has proposed adjustments to taxes for various issues, including but not limited to, deductible storm costs, research and experimentation costs, domestic production activities deduction, and repair allowance deductions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2012, could decrease by a maximum of $11.0 million for Cleco and $11.3 million for Cleco Power in the next 12 months as a result of reaching settlements with the IRS and state tax authorities. The settlements could involve the payment of additional taxes, the adjustment of deferred taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.
Note 8 — Disclosures about Segments
Cleco’s reportable segments are based on its method of internal reporting, which disaggregates business units by first-tier subsidiary. Cleco’s reportable segments are Cleco Power and Midstream. The reconciling items in the following tables consist of the holding company, a shared services subsidiary, two transmission interconnection facilities, and an investment subsidiary.
 
Each reportable segment engages in business activities from which it earns revenue and incurs expenses. Segment managers report periodically to Cleco’s Chief Executive Officer (the chief operating decision-maker) with discrete financial information and, at least quarterly, present discrete financial information to Cleco Corporation’s Board of Directors. Each reportable segment prepared budgets for 2012 that were presented to and approved by Cleco Corporation’s Board of Directors.
The financial results of Cleco’s segments are presented on an accrual basis. Management evaluates the performance of its segments and allocates resources to them based on segment profit and the requirements to implement new strategic initiatives and projects to meet current business objectives. Material intercompany transactions occur on a regular basis. These intercompany transactions relate primarily to joint and common administrative support services provided by Support Group.


35

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

SEGMENT INFORMATION FOR THE THREE MONTHS ENDED JUNE 30,
2012 (THOUSANDS)
CLECO
POWER

 
MIDSTREAM

 
RECONCILING
ITEMS

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
 
 
Electric operations
$
228,293

 
$

 
$

 
$

 
$
228,293

Tolling operations

 
6,309

 

 
(6,309
)
 

Other operations
11,613

 
1

 
497

 

 
12,111

Electric customer credits
(281
)
 

 

 

 
(281
)
Affiliate revenue
342

 

 
13,590

 
(13,932
)
 

Operating revenue, net
$
239,967

 
$
6,310

 
$
14,087

 
$
(20,241
)
 
$
240,123

Depreciation
$
30,559

 
$
1,460

 
$
232

 
$
(1
)
 
$
32,250

Interest charges
$
20,805

 
$
(1,159
)
 
$
824

 
$
146

 
$
20,616

Interest income
$
(6
)
 
$

 
$
(141
)
 
$
144

 
$
(3
)
Federal and state income tax expense (benefit)
$
20,501

 
$
4,051

 
$
(4,031
)
 
$
(1
)
 
$
20,520

Segment profit
$
37,284

 
$
6,534

 
$
2,868

 
$

 
$
46,686

Additions to long-lived assets
$
55,614

 
$
6,025

 
$
482

 
$

 
$
62,121

Equity investment in investees
$
14,532

 
$

 
$
9

 
$

 
$
14,541

Total segment assets
$
3,704,786

 
$
218,073

 
$
189,000

 
$
(108,351
)
 
$
4,003,508


2011 (THOUSANDS)
CLECO
POWER

 
MIDSTREAM

 
RECONCILING
ITEMS

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
 
 
Electric operations
$
260,485

 
$

 
$

 
$

 
$
260,485

Tolling operations

 
4,222

 

 

 
4,222

Other operations
12,453

 
7

 
526

 
(3
)
 
12,983

Electric customer credits
(4,822
)
 

 

 

 
(4,822
)
Affiliate revenue
348

 
12

 
13,075

 
(13,380
)
 
$
55

Operating revenue, net
$
268,464

 
$
4,241

 
$
13,601

 
$
(13,383
)
 
$
272,923

Depreciation
$
28,996

 
$
1,457

 
$
246

 
$

 
$
30,699

Interest charges
$
24,322

 
$
628

 
$
631

 
$
38

 
$
25,619

Interest income
$
168

 
$

 
$
(35
)
 
$
37

 
$
170

Equity income from investees, before tax
$

 
$
61,440

 
$

 
$

 
$
61,440

Federal and state income tax expense (benefit)
$
15,879

 
$
21,536

 
$
(895
)
 
$

 
$
36,520

Segment profit (1)
$
35,694

 
$
34,425

 
$
229

 
$

 
$
70,348

Additions to long-lived assets
$
35,185

 
$
122

 
$
611

 
$

 
$
35,918

Equity investment in investees (2)
$
14,532

 
$

 
$
8

 
$

 
$
14,540

Total segment assets (2)
$
3,726,471

 
$
233,891

 
$
201,074

 
$
(111,234
)
 
$
4,050,202

(1) Reconciliation of segment profit to consolidated profit:
Segment profit
 
 

 
$
70,348

 
 

(2) Balances as of December 31, 2011
Unallocated items:
 
 

 
 

 
 

 
Preferred dividends requirements
 
 

 
15

 
 

 
Preferred stock redemption costs
 
 
 
112

 
 
 
Net income applicable to common stock
 
$
70,221

 
 



36

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

SEGMENT INFORMATION FOR THE SIX MONTHS ENDED JUNE 30,
2012 (THOUSANDS)
CLECO
POWER

 
MIDSTREAM

 
RECONCILING
ITEMS

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
 
 
Electric operations
$
437,883

 
$

 
$

 
$

 
$
437,883

Tolling operations

 
7,543

 

 
(7,543
)
 

Other operations
22,062

 
1

 
994

 
(1
)
 
23,056

Electric customer credits
1,955

 

 

 

 
1,955

Affiliate revenue
687

 

 
25,197

 
(25,884
)
 

Operating revenue
$
462,587

 
$
7,544

 
$
26,191

 
$
(33,428
)
 
$
462,894

Depreciation
$
60,648

 
$
2,992

 
$
456

 
$
1

 
$
64,097

Interest charges
$
39,291

 
$
313

 
$
1,444

 
$
192

 
$
41,240

Interest income
$
23

 
$

 
$
(185
)
 
$
193

 
$
31

Equity income from investees, before tax
$

 
$

 
$
1

 
$

 
$
1

Federal and state income tax expense (benefit)
$
35,008

 
$
4,789

 
$
(5,866
)
 
$
(1
)
 
$
33,930

Segment profit
$
64,089

 
$
7,624

 
$
5,004

 
$
1

 
$
76,718

Additions to long-lived assets
$
106,002

 
$
2,223

 
$
869

 
$

 
$
109,094

Equity investment in investees
$
14,532

 
$

 
$
9

 
$

 
$
14,541

Total segment assets
$
3,704,786

 
$
218,073

 
$
189,000

 
$
(108,351
)
 
$
4,003,508

 

2011 (THOUSANDS)
CLECO
POWER

 
MIDSTREAM

 
RECONCILING
ITEMS

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
 
 
Electric operations
$
498,953

 
$

 
$

 
$

 
$
498,953

Tolling operations

 
7,003

 

 

 
7,003

Other operations
24,696

 
7

 
1,010

 
(2
)
 
25,711

Electric customer credits
(5,256
)
 

 

 

 
(5,256
)
Affiliate revenue
694

 
45

 
24,096

 
(24,633
)
 
202

Operating revenue
$
519,087

 
$
7,055

 
$
25,106

 
$
(24,635
)
 
$
526,613

Depreciation
$
57,111

 
$
2,913

 
$
487

 
$
1

 
$
60,512

Interest charges
$
48,723

 
$
1,211

 
$
2,198

 
$
100

 
$
52,232

Interest income
$
281

 
$
1

 
$
(96
)
 
$
99

 
$
285

Equity income (loss) from investees, before tax
$

 
$
62,053

 
$
(1
)
 
$

 
$
62,052

Federal and state income tax expense (benefit)
$
30,279

 
$
20,853

 
$
(2,417
)
 
$
(1
)
 
$
48,714

Segment profit (loss) (1)
$
65,724

 
$
33,328

 
$
311

 
$

 
$
99,363

Additions to long-lived assets
$
75,914

 
$
1,128

 
$
671

 
$

 
$
77,713

Equity investment in investees (2)
$
14,532

 
$

 
$
8

 
$

 
$
14,540

Total segment assets (2)
$
3,726,471

 
$
233,891

 
$
201,074

 
$
(111,234
)
 
$
4,050,202

(1) Reconciliation of segment profit to consolidated profit:
Segment profit
 
 

 
$
99,363

 
 

(2) Balances as of December 31, 2011
Unallocated items:
 
 

 
 
 
 

 
Preferred dividends requirements
 
 

 
26

 
 

 
Preferred stock redemption costs
 
 
 
112

 
 
 
Net income applicable to common stock
 
$
99,225

 
 




37

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Note 9 — Electric Customer Credits
Beginning in 2010, the amount of Cleco Power’s yearly retail earnings is subject to the terms of a FRP established by the LPSC. The rates and the FRP became effective upon commencement of commercial operations at Madison Unit 3 on February 12, 2010. The 2010 FRP allows Cleco Power the opportunity to earn a target return on equity of 10.7%, including returning to retail customers 60% of retail earnings between 11.3% and 12.3% and all retail earnings over 12.3%. The amount of credits due customers, if any, is determined by Cleco Power and the LPSC annually. The ultimate amount of any customer refund is subject to LPSC approval. The 2010 FRP established that Cleco Power file monitoring reports for the 12 months ended June 30, 2010, and September 30, 2010, on or before October 31, 2010, and January 31, 2011, respectively. Beginning in 2011, Cleco Power must file annual monitoring reports no later than October 31 for the 12-month period ending June 30. 
On October 31, 2011, Cleco Power filed its report for the 12 months ended June 30, 2011, which indicated that $5.1 million was due to be returned to customers. On July 18, 2012, the LPSC approved the monitoring report for the 12 months ended June 30, 2011. Cleco Power plans to issue refunds for this filing on customers' bills in the third quarter of 2012. The accrual for estimated electric customer credits reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at both June 30, 2012, and December 31, 2011, was $7.3 million.
Note 10 — Variable Interest Entities
Cleco reports its investments in VIEs in accordance with the authoritative guidance. Cleco and Cleco Power report the investment in Oxbow on the equity method of accounting. Under the equity method, the assets and liabilities of this entity are reported as equity investment in investees on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. The revenue and expenses (excluding income taxes) of this entity are netted and reported as equity income or loss from investees on Cleco and Cleco Power’s Condensed Consolidated Statements of Income.
Prior to April 30, 2011, Cleco Corporation also reported its investment in Cajun on the equity method of accounting. In conjunction with the disposition of Acadia Unit 2, APH received 100% ownership in Acadia in exchange for its 50% interest in Cajun, and Acadia became a consolidated subsidiary of APH.
 
Consolidated VIEs
 
Acadia
In October 2009, Acadia and Entergy Louisiana announced that definitive agreements had been executed whereby Entergy Louisiana would acquire Acadia Unit 2.  On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 to Entergy Louisiana for $298.8 million. Following the disposition, Acadia no longer owns any materials and supply inventory, property, plant, and equipment, or land. Following the transaction, ongoing operations at Acadia are minimal, relating only to the previously established accounts receivable, accounts payable, and servicing indemnifications which Cleco assumed in the transaction. In conjunction with the transaction, APH received 100% ownership in Acadia in exchange for its 50% interest in Cajun, and Acadia became a
 
consolidated subsidiary of APH. For more information on the Acadia Unit 2 transaction, see Note 13 — “Acadia Unit 2 Transaction.”
The following table contains summarized financial information for Cajun prior to the disposition of Acadia Unit 2.
(THOUSANDS)
FOR THE THREE MONTHS
ENDED JUNE 30, 2011*
 
FOR THE SIX MONTHS
ENDED JUNE 30, 2011*
 
Operating revenue
 
$
50

 
$
5,227

Operating expenses
 
1,133

 
5,914

Gain on sale of assets
 
71,465

 
71,422

Other income
 
57

 
929

Income before taxes
 
$
70,439

 
$
71,664

*The 2011 income statements include only activity through the April 29, 2011, reconsolidation.

Prior to the reconsolidation, income tax expenses related to Cajun were recorded on APH’s financial statements. For the four months ended April 30, 2011, income tax expenses related to Cajun on APH’s financial statements were $24.0 million.

Equity Method VIEs

Equity investment in investees at June 30, 2012, primarily represented Cleco Power’s $14.5 million investment in Oxbow. Equity investments which are less than 100% owned by Cleco Innovations LLC represented less than 0.1 million of the total balance.
The following table presents the equity income (loss) from each investment accounted for using the equity method.  
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Cajun
$

 
$
61,440

 
$

 
$
62,053

Subsidiaries less than 100% owned by Cleco Innovations

 

 
1

 
(1
)
Total equity income
$

 
$
61,440

 
$
1

 
$
62,052

  
Oxbow
Oxbow is owned 50% by Cleco Power and 50% by SWEPCO and is accounted for as an equity method investment. Cleco Power is not the primary beneficiary because it shares the power to control Oxbow’s significant activities with SWEPCO. Cleco’s current assessment of its maximum exposure to loss related to Oxbow at June 30, 2012, consisted of its equity investment of $14.5 million. The following table presents the components of Cleco Power’s equity investment in Oxbow.
INCEPTION TO DATE (THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Purchase price
$
12,873

 
$
12,873

Cash contributions
1,659

 
1,659

Total equity investment in investee
$
14,532

 
$
14,532

 
The following table compares the carrying amount of Oxbow’s assets and liabilities with Cleco’s maximum exposure to loss related to its investment in Oxbow.
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Oxbow’s net assets/liabilities
$
29,065

 
$
29,065

Cleco Power’s 50% equity
$
14,532

 
$
14,532

Cleco’s maximum exposure to loss
$
14,532

 
$
14,532



38

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

The following tables contain summarized financial information for Oxbow.
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Current assets
$
1,624

 
$
1,711

Property, plant, and equipment, net
23,214

 
23,339

Other assets
4,251

 
4,128

Total assets
$
29,089

 
$
29,178

Current liabilities
$
24

 
$
40

Other liabilities

 
73

Partners’ capital
29,065

 
29,065

Total liabilities and partners’ capital
$
29,089

 
$
29,178

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
2012

 
2011

Operating revenue
$
294

 
$
293

 
$
676

 
$
498

Operating expenses
294

 
293

 
676

 
498

Income before taxes
$

 
$

 
$

 
$

 
Oxbow’s property, plant, and equipment, net consists of land and lignite reserves. The lignite reserves are intended to be used to provide fuel to the Dolet Hills Power Station. DHLC mines the lignite reserves at Oxbow through the Amended Lignite Mining Agreement.
Oxbow has no third-party agreements, guarantees, or other third-party commitments that contain obligations affecting Cleco Power’s investment in Oxbow.
Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees

Litigation
 
Devil’s Swamp
In October 2007, Cleco received a Special Notice for Remedial Investigation and Feasibility Study (RI/FS) from the EPA pursuant to CERCLA (also known as the Superfund statute). CERCLA establishes several classes of potentially responsible parties (PRPs) for a contaminated site, and imposes strict, joint and several liability on those PRPs for the cost of response to the contamination. The special notice requested that Cleco Corporation and Cleco Power, along with many other listed PRPs, enter into negotiations with the EPA for the performance of an RI/FS at an area known as the Devil’s Swamp Lake site just northwest of Baton Rouge, Louisiana. The EPA has identified Cleco as one of many companies sending PCB wastes for disposal to the site. The Devil’s Swamp Lake site has been proposed to be added to the National Priorities List (NPL) based on the release of PCBs to fisheries and wetlands located on the site. The EPA has yet to make a final determination on whether to add Devil’s Swamp Lake site to the NPL. The PRPs began discussing a potential proposal to the EPA in February 2008. Negotiations among the PRPs and the EPA are ongoing in regard to the RI/FS for the Devil’s Swamp Lake site, with little progress having been made since February 2008. Since this investigation is in the preliminary stages, management is unable to determine how significant Cleco’s share of the costs associated with the RI/FS and possible response action at the facility site, if any, may be and whether or not this will have a material adverse effect on the Registrants’ financial condition, results of operations, or cash flows. 
 
