Quarterly Report (10-q)

Date : 05/13/2019 @ 7:35PM
Source : Edgar (US Regulatory)
Stock : Cleco Corp. (CNL)
Quote : 55.36  0.0 (0.00%) @ 12:00AM
Cleco share price Chart

Quarterly Report (10-q)

 
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 March 31, 2019
Or
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 1-15759
CLECO CORPORATE HOLDINGS LLC
(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 ¨ No x
 
Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x  No ¨
 
Indicate by check mark whether Cleco Corporate Holdings LLC is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one): Large accelerated filer ¨      Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨      Emerging growth company ¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether Cleco Power LLC is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one): Large accelerated filer ¨      Accelerated filer ¨      Non-accelerated filer x      Smaller reporting company ¨      Emerging growth company ¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act)  Yes ¨     No x
Securities registered pursuant to Section 12(b) of the Act:
Cleco Corporate Holdings LLC: None
Cleco Power LLC: None

Cleco Corporate Holdings LLC has no common stock outstanding. All of the outstanding equity of Cleco Corporate Holdings LLC is held by Cleco Group LLC, a wholly owned subsidiary of Cleco Partners L.P.

Cleco Power LLC, a wholly owned subsidiary of Cleco Corporate Holdings LLC, 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
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

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


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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

GLOSSARY OF TERMS
Abbreviations or acronyms used in this filing, including all items in Parts I and II, are defined below.
ABBREVIATION OR ACRONYM
DEFINITION
2016 Merger
Merger of Merger Sub with and into Cleco Corporation pursuant to the terms of the Merger Agreement which was completed on April 13, 2016
2016 Merger Commitments
Cleco Partners’, Cleco Group’s, Cleco Holdings’, and Cleco Power’s 77 commitments to the LPSC as defined in Docket No. U-33434 of which a performance report must be filed annually by October 31 for the 12 months ending June 30
401(k) Plan
Cleco Power 401(k) Savings and Investment Plan
ABR
Alternate Base Rate which is the greater of the prime rate, the federal funds effective rate plus 0.50%, or LIBOR plus 1.0%
Acadia
Acadia Power Partners, LLC, previously a wholly owned subsidiary of Midstream. Acadia Power Partners, LLC was dissolved effective August 29, 2014.
Acadia Unit 1
Cleco Power’s 580-MW, combined cycle power plant located at the Acadia Power Station in Eunice, Louisiana
Acadia Unit 2
Entergy Louisiana’s 580-MW, combined cycle power plant located at the Acadia Power Station in Eunice, Louisiana, which is operated by Cleco Power 
ADIT
Accumulated Deferred Income Tax
AFUDC
Allowance for Funds Used During Construction
ALJ
Administrative Law Judge
Amended Lignite Mining Agreement
Amended and restated lignite mining agreement effective December 29, 2009
AMI
Advanced Metering Infrastructure
AOCI
Accumulated Other Comprehensive Income (Loss)
ARO
Asset Retirement Obligation
Attala
Attala Transmission LLC, a wholly owned subsidiary of Cleco Holdings
BCI
British Columbia Investment Management Corporation
CCR
Coal combustion by-products or residual
CEO
Chief Executive Officer
CFO
Chief Financial Officer
Cleco
Cleco Holdings and its subsidiaries
Cleco Cajun
Cleco Cajun LLC, formerly Cleco Energy LLC, a wholly owned subsidiary of Cleco Holdings
Cleco Cajun Transaction
The transaction between Cleco Cajun and NRG Energy in which Cleco Cajun acquired all the membership interest in NRG South Central, which closed on February 4, 2019, pursuant to the Purchase and Sale Agreement, which includes the Cottonwood Sale Leaseback.
Cleco Corporation
Pre-2016 Merger entity that was converted to a limited liability company and changed its name to Cleco Corporate Holdings LLC on April 13, 2016
Cleco Group
Cleco Group LLC, a wholly owned subsidiary of Cleco Partners
Cleco Holdings
Cleco Corporate Holdings LLC, a wholly owned subsidiary of Cleco Group
Cleco Katrina/Rita
Cleco Katrina/Rita Hurricane Recovery Funding LLC, a wholly owned subsidiary of Cleco Power
Cleco Partners
Cleco Partners L.P., a Delaware limited partnership that is owned by a consortium of investors, including funds or investment vehicles managed by MIRA, BCI, John Hancock Financial, and other infrastructure investors
Cleco Power
Cleco Power LLC and its subsidiaries, a wholly owned subsidiary of Cleco Holdings
Consent Decree
The Consent Decree, entered March 5, 2013, in Civil Action No. 09-100-JJB-DLD, US District Court for the Middle District of Louisiana, by and among the EPA, the Louisiana Department of Environmental Quality and Louisiana Generating relating to Big Cajun II, Unit 1, New Roads, Louisiana
Cottonwood Energy
Cottonwood Energy Company LP, a wholly owned subsidiary of Cleco Cajun. Prior to the closing of the Cleco Cajun Transaction on February 4, 2019, Cottonwood Energy was an indirect subsidiary of NRG South Central.
Cottonwood Plant
Cleco Cajun’s 1,263-MW, natural-gas-fired generating station located in Deweyville, Texas
Cottonwood Sale Leaseback
A lease agreement 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.
Coughlin
Cleco Power’s 775-MW, combined-cycle power plant located in St. Landry, Louisiana
DHLC
Dolet Hills Lignite Company, LLC, a wholly owned subsidiary of SWEPCO
Diversified Lands
Diversified Lands LLC, a wholly owned subsidiary of Cleco Holdings
Dolet Hills
A facility consisting of Dolet Hills Power Station, the Dolet Hills mine, and the Oxbow mine
Dolet Hills Power Station
A 650-MW generating unit at Cleco Power’s plant site in Mansfield, Louisiana. Cleco Power has a 50% ownership interest in the capacity of Dolet Hills.
EAC
Environmental Adjustment Clause
EBITDA
Earnings before interest, taxes, depreciation, and amortization
Entergy Gulf States
Entergy Gulf States Louisiana, LLC
Entergy Louisiana
Entergy Louisiana, LLC
EPA
U.S. Environmental Protection Agency
ERO
Electric Reliability Organization
Evangeline
Cleco Evangeline LLC, a wholly owned subsidiary of Midstream
FAC
Fuel Adjustment Clause

