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EX-95 - EXHIBIT 95 - Cleco Corporate Holdings LLCcnl-93017xq3ex95.htm
EX-32.4 - EXHIBIT 32.4 - Cleco Corporate Holdings LLCcnl-93017xq3ex324.htm
EX-32.3 - EXHIBIT 32.3 - Cleco Corporate Holdings LLCcnl-93017xq3ex323.htm
EX-32.2 - EXHIBIT 32.2 - Cleco Corporate Holdings LLCcnl-93017xq3ex322.htm
EX-32.1 - EXHIBIT 32.1 - Cleco Corporate Holdings LLCcnl-93017xq3ex321.htm
EX-31.4 - EXHIBIT 31.4 - Cleco Corporate Holdings LLCcnl-93017xq3ex314.htm
EX-31.3 - EXHIBIT 31.3 - Cleco Corporate Holdings LLCcnl-93017xq3ex313.htm
EX-31.2 - EXHIBIT 31.2 - Cleco Corporate Holdings LLCcnl-93017xq3ex312.htm
EX-31.1 - EXHIBIT 31.1 - Cleco Corporate Holdings LLCcnl-93017xq3ex311.htm
EX-12.B - EXHIBIT 12.B - Cleco Corporate Holdings LLCcnl-93017xq3ex12b.htm
EX-12.A - EXHIBIT 12.A - Cleco Corporate Holdings LLCcnl-93017xq3ex12a.htm
 
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 September 30, 2017
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 x  No ¨
 
Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (Do not check if a smaller reporting company) 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 (Do not check if a smaller reporting company) 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

As of November 9, 2017, Cleco Corporate Holdings LLC has no common stock outstanding. All of the outstanding interest 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
 
2017 3RD QUARTER FORM 10-Q

This Combined 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 report should be read in its entirety as it pertains to each respective Registrant. The Notes to the Unaudited Condensed Consolidated Financial Statements are combined.


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CLECO
 
 
CLECO POWER
 
2017 3RD 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
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 
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
ARRA
American Recovery and Reinvestment Act of 2009
Attala
Attala Transmission LLC, a wholly owned subsidiary of Cleco Holdings
bcIMC
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 Corporation
Pre-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, bcIMC, John Hancock Financial, and other infrastructure investors
Cleco Power
Cleco Power LLC and its subsidiaries, a wholly owned subsidiary of Cleco Holdings
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
Entergy Mississippi
Entergy Mississippi, Inc.
EPA
U.S. Environmental Protection Agency
ERO
Electric Reliability Organization
ESPP
Employee Stock Purchase Plan
Evangeline
Cleco Evangeline LLC, a wholly owned subsidiary of Midstream
FAC
Fuel Adjustment Clause
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
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)
LED
Louisiana Economic Development
LIBOR
London Interbank Offered Rate
LPSC
Louisiana Public Service Commission
LTIP
Long-Term Incentive Compensation Plan
MATS
Mercury and Air Toxics Standards
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

3


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

ABBREVIATION OR ACRONYM
DEFINITION
Merger Agreement
Agreement and Plan of Merger, dated as of October 17, 2014, by and among Cleco Partners, Merger Sub, and Cleco Corporation
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
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 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
NMTC
New Markets Tax Credit
NMTC Fund
USB NMTC Fund 2008-1 LLC was formed to invest in projects qualifying for New Markets Tax Credits and Solar Projects
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
Predecessor
Pre-merger activity of Cleco. Cleco has accounted for the merger transaction by applying the acquisition method of accounting. The predecessor period is not comparable to the successor period.
Registrant(s)
Cleco Holdings and/or Cleco Power
ROE
Return on Equity
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
Southwest Power Pool
SSR
System Support Resource
Successor
Post-merger activity of Cleco. Cleco has accounted for the merger transaction by applying the acquisition method of accounting. The successor period is not comparable to the predecessor period.
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.
Teche Unit 3
A 359-MW generating unit at Cleco Power’s plant site in Baldwin, Louisiana
VaR
Value-at-Risk


4


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Combined 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 Combined Quarterly Report 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 Merger on Cleco Holdings’ and Cleco Power’s business relationships, operating results, and business generally,
regulatory factors such as changes in rate-setting practices or policies; the unpredictability in 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,
the ability to recover fuel costs through the FAC,
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 Power’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, 
the ability of the lignite reserves at Dolet Hills to provide sufficient fuel to the Dolet Hills Power Station until at least 2036,
Cleco Power’s ability to maintain its right to sell wholesale power at market-based rates within its control area, 
Cleco Power’s dependence on energy from sources other than its facilities and future sources of such additional energy,
reliability of Cleco Power’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 certain 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 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 Merger Commitments,
Cleco Holdings’ dependence on the earnings, dividends, or distributions from its subsidiaries to meet its debt obligations,

5


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

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, 
nonperformance by and creditworthiness of the guarantor counterparty of the NMTC Fund, 
credit ratings of Cleco Holdings and Cleco Power, 
the ability to remain in compliance with 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
employee workforce factors, including aging workforce, changes in management, and inadequate resources.

 
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, please see Part I, Item 1A, “Risk Factors” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
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 Combined 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.


6


CLECO
 
 
CLECO POWER
 
2017 3RD 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, 2016. 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.”

7


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Operating revenue
 
 
 
Electric operations
$
317,589

 
$
323,707

Other operations
21,282

 
18,976

Gross operating revenue
338,871

 
342,683

Electric customer credits
(372
)
 
177

Operating revenue, net
338,499

 
342,860

Operating expenses
 
 
 
Fuel used for electric generation
103,217

 
101,908

Power purchased for utility customers
39,355

 
36,058

Other operations
27,957

 
35,361

Maintenance
18,031

 
19,412

Depreciation and amortization
42,228

 
42,535

Taxes other than income taxes
12,414

 
12,574

Merger transaction and commitment costs
185

 
1,869

Total operating expenses
243,387

 
249,717

Operating income
95,112

 
93,143

Interest income
354

 
318

Allowance for equity funds used during construction
2,096

 
1,308

Other income
2,557

 
658

Other expense
(1,299
)
 
(248
)
Interest charges
 
 
 
Interest charges, including amortization of debt issuance costs, premiums, and discounts, net
31,110

 
32,233

Allowance for borrowed funds used during construction
(648
)
 
(375
)
Total interest charges
30,462

 
31,858

Income before income taxes
68,358

 
63,321

Federal and state income tax expense
23,054

 
23,700

Net income
$
45,304

 
$
39,621

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

8


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Net income
$
45,304

 
$
39,621

Other comprehensive loss, net of tax
 

 
 
Postretirement benefits loss (net of tax benefits of $26 and $1,442, respectively)
(44
)
 
(2,305
)
Total other comprehensive loss, net of tax
(44
)
 
(2,305
)
Comprehensive income, net of tax
$
45,260

 
$
37,316

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

9


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE MONTHS ENDED SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 -
APR. 12, 2016

Operating revenue
 
 
 
 
 
Electric operations
$
839,080

 
$
553,634

 
$
281,154

Other operations
59,627

 
33,110

 
19,080

Gross operating revenue
898,707

 
586,744

 
300,234

Electric customer credits
(1,045
)
 
(381
)
 
(364
)
Operating revenue, net
897,662

 
586,363

 
299,870

Operating expenses
 
 
 
 
 
Fuel used for electric generation
261,063

 
168,159

 
96,378

Power purchased for utility customers
114,675

 
60,439

 
27,249

Other operations
89,201

 
59,633

 
33,563

Maintenance
66,955

 
42,317

 
29,813

Depreciation and amortization
124,630

 
76,695

 
44,076

Taxes other than income taxes
36,790

 
22,953

 
14,611

Merger transaction and commitment costs
187

 
173,172

 
34,912

Gain on sale of asset

 

 
(1,095
)
Total operating expenses
693,501

 
603,368

 
279,507

Operating income (loss)
204,161

 
(17,005
)
 
20,363

Interest income
1,046

 
515

 
265

Allowance for equity funds used during construction
4,446

 
2,057

 
723

Other income
4,402

 
2,395

 
870

Other expense
(1,833
)
 
(435
)
 
(590
)
Interest charges
 
 
 
 
 
Interest charges, including amortization of debt issuance costs, premiums, and discounts, net
94,077

 
58,926

 
22,330

Allowance for borrowed funds used during construction
(1,277
)
 
(603
)
 
(207
)
Total interest charges
92,800

 
58,323

 
22,123

Income (loss) before income taxes
119,422

 
(70,796
)
 
(492
)
Federal and state income tax expense (benefit)
42,381

 
(28,502
)
 
3,468

Net income (loss)
$
77,041

 
$
(42,294
)
 
$
(3,960
)
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 
 
 


10


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE MONTHS ENDED SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Net income (loss)
$
77,041

 
$
(42,294
)
 
$
(3,960
)
Other comprehensive (loss) income, net of tax
 
 
 
 
 
Postretirement benefits (loss) gain (net of tax benefit of $1,359 and $1,442 and tax expense of $367, respectively)
(2,175
)
 
(2,305
)
 
587

Amortization of interest rate derivatives to earnings (net of tax expense of $0, $0, and $37, respectively)

 

 
60

Total other comprehensive (loss) income, net of tax
(2,175
)
 
(2,305
)
 
647

Comprehensive income (loss), net of tax
$
74,866

 
$
(44,599
)
 
$
(3,313
)
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 
 
 


11


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
6,127

 
$
23,077

Restricted cash and cash equivalents
8,874

 
23,084

Customer accounts receivable (less allowance for doubtful accounts of $2,102 in 2017 and $7,199 in 2016)
78,313

 
56,780

Other accounts receivable
33,934

 
19,778

Unbilled revenue
38,912

 
34,268

Fuel inventory, at average cost
51,847

 
46,410

Materials and supplies, at average cost
84,522

 
81,818

Energy risk management assets
13,425

 
7,884

Accumulated deferred fuel
21,057

 
20,787

Cash surrender value of company-/trust-owned life insurance policies
81,165

 
77,225

Prepayments
6,553

 
7,813

Regulatory assets
27,636

 
26,803

Other current assets
410

 
1,315

Total current assets
452,775

 
427,042

Property, plant, and equipment
 
 
 
Property, plant, and equipment
3,556,775

 
3,476,581

Accumulated depreciation
(162,040
)
 
(75,816
)
Net property, plant, and equipment
3,394,735

 
3,400,765

Construction work in progress
163,423

 
78,577

Total property, plant, and equipment, net
3,558,158

 
3,479,342

Equity investment in investee
18,172

 
18,672

Goodwill
1,490,797

 
1,490,797

Prepayments
1,887

 
4,731

Restricted cash and cash equivalents
24,547

 
23,410

Regulatory assets - deferred taxes, net
240,431

 
237,449

Regulatory assets
430,893

 
454,644

Net investment in direct financing lease
13,381

 
13,420

Intangible assets
121,269

 
142,634

Tax credit fund investment, net
10,409

 
11,888

Other deferred charges
34,982

 
39,115

Total assets
$
6,397,701

 
$
6,343,144

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 

 
 

 
 
 
 
 
 
 
 
(Continued on next page)
 
 
 

12


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
Condensed Consolidated Balance Sheets (Unaudited)
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Liabilities and member’s equity
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Short-term debt
$
6,470

 
$

Long-term debt due within one year
19,193

 
19,715

Accounts payable
99,138

 
112,087

Customer deposits
58,018

 
56,599

Provision for rate refund
3,734

 
3,974

Provision for merger commitments
4,945

 
14,371

Taxes payable, net
26,894

 
3,942

Interest accrued
38,656

 
14,783

Energy risk management liabilities
538

 
201

Deferred compensation
11,604

 
11,654

Other current liabilities
21,309

 
14,850

Total current liabilities
290,499

 
252,176

Long-term liabilities and deferred credits
 

 
 

Accumulated deferred federal and state income taxes, net
1,075,869

 
1,033,055

Accumulated deferred investment tax credits
2,254

 
2,751

Postretirement benefit obligations
230,203

 
223,003

Restricted storm reserve
18,189

 
17,385

Other deferred credits
29,430

 
29,440

Total long-term liabilities and deferred credits
1,355,945

 
1,305,634

Long-term debt, net
2,713,583

 
2,738,571

Total liabilities
4,360,027

 
4,296,381

Commitments and contingencies (Note 12)


 


Member’s equity
 

 
 

Membership interest
1,985,421

 
2,069,376

Retained earnings/(Accumulated deficit)
52,928

 
(24,113
)
Accumulated other comprehensive (loss) income
(675
)
 
1,500

Total member’s equity
2,037,674

 
2,046,763

Total liabilities and member’s equity
$
6,397,701

 
$
6,343,144

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 

 
 


13


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE
MONTHS ENDED
SEPT. 30, 2017

 
APR. 13 2016 -
SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Operating activities
 
 
 
 
 
Net income (loss)
$
77,041

 
$
(42,294
)
 
$
(3,960
)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Depreciation and amortization
140,433

 
104,561

 
45,869

Gain on sale of asset

 

 
(1,095
)
Provision for doubtful accounts
2,694

 
1,932

 
1,212

Unearned compensation expense
2,809

 
769

 
3,276

Allowance for equity funds used during construction
(4,446
)
 
(2,056
)
 
(724
)
Deferred income taxes
41,192

 
(25,681
)
 
2,219

Deferred fuel costs
4,231

 
(11,489
)
 
977

Cash surrender value of company-/trust-owned life insurance
(3,940
)
 
(2,198
)
 
(840
)
Changes in assets and liabilities
 
 
 
 
 
Accounts receivable
(44,139
)
 
(23,157
)
 
(1,865
)
Accounts receivable, affiliate
12

 
(3,794
)
 

Unbilled revenue
(4,643
)
 
(13,643
)
 
563

Fuel inventory and materials and supplies
(6,885
)
 
19,464

 
19,312

Prepayments
5,509

 
(236
)
 
2,395

Accounts payable
(22,325
)
 
(15,294
)
 
8,348

Customer deposits
9,317

 
5,421

 
3,342

Provision for merger commitments
(9,244
)
 
40,357

 

Postretirement benefit obligations
3,789

 
2,267

 
9,746

Regulatory assets and liabilities, net
9,430

 
9,640

 
5,178

Other deferred accounts
(6,546
)
 
(2,065
)
 
6,878

Taxes accrued
22,233

 
5,006

 
10,820

Interest accrued
23,772

 
13,479

 
17,909

Other operating
6,595

 
5,714

 
219

Net cash provided by operating activities
246,889


66,703

 
129,779

Investing activities
 
 
 