Discrimination Complaints
On December 11, 2009, a complaint was filed in the U.S. District Court for the Western District of Louisiana (the Court) on behalf of eight current employees and four former employees alleging that Cleco discriminated against each of them on the basis of race. Each is seeking various remedies provided under applicable statutes prohibiting racial discrimination in the workplace, and together, the plaintiffs seek monetary compensation exceeding $35.0 million. On July 29, 2010, the plaintiffs moved to add an additional current employee alleging that Cleco had discriminated on the basis of race. The additional plaintiff seeks compensation of no less than $2.5 million and became the thirteenth plaintiff. On April 13, 2011, Cleco entered into a settlement with one of the current employees which resulted in a dismissal of one of the thirteen cases with prejudice. In September 2011, the Court ruled on Cleco’s summary judgment motions. The judge granted and denied the motions in part, with the end result that eleven out of twelve of the remaining plaintiffs have at least one claim remaining. The Court has severed the cases of the eleven remaining plaintiffs for further proceedings, and, if necessary, trial. After additional depositions were completed in February 2012, Cleco filed a summary judgment motion in each of the remaining eleven cases on March 8, 2012. Each of such motions were fully briefed and submitted for decision by May 11, 2012. None of these cases have been set for trial and likely will not be set until the Court rules on Cleco’s motions for summary judgment. In view of the uncertainty of the claims, management is not able to predict or give a reasonable estimate of the possible range of liability, if any, of these claims.

City of Opelousas
On March 9, 2010, a complaint was filed in the 27th Judicial District Court of St. Landry Parish, State of Louisiana, on behalf of three Cleco Power customers in Opelousas, Louisiana.  The complaint alleges that Cleco Power overcharged the plaintiffs by applying to customers in Opelousas the same retail rates as Cleco Power applies to all of its retail customers.  The plaintiffs claim that Cleco Power owes customers in Opelousas more than $30.0 million as a result of the alleged overcharges. The plaintiffs allege that Cleco Power should have established, solely for customers in Opelousas, retail rates that are separate and distinct from the retail rates that apply to other customers of Cleco Power and that Cleco Power should not collect from customers in Opelousas the storm surcharge approved by the LPSC following hurricanes Katrina and Rita. Cleco Power currently operates in Opelousas pursuant to a franchise granted to Cleco Power by the City of Opelousas in 1986 and an operating and franchise agreement dated May 14, 1991, pursuant to which Cleco Power operates its own electric facilities and leases and operates electric facilities owned by the City of Opelousas. In April 2010, Cleco Power filed a petition with the LPSC appealing to its expertise in declaring that the ratepayers of Opelousas have been properly charged the rates that are applicable to Cleco Power’s retail customers and that no overcharges have been collected. In addition, Cleco Power removed the purported class action lawsuit filed on behalf of Opelousas electric customers from the state court to the U.S. District Court for the Western District of Louisiana in April 2010, so that it could be properly addressed under the terms of the Class Action Fairness Act. On May 11, 2010, a second class action lawsuit was filed in the 27th Judicial


39

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

District Court for St. Landry Parish, State of Louisiana, repeating the allegations of the first complaint, which was submitted on behalf of 249 Opelousas residents. Cleco Power has responded in the same manner as with the first class action lawsuit. In September 2010, the federal court remanded both cases to the state court in which they were originally filed for further proceedings. In January 2011, the presiding judge in the state court proceeding ruled that the jurisdiction to hear the two class actions resides in the state court and not with the LPSC as argued by both Cleco and the LPSC Staff. Both Cleco and the LPSC Staff appealed this ruling to the Third Circuit Court of Appeals for the State of Louisiana (Third Circuit). In September 2011, the Third Circuit denied both appeals. In October 2011, both Cleco and the LPSC appealed the Third Circuit’s ruling to the Louisiana Supreme Court. In November 2011, the Louisiana Supreme Court granted the appeals and remanded the case to the Third Circuit for further briefing, argument, and opinion. In February 2011, the administrative law judge (ALJ) in the LPSC proceeding ruled that the LPSC has jurisdiction to decide the claims raised by the class action plaintiffs. At its December 2011 Business and Executive Session, the LPSC adopted the ALJ’s recommendation that Cleco be granted summary judgment in its declaratory action finding that Cleco’s ratepayers in the City of Opelousas have been served under applicable rates and policies approved by the LPSC and Cleco’s Opelousas ratepayers have not been overcharged in connection with LPSC rates or ratemaking. On January 30, 2012, the class action plaintiffs filed their appeal of such LPSC decision to the 19th Judicial District Court for Baton Rouge Parish, State of Louisiana. On February 15, 2012, the Third Circuit ruled that the State Court, and not the LPSC, has jurisdiction to hear the case. On March 15, 2012, Cleco Power appealed the Third Circuit’s ruling to the Louisiana Supreme Court asking that it overturn the Third Circuit decision and confirm the LPSC’s exclusive jurisdiction over this matter. The LPSC also appealed the Third Circuit’s ruling to the Louisiana Supreme Court in March 2012. On May 18, 2012, the Louisiana Supreme Court granted the writ application of Cleco Power and the LPSC and set the matter for further briefing on the merits of the jurisdiction question raised in the writ application. Cleco Power expects such briefing to be completed during the third quarter of 2012 and the Louisiana Supreme Court has scheduled oral arguments for September 7, 2012. In view of the uncertainty of the claims, management is not able to predict or give a reasonable estimate of the possible range of liability, if any, of these claims. However, if it is found that Cleco Power overcharged customers resulting in a refund, any such refund could have a material adverse effect on the Registrants’ results of operations, financial condition, and cash flows.
 
LPSC Audits

Fuel Audit
The cost of fuel used for electric generation and the cost of power purchased for utility customers are recovered through an LPSC-established fuel adjustment clause that enables Cleco Power to pass on to its customers substantially all such charges. The LPSC Fuel Adjustment Clause General Order issued November 6, 1997, in Docket No. U-21497 provides that an audit of fuel adjustment clause filings will be performed not less than every other year. In March 2009, the LPSC
 
initiated an audit of fuel adjustment clause filings for the years 2003 through 2008. The total amount of fuel expenses included in the audit is approximately $3.26 billion. In February 2012, the LPSC Staff’s consultant issued a preliminary audit report recommending a cost disallowance of approximately $0.4 million plus interest for these filing years. There was no opposition from intervenors to the recommendations of the LPSC Staff’s consultant and the report was approved by the LPSC on July 18, 2012. Cleco Power has fuel adjustment clause filings for the years 2009 through 2011 that are still subject to audit.
 
Environmental Audit
In July 2009, the LPSC issued Docket No. U-29380 Subdocket A, which provides for an environmental adjustment clause to recover certain costs of environmental compliance as an adder to customers’ bills. The costs eligible for recovery are prudently incurred air emissions credits associated with complying with federal, state, and local air emission regulations that apply to the generation of electricity reduced by the sale of such allowances. Also eligible for recovery are variable emission mitigation costs, which are the cost of reagents such as ammonia and limestone that are used to reduce air emissions. In November 2011, the LPSC opened Docket No. X-32150 to audit the costs for the period October 2009 through October 2010. The total amount of environmental expenses included in the audit is approximately $11.3 million. Cleco Power has responded to data requests from the LPSC. In April 2012, the LPSC Staff’s consultant issued a preliminary audit report recommending no cost disallowance for the review period. There was no opposition from intervenors to the recommendations of the LPSC Staff’s consultant and the report was approved by the LPSC on July 18, 2012. Cleco Power has environmental adjustment clause filings for the years 2010 through 2012 that are still subject to audit.

Other
Cleco is involved in various litigation matters, including regulatory, environmental, and administrative proceedings before various courts, regulatory commissions, arbitrators, and governmental agencies regarding matters arising in the ordinary course of business. The liability Cleco may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued. Management regularly analyzes current information and, as of June 30, 2012, believes the range of probable and reasonably estimable liabilities based on the eventual disposition of these matters is between $3.0 million and $7.0 million.
 
Off-Balance Sheet Commitments
Cleco Corporation and Cleco Power have entered into various off-balance sheet commitments, in the form of guarantees and standby letters of credit, in order to facilitate their activities and the activities of Cleco Corporation’s subsidiaries and equity investees (affiliates). Cleco Corporation and Cleco Power also have agreed to contractual terms that require them to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees in the authoritative guidance.
Cleco Corporation entered into these off-balance sheet commitments in order to entice desired counterparties to


40

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

contract with its affiliates by providing some measure of credit assurance to the counterparty in the event Cleco’s affiliates do not fulfill certain contractual obligations. If Cleco Corporation had not provided the off-balance sheet commitments, the desired counterparties may not have contracted with Cleco’s affiliates, or may have contracted with them at terms less favorable to its affiliates.
The off-balance sheet commitments are not recognized on Cleco’s Condensed Consolidated Balance Sheets because management has determined that Cleco’s affiliates are able to perform these obligations under their contracts and that it is not probable that payments by Cleco will be required. Cleco’s off-balance sheet commitments as of June 30, 2012, are summarized in the following table, and a discussion of the off-balance sheet commitments follows the table. The discussion should be read in conjunction with the table to understand the impact of the off-balance sheet commitments on Cleco’s financial condition.
 
AT JUNE 30, 2012
 
(THOUSANDS)
FACE
AMOUNT

 
REDUCTIONS

 
NET
AMOUNT

Cleco Corporation
 
 
 
 
 
Guarantee issued to Entergy Mississippi on behalf of Attala
$
500

 
$

 
$
500

Cleco Power
 

 
 

 
 

Obligations under standby letter of credit issued to the Louisiana Department of Labor
3,725

 

 
3,725

Total
$
4,225

 
$

 
$
4,225

 
In January 2006, Cleco Corporation provided a $0.5 million guarantee to Entergy Mississippi for Attala’s obligations under the Interconnection Agreement. This guarantee will be effective through the life of the agreement.
The State of Louisiana allows employers of certain financial net worth to self-insure their workers’ compensation benefits. Cleco Power has a certificate of self-insurance from the Louisiana Office of Workers’ Compensation and is required to post a $3.7 million letter of credit, an amount equal to 110% of the average losses over the previous three years, as surety.
On January 4, 2012, Cleco Corporation provided a $1.0 million guarantee to Tenaska Power Services for Cleco Evangeline’s obligations under the Western Systems Power Pool agreement. This guarantee terminated on May 31, 2012.
 
Disclosures about Guarantees
Cleco Corporation provided a limited guarantee and an indemnification to Entergy Louisiana and Entergy Gulf States for Perryville’s performance, indemnity, representation, and warranty obligations under the Sale Agreement, the Power Purchase Agreement, and other ancillary agreements related to the sale of the Perryville facility in 2004. This is a continuing guarantee and all obligations of Cleco Corporation shall continue until the guaranteed obligations have been fully performed or otherwise extinguished. The discounted probability-weighted liability under the guarantees and indemnifications recognized on Cleco’s Condensed Consolidated Balance Sheet as of June 30, 2012, was $0.2 million. The maximum amount of the potential payment to Entergy Louisiana and Entergy Gulf States is $42.4 million. Currently, management does not expect to be required to pay Entergy Louisiana and Entergy Gulf States under the guarantee.
 
In February 2010, Cleco Power acquired Acadia Unit 1 and half of Acadia Power Station’s related common facilities. Acadia provided limited guarantees and indemnifications to Cleco Power under the Master Reorganization and Redemption Agreement. The maximum amount of the potential payment to Cleco Power for indemnifications is $30.0 million, except for the indemnifications relating to the fundamental organizational structure of Acadia against which there is no maximum amount. Cleco Corporation is obligated to pay a maximum of $10.0 million if Acadia is unable to pay claims to Cleco Power pursuant to the guarantee. Acadia recorded an indemnification liability of $13.5 million which represents the fair value of these indemnifications.  
Acadia and APH will reduce the indemnification liabilities either through expiration of the contractual life or through a reduction in the probability of a claim arising. The indemnification obligation is expected to have a term of approximately three years. After the three-year period, a residual value of less than $0.1 million will remain. At June 30, 2012, Acadia had an indemnification liability of approximately $0.4 million remaining, which represents the risk of payment, as a contingent sale obligation recorded on Cleco’s Condensed Consolidated Balance Sheet. APH recognized no income for the three and six months ended June 30, 2012, and income of $0.1 million and $0.9 million for the three and six months ended June 30, 2011, respectively, primarily due to the contractual expiration of the underlying indemnifications. Acadia recognized no income for the three months ended June 30, 2012 and income of $7.2 million for the six months ended June 30, 2012, primarily due to the contractual expiration of the underlying indemnifications. During the three and six months ended June 30, 2011, Acadia recognized income of $0.1 million and $1.0 million, respectively, primarily due to the contractual expiration of the underlying indemnifications.
On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana. Acadia provided limited guarantees and indemnifications to Entergy Louisiana and recorded an indemnification liability of $21.8 million, which represents the fair value of these indemnifications. In conjunction with the disposition of Acadia Unit 2, APH received 100% ownership in Acadia in exchange for its 50% interest in Cajun, and Acadia became a consolidated subsidiary of APH.  
Acadia and APH will reduce the indemnification liabilities either through expiration of the contractual life or through a reduction in the probability of a claim arising. The indemnification obligation is expected to have a term of three years. After the three-year period, a residual value of approximately $0.2 million will remain. At June 30, 2012, Acadia had an indemnification liability of $10.0 million remaining, which represents the risk of payment, as a contingent sale obligation recorded on Cleco’s Condensed Consolidated Balance Sheet. Acadia recognized income of $11.8 million for the three and six months ended June 30, 2012, primarily due to the contractual expiration of the underlying indemnifications. The maximum amount of the potential payment to Entergy Louisiana for the indemnifications is the purchase price of $298.8 million, except for the liabilities retained by Acadia, for which there is no maximum amount. Cleco Corporation is obligated to pay the same maximum amounts as Acadia if Acadia is unable to pay claims to Entergy Louisiana pursuant to the guarantee.