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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

ABBREVIATION OR ACRONYM
DEFINITION
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings, a credit rating agency
FTR
Financial Transmission Right
FRP
Formula Rate Plan
GAAP
Generally Accepted Accounting Principles in the U.S.
IRS
Internal Revenue Service
kWh
Kilowatt-hour(s)
LIBOR
London Interbank Offered Rate
LMP
Locational Marginal Price
Louisiana Generating
Louisiana Generating, LLC, a wholly owned subsidiary of Cleco Cajun. Prior to the closing of the Cleco Cajun Transaction on February 4, 2019, Louisiana Generating was an indirect subsidiary of NRG South Central.
LPSC
Louisiana Public Service Commission
LTSA
Long-Term Parts and Service Agreement between Cottonwood Energy and a third party, dated January 19, 2001, that Cleco Cajun assumed as a result of the Cleco Cajun Transaction to provide maintenance services related to the Cottonwood Plant
Madison Unit 3
A 641-MW generating unit at Cleco Power’s plant site in Boyce, Louisiana
MATS
Mercury and Air Toxics Standards
Merger Agreement
Agreement and Plan of Merger, dated as of October 17, 2014, by and among Cleco Partners, Merger Sub, and Cleco Corporation relating to the 2016 Merger
Merger Sub
Cleco MergerSub Inc., previously an indirect wholly owned subsidiary of Cleco Partners that was merged with and into Cleco Corporation, with Cleco Corporation surviving the 2016 Merger, and Cleco Corporation converting to a limited liability company and changing its name to Cleco Holdings
Midstream
Cleco Midstream Resources LLC, a wholly owned subsidiary of Cleco Holdings
MIRA
Macquarie Infrastructure and Real Assets Inc.
MISO
Midcontinent Independent System Operator, Inc.
Moody’s
Moody’s Investors Service, a credit rating agency
MW
Megawatt(s)
MWh
Megawatt-hour(s)
NERC
North American Electric Reliability Corporation
NRG Energy
NRG Energy, Inc.
NRG South Central
NRG South Central Generating LLC
Other Benefits
Includes medical, dental, vision, and life insurance for Cleco’s retirees
Oxbow
Oxbow Lignite Company, LLC, 50% owned by Cleco Power and 50% owned by SWEPCO
Perryville
Perryville Energy Partners, L.L.C., a wholly owned subsidiary of Cleco Holdings
Purchase and Sale Agreement
Purchase and Sale Agreement, dated as of February 6, 2018, by and among NRG Energy, NRG South Central, and Cleco Cajun
Registrant(s)
Cleco Holdings and/or Cleco Power
ROE
Return on Equity
ROU
Right of Use
RTO
Regional Transmission Organization
S&P
Standard & Poor’s Ratings Services, a credit rating agency
SEC
U.S. Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
SPP RE
Southwest Power Pool Regional Entity
SSR
System Support Resource
START
Strategic Alignment and Real-Time Transformation
Support Group
Cleco Support Group LLC, a wholly owned subsidiary of Cleco Holdings
SWEPCO
Southwestern Electric Power Company, an electric utility subsidiary of American Electric Power Company, Inc.
TCJA
Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
Teche Unit 3
A 359-MW generating unit at Cleco Power’s plant site in Baldwin, Louisiana
VaR
Value-at-Risk



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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This 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 Quarterly Report on Form 10-Q are forward-looking statements, including, without limitation, future capital expenditures; business strategies; goals, beliefs, plans and objectives; competitive strengths; market developments; development and operation of facilities; growth in sales volume; meeting capacity requirements; expansion of service to existing 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:
 
the effects of the Cleco Cajun Transaction and the 2016 Merger on Cleco’s business relationships, operating results, and business generally,
regulatory factors, such as changes in rate-setting practices or policies; political actions of governmental regulatory bodies; adverse regulatory ratemaking actions; recovery of investments made under traditional regulation; recovery of storm restoration costs; the frequency, timing, and amount of rate increases or decreases; the impact that rate cases or requests for FRP extensions may have on operating decisions of Cleco Power; the results of periodic NERC, LPSC, and FERC audits; participation in MISO and the related operating challenges and uncertainties, including increased wholesale competition relative to additional suppliers; and compliance with the ERO reliability standards for bulk power systems by Cleco Power,
Cleco Power’s ability to recover fuel costs through the FAC,
the ability to successfully integrate the assets acquired in the Cleco Cajun Transaction into Cleco’s operations,
factors affecting utility operations, such as unusual weather conditions or other natural phenomena; catastrophic weather-related damage caused by hurricanes and other storms or severe drought conditions; unscheduled generation outages; unanticipated maintenance or repairs; unanticipated changes to fuel costs or fuel supply costs, shortages, transportation problems, or other developments; fuel mix of Cleco’s generating facilities; decreased customer load; environmental incidents and compliance costs; and power transmission system constraints,
reliance on third parties for determination of Cleco’s commitments and obligations to markets for generation resources and reliance on third-party transmission services,
 