 
 
Additions to property, plant, and equipment
(185,609
)
 
(102,677
)
 
(42,392
)
Allowance for equity funds used during construction
4,446

 
2,056

 
724

Proceeds from sale of property
590

 
263

 
1,932

Contributions to equity investment in investee

 

 
(2,450
)
Return of equity investment in tax credit fund
1,223

 
901

 
476

Transfer of cash from (to) restricted accounts, net
13,073

 
(33,943
)
 
4,847

Other investing
7

 
137

 
53

Net cash used in investing activities
(166,270
)

(133,263
)
 
(36,810
)
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
(Continued on next page)
 
 
 
 
 

14


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE
MONTHS ENDED
SEPT. 30, 2017

 
APR. 13 2016 -
SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Financing activities
 
 
 
 
 
Proceeds from short-term debt, net
6,470

 

 

Draws on credit facilities
134,000

 
15,000

 
3,000

Payments on credit facilities
(134,000
)
 
(15,000
)
 
(10,000
)
Issuance of long-term debt

 
1,350,000

 

Repayment of long-term debt
(17,896
)
 
(1,358,268
)
 
(8,546
)
Payment of financing costs
(369
)
 
(6,860
)
 
(43
)
Dividends paid on common stock

 
(572
)
 
(24,579
)
Contribution from member

 
100,720

 

Distributions to member
(83,955
)
 
(56,000
)
 

Other financing
(1,819
)
 
(1,220
)
 
(717
)
Net cash (used in) provided by financing activities
(97,569
)

27,800

 
(40,885
)
Net (decrease) increase in cash and cash equivalents
(16,950
)

(38,760
)
 
52,084

Cash and cash equivalents at beginning of period
23,077

 
120,330

 
68,246

Cash and cash equivalents at end of period
$
6,127


$
81,570

 
$
120,330

 
 
 
 
 
 
Supplementary cash flow information
 
 
 
 
 
Interest paid, net of amount capitalized
$
64,555

 
$
42,963

 
$
2,478

Income taxes (refunded) paid, net
$
(6
)
 
$
256

 
$
(481
)
Supplementary non-cash investing and financing activities
 
 
 
 
 
Accrued additions to property, plant, and equipment
$
13,083

 
$
15,853

 
$
10,619

Non-cash additions to property, plant, and equipment
$
3,015

 
$

 
$

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 
 
 


15


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

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

 
(ACCUMULATED DEFICIT)
 /RETAINED EARNINGS

 
AOCI

 
TOTAL
MEMBER’S
EQUITY

Balances, Dec. 31, 2016
$
2,069,376

 
$
(24,113
)
 
$
1,500

 
$
2,046,763

Distributions to member
(83,955
)
 

 

 
(83,955
)
Net income

 
77,041

 

 
77,041

Other comprehensive loss, net of tax

 

 
(2,175
)
 
(2,175
)
Balances, Sept. 30, 2017
$
1,985,421

 
$
52,928


$
(675
)

$
2,037,674

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

 
 

 
 


16


CLECO
 
 
CLECO POWER
 
2017 3RD 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, 2016. 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.”


17


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Operating revenue
 
 
 
Electric operations
$
320,009

 
$
326,281

Other operations
20,768

 
18,460

Affiliate revenue
209

 
213

Gross operating revenue
340,986

 
344,954

Electric customer credits
(372
)
 
177

Operating revenue, net
340,614

 
345,131

Operating expenses
 
 
 
Fuel used for electric generation
103,217

 
101,908

Power purchased for utility customers
39,355

 
36,058

Other operations
28,680

 
35,886

Maintenance
17,812

 
19,326

Depreciation and amortization
40,049

 
40,353

Taxes other than income taxes
12,008

 
12,180

Total operating expenses
241,121

 
245,711

Operating income
99,493

 
99,420

Interest income
332

 
264

Allowance for equity funds used during construction
2,096

 
1,308

Other income
1,463

 
629

Other expense
(1,299
)
 
(445
)
Interest charges
 
 
 
Interest charges, including amortization of debt issuance costs, premiums, and discounts, net
17,789

 
19,552

Allowance for borrowed funds used during construction
(648
)
 
(375
)
Total interest charges
17,141

 
19,177

Income before income taxes
84,944

 
81,999

Federal and state income tax expense
30,092

 
29,427

Net income
$
54,852

 
$
52,572

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 


18


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Net income
$
54,852

 
$
52,572

Other comprehensive income, net of tax
 

 
 

Postretirement benefits gain (net of tax expense of $104 in 2017 and $1,364 in 2016)
167

 
2,180

Amortization of interest rate derivatives to earnings (net of tax expense of $33 in 2017 and 2016)
53

 
53

Total other comprehensive income, net of tax
220

 
2,233

Comprehensive income, net of tax
$
55,072

 
$
54,805

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 


19


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

 
 
 
 
CLECO POWER
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Operating revenue
 
 
 
Electric operations
$
847,417

 
$
839,593

Other operations
58,083

 
50,638

Affiliate revenue
649

 
669

Gross operating revenue
906,149

 
890,900

Electric customer credits
(1,045
)
 
(745
)
Operating revenue, net
905,104

 
890,155

Operating expenses
 
 


Fuel used for electric generation
261,063

 
264,537

Power purchased for utility customers
114,675

 
87,688

Other operations
90,453

 
94,566

Maintenance
66,496

 
71,818

Depreciation and amortization
118,280

 
115,196

Taxes other than income taxes
35,412

 
36,096

Merger commitment costs

 
151,501

Gain on sale of asset

 
(1,095
)
Total operating expenses
686,379

 
820,307

Operating income
218,725

 
69,848

Interest income
926

 
590

Allowance for equity funds used during construction
4,446

 
2,780

Other income
1,839

 
828

Other expense
(1,833
)
 
(1,082
)
Interest charges
 
 
 
Interest charges, including amortization of debt issuance costs, premiums, and discounts, net
53,931

 
58,587

Allowance for borrowed funds used during construction
(1,277
)
 
(810
)
Total interest charges
52,654

 
57,777

Income before income taxes
171,449

 
15,187

Federal and state income tax expense
63,010

 
2,965

Net income
$
108,439

 
$
12,222

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

20


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

 
 
 
 
CLECO POWER
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Net income
$
108,439

 
$
12,222

Other comprehensive income, net of tax
 
 
 
Postretirement benefits (loss) gain (net of tax benefit of $38 in 2017 and tax expense of $1,602 in 2016)
(60
)
 
2,561

Amortization of interest rate derivatives to earnings (net of tax expense of $99 in 2017 and 2016)
159

 
159

Total other comprehensive income, net of tax
99

 
2,720

Comprehensive income, net of tax
$
108,538

 
$
14,942

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

21


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Assets
 
 
 
Utility plant and equipment
 
 
 
Property, plant, and equipment
$
4,858,764

 
$
4,790,565

Accumulated depreciation
(1,687,337
)
 
(1,618,241
)
Net property, plant, and equipment
3,171,427

 
3,172,324

Construction work in progress
162,500

 
77,306

Total utility plant and equipment, net
3,333,927

 
3,249,630

Current assets
 
 
 
Cash and cash equivalents
4,227

 
21,482

Restricted cash and cash equivalents
8,874

 
23,084

Customer accounts receivable (less allowance for doubtful accounts of $2,102 in 2017 and $7,199 in 2016)
78,313

 
56,780

Accounts receivable - affiliate
1,545

 
1,406

Other accounts receivable
33,676

 
19,457

Taxes receivable, net

 
12,490

Unbilled revenue
38,912

 
34,268

Fuel inventory, at average cost
51,847

 
46,410

Materials and supplies, at average cost
84,522

 
81,818

Energy risk management assets
13,425

 
7,884

Accumulated deferred fuel
21,057

 
20,787

Cash surrender value of company-owned life insurance policies
20,216

 
20,018

Prepayments
5,367

 
5,892

Regulatory assets
18,779

 
17,721

Other current assets

 
577

Total current assets
380,760

 
370,074

Equity investment in investee
18,172

 
18,672

Prepayments
1,887

 
4,731

Restricted cash and cash equivalents
24,526

 
23,389

Regulatory assets - deferred taxes, net
240,431

 
237,449

Regulatory assets
253,146

 
268,016

Intangible asset
45,636

 
58,473

Other deferred charges
33,020

 
37,014

Total assets
$
4,331,505

 
$
4,267,448

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
(Continued on next page)
 
 
 

22


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO POWER
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Liabilities and member’s equity
 
 
 
Member’s equity
$
1,568,740

 
$
1,535,202

Long-term debt, net
1,216,967

 
1,235,056

Total capitalization
2,785,707

 
2,770,258

Current liabilities
 
 
 
Short-term debt
6,470

 

Long-term debt due within one year
19,193

 
19,715

Accounts payable
92,522

 
101,874

Accounts payable - affiliate
8,293

 
7,190

Customer deposits
58,018

 
56,599

Provision for rate refund
3,734

 
3,974

Provision for merger commitments
4,945

 
14,371

Taxes payable, net
19,487

 

Interest accrued
20,348

 
7,141

Energy risk management liabilities
538

 
201

Other current liabilities
15,659

 
9,951

Total current liabilities
249,207

 
221,016

Commitments and contingencies (Note 12)


 


Long-term liabilities and deferred credits
 
 
 
Accumulated deferred federal and state income taxes, net
1,084,482

 
1,068,592

Accumulated deferred investment tax credits
2,254

 
2,751

Postretirement benefit obligations
164,183

 
159,107

Restricted storm reserve
18,189

 
17,385

Other deferred credits
27,483

 
28,339

Total long-term liabilities and deferred credits
1,296,591

 
1,276,174

Total liabilities and member’s equity
$
4,331,505

 
$
4,267,448

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

23


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

CLECO POWER
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

Operating activities
 
 
 
Net income
$
108,439

 
$
12,222

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
123,911

 
120,703

Gain on sale of asset

 
(1,095
)
Provision for doubtful accounts
2,592

 
3,014

Unearned compensation expense
1,479


1,394

Allowance for equity funds used during construction
(4,446
)
 
(2,780
)
Deferred income taxes
12,847

 
5,201

Deferred fuel costs
4,231

 
(10,512
)
Changes in assets and liabilities
 
 
 
Accounts receivable
(44,115
)
 
(24,378
)
Accounts receivable, affiliate
1,221

 
1,647

Unbilled revenue
(4,643
)
 
(13,080
)
Fuel inventory and materials and supplies
(6,885
)
 
38,776

Prepayments
4,774

 
1,368

Accounts payable
(19,648
)
 
(9,485
)
Accounts payable, affiliate
611

 
(2,583
)
Customer deposits
9,317

 
8,763

Provision for merger commitments
(9,244
)
 
40,357

Postretirement benefit obligations
3,673

 
3,656

Regulatory assets and liabilities, net
7,939

 
13,893

Other deferred accounts
(6,093
)
 
4,813

Taxes accrued
31,258

 
1,607

Interest accrued
13,207

 
15,147

Other operating
5,537

 
5,818

Net cash provided by operating activities
235,962

 
214,466

Investing activities
 
 
 
Additions to property, plant, and equipment
(183,604
)
 
(144,637
)
Allowance for equity funds used during construction
4,446

 
2,780

Proceeds from sale of property
590

 
2,195

Contributions to equity investment in investee

 
(2,450
)
Transfer of cash from (to) restricted accounts, net
13,073

 
(29,096
)
Other investing
637

 
190

Net cash used in investing activities
(164,858
)
 
(171,018
)
Financing activities
 
 
 
Proceeds from short-term debt, net
6,470

 

Draws on credit facility
106,000

 
15,000

Payments on credit facility
(106,000
)
 
(15,000
)
Repayment of long-term debt
(17,896
)
 
(16,814
)
Contributions from parent

 
50,000

Distributions to parent
(75,000
)
 
(85,000
)
Other financing
(1,933
)
 
(2,070
)
Net cash used in financing activities
(88,359
)
 
(53,884
)
Net decrease in cash and cash equivalents
(17,255
)
 
(10,436
)
Cash and cash equivalents at beginning of period
21,482

 
65,705

Cash and cash equivalents at end of period
$
4,227

 
$
55,269

 
 
 
 
Supplementary cash flow information
 
 
 
Interest paid, net of amount capitalized
$
36,241

 
$
40,153

Income taxes refunded, net
$

 
$
(485
)
Supplementary non-cash investing and financing activities
 
 
 
Accrued additions to property, plant, and equipment
$
13,072

 
$
15,837

Non-cash additions to property, plant, and equipment
$
3,015

 
$

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 
 
 

24


CLECO
 
 
CLECO POWER
 
2017 3RD 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, 2016
$
1,548,624

 
$
(13,422
)
 
$
1,535,202

Distributions to parent
(75,000
)
 

 
(75,000
)
Net income
108,439

 

 
108,439

Other comprehensive income, net of tax

 
99

 
99

Balances, Sept. 30, 2017
$
1,582,063

 
$
(13,323
)
 
$
1,568,740

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
 

 
 

 
 


25


CLECO
 
 
CLECO POWER
 
2017 3RD 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 Combinations
Cleco and Cleco Power
Note 3
Recent Authoritative Guidance
Cleco and Cleco Power
Note 4
Regulatory Assets and Liabilities
Cleco and Cleco Power
Note 5
Fair Value Accounting
Cleco and Cleco Power
Note 6
Debt
Cleco and Cleco Power
Note 7
Pension Plan and Employee Benefits
Cleco and Cleco Power
Note 8
Income Taxes
Cleco and Cleco Power
Note 9
Disclosures about Segments
Cleco
Note 10
Regulation and Rates
Cleco and Cleco Power
Note 11
Variable Interest Entities
Cleco and Cleco Power
Note 12
Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees
Cleco and Cleco Power
Note 13
Affiliate Transactions
Cleco and Cleco Power
Note 14
Accumulated Other Comprehensive Loss
Cleco and Cleco Power
Note 15
Subsequent Event
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.

