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CNL > SEC Filings for CNL > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for CLECO CORP

Form 10-K for CLECO CORP


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cleco uses its website, https:\\www.cleco.com, as a routine channel for distribution of important information, including news releases, analyst presentations, and financial information. Cleco's website is the primary source of publicly disclosed news about Cleco. Cleco is providing the address to its website solely for the information of investors and does not intend the address to be an active link. The contents of the website are not incorporated into this Annual Report on Form 10-K.
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 nine generating units with a total nameplate capacity of 2,565 MW and serves approximately 284,000 customers in Louisiana through its retail business and supplies wholesale power in Louisiana and Mississippi, and

Midstream, a wholesale energy business, owns Evangeline (which owns and operates Coughlin). Evangeline owns two generating units with a total nameplate capacity of 775 MW. During 2013, FERC and LPSC approval was granted to transfer Coughlin to Cleco Power. The transaction is expected to occur in March 2014. For additional information, see "- Financial Condition - Regulatory and Other Matters - Generation RFP - 2012 Long-Term RFP for Capacity and Energy Resources."

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 implementation of various environmental controls to comply with the MATS ruling, completion of the transfer of ownership and control of Coughlin from Evangeline, extension of its current FRP, and integration of operations with MISO. These initiatives are discussed below.

MATS
The MATS rule was finalized in February 2012 and requires affected electric generating units to meet specific numeric emission standards and work practice standards to address hazardous air pollutants. MATS imposes strict emission limits on new and existing coal- and liquid oil-fired electric generating units for mercury, acid gases, and non-mercury metallic pollutants. Cleco Power units impacted by the rule include Rodemacher Unit 2, Madison Unit 3, and Dolet Hills. MATS allows existing sources approximately three years to comply with the rule. The actual compliance deadline is April 16, 2015. Cleco Power completed its evaluation of control technology options and has identified capital expenditures that are required to engineer, procure, and install pollution controls and emissions monitoring equipment to ensure Cleco Power will be in a position to comply with MATS in a timely manner. New equipment to be installed and operational by the


CLECO CORPORATION
CLECO POWER 2013 FORM 10-K

compliance date at Rodemacher Unit 2 and Dolet Hills includes dry sorbent injection for acid gas control and fabric filters (baghouses) for metal particulate control. In addition, activated carbon injection for mercury control is to be installed and operational by the compliance date at Rodemacher Unit 2, Madison Unit 3, and Dolet Hills. Cleco Power has selected the equipment and work has been initiated at both Dolet Hills and Rodemacher Unit 2, with work at Madison Unit 3 expected to begin in the second quarter of 2014. Work on Dolet Hills is anticipated to be in service by May 2014. Work on Rodemacher 2 is anticipated to be in service by November 2014. Cleco Power filed an application with the LPSC in August 2012, requesting authorization to recover the revenue requirements associated with the MATS equipment. The LPSC proceeding is currently in the discovery phase. The MATS project is expected to cost $265.0 million, of which Cleco Power's portion is $111.3 million. As of December 31, 2013, $133.1 million has been spent on the project, of which Cleco Power's portion was $57.2 million.

Power Supply Options/Coughlin Transfer from Midstream 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. In October 2011, an RFP was issued seeking up to approximately 750 MW of capacity and energy, for a three- or five-year period for supply starting May 1, 2012. Cleco Power selected Evangeline's proposal for a 730-MW product beginning May 1, 2012, and ending April 30, 2015, and received approval from the LPSC and FERC in early 2012. In July 2012, Cleco Power issued a final RFP seeking long-term resources beyond April 2015. In October 2012, Cleco Power announced Evangeline as the winning bidder in Cleco Power's 2012 Long-Term RFP. In December 2012, Cleco Power and Evangeline executed definitive agreements to transfer ownership and control of Coughlin from Evangeline to Cleco Power. Cleco Power received approval from FERC on August 26, 2013, and from the LPSC on December 16, 2013, to transfer Coughlin to Cleco Power. The transaction is expected to occur in March 2014. For more information on the RFP, see "- Financial Condition - Regulatory and Other Matters - Generation RFP."