global and domestic economic conditions, including the ability of customers to continue paying their utility bills, related growth and/or down-sizing of businesses in Cleco’s service area, monetary fluctuations, changes in commodity prices, and inflation rates, 
political uncertainty in the U.S., including the ongoing debates related to the U.S. federal government budget and debt ceiling, and volatility and disruption in global capital and credit markets,
the ability of the lignite reserves at Dolet Hills to provide sufficient fuel to the Dolet Hills Power Station for seasonal operations until at least 2036,
Cleco’s ability to maintain its right to sell wholesale power at market-based rates within its control area, 
Cleco’s dependence on energy from sources other than its facilities and future sources of such additional energy,
reliability of Cleco’s generating facilities,
the imposition of energy efficiency requirements or increased conservation efforts of customers,
the impact of current or future environmental laws and regulations, including those related to CCRs, greenhouse gases, and energy efficiency that could limit or terminate the operation of Cleco’s generating units, increase costs, or reduce customer demand for electricity,
the ability to recover costs of compliance with environmental laws and regulations, including those through the EAC,
financial or regulatory accounting principles or policies imposed by FASB, the SEC, FERC, the LPSC, or similar entities with regulatory or accounting oversight, 
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,
legal, environmental, and regulatory delays and other obstacles associated with acquisitions, reorganizations, investments in joint ventures, or other capital projects,
costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters,
the availability and use of alternative sources of energy and technologies, such as wind, solar, battery storage, and distributed generation,
changes in federal, state, or local laws (including the TCJA and other tax laws), changes in tax rates, disallowances of tax positions, or changes in other regulating policies that may result in a change to tax benefits or expenses,
the restriction on the ability of Cleco Power to make distributions to Cleco Holdings in certain instances, as a result of the 2016 Merger Commitments,

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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

Cleco’s ability to remain in compliance with the commitments made to the LPSC in connection with the Cleco Cajun Transaction,
Cleco Holdings’ dependence on the earnings, dividends, or distributions from its subsidiaries to meet its debt obligations,
acts of terrorism, cyber attacks, data security breaches or other attempts to disrupt Cleco’s business or the business of third parties, or other man-made disasters,
credit ratings of Cleco Holdings and Cleco Power,
Cleco Holdings’ and Cleco Power’s ability to remain in compliance with their respective debt covenants,
the availability or cost of capital resulting from changes in global markets, Cleco’s business or financial condition, interest rates, or market perceptions of the electric utility industry and energy-related industries, and
workforce factors, including aging workforce, changes in management, and unavailability of skilled employees.

 
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, see Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, and in Part I, Item 1A, “Risk Factors” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
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.
Any forward-looking statement is considered only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, 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.


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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

PART I — FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cleco
These unaudited condensed consolidated financial statements should be read in conjunction with Cleco’s Consolidated Financial Statements and Notes included in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2018 . 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.”

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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Operating revenue
 
 
 
Electric operations
$
312,949

 
$
262,211

Other operations
39,397

 
22,196

Gross operating revenue
352,346


284,407

Electric customer credits
(8,160
)
 
(7,647
)
Operating revenue, net
344,186

 
276,760

Operating expenses
 
 
 
Fuel used for electric generation
104,054

 
67,016

Power purchased for utility customers
60,099

 
53,159

Other operations and maintenance
60,733

 
55,139

Depreciation and amortization
49,856

 
42,507

Taxes other than income taxes
13,870

 
12,258

Merger transaction and commitment costs
4,990

 
1,947

Gain on sale of asset
(2
)
 

Total operating expenses
293,600

 
232,026

Operating income
50,586

 
44,734

Interest income
1,491

 
783

Allowance for equity funds used during construction
5,688

 
2,363

Other income
5,108

 
554

Other expense
(2,331
)
 
(3,554
)
Interest charges
 
 
 
Interest charges, net
36,115

 
32,030

Allowance for borrowed funds used during construction
(2,116
)
 
(873
)
Total interest charges
33,999

 
31,157

Income before income taxes
26,543

 
13,723

Federal and state income tax expense
5,986

 
2,862

Net income
$
20,557

 
$
10,861

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

8


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Net income
$
20,557

 
$
10,861

Other comprehensive (loss) income, net of tax
 

 
 
Postretirement benefits (loss) gain (net of tax benefit of $47 in 2019 and tax expense of $15 in 2018)
(135
)
 
43

Total other comprehensive (loss) income, net of tax
(135
)
 
43

Comprehensive income, net of tax
$
20,422

 
$
10,904

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

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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
101,641

 
$
110,175

Restricted cash and cash equivalents
5,456

 
11,241

Customer accounts receivable (less allowance for doubtful accounts of $710 in 2019 and $814 in 2018)
94,292

 
50,043

Other accounts receivable
35,831

 
27,196

Unbilled revenue
30,205

 
35,314

Fuel inventory, at average cost
106,283

 
82,836

Materials and supplies, at average cost
118,574

 
92,671

Energy risk management assets
9,171

 
23,355

Accumulated deferred fuel
17,179

 
20,112

Cash surrender value of company-/trust-owned life insurance policies
82,197

 
80,391

Prepayments
7,526

 
7,911

Regulatory assets
22,107

 
22,461

Other current assets
10,604

 
1,256

Total current assets
641,066

 
564,962

Property, plant, and equipment
 
 
 
Property, plant, and equipment
4,450,790

 
3,728,477

Accumulated depreciation
(327,192
)
 
(303,727
)
Net property, plant, and equipment
4,123,598

 
3,424,750

Construction work in progress
421,515

 
354,045

Total property, plant, and equipment, net
4,545,113

 
3,778,795

Equity investment in investee
18,172

 
18,172

Goodwill
1,490,797

 
1,490,797

Prepayments
40,056

 
2,251

Restricted cash and cash equivalents
19,056

 
18,670

Note receivable
15,677

 
15,829

Regulatory assets
417,314

 
425,330

Intangible assets
176,683

 
84,307

Right of use assets
15,327

 

