Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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 in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP for annual financial statements. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements. Because the interim Condensed Consolidated Financial Statements and the accompanying notes do not include all of the information and notes required by GAAP for annual financial statements, the Condensed Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the Consolidated Financial Statements and accompanying notes in the Registrants’ Combined Annual Report on Form 10-K for the year ended December 31, 2013.

These Condensed Consolidated Financial Statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to fairly present the financial position and results of operations of Cleco. Amounts reported in Cleco’s interim financial statements are not necessarily indicative of amounts expected for the annual periods due to the effects of seasonal temperature variations on energy consumption, regulatory rulings, the timing of maintenance on electric generating units, changes in mark-to-market valuations, changing commodity prices, discrete income tax items, and other factors.

In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. For information on recent authoritative guidance and its effect on financial results, see Note 2 — “Recent Authoritative Guidance.”

Unbilled Revenue

Cleco Power accrues estimated revenue monthly for energy used by customers but not yet billed. The monthly estimated unbilled revenue amounts are recorded as unbilled revenue and a receivable. During the third quarter of 2014, Cleco Power began using actual customer energy consumption data available from its installation of AMI to calculate unbilled revenues.

Property, Plant, and Equipment

Property, plant, and equipment consists 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.

During 2014, Cleco Power’s investment in regulated utility property, plant, and equipment increased primarily due to the transfer of Coughlin from Midstream to Cleco Power. The transfer of Coughlin was recorded on Cleco Power’s books at the historical carrying value of $176.0 million, net of the related accumulated depreciation of $82.6 million. The transfer of Coughlin followed the accounting guidance for a business under common control, which is typically accounted for as if the transfer had occurred at the beginning of the period. However, management determined the retrospective application of this transfer to be quantitatively and qualitatively immaterial when taken as a whole in relation to Cleco Power’s Condensed Consolidated Financial Statements. As a result, Cleco Power’s Condensed Consolidated Financial Statements were not retrospectively adjusted to reflect the transfer. For more information regarding the Coughlin transfer, see Note 14 — “Coughlin Transfer.”

Cleco’s property, plant, and equipment consisted of:

(THOUSANDS)	AT SEPT. 30, 2014			AT DEC. 31, 2013
Regulated utility plants	$	4,429,881		$	4,052,774
Other	15,012			273,748
Total property, plant, and equipment	4,444,893			4,326,522
Accumulated depreciation	(1,419,001		)	(1,351,223		)
Net property, plant, and equipment	$	3,025,892		$	2,975,299

Restricted Cash and Cash Equivalents

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 and cash equivalents consisted of:  

(THOUSANDS)	AT SEPT. 30, 2014		AT DEC. 31, 2013
Diversified Lands’ mitigation escrow	$	21	$	21
Cleco Katrina/Rita’s storm recovery bonds	3,471		8,986
Cleco Power’s future storm restoration costs	14,706		4,726
Cleco Power’s building renovation escrow	810		286
Total restricted cash and cash equivalents	$	19,008	$	14,019

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 administration fees, interest, and principal on storm recovery bonds. During the nine months ended September 30, 2014, Cleco Katrina/Rita collected $15.1 million net of administration fees. In March and September 2014, Cleco Katrina/Rita used $7.6 million and $7.3 million, respectively, for scheduled storm recovery bond principal payments and $3.0 million and $2.7 million, respectively, for related interest.

Cleco Power’s restricted cash and cash equivalents held for future storm restoration costs increased $10.0 million from December 31, 2013, primarily due to the transfer of $13.2 million of restricted investments that were held with an outside investment manager and liquidated during the first quarter of 2014. This increase was partially offset by the transfer of $4.0 million to cover the expenses associated with storm activity during the first quarter of 2014.

In connection with Cleco Power’s building modernization project, Cleco Power was required to establish an escrow account with a qualified financial institution and deposit all retainage monies as they accrue under the construction contract. Upon completion of the construction work, the funds including any interest held in the escrow account will be released from escrow and paid to the construction contractor.

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. For more information about fair value levels, see Note 4 — “Fair Value Accounting.”

Risk Management

Market risk inherent in Cleco’s market risk-sensitive instruments and positions includes potential changes in value arising from changes in interest rates and the commodity market prices of power, FTRs, and natural gas in the industry 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, FTRs, 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 also enter into risk mitigating positions that would not meet the requirements of a normal-purchase, normal-sale transaction in order to attempt to mitigate the volatility in customer fuel costs. These positions are marked-to-market with the resulting gain or loss recorded on Cleco and Cleco Power's Condensed Consolidated Balance Sheets 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 in accordance with regulatory policy. When these positions close, actual gains or losses are included in the FAC and reflected on customers’ bills as a component of the fuel cost adjustment. There were no open natural gas positions at September 30, 2014 or December 31, 2013.