Extension of FRP
On April 26, 2013, Cleco Power filed an application with the LPSC to extend its current FRP and to seek rate recovery of Coughlin. Cleco Power requested in its application that the FRP extension be effective through June 2020. The docket is currently in the discovery phase. The procedural schedule was suspended on November 14, 2013 in order to give Cleco Power and staff additional time to evaluate various rate options. Cleco Power expects LPSC action on this request by the end of the second quarter of 2014.

MISO
Cleco Power elected to join MISO in December 2013. In December 2012, Cleco Power filed an application with the LPSC indicating Cleco's intent to join MISO, requesting the LPSC to find that transferring control of certain transmission assets to MISO was in the public interest, to create an accounting order deferring costs related to Cleco Power's transition into the MISO market, and to expedite treatment. On June 26, 2013, the LPSC unanimously approved Cleco Power's change of control request. On June 18, 2013, Cleco Power

filed a related application with the LPSC requesting approval of Cleco Power's proposed MISO integration, implementation, and ratemaking plans. On November 13, 2013, the LPSC approved Cleco Power's application. Cleco Power integrated its operations with MISO on December 19, 2013. For more information on MISO, see "- Financial Condition - Regulatory and Other Matters - Market Restructuring" and

Part 1, Item 1A, "Risk Factors - MISO."

Cleco Midstream

Evangeline
In December 2011, Evangeline was 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 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. Midstream was marketing Coughlin's capacity for periods beginning after April 30, 2015, and had been evaluating various options to optimize Coughlin's value. In October 2012, Cleco Power announced that Evangeline was the winning bidder in Cleco Power's 2012 Long-Term RFP. In December 2012, Cleco Power and Evangeline executed definitive agreements to transfer ownership and control of Coughlin from Evangeline to Cleco Power. Cleco Power received authorization from FERC on August 26, 2013. Additionally, at its December 16, 2013 Business and Executive Session, the LPSC voted to approve the transfer of Coughlin to Cleco Power. Cleco Power's FRP extension, which contains the rate treatment of the transfer, is currently under LPSC review with a decision expected by the end of the second quarter of 2014. For more information, see "- Financial Condition - Regulatory and Other Matters - Generation RFP."

Acadia
In October 2009, Acadia and Entergy Louisiana executed definitive agreements whereby Entergy Louisiana would purchase Acadia Unit 2. On April 29, 2011, Acadia completed its disposition of Acadia Unit 2 to Entergy Louisiana for $298.8 million. APH's portion of the proceeds from the sale were used to repay Cleco Corporation's $150.0 million bank term loan. For more information on the Acadia Unit 2 transaction, see Item 8, "Financial Statements and Supplementary Data - Notes to the Financial Statements - Note 18 - Acadia Transactions - Acadia Unit 2."

RESULTS OF OPERATIONS

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.


CLECO CORPORATION
CLECO POWER 2013 FORM 10-K

Cleco Consolidated Results of Operations -
Year ended December 31, 2013,
Compared to Year ended December 31, 2012
                                                                   FOR THE YEAR ENDED DEC. 31,
                                                                       FAVORABLE/(UNFAVORABLE)
(THOUSANDS)                       2013                2012           VARIANCE           CHANGE
Operating revenue, net  $    1,096,714     $       993,697     $      103,017             10.4  %
Operating expenses             788,382             712,046            (76,336 )          (10.7 )%
Operating income        $      308,332     $       281,651     $       26,681              9.5  %
Allowance for other
funds used during
construction            $        4,081     $         6,711     $       (2,630 )          (39.2 )%
Other income            $       13,857     $        29,117     $      (15,260 )          (52.4 )%
Other expense           $       (2,861 )   $        (4,694 )   $        1,833             39.0  %
Federal and state
income taxes            $       79,575     $        65,327     $      (14,248 )          (21.8 )%
Net income applicable
to common stock         $      160,685     $       163,648     $       (2,963 )           (1.8 )%