41

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

As part of the Amended Lignite Mining Agreement ,Cleco Power and SWEPCO, joint owners of Dolet Hills, have agreed to pay the lignite miner’s loan and lease principal obligations when due, if the lignite miner does not have sufficient funds or credit to pay. Any amounts paid on behalf of the miner would be credited by the lignite miner against the next invoice for lignite delivered. At June 30, 2012, Cleco Power had a liability of $3.8 million related to the amended agreement. The maximum projected payment by Cleco Power under this guarantee is estimated to be $72.5 million; however, the Amended Lignite Mining Agreement does not contain a cap. The projection is based on the forecasted loan and lease
 
obligations to be incurred by DHLC, primarily for purchases of equipment. Cleco Power has the right to dispute the incurrence of loan and lease obligations through the review of the mining plan before the incurrence of such loan and lease obligations. The Amended Lignite Mining Agreement does not terminate pursuant to its terms until 2026 and does not affect the amount the Registrants can borrow under their credit facilities. Currently, management does not expect to be required to pay DHLC under the guarantee.
The following table summarizes the expected termination dates of the off-balance sheet commitments and on-balance sheet guarantees discussed above.

 
 
 
 
 
 

 
AT JUNE 30, 2012
 
 
 

 
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
 
(THOUSANDS)
NET
AMOUNT
COMMITTED

 
LESS THAN
ONE YEAR

 
1-3 YEARS

 
3-5 YEARS

 
MORE
THAN
5 YEARS

Off-balance sheet commitments
$
4,225

 
$
3,725

 
$

 
$

 
$
500

On-balance sheet guarantees
14,356

 

 
10,350

 

 
4,006

Total
$
18,581

 
$
3,725

 
$
10,350

 
$

 
$
4,506


In its bylaws, Cleco Corporation has agreed to indemnify directors, officers, agents, and employees who are made a party to a pending or completed suit, arbitration, investigation, or other proceeding whether civil, criminal, investigative or administrative, if the basis of inclusion arises as the result of acts conducted in the discharge of their official capacity. Cleco Corporation has purchased various insurance policies to reduce the risks associated with the indemnification. In its operating agreement, Cleco Power provides for the same indemnification as described above with respect to its managers, officers, agents, and employees.
Generally, neither Cleco Corporation nor Cleco Power has recourse that would enable them to recover amounts paid under their guarantee or indemnification obligations. The one exception is the insurance contracts associated with the indemnification of directors, managers, officers, agents, and employees. There are no assets held as collateral for third parties that either Cleco Corporation or Cleco Power could obtain and liquidate to recover amounts paid pursuant to the guarantees or indemnification obligations.

Other Commitments
 
New Markets Tax Credits
In August 2008, Cleco Corporation acquired a 99.9% membership interest in USB NMTC Fund 2008-1 LLC (the Fund). The Fund was formed by U.S. Bancorp Community Development Corporation (USBCDC). The purpose of the Fund is to invest in projects located in qualified active low-income communities that are underserved by typical debt capital markets. These investments are designed to generate new markets tax credits and historical rehabilitation tax credits.
In July 2011, the operating agreement of the Fund was amended to include renewable energy investments qualifying for grants under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. As part of the amendment, the guarantee performance targets provided to Cleco by the Fund were increased. U.S. Bank is the parent company of the managing member of the Fund and is the guarantor of the performance targets. In April 2012, the operating agreement of the Fund was amended. The primary purpose of the amendment was to adjust the ownership percentage of an
 
underlying project. There was no material change to total capital contributions made by Cleco or total benefits and cash to be received by Cleco.
The tax benefits received from the Fund reduce the federal income tax obligations of Cleco Corporation. In total, Cleco Corporation will contribute $286.3 million of equity contributions to the Fund and will receive at least $304.6 million of net tax benefits and cash from the inception of the investment in 2008 over the life of the investment, which ends in 2017 under the new amendment. The $18.3 million difference between equity contributions and total benefits received will be recognized over the life of the Fund as net tax benefits are delivered. The following table reflects remaining future equity contributions.
(THOUSANDS)
CONTRIBUTION

Six months ending December 31, 2012
$
28,319

Years ending December 31,
 

2013
48,777

2014
37,525

2015
13,998

2016
12,530

2017
5,211

Total
$
146,360

 
Of the $146.4 million, $51.3 million is due to be paid within the next twelve months. Due to the right of offset, the investment and associated debt are presented on Cleco’s Condensed Consolidated Balance Sheet in the line item titled tax credit fund investment, net. The amount of tax benefits delivered in excess of capital contributions as of June 30, 2012, was $96.4 million. The amount of tax benefits delivered but not utilized as of June 30, 2012, was $77.2 million and is reflected as a deferred tax asset.
The equity contribution does not contain a stated rate of interest. Cleco Corporation has recorded the liability and investment at its calculated fair value within the framework of the authoritative guidance. In order to calculate the fair value, management used an imputed rate of interest assuming that Cleco Corporation obtained financing of a similar nature from a third-party. The imputed interest rate was used in a net present value model in order to calculate the fair value of the


42

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

remaining portion of the delayed equity contributions. The following table contains the disclosures required by the authoritative guidelines for equity investments with an imputed interest rate. 
(THOUSANDS)
 
Equity contributions, imputed interest rate 6%
 
Principal payment schedule above:
$
146,360

Less:  unamortized discount
14,775

Total
$
131,585

 
The gross investment amortization expense will be recognized over a ten-year period, with five years remaining under the new amendment, using the cost method in accordance with the authoritative guidance for investments. The grants received under Section 1603 and other cash reduce the basis of the investment. Periodic amortization of the investment and the deferred taxes generated by the basis reduction temporary difference are included as components of income tax expense.

Risks and Uncertainties
 
Cleco Corporation
Cleco Corporation could be subject to possible adverse consequences if Cleco’s counterparties fail to perform their obligations or if Cleco Corporation or its affiliates are not in compliance with loan agreements or bond indentures.
 
Other
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. After assessing the current operating performance, liquidity, and credit ratings of Cleco Corporation, management believes that Cleco will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. If Cleco Corporation’s credit ratings were to be downgraded by Moody’s and Standard & Poor’s, Cleco Corporation would be required to pay additional fees and higher interest rates under its bank credit and other debt agreements.
Changes in the regulatory environment or market forces could cause Cleco to determine its assets have suffered an other-than-temporary decline in value, whereby an impairment would be required to be taken and Cleco’s financial condition could be materially adversely affected.
 
Cleco Power
Cleco Power supplies the majority of its customers’ electric power requirements from its own generation facilities. In addition to power obtained from power purchase agreements, Cleco Power purchases power from other utilities and marketers to supplement its generation at times of relatively high demand or when the purchase price of power is less than its own cost of generation. Due to its location on the transmission grid, Cleco Power relies on two main suppliers of electric transmission when accessing external power markets. At times, constraints limit the amount of purchased power these transmission providers can deliver into Cleco Power’s service territory.
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not
 
satisfied by operating cash flows. After assessing the current operating performance, liquidity, and credit ratings of Cleco Power, management believes that Cleco Power will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. Cleco Power pays fees and interest under its bank credit agreements based on the highest rating held. If Cleco Power’s credit ratings were to be downgraded by Moody’s and Standard & Poor’s, Cleco Power would be required to pay additional fees and higher interest rates under its bank credit agreements. Cleco Power’s collateral for derivatives is based on the lowest rating held. If Cleco Power’s credit ratings were to be downgraded by Moody’s or Standard & Poor’s, Cleco Power would be required to pay additional collateral for derivatives.
Note 12 — Affiliate Transactions
At June 30, 2012, Cleco Corporation had no affiliate balances that were payable to or due from its non-consolidated affiliates.
Cleco Power has affiliate balances that are payable to or due from its affiliates. At June 30, 2012, the payable to Support Group was $7.4 million, the payable to Cleco Corporation was $2.3 million, the payable to Evangeline was $1.5 million, and the payable to other affiliates was less than $0.1 million. Also, at June 30, 2012, the receivable from Support Group was $2.4 million, the receivable from Cleco Corporation was $1.6 million, and the receivable from other affiliates was $0.1 million. 
Note 13 — Acadia Unit 2 Transaction
On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 and Acadia Power Station’s remaining common facilities to Entergy Louisiana. The significant terms of the transaction were:

Entergy Louisiana acquired Acadia Unit 2 for $298.8 million;
In exchange for $10.9 million, APH indemnified the third-party owners of Cajun and their affiliates against 50% of Acadia’s liabilities and other obligations related to the Acadia Unit 2 transaction;
APH recognized a gain of $62.0 million, which included $26.2 million of equity income that represents the 2007 investment impairment charge of $45.9 million, partially offset by $19.7 million of capitalized interest during the construction of Acadia;
APH received 100% ownership in Acadia in exchange for its 50% interest in Cajun, and Acadia became a consolidated subsidiary of APH; and
Cleco Power operates Acadia Unit 2 on behalf of Entergy Louisiana.
 
Following the transaction, ongoing operations at Acadia are minimal, relating only to the previously established accounts receivable, accounts payable, and servicing of indemnities. Therefore, Acadia does not meet the definition of a business.



43

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in combination with the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and Cleco and Cleco Power’s Condensed Consolidated Financial Statements contained in this Combined Quarterly Report on Form 10-Q. The information included therein is essential to understanding the following discussion and analysis. Below is information concerning the consolidated results of operations of Cleco for the three and six months ended June 30, 2012, and June 30, 2011.
RESULTS OF OPERATIONS

Overview
Cleco is a regional energy company that conducts substantially all of its business operations through its two primary subsidiaries:

Cleco Power, a regulated electric utility company, which owns 9 generating units with a total nameplate capacity of 2,524 MW and serves approximately 281,000 customers in Louisiana through its retail business and 10 communities across Louisiana and Mississippi through wholesale power contracts; and
Midstream, a wholesale energy business, which owns Evangeline (which operates Coughlin).

Cleco Power
Many factors affect Cleco Power’s primary business of selling electricity. These factors include the presence of a stable regulatory environment, which can impact cost recovery and return on equity, as well as the recovery of costs related to growing energy demand and rising fuel prices; the ability to increase energy sales while containing costs; and the ability to meet increasingly stringent regulatory and environmental standards. Key initiatives that Cleco Power is currently working on include the Acadiana Load Pocket project, the AMI project and long-term power supply options beyond 2012. These initiatives are discussed below.
 
Acadiana Load Pocket Project
In September 2008, Cleco Power entered into an agreement with two other utilities to upgrade and expand interconnected transmission systems in south central Louisiana in an area known as the Acadiana Load Pocket. The project received LPSC and SPP approval in February 2009. Cleco Power’s estimated cost for its portion of the project is $125.0 million, including AFUDC. As of June 30, 2012, Cleco Power had spent $112.0 million on the project, including AFUDC. A return on and recovery of the costs associated with the completed portions of the Acadiana Load Pocket project are included in base revenue. The project was substantially completed by the end of June 2012. Remaining portions of the project are expected to be complete by December 2012. For information on the impact the Acadiana Load Pocket project is expected to have on base revenue, see “— Comparison of the Three Months Ended June 30, 2012, and 2011 — Cleco Power — Base.”


 
AMI Project
In May 2010, Cleco Power accepted the terms of a $20.0 million grant from the DOE under the DOE’s small-grant process to implement advanced metering technology for all of Cleco Power’s retail customers. Cleco Power estimates the project will cost $73.0 million, with the DOE grant providing $20.0 million toward the project and Cleco Power providing the remaining $53.0 million. The grant program is a part of the American Recovery and Reinvestment Act of 2009, an economic stimulus package passed by Congress in February 2009. Advanced metering technology includes the installation of electric meters that enable two-way communication capabilities between a home or business and a utility company. At June 30, 2012, Cleco Power had incurred $24.7 million in project costs, of which $10.6 million has been submitted to the DOE for reimbursement. As of June 30, 2012, Cleco Power had received $8.1 million in payments from the DOE. The project is expected to be completed in the third quarter of 2013. For more information on the AMI Project, see "— Financial Condition — Regulatory and Other Matters — AMI Project.”
 
Power Supply Options
Cleco Power is evaluating a range of long-term power supply options beyond 2012. Cleco Power is continuing to update its IRP to look at future sources of supply to meet its capacity and energy requirements and to comply with new environmental standards, primarily CSAPR. In August 2011, Cleco Power issued an RFP for resources to enhance reliability for January through April 2012 and selected and negotiated two agreements from the RFP, a power purchase agreement with NRG Power Marketing LLC and a tolling agreement with Evangeline. Both agreements began on January 1, 2012. In October 2011, a second RFP, seeking up to approximately 750 MW of capacity and energy, for a three- or five-year period was issued for supply starting May 1, 2012, to meet CSAPR. Cleco Power selected Evangeline’s proposal for a 730-MW product beginning May 1, 2012, and ending April 30, 2015. The definitive agreement between Evangeline and Cleco Power was executed in January 2012 and approved by the LPSC in March 2012 and FERC in April 2012. In May 2012, Cleco Power issued a draft RFP seeking long-term resources beyond April 2015. The final RFP was issued in July 2012. For more information on Cleco Power's RFPs, see “— Financial Condition — Regulatory and Other Matters — Generation RFP.”