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 year ended December 31, 2016.
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.”
On April 13, 2016, Cleco Holdings completed its merger with Merger Sub whereby Merger Sub merged with and into Cleco Corporation, with Cleco Corporation surviving the Merger, and Cleco Corporation converting to a limited liability company and changing its name to Cleco Holdings, as a direct, wholly owned subsidiary of Cleco Group and an indirect, wholly owned subsidiary of Cleco Partners. At the effective time of the Merger, each outstanding share of Cleco Corporation common stock, par value $1.00 per share (other than shares that were owned by Cleco Corporation, Cleco Partners, Merger Sub, or any other direct or indirect wholly owned subsidiary of Cleco Partners or Cleco Corporation), were cancelled and were converted into the right to receive $55.37 per share in cash, without interest, with all dividends payable before the effective time of the Merger.
Cleco Holdings accounted for the merger transaction by applying the acquisition method of accounting. The objective of the acquisition method is to establish a new accounting basis for the acquiree, Cleco Holdings and its subsidiaries, and requires the acquirer, Cleco Group, to recognize and measure the acquiree’s assets and liabilities at fair value as of the acquisition date. Cleco Power’s assets and liabilities were recorded at historical cost since Cleco did not elect pushdown accounting at the Cleco Power level. The financial statements and accompanying footnotes for Cleco have been segregated to present pre-merger activity as the “Predecessor” and post-merger activity as the “Successor.” The predecessor period is not comparable to the successor period.

Goodwill
Goodwill is the excess of the purchase price (consideration transferred and liabilities assumed) over the estimated fair value of net assets of the acquired business and is not subject

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to amortization. On April 13, 2016, in connection with the completion of the Merger, Cleco recognized goodwill of $1.49 billion. Management assigned goodwill to Cleco’s reportable segment, Cleco Power. Goodwill is required to be tested for impairment at the reporting segment level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying value. Application of the goodwill impairment test requires significant judgments, including the identification of reporting segments, assignments of assets and liabilities to reporting segments, assignment of goodwill to reporting segments, and the determination of the fair value of the reporting segments. Management has determined that Cleco Power is Cleco’s only reporting segment.
Cleco conducted its 2017 annual impairment test using an August 1, 2017, measurement date. The fair value of Cleco’s reporting segment, Cleco Power, was estimated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. Significant assumptions used in these fair value estimates include estimation of future cash flows, long-term rate of growth, the selection of comparable companies, and weighted-average cost of capital (WACC) or discount rate. Changes in these assumptions could materially affect the determination of fair value and goodwill impairment at Cleco Power. Based on the tests performed, management has determined that there was no impairment of Cleco Power’s goodwill as of August 1, 2017.
Management estimated the fair value of Cleco Power’s equity to be $3.34 billion at the August 1, 2017, measurement date. The carrying value of Cleco Power’s equity was approximately $3.25 billion with the excess of the fair value over the carrying value representing 3% or $89.5 million. There were no accumulated impairment charges.
The fair value estimate is particularly sensitive to WACC. WACC takes into account both the after-tax cost of debt and the cost of equity. WACC used for calculating the fair values as of August 1, 2017, was 5.2%. A downgrade in Cleco Power’s debt ratings or a decrease in income tax rates could increase Cleco Power’s after-tax cost of debt. In addition, an increase in interest rates or return required by investors in equity markets could increase Cleco Power’s cost of equity. Any increase in the cost of equity or the cost of debt could materially impact Cleco Power’s fair value estimate. A WACC of 5.1% or 5.3% would have resulted in fair value calculations of $3.43 billion and $3.25 billion, respectively.
The fair value estimate is also sensitive to long-term cash flow growth rates applicable to periods beyond management’s five-year business plan. Management assumed a long-term cash flow growth rate of 2.5% based on historical and projected consumer price inflation, economic indicators, and projected industry growth. Any change in the expected terminal cash flow growth rate could materially impact Cleco Power’s fair value estimate. A terminal cash flow growth rate of 2.4% or 2.6% would have resulted in a fair value calculation of $3.25 billion and $3.43 billion, respectively.

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 SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,798


$
9,213

Cleco Power’s charitable contributions
1,200

 
1,200

Cleco Power’s rate credit escrow
3,876

 
12,671

Total current
8,874

 
23,084

Non-current
 
 
 
Diversified Lands’ mitigation escrow
21

 
21

Cleco Power’s future storm restoration costs
17,999

 
17,379

Cleco Power’s charitable contributions
3,640

 
4,179

Cleco Power’s rate credit escrow
2,887

 
1,831

Total non-current
24,547

 
23,410

Total restricted cash and cash equivalents
$
33,421

 
$
46,494

Cleco Power
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,798

 
$
9,213

Charitable contributions
1,200

 
1,200

Rate credit escrow
3,876

 
12,671

Total current
8,874

 
23,084

Non-current
 
 
 
Future storm restoration costs
17,999

 
17,379

Charitable contributions
3,640

 
4,179

Rate credit escrow
2,887

 
1,831

Total non-current
24,526

 
23,389

Total restricted cash and cash equivalents
$
33,400

 
$
46,473


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, 2016, to September 30, 2017, was due to Cleco Katrina/Rita using $17.9 million for scheduled storm recovery bond principal payments and $3.6 million for related interest payments, partially offset by collections of $16.1 million net of administration fees.
Included in the Merger Commitments were $6.0 million of charitable contributions to be disbursed over five years and $136.0 million of rate credits to eligible customers. In April 2016, in accordance with the Merger Commitments, Cleco Power established the charitable contribution fund and also deposited the rate credit funds into an escrow account. In April 2016, the LPSC voted to issue the rate credits equally to customers with service as of June 30, 2016, beginning in July 2016. As of September 30, 2017, $1.2 million of the charitable contributions and $129.4 million of the rate credits had been released from restricted cash.

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

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2017 3RD QUARTER FORM 10-Q

required for recognition purposes. For more information about fair value levels, see Note 5 — “Fair Value Accounting.”

Risk Management
Market risk inherent in Cleco’s market risk-sensitive instruments and positions includes potential changes in value arising from changes in interest rates and the commodity market prices of power, FTRs, and natural gas in the industry on different energy exchanges. Cleco’s Energy Market Risk Management Policy authorizes the use of various derivative instruments, including exchange traded futures and option contracts, forward purchase and sales contracts, and swap transactions to reduce exposure to fluctuations in the price of power, FTRs, and natural gas. Cleco 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. In June 2015, the LPSC approved a long-term natural gas hedging pilot program that requires Cleco Power to establish a proposal for a program that will be designed to provide gas price stability for a minimum of five years. This proposal was submitted to the LPSC on July 28, 2017. An ALJ was assigned to the docket and a status conference was held on October 3, 2017. A procedural schedule was determined and management expects a final determination in the second quarter of 2018. There were no open natural gas positions at September 30, 2017, or December 31, 2016.
Cleco Power purchases FTRs in auctions facilitated by MISO. The majority of its FTRs are purchased in annual auctions during the second quarter, but Cleco Power may purchase additional FTRs in monthly auctions. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving Cleco Power’s customer load. FTRs are not designated as hedging instruments for accounting purposes. Cleco Power records FTRs at their estimated fair value when purchased. Each accounting period, Cleco Power adjusts the carrying value of FTRs to their estimated fair value based on the most recent MISO FTR auction prices. Unrealized gains or losses on FTRs held by Cleco Power are included in Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheets. Realized gains or losses on settled FTRs are recorded in Fuel used for electric generation on Cleco Power’s Condensed Consolidated Statements of Income. At September 30, 2017, Cleco Power’s Condensed Consolidated Balance Sheets reflected the fair value of open FTR positions of $13.4 million in Energy risk management assets and $0.5 million in Energy risk management liabilities, compared to $7.9 million in Energy risk management assets and $0.2 million in Energy risk management liabilities at December 31, 2016. For more information on FTRs, see Note 5 — “Fair Value Accounting — Commodity Contracts.”
 
Cleco and Cleco Power maintain a master netting agreement policy and monitor credit risk exposure through review of counterparty credit quality, aggregate counterparty credit exposure, and aggregate counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Cleco Power has agreements in place with various counterparties that authorize the netting of financial buys and sells and contract payments to mitigate credit risk for transactions entered into for risk management purposes.
Cleco 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.

Stock-Based Compensation
Prior to the completion of the Merger, Cleco had two stock-based compensation plans: the ESPP and the LTIP. As a result of the completion of the Merger, both stock-based compensation plans were terminated.
Pursuant to the terms of the LTIP, certain officers, key employees, and directors of Cleco were eligible to be granted stock options, restricted stock, also known as non-vested stock, common stock equivalents, and stock appreciation rights. During the predecessor period January 1, 2016, through April 12, 2016, Cleco granted no shares of non-vested stock pursuant to the LTIP. As a result of the Merger on April 13, 2016, all unvested shares outstanding under the LTIP that were granted prior to January 1, 2015, vested at target and were paid out in cash to plan participants. Unvested shares that were granted during 2015 were prorated to the target amount and paid out in cash to plan participants in accordance with the terms of the Merger Agreement.
During the predecessor period January 1, 2016, through April 12, 2016, Cleco reported pretax compensation expense of $3.2 million on non-vested stock with a related tax benefit of $1.2 million. In April 2016, Cleco incurred $2.3 million of merger expense due to the accelerated vesting of the LTIP shares for the predecessor period. For more information about the Merger, see Note 2 — “Business Combinations.”
During the nine months ended September 30, 2016, Cleco Power reported pretax compensation expense of $1.0 million on non-vested stock with a related tax benefit of $0.4 million.
Note 2 — Business Combinations

Regulatory Matters
On March 28, 2016, the LPSC approved the Merger. The LPSC’s written order approving the Merger was issued on April 7, 2016. Approval of the Merger was conditioned upon certain commitments, including $136.0 million of customer rate credits, a $7.0 million one-time contribution for economic development in Cleco Power’s service territory to be administered by the LED, $6.0 million of charitable contributions to be disbursed over five years, and $2.5 million of contributions for economic development for Louisiana state and local organizations to be disbursed over five years. These commitment costs were accrued on April 13, 2016. In addition, the Merger Commitments also included $1.2 million of annual

28


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2017 3RD QUARTER FORM 10-Q

refunds to customers representing cost savings due to the Merger. For more information, see Note 10 — “Regulation and Rates.”

Accounting for the Merger Transaction
The total purchase price consideration was approximately $3.36 billion, which consisted of cash paid to Cleco Corporation shareholders of $3.35 billion and cash paid for Cleco LTIP equity awards of $9.5 million. There were no remaining LTIP equity awards as of the close of the Merger.
Pushdown accounting was applied to Cleco, and accordingly, the Cleco consolidated assets acquired and liabilities assumed were recorded on April 13, 2016, at their fair values as follows:
Purchase Price Allocation
 
(THOUSANDS)
AT APR. 13, 2016

Current assets
$
455,016

Property, plant, and equipment, net
3,432,144

Goodwill
1,490,797

Other long-term assets
1,023,487

Less
 
Current liabilities
228,515

Net deferred income tax liabilities
1,059,939

Other deferred credits
279,379

Long-term debt, net
1,470,126

Total purchase price
$
3,363,485


Cleco Power’s assets and liabilities were recorded at historical cost since Cleco did not elect pushdown accounting at the Cleco Power level.
The following table presents the fair value adjustments to Cleco’s balance sheet and recognition of goodwill:
(THOUSANDS)
AT APR. 13, 2016

Property, plant, and equipment
$
(1,334,932
)
Accumulated depreciation
$
(1,565,776
)
Goodwill
$
1,490,797

Intangible assets
$
91,826

Regulatory assets
$
250,409

Deferred income tax liabilities
$
126,853

Other deferred credits
$
21,175

Long-term debt
$
198,599


Most of the carrying values of Cleco’s assets and liabilities were determined to be stated at fair value at the Merger date, considering that most of these assets are subject to regulation by the LPSC and FERC. Under such regulation, rates charged to customers are established by a regulator to provide for recovery of costs and a fair return on rate base and are generally measured at historical cost. As such, a market participant would not expect to recover any more or less than the carrying value of the assets. Prior to the Merger, the Coughlin step-up value was not recorded on Cleco’s Condensed Consolidated Balance Sheet due to the accounting treatment for the transfer of that asset in March 2014. However, the recovery of the step-up value of the Coughlin asset was approved by the LPSC for recovery in base rates, including a return on rate base. On the date of the Merger, the step-up value for the Coughlin asset was recognized on Cleco’s Condensed Consolidated Balance Sheet since Cleco Power is able to earn a return on and recover these costs from its customers. The beginning balance
 
of fixed depreciable assets was shown net at the date of the Merger, as no accumulated depreciation existed on the date of the Merger.
The excess of the purchase price over the estimated fair value of assets acquired and the liabilities assumed was $1.49 billion, which was recognized as goodwill by Cleco Holdings at the Merger date. The goodwill represents the potential long-term return of Cleco to its member. Management has assigned goodwill to Cleco’s reportable segment, Cleco Power.
A fair value adjustment was recorded on Cleco’s Condensed Consolidated Balance Sheet to reflect the valuation of the Cleco trade name. This adjustment is included in Intangible assets on Cleco’s Condensed Consolidated Balance Sheet. The valuation of the trade name was estimated by applying the relief-from-royalty method under the income approach. This valuation method is based on the premise that, in lieu of ownership of the asset, a company would be willing to pay a royalty to a third-party for the use of that asset. The owner of the asset is spared this cost, and the value of the asset is estimated by the cost savings. The projected revenue attributed to the trade name was based on projections of the value of Cleco’s wholesale contracts. The trade name is being amortized over 20 years. The amortization of the Cleco trade name is included in Depreciation and amortization on Cleco’s Condensed Consolidated Statement of Income.
On the date of the Merger, fair value adjustments were recorded on Cleco’s Condensed Consolidated Balance Sheet for the difference between the contract price and the market price of long-term wholesale power supply agreements. These adjustments are classified as Intangible assets on Cleco’s Condensed Consolidated Balance Sheet. The valuation of the power supply agreements was estimated using the income approach. The income approach is based upon discounted projected future cash flows associated with the underlying contracts. The intangible assets for the power supply agreements are being amortized over the remaining term of each applicable contract. The amortization of the power supply agreements is included in Electric operations on Cleco’s Condensed Consolidated Statement of Income.
The net increase in deferred tax liabilities on Cleco’s Condensed Consolidated Balance Sheet represents the differences between the assigned fair values of assets acquired and their related income tax basis, net of a deferred tax asset representing the net operating loss carryforward that will be utilized in future periods. As the underlying asset assigned fair values are amortized, the related deferred tax liabilities will be included in income tax expense. Goodwill is not deductible for income tax purposes; therefore, no deferred income tax assets or liabilities were recognized for goodwill.
Other fair value adjustments were recorded for long-term debt, postretirement benefit remeasurements and deferred losses, and interest rate derivative settlement gains and losses. These fair value adjustments are subject to rate regulation, but do not earn a return. In these instances, a corresponding regulatory asset was established, as the underlying utility asset or liability amounts are recoverable from or refundable to customers at historical cost through the rate setting process. These regulatory assets established to offset fair value adjustments are amortized in amounts and over time frames consistent with the realization or settlement of the fair value adjustments.
The valuations performed in the second quarter of 2016 to estimate the fair value of assets acquired and liabilities assumed were considered preliminary as a result of the short