Consolidated net income applicable to common stock decreased $3.0 million, or 1.8%, in 2013 compared to 2012 primarily due to lower Midstream and corporate earnings, partially offset by higher earnings at Cleco Power.
Operating revenue, net of electric customer credits increased $103.0 million, or 10.4%, in 2013 compared to 2012 primarily as a result of higher base revenue and higher fuel cost recovery revenue at Cleco Power.
Operating expenses increased $76.3 million, or 10.7%, in 2013 compared to 2012 primarily due to higher per-unit costs and volumes of fuel used for electric generation, higher purchased power costs, higher maintenance expenses, higher taxes other than income taxes, and higher depreciation expense at Cleco Power. Allowance for other funds used during construction decreased $2.6 million, or 39.2%, in 2013 compared to 2012, primarily due to the completion of miscellaneous transmission projects at Cleco Power in 2012 and early 2013. Other income decreased $15.3 million, or 52.4%, in 2013 compared to 2012 primarily due to lower income in 2013 related to the contractual expiration of underlying indemnifications resulting from the disposition of Acadia Units 1 and
2. Also contributing to this decrease was lower mutual assistance income and lower royalty payments. Partially offsetting these decreases were an increase in cash surrender value of life insurance policies and a death benefit recognized on life insurance policies. Other expense decreased $1.8 million, or 39.0%, in 2013 compared to 2012 primarily due to lower mutual assistance expenses. Federal and state income taxes increased $14.2 million, or 21.8%, in 2013 compared to 2012. Tax expense increased primarily due to the change in pre-tax income, excluding AFUDC equity, a decrease in tax credits, lower permanent tax deductions, lower flowthrough of tax benefits, an increase in the liability for uncertain tax positions, and the absence of a favorable settlement with taxing authorities. The effective income tax rate is 33.1% which is different than the federal statutory rate primarily due to permanent tax deductions, flowthrough benefits associated with AFUDC equity, a decrease in the liability for uncertain tax positions, adjustments for tax returns as filed, tax credits, and state tax expense. In July 2012, Cleco and Cleco Power filed a PLR request with the IRS in order to determine the appropriateness and timing of the special allowance for depreciation for Madison

Unit 3. In December 2012, Cleco received a favorable PLR from the IRS, consistent with the request allowing for the additional first year depreciation deduction in the amount of $411.0 million as reflected on Cleco's 2011 federal income tax return. Cleco and Cleco Power consider it more likely than not that the income tax losses generated on the 2011 income tax return will be utilized to reduce future payments of income taxes and both Cleco and Cleco Power expect to utilize the entire net operating loss carryforward within the statutory deadlines.
Results of operations for Cleco Power and Midstream are more fully described below.

CLECO POWER

Significant Factors Affecting Cleco Power

Revenue is primarily affected by the following factors:
As an electric utility, Cleco Power is affected, to varying degrees, by a number of factors influencing the electric utility industry in general. These factors include, among others, an increasingly competitive business environment, the cost of compliance with environmental and reliability regulations, conditions in the credit markets and global economy, and changes in the federal and state regulation of generation, transmission, and the sale of electricity. For a discussion of various regulatory changes and competitive forces affecting Cleco Power and other electric utilities, see Part I, Item 1 "Business - Regulatory Matters, Industry Developments, and Franchises - Franchises" and "- Financial Condition - Regulatory and Other Matters - Market Restructuring." For a discussion of risk factors affecting Cleco Power's business, see Item 1A, "Risk Factors - Transmission Constraints," "- LPSC Audits," "- Hedging and Risk Management Activities," "- Commodity Prices," "- Global Economic Environment and Uncertainty; Access to Capital," "- Future Electricity Sales," "- Cleco Power's Generation and Transmission and Distribution Facilities," "- MISO," "- Reliability and Infrastructure Protection Standards Compliance," "- Environmental Compliance," "- Regulatory Compliance," "- Cleco Power's Rates," "- Retail Electric Service," "- Wholesale Electric Service," "- Weather Sensitivity," "- Cleco Credit Ratings," "- Alternative Generation Technology," "- Insurance," "- Litigation," "- Taxes," "- Health Care Reform," "- Technology and Terrorism Threats," "- Cleco Power LLC's Unsecured and Unsubordinated Obligations," and "- Workforce."
Cleco Power's residential customers' demand for electricity is largely 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.
Over the last five years, Cleco Power has experienced moderate growth in retail non-industrial sales and anticipates


