

Note 2 — Business Combination

On February 4, 2019, Cleco Cajun acquired from NRG Energy all of the outstanding membership interests in NRG South Central. This acquisition will enable Cleco to significantly increase the scale of its operations in Louisiana. As a result, Cleco Cajun indirectly owns:


•	a 176-MW natural-gas-fired generating station located in Sterlington, Louisiana,


•	a 220-MW natural-gas-fired facility and a 210-MW natural-gas-fired peaking facility, both located in Jarreau, Louisiana,


•	a 580-MW coal-fired generating facility, a 540-MW natural-gas-fired generating station, and 58% of a 588-MW coal-fired generating station all located in New Roads, Louisiana,


•	225 MW of a 300-MW natural-gas-fired peaking facility located in Jennings, Louisiana,


•	a 1,263-MW natural-gas-fired generating station located in Deweyville, Texas (the Cottonwood Plant),


•	wholesale contracts to provide electricity and capacity to nine Louisiana cooperatives, five municipalities across Arkansas, Louisiana, and Texas, and one investor-owned utility,


•	transmission assets, which consist of equipment and land required to connect the generation stations and the wholesale customers to the transmission grid, and


•	current assets consisting of cash, inventory, receivables and other miscellaneous assets.

Cleco Cajun, NRG Energy, and NRG South Central have each made customary representations, warranties and covenants in the Cleco Cajun Transaction, which includes customary indemnification provisions. Cleco Holdings has agreed to guarantee the obligations of Cleco Cajun, subject to certain limitations. In addition, upon closing, a lease agreement was executed and delivered between Cottonwood Energy and a special-purpose entity that is a subsidiary of NRG Energy pursuant to which NRG Energy will lease back the Cottonwood Plant and will operate it no later than May 2025. Upon closing, Cottonwood Energy became a subsidiary of Cleco Cajun.

Regulatory Matters

In January 2019, the LPSC approved the Cleco Cajun Transaction. Approval of the transaction was conditioned upon certain commitments, including holding Cleco Power ratepayers harmless for any adverse impacts, increased costs of debt or equity, and credit rating downgrades attributable to the Cleco Cajun Transaction; the repayment of $400.0 million of Cleco Holdings debt by 2024, of which $66.7 million is required in 2019; and a $4.0 million annual reduction to Cleco Power’s retail customer rates. For more information about the debt and rate reduction commitments, see Note 8 — “Debt” and Note 6 — “Regulatory Assets and Liabilities,” respectively.

Louisiana Generating

In 2017, Louisiana Generating received insurance settlement proceeds for costs incurred to resolve a lawsuit which was brought by the EPA and Louisiana Department of Environmental Quality against Louisiana Generating related to Big Cajun II-Unit 3. Entergy, as co-owner of Big Cajun II-Unit 3, is expected to be allocated a portion of the insurance settlement proceeds. Any amount allocated to Entergy will be determined by ongoing litigation and negotiations. NRG South Central estimated this amount to be $10.0 million. As part of the Cleco Cajun Transaction, Cleco Cajun assumed the contingent liability and NRG Energy indemnified Cleco for losses associated with this litigation matter. As a result, Cleco also recorded a $10.0 million indemnification asset.

Prior to the Cleco Cajun Transaction, NRG South Central was involved in various litigation matters, including environmental and contract proceedings, before various courts regarding matters arising out of the ordinary course of business. Management is unable to estimate any potential losses that Cleco Cajun may ultimately be responsible for with respect to any one of these matters in the event of a negative outcome. As part of the Cleco Cajun Transaction, NRG Energy indemnified Cleco for losses associated with matters that existed as of the closing date, including pending litigation.

Accounting for the Cleco Cajun Transaction

As consideration for all of the outstanding membership interest in NRG South Central, Cleco paid cash of approximately $962.2 million, which represents the $1.0 billion acquisition price net of working capital and other adjustments of $37.8 million.

In connection with the Cleco Cajun Transaction on February 4, 2019, Cleco Holdings borrowed $300.0 million under a new bridge loan agreement and $100.0 million under a new term loan agreement. Both loan agreements are variable rate debt and have a three-year term. Both loan agreements contain certain financial covenants, including requiring Cleco Holdings to maintain (i) a debt to capital ratio (as defined in the applicable agreement) below 65% and (ii) a rating applicable to the Company’s senior debt rating (as defined in the applicable agreement). Cleco Holdings anticipates that some or all of the variable rate debt may be replaced or repaid with long-term financing, markets permitting, within 12 months of the closing of the Cleco Cajun Transaction. Also in connection with the Cleco Cajun Transaction, Cleco Holdings increased its credit facility capacity by $75.0 million, for a total credit facility of $175.0 million. All other terms remained the same. Also in connection with the Cleco Cajun Transaction on February 4, 2019, Cleco Holdings made a $75.0 million draw on its credit facility, which was repaid on February 5, 2019.