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2017 3RD QUARTER FORM 10-Q

time period between the closing of the Merger and the end of the second quarter of 2016. During the third quarter of 2016, valuations were performed for the valuation and assessment of the postretirement benefit plans as of April 13, 2016, and the economic useful life of the Cleco trade name. Cleco completed its evaluation and determination of the fair value of certain assets and liabilities acquired as of December 31, 2016. There were no adjustments to those amounts during the nine months ended September 30, 2017. While management believes the positions reflected on the income tax returns are reasonable, the returns have not been audited by the applicable taxing authorities.
Note 3 — Recent Authoritative Guidance
The Registrants adopted, or will adopt, the recent authoritative guidance listed below on their respective effective dates.
In May 2014, FASB amended the accounting guidance for revenue recognition. The amended guidance affects entities that enter into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity must identify the performance obligations in a contract and the transaction price, and allocate the price to specific performance obligations to recognize the revenue when the obligation is completed. The amendments in this update also require extensive disclosure of sufficient information to allow users to understand the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts. Additional disclosure requirements include disaggregated revenue, reconciliation of contract balances, the entity’s performance obligations, significant judgments used, costs to obtain or fulfill a contract and the use of practical expedients. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Reporting entities have the option of using either a full retrospective or a modified retrospective approach. Under the full retrospective approach, companies will apply rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the modified retrospective approach, companies will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules. Cleco intends to implement the amended guidance in January 2018 using the modified retrospective approach.
Upon initial evaluation, key changes in the standard that management is assessing for potential areas of impact include accounting for contract modifications, contracts with pricing provisions that may require it to recognize revenue at prices other than the contract price (e.g., straight-line or estimated future market prices), and accounting for alternative revenue programs. Management has not identified any impacts that would have a material impact on the results of operations, financial condition, or cash flows of the Registrants. Management expects most of Cleco’s revenue to be in scope of the new guidance. The majority of sales, including energy provided to residential customers, are from tariff offerings that provide electricity supplied and billed in that period. As such,
 
management does not expect that there will be a significant shift in the timing or pattern of revenue recognition for such sales. Management is evaluating other revenue streams, including long-term contracts with industrial and wholesale customers. Management will continue to evaluate the impact of this guidance, including any additional clarifying amendments issued during implementation. Management is finalizing the design and implementation of controls related to the new standard.
In February 2016, FASB amended the guidance to account for leases. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes practical expedients that may be elected by entities. Other than an expected increase in assets and liabilities, the full impact of the amended guidance has not been determined. Management will continue to evaluate the impact of this guidance, including any additional clarifying amendments issued during implementation. The amended guidance could have a material impact on the results of operations, financial condition, or cash flows of the Registrants.
In August 2016, FASB amended the guidance for certain cash flow issues with the objective of reducing existing diversity in practice. This guidance affects the cash flow classification related to certain types of transactions including debt, contingent consideration, proceeds from the settlement of insurance claims, and distributions from equity method investees. The adoption of this guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. This amendment should be applied using a retrospective transition method to each period presented. This guidance will impact the presentation of the cash flow statement, but will not have an impact on the results of operations or financial condition of the Registrants.
In October 2016, FASB amended the income tax guidance related to intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
In November 2016, FASB amended guidance for certain cash flow issues. The amended guidance requires that a statement of cash flow explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this guidance is

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effective for fiscal years beginning after December 15, 2017, including interim periods within those years. This amendment should be applied using a retrospective transition method to each period presented. This guidance will impact the presentation of the cash flow statement, but will not have an impact on the results of operations or financial condition of the Registrants.
In January 2017, FASB issued amendments to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
In January 2017, FASB amended the accounting guidance to simplify the measurement of a goodwill impairment loss. The amended guidance eliminates step two of the goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The adoption of this guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
In March 2017, FASB amended guidance related to defined benefit pension and other postretirement benefit plans. The new amendment requires an entity to present service cost in the same line item as other current employee compensation costs and to present the remaining components of net benefit cost in a separate line item outside of operating items. The amendment also allows only the service cost component of net benefit cost to be eligible for capitalization. The non-service cost components that are no longer eligible for capitalization under GAAP will be presented as regulatory assets. The adoption of this guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those years. This amendment should be applied retrospectively for the presentation of the service cost in the income statement while the capitalization of the service cost should be applied prospectively. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
In May 2017, FASB amended guidance related to service concession arrangements. The amendment clarifies that the grantor, rather than the third-party users, is the customer of the operation services in all cases for service concession arrangements. The adoption of this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
In August 2017, FASB amended guidance related to derivatives and hedging. The amendment broadens the financial and non-financial hedging strategies that will be eligible for hedge accounting. The new guidance also
 
changes how a company tests hedging strategies for effectiveness. The adoption of this guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. Management does not expect this guidance to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
Note 4 — Regulatory Assets and Liabilities
Cleco capitalizes or defers certain costs for recovery from customers and recognizes a liability for amounts expected to be returned to customers based on regulatory approval and management’s ongoing assessment that it is probable these items will be recovered or refunded through the ratemaking process.
Under the current regulatory environment, Cleco believes these regulatory assets will be fully recoverable; however, if in the future, as a result of regulatory changes or competition, Cleco’s ability to recover these regulatory assets would no longer be probable, then to the extent that such regulatory assets were determined not to be recoverable, Cleco would be required to write-down such assets. In addition, potential deregulation of the industry or possible future changes in the method of rate regulation of Cleco could require discontinuance of the application of the authoritative guidance on regulated operations.
The following table summarizes Cleco Power’s regulatory assets and liabilities:
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Regulatory assets – deferred taxes, net
$
240,431

 
$
237,449

Mining costs
4,461

 
6,372

Interest costs
4,590

 
4,860

AROs
2,590

 
2,096

Postretirement costs
137,815

 
145,268

Tree trimming costs
6,801

 
5,549

Training costs
6,591

 
6,708

Surcredits, net
3,084

 
5,876

AMI deferred revenue requirement
4,363

 
4,772

Emergency declarations
3,976

 

Production operations and maintenance expenses
9,656

 
13,999

AFUDC equity gross-up
70,046

 
70,423

Acadia Unit 1 acquisition costs
2,362

 
2,442

Financing costs
8,385

 
8,663

Biomass costs

 
18

MISO integration costs
702

 
1,404

Coughlin transaction costs
976

 
999

Corporate franchise tax
968

 
1,308

MATS costs
3,846

 
4,270

Other
713

 
710

Total regulatory assets
271,925

 
285,737

Accumulated deferred fuel
21,057

 
20,787

Total regulatory assets, net
$
533,413

 
$
543,973



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2017 3RD QUARTER FORM 10-Q

The following table summarizes Cleco’s net regulatory assets and liabilities:
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Total Cleco Power regulatory assets, net
$
533,413

 
$
543,973

Cleco Holdings’ Merger adjustments (1)
 
 
 
Fair value of long-term debt
149,256

 
155,776

Postretirement costs
21,872

 
23,362

Financing costs
8,708

 
8,966

Debt issuance costs
6,768

 
7,606

Total Cleco regulatory assets, net
$
720,017

 
$
739,683

(1) Cleco Holdings’ regulatory assets include acquisition accounting adjustments as a result
of the Merger.

Emergency Declarations
In August 2016, the LPSC issued emergency declaration executive orders following flooding events in south Louisiana which prohibited public utilities from disconnecting or charging late fees to customers for non-payment in affected parishes. In January 2017, the LPSC issued an order terminating those executive orders effective March 1, 2017. The January 2017 order also provided that public utilities were entitled to formally petition the LPSC to recover lost revenues as a result of the executive orders issued in August 2016. Beginning July 2017, Cleco Power’s lost revenues are being recovered and amortized over a three-year period.

Cleco Holdings’ Merger Adjustments
As a result of the Merger, Cleco implemented acquisition accounting, which eliminated AOCI at the Cleco consolidated level on the date of the Merger. Cleco will continue to recover expenses related to certain postretirement costs; therefore, Cleco recognized a regulatory asset based on its determination that these costs can continue to be collected from customers. These costs are being amortized to Other operations expense over the average remaining service period of participating employees. Cleco will also continue to recover financing costs associated with the settlement of two treasury rate locks and a forward starting swap contract that were previously recognized in AOCI. Additionally, as a result of the Merger, a regulatory asset was recorded for debt issuance costs that were eliminated at Cleco and a regulatory asset was recorded for the difference between the carrying value and the fair value of long-term debt. These regulatory assets are being amortized over the terms of the related debt issuances. On March 1, 2017, Cleco completed the repayment of the first of
 
two tranches of its Cleco Katrina/Rita storm recovery bonds issued in March 2008. As a result, the fair value adjustments for the redeemed long-term debt and the related unamortized debt issuance cost of $0.7 million on Cleco’s Condensed Consolidated Balance Sheet were derecognized. The offset was to the respective regulatory assets.
Note 5 — Fair Value Accounting
The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2017, and December 31, 2016, for cash equivalents, restricted cash equivalents, accounts receivable, other accounts receivable, short-term debt, and accounts payable approximate fair value because of their short-term nature. Cleco applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including business combinations as well as impairment related to goodwill and other long-lived assets.
The following tables summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments not measured at fair value on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets:
Cleco
 
 
 
 
 
 
 
 
AT SEPT. 30, 2017
 
 
AT DEC. 31, 2016
 
(THOUSANDS)
CARRYING
VALUE*

 
FAIR VALUE

 
CARRYING
VALUE*

 
FAIR VALUE

Long-term debt
$
2,743,987

 
$
2,831,805

 
$
2,768,149

 
$
2,754,518

* The carrying value of long-term debt excludes deferred issuance costs of $11.2 million and $11.7 million at September 30, 2017, and December 31, 2016, respectively.
Cleco Power
 
 
 
 
 
 
 
 
AT SEPT. 30, 2017
 
 
AT DEC. 31, 2016
 
(THOUSANDS)
CARRYING
VALUE*

 
FAIR VALUE

 
CARRYING
VALUE*

 
FAIR VALUE

Long-term debt
$
1,244,731

 
$
1,428,761

 
$
1,262,373

 
$
1,418,693

* The carrying value of long-term debt excludes deferred issuance costs of $8.6 million and $9.4 million at September 30, 2017, and December 31, 2016, respectively.
  
Fair Value Measurements and Disclosures
Cleco classifies assets and liabilities that are measured at their fair value according to three different levels depending on the inputs used in determining fair value.
The following tables disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured on a recurring basis:

32


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Cleco
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLECO CONSOLIDATED FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
 
(THOUSANDS)
AT SEPT. 30, 2017

 
QUOTED PRICES
IN ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

 
AT DEC. 31, 2016

 
QUOTED PRICES
IN ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

Asset description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institutional money market funds
$
35,117

 
$

 
$
35,117

 
$

 
$
66,410

 
$

 
$
66,410

 
$

FTRs
13,425

 

 

 
13,425

 
7,884

 

 

 
7,884

Total assets
$
48,542

 
$

 
$
35,117

 
$
13,425

 
$
74,294

 
$

 
$
66,410

 
$
7,884

Liability description
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

FTRs
$
538

 
$

 
$

 
$
538

 
$
201

 
$

 
$

 
$
201

Total liabilities
$
538

 
$

 
$

 
$
538

 
$
201

 
$

 
$

 
$
201

Cleco Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
 
(THOUSANDS)
AT SEPT. 30, 2017

 
QUOTED PRICES IN ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

 
AT DEC. 31, 2016

 
QUOTED PRICES
IN ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)

 
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)

 
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)

Asset description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institutional money market funds
$
33,796

 
$

 
$
33,796

 
$

 
$
65,089

 
$

 
$
65,089

 
$

FTRs
13,425

 

 

 
13,425

 
7,884

 

 

 
7,884

Total assets
$
47,221

 
$

 
$
33,796

 
$
13,425

 
$
72,973

 
$

 
$
65,089

 
$
7,884

Liability description
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

FTRs
$
538

 
$

 
$

 
$
538

 
$
201

 
$

 
$

 
$
201

Total liabilities
$
538

 
$

 
$

 
$
538

 
$
201

 
$

 
$

 
$
201


The following tables summarize the net changes in the net fair value of FTR assets and liabilities classified as Level 3 in the fair value hierarchy for Cleco and Cleco Power:
Cleco
 
 
 
 
 
 
 
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE THREE
MONTHS ENDED
SEPT. 30, 2017

 
FOR THE THREE
MONTHS ENDED
SEPT. 30, 2016

 
FOR THE NINE
MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 -
SEPT. 30, 2016

 
JAN. 1, 2016 -
APR. 12, 2016

Beginning balance
$
17,943

 
$
13,618

 
$
7,683

 
$
3,458

 
$
7,398

Unrealized gains (losses)*
1,591

 
1,840

 
(791
)
 
2,529

 
(1,031
)
Purchases
419

 
164

 
23,537

 
12,772

 
2,070

Settlements
(7,066
)
 
(6,046
)
 
(17,542
)
 
(9,183
)
 
(4,979
)
Ending balance
$
12,887

 
$
9,576

 
$
12,887

 
$
9,576

 
$
3,458

* Unrealized gains and losses are reported through Accumulated deferred fuel on Cleco’s Condensed Consolidated Balance Sheet.
 
 
 
 
 
 
Cleco Power
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

2016

 
2017

2016

Beginning balance
$
17,943

$
13,618

 
$
7,683

$
7,398

Unrealized gains (losses)*
1,591

1,840

 
(791
)
1,498

Purchases
419

164

 
23,537

14,842

Settlements
(7,066
)
(6,046
)
 
(17,542
)
(14,162
)
Ending balance
$
12,887

$
9,576

 
$
12,887

$
9,576

* Unrealized gains and losses are reported through Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheet.
 