CLECO CORPORATION
CLECO POWER 2013 FORM 10-K

the same over the next five years. For the retail industrial class, Cleco Power expects new industrial load to be added in 2014 and 2015, principally driven by development in the natural gas industry, textile industry, and wood products industry. In addition, Cleco Power also expects to begin providing service to expansions of current customers' operations, as well as service to new retail customers. These expansions of current customers' operations and service to new retail customers is expected to contribute additional base revenue of $2.4 million in 2014, an additional $3.4 million in 2015, and an additional $1.5 million in 2016. Cleco Power's expectations and projections regarding retail sales are dependent upon factors such as weather conditions, natural gas prices, customer conservation efforts, retail marketing and business development programs, and the economy of Cleco Power's service area. For more information, see "Cautionary Note Regarding Forward-Looking Statements." Other issues facing the electric utility industry that could affect sales include:

imposition of federal and/or state renewable portfolio standards,

imposition of energy efficiency mandates,

legislative and regulatory changes,

increases in environmental regulations and compliance costs,

cost of power impacted by the price movement of natural gas and the addition of new generation capacity,

transmission congestion costs,

increase in capital and operations and maintenance costs due to higher construction and labor costs,

changes in electric rates compared to customers' ability to pay,

changes in the credit markets and global economy, and

integration of operations with MISO.

For more information on energy legislation in regulatory matters that could affect Cleco, see "- Financial Condition - Regulatory and Other Matters - Market Restructuring - Wholesale Electric Markets." Cleco Power's revenues and earnings also are substantially affected by regulatory proceedings known as rate cases. During those cases, the LPSC and FERC determine Cleco Power's rate base, depreciation rates, operation and maintenance costs, and administrative and general costs that Cleco Power may recover from its customers through the rates charged for electric service. These proceedings may examine, among other things, the prudence of Cleco Power's operation and maintenance practices, level of subject expenditures, allowed rates of return, and previously incurred capital expenditures. The LPSC has the authority to disallow costs found not to have been prudently incurred. These regulatory proceedings typically involve multiple parties, including governmental bodies and officials, consumer advocacy groups, and various consumers of energy, who have differing concerns but who have the common objective of limiting rate increases or reducing rates. Rate cases generally have long timelines which may be limited by statute. Decisions are typically subject to appeal, leading to additional uncertainty.

Other expenses are primarily affected by the following factors:
The majority of Cleco Power's non-fuel cost recovery expenses consist of other operations, maintenance, depreciation, and taxes other than income taxes. Other operations expenses are affected by, among other things, the cost of employee benefits, insurance expenses, and the costs associated with energy delivery and customer service. Annual maintenance expenses associated with Cleco Power's plants generally depend upon their physical characteristics, maintenance practices, and the effectiveness of their preventive maintenance programs. Transmission and distribution maintenance expenses are generally affected by the level of repair and rehabilitation of lines to maintain reliability. Depreciation expense primarily is affected by the cost of the facilities in service, the time the facilities were placed in service, and the estimated useful life of the facilities. Taxes other than income taxes generally include payroll taxes, franchise taxes, and ad valorem taxes. Cleco Power anticipates certain non-fuel cost recovery expenses to be higher in 2014 compared to 2013. These expenses include higher plant operations and maintenance expenses, higher depreciation expense, higher taxes other than income taxes, higher income tax expense, and higher administrative and general expenses. In addition, Cleco Power expects its postretirement benefit expenses to be affected by changes in discount rates, actual returns on plan assets, level of benefits provided, and actuarial assumptions used in the calculations.