Cleco Midstream
 
Evangeline
In March 2010, Evangeline restructured its tolling agreement with JPMVEC and shortened the expiration of the prior long-term agreement from 2020 to December 31, 2011 (with a JPMVEC option to extend one year). JPMVEC did not exercise the option to extend the tolling agreement and as a result, Coughlin’s capacity and energy became available to Midstream beginning January 1, 2012. Evangeline was one of the successful bidders in Cleco Power’s RFP for short-term 2012 resources beginning January 1, 2012, and began providing 250 MW of capacity and energy to Cleco Power


44

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

under a tolling agreement through April 30, 2012. In addition to Cleco Power’s RFP referenced above, in December 2011, Evangeline was also notified that Cleco Power selected its proposal to fulfill Cleco Power’s capacity and energy needs as defined in the Cleco Power RFP for contractual resources to meet CSAPR beginning in 2012. The proposal was for a 730-MW product beginning May 1, 2012, and ending April 30, 2015. The definitive agreement between Evangeline and Cleco Power was executed in January 2012 and was approved by the LPSC in March 2012 and FERC in April 2012. Currently, Midstream is marketing Coughlin’s capacity for periods beginning after April 30, 2015, and is evaluating various options to optimize Coughlin’s value. For more information, see “— Financial Condition — Regulatory and Other Matters — Generation RFP.”
 
Comparison of the Three Months Ended June 30, 2012, and 2011
Cleco Consolidated
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue, net
$
240,123

 
$
272,923

 
$
(32,800
)
 
(12.0
)%
Operating expenses
165,880

 
203,342

 
37,462

 
18.4
 %
Operating income
$
74,243

 
$
69,581

 
$
4,662

 
6.7
 %
Allowance for other funds used during construction
$
1,399

 
$
876

 
$
523

 
59.7
 %
Equity income from investees, before tax
$

 
$
61,440

 
$
(61,440
)
 
(100.0
)%
Other income
$
13,014

 
$
1,050

 
$
11,964

 
*

Interest charges
$
20,616

 
$
25,619

 
$
5,003

 
19.5
 %
Federal and state income taxes
$
20,520

 
$
36,520

 
$
16,000

 
43.8
 %
Net income applicable to common stock
$
46,686

 
$
70,221

 
$
(23,535
)
 
(33.5
)%
* Not meaningful
 

 
 

 


 


 
Consolidated net income applicable to common stock decreased $23.5 million, or 33.5%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to lower Midstream earnings. Partially offsetting this decrease was higher corporate earnings.
Operating revenue, net decreased $32.8 million, or 12.0%, in the second quarter of 2012 compared to the second quarter of 2011 largely as a result of lower fuel cost recovery revenue at Cleco Power.
Operating expenses decreased $37.5 million, or 18.4%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to lower per unit costs and volumes of fuel used for electric generation.
Allowance for funds used during construction increased $0.5 million, or 59.7%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to higher AFUDC accruals related to the AMI Project and miscellaneous transmission projects.
Equity income from investees, before tax, decreased $61.4 million, or 100.0%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during the second quarter of 2011.
Other income increased $12.0 million in the second quarter of 2012 compared to the second quarter of 2011 largely as a result of the contractual expiration of an underlying indemnification resulting from the disposition of Acadia Unit 2.
 
Interest charges decreased $5.0 million, or 19.5%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to lower interest charges at Cleco Power.
Federal and state income taxes decreased $16.0 million, or 43.8%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to $15.4 million for the change in pre-tax income excluding AFUDC equity, $1.6 million for tax credits, and $1.1 million to record tax expense at the projected annual effective tax rate. These decreases were partially offset by $1.3 million for the absence in 2012 of the valuation allowance reversal booked in 2011, and $0.8 million for miscellaneous items.
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
 
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Base
$
156,192

 
$
157,934

 
$
(1,742
)
 
(1.1
)%
Fuel cost recovery
72,101

 
102,551

 
(30,450
)
 
(29.7
)%
Electric customer credits
(281
)
 
(4,822
)
 
4,541

 
94.2
 %
Other operations
11,613

 
12,453

 
(840
)
 
(6.7
)%
Affiliate revenue
342

 
348

 
(6
)
 
(1.7
)%
Operating revenue, net
239,967

 
268,464

 
(28,497
)
 
(10.6
)%
Operating expenses
 

 
 

 
 

 
 

Fuel used for electric generation – recoverable
54,205

 
77,277

 
23,072

 
29.9
 %
Power purchased for utility customers – recoverable
17,899

 
25,269

 
7,370

 
29.2
 %
Non-recoverable fuel and power purchased
4,958

 
1,790

 
(3,168
)
 
(177.0
)%
Other operations
27,243

 
29,321

 
2,078

 
7.1
 %
Maintenance
19,630

 
22,581

 
2,951

 
13.1
 %
Depreciation
30,559

 
28,996

 
(1,563
)
 
(5.4
)%
Taxes other than income taxes
8,682

 
8,396

 
(286
)
 
(3.4
)%
Gain on sale of assets
(1
)
 

 
1

 
100.0
 %
Total operating expenses
163,175

 
193,630

 
30,455

 
15.7
 %
Operating income
$
76,792

 
$
74,834

 
$
1,958

 
2.6
 %
Allowance for other funds used during construction
$
1,399

 
$
876

 
$
523

 
59.7
 %
Other income
$
1,228

 
$
644

 
$
584

 
90.7
 %
Interest charges
$
20,805

 
$
24,322

 
$
3,517

 
14.5
 %
Federal and state income taxes
$
20,501

 
$
15,879

 
$
(4,622
)
 
(29.1
)%
Net income
$
37,284

 
$
35,694

 
$
1,590

 
4.5
 %

Cleco Power’s net income in the second quarter of 2012 increased $1.6 million, or 4.5%, compared to the second quarter of 2011. Contributing factors include:

lower other operations and maintenance expenses,
lower electric customer credits, and
lower interest charges.

These factors were partially offset by:

higher non-recoverable fuel and power purchased,
lower base revenue,


45

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

higher depreciation expense,
lower other operations revenue, and
higher effective income tax rate.
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(MILLION kWh)
2012

 
2011

 
FAVORABLE/
(UNFAVORABLE)

Electric sales
 
 
 
 
 
Residential
848

 
871

 
(2.6
)%
Commercial
667

 
648

 
2.9
 %
Industrial
578

 
597

 
(3.2
)%
Other retail
33

 
33

 

Total retail
2,126

 
2,149

 
(1.1
)%
Sales for resale
466

 
397

 
17.4
 %
Unbilled
168

 
204

 
(17.6
)%
Total retail and wholesale customer sales
2,760

 
2,750

 
0.4
 %

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
FAVORABLE/
(UNFAVORABLE)

Electric sales
 
 
 
 
 
Residential
$
66,150

 
$
69,338

 
(4.6
)%
Commercial
44,317

 
44,309

 

Industrial
21,132

 
21,205

 
(0.3
)%
Other retail
2,407

 
2,418

 
(0.5
)%
Surcharge
2,036

 
2,833

 
(28.1
)%
Other
(1,566
)
 
(1,585
)
 
1.2
 %
Total retail
134,476

 
138,518

 
(2.9
)%
Sales for resale
11,710

 
11,039

 
6.1
 %
Unbilled
10,006

 
8,377

 
19.4
 %
Total retail and wholesale customer sales
$
156,192

 
$
157,934

 
(1.1
)%
 
Cleco Power’s residential customers’ demand for electricity largely is affected by weather. Weather generally is measured in cooling-degree days and heating-degree days. A cooling-degree day is an indication of the likelihood that a consumer will use air conditioning, while a heating-degree day is an indication of the likelihood that a consumer will use heating. An increase in heating-degree days does not produce the same increase in revenue as an increase in cooling-degree days, because alternative heating sources are more available and because winter energy is priced below the rate charged for energy used in the summer. Normal heating-degree days and cooling-degree days are calculated for a month by separately calculating the average actual heating- and cooling-degree days for that month over a period of 30 years.
The following table shows how cooling degree-days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree days.
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 
 
 
 
 
 
2012 CHANGE
 
 
2012

 
2011

 
NORMAL

 
PRIOR YEAR

 
NORMAL

Cooling-degree days
1,143

 
1,206

 
942

 
(5.2
)%
 
21.3
%
 
Base
Base revenue decreased $1.7 million, or 1.1%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to milder weather.
 
Cleco Power expects new industrial load to be added during the remainder of 2012 and 2013, principally driven by expected development of Haynesville shale discovered in northwestern Louisiana. In addition, Cleco Power expects to begin providing service to expansions of current customers’ operations, as well as service to new customers. These expansions of service to current customers and service to new customers are expected to contribute base revenue of $0.8 million during the remainder of 2012 and an additional $0.4 million in 2013. Cleco Power also anticipates up to an additional $2.2 million of base revenue for the remainder of 2012 associated with the completed portions of the Acadiana Load Pocket transmission project. For information on the effects of future energy sales on Cleco Power’s financial condition, results of operations, and cash flows, see “Risk Factors — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Fuel Cost Recovery
Fuel cost recovery revenue billed to customers decreased $30.5 million, or 29.7%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to decreases in the per-unit cost of fuel used for electric generation and power purchased for utility customers. Also contributing to the decrease were lower volumes of fuel used for electric generation. Partially offsetting the decrease were higher volumes of power purchased for utility customers. Changes in fuel costs historically have not significantly affected Cleco Power’s net income. Generally, fuel and purchased power expenses are recovered through the LPSC-established fuel adjustment clause, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 88% of Cleco Power’s total fuel cost during the second quarter of 2012 was regulated by the LPSC, while the remainder was regulated by FERC. Recovery of fuel adjustment clause costs is subject to refund until approval is received from the LPSC. For information on Cleco Power’s current LPSC fuel audit, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees.”
 
Electric Customer Credits
Electric customer credits decreased $4.5 million, or 94.2%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to a decrease in the estimated accrual for rate refunds. For more information on the accrual for electric customer credits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”

Other Operations
Other operations revenue decreased $0.8 million, or 6.7%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to $3.4 million related to the absence of a gain on the sale of Cleco Power’s fuel oil inventory, partially offset by $2.0 million related to wholesale power sales and $0.6 million related to other miscellaneous revenue.



46

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Operating Expenses
Operating expenses decreased $30.5 million, or 15.7%, in the second quarter of 2012 compared to the second quarter of 2011. Fuel used for electric generation (recoverable) decreased $23.1 million, or 29.9%, primarily due to lower per unit costs and volumes of fuel used for electric generation as compared to the second quarter of 2011. Power purchased for utility customers (recoverable) decreased $7.4 million, or 29.2%, largely due to lower per unit costs of purchased power. Partially offsetting this decrease was higher volumes of purchased power. Fuel used for electric generation and power purchased for utility customers generally are influenced by natural gas prices, as well as availability of transmission. However, other factors such as scheduled and/or unscheduled outages, unusual maintenance or repairs, or other developments may affect fuel used for electric generation and power purchased for utility customers. Non-recoverable fuel and power purchased increased $3.2 million, or 177.0%, primarily due to higher non-recoverable wholesale power purchases. Other operations expense decreased $2.1 million, or 7.1%, primarily due to lower customer service expenses. Maintenance expenses decreased $3.0 million, or 13.1%, primarily due to lower generating station, distribution, and transmission maintenance work performed during the second quarter of 2012. Depreciation expense increased $1.6 million, or 5.4%, primarily due to normal recurring additions to fixed assets.

Allowance for Other Funds Used During Construction
Allowance for other funds used during construction increased $0.5 million, or 59.7%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to higher AFUDC accruals related to the AMI Project and miscellaneous transmission projects.

Other Income
Other income increased $0.6 million, or 90.7%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to higher revenue from mutual assistance to other utilities for restoration efforts and higher royalty payments.
 
Interest Charges
Interest charges decreased $3.5 million, or 14.5%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to $1.9 million related to uncertain tax positions, $2.3 million related to reacquired debt in October and December 2011, $0.6 million related to the retirement of pollution control bonds in January and May 2012, and $0.2 million of lower other net miscellaneous interest charges. Partially offsetting these decreases was $1.5 million related to the issuance of private placement notes in December 2011 and May 2012.
 

Income Taxes
Federal and state income taxes increased $4.6 million, or 29.1%, during the second quarter of 2012 compared to the second quarter of 2011. The increase is primarily due to $2.1 million for the change in pre-tax income excluding AFUDC equity, $1.3 million for the absence in 2012 of the valuation allowance reversal booked in 2011, $0.3 million to record tax expense at the projected annual effective rate, and $0.9 million
 
for miscellaneous items.
Midstream
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Tolling operations
$
6,309

 
$
4,222

 
$
2,087

 
49.4
 %
Other operations
1

 
7

 
(6
)
 
(85.7
)%
Affiliate revenue

 
12

 
(12
)
 
(100.0
)%
Operating revenue
6,310

 
4,241

 
2,069

 
48.8
 %
Operating expenses
 

 
 

 
 

 
 

Fuel used for electric generation
304

 

 
(304
)
 

Power purchased for utility customers
9

 

 
(9
)
 

Other operations
1,873

 
2,058

 
185

 
9.0
 %
Maintenance
4,452

 
5,534

 
1,082

 
19.6
 %
Depreciation
1,460

 
1,457

 
(3
)
 
(0.2
)%
Taxes other than income taxes
612

 
626

 
14

 
2.2
 %
Gain on sale of assets
(21
)
 
(506
)
 
(485
)
 
(95.8
)%
Total operating expenses
8,689

 
9,169

 
480

 
5.2
 %
Operating loss
$
(2,379
)
 
$
(4,928
)
 
$
2,549

 
51.7
 %
Equity income from investees, before tax
$

 
$
61,440

 
$
(61,440
)
 
(100.0
)%
Other income
$
11,809

 
$
86

 
$
11,723

 
*

Interest charges
$
(1,159
)
 
$
628

 
$
1,787

 
284.6
 %
Federal and state income tax expense
$
4,051

 
$
21,536

 
$
17,485

 
81.2
 %
Net income
$
6,534

 
$
34,425

 
$
(27,891
)
 
(81.0
)%
* Not meaningful
 

 
 

 
 

 
 


Factors affecting Midstream during the second quarter of 2012 are described below.
 
Operating Revenue
Operating revenue increased $2.1 million, or 48.8%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to higher tolling revenue at Evangeline resulting from the new power purchase agreement with Cleco Power for Units 6 and 7 that began in January 2012 as compared to the Evangeline 2010 Tolling Agreement with JPMVEC for Unit 7. 

Operating Expenses
Operating expenses decreased $0.5 million, or 5.2%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to lower maintenance expenses at Evangeline and Acadia. Lower maintenance expenses at Evangeline were due to the absence of compressor blade damages, partially offset by a lower gain on sale of assets. Lower maintenance expenses at Acadia were primarily due to the 2011 disposition of Acadia Unit 2.
 