Other deferred charges
39,908

 
37,701

Total assets
$
7,419,169

 
$
6,436,814

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

 
 

 
 
 
 
(Continued on next page)
 
 
 

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CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Liabilities and member’s equity
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Long-term debt and finance leases due within one year
$
92,596

 
$
21,128

Accounts payable
151,302

 
156,589

Accounts payable - affiliate
3,102

 

Customer deposits
61,624

 
61,736

Provision for rate refund
44,002

 
35,842

Taxes payable, net
50,734

 
43,674

Interest accrued
44,490

 
15,828

Energy risk management liabilities
1,361

 
468

Regulatory liabilities - other
6,315

 
2,496

Deferred compensation
10,950

 
10,753

Other current liabilities
47,869

 
30,536

Total current liabilities
514,345

 
379,050

Long-term liabilities and deferred credits
 

 
 

Accumulated deferred federal and state income taxes, net
621,038

 
608,030

Postretirement benefit obligations
249,638

 
249,264

Regulatory liabilities - other
2,130

 
2,496

Regulatory liabilities - deferred taxes, net
154,651

 
155,537

Restricted storm reserve
15,696

 
15,485

Deferred lease revenue
60,460

 

Intangible liabilities
31,108

 

Asset retirement obligations
17,899

 
6,881

Operating lease liability
11,634

 

Other deferred credits
23,252

 
20,846

Total long-term liabilities and deferred credits
1,187,506

 
1,058,539

Long-term debt and finance leases, net
3,187,256

 
2,874,485

Total liabilities
4,889,107

 
4,312,074

Commitments and contingencies (Note 14)


 


Member’s equity
2,530,062

 
2,124,740

Total liabilities and member’s equity
$
7,419,169

 
$
6,436,814

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

 
 


11


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Operating activities
 
 
 
Net income
$
20,557

 
$
10,861

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
56,776

 
46,754

Unearned compensation expense
948

 
1,116

Allowance for equity funds used during construction
(5,688
)
 
(2,363
)
Deferred lease revenue
(1,440
)
 

Deferred income taxes
5,425

 
1,733

Deferred fuel costs
13,869

 
(11,353
)
Cash surrender value of company-/trust-owned life insurance
(1,806
)
 
346

Changes in assets and liabilities
 
 
 
Accounts receivable
(6,929
)
 
10,563

Unbilled revenue
5,109

 
6,387

Fuel inventory and materials and supplies
(1,939
)
 
11,573

Prepayments
14

 
2,199

Accounts payable
(19,999
)
 
(40,239
)
Accounts payable - affiliate
3,102

 

Customer deposits
2,598

 
3,500

Provision for merger commitments
(732
)
 
(1,187
)
Postretirement benefit obligations
192

 
1,007

Regulatory assets and liabilities, net
5,173

 
3,960

Other deferred accounts
(540
)
 
5,871

Taxes accrued
5,403

 
11,108

Interest accrued
28,662

 
26,220

Other operating
(626
)
 
(93
)
Net cash provided by operating activities
108,129

 
87,963

Investing activities
 
 
 
Additions to property, plant, and equipment
(83,679
)
 
(64,133
)
Allowance for equity funds used during construction
5,688

 
2,363

Reimbursement for property loss
29

 
1,172

Return of equity investment in investees

 
2,775

Payment to acquire business, net of cash acquired
(814,969
)
 

Other investing
270

 
75

Net cash used in investing activities
(892,661
)
 
(57,748
)
Financing activities
 
 
 
Draws on credit facilities
108,000

 

Payments on credit facilities
(108,000
)
 

Issuances of long-term debt
400,000

 
50,000

Repayment of long-term debt
(10,382
)
 
(9,700
)
Payment of financing costs
(3,785
)
 
(655
)
Contributions from member
384,900

 

Distributions to member

 
(19,500
)
Other financing
(134
)
 

Net cash provided by financing activities
770,599


20,145

Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents
(13,933
)

50,360

Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
140,086

(1)  
152,202

Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
126,153

(2)  
$
202,562

 
 
 
 
Supplementary cash flow information
 
 
 
Interest paid, net of amount capitalized
$
5,752

 
$
4,236

Income taxes paid, net
$

 
$
270

Supplementary non-cash investing and financing activities
 
 
 
Accrued additions to property, plant, and equipment
$
50,670

 
$
35,067

(1)  Includes cash and cash equivalents of $110,175, current restricted cash and cash equivalents of $11,241, and non-current restricted cash and cash equivalents of $18,670.
(2)  Includes cash and cash equivalents of $101,641, current restricted cash and cash equivalents of $5,456, and non-current restricted cash and cash equivalents of $19,056.

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

12


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO
 
Condensed Consolidated Statements of Changes in Member’s Equity (Unaudited)
(THOUSANDS)
MEMBERSHIP INTEREST

 
RETAINED EARNINGS

 
AOCI

 
TOTAL
MEMBER’S
EQUITY

Balances, Dec. 31, 2017
$
2,069,376

 
$
29,902

 
$
(2,921
)
 
$
2,096,357

Distributions to member

 
(19,500
)
 

 
(19,500
)
Net income

 
10,861

 

 
10,861

Other comprehensive income, net of tax

 

 
43

 
43

Balances, Mar. 31, 2018
$
2,069,376

 
$
21,263


$
(2,878
)

$
2,087,761

 
 
 
 
 
 
 
 
Balances, Dec. 31, 2018
$
2,069,376

 
$
53,578

 
$
1,786

 
$
2,124,740

Contribution from member

 
384,900

 

 
384,900

Net income

 
20,557

 

 
20,557

Other comprehensive loss, net of tax

 

 
(135
)
 
(135
)
Balances, Mar. 31, 2019
$
2,069,376

 
$
459,035

 
$
1,651

 
$
2,530,062

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

 
 

 
 


13


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2018 . 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.”