CLECO CORPORATION
CLECO POWER 2013 FORM 10-K

Cleco Power's Results of Operations -
Year ended December 31, 2013,
Compared to Year ended December 31, 2012
                                                                   FOR THE YEAR ENDED DEC. 31,
                                                                       FAVORABLE/(UNFAVORABLE)
(THOUSANDS)                         2013              2012           VARIANCE           CHANGE
Operating revenue
Base                      $      654,015     $     606,577     $       47,438              7.8  %
Fuel cost recovery               393,533           337,592             55,941             16.6  %
Electric customer
credits                           (1,836 )            (630 )           (1,206 )         (191.4 )%
Other operations                  48,909            48,156                753              1.6  %
Affiliate revenue                  1,338             1,372                (34 )           (2.5 )%
Operating revenue, net    $    1,095,959     $     993,067     $      102,892             10.4  %
Operating expenses
Recoverable fuel used
for electric generation   $      326,089     $     277,605     $      (48,484 )          (17.5 )%
Recoverable power
purchased for utility
customers                         67,445            59,989             (7,456 )          (12.4 )%
FAC non-recoverable
fuel and power
purchased                         13,302            21,338              8,036             37.7  %
Other operations                 114,884           115,072                188              0.2  %
Maintenance                       85,638            72,386            (13,252 )          (18.3 )%
Depreciation                     135,717           125,486            (10,231 )           (8.2 )%
Taxes other than income
taxes                             46,203            33,999            (12,204 )          (35.9 )%
Gain on sale of assets                 -                (2 )               (2 )         (100.0 )%
Total operating
expenses                  $      789,278     $     705,873     $      (83,405 )          (11.8 )%
Operating income          $      306,681     $     287,194     $       19,487              6.8  %
Allowance for other
funds used during
construction              $        4,081     $       6,711     $       (2,630 )          (39.2 )%
Other income              $        4,883     $       5,847     $         (964 )          (16.5 )%
Interest charges          $       82,677     $      80,502     $       (2,175 )           (2.7 )%
Federal and state
income taxes              $       79,381     $      68,133     $      (11,248 )          (16.5 )%
Net income                $      150,410     $     146,848     $        3,562              2.4  %

Cleco Power's net income for 2013 increased $3.6 million, or 2.4%, compared to 2012. Contributing factors include:

higher base revenue,

lower FAC non-recoverable fuel and power purchased, and

higher other operations revenue.

These were partially offset by:

higher maintenance expenses,

higher taxes other than income taxes,

higher income taxes,

higher depreciation expense,

lower allowance for other funds used during construction,

higher interest charges,

higher electric customer credits, and

lower other income.

                                                 FOR THE YEAR ENDED DEC. 31,
                                                                  FAVORABLE/
(MILLION kWh)                               2013      2012     (UNFAVORABLE)
Electric sales
Residential                                3,714     3,624               2.5 %
Commercial                                 2,672     2,655               0.6 %
Industrial                                 2,322     2,311               0.5 %
Other retail                                 134       133               0.8 %
Total retail                               8,842     8,723               1.4 %
Sales for resale                           2,057     1,934               6.4 %
Unbilled                                      61       (43 )           241.9 %

Total retail and wholesale customer sales 10,960 10,614 3.3 %

                                                        FOR THE YEAR ENDED DEC. 31,
                                                                         FAVORABLE/
(THOUSANDS)                                    2013          2012     (UNFAVORABLE)
Electric sales
Residential                               $ 297,158     $ 281,378               5.6 %
Commercial                                  189,807       181,093               4.8 %
Industrial                                   91,093        85,675               6.3 %
Other retail                                 10,590         9,908               6.9 %
Surcharge                                    14,978         9,133              64.0 %
Other                                        (4,694 )      (6,252 )            24.9 %
Total retail                              $ 598,932     $ 560,935               6.8 %
Sales for resale                             51,922        47,767               8.7 %
Unbilled                                      3,161        (2,125 )           248.8 %
Total retail and wholesale customer sales $ 654,015     $ 606,577               7.8 %

The following chart shows how cooling and heating degree-days varied from normal conditions and from the prior period. Cleco Power uses temperature data collected by the NOAA to determine cooling and heating degree-days.

                                            FOR THE YEAR ENDED DEC. 31,
                                                            2013 CHANGE
                     2013     2012     NORMAL    PRIOR YEAR      NORMAL
Cooling degree-days 2,954    3,189      2,780          (7.4 )%      6.3 %
Heating degree-days 1,559    1,018      1,554          53.1  %      0.3 %

Base
Base revenue increased $47.4 million, or 7.8%, during 2013 compared to 2012 primarily due to higher industrial and wholesale sales, an adjustment to customer surcredits, and increased sales from colder winter weather, which resulted in a $26.4 million increase to base revenue. Also contributing to this . . .

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