Equity Income from Investees
Equity income from investees, before tax, decreased $61.4 million, or 100.0%, in the second quarter of 2012 compared to the second quarter of 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during the second quarter of 2011.
 


47

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Other Income
Other income increased $11.7 million in the second quarter of 2012 compared to the second quarter of 2011 largely as a result of the contractual expiration of an underlying indemnification resulting from the disposition of Acadia Unit 2.

Interest Charges
Interest charges decreased $1.8 million, or 284.6%, during the second quarter of 2012 compared to the second quarter of 2011 primarily related to uncertain tax positions.

Income Taxes
Federal and state income taxes decreased $17.5 million, or 81.2%, during the second quarter of 2012 compared to the second quarter of 2011 primarily due to a decrease in pre-tax income. The effective income tax rate is different than the federal statutory rate due to state tax expense.

Comparison of the Six Months Ended June 30, 2012, and 2011
Cleco Consolidated
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue, net
$
462,894

 
$
526,613

 
$
(63,719
)
 
(12.1
)%
Operating expenses
334,357

 
392,516

 
58,159

 
14.8
 %
Operating income
$
128,537

 
$
134,097

 
$
(5,560
)
 
(4.1
)%
Equity income from investees, before tax
$
1

 
$
62,052

 
$
(62,051
)
 
(100.0
)%
Other income
$
22,389

 
$
2,254

 
$
20,135

 
893.3
 %
Interest charges
$
41,240

 
$
52,232

 
$
10,992

 
21.0
 %
Federal and state income taxes
$
33,930

 
$
48,714

 
$
14,784

 
30.3
 %
Net income applicable to common stock
$
76,718

 
$
99,225

 
$
(22,507
)
 
(22.7
)%

Consolidated net income applicable to common stock decreased $22.5 million, or 22.7%, in the first six months of 2012 compared to the first six months of 2011 primarily due to lower Midstream and Cleco Power earnings. Partially offsetting this decrease was higher corporate earnings.
Operating revenue, net decreased $63.7 million, or 12.1%, in the first six months of 2012 compared to the first six months of 2011 largely as a result of lower fuel cost recovery revenue at Cleco Power.
Operating expenses decreased $58.2 million, or 14.8%, in the first six months of 2012 compared to the first six months of 2011 primarily due to lower per unit costs and volumes of fuel used for electric generation.
Equity income from investees, before tax, decreased $62.1 million, or 100.0%, in the first six months of 2012 compared to the first six months of 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during the first half of 2011.
Other income increased $20.1 million, or 893.3%, in the first six months of 2012 compared to the first six months of 2011 largely as a result of the contractual expiration of underlying indemnifications resulting from the disposition of Acadia Units 1 and 2.
Interest charges decreased $11.0 million, or 21.0%, during the first six months of 2012 compared to the first six months of 2011 primarily due to lower interest charges at Cleco Power.
Federal and state income taxes decreased $14.8 million,
 
or 30.3%, during the first six months of 2012 compared to the first six months of 2011 primarily due to $14.3 million for the change in pre-tax income excluding AFUDC equity and $3.1 million for tax credits. These decreases were partially offset by $0.4 million to record tax expense at the projected annual effective tax rate, $1.3 million for the absence in 2012 of the valuation allowance reversal booked in 2011, and $0.9 million for miscellaneous items.
Results of operations for Cleco Power and Midstream are more fully described below.
Cleco Power
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Base
$
285,524

 
$
292,007

 
$
(6,483
)
 
(2.2
)%
Fuel cost recovery
152,359

 
206,946

 
(54,587
)
 
(26.4
)%
Electric customer credits
1,955

 
(5,256
)
 
7,211

 
137.2
 %
Other operations
22,062

 
24,696

 
(2,634
)
 
(10.7
)%
Affiliate revenue
687

 
694

 
(7
)
 
(1.0
)%
Operating revenue, net
462,587

 
519,087

 
(56,500
)
 
(10.9
)%
Operating expenses
 
 
 
 
 

 
 

Fuel used for electric generation - recoverable
126,883

 
173,421

 
46,538

 
26.8
 %
Power purchased for utility customers - recoverable
25,479

 
33,519

 
8,040

 
24.0
 %
Non-recoverable fuel and power purchased
7,636

 
3,412

 
(4,224
)
 
(123.8
)%
Other operations
53,585

 
54,711

 
1,126

 
2.1
 %
Maintenance
35,644

 
38,194

 
2,550

 
6.7
 %
Depreciation
60,648

 
57,111

 
(3,537
)
 
(6.2
)%
Taxes other than income taxes
17,614

 
16,783

 
(831
)
 
(5.0
)%
Gain on sale of assets
(1
)
 
(1
)
 

 

Total operating expenses
327,488

 
377,150

 
49,662

 
13.2
 %
Operating income
$
135,099

 
$
141,937

 
$
(6,838
)
 
(4.8
)%
Other income
$
2,323

 
$
844

 
$
1,479

 
175.2
 %
Interest charges
$
39,291

 
$
48,723

 
$
9,432

 
19.4
 %
Federal and state income taxes
$
35,008

 
$
30,279

 
$
(4,729
)
 
(15.6
)%
Net income
$
64,089

 
$
65,724

 
$
(1,635
)
 
(2.5
)%

Cleco Power's net income in the first six months of 2012 decreased $1.6 million, or 2.5%, compared to the first six months of 2011. Contributing factors include:

lower base revenue,
higher non-recoverable fuel and power purchased,
higher depreciation expense,
lower other operations revenue, and
higher effective income tax rate.

These were partially offset by:

lower interest charges,
lower electric customer credits,
lower other operations and maintenance expenses, and
higher other income.


48

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(Million kWh)
2012

 
2011

 
FAVORABLE/
(UNFAVORABLE)

Electric sales
 
 
 
 
 
Residential
1,632

 
1,831

 
(10.9
)%
Commercial
1,237


1,242

 
(0.4
)%
Industrial
1,128

 
1,151

 
(2.0
)%
Other retail
65

 
66

 
(1.5
)%
Total retail
4,062

 
4,290

 
(5.3
)%
Sales for resale
856

 
843

 
1.5
 %
Unbilled
80

 
39

 
105.1
 %
Total retail and wholesale customer sales
4,998

 
5,172

 
(3.4
)%

 
FOR THE SIX MONTHS ENDED JUNE 30,
 
(THOUSANDS)
2012

 
2011

 
FAVORABLE/
(UNFAVORABLE)

Electric sales
 
 
 
 
 
Residential
$
122,540

 
$
136,527

 
(10.2
)%
Commercial
86,064

 
88,401

 
(2.6
)%
Industrial
41,224

 
41,855

 
(1.5
)%
Other retail
4,767

 
4,884

 
(2.4
)%
Surcharge
4,851

 
4,550

 
6.6
 %
Other
(3,120
)
 
(3,295
)
 
5.3
 %
Total retail
256,326

 
272,922

 
(6.1
)%
Sales for resale
23,495

 
22,978

 
2.2
 %
Unbilled
5,703

 
(3,893
)
 
246.5
 %
Total retail and wholesale customer sales
$
285,524

 
$
292,007

 
(2.2
)%

The following chart shows how cooling- and heating-degree days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree days.
 
 
 
 
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 
 
 
 
 
 
2012 CHANGE
 
 
2012

 
2011

 
NORMAL

 
PRIOR YEAR

 
NORMAL

Heating-degree days
500

 
937

 
940

 
(46.6
)%
 
(46.8
)%
Cooling-degree days
1,394

 
1,345

 
1,020

 
3.6
 %
 
36.7
 %

Base
Base revenue decreased $6.5 million, or 2.2%, during the first six months of 2012 compared to the first six months of 2011 primarily due to lower electric sales, generally resulting from milder winter weather. For information on the anticipated effects of changes in base revenue in future periods, see “— Comparison of the Three Months Ended June 30, 2012, and 2011 — Cleco Power — Base.” For information on the effects of future energy sales on Cleco Power's financial condition, results of operations, and cash flows, see “Risk Factors — Future Electricity Sales” in the Registrants' Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Fuel Cost Recovery
Fuel cost recovery revenue billed to customers decreased $54.6 million, or 26.4%, during the first six months of 2012 compared to the first six months in 2011 primarily due to decreases in the per-unit cost of fuel used for electric generation and power purchased for utility customers. Also contributing to the decrease were lower volumes of fuel used
 
for electric generation. Partially offsetting the decrease were higher volumes of power purchased for utility customers. For information on Cleco Power's ability to recover fuel and purchase power costs, see “— Comparison of the Three Months Ended June 30, 2012, and 2011 — Cleco Power — Fuel Cost Recovery.”

Electric Customer Credits
Electric customer credits decreased $7.2 million, or 137.2% during the first six months of 2012 compared to the first six months of 2011 due to changes in the estimated accrual for rate refunds. For additional information on the accrual of electric customer credits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”

Other Operations
Other operations revenue decreased $2.6 million, or 10.7%, in the first six months of 2012 compared to the first six months of 2011 primarily due to $5.8 million related to lower mineral lease payments, lower transmission revenue, and the absence of a gain on the sale of Cleco Power's fuel oil inventory. Partially offsetting these amounts were $2.0 million related to wholesale power sales and $1.2 million related to other miscellaneous revenue.

Operating Expenses
Operating expenses decreased $49.7 million, or 13.2%, in the first six months of 2012 compared to the first six months of 2011. Fuel used for electric generation (recoverable) decreased $46.5 million, or 26.8%, primarily due to lower per unit costs and volumes of fuel used as compared to the first six months of 2011. Power purchased for utility customers (recoverable) decreased $8.0 million, or 24.0%, largely due to lower per-unit costs of purchased power. Partially offsetting this decrease was higher volumes of purchased power. Fuel used for electric generation and power purchased for utility customers generally are influenced by natural gas prices, as well as availability of transmission. However, other factors such as scheduled and/or unscheduled outages, unusual maintenance or repairs, or other developments may affect fuel used for electric generation and power purchased for utility customers. Non-recoverable fuel and purchased power increased $4.2 million, or 123.8%, primarily due to higher non-recoverable wholesale power purchases and higher capacity payments. Other operations expense decreased $1.1 million, or 2.1%, primarily due to lower customer service expenses. Partially offsetting this decrease was higher generating station expenses. Maintenance expense decreased $2.6 million, or 6.7%, primarily due to lower generating station and distribution maintenance work performed during the first six months of 2012. Depreciation expense increased $3.5 million, or 6.2%, primarily due to Teche Unit 4 and portions of the Acadiana Load Pocket project being placed in service and other normal recurring additions to fixed assets. Taxes other than income taxes increased $0.8 million, or 5.0%, primarily due to higher property taxes.

Other Income
Other income increased $1.5 million, or 175.2%, during the first six months of 2012 compared to the first six months of 2011 primarily due to higher royalty payments.



49

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Interest Charges
Interest charges decreased $9.4 million, or 19.4%, during the first six months of 2012 compared to the first six months of 2011 primarily due to $7.3 million related to uncertain tax positions, $4.5 million related to reacquired debt in October and December 2011, and $0.7 million related to the retirement of pollution control bonds in January and May 2012. Partially offsetting these decreases was $2.9 million related to the issuance of private placement notes in December 2011 and May 2012 and $0.2 million of higher other net miscellaneous interest charges.

Income Taxes
Federal and state income taxes increased $4.7 million, or 15.6%, during the first six months of 2012 compared to the first six months of 2011. The increase is primarily due to $1.3 million for the change in pre-tax income including AFUDC equity, $1.3 million for the absence in 2012 of the valuation allowance reversal booked in 2011, $0.8 million to record tax expense at the projected annual effective tax rate, $1.0 for other miscellaneous items, and $0.3 million for tax credits.
Midstream
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2012

 
2011

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Tolling operations
$
7,543

 
$
7,003

 
$
540

 
7.7
 %
Other operations
1

 
7

 
(6
)
 
(85.7
)%
Affiliate revenue

 
45

 
(45
)
 
(100.0
)%
Operating revenue
7,544

 
7,055

 
489

 
6.9
 %
Operating expenses
 
 
 
 


 


Fuel used for electric generation
304

 

 
(304
)
 

Power purchased for utility customers
9

 

 
(9
)
 

Other operations
3,656

 
3,874

 
218

 
5.6
 %
Maintenance
5,625

 
6,666

 
1,041

 
15.6
 %
Depreciation
2,992

 
2,913

 
(79
)
 
(2.7
)%
Taxes other than income taxes
1,284

 
1,260

 
(24
)
 
(1.9
)%
Gain on sale of assets
(43
)
 
(494
)
 
(451
)
 
(91.3
)%
Total operating expenses
13,827

 
14,219

 
392

 
2.8
 %
Operating loss
$
(6,283
)
 
$
(7,164
)
 
$
881

 
12.3
 %
Equity income from investees, before tax
$

 
$
62,053

 
$
(62,053
)
 
(100.0
)%
Other income
$
19,016

 
$
521

 
$
18,495

 
*

Interest charges
$
313

 
$
1,211

 
$
898

 
74.2
 %
Federal and state income tax expense
$
4,789

 
$
20,853

 
$
16,064

 
77.0
 %
Net income
$
7,624

 
$
33,328

 
$
(25,704
)
 
(77.1
)%
* Not meaningful
 
 
 
 
 
 
 

Factors affecting Midstream during the first six months of 2012 are described below.

Operating Revenue
Operating revenue increased $0.5 million, or 6.9%, during the first six months of 2012 compared to the first six months of 2011 primarily due to higher tolling revenue at Evangeline resulting from the new power purchase agreement with Cleco Power for Units 6 and 7 that began in January 2012 as compared to the Evangeline 2010 Tolling Agreement with JPMVEC for Unit 7. 
 
Operating Expenses
Operating expenses decreased $0.4 million, or 2.8%, during the first six months of 2012 compared to the first six months of 2011 primarily due to lower maintenance expenses at Evangeline and Acadia. Lower maintenance expenses at Evangeline were due to the absence of compressor blade damages, partially offset by a lower gain on sale of assets. Lower maintenance expenses at Acadia were primarily due to the 2011 disposition of Acadia Unit 2.

Equity Income from Investees
Equity income from investees, before tax, decreased $62.1 million, or 100.0%, during the first six months of 2012 compared to the first six months of 2011 primarily due to the absence of the gain from the disposition of Acadia Unit 2 during the first half of 2011.