14


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Operating revenue
 
 
 
Electric operations
$
257,175

 
$
264,631

Other operations
19,430

 
22,195

Affiliate revenue
300

 
208

Gross operating revenue
276,905

 
287,034

Electric customer credits
(8,160
)
 
(7,647
)
Operating revenue, net
268,745

 
279,387

Operating expenses
 
 
 
Fuel used for electric generation
94,131

 
67,016

Power purchased for utility customers
29,654

 
53,159

Other operations and maintenance
47,700

 
56,385

Depreciation and amortization
42,377

 
40,388

Taxes other than income taxes
9,978

 
11,918

Total operating expenses
223,840

 
228,866

Operating income
44,905

 
50,521

Interest income
994

 
641

Allowance for equity funds used during construction
5,688

 
2,363

Other income
4,596

 
740

Other expense
(4,328
)
 
(2,608
)
Interest charges
 
 
 
Interest charges, net
19,261

 
18,529

Allowance for borrowed funds used during construction
(2,116
)
 
(873
)
Total interest charges
17,145

 
17,656

Income before income taxes
34,710

 
34,001

Federal and state income tax expense
7,998

 
7,997

Net income
$
26,712

 
$
26,004

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


15


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Net income
$
26,712

 
$
26,004

Other comprehensive income, net of tax
 

 
 

Postretirement benefits gain (net of tax expense of $55 in 2019 and $83 in 2018)
156

 
233

Amortization of interest rate derivatives to earnings (net of tax expense of $22 in 2019 and $22 in 2018)
64

 
64

Total other comprehensive income, net of tax
220

 
297

Comprehensive income, net of tax
$
26,932

 
$
26,301

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

 
 
 
 
 
 
 
 

16


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Assets
 
 
 
Utility plant and equipment
 
 
 
Property, plant, and equipment
$
5,003,196

 
$
5,015,004

Accumulated depreciation
(1,813,732
)
 
(1,804,563
)
Net property, plant, and equipment
3,189,464

 
3,210,441

Construction work in progress
416,886

 
351,828

Total utility plant and equipment, net
3,606,350

 
3,562,269

Current assets
 
 
 
Cash and cash equivalents
22,487

 
31,987

Restricted cash and cash equivalents
5,456

 
11,241

Customer accounts receivable (less allowance for doubtful accounts of $710 in 2019 and $814 in 2018)
47,932

 
50,043

Accounts receivable - affiliate
2,046

 
3,318

Other accounts receivable
32,240

 
24,523

Unbilled revenue
30,205

 
35,314

Fuel inventory, at average cost
88,602

 
82,836

Materials and supplies, at average cost
92,743

 
92,671

Energy risk management assets
5,684

 
23,355

Accumulated deferred fuel
17,179

 
20,112

Cash surrender value of company-owned life insurance policies
17,453

 
20,497

Prepayments
4,751

 
6,143

Regulatory assets
10,210

 
13,603

Other current assets
588

 
1,162

Total current assets
377,576

 
416,805

Equity investment in investee
18,172

 
18,172

Prepayments
2,512

 
2,251

Restricted cash and cash equivalents
18,326

 
18,649

Note receivable
15,677

 
15,829

Regulatory assets
259,389

 
261,569

Intangible asset
16,223

 
21,093

Right of use assets
15,007

 

Other deferred charges
37,194

 
32,419

Total assets
$
4,366,426

 
$
4,349,056

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
 
 
 
 
(Continued on next page)
 
 
 

17


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Liabilities and member’s equity
 
 
 
Member’s equity
$
1,621,465

 
$
1,594,533

Long-term debt and finance leases, net
1,376,819

 
1,387,774

Total capitalization
2,998,284

 
2,982,307

Current liabilities
 
 
 
Long-term debt and finance leases due within one year
21,815

 
21,128

Accounts payable
114,412

 
146,314

Accounts payable - affiliate
18,274

 
7,843

Customer deposits
61,624

 
61,736

Provision for rate refund
44,002

 
35,842

Taxes payable, net
26,217

 
48,177

Interest accrued
25,120

 
8,252

Energy risk management liabilities
872

 
468

Regulatory liabilities - other
6,315

 
2,496

Other current liabilities
24,737

 
22,263

Total current liabilities
343,388

 
354,519

Commitments and contingencies (Note 14)


 


Long-term liabilities and deferred credits
 
 
 
Accumulated deferred federal and state income taxes, net
629,342

 
630,765

Postretirement benefit obligations
183,318

 
182,721

Regulatory liabilities - other
2,130

 
2,496

Regulatory liabilities - deferred taxes, net
154,651

 
155,537

Restricted storm reserve
15,696

 
15,485

Asset retirement obligations
6,989

 
6,881

Operating lease liability
11,489

 

Other deferred credits
21,139

 
18,345

Total long-term liabilities and deferred credits
1,024,754

 
1,012,230

Total liabilities and member’s equity
$
4,366,426

 
$
4,349,056

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

18


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
FOR THE THREE MONTHS ENDED MAR. 31,
 
(THOUSANDS)
2019

 
2018

Operating activities
 
 
 
Net income
$
26,712

 
$
26,004

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
43,739

 
42,022

Allowance for equity funds used during construction
(5,688
)
 
(2,363
)
Deferred income taxes
(2,386
)
 
4,692

Deferred fuel costs
13,869

 
(11,353
)
Cash surrender value of company-owned life insurance
3,044

 
(63
)
Changes in assets and liabilities
 
 
 
Accounts receivable
(8,045
)
 
10,710

Accounts receivable - affiliate
1,687

 
524

Unbilled revenue
5,109

 
6,387

Fuel inventory and materials and supplies
(6,147
)
 
11,573

Prepayments
965

 
2,075

Accounts payable
(10,704
)
 