 
 

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions as of September 30, 2017, and December 31, 2016:
 
FAIR VALUE
 
 
VALUATION TECHNIQUE
 
SIGNIFICANT
UNOBSERVABLE INPUTS
 
FORWARD PRICE RANGE
 
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)
ASSETS

 
LIABILITIES

 
 
 
 
 
LOW

 
HIGH

FTRs at Sept. 30, 2017
$
13,425

 
$
538

 
RTO auction pricing
 
FTR price - per MWh
 
$
(3.07
)
 
$
5.87

FTRs at Dec. 31, 2016
$
7,884

 
$
201

 
RTO auction pricing
 
FTR price - per MWh
 
$
(3.61
)
 
$
6.04



33


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Cleco utilizes different valuation techniques for fair value calculations. In order to measure the fair value for Level 1 assets and liabilities, Cleco obtains the closing price from published indices in active markets for the various instruments and multiplies this price by the appropriate number of instruments held. Cleco’s Level 2 fair values are determined by obtaining the closing price of similar assets and liabilities from published indices in active markets and then discounting the price to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. Level 3 fair values occur in situations in which there is little, if any, market activity for the asset or liability at the measurement date. Cleco’s Level 3 assets and liabilities are valued using RTO auction prices. Cleco has consistently applied the Level 2 and Level 3 fair value techniques from fiscal period to fiscal period. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.
The assets and liabilities reported at fair value are grouped into classes based on the underlying nature and risks associated with the individual asset or liability.
At September 30, 2017, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash equivalents. The institutional money market funds were reported on Cleco’s Condensed Consolidated Balance Sheets in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $1.8 million, $8.9 million, and $24.4 million, respectively, at September 30, 2017, and $20.0 million, $23.1 million, and $23.3 million, respectively, at December 31, 2016. At Cleco Power, the institutional money market funds were reported on Cleco Power’s Condensed Consolidated Balance Sheets in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $0.5 million, $8.9 million, and $24.4 million, respectively, at September 30, 2017, and $18.7 million, $23.1 million, and $23.3 million, respectively, at December 31, 2016. If the money market funds failed to perform under the terms of the investments, Cleco and Cleco Power would be exposed to a loss of the invested amounts. Collateral on these types of
 
investments is not required by Cleco or Cleco Power. The Level 2 institutional money market funds asset consists of a single class. In order to capture interest income and minimize risk, cash is invested in money market funds that invest primarily in short-term securities issued by the U.S. Treasury to maintain liquidity and achieve the goal of a net asset value of a dollar. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the underlying securities of the fund.
Cleco Power’s FTRs were priced using MISO’s monthly auction prices. Forward seasonal periods are not included in every monthly auction; therefore, the average of the most recent seasonal auction prices are used for monthly valuation. FTRs are categorized as Level 3 fair value measurements because the only relevant pricing available comes from MISO auctions, which occur monthly in the Multi-Period Monthly Auction.
During the nine months ended September 30, 2017, and the year ended December 31, 2016, Cleco did not experience any transfers between levels within the fair value hierarchy.

Commodity Contracts
The following table presents the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2017, and December 31, 2016:
 
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
 
(THOUSANDS)
BALANCE SHEET LINE ITEM
 
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Commodity-related contracts
 
 
 
 
FTRs
 
 
 
 
 
Current
Energy risk management assets
 
$
13,425

 
$
7,884

Current
Energy risk management liabilities
 
538

 
201

Commodity-related contracts, net
 
$
12,887

 
$
7,683


The following tables present the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the nine months ended September 30, 2017, and 2016:
Cleco
 
 
 
 
 
 
 
 
 
 
 
 
AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
DERIVATIVES LINE ITEM
FOR THE THREE
MONTHS ENDED
SEPT. 30, 2017

 
FOR THE THREE
MONTHS ENDED
SEPT. 30, 2016

 
FOR THE NINE MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 -
SEPT. 30, 2016

 
JAN. 1, 2016 -
APR. 12, 2016

Commodity contracts
 
 
 
 
 
 
 
 
 
 
FTRs(1)
Electric operations
$
14,062

 
$
9,718

 
$
35,172

 
$
23,467

 
$
8,563

FTRs(1)
Power purchased for utility customers
(7,767
)
 
(5,066
)
 
(18,759
)
 
(11,742
)
 
(5,761
)
Total
 
$
6,295

 
$
4,652

 
$
16,413

 
$
11,725

 
$
2,802

(1) For the three and nine months ended September 30, 2017, unrealized gains (losses) associated with FTRs not recognized in income on derivatives of $1.6 million and $(0.8) million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the periods July 1, 2016 - September 30, 2016, January 1, 2016 - April 12, 2016, and April 13, 2016 - September 30, 2016, unrealized (losses) gains associated with FTRs not recognized in income on derivatives of $1.8 million, $(1.0) million, and 2.5 million, respectively, were reported through Accumulated deferred fuel on the balance sheet.


34


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Cleco Power
 
 
 
 
 
 
 
 
AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
DERIVATIVES LINE ITEM
2017

2016

 
2017

2016

Commodity contracts
 
 
 
 
 
 
FTRs(1)
Electric operations
$
14,062

$
9,718

 
$
35,172

$
32,030

FTRs(1)
Power purchased for utility customers
(7,767
)
(5,066
)
 
(18,759
)
(17,503
)
Total
 
$
6,295

$
4,652

 
$
16,413

$
14,527

(1) For the three and nine months ended September 30, 2017, unrealized gains (losses) associated with FTRs not recognized in income on derivatives of $1.6 million and $(0.8) million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the three and nine months ended September 30, 2016, unrealized gains associated with FTRs not recognized in income on derivatives of $1.8 million and $1.5 million, respectively, were reported through Accumulated deferred fuel on the balance sheet.

At September 30, 2017, and December 31, 2016, Cleco Power had no open positions hedged for natural gas. In June 2015, the LPSC approved a long-term natural gas hedging pilot program that requires Cleco Power to establish a proposal for a program that will be designed to provide gas price stability for a minimum of five years. This proposal was submitted to the LPSC on July 28, 2017. An ALJ was assigned to the docket and a status conference was held on October 3, 2017. A procedural schedule was determined and management expects a final determination in the second quarter of 2018.
Cleco Power purchases FTRs in auctions facilitated by MISO. The majority of its FTRs are purchased in annual auctions during the second quarter, but Cleco Power may purchase additional FTRs in monthly auctions. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving Cleco Power’s customer load. FTRs represent rights to congestion credits or charges along a path during a given time frame for a certain MW quantity. FTRs are not designated as hedging instruments for accounting purposes. The total volume of FTRs that Cleco Power had outstanding at September 30, 2017, and December 31, 2016, was 14.4 million MWh and 9.0 million MWh, respectively.
Note 6 — Debt
At September 30, 2017, Cleco and Cleco Power had $6.5 million of short-term debt outstanding under Cleco Power’s $10.0 million uncommitted line of credit, at an all-in interest rate of 2.98%. At December 31, 2016, Cleco and Cleco Power had no short-term debt outstanding. Cleco Holdings and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short-term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
In May 2016, Cleco Holdings completed the private sale of $535.0 million aggregate principal amount of its 3.743% senior notes due May 1, 2026, and $350.0 million aggregate principal amount of its 4.973% senior notes due May 1, 2046. Cleco Holdings used the proceeds from the issuance and sale of these notes to repay a portion of the $1.35 billion Acquisition Loan Facility entered into in connection with the completion of the Merger. On April 28, 2017, Cleco Holdings completed an exchange offer for all of its then outstanding 3.743% and
 
4.973% senior notes, which were not registered under the Securities Act of 1933, as amended, for an equal principal amount of newly issued 3.743% senior notes due May 1, 2026, and 4.973% senior notes due May 1, 2046, that were so registered. Cleco Holdings did not receive any proceeds from the exchange offer.
On March 1, 2017, Cleco completed the repayment of the first of two tranches of its Cleco Katrina/Rita storm recovery bonds issued in March 2008. The total principal amount for both tranches was $180.6 million. The first tranche had an initial principal amount of $113.0 million at an interest rate of 4.41% and a final maturity date of March 1, 2020. As part of the early redemption on March 1, 2017, Cleco paid $1.1 million in principal and less than $0.1 million in accrued interest.
Note 7 — Pension Plan and Employee Benefits
 
Pension Plan and Other Benefits Plan
Employees hired before August 1, 2007, are covered by a non-contributory, defined benefit pension plan. Benefits under the plan reflect an employee’s years of service, age at retirement, and highest total average compensation for any consecutive five calendar years during the last ten years of employment with Cleco. Cleco’s policy is to base its contributions to the employee pension plan upon actuarial computations utilizing the projected unit credit method, subject to the IRS’s full funding limitation. Cleco did not make any required or discretionary contributions to the pension plan in 2016 and does not expect to make any in 2017. The required contributions are driven by liability funding target percentages set by law which could cause the required contributions to be uneven among the years. The ultimate amount and timing of the contributions may be affected by changes in the discount rate, changes in the funding regulations, and actual returns on fund assets. Cleco Power is considered the plan sponsor and Support Group is considered the plan administrator.
Cleco’s retirees and their dependents may be eligible to receive medical, dental, vision, and life insurance benefits (other benefits). Cleco recognizes the expected cost of these other benefits during the periods in which the benefits are earned.
The components of net periodic pension and other benefit cost for the three and nine months ended September 30, 2017, and 2016 were as follows:

35


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

 
PENSION BENEFITS
 
OTHER BENEFITS
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
FOR THE THREE MONTHS ENDED SEPT. 30,
(THOUSANDS)
2017

 
2016

 
2017

 
2016

Components of periodic benefit costs
 
 
 
 
 
 
 
Service cost
$
2,260

 
$
2,229

 
$
314

 
$
380

Interest cost
5,412

 
5,455

 
372

 
420

Expected return on plan assets
(6,016
)
 
(6,001
)
 

 

Amortizations
 
 
 
 
 
 
 
Prior period service credit
(18
)
 
(18
)
 

 

Net loss (gain)
2,502

 
3,365

 
(32
)
 

Net periodic benefit cost
$
4,140

 
$
5,030

 
$
654

 
$
800

 
PENSION BENEFITS
 
OTHER BENEFITS
 
SUCCESSOR
 
PREDECESSOR
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

 
FOR THE NINE MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Components of periodic benefit costs
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6,779

 
$
4,122

 
$
2,563

 
$
1,084

 
$
709

 
$
431

Interest cost
16,235

 
10,124

 
6,242

 
1,176

 
784

 
476

Expected return on plan assets
(18,048
)
 
(11,195
)
 
(6,812
)
 

 

 

Amortizations
 
 
 
 
 
 
 
 
 
 
 
Prior period service (credit) cost
(53
)
 
(33
)
 
(20
)
 

 

 
34

Net loss (gain)
7,506

 
5,211

 
2,798

 
(37
)
 

 
181

Net periodic benefit cost
$
12,419

 
$
8,229

 
$
4,771

 
$
2,223

 
$
1,493

 
$
1,122

 

Because Cleco Power is the pension plan sponsor and the related trust holds the assets, the net unfunded status of the pension plan is reflected at Cleco Power. The liability of Cleco’s other subsidiaries is transferred with a like amount of assets to Cleco Power monthly. The expense of the pension plan related to Cleco’s other subsidiaries for the three months ended September 30, 2017, and 2016 was $0.5 million and $0.4 million, respectively. The amount for the predecessor period January 1, 2016, through April 12, 2016, was $0.5 million. The expense for the successor periods for the nine months ended September 30, 2017, and April 13, 2016, through September 30, 2016, was $1.4 million and $0.8 million, respectively.
Cleco Holdings is the plan sponsor for the other benefit plans. There are no assets set aside in a trust and the liabilities are reported on the individual subsidiaries’ financial statements. The expense related to other benefits reflected in Cleco Power’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017, was $0.8 million and $2.5 million, respectively. The amounts for the three and nine months ended September 30, 2016, were also $0.8 million and $2.5 million, respectively. The current and non-current portions of the other benefits liability for Cleco and Cleco Power at September 30, 2017, and December 31, 2016, were as follows:
Cleco
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
$
3,854

 
$
3,854

Non-current
$
39,296

 
$
40,196

Cleco Power
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
$
3,345

 
$
3,345

Non-current
$
34,147

 
$
34,892

 
SERP
Certain Cleco officers are covered by SERP. In 2014, SERP was closed to new participants; however, with regard to
 
current SERP participants, including former employees or their beneficiaries, all terms of SERP will continue, other than as described below. SERP is a non-qualified, non-contributory, defined benefit pension plan. Generally, benefits under the plan reflect an employee’s years of service, age at retirement and the sum of (a) the highest base salary paid out over the last five calendar years and (b) the average of the three highest cash bonuses paid during the 60 months prior to retirement. SERP benefits are reduced by retirement benefits received from any other defined benefit pension plan, supplemental executive retirement plan, or Cleco contributions under the enhanced 401(k) Plan to the extent such contributions exceed the amount the employee would have received under the terms of the original 401(k) Plan. In accordance with the SERP plan document and the Merger Agreement, four executive officers received enhanced benefits, and upon termination of employment, two of these executive officers received accelerated vesting. Another executive officer received enhanced SERP benefits, net of other postretirement benefits, as part of a separation agreement. Two current executive officers’ SERP benefits will be capped as of December 31, 2017, with regard to final compensation; however, adjustments will continue with regard to age and tenure with Cleco. Additionally, these executive officers had their annual bonuses set at target rather than actual awards for the year 2016 and will have their annual bonuses set at target rather than actual awards for the year 2017 for the average incentive award portion of their SERP benefit calculation. A third executive officer’s SERP calculation will use a fixed salary amount for 2017 and will exclude any compensation exceeding this amount. Management will review current market trends as it evaluates Cleco’s future compensation strategy. Cleco does not fund the SERP liability, but instead pays for current benefits out of the general funds available. Cleco Power has formed a rabbi trust. The life insurance policies issued on SERP participants designate the rabbi trust as the beneficiary. Market conditions could have a significant impact on the cash surrender value of the life

36


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

insurance policies. Proceeds from the life insurance policies are expected to be used to pay the SERP participants’ death benefits, as well as future SERP payments. However, because SERP is a non-qualified plan, the assets of the trust could be used to satisfy general creditors of Cleco Power in the event of insolvency. All SERP benefits are paid out of the general cash available of the respective companies that employed the officer. Cleco Power is considered the plan sponsor and Support Group is considered the plan administrator.
The components of net periodic benefit cost related to SERP for the three and nine months ended September 30, 2017, and 2016, were as follows:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
(THOUSANDS)
2017