Other Income
Other income increased $18.5 million during the first six months of 2012 compared to the first six months of 2011 as a result of the contractual expiration of underlying indemnifications resulting from the disposition of Acadia Units 1 and 2.

Interest Charges
Interest charges decreased $0.9 million, or 74.2%, during the first six months of 2012 compared to the first six months of 2011 primarily due to uncertain tax positions.

Income Taxes
Federal and state income taxes decreased $16.1 million, or 77.0%, during the first six months of 2012 compared to the first six months of 2011 primarily due to a decrease in pre-tax income. The effective income tax rate is different than the federal statutory rate due to state tax expense.
FINANCIAL CONDITION

Liquidity and Capital Resources

General Considerations and Credit-Related Risks
 
Credit Ratings and Counterparties
Financing for operational needs and capital expenditure requirements not satisfied by operating cash flows depends upon the cost and availability of external funds through both short- and long-term financing. The inability to raise capital on favorable terms could negatively affect Cleco’s or Cleco Power’s ability to maintain or expand its businesses. Access to funds is dependent upon factors such as general economic and capital market conditions, regulatory authorizations and policies, Cleco Corporation’s and Cleco Power’s credit ratings, the cash flows from routine operations, and the credit ratings of project counterparties. After assessing the current operating performance, liquidity, and credit ratings of Cleco Corporation and Cleco Power, management believes that Cleco and Cleco Power will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. The following table presents the credit ratings of Cleco Corporation and Cleco Power at June 30, 2012.


50

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

 
SENIOR UNSECURED DEBT
 
MOODY’S
 
STANDARD & POOR’S
Cleco Corporation
Baa3
 
BBB-
Cleco Power
Baa2
 
 BBB
 
Cleco notes that credit ratings are not recommendations to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
During the six-months ended June 30, 2012, there were no changes to Cleco Corporation or Cleco Power’s credit ratings or rating agency’s outlooks. At June 30, 2012, Moody’s and Standard & Poor’s outlooks for both Cleco Corporation and Cleco Power were stable. Cleco Corporation and Cleco Power pay fees and interest under their bank credit agreements based on the highest rating held. If Cleco Corporation or Cleco Power’s credit rating were to be downgraded by Moody's and Standard & Poor’s, Cleco Corporation and/or Cleco Power would be required to post additional fees and incur higher interest rates under their bank credit agreements. Cleco Power’s collateral for derivatives is based on the lowest rating held. If Cleco Power’s credit ratings were to be downgraded by Moody’s or Standard & Poor’s, Cleco Power would be required to post additional collateral for derivatives.
With respect to any open power or natural gas trading positions that Cleco may initiate in the future, Cleco may be required to provide credit support or pay liquidated damages. The amount of credit support that Cleco may be required to provide at any point in the future is dependent on the amount of the initial transaction, changes in the market price of power and natural gas, the changes in open power and gas positions, and changes in the amount counterparties owe Cleco. Changes in any of these factors could cause the amount of requested credit support to increase or decrease.
 
Global and U.S. Economic Environment
The current economic environment and uncertainty may have an impact on Cleco’s business and financial condition. Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Market conditions during the past few years have limited the availability and have increased the costs of capital for many companies. Although the Registrants have not experienced restrictions in the financial markets, their ability to access the capital markets may be restricted at a time when the Registrants would like, or need, to do so. Any restrictions could have a material impact on the Registrants’ ability to fund capital expenditures or debt service, or on their flexibility to react to changing economic and business conditions. Credit constraints could have a material negative impact on the Registrants’ lenders or customers, causing them to fail to meet their obligations to the Registrants or to delay payment of such obligations. The lower interest rates that the Registrants have been exposed to have been beneficial to recent debt issuances; however, these rates have negatively affected interest income for the Registrants’ short-term investments.
 
Fair Value Measurements
Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value
 
each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power are required to disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes under GAAP.  Other financial assets and liabilities, such as long-term debt, are reported at their carrying values at their date of issuance on the consolidated balance sheets with their fair values as of the balance sheet date disclosed within the three levels. For more information about fair value levels, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 4 — Fair Value Accounting.”

Cash Generation and Cash Requirements

Restricted Cash
Various agreements to which Cleco is subject contain covenants that restrict its use of cash. As certain provisions under these agreements are met, cash is transferred out of related escrow accounts and becomes available for its intended purposes and/or general corporate purposes. Cleco’s restricted cash consisted of:  
(THOUSANDS)
AT JUNE 30, 2012

 
AT DECEMBER 31, 2011

Diversified Lands’ mitigation escrow
$
97

 
$
97

Cleco Katrina/Rita’s storm recovery bonds
8,091

 
8,761

Cleco Power’s future storm restoration costs
25,734

 
24,876

Cleco Power’s renewable energy grant

 
381

Cleco Power’s NOx allowance escrow
1,713

 
1,713

Total restricted cash
$
35,635

 
$
35,828

 
Cleco Katrina/Rita has the right to bill and collect storm restoration costs from Cleco Power’s customers. As cash is collected, it is restricted for payment of operating expenses, interest, and principal on storm recovery bonds. During the six months ended June 30, 2012, Cleco Katrina/Rita had collected $9.6 million net of operating expenses. In March 2012, Cleco Katrina/Rita used $6.7 million for scheduled storm recovery bond principal payments and $3.6 million for related interest. 

Debt

Cleco Consolidated
Cleco had no short-term debt outstanding at June 30, 2012, or December 31, 2011.
At June 30, 2012, Cleco’s long-term debt outstanding was $1.33 billion, of which $88.5 million was due within one year, compared to $1.36 billion outstanding at December 31, 2011, which included $24.3 million due within one year. The long-term debt due within one year at June 30, 2012, represents$75.0 million in senior notes due May 1, 2013 and $13.5 million principal payments for the Cleco Katrina/Rita storm recovery bonds. For Cleco, long-term debt decreased $28.3 million primarily due to $50.1 million of DeSoto Parish pollution control bonds that were redeemed in May 2012 and $11.2 million of Rapides Parish pollution control bonds that were redeemed in January 2012. Also contributing to the decrease was a $10.0 million reduction in credit facility draws, a $6.7 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2012, and $0.9 million of capital lease payments. These decreases were partially offset by the


51

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

issuance of $50.0 million of senior notes in May 2012 and debt premium amortizations of $0.6 million.
On January 25, 2012, Cleco Power redeemed at par $11.2 million of 5.875% Rapides Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.3 million of accrued interest on the redeemed notes.
On May 8, 2012, Cleco Power issued $50.0 million senior unsecured private placement notes at an interest rate of 4.33%. The maturity date of the notes is May 15, 2027. The proceeds were used primarily for the early redemption of $50.1 million of 5.875% DeSoto Parish pollution control bonds as described above.
On May 11, 2012, Cleco Power redeemed at par all $50.1 million of 5.875% DeSoto Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.6 million of accrued interest on the redeemed notes.
Cash and cash equivalents available at June 30, 2012, were $23.7 million combined with $550.0 million facility capacity ($250.0 million from Cleco Corporation and $300.0 million from Cleco Power) for total liquidity of $573.7 million. Cash and cash equivalents available at June 30, 2012, decreased $69.9 million when compared to cash and cash equivalents available at December 31, 2011. This decrease is primarily due to additions to property, plant, and equipment, the net repayment of debt, and payment of common dividends.
At June 30, 2012, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents. In order to mitigate potential credit risk, Cleco and Cleco Power have established guidelines for short-term investments. For more information on the concentration of credit risk through short-term investments classified as cash equivalents, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 4 — Fair Value Accounting.”
At June 30, 2012, and December 31, 2011, Cleco had a working capital surplus of $69.7 million and $135.8 million, respectively. The $66.1 million decrease in working capital is primarily due to:

a $69.9 million decrease in cash and cash equivalents as discussed above, and
a $64.3 million increase in long-term debt due within one year primarily due to $75.0 million of senior notes that are due in May 2013.

These decreases in working capital were partially offset by:

a $38.8 million decrease in accounts payable primarily due to year-end pending ad valorem tax payments, employee incentive payments and fuel payments,
a $9.1 million net increase related to changes in the recognition of current taxes and uncertain tax positions and related interest charges expected to be settled in the next 12 months,
an $8.5 million increase in fuel inventory due to dispatching natural gas-fired units due to lower fuel costs, and
a $7.0 million reduction in the deferred construction carrying costs owed to customers in the next 12 months.

 
Cleco Corporation (Holding Company Level)
Cleco Corporation had no short-term debt outstanding at June 30, 2012, or December 31, 2011.
At June 30, 2012, Cleco Corporation had no draws outstanding under its $250.0 million credit facility compared to $10.0 million outstanding at December 31, 2011. This facility provides for working capital and other needs. Cleco Corporation and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
Cash and cash equivalents available at June 30, 2012, were $10.9 million. Cash and cash equivalents available at June 30, 2012, decreased $11.7 million when compared to cash and cash equivalents available at December 31, 2011, primarily due to routine working capital fluctuations.
 
Cleco Power
Cleco Power had no short-term debt outstanding at June 30, 2012, or December 31, 2011.
At June 30, 2012, Cleco Power’s long-term debt outstanding was $1.33 billion, of which $88.5 million was due within one year, compared to $1.35 billion at December 31, 2011, of which $24.3 million was due within one year. The long-term debt due within one year at June 30, 2012, represents $75.0 million in senior notes due May 1, 2013 and $13.5 million principal payments for the Cleco Katrina/Rita storm recovery bonds. For Cleco Power, long-term debt decreased $18.3 million primarily due to $50.1 million of DeSoto Parish pollution control bonds that were redeemed in May 2012 and $11.2 million of Rapides Parish pollution control bonds that were redeemed in January 2012. Also contributing to the decrease was a $6.7 million scheduled Cleco Katrina/Rita storm recovery bond principal payment made in March 2012, and $0.9 million of capital lease payments. These decreases were partially offset by the issuance of $50.0 million of senior notes in May 2012 and debt premium amortizations of $0.6 million.
On January 25, 2012, Cleco Power redeemed at par $11.2 million of 5.875% Rapides Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.3 million of accrued interest on the redeemed notes.
On May 8, 2012, Cleco Power issued $50.0 million senior unsecured private placement notes at an interest rate of 4.33%. The maturity date of the notes is May 15, 2027. The proceeds were used primarily for the early redemption of $50.1 million of 5.875% DeSoto Parish pollution control bonds as described above.
On May 11, 2012, Cleco Power redeemed at par all $50.1 million of 5.875% DeSoto Parish pollution control bonds due September 2029. As part of the redemption, Cleco Power paid $0.6 million of accrued interest on the redeemed notes.
At June 30, 2012, and December 31, 2011, there were no borrowings outstanding under Cleco Power’s $300.0 million credit facility. This facility provides for working capital and other needs. Cleco Corporation and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
Cash and cash equivalents available at June 30, 2012, were $10.2 million, combined with $300.0 million facility capacity for total liquidity of $310.2 million. Cash and cash equivalents decreased $57.2 million, when compared to cash


52

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

and cash equivalents at December 31, 2011, primarily due to additions to property, plant, and equipment, payment of intercompany dividends, and the net repayment of debt.
At June 30, 2012, Cleco Power had a working capital deficit of $33.9 million compared to a surplus of $36.4 million at December 31, 2011.  The $70.3 million decrease in working capital is primarily due to:

a $57.2 million decrease in cash and cash equivalents, as discussed above,
a $64.3 million increase in long-term debt due within one year primarily due to $75.0 million of senior notes that are due May 2013, and
a $5.8 million net decrease related to changes in the recognition of current taxes and uncertain tax positions and related interest charges expected to be settled in the next 12 months.
 
These decreases in working capital were partially offset by:

a $31.8 million decrease in accounts payable primarily due to year-end pending ad valorem tax payments, employee incentive payments and fuel payments,
an $8.5 million increase in fuel inventory primarily due to dispatching of natural gas-fired units due to lower fuel costs, and
a $7.0 million reduction in the deferred construction carrying costs owed to customers in the next 12 months.

Credit Facilities
Cleco Corporation’s current credit facility agreement has a maximum capacity of $250.0 million and a maturity date of October 7, 2016. The borrowing costs are LIBOR plus 1.50% or ABR plus 0.50%, plus facility fees of 0.25%. If Cleco Corporation’s credit ratings were to be downgraded one level, Cleco Corporation would be required to pay fees and interest at a rate of 0.25% higher than the level for its current credit facility.
Cleco Power’s current credit facility agreement has a maximum capacity of $300.0 million and matures on October 7, 2016. The borrowing costs are LIBOR plus 1.275% or ABR plus 0.275%, plus facility fees of 0.225%. If Cleco Power’s credit ratings were to be downgraded one level, Cleco Power would be required to pay fees and interest at a rate of 0.25% higher than the level on its current credit facility.
At June 30, 2012, Cleco Corporation and Cleco Power were in compliance with the covenants in their credit facilities. If Cleco Corporation were to default under the covenants in its credit facility or other debt agreements, it would be unable to borrow additional funds under the facility, and the lenders could accelerate all principal and interest outstanding. Further, if Cleco Power were to default under its credit facility or other debt agreements, Cleco Corporation would be considered in default under its credit facility.

Midstream
Midstream had no debt outstanding at June 30, 2012, or December 31, 2011.


 
Cleco Consolidated Cash Flows
 
Net Operating Cash Flow
Net cash provided by operating activities was $103.3 million during the first six months of 2012, compared to $148.8 million during the first six months of 2011. Cash provided by operating activities during the first six months of 2012 decreased $45.5 million from the first six months of 2011, primarily due to the following items:

the absence of the return on equity investment in Acadia of $58.7 million,
the absence of 2011 fuel oil inventory sales of $28.0 million,
lower expenditures for other fuel inventories and related transportation of $18.4 million, primarily petroleum coke and coal,
higher vendor payments of $14.0 million, and
the absence of $10.9 million cash received in exchange for accepting the contingent sale liability related to the Acadia Unit 2 transaction in 2011.

These increases were partially offset by:

lower pension plan contributions of $60.0 million,
lower tax payments of $13.5 million, and
higher collection of receivables of $8.5 million.
 
