Summary of CLECO CORP - Yahoo! Finance

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, 2007, and Cleco Corporation and Cleco Power's Condensed Consolidated Financial Statements contained in this 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 nine months ended September 30, 2008, and September 30, 2007.

OVERVIEW

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

ЖЖЖ Cleco Power, an integrated electric utility services company regulated by the LPSC, the FERC, and other regulators, that serves approximately 273,000 customers across Louisiana and also engages in energy management activities; and

ЖЖЖ Midstream, a merchant energy company regulated by the FERC, that owns and operates a merchant power plant (Evangeline). Midstream also has 50 percent ownership in a merchant power plant (Acadia) and operates the plant on behalf of its partner.

Current market conditions have limited the availability and have increased the costs of capital for some companies. The inability to raise capital on favorable terms could negatively affect Cleco and Cleco Power's ability to maintain and expand its businesses. After assessing the current operating performance, liquidity, and credit ratings of Cleco and Cleco Power, management believes that they will continue for the foreseeable future to have access to the capital markets at reasonable rates.
While management believes that Cleco remains a strong company, Cleco continues to focus on several challenges and factors that could affect its operations and financial condition in the near term.

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.
As part of a plan to diversify its fuel mix, combat rising fuel prices and resolve its long-term generation capacity needs, Cleco Power began constructing a 600-MW solid-fuel generating unit at its Rodemacher power plant in May 2006. When complete, Rodemacher Unit 3 will meet a portion of the utility's future power supply needs and help stabilize customer fuel costs. The project's capital cost, including carrying costs during construction, is estimated at $1.0 billion. Cleco Power anticipates the plant will be substantially complete and operational by the summer of 2009. Cleco Power's current base rates have been extended through the start of Rodemacher Unit 3.
On July 14, 2008, Cleco Power filed a request with the LPSC for a new rate plan to establish rates that would allow Cleco Power to recover its Rodemacher Unit 3 investment and go into effect when the unit begins commercial operations. Cleco Power has requested a 12.25% return on equity in the new rate plan. Cleco Power's current base rates allow it the opportunity to earn a maximum regulated return on equity of 11.65%, which is based on a return on equity of 11.25% and 12.25% shared between shareholders and customers in a 40/60 ratio. Cleco Power is currently recording AFUDC associated with construction of Rodemacher Unit
3. Once the unit begins commercial operations, Cleco Power will no longer record AFUDC related to Rodemacher Unit 3. Recovery of the Rodemacher Unit 3 investment is the largest component in Cleco Power's new rate plan proposal. If the LPSC does not increase Cleco Power's base rates or denies Cleco Power's request to recover costs incurred in the construction of Rodemacher Unit 3, Cleco Power's results of operations, financial condition, and cash flows could be materially adversely affected. For additional information, see "- Financial Condition - Liquidity and Capital Resources - Regulatory Matters - Cleco Power's Rate Case" and - "Rodemacher Unit 3." In September 2008, Cleco Power's distribution and transmission systems sustained substantial damage from two separate hurricanes. On September 1, 2008, Hurricane Gustav made landfall in southeastern Louisiana as a Category 2 hurricane, affecting Cleco Power's entire service territory leaving 90%, or approximately 246,000 customers (out of approximately 273,000 customers), without electricity. On September 12, 2008, only three days after Cleco Power's storm team restored service to customers affected by Hurricane Gustav, Hurricane Ike began moving toward the Texas

CLECO CORPORATION CLECO POWER 2008 3RD QUARTER FORM 10-Q

coastline causing new power outages. The storm officially made landfall in Texas on September 13, 2008, also as a Category 2 hurricane. Hurricane Ike left approximately 80,000 customers without power and caused extensive flooding in the southern portion of Cleco Power's service territory. Crews restored power by September 16, 2008, to all customers whose service could be reconnected after Hurricane Ike. The current estimate of the cost of restoration for Hurricanes Gustav and Ike is approximately $85.0 million, of which approximately 80% relates to Hurricane Gustav and the remaining 20% to Hurricane Ike. Cleco Power and the LPSC have agreed on a plan to recover Hurricanes Gustav and Ike storm restoration costs. The plan allows Cleco Power to capitalize approximately $45.0 million of the storm costs. The remaining cost will be offset against Cleco Power's existing storm damage reserve. Cleco Power will also pursue any federal funds made available to utilities. For additional information on the financial impact of Hurricanes Gustav and Ike, see Item 1, "Notes to the Unaudited Condensed Financial Statements - Note 14 - Storm Restoration."

Midstream
Acadia resides in the Southeastern Electric Reliability Council (SERC)-Entergy sub-region. For merchant generators, this sub-region is challenged both by the general oversupply of gas-fired generation available to serve the Entergy system needs and the physical transmission constraints that can limit the amount of power that Acadia can deliver. The SERC-Entergy sub-region has reserve margins among the highest in the nation. These high reserve margins can lead to lower capacity factors and lower profitability for Acadia. In the coming years, the wholesale power market within the SERC-Entergy sub-region is expected to tighten as load grows. The tightening wholesale power market is expected to result in higher wholesale power prices. Due to Acadia's location on the transmission grid, Acadia relies on two main suppliers of electric transmission when accessing external power markets. At times, transmission availability limits the wholesale markets accessible by Acadia resulting in limited buyers for Acadia's output.
To address these risks, Acadia markets short-, mid- and long-term products where available. Through its third-party energy marketer, Acadia pursues opportunities in the hourly, weekly, monthly, and annual markets. In addition, Acadia actively participates in long-term requests for capacity and energy. Acadia's success in these marketing efforts is a primary driver of Acadia's earnings and cash flow. In May 2008, Acadia was notified that Cleco Power selected its proposal to fulfill Cleco Power's capacity and energy needs as defined in the Cleco Power 2009 short-term RFP. The proposal was for a 235-MW product beginning March 1, 2009, and ending September 30, 2009. The definitive agreement between Acadia and Cleco Power was executed on July 31, 2008. Approval of this agreement by both the LPSC and FERC is required.