 
2016

Components of periodic benefit costs
 
 
 
Service cost
$
123

 
$
213

Interest cost
810

 
839

Amortizations
 
 
 
Prior period service credit
(57
)
 
(9
)
Net loss
536

 
511

Total benefit cost
$
1,412

 
$
1,554

 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE
MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Components of periodic benefit costs
 
 
 
 
 
Service cost
$
370

 
$
277

 
$
702

Interest cost
2,430

 
1,543

 
900

Amortizations
 
 
 
 
 
Prior period service (credit) cost
(124
)
 
(42
)
 
17

Net loss
1,560

 
1,120

 
574

Net periodic benefit cost
4,236

 
2,898

 
2,193

Curtailment charge

 

 
3,602

Special/contractual termination benefits
315

 

 
3,222

Total benefit cost
$
4,551

 
$
2,898

 
$
9,017


There was a remeasurement of SERP on March 30, 2017, to reflect a special termination benefit resulting from an executive officer’s separation agreement. On the date of the remeasurement, the discount rate decreased from 4.22% to 4.08%. This remeasurement resulted in a special termination benefit for the executive officer of $0.3 million.
There was a remeasurement of SERP at April 13, 2016, to reflect change in control benefits as a result of the Merger. On the date of the remeasurement, the discount rate decreased from 4.60% to 4.15%. This remeasurement resulted in a $3.6 million curtailment charge and $3.2 million of special/contractual termination benefits. The curtailments and special/contractual termination benefits are included in Merger transaction and commitment costs on Cleco’s Consolidated Statements of Income. There was an additional remeasurement of SERP at August 31, 2016, to reflect changes to the plan relating to three executive officers’ SERP benefits being capped as of December 31, 2017, with regard to final compensation. On the date of the remeasurement, the discount rate decreased from 4.15% to 3.47%.
The total expense related to SERP reflected on Cleco Power’s Condensed Consolidated Statements of Income was $0.3 million and $0.9 million for the three and nine months ended September 30, 2017, respectively, compared to $0.3
 
million and $1.1 million for the three and nine months ended September 30, 2016, respectively.
Liabilities relating to SERP are reported on the individual subsidiaries’ financial statements. The current and non-current portions of the SERP liability for Cleco and Cleco Power at September 30, 2017, and December 31, 2016, were as follows:
Cleco
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
$
4,431

 
$
4,308

Non-current
$
76,870

 
$
73,738

Cleco Power
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
$
939

 
$
885

Non-current
$
15,999

 
$
15,145


401(k) Plan
Cleco’s 401(k) Plan is intended to provide active, eligible employees with voluntary, long-term savings and investment opportunities. The 401(k) Plan is a defined contribution plan and is subject to the applicable provisions of the Employee Retirement Income Security Act of 1974. In accordance with the 401(k) Plan, employer contributions are made in the form of cash. Cash contributions are invested in proportion to the participant’s voluntary contribution investment choices. Participation in the 401(k) Plan is voluntary, and all active Cleco employees are eligible to participate. Cleco’s 401(k) Plan expense for the three and nine months ended September 30, 2017, and 2016, was as follows:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
(THOUSANDS)
2017

 
2016

401(k) Plan expense
$
1,386

 
$
1,331

 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE
MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

401(k) Plan expense
$
4,259

 
$
2,440

 
$
1,593


Cleco Power is the plan sponsor for the 401(k) Plan. The expense of the 401(k) Plan related to Cleco’s other subsidiaries for the three and nine months ended September 30, 2017, and 2016, was as follows:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
(THOUSANDS)
2017

 
2016

401(k) Plan expense
$
234

 
$
204

 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

401(k) Plan expense
$
710

 
$
378

 
$
319


37


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Note 8 — Income Taxes

Effective Tax Rates
The following tables summarize the effective income tax rates for Cleco and Cleco Power for the three and nine months ended September 30, 2017, and 2016:
 

Cleco
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
 
FOR THE THREE MONTHS ENDED
SEPT. 30, 2017

 
FOR THE THREE
MONTHS ENDED
SEPT. 30, 2016

 
FOR THE NINE MONTHS ENDED SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Effective tax rate
33.7
%
 
37.4
%
 
35.5
%
 
40.3
%
 
(704.9
)%
Cleco Power
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
 
2017

 
2016

 
2017

 
2016

Effective tax rate
35.4
%
 
35.9
%
 
36.8
%
 
19.5
%

For the successor periods, the effective income tax rates for Cleco were different than the federal statutory rate primarily due to permanent tax differences, the flowthrough of state tax benefits, including AFUDC equity, benefits delivered from Cleco’s investment in the NMTC Fund, and state tax expense.
For the predecessor period, the effective income tax rates for Cleco were different than the federal statutory rate primarily due to a significant portion of the merger costs not being deductible, the flowthrough of state tax benefits, including AFUDC equity, benefits delivered from Cleco’s investment in the NMTC Fund, and state tax expense.
For the three and nine months ended September 30, 2017, and 2016, the effective income tax rate for Cleco Power was different than the federal statutory rate primarily due to the flowthrough of state tax benefits, including AFUDC equity, and state tax expense.

Uncertain Tax Positions
Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. At September 30, 2017, and December 31, 2016, Cleco and Cleco Power had no interest payable related to uncertain tax positions. For the nine months ended September 30, 2017, and 2016, Cleco and Cleco Power had no interest expense related to uncertain tax positions.
At September 30, 2017, Cleco had no liability for uncertain tax positions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of September 30, 2017, for Cleco and Cleco Power would be unchanged in the next 12 months. The settlement of open tax years could involve the payment of additional taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.
The federal income tax years that remain subject to examination by the IRS are 2013, 2014, 2015, and 2016.
Beginning with the 2013 tax year, Cleco entered into the IRS’s Compliance Assurance Process which allows taxpayers
 
to work collaboratively with an IRS team to identify and resolve potential tax issues before the federal tax return is filed each year. Cleco must apply for admission to the program each year. Cleco has been approved for the Compliance Assurance Process through the 2017 tax year.
The state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2014 and 2015.
Cleco classifies income tax penalties as a component of other expense. For the nine months ended September 30, 2017, and 2016, no penalties were recognized.
Note 9 — Disclosures about Segments
Cleco’s reportable segment is based on its method of internal reporting, which disaggregates business units by its first-tier subsidiary.
Cleco Power, the reportable segment, engages in business activities from which it earns revenue and incurs expenses. Segment managers report periodically to Cleco’s CEO with discrete financial information and, at least quarterly, present discrete financial information to Cleco and Cleco Power’s Boards of Managers. The reportable segment prepares budgets that are presented to and approved by Cleco and Cleco Power’s Boards of Managers. The column shown as Other in the chart below includes the holding company, a shared services subsidiary, two transmission interconnection facility subsidiaries, and an investment subsidiary.
The financial results of Cleco’s segment are presented on an accrual basis. Management evaluates the performance of its segment and allocates resources to it based on segment profit and the requirements to implement new strategic initiatives and projects to meet current business objectives. Material intercompany transactions occur on a regular basis. These intercompany transactions relate primarily to joint and common administrative support services.

38


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

SEGMENT INFORMATION FOR THE THREE MONTHS ENDED SEPT. 30,
2017 (THOUSANDS)
CLECO POWER

 
OTHER

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
Electric operations
$
320,009

 
$
(2,420
)
 
$

 
$
317,589

Other operations
20,768

 
514

 

 
21,282

Electric customer credits
(372
)
 

 

 
(372
)
Affiliate revenue
209

 
13,517

 
(13,726
)
 

Operating revenue, net
$
340,614

 
$
11,611

 
$
(13,726
)
 
$
338,499

Depreciation and amortization
$
40,049

 
$
2,179

 
$

 
$
42,228

Merger transaction and commitment costs
$

 
$
185

 
$

 
$
185

Interest charges
$
17,141

 
$
13,331

 
$
(10
)
 
$
30,462

Interest income
$
332

 
$
31

 
$
(9
)
 
$
354

Federal and state income tax expense (benefit)
$
30,092

 
$
(7,038
)
 
$

 
$
23,054

Net income (loss)
$
54,852

 
$
(9,548
)
 
$

 
$
45,304

2016 (THOUSANDS)
CLECO POWER

 
OTHER

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
Electric operations
$
326,281

 
$
(2,574
)
 
$

 
$
323,707

Other operations
18,460

 
517

 
(1
)
 
18,976

Electric customer credits
177

 

 

 
177

Affiliate revenue
213

 
13,060

 
(13,273
)
 

Operating revenue, net
$
345,131

 
$
11,003

 
$
(13,274
)
 
$
342,860

Depreciation and amortization
$
40,353

 
$
2,182

 
$

 
$
42,535

Merger transaction and commitment costs
$

 
$
1,869

 
$

 
$
1,869

Interest charges
$
19,177

 
$
12,709

 
$
(28
)
 
$
31,858

Interest income
$
264

 
$
82

 
$
(28
)
 
$
318

Federal and state income tax expense (benefit)
$
29,427

 
$
(5,728
)
 
$
1

 
$
23,700

Net income (loss)
$
52,572

 
$
(12,952
)
 
$
1

 
$
39,621

SEGMENT INFORMATION FOR THE NINE MONTHS ENDED SEPT. 30,
 
SUCCESSOR
2017 (THOUSANDS)
CLECO POWER

 
OTHER

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
Electric operations
$
847,417

 
$
(8,337
)
 
$

 
$
839,080

Other operations
58,083

 
1,544

 

 
59,627

Electric customer credits
(1,045
)
 

 

 
(1,045
)
Affiliate revenue
649

 
41,882

 
(42,531
)
 

Operating revenue, net
$
905,104

 
$
35,089

 
$
(42,531
)
 
$
897,662

Depreciation and amortization
$
118,280

 
$
6,351

 
$
(1
)
 
$
124,630

Merger transaction and commitment costs
$

 
$
187

 
$

 
$
187

Interest charges
$
52,654

 
$
40,297

 
$
(151
)
 
$
92,800

Interest income
$
926

 
$
271

 
$
(151
)
 
$
1,046

Federal and state income tax expense (benefit)
$
63,010

 
$
(20,629
)
 
$

 
$
42,381

Net income (loss)
$
108,439

 
$
(31,398
)
 
$

 
$
77,041

Additions to property, plant, and equipment
$
183,604

 
$
2,005

 
$

 
$
185,609

Equity investment in investees (1)
$
18,172

 
$

 
$

 
$
18,172

Goodwill (1)
$
1,490,797

 
$

 
$

 
$
1,490,797

Total segment assets (1)
$
5,822,302

 
$
592,681

 
$
(17,282
)
 
$
6,397,701

(1) Balances as of September 30, 2017
 
 
 
 
 
 
 

39


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

 
SUCCESSOR
APR. 13, 2016 - SEPT. 30, 2016
 
PREDECESSOR
JAN. 1, 2016 - APR. 12, 2016
2016 (THOUSANDS)
CLECO POWER

 
OTHER

 
ELIMINATIONS

 
CONSOLIDATED

 
CLECO POWER

 
OTHER

 
ELIMINATIONS

 
CONSOLIDATED

Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric operations
$
558,439

 
$
(4,805
)
 
$

 
$
553,634

 
$
281,154

 
$

 
$

 
$
281,154

Other operations
32,145

 
965

 

 
33,110

 
18,493

 
587

 

 
19,080

Electric customer credits
(381
)
 

 

 
(381
)
 
(364
)
 

 

 
(364
)
Affiliate revenue
406

 
23,823

 
(24,229
)
 

 
263

 
15,024

 
(15,287
)
 

Operating revenue, net
$
590,609

 
$
19,983

 
$
(24,229
)
 
$
586,363

 
$
299,546

 
$
15,611

 
$
(15,287
)
 
$
299,870

Depreciation and amortization
$
71,498

 
$
5,198

 
$
(1
)
 
$
76,695

 
$
43,698

 
$
377

 
$
1

 
$
44,076

Merger transaction and commitment costs
$
151,501

 
$
21,671

 
$

 
$
173,172

 
$

 
$
34,928

 
$
(16
)
 
$
34,912

Interest charges
$
35,937

 
$
22,430

 
$
(44
)
 
$
58,323

 
$
21,840

 
$
295

 
$
(12
)
 
$
22,123

Interest income
$
382

 
$
177

 
$
(44
)
 
$
515

 
$
208

 
$
69

 
$
(12
)
 
$
265

Federal and state income tax (benefit) expense
$
(10,028
)
 
$
(18,474
)
 
$

 
$
(28,502
)
 
$
12,993

 
$
(9,525
)
 
$

 
$
3,468

Net (loss) income
$
(9,326
)
 
$
(32,968
)
 
$

 
$
(42,294
)
 
$
21,548

 
$
(25,508
)
 
$

 
$
(3,960
)
Additions to property, plant, and equipment
$
102,284

 
$
393

 
$

 
$
102,677

 
$
42,353

 
$
39

 
$

 
$
42,392

Equity investment in investees (1)
$
18,672

 
$

 
$

 
$
18,672

 
 
 
 
 
 
 
 
Goodwill (1)
$
1,490,797

 
$

 
$

 
$
1,490,797

 
 
 
 
 
 
 
 
Total segment assets (1)
$
5,758,245

 
$
614,959

 
$
(30,060
)
 
$
6,343,144

 
 
 
 
 
 
 
 
(1) Balances as of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Note 10 — Regulation and Rates

Transmission ROE
Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. The first complaint, filed in November 2013, was for the period November 2013 through February 2015. In September 2016, FERC issued a Final Order in response to the first complaint establishing a 10.32% ROE.
The second complaint, filed in February 2015, was for the period February 2015 through May 2016. In June 2016, an ALJ issued an initial decision in the second rate case docket recommending a 9.70% base ROE. Cleco Power is unable to determine when a binding FERC order will be issued on the second ROE complaint.
On February 13, 2017, $1.2 million of refunds relating to the first complaint were submitted to MISO. As of September 30, 2017, Cleco Power had $2.0 million accrued for ROE reductions, including accrued interest.
For more information on the ROE complaints, see Note 12 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE.”

FRP
Cleco Power’s annual retail earnings are subject to an FRP that was approved by the LPSC in June 2014. Under the terms of the FRP, Cleco Power is allowed to earn a target ROE of 10.0%, while providing the opportunity to earn up to 10.9%. Additionally, 60.0% of retail earnings between 10.9% and 11.75% and all retail earnings over 11.75% are required to be refunded to customers. The amount of credits due to customers, if any, is determined by Cleco Power and the LPSC annually. Credits are typically included on customers’ bills the following summer, but the amount and timing of the refunds is ultimately subject to LPSC approval. Cleco Power will file an application with the LPSC for a new FRP by June 30, 2019, with anticipated new rates being effective July 1, 2020.
 