Net Investing Cash Flow
Net cash used in investing activities was $99.8 million during the first six months of 2012, compared to cash provided by investing activities of $17.3 million during the first six months of 2011. Net cash used in investing activities during the first six months of 2012 was higher than the first six months of 2011 primarily due to the absence of the 2011 return of investment in Acadia, higher additions to property, plant, and equipment, higher contributions to the tax credit fund, and lower transfers of cash from restricted accounts, partially offset by a higher return of investment from the investment in new markets tax credits, a casualty loss insurance reimbursement, and higher property, plant, and equipment grants received.
During the first six months of 2012, Cleco had additions to property, plant, and equipment, net of AFUDC of $99.9 million and a $31.3 million investment in new markets tax credits. This was partially offset by a $22.2 million return of investment from the tax credit fund, a $5.5 million casualty loss insurance reimbursement, and $4.6 million of grants received.
During the first six months of 2011, Cleco had an $89.7
million return of equity investment in Acadia and transferred $5.8 million from restricted accounts, primarily related to GO Zone bonds. This was partially offset by additions to property, plant, and equipment, net of AFUDC of $64.2 million and an $18.5 million investment in the tax credit fund.
 
Net Financing Cash Flow
Net cash used in financing activities was $73.4 million during the first six months of 2012, compared to $195.1 million during the first six months of 2011. Net cash used in financing activities during the first six months of 2012 was lower than the first six months of 2011 primarily due to the absence of 2011 repayments of a bank term loan, the issuance of long-term debt, and lower payments on the credit facility. This was partially offset by higher retirements of long-term debt, the absence of draws on the credit facility, the repurchase of


53

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

common stock, and dividends paid on common stock.
During the first six months of 2012, Cleco retired $68.0 million of long-term bonds. Cleco also used $38.1 million for dividend payments, $10.0 million for payments on the credit facility, and $8.0 million for the repurchase of common stock.
During the first six months of 2011, Cleco repaid a $150.0 million bank term loan, $15.0 million of credit facility draws, and $6.3 million of long-term bonds. Cleco also used $32.2 million for the payment of common stock dividends. This was partially offset by $10.0 million in credit facility draws.
 
Cleco Power Cash Flows
 
Net Operating Cash Flow
Net cash provided by operating activities was $93.5 million during the first six months of 2012, compared to $71.8 million during the first six months of 2011. Cash provided by operating activities during the first six months of 2012 increased $21.7 million from the first six months of 2011 primarily due to the following items:

lower pension plan contributions of $60.0 million,
higher collection of receivables of $8.5 million,
the absence of tax movie credits purchased in 2011 of $4.0 million, and
the absence of 2011 tax payments of $2.2 million.

These increases were partially offset by:

lower fuel oil inventory sales of $28.0 million,
lower expenditures for other fuel inventories and related transportation of $18.4 million, primarily petroleum coke and coal, and
higher vendor payments of $12.2 million.

Net Investing Cash Flow
Net cash used in investing activities was $91.6 million during the first six months of 2012, compared to $49.6 million during the first six months of 2011. Net cash used in investing activities during the first six months of 2012 was higher than the first six months of 2011 primarily due to higher additions to property, plant, and equipment and lower transfers of cash from restricted accounts, partially offset by higher property, plant, and equipment grants received.
During the first six months of 2012, Cleco had additions to property, plant, and equipment, net of AFUDC of $97.0 million, partially offset by $4.6 million of grants received.
During the first six months of 2011, Cleco Power had additions to property, plant, and equipment, net of AFUDC of $56.6 million. This was partially offset by the transfer of $5.8 million of cash from restricted accounts, primarily related to GO Zone bonds.
 
Net Financing Cash Flow
Net cash used in financing activities was $59.2 million during the first six months of 2012, compared to $57.3 million during the first six months of 2011. Net cash used in financing activities during the first six months of 2012 was higher than the first six months of 2011 primarily due to higher repayments of long-term debt, partially offset by the issuance of long-term debt and $10.0 million of lower distributions made to Cleco Corporation.

 
Contractual Obligations and Other Commitments
Cleco, in the normal course of business activities, enters into a variety of contractual obligations. Some of these result in direct obligations that are reflected in the Condensed Consolidated Balance Sheets while other commitments, some firm and some based on uncertainties, are not reflected in the consolidated financial statements.
For more information regarding Cleco’s Contractual Obligations and Other Commitments, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Contractual Obligations and Other Commitments” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Off-Balance Sheet Commitments and Disclosures about Guarantees
Cleco Corporation and Cleco Power have entered into various off-balance sheet commitments, in the form of guarantees and standby letters of credit, in order to facilitate their activities and the activities of Cleco Corporation’s subsidiaries and equity investees (affiliates). Cleco Corporation and Cleco Power have also agreed to contractual terms that require them to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees in the authoritative guidance. For more information on off-balance sheet commitments, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Off-Balance Sheet Commitments” and “— Disclosures about Guarantees.”

Regulatory and Other Matters
 
Generation RFP
 
Renewable Energy Pilot Program
In November 2010, the LPSC established a two-part renewable energy pilot program implementation plan consisting of a research component and an RFP component. Cleco Power is meeting the requirements of the research component by developing eight self-build renewable energy projects, each with a maximum nameplate rating of 300 kilowatts. The RFP component of the program requires each LPSC jurisdictional utility to conduct an RFP for new long-term renewable resources, while prohibiting the utilities from bidding self-build projects into the long-term RFP. Cleco Power’s requirement is 43 MW of renewable energy with a minimum term of 10 years and a maximum term of 20 years, and can reasonably be expected to be deliverable within the 2011-2014 time period. Because Madison Unit 3 is designed to burn biomass fuel, with minor modifications, in addition to its primary fuel, Cleco Power has been given an exception allowing it to conduct an RFP for biomass fuel along with identifying the costs to co-fire biomass fuel in Madison Unit 3. In November 2011, Cleco Power received LPSC approval for recovery of the test burn costs, and performed a biomass test burn at Madison Unit 3 during the fourth quarter of 2011. Cleco Power issued its final RFP for biomass fuel in February 2012, and received all proposals by April 17, 2012. Cleco plans to file in August 2012 a written report to the LPSC regarding the cost of co-firing biomass fuel in Madison Unit 3. Following its review of the results of Cleco Power’s RFP and Cleco Power’s written report, the LPSC may authorize Cleco Power to pursue co-firing biomass fuel in


54

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Madison Unit 3 or require Cleco Power to conduct an additional RFP for 43 MW of renewable energy as discussed above. For more information on Cleco’s renewable energy pilot program, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Generation RFP” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
RFP for Short-Term 2012 Resources
In August 2011, Cleco Power issued an RFP for short-term 2012 resources to enhance reliability for the period January through April 2012. Cleco Power selected and negotiated two agreements from the RFP, a power purchase agreement with NRG Power Marketing LLC, and a tolling agreement with Evangeline. The NRG agreement provided 200 MW of capacity and energy from January 1, 2012, through April 30, 2012, while the Evangeline agreement provided 250 MW of capacity and energy from January 1, 2012, through April 30, 2012.

RFP for Contractual Resources to Meet CSAPR Beginning in May 2012
In September 2011, Cleco Power issued a draft RFP for resources to meet CSAPR and conducted a bidders conference on October 13, 2011. The final RFP seeking up to approximately 750 MW of capacity and energy for a three- or five-year term was published on October 21, 2011. In March 2012, Cleco Power received approval from the LPSC for a three-year power purchase agreement providing 730 MW of capacity and energy with Evangeline for a delivery term beginning May 1, 2012, and ending April 30, 2015. Because Cleco Power and Evangeline are affiliates, Cleco Power also received approval from FERC to make power sales between affiliates pursuant to Section 205 of the Federal Power Act.

2012 Long-Term RFP for Capacity and Energy Resources
In May 2012, Cleco Power issued a draft RFP for long-term resources beginning May 2015 to meet long-term capacity and energy needs due to load growth and environmental regulations. Cleco Power conducted a bidders conference in May 2012, and issued the final RFP in July 2012 seeking up to approximately 800 MW of capacity and energy. Proposals are due from potential suppliers in August 2012.

Coughlin Acquisition Offer
Evangeline’s responses to Cleco Power’s RFP for Contractual Resources to meet CSAPR beginning in May 2012 included a proposal for a power purchase agreement containing an option under which Cleco Power could acquire the Coughlin Power Station from Evangeline (Coughlin Acquisition Offer). Evangeline’s Coughlin Acquisition Offer was unsolicited. The proposal that Cleco Power selected, which resulted in the three-year power purchase agreement with Evangeline, did not include the Coughlin Acquisition Offer. Separate and apart from the three-year power purchase agreement with Evangeline, Cleco Power has tentatively and provisionally accepted Evangeline’s Coughlin Acquisition Offer, subject to market-based testing of such offer against other proposals from non-affiliated market participants in Cleco Power’s 2012 Long-Term RFP.

 
Environmental Matters
Cleco is subject to extensive environmental regulation by federal, state, and local authorities and is required to comply with numerous environmental laws and regulations, and to obtain and comply with numerous governmental permits, in operating its facilities. In addition, existing environmental laws, regulations, and permits could be revised or reinterpreted; new laws and regulations could be adopted or become applicable to Cleco or its facilities; and future changes in environmental laws and regulations could occur, including potential regulatory and enforcement developments related to air emissions. Cleco may incur significant additional costs to comply with these revisions, reinterpretations, and requirements. Cleco Power would then seek recovery of additional environmental compliance costs as riders through the LPSC’s environmental adjustment clause or its FRP, or as a base rate adjustment as appropriate. If Cleco fails to comply with these revisions, reinterpretations, and requirements, it could be subject to civil or criminal liabilities and fines.
On June 26, 2012, the United States Court of Appeals for the D.C. Circuit issued a decision, unanimously ruling in favor of the EPA in its efforts to regulate greenhouse gases (GHG). The Court affirmed the EPA’s first round of GHG regulations in all respects. These regulations included the EPA's 2009 endangerment finding, its motor vehicle GHG emission rule, its timing rule in which it commenced GHG regulation of stationary sources under the Prevention of Significant Deterioration (PSD) and Title V permitting programs, and its tailoring rule in which it limited PSD and Title V regulation to large industrial sources. The suite of rules were challenged by a large number of businesses, business associations, and several states. The effects of this ruling will continue to develop as the EPA implements the rule, but for now Cleco’s power generating units are subject to the GHG permitting requirements under PSD and Title V. As such, these rules will apply to existing units only if a physical or operational change is made that increases the unit's emissions by 75,000 tons per year or more. Any modification that triggers PSD will be required to undergo GHG permitting, which will include a detailed Best Available Control Technology (BACT) analysis for GHG’s as prescribed by the EPA. The guidance from the EPA regarding the BACT for steam electric generating units, for the most part, consists of considerations of efficiency in various aspects of the modification. However, Cleco expects this process to become increasingly stringent as the BACT will change with technology improvements. New and renewed Title V permits will be required to enumerate GHG emissions as well.
For a discussion of other Cleco environmental matters, please read “Business — Environmental Matters” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Retail Rates of Cleco Power
For information concerning amounts accrued and refunded by Cleco Power as a result of the FRP and information on the LPSC Staff’s FRP reviews, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 9 — Electric Customer Credits.”
For information on certain other regulatory aspects of retail rates concerning Cleco Power, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other


55

CLECO CORPORATION
 
 
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2012 2ND QUARTER FORM 10-Q

Matters — Retail Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Wholesale Rates of Cleco

Transmission Service
On March 29, 2012, Cleco Power filed a request with the FERC for revisions to its Open Access Transmission Tariff (OATT). The revisions are proposed to allow adoption of a formula rate methodology for transmission delivery and ancillary services provided by Cleco Power under the OATT and the existing bilateral Electric System Interconnection Agreements that preceded the OATT. The new formula rates also will permit recovery of Cleco Power’s FERC-jurisdictional investments in transmission and other assets placed in service since the existing rates were established. The FERC scheduled a settlement conference, which was held on June 21, 2012. As a result of the settlement conference, Cleco Power received a set of data requests. Cleco Power responded to these data requests in July 2012. Cleco Power anticipates settlement of this rate proceeding in late 2012.
For more information on the wholesale rates of Cleco, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Wholesale Rates of Cleco” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Market Restructuring
 
Wholesale Electric Markets
For more information on regulatory aspects of wholesale electric markets affecting Cleco, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Wholesale Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Retail Electric Markets
For a discussion of the regulatory aspects of retail electric markets affecting Cleco Power, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Retail Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Lignite Deferral
At June 30, 2012, and December 31, 2011, Cleco Power had $17.8 million and $19.1 million, respectively, in deferred lignite mining costs remaining uncollected.
For more information on Cleco Power’s deferred lignite mining expenditures, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Lignite Deferral” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
 
Acadiana Load Pocket Project
In September 2008, Cleco Power entered into an agreement with two other utilities to upgrade and expand interconnected transmission systems in south central Louisiana in an area known as the Acadiana Load Pocket. The project received LPSC and SPP approval in February 2009. Cleco Power’s estimated cost for its portion of the project is $125.0 million, including AFUDC. As of June 30, 2012, Cleco Power had spent $112.0 million on the project, including AFUDC. A return on and recovery of the costs associated with the completed portions of the Acadiana Load Pocket project are included in base revenue. The project was substantially completed by the end of June 2012. Remaining portions of the project are expected to be complete by December 2012. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Acadiana Load Pocket Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011. For information on the impact the Acadiana Load Pocket project is expected to have on base revenue, see “Results of Operations — Comparison of the Three Months Ended June 30, 2012, and 2011 — Cleco Power — Base.”
 
AMI Project
In May 2010, Cleco Power accepted the terms of a $20.0 million grant from the DOE under the DOE’s small-grant process to implement advanced metering technology for all of Cleco Power’s retail customers. Cleco Power estimates the project will cost $73.0 million, with the DOE grant providing $20.0 million toward the project and Cleco Power providing the remaining $53.0 million. The grant program is a part of the American Recovery and Reinvestment Act of 2009, an economic stimulus package passed by Congress in February 2009. Advanced metering technology includes the installation of electric meters that enable two-way communication capabilities between a home or business and a utility company. At June 30, 2012, Cleco Power had incurred $24.7 million in project costs, of which $10.6 million has been submitted to the DOE for reimbursement. As of June 30, 2012, Cleco Power had received $8.1 million in payments from the DOE. The project is expected to be completed in the third quarter of 2013. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — AMI Project” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Financial Reform Legislation
In July 2010, the President signed the Dodd-Frank Act into law. Title VII of the Dodd-Frank Act established a comprehensive new regulatory framework for swaps and security-based swaps, including mandatory clearing, exchange trading, collateral requirements, margin requirements, and other transparency requirements. In July 2012, the Commodity Futures Trading Commission (CFTC) published final rules for the definition of a swap. Management will continue to monitor this law and its possible impact on the Registrants.