The remaining cash required to finance the transaction consisted of an equity contribution from Cleco Group of $384.9 million and $102.3 million from cash on hand at Cleco Holdings.

In connection with the Cleco Cajun Transaction, Cleco Holdings, on behalf of Cleco Cajun, issued three letters of credit totaling $1.1 million to a capacity agreement customer and a gas transport company. These letters of credit automatically renew each year and have no impact on the Cleco Holdings’ credit facility.

Cleco Cajun accounted for the Cleco Cajun Transaction as a business combination, and accordingly, the assets acquired and liabilities assumed were recorded on Cleco’s Condensed Consolidated Balance Sheet as of February 4, 2019, at their estimated fair values as follows:



Preliminary Purchase Price Allocation
(THOUSANDS)	AT FEB. 4, 2019
Current assets
Cash and cash equivalents	$	146,494
Customer and other accounts receivable	48,401
Fuel inventory	22,060
Materials and supplies	25,659
Energy risk management assets	4,193
Other current assets	10,000
Non-current assets
Property, plant, and equipment, net	727,906
Prepayments	36,222
Restricted cash and cash equivalents	707
Intangible assets	102,500
Other deferred charges	132
Total assets acquired	1,124,274
Current liabilities
Accounts payable	35,456
Taxes payable	723
Energy risk management liabilities	242
Other current liabilities	14,243
Non-current liabilities
Accumulated deferred federal and state income taxes, net	6,744
Deferred lease revenue	61,900
Intangible liabilities	31,900
Asset retirement obligations	10,789
Operating lease liability	107
Total liabilities assumed	162,104
Total purchase price consideration	$	962,170

The fair values of Cleco Cajun’s acquired assets and assumed liabilities were determined based on significant estimates and assumptions, including projected future cash flows and discount rates reflecting risk inherent in those future cash flows. There were also estimates made to determine the expected useful lives of each class of assets acquired.

On the date of the acquisition, preliminary fair value adjustments were recorded on Cleco’s Condensed Consolidated Balance Sheet for the difference between the contract and market price of acquired long-term wholesale power agreements. The preliminary fair value of intangible assets of $102.5 million and intangible liabilities of $7.8 million was reflected in the preliminary purchase price allocation. The valuation of the acquired intangible assets and liabilities was estimated by applying the differential cash flows approach, which is based upon discounted projected future cash flows associated with the underlying contracts. The power supply agreement intangible assets and liabilities are being amortized to Electric operations over the remaining term of the applicable agreements.

As part of the Cleco Cajun Transaction, Cleco assumed an LTSA for maintenance services related to the Cottonwood Plant. The preliminary fair value of the LTSA was estimated by applying the differential cash flows approach. An intangible liability of $24.1 million was reflected in the preliminary purchase price allocation and is being amortized using the straight-line method over the estimated remaining life of the LTSA of seven years. The amortization is included as a reduction to the acquired LTSA prepayments.

On the date of the acquisition, the preliminary fair value of the lease between Cottonwood Energy and a special-purpose entity that is a subsidiary of NRG Energy was estimated by applying the differential cash flows approach. Deferred lease revenue of $61.9 million was reflected in the preliminary purchase price allocation and is being amortized over the term of the lease agreement. The amortization is included in Other operations revenue.

The net increase in Accumulated deferred federal and state income taxes, net represents the differences between the preliminary assigned fair values of assets acquired and their related preliminary income tax basis.

The valuations performed in the first quarter of 2019 to assess the fair value of certain assets acquired and liabilities assumed are considered preliminary as a result of the short time period between the closing of the acquisition and the end of the first quarter of 2019. Accounting guidance provides that the allocation of the purchase price may be modified up to one year from the date of the acquisition as more information becomes available. The significant assets and liabilities for which preliminary valuation amounts are recognized at March 31, 2019, include the fair value of property, plant, and equipment, intangible assets and liabilities, deferred lease revenue, and asset retirement obligations. The preliminary amounts recognized are subject to revision until valuations are completed and to the extent that additional information becomes available about the facts and circumstances that existed as of the acquisition date. Cleco expects these final valuations and assessments will be completed by the end of 2019, which may affect the purchase price allocation.

Pro forma Impact of the Cleco Cajun Transaction

The following table includes the unaudited pro forma financial information reflecting the consolidated results of operations of Cleco as if the Cleco Cajun Transaction had taken place on January 1, 2018. The pro forma net income was adjusted to exclude nonrecurring transaction related expenses of $3.9 million and $1.6 million for the three months ended March 31, 2019, and 2018, respectively.

The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved had the transaction taken place on the dates indicated, or the future consolidated results of operations of the combined companies.



Unaudited Pro Forma Financial Information
	FOR THE THREE MONTHS ENDED MAR. 31,
(THOUSANDS)	2019		2018
Operating revenue, net	$	381,796	$	393,181
Net income	$	32,986	$	32,637