(35,030
)
Accounts payable - affiliate
8,422

 
672

Customer deposits
2,598

 
3,500

Provision for merger commitments
(732
)
 
(1,187
)
Postretirement benefit obligations
394

 
1,061

Regulatory assets and liabilities, net
4,676

 
3,463

Other deferred accounts
(840
)
 
6,116

Taxes accrued
(22,895
)
 
13,127

Interest accrued
16,868

 
15,555

Other operating
(677
)
 
1,861

Net cash provided by operating activities
69,969

 
99,346

Investing activities
 
 
 
Additions to property, plant, and equipment
(81,040
)
 
(63,343
)
Allowance for equity funds used during construction
5,688

 
2,363

Reimbursement of property loss
29

 
1,172

Other investing
270

 
75

Net cash used in investing activities
(75,053
)
 
(59,733
)
Financing activities
 
 
 
Draws on credit facility
33,000

 

Payments on credit facility
(33,000
)
 

Issuances of long-term debt

 
50,000

Repayment of long-term debt
(10,382
)
 
(9,700
)
Distributions to parent

 
(28,000
)
Other financing
(142
)
 
(655
)
Net cash (used in) provided by financing activities
(10,524
)
 
11,645

Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents
(15,608
)
 
51,258

Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
61,877

(1)  
102,957

Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
46,269

(2)  
$
154,215

 
 
 
 
Supplementary cash flow information
 
 
 
Interest paid, net of amount capitalized
$
1,348

 
$
1,789

Supplementary non-cash investing and financing activities
 
 
 
Accrued additions to property, plant, and equipment
$
49,477

 
$
35,038

(1)  Includes cash and cash equivalents of $31,987, current restricted cash and cash equivalents of $11,241, and non-current restricted cash and cash equivalents of $18,649.
(2)  Includes cash and cash equivalents of $22,487, current restricted cash and cash equivalents of $5,456, and non-current restricted cash and cash equivalents of $18,326.

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

19


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

CLECO POWER
 
 
 
Condensed Consolidated Statements of Changes in Member’s Equity (Unaudited)
(THOUSANDS)
MEMBER’S EQUITY

 
AOCI

 
TOTAL
MEMBER’S
EQUITY

Balances, Dec. 31, 2017
$
1,564,362

 
$
(13,683
)
 
$
1,550,679

Distributions to parent
(28,000
)
 

 
(28,000
)
Net income
26,004

 

 
26,004

Other comprehensive income, net of tax

 
297

 
297

Balances, Mar. 31, 2018
$
1,562,366

 
$
(13,386
)
 
$
1,548,980

 
Balances, Dec. 31, 2018
$
1,607,715

 
$
(13,182
)
 
$
1,594,533

Net income
26,712

 

 
26,712

Other comprehensive income, net of tax

 
220

 
220

Balances, Mar. 31, 2019
$
1,634,427

 
$
(12,962
)
 
$
1,621,465

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

 
 

 
 


20


CLECO
 
 
CLECO POWER
 
2019 1ST 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 and Cleco Power
Note 2
Business Combination
Cleco
Note 3
Recent Authoritative Guidance
Cleco and Cleco Power
Note 4
Leases
Cleco and Cleco Power
Note 5
Revenue Recognition
Cleco and Cleco Power
Note 6
Regulatory Assets and Liabilities
Cleco and Cleco Power
Note 7
Fair Value Accounting
Cleco and Cleco Power
Note 8
Debt
Cleco and Cleco Power
Note 9
Pension Plan and Employee Benefits
Cleco and Cleco Power
Note 10
Income Taxes
Cleco and Cleco Power
Note 11
Disclosures about Segments
Cleco
Note 12
Regulation and Rates
Cleco and Cleco Power
Note 13
Variable Interest Entities
Cleco and Cleco Power
Note 14
Litigation, Other Commitments and Contingencies, and   Disclosures about Guarantees
Cleco and Cleco Power
Note 15
Affiliate Transactions
Cleco and Cleco Power
Note 16
Intangible Assets and Liabilities
Cleco and Cleco Power
Note 17
Accumulated Other Comprehensive Loss
Cleco 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 Holdings and its majority-owned subsidiaries after elimination of intercompany accounts and transactions.
Cleco’s condensed consolidated financial statements include the financial results of Cleco Cajun from the closing of the Cleco Cajun Transaction on February 4, 2019, through March 31, 2019. For more information about the Cleco Cajun Transaction, see Note 2 — “Business Combination.”

Basis of Presentation
The condensed consolidated financial statements of Cleco and Cleco Power have been prepared in accordance with GAAP for interim financial information and with the instructions to the 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 fiscal year ended December 31, 2018.
These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to fairly state the financial position and results of operations of Cleco and Cleco Power. Amounts reported in Cleco and Cleco Power’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 3 — “Recent Authoritative Guidance.”

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 and Cleco Power’s restricted cash and cash equivalents consisted of:
Cleco
 
 
 
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,724


$
9,505

Cleco Power’s charitable contributions
1,200

 
1,200

Cleco Power’s rate credit escrow
532

 
536

Total current
5,456

 
11,241

Non-current
 
 
 
Diversified Lands’ mitigation escrow
21

 
21

Cleco Cajun’s defense fund
709

 

Cleco Power’s future storm restoration costs
15,665

 
15,391

Cleco Power’s charitable contributions
2,421

 
2,753

Cleco Power’s rate credit escrow
240

 
505

Total non-current
19,056

 
18,670

Total restricted cash and cash equivalents
$
24,512

 
$
29,911


21


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

Cleco Power
 
 
 
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,724

 
$
9,505

Charitable contributions
1,200

 
1,200

Rate credit escrow
532

 
536

Total current
5,456

 
11,241

Non-current
 
 
 
Future storm restoration costs
15,665

 
15,391

Charitable contributions
2,421

 
2,753

Rate credit escrow
240

 
505

Total non-current
18,326

 
18,649

Total restricted cash and cash equivalents
$
23,782

 
$
29,890


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. The change from December 31, 2018 , to March 31, 2019 , was due to Cleco Katrina/Rita using $10.4 million for scheduled storm recovery bond principal payments and $0.9 million for related interest payments, partially offset by collections of $5.5 million net of administration fees.
As part of the Cleco Cajun Transaction, Cleco acquired restricted cash of $ 0.7 million to be used by Cleco Cajun’s cooperative customers for defense funds in the event of potential takeovers. There is no further obligation of Cleco with respect to such expenses, including the replenishment of the fund.