Cleco Power must file annual monitoring reports no later than October 31 for the 12-month period ended June 30. On October 31, 2016, Cleco Power filed its monitoring report for the 12-month period ended June 30, 2016, which indicated that no refund was due as a result of the FRP and $0.3 million was due as a result of the cost of service savings from the Merger Commitments. On June 28, 2017, the LPSC approved the 2016 FRP monitoring report which confirmed no earnings-related refund. The $0.3 million cost of service savings were refunded on customer bills in September 2017. On October 31, 2017, Cleco Power filed its monitoring report for the 12-month period ended June 30, 2017, which indicated that no refund was due as a result of the FRP and $1.2 million was due as a result of the cost of service savings from the Merger Commitments. As of September 30, 2017, Cleco Power had $1.5 million accrued for the cost of service savings refund.

Merger Commitments
On March 28, 2016, the LPSC approved the Merger. The LPSC’s written order approving the Merger was issued on April 7, 2016. Approval of the Merger was conditioned upon certain commitments, including $136.0 million of customer rate credits. On April 28, 2016, the LPSC voted to issue credits equally to eligible customers with service as of June 30, 2016, beginning in July 2016. As of September 30, 2017, Cleco Power had issued $130.0 million of customer rate credits. Also included in the Merger Commitments were $2.5 million of contributions for economic development for Louisiana state and local organizations to be disbursed over five years, an additional $7.0 million one-time contribution for economic development in Cleco Power’s service territory to be administered by the LED, and $6.0 million of charitable contributions to be disbursed over five years. In December 2016, the $7.0 million one-time contribution was paid to the LED.
In addition, the Merger Commitments included $1.2 million of annual estimated cost of service savings expected as a result of the Merger. The cost of service savings are not subject to the target ROE or any sharing mechanism in the current FRP and will continue until Cleco Power’s anticipated new rates begin on July 1, 2020. The cost of service savings

40


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

are included in the annual monitoring reports and are refunded to customers annually. A report on the status of the Merger Commitments must be filed annually by October 31 for the 12-month period ended June 30. On October 31, 2016, Cleco Power filed the annual Merger Commitment status report for the period ended June 30, 2016. On October 31, 2017, Cleco Power filed the annual Merger Commitment status report for the period ended June 30, 2017. For more information on the cost of service savings, see “— FRP.”

SSR
In September 2016, Cleco Power filed an Attachment Y with MISO requesting retirement of Teche Unit 3 effective April 1, 2017. MISO conducted a study which determined the proposed retirement of Teche Unit 3 would result in violations of specific applicable reliability standards for which no mitigation is available. As a result, MISO designated Teche Unit 3 as an SSR unit until such time that an appropriate alternative solution can be implemented to mitigate reliability issues. One mitigating factor that has been identified is Cleco Power’s Terrebonne to Bayou Vista Transmission project, which is expected to be complete by the third quarter of 2018. Cleco Power has a 12-month SSR Agreement for the period April 1, 2017, to March 31, 2018. During this time, Cleco Power will continue to operate Teche Unit 3. Cleco Power has filed with FERC for its approval to collect $20.3 million annually in SSR payments from MISO which includes recovering operations and maintenance expenses, administrative and general expenses, taxes, depreciation, capital expenditures, and carrying charges, all of which are related to Teche Unit 3 for the period of the SSR Agreement. At the end of the agreement, when Teche Unit 3 is retired, any SSR payments received from MISO for capital expenditures paid by third parties will be credited to property, plant, and equipment. As of September 30, 2017, Cleco Power had $2.2 million accrued for SSR payments received for capital expenditures related to Teche Unit 3. In the second quarter of 2017, Cleco Power began receiving the monthly SSR payments from MISO, subject to refund pending review and approval by FERC. On July 20, 2017, Cleco Power, FERC staff, and intervenors met at the first settlement conference and set a procedural schedule for data requests between parties. On July 27, 2017, Cleco Power received five sets of informal data requests from FERC staff and intervenors. The next settlement conference is scheduled for November 16, 2017. Cleco Power is unable to determine when a binding FERC order will be issued. Also in the second quarter of 2017, MISO began allocating SSR costs to the load serving entities that require the operation of the SSR unit for reliability purposes, including Cleco Power. In the first quarter of 2018, another study is expected to be performed by MISO to determine if an SSR Agreement will be needed after March 31, 2018. At the end of the SSR Agreement, Cleco Power will have the option to rescind the Attachment Y requesting retirement of Teche Unit 3. If this option is exercised, Cleco Power may be required to refund recoverable capital expenditures plus interest. Management does not expect to be required to refund any portion of these costs.

Other
In April 2016, the LPSC issued Docket No. R-34026 to investigate double leveraging issues for all LPSC-jurisdictional utilities whereby double leveraging is utilized to fund a utility’s capital structure, and to consider whether any costs associated with such double leveraging should be included in
 
the rates paid by the utility’s retail customers. Cleco Power filed a motion to intervene in this proceeding along with other Louisiana utilities. In April 2016, the LPSC also issued Docket No. R-34029 to investigate tax structure issues for all LPSC-jurisdictional utilities to consider whether only the state and federal taxes included in a utility’s retail rate will be those that do not exceed the utility’s share of the actual taxes paid to those federal and state taxing authorities. Cleco Power filed a motion to intervene in this proceeding along with other Louisiana utilities. In October 2016, Cleco received the first set of data requests from the LPSC Staff for each of the above mentioned dockets. Cleco has filed responses to the non-confidential requests and is waiting on the completion of a confidentiality agreement to respond to the confidential requests. Cleco is unable to determine if or when the completion of this confidentiality agreement will occur.
Note 11 — Variable Interest Entities
Cleco and Cleco Power apply the equity method of accounting to report the investment in Oxbow in the consolidated financial statements. Under the equity method, the assets and liabilities of this entity are reported as Equity investment in investee on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. The revenue and expenses (excluding income taxes) of this entity are netted and reported as equity income or loss from investees on Cleco and Cleco Power’s Condensed Consolidated Statements of Income.
Oxbow is owned 50% by Cleco Power and 50% by SWEPCO. Cleco Power is not the primary beneficiary because it shares the power to control Oxbow’s significant activities with SWEPCO. Cleco Power’s current assessment of its maximum exposure to loss related to Oxbow at September 30, 2017, consisted of its equity investment of $18.2 million. In June 2017, Cleco Power received $0.5 million from Oxbow as a return of investment.
During the first quarter of 2017, the transition from the Dolet Hills mine to the Oxbow mine commenced. This transition was completed in July 2017.
The following table presents the components of Cleco Power’s equity investment in Oxbow:
INCEPTION TO DATE (THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Purchase price
$
12,873

 
$
12,873

Cash contributions
6,399

 
6,399

Dividends
(1,100
)
 
(600
)
Total equity investment in investee
$
18,172

 
$
18,672


The following table compares the carrying amount of Oxbow’s assets and liabilities with Cleco Power’s maximum exposure to loss related to its investment in Oxbow:
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Oxbow’s net assets/liabilities
$
36,344

 
$
37,345

Cleco Power’s 50% equity
$
18,172

 
$
18,672

Cleco Power’s maximum exposure to loss
$
18,172

 
$
18,672



41


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

The following table contains summarized financial information for Oxbow:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

 
2017

 
2016

Operating revenue
$
392

 
$
1,034

 
$
1,997

 
$
4,661

Operating expenses
392

 
1,034

 
1,997

 
4,661

Income before taxes
$

 
$

 
$

 
$


DHLC mines lignite reserves at Oxbow through the Amended Lignite Mining Agreement. The lignite reserves are intended to be used to provide fuel to the Dolet Hills Power Station.
Oxbow has no third-party agreements, guarantees, or other third-party commitments that contain obligations affecting Cleco Power’s investment in Oxbow.
Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees

Litigation
 
Devil’s Swamp
In October 2007, Cleco received a Special Notice for Remedial Investigation and Feasibility Study (RI/FS) from the EPA pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (also known as the Superfund statute) for a facility known as the Devil’s Swamp Lake site located just northwest of Baton Rouge, Louisiana. The special notice requested that Cleco and Cleco Power, along with many other listed potentially responsible parties (PRP), enter into negotiations with the EPA for the performance of an RI/FS at the Devil’s Swamp Lake site. The EPA identified Cleco as one of many companies that sent polychlorinated biphenyl (PCB) wastes for disposal to the site. The EPA proposed to add the Devil’s Swamp Lake site to the National Priorities List on March 8, 2004, based on the release of PCBs to fisheries and wetlands located on the site, but no final listing decision has yet been made. The PRPs began discussing a potential proposal to the EPA in February 2008. The EPA issued a Unilateral Administrative Order to two PRPs, Clean Harbors, Inc. and Baton Rouge Disposal, to conduct an RI/FS in December 2009. The Tier 1 part of the study was completed in June 2012. Field activities for the Tier 2 investigation were completed in July 2012. The draft Tier 2 remedial investigation report was submitted in December 2014. In 2015, remedial investigation activities included the collection and analysis of sediment, crawfish, and fish tissue samples. After reviewing the sample analysis, in August 2015, the Louisiana Department of Health and Hospitals updated the advisory for the area to advise that fish and crawfish from the area should not be eaten. The final Tier 2 remedial investigation report was made public in December 2015. Currently, the study/remedy selection task continues, and there is no record of a decision. Therefore, management is unable to determine how significant Cleco’s share of the costs associated with the RI/FS and possible response action at the site, if any, and whether this will have a material impact on the results of operations, financial condition, or cash flows of the Registrants.

Merger
In connection with the Merger, four actions were filed in the Ninth Judicial District Court for Rapides Parish, Louisiana and
 
three actions were filed in the Civil District Court for Orleans Parish, Louisiana. The petitions in each action generally alleged, among other things, that the members of Cleco Corporation’s Board of Directors breached their fiduciary duties by, among other things, conducting an allegedly inadequate sale process, agreeing to the Merger at a price that allegedly undervalued Cleco, and failing to disclose material information about the Merger. The petitions also alleged that Cleco Partners, Cleco Corporation, Merger Sub, and in some cases, certain of the investors in Cleco Partners, either aided and abetted or entered into a civil conspiracy to advance those supposed breaches of duty. The petitions seek various remedies, including monetary damages, which includes attorneys’ fees and expenses.
The four actions filed in the Ninth Judicial District Court for Rapides Parish are captioned as follows:

Braunstein v. Cleco Corporation, No. 251,383B (filed October 27, 2014),
Moore v. Macquarie Infrastructure and Real Assets, No. 251,417C (filed October 30, 2014),
Trahan v. Williamson, No. 251,456C (filed November 5, 2014), and
L’Herisson v. Macquarie Infrastructure and Real Assets, No. 251,515F (filed November 14, 2014).

On November 14, 2014, the plaintiff in the Braunstein action moved for a dismissal of the action without prejudice, and that motion was granted on November 19, 2014. On December 3, 2014, the Court consolidated the remaining three actions and appointed interim co-lead counsel. On December 18, 2014, the plaintiffs in the consolidated action filed a Consolidated Amended Verified Derivative and Class Action Petition for Damages and Preliminary and Permanent Injunction (the Consolidated Amended Petition). The consolidated action named Cleco Corporation, its directors, Cleco Partners, and Merger Sub as defendants. The Consolidated Amended Petition alleged, among other things, that Cleco Corporation’s directors breached their fiduciary duties to Cleco’s shareholders and grossly mismanaged Cleco by approving the Merger Agreement because it allegedly did not value Cleco adequately, failing to structure a process through which shareholder value would be maximized, engaging in self-dealing by ignoring conflicts of interest, and failing to disclose material information about the Merger. The Consolidated Amended Petition further alleged that all defendants conspired to commit the breaches of fiduciary duty. Cleco believes that the allegations of the Consolidated Amended Petition are without merit and that it has substantial meritorious defenses to the claims set forth in the Consolidated Amended Petition.
The three actions filed in the Civil District Court for Orleans Parish are captioned as follows:

Butler v. Cleco Corporation, No. 2014-10776 (filed November 7, 2014),
Creative Life Services, Inc. v. Cleco Corporation, No. 2014-11098 (filed November 19, 2014), and
Cashen v. Cleco Corporation, No. 2014-11236 (filed November 21, 2014). 

Both the Butler and Cashen actions name Cleco Corporation, its directors, Cleco Partners, Merger Sub, MIRA, bcIMC, and John Hancock Financial as defendants. The

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Creative Life Services action names Cleco Corporation, its directors, Cleco Partners, Merger Sub, MIRA, and Macquarie Infrastructure Partners III, L.P., as defendants. On December 11, 2014, the plaintiff in the Butler action filed an Amended Class Action Petition for Damages. Each petition alleged, among other things, that the members of Cleco Corporation’s Board of Directors breached their fiduciary duties to Cleco’s shareholders by approving the Merger Agreement because it allegedly does not value Cleco adequately, failing to structure a process through which shareholder value would be maximized and engaging in self-dealing by ignoring conflicts of interest. The Butler and Creative Life Services petitions also allege that the directors breached their fiduciary duties by failing to disclose material information about the Merger. Each petition further alleged that Cleco, Cleco Partners, Merger Sub, and certain of the investors in Cleco Partners aided and abetted the directors’ breaches of fiduciary duty. On December 23, 2014, the directors and Cleco filed declinatory exceptions in each action on the basis that each action was improperly brought in Orleans Parish and should either be transferred to the Ninth Judicial District Court for Rapides Parish or dismissed. On December 30, 2014, the plaintiffs in each action jointly filed a motion to consolidate the three actions pending in Orleans Parish and to appoint interim co-lead plaintiffs and co-lead counsel. On January 23, 2015, the Court in the Creative Life Services case sustained the defendants’ declinatory exceptions and dismissed the case so that it could be transferred to the Ninth Judicial District Court for Rapides Parish. On February 5, 2015, the plaintiffs in Butler and Cashen also consented to the dismissal of their cases from Orleans Parish so they could be transferred to the Ninth Judicial District Court for Rapides Parish.
On February 25, 2015, the Ninth Judicial District Court for Rapides Parish held a hearing on a motion for preliminary injunction filed by plaintiffs Moore, L’Herisson, and Trahan seeking to enjoin the shareholder vote at the Special Meeting of Shareholders held on February 26, 2015, for approval of the Merger Agreement. Following the hearing, the Court denied the plaintiffs’ motion. On June 19, 2015, three of the plaintiffs filed their Second Consolidated Amended Verified Derivative and Class Action Petition. This will be considered according to a schedule established by the Ninth Judicial District Court for Rapides Parish. Cleco filed exceptions seeking dismissal of the amended petition on July 24, 2015.
On March 21, 2016, the plaintiffs filed their Third Consolidated Amended Verified Derivative Petition for Damages and Preliminary and Permanent Injunction. On May 13, 2016, the plaintiffs filed their Fourth Verified Consolidated Amended Class Action Petition. This petition eliminated the request for preliminary and permanent injunction and also named an additional executive officer as a defendant. Cleco filed exceptions seeking dismissal of the amended Petition. A hearing was held on September 15, 2016. On September 26, 2016, the District Court granted the exceptions filed by Cleco and dismissed all claims asserted by the former shareholders. The plaintiffs appealed the District Court’s ruling to the Louisiana Third Circuit Court of Appeal. The Third Circuit Court of Appeal heard oral arguments in the case on September 21, 2017. Cleco expects a ruling by December 31, 2017. Cleco believes that the allegations of the petitions in each action are without merit and that it has substantial meritorious defenses to the claims set forth in each of the petitions.