56

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

Franchises
On March 13, 2012, the City of Slidell unanimously voted to renew the franchise agreement with Cleco Power. The renewal extends the agreement for 33 years until April 2045. Approximately 16,400 Cleco Power customers are located in Slidell.
On April 5, 2012, the City of Oakdale unanimously voted to renew the franchise agreement with Cleco Power. The renewal extends the agreement for 27 years until April 2039. Approximately 3,400 Cleco Power customers are located in Oakdale.
On April 10, 2012, the Town of Berwick unanimously voted to renew the franchise agreement with Cleco Power. The renewal extends the agreement for 22 years until April 2034. Approximately 2,700 Cleco Power customers are located in Berwick.
For more information on other electric service franchises, please read “Business — Regulatory Matters, Industry Developments, and Franchises — Franchises” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Other Franchise Matters
On March 9, 2010, a complaint was filed in the 27th Judicial District Court of St. Landry Parish, State of Louisiana on behalf of three Cleco Power customers in Opelousas, Louisiana. The complaint alleges that Cleco Power overcharged the plaintiffs by applying to customers in Opelousas the same retail rates as Cleco Power applies to all of its retail customers. In addition, on May 11, 2010, a second complaint repeating the allegations of the first was filed on behalf of a number of Opelousas residents. For more information regarding these complaints, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 11 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — City of Opelousas.”

Recent Authoritative Guidance
For a discussion of recent authoritative guidance, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 2 — Recent Authoritative Guidance” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES
Cleco’s critical accounting policies include those accounting policies that are both important to Cleco’s financial condition and results of operations and those that require management to make difficult, subjective, or complex judgments about future events, which could result in a material impact to the financial statements of Cleco Corporation’s segments or to Cleco as a consolidated entity.  The financial statements contained in this report are prepared in accordance with accounting principles generally accepted in the United States of America, which require Cleco to make estimates and assumptions.  Estimates and assumptions about future events and their effects cannot be made with certainty.  Management bases its current estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances.  On an ongoing basis, these estimates and assumptions are evaluated and, if necessary, adjustments are made when warranted by new or
 
updated information or by a change in circumstances or environment.  Actual results may differ significantly from these estimates under different assumptions or conditions. 
In July 2012, a law was passed that changes the calculation of minimum pension funding requirements. The effect of this law will be to lower minimum funding requirements in the short-term (about two to three years). This law is not expected to impact overall minimum plan contributions over the long-term.
For more information on Cleco’s critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in the Registrant’s Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
CLECO POWER — NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Set forth below is information concerning the results of operations of Cleco Power for the three and six months ended June 30, 2012, and June 30, 2011. The following narrative analysis should be read in combination with Cleco Power’s Unaudited Condensed Consolidated Financial Statements and the Notes contained in this Combined Quarterly Report on Form 10-Q.
Cleco Power meets the conditions specified in General Instructions 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 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures about Market Risk) of Part I of Form 10-Q and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds) and Item 3 (Defaults upon Senior Securities). Pursuant to the General Instructions, Cleco Power has included an explanation of the reasons for material changes in the amount of revenue and expense items of Cleco Power between the first six months of 2012 and the first six months of 2011. Reference is made to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
For an explanation of material changes in the amount of revenue and expense items of Cleco Power between the second quarter of 2012 and the second quarter of 2011, see “— Results of Operations — Comparison of the Three Months Ended June 30, 2012, and 2011 — Cleco Power” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.
For an explanation of material changes in the amount of revenue and expense items of Cleco Power between the first six months of 2012 and the first six months of 2011, see “— Results of Operations — Comparison of the Six Months Ended June 30, 2012, and 2011 — Cleco Power” of this Combined Quarterly Report on Form 10-Q, which discussion is incorporated herein by reference.


57

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Overview
Market risk inherent in Cleco’s market risk-sensitive instruments and positions includes potential changes arising from changes in interest rates and the commodity market prices of power and natural gas in the industry on different energy exchanges.
Cleco applies the authoritative guidance as it relates to derivatives and hedging to determine whether the market risk-sensitive instruments and positions are required to be marked-to-market. Generally, Cleco Power’s market risk-sensitive instruments and positions qualify for the normal-purchase, normal-sale exception to mark-to-market accounting since Cleco Power takes physical delivery and the instruments and positions are used to satisfy customer requirements. When positions close, actual gains or losses are included in the fuel adjustment clause and reflected on customers’ bills as a component of the fuel cost adjustment.
Cleco’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 power 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.
Cleco monitors credit risk exposure through reviews of counterparty credit quality, aggregate counterparty credit exposure, and aggregate counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Cleco Power has agreements in place with various counterparties that authorize the netting of financial transactions and contract payments to mitigate credit risk for transactions entered into for risk management purposes.
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Market conditions during the past few years have limited the availability and have increased the costs of capital for many companies. The inability to raise capital on favorable terms could negatively affect Cleco’s ability to maintain and expand its businesses. After assessing the current operating performance, liquidity, and credit ratings of Cleco, management believes that it will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. Cleco Corporation and Cleco Power pay fees and interest under their respective credit facilities based on the highest rating held. If Cleco Corporation or Cleco Power’s credit ratings were to be downgraded by Moody’s and Standard & Poor’s, Cleco Corporation or Cleco Power, as the case may be, would be required to pay additional fees and higher interest rates under their respective credit facilities. Cleco Power’s collateral for derivatives is based on the lowest rating held. If Cleco Power’s credit ratings were to be downgraded by Standard & Poor’s or Moody’s, Cleco Power would be required to pay additional collateral for derivatives.


 

Interest Rate Risks
Cleco 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, for example, refinancing balances outstanding under its variable-rate credit facility with fixed-rate debt. For details, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 5 — Debt." Calculations of the changes in fair market value and interest expense of the debt securities are made over a one-year period.
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.
At June 30, 2012, Cleco had no short-term variable rate debt outstanding.
At June 30, 2012, Cleco Corporation had no borrowings outstanding under its $250.0 million credit facility.
On November 14, 2011, Cleco Power entered into a forward starting interest rate swap contract in order to mitigate the interest rate exposure on coupon payments related to a $50.0 million fixed-rate forecasted debt issuance. The forward starting interest rate swap has a spot 30-year all-in swap rate of 3.05%, notional amount of $50.0 million, with the pricing date of May 14, 2013, or the issuance of the notes, whichever is earlier. The forward starting interest rate swap meets the criteria of a cash flow hedge under the authoritative guidance as it relates to derivatives and hedging. The fair market value of the forward starting interest rate swap is the difference between the present value of the fixed payments to be paid by Cleco Power and the present value of the three-month LIBOR payments to be received by Cleco Power. Cleco Power recognized $6.2 million and $1.5 million of unrealized mark-to-market losses in other comprehensive income for the three and six months ended June 30, 2012, respectively. The offsetting liability was recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets as an interest rate risk management liability. There was no impact to earnings due to ineffectiveness for the three and six months ended June 30, 2012. For every 0.01% change in the three-month LIBOR forward curve, the value of the forward starting interest rate swap changes by approximately $0.1 million.

Commodity Price Risks
Management believes Cleco has controls in place to minimize the risks involved in its financial and energy commodity activities. Independent controls over energy commodity functions consist of a middle office (risk management), a back office (accounting), and regulatory compliance staff, as well as monitoring by a risk management committee comprised of officers and the General Manager – Internal Audit, who are approved by Cleco Corporation’s Board of Directors. Risk limits are recommended by the Risk Management Committee and monitored through a daily risk report that identifies the current VaR, current market conditions, and concentration of energy market positions.
Cleco Power provides fuel for generation and purchases power to meet the power demands of customers. Cleco Power has entered into positions to mitigate the volatility in customer fuel costs, as encouraged by an LPSC order. Cleco Power’s fuel stabilization policy targets certain levels of hedging


58

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

percentages to help mitigate the volatility in customer fuel costs. The change in positions could result in increased volatility in the marked-to-market amounts for the financial positions. These positions are marked-to-market with the resulting gain or loss recorded on the balance sheet as a component of the accumulated deferred fuel asset or liability and a component of the energy risk management assets or liabilities. When these positions close, actual gains or losses are deferred and included in the fuel adjustment clause in the month the physical contract settles. Based on market prices at June 30, 2012, and December 31, 2011, the net mark-to-market impact related to open natural gas positions was losses of less than $0.1 million and $5.3 million, respectively. All of these natural gas positions open at June 30, 2012, will close over the next 12 months. Deferred losses relating to closed natural gas positions at June 30, 2012, and December 31, 2011, totaled $0.5 million and $1.2 million, respectively.
Cleco utilizes a VaR model to assess the market risk of its hedging portfolios, including derivative financial instruments. VaR represents the potential loss in fair value for an instrument from adverse changes in market factors over a defined period of time with a specified confidence level. VaR is calculated daily, using the variance/covariance method with delta approximation, assuming a holding period of one day, and a 95% confidence level for natural gas and power positions. Volatility is calculated daily from historical forward prices using the exponentially weighted moving average method. Based on these assumptions, the VaR relating to Cleco Power’s hedge transactions for the three and six months ended
 
June 30, 2012, as well as the VaR at December 31, 2011, is summarized as follows:
 
FOR THE THREE MONTHS
ENDED JUNE 30, 2012
 
(THOUSANDS)
HIGH

 
LOW

 
AVERAGE

Fuel cost hedges
$
243.4

 
$
73.3

 
$
174.9


 
FOR THE SIX MONTHS
ENDED JUNE 30, 2012
 
 
AT JUNE 30,

 
AT DECEMBER 31,

(THOUSANDS)
HIGH

LOW

AVERAGE

 
2012

 
2011

Fuel cost hedges
$
382.0

$
73.3

$
230.3

 
$
124.2

 
$
196.1

Cleco Power
Please refer to “— Risk Overview” for a discussion of market risk inherent in Cleco Power’s market risk-sensitive instruments.
Cleco Power has entered into various fixed- and variable-rate debt obligations. Please refer to “— Interest Rate Risks” for a discussion of how Cleco Power monitors its mix of fixed- and variable-rate debt obligations and the manner of calculating changes in fair market value and interest expense of its debt obligations.
Cleco Power had no short- or long-term variable-rate debt as of June 30, 2012.
Please refer to “— Commodity Price Risks” for a discussion of controls, transactions, VaR, and market value maturities associated with Cleco Power’s energy commodity activities.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of June 30, 2012, evaluations were performed under the supervision and with the participation of Cleco Corporation and Cleco Power LLC (individually, “Registrant” and collectively, the “Registrants”) management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The evaluations assessed the effectiveness of the Registrants’ disclosure controls and procedures. Based on the evaluations, the CEO and CFO have concluded that the Registrants’ disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules
 
and forms; and that the Registrants’ disclosure controls and procedures are also effective in ensuring that such information is accumulated and communicated to the Registrants’ management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of the Registrants’ management, including the CEO and CFO, the Registrants evaluated changes in internal control over financial reporting that occurred during the quarter ended June 30, 2012, and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.


59

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
CLECO
For information on legal proceedings affecting Cleco, see Part
I, Item 1, “Notes to the Unaudited Condensed Consolidated
Financial Statements — Note 11 — Litigation, Other
Commitments and Contingencies, and Disclosures about
Guarantees — Litigation.”

 
CLECO POWER
For information on legal proceedings affecting Cleco Power,
see Part I, Item 1, “Notes to the Unaudited Condensed
Consolidated Financial Statements — Note 11 — Litigation,
Other Commitments and Contingencies, and Disclosures
about Guarantees — Litigation.”


ITEM 1A.      RISK FACTORS
 
There have been no material changes from the risk factors disclosed under the heading “Risk Factors” in Item 1A of the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Annual Report on Form 10-K”). For risks that could affect actual
 
results and cause results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Registrants, see the risk factors disclosed under “Risk Factors” in Item 1A of the 2011 Annual Report on Form 10-K.

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Common Stock Repurchases
In January 2011, Cleco Corporation’s Board of Directors approved the implementation of a new common stock repurchase program. This program authorizes management to repurchase, from time to time, shares of common stock so that Cleco's diluted average shares of common stock outstanding remain approximately equal to its diluted average shares of common stock outstanding for 2010. Under this program, purchases may be made on a discretionary basis at times and
 
in amounts as determined by management, subject to market conditions, legal requirements and other factors. Purchases under the program will not be announced in advance and may be made in the open market or through privately negotiated transactions.
The following table summarizes the common stock repurchases by Cleco Corporation during the quarter ended June 30, 2012.

PERIOD

TOTAL NUMBER OF SHARES PURCHASED

 
AVERAGE PRICE PAID PER SHARE

 
TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS

 
MAXIMUM NUMBER OF
 SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS

April 2012

 

 

 

May 2012
200,000

 
$
40.00

 
200,000

 
200,000
*
June 2012

 

 

 

*Management does not anticipate repurchasing any shares of common stock during the third quarter of 2012. Pursuant to the objectives of the program, repurchases under the program should resume in 2013.
ITEM 4.       MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Combined Quarterly Report on Form 10-Q.
 





ITEM 5.       OTHER INFORMATION
None



60

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

ITEM 6.      EXHIBITS
CLECO CORPORATION
 
10.1
Note Purchase Agreement dated May 8, 2012, by and among Cleco Power and the Purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 10.1 to Cleco Corporation's Form 8-K dated May 9, 2012).
12(a)
Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the three-, six-, and twelve-month periods ended June 30, 2012, for Cleco Corporation
31.1
CEO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002
31.2
CFO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002
32.1
CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2
CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
95
Mine Safety Disclosures
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
CLECO POWER
 
10.2
Note Purchase Agreement dated May 8, 2012, by and among Cleco Power and the Purchasers listed on the signature pages thereto (incorporated by reference to Exhibit 10.1 to Cleco Power's Form 8-K dated May 9, 2012).
12(b)
Computation of Ratios of Earnings to Fixed Charges for the three-, six-, and twelve-month periods ended June 30, 2012, for Cleco Power
31.3
CEO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002
31.4
CFO Certification in accordance with section 302 of the Sarbanes-Oxley Act of 2002
32.3
CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.4
CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002
95
Mine Safety Disclosures
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 

61

CLECO CORPORATION
 
 
CLECO POWER
 
2012 2ND QUARTER FORM 10-Q

SIGNATURES
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/ Terry L. Taylor                                         
 
 
Terry L. Taylor
 
 
Controller & Chief Accounting Officer

Date: July 31, 2012




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 POWER LLC
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Terry L. Taylor                                               
 
 
Terry L. Taylor
 
 
Controller & Chief Accounting Officer




Date: July 31, 2012

62