Leases
Cleco accounts for leases in accordance with accounting guidance effective January 1, 2019. For more information on this guidance, see Note 3 — “Recent Authoritative Guidance.”
Cleco determines if a contract is a lease at its inception. If a contract is determined to be a lease, Cleco recognizes an ROU asset and lease liability at the commencement date based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit interest rate if readily determinable. Cleco’s incremental borrowing rate for a term similar to the duration of the lease based on information available at the commencement date is used if the implicit interest rate is not readily determinable.
Cleco recognizes ROU assets and lease liabilities for leasing arrangements with terms greater than one year. Except for the marine transportation asset class, Cleco accounts for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. Cleco’s marine transportation contracts, which include barges and towboats, contain non-lease components, such as maintenance and labor. Cleco allocates the consideration in these contracts between lease and non-lease components based on estimates of fair value from third parties that typically execute leases for this class of assets.
Expense for a lessee operating lease is recognized as a single lease cost on a straight-line basis over the lease term and reflected in the appropriate income statement line item based on the leased asset’s function. Income for a lessor operating lease is recognized as a single lease income item on a straight-line basis over the lease term and reflected in the appropriate income statement line item based on the lease asset’s function.
 
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 disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes. For more information about fair value levels, see Note 7 — “Fair Value Accounting.”

Risk Management
Market price risk is inherent in Cleco Power and Cleco Cajun’s fuel supply, generation, and customer supply activities. This includes changes in interest rates and commodity market prices, inclusive of solid and natural gas fuel costs, electricity, transmission, and transportation. 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 evaluates derivatives and hedging activities to determine whether the market risk-sensitive instruments and positions are required to be marked-to-market.
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 would be 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 would be deferred as a component of deferred fuel assets or liabilities in accordance with regulatory policy. When these positions close, actual gains or losses would be included in the FAC and reflected on customers’ bills as a component of the fuel charge. For Cleco Cajun, FTRs are marked-to-market with the resulting unrealized gain or loss recorded on the income statement as a component of power purchase expense and on the balance sheet as a component of energy risk management assets or liabilities. When these positions close, realized gains or losses are included in power purchase expense or electric operations income, and the expense is reflected in customers’ bills. For more information on FTRs, see Note 7 — “Fair Value Accounting — Commodity Contracts.” There were no open natural gas positions at March 31, 2019 , or December 31, 2018 .
Cleco and Cleco Power purchase FTRs in auctions facilitated by MISO. The majority of these FTRs are purchased in annual auctions during the second quarter, but additional FTRs may be purchased in monthly auctions. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving customer load. FTRs are not designated as hedging instruments for accounting purposes.
FTRs are recorded at their estimated fair value when purchased. Each accounting period, Cleco adjusts the carrying value of FTRs to their estimated fair value based on the most recent MISO FTR auction prices.
Cleco monitors credit risk exposure through review of counterparty credit quality and counterparty credit exposure. Cleco manages counterparty credit risk exposure by establishing appropriate credit limits with counterparties and

22


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

requiring contractual guarantees, cash deposits, or letters of credit from counterparties, as deemed necessary. Cleco Power and Cleco Cajun have agreements in place with various counterparties that may authorize transaction netting and contract payments to mitigate credit risk of transactions.
Cleco and Cleco Power 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 each reporting period presented, the Registrants did not enter into any contracts to mitigate the volatility in interest rate risk.
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.

23


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

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

Note 3 — Recent Authoritative Guidance
In February 2016, FASB amended the guidance to account for leases. Effective January 1, 2019, Cleco adopted the amended guidance using the optional transition method that allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption, apply the new disclosure requirements beginning in the period of adoption, and continue to present comparative period information as required under previous guidance.

24


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

In addition, Cleco elected the transition practical expedient that permits an entity to not reassess prior conclusions about lease identification, lease classification, and initial direct costs under the new standard, as well as the practical expedient that permits entities to not assess existing land easements under the new standard.
Adoption of this standard resulted in the recognition of ROU assets and lease liabilities for Cleco and Cleco Power’s operating leases of $16.1 million and $15.9 million , respectively. There was no impact to retained earnings as a result of adopting this standard. Adoption of this standard did not materially impact the Registrants’ results of operations or liquidity, and their accounting for finance leases is substantially unchanged. For more information on Cleco’s lease obligations, see Note 4 — “Leases.”
In June 2016, FASB amended the guidance for the measurement of credit losses on receivables and certain other assets. The guidance requires use of a current expected loss model, which may result in earlier recognition of credit losses. The adoption of this guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Management is evaluating the impact that the adoption of this guidance will have on the results of operations, financial condition, or cash flows of the registrants.
Note 4 — Leases
Cleco maintains operating and finance leases in its ordinary course of business activities.
Effective January 1, 2019, Cleco adopted new guidance which requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. A lease is deemed to exist when the right to control the use of identified property, plant, or equipment is conveyed through a contract for a certain period of time and consideration is paid. For more information on the new guidance, see Note 3 — “Recent Authoritative Guidance.” For more information on how leases are identified, see Note 1 — “Summary of Significant Accounting Policies — Leases.”