In connection with joining MISO, Cleco Power received a direct allocation of FTRs in November 2013. Cleco Power currently purchases the majority of its FTRs in annual auctions facilitated by MISO during the second quarter of each year and may also purchase additional FTRs in monthly auctions facilitated by MISO. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving Cleco Power’s customer load. They are not designated as hedging instruments for accounting purposes. Cleco Power initially records FTRs at their estimated fair value and subsequently adjusts the carrying value to their estimated fair value at the end of each accounting period prior to settlement. Unrealized gains or losses on FTRs held by Cleco Power are included in Accumulated deferred fuel on Cleco and Cleco Power's Condensed Consolidated Balance Sheets. Realized gains or losses on settled FTRs are recorded in Electric operations or Power purchased for utility customers on Cleco and Cleco Power’s Condensed Consolidated Statements of Income. At September 30, 2014, Cleco and Cleco Power's Condensed Consolidated Balance Sheets reflected the fair value of open FTR positions of $18.5 million in Energy risk management assets and $1.7 million in Energy risk management liabilities, compared to $9.0 million in Energy risk management assets and $0.4 million in Energy risk management liabilities at December 31, 2013. For more information on FTRs, see Note 4 — “Fair Value Accounting — Derivatives and Hedging — Commodity Contracts.”

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 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 may enter into 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 more information on the interest rate risk contracts affecting Cleco's current financial statements, see Note 4 — “Fair Value Accounting — Derivatives and Hedging — Interest Rate Derivatives.”

Accounting for MISO Transactions

Cleco Power participates in MISO’s Energy and Operating Reserve market where hourly sales and purchases are netted. If the hourly activity nets to sales, the result is reported in Electric operations; however, if the hourly activity nets to purchases, the result is reported in Power purchased for utility customers on Cleco and Cleco Power’s Condensed Consolidated Statements of Income.

Earnings per Average Common Share

The following tables show the calculation of basic and diluted earnings per share:

						FOR THE THREE MONTHS ENDED SEPT. 30,
				2014					2013
(THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)	INCOME		SHARES	PER SHARE AMOUNT		INCOME		SHARES	PER SHARE AMOUNT
Basic net income applicable to common stock	$	70,835	60,372,569	$	1.17	$	66,407	60,450,384	$	1.10
Effect of dilutive securities
Add:  restricted stock (LTICP)			317,027					298,263
Diluted net income applicable to common stock	$	70,835	60,689,596	$	1.17	$	66,407	60,748,647	$	1.09

						FOR THE NINE MONTHS ENDED SEPT. 30,
				2014					2013
(THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)	INCOME		SHARES	PER SHARE AMOUNT		INCOME		SHARES	PER SHARE AMOUNT
Basic net income applicable to common stock	$	133,392	60,410,122	$	2.21	$	135,572	60,428,944	$	2.25
Effect of dilutive securities
Add:  restricted stock (LTICP)			301,421					265,688
Diluted net income applicable to common stock	$	133,392	60,711,543	$	2.20	$	135,572	60,694,632	$	2.23

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 awarded or outstanding during the nine months ended September 30, 2014 and 2013.

Stock-Based Compensation

At September 30, 2014, 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. In accordance with the Merger Agreement, the ESPP has been suspended pending the completion of the Merger. Effective upon the completion of the Merger, the ESPP will be cancelled. 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. For more information about the Merger, see Note 15 — “Subsequent Event — Agreement and Plan of Merger.”

During the nine months ended September 30, 2014, Cleco granted 122,222 shares of non-vested stock to certain officers and key employees 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:

	CLECO CORPORATION				CLECO POWER				CLECO CORPORATION				CLECO POWER
	FOR THE THREE MONTHS ENDED SEPT. 30,								FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	2014		2013		2014		2013		2014		2013		2014		2013
Equity classification
Non-vested stock	$	1,344	$	1,585	$	528	$	492	$	4,798	$	4,487	$	1,461	$	1,204
Total equity classification	$	1,344	$	1,585	$	528	$	492	$	4,798	$	4,487	$	1,461	$	1,204
Liability classification
Common stock equivalent units	$	—	$	—	$	—	$	—	$	—	$	1	$	—	$	1
Total pre-tax compensation expense	$	1,344	$	1,585	$	528	$	492	$	4,798	$	4,488	$	1,461	$	1,205
Tax benefit	$	517	$	610	$	203	$	189	$	1,846	$	1,727	$	562	$	463

Common Stock Repurchase Program

In January 2011, Cleco Corporation’s Board of Directors approved the implementation of a 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. During the first quarter of 2014, Cleco Corporation repurchased 250,000 shares of common stock. No other shares of common stock were repurchased during the nine months ended September 30, 2014 or 2013. In accordance with the Merger Agreement, until the completion of the Merger, no additional common stock will be repurchased under this program. For more information about the Merger, see Note 15 — “Subsequent Event — Agreement and Plan of Merger.”