Operating Leases
Cleco Power leases utility systems from two municipalities and one non-municipal public body. The first municipal lease has a term of 10 years and expires on August 11, 2021. The second municipal lease has a term of 10 years and expires on May 13, 2028. The non-municipal lease has a term of 27 years and expires on July 31, 2039. Each utility system lease contains fixed and variable components, as well as provisions for extensions.
Cleco Power has leases for 200 railcars for coal transportation. One lease for 115 railcars expires on March 31, 2021, and the other lease for 85 railcars expires on March 31, 2020. Cleco Cajun has a lease for 135 railcars for coal transportation, which commenced in February 2019 and is a short-term lease with an initial term of 12 months. This short-term lease renews for additional one -month terms unless Cleco Cajun chooses to terminate. Cleco reassesses its need for the railcars upon the expiration of each term. Cleco pays a monthly rental fee per car. The railcar leases do not contain contingent rent payments.
Cleco Power has leases for three towboats in order to transport petroleum coke to Madison Unit 3. Each of the towboat leases has a term of 10 years and expires on March 31, 2028. Under these agreements, the rates are adjusted annually per the Producer Price Index. Each lease contains provisions for a five -year extension.
Cleco and Cleco Power’s remaining operating leases provide for office and operating facilities, office equipment, and tower rentals.
The following is a schedule by year of future minimum lease payments due under Cleco and Cleco Power’s long-term operating leases together with the present value of the net minimum lease payments as of March 31, 2019:
(THOUSANDS)
CLECO POWER

 
CLECO

Nine months ending Dec. 31, 2019
$
4,598

 
$
4,773

Years ending Dec. 31,
 
 
 
2020
5,918

 
5,952

2021
4,593

 
4,626

2022
3,225

 
3,256

2023
3,201

 
3,229

Thereafter
25,150

 
25,172

Total minimum lease payments
$
46,685

 
$
47,008

Less: amount representing interest
31,678

 
31,689

Present value of net minimum operating lease payments
$
15,007

 
$
15,319

Current liabilities
$
3,518

 
$
3,685

Non-current liabilities
11,489

 
11,634

 

The following table is a summary of expected operating lease payments for Cleco and Cleco Power at December 31, 2018:
(THOUSANDS)
CLECO HOLDINGS

 
CLECO
POWER

 
TOTAL

Year ending Dec. 31,
 
 
 
 
 
2019
$
120

 
$
4,030

 
$
4,150

2020

 
3,890

 
3,890

2021

 
2,789

 
2,789

2022

 
1,239

 
1,239

2023

 
1,214

 
1,214

Thereafter

 
7,235

 
7,235

Total operating lease payments
$
120

 
$
20,397

 
$
20,517


Finance Lease
In April 2018, Cleco Power entered into an agreement with Savage Inland Marine for 42 barges used to transport petroleum coke through March 2033. The agreement meets the accounting definition of a finance lease.
The barge lease rate contains both a fixed and variable component, of which the latter is adjusted every third anniversary of the agreement for estimated executory costs. If the barges are idle, the lessor is required to attempt to sublease the barges to third parties with the revenue reducing Cleco Power’s lease payment. This agreement contains a provision for early termination upon the occurrence of any one of four cancellation events.
For the three months ended March 31, 2019, Cleco Power paid $0.7 million in lease payments and received $0.3 million of revenue from subleases.
The following is an analysis of the leased property under the finance lease:
(THOUSANDS)
AT MAR. 31, 2019

 
AT DEC. 31, 2018

Barges
$
16,800

 
$
16,800

Less: accumulated amortization
1,120

 
840

Net finance lease
$
15,680

 
$
15,960


The following is a schedule by year of future minimum lease payments due under the finance lease together with the present value of the net minimum lease payments as of March 31, 2019:
(THOUSANDS)
 
Nine months ending Dec. 31, 2019
$
1,653

Years ending Dec. 31,
 
2020
2,203

2021
2,203

2022
2,203

2023
2,203

2024
2,203

Thereafter
17,674

Total minimum lease payments
30,342

Less: amount representing interest
14,058

Present value of net minimum lease payments
$
16,284

Current liabilities
$
572

Non-current liabilities
$
15,712



25


CLECO
 
 
CLECO POWER
 
2019 1ST QUARTER FORM 10-Q

The following is a schedule by year of future minimum lease payments due under the finance lease together with the present value of the net minimum lease payments as of December 31, 2018:
 
(THOUSANDS)

Years ending Dec. 31,
 
2019
$
2,611

2020
2,611

2021
2,611

2022
2,611

2023
2,611

Thereafter
23,655

Total minimum lease payments
36,710

Less: executory costs
5,817

Net minimum lease payments
30,893

Less: amount representing interest
14,475

Present value of net minimum lease payments
$
16,418

Current liabilities
$
557

Non-current liabilities
$
15,861


Additional Lessee Disclosures
Cleco and Cleco Power’s total lease cost includes amounts on the income statement, as well as amounts capitalized as part of property, plant, or equipment or inventory. The following table reflects total lease costs for Cleco and Cleco Power:
 
FOR THE THREE MONTHS
ENDED MAR. 31, 2019
 
(THOUSANDS)
CLECO POWER

 
CLECO

Finance lease cost
 
 
 
Amortization of ROU assets
$
280

 
$
280

Interest on lease liabilities
417

 
417

Operating lease cost
1,081

 
1,136

Variable lease cost
162

 
162

Total lease cost
$
1,940

 
$
1,995


 
The following table presents additional information related to Cleco and Cleco Power’s operating and finance leases as of and for the three months ended March 31, 2019 :
(THOUSANDS)
BALANCE SHEET LINE ITEM
CLECO POWER

 
CLECO

Supplemental balance sheet information
 
 
ROU assets