 
Gulf Coast Spinning
In September 2015, a potential customer sued Cleco for failure to fully perform an alleged verbal agreement to lend or otherwise fund its startup costs to the extent of $6.5 million. Gulf Coast Spinning Company, LLC (Gulf Coast), the primary plaintiff, alleges that Cleco promised to assist it in raising approximately $60.0 million, which Gulf Coast needed to construct a cotton spinning facility near Bunkie, Louisiana. According to the petition filed by Gulf Coast in the 12th Judicial District Court for Avoyelles Parish, Louisiana (the “District Court”), Cleco made such promises of funding assistance in order to cultivate a new industrial electric customer which would increase its revenues under a power supply agreement that it executed with Gulf Coast. Gulf Coast seeks unspecified damages arising from its inability to raise sufficient funds to complete the project, including lost profits.
Cleco filed an Exception of No Cause of Action arguing that the case should be dismissed. The District Court denied Cleco’s exception in December 2015, after considering briefs and arguments. In January 2016, Cleco appealed the District Court’s denial of its exception by filing with the Third Circuit Court of Appeal for the State of Louisiana. In June 2016, the Third Circuit Court of Appeal for the State of Louisiana denied the request to have the case dismissed. In July 2016, Cleco filed a writ to the Louisiana Supreme Court seeking a review of the District Court’s denial of Cleco’s exception. In November 2016, the Louisiana Supreme Court denied Cleco’s writ application.
In February 2016, the parties agreed to a stay of all proceedings pending discussions concerning settlement. In May 2016, the District Court lifted the stay at the request of Gulf Coast. The parties are currently participating in discovery. Cleco believes the allegations of the petition are contradicted by the written documents executed by Gulf Coast, are otherwise without merit, and that it has substantial meritorious defenses to the claims alleged by Gulf Coast.

Sabine River Flood
On March 17, 2017, Cleco was served with a summons in Perry Bonin, Ace Chandler, and Michael Manuel, et al v. Sabine River Authority of Texas and Sabine River Authority of Louisiana, No. B-160173-C. The action was filed in the 163rd Judicial District Court for Orange County, Texas, and relates to flooding that occurred in Texas and Louisiana in March 2016. The plaintiffs have alleged that the flooding was the result of the release of water from the Toledo Bend spillway gates into the Sabine River. While the plaintiffs have made numerous allegations, they have specifically alleged that Cleco Power, included as one of several companies and governmental bodies, failed to repair one of the two hydroelectric generators at the Toledo Bend Dam, which in turn contributed to the flooding. Cleco Power does not operate the hydroelectric generator. Management believes that the case, as it relates to Cleco Power, has no merit.
The suit has been removed to federal court in Texas. Unless and until the federal court remands the case, it will stay in federal court.

LPSC Audits

Fuel Audit
Generally, the cost of fuel used for electric generation and the cost of power purchased for utility customers are recovered through the LPSC-established FAC that enables Cleco Power

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to pass on to its customers substantially all such charges. Recovery of FAC costs is subject to periodic fuel audits by the LPSC. The LPSC FAC General Order issued in November 1997, in Docket No. U-21497 provides that an audit of FAC filings will be performed at least every other year. In February 2016, the LPSC initiated an audit of Cleco Power’s fuel and purchased power expenses for the period January 2014 through December 2015. The total amount of fuel expense included in the audit was $582.6 million. On January 19, 2017, the LPSC Staff issued its audit report which recommended no disallowance of fuel costs. The report was approved by the LPSC on April 19, 2017. Cleco Power has FAC filings for January 2016 and thereafter that remain subject to audit. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings.

Environmental Audit
In July 2009, the LPSC issued Docket No. U-29380 Subdocket A, which provides for an EAC to recover from customers certain costs of environmental compliance. The costs eligible for recovery are prudently incurred air emissions credits associated with complying with federal, state, and local air emission regulations that apply to the generation of electricity reduced by the sale of such allowances. Also eligible for recovery are variable emission mitigation costs, which are the costs of reagents such as ammonia and limestone that are a part of the fuel mix used to reduce air emissions, among other things. In February 2016, the LPSC initiated an audit of Cleco Power’s environmental costs for the period November 2010 through December 2015. The total amount of environmental costs included in the audit was $81.2 million. In December 2016, the LPSC Staff issued its audit report which recommended a disallowance of environmental costs of less than $0.1 million. The report was approved by the LPSC on February 17, 2017. Cleco Power has EAC filings for January 2016 and thereafter that remain subject to audit. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings.
In the second quarter of 2015, Cleco Power began incurring additional environmental compliance expenses for reagents associated with compliance with MATS. In June 2015, the U.S. Supreme Court remanded the MATS rule to the D.C. Circuit Court of Appeals. In December 2015, the D.C. Circuit Court of Appeals remanded the rule to the EPA; however, the D.C. Circuit Court of Appeals did not vacate this rule. In April 2016, the EPA released a final supplemental finding that, even considering costs, it is appropriate and necessary to regulate hazardous air pollutants. By the June 24, 2016, deadline, six petitions were filed with the U.S. Court of Appeals for the D.C. Circuit Court of Appeals for review of the EPA’s findings. At the request of the EPA, on April 27, 2017, the court issued an order holding the cases in abeyance pending the EPA’s review of its supplemental finding. Oral arguments are set for November 16, 2017. These expenses are also eligible for recovery through Cleco Power’s EAC and are subject to periodic review by the LPSC.

Transmission ROE
Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. The complaints sought to reduce the 12.38% ROE
 
used in MISO’s transmission rates to a proposed 6.68%. The first complaint, filed in November 2013, was for the period November 2013 through February 2015. In September 2016, FERC issued a Final Order in response to the first complaint establishing a 10.32% ROE.
The second complaint, filed in February 2015, was for the period February 2015 through May 2016. In June 2016, an ALJ issued an initial decision in the second rate case docket recommending a 9.70% base ROE. Cleco Power is unable to determine when a binding FERC order will be issued on the second ROE complaint.
In November 2014, the MISO transmission owners committee, of which Cleco is a member, filed a request with FERC for an incentive to increase the new ROE by 50 basis points for RTO participation as allowed by the MISO tariff. In January 2015, FERC granted the request. The collection of the adder is delayed until the resolution of the ROE complaint proceedings.
On February 13, 2017, $1.2 million of refunds relating to the first complaint were submitted to MISO. As of September 30, 2017, Cleco Power had $2.0 million accrued for a reduction to the ROE, including accrued interest. Management believes a reduction in the ROE, as well as any additional refund, will not have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants. 

Other
Cleco is involved in various litigation matters, including regulatory, environmental, and administrative proceedings before various courts, regulatory commissions, arbitrators, and governmental agencies regarding matters arising in the ordinary course of business. The liability Cleco may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued. Management regularly analyzes current information and, as of September 30, 2017, believes the probable and reasonably estimable liabilities based on the eventual disposition of these matters is $4.6 million and has accrued this amount.

Off-Balance Sheet Commitments and Guarantees
Cleco Holdings and Cleco Power have entered into various off-balance sheet commitments, in the form of guarantees and standing letters of credit, in order to facilitate their activities and the activities of Cleco Holdings’ subsidiaries and equity investees (affiliates). Cleco Holdings and Cleco Power have also agreed to contractual terms that require the Registrants to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees.
Cleco Holdings entered into these off-balance sheet commitments in order to entice desired counterparties to contract with its affiliates by providing some measure of credit assurance to the counterparty in the event Cleco’s affiliates do not fulfill certain contractual obligations. If Cleco Holdings had not provided the off-balance sheet commitments, the desired counterparties may not have contracted with Cleco’s affiliates, or may have contracted with them at terms less favorable to its affiliates.
The off-balance sheet commitments are not recognized on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets because management has determined that Cleco and Cleco Power’s affiliates are able to perform the obligations

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2017 3RD QUARTER FORM 10-Q

under their contracts and that it is not probable that payments by Cleco or Cleco Power will be required.
Cleco Holdings provided guarantees and indemnities to Entergy Louisiana and Entergy Gulf States as a result of the sale of the Perryville facility in 2005. The remaining indemnifications relate to environmental matters that may have been present prior to closing. These remaining indemnifications have no limitations to time. The maximum amount of the potential payment to Entergy Louisiana and Entergy Gulf States is $42.4 million. Currently, management does not expect to be required to pay Entergy Louisiana and Entergy Gulf States under these guarantees.
On behalf of Acadia, Cleco Holdings provided guarantees and indemnifications as a result of the sales of Acadia Unit 1 to Cleco Power and Acadia Unit 2 to Entergy Louisiana in 2010 and 2011, respectively. The remaining indemnifications relate to the fundamental organizational structure of Acadia. These remaining indemnifications have no limitations as to time or maximum potential future payments. Currently, management does not expect to be required to pay Cleco Power or Entergy Louisiana under these guarantees.
Cleco Holdings provided indemnifications to Cleco Power as a result of the transfer of Coughlin to Cleco Power in March 2014. Cleco Power also provided indemnifications to Cleco Holdings and Evangeline as a result of the transfer of Coughlin to Cleco Power. The maximum amount of the potential payment to Cleco Power, Cleco Holdings, and Evangeline for their respective indemnifications is $40.0 million, except for indemnifications relating to the fundamental organizational structure of each respective entity, of which the maximum amount is $400.0 million. Currently, management does not expect to be required to make any payments under these indemnifications.
As part of the Amended Lignite Mining Agreement, Cleco Power and SWEPCO, joint owners of Dolet Hills Power Station, have agreed to pay the loan and lease principal obligations of the lignite miner, DHLC, when due if DHLC does not have sufficient funds or credit to pay. Any amounts paid on behalf of the miner would be credited by the lignite miner against future invoices for lignite delivered. The maximum projected payment by Cleco Power under this guarantee is estimated to be $106.5 million; however, the Amended Lignite Mining Agreement does not contain a cap. The projection is based on the forecasted loan and lease obligations to be incurred by DHLC, primarily for purchases of equipment. Cleco Power has the right to dispute the incurrence of loan and lease obligations through the review of the mining plan before the incurrence of such loan and lease obligations. The Amended Lignite Mining Agreement is not expected to terminate pursuant to its terms until 2036 and does not affect the amount the Registrants can borrow under their credit facilities. Currently, management does not expect to be required to pay DHLC under this guarantee.
Generally, neither Cleco Holdings nor Cleco Power has recourse that would enable them to recover amounts paid under their guarantee or indemnification obligations. There are no assets held as collateral for third parties that either Cleco Holdings or Cleco Power could obtain and liquidate to recover amounts paid pursuant to the guarantees or indemnification obligations.

 
Other Commitments
 
NMTC Fund
In 2008, Cleco Holdings and US Bancorp Community Development (USBCDC) formed the NMTC Fund. Cleco Holdings has a 99.9% membership interest in the NMTC Fund and USBCDC has a 0.1% interest. The purpose of the NMTC Fund is to invest in projects located in qualified active low-income communities that are underserved by typical debt capital markets. These investments are designed to generate NMTCs and Historical Rehabilitation tax credits. The NMTC Fund was later amended to include renewable energy investments. The majority of the energy investments qualify for grants under Section 1603 of the ARRA. The tax benefits received from the NMTC Fund reduce the federal income tax obligations of Cleco Holdings. In total, Cleco Holdings contributed $285.5 million of equity contributions to the NMTC Fund and will receive at least $303.8 million in the form of tax credits, tax losses, capital gains/losses, earnings, and cash over the life of the investment, which ends in 2018. The $18.3 million difference between equity contributions and total benefits received will be recognized over the life of the NMTC Fund as net tax benefits are delivered.
Due to the right of offset, the investment and associated debt are presented in Tax credit fund investment, net, on Cleco’s Condensed Consolidated Balance Sheet. At December 31, 2016, the amount of the liability component contained in the net asset was $0.6 million, and it was paid on March 30, 2017. The amount of tax benefits delivered in excess of capital contributions as of September 30, 2017, was $11.8 million.
By using the cost method for investments, the gross investment amortization expense will be recognized over a ten-year period, which is projected to end in 2018. The basis of the investment is reduced by the grants received under Section 1603 of the ARRA, which allow certain projects to receive a federal grant in lieu of tax credits, and other cash. Periodic amortization of the investment and the deferred taxes generated by the basis reduction temporary difference are included as components of income tax expense.

Fuel Transportation Agreement
In October 2007, Cleco Power entered into an agreement with Savage Services that met the accounting definition of a capital lease for barges in order to transport petroleum coke and limestone to Madison Unit 3. In December 2012, Cleco Power entered into an amended agreement for 42 dedicated barges. The amended agreement continued to meet the accounting definition of a capital lease until its expiration on August 31, 2017. Upon expiration of the amended agreement, Cleco Power entered into a second amended agreement with Savage Services to continue use of the 42 barges. The new agreement meets the accounting definition of an operating lease and automatically renews the terms of the lease on a month-to-month basis until terminated by either party. For the three and nine months ended September 30, 2017, Cleco Power recognized $0.3 million in operating lease expense for the barges. Cleco Power is evaluating future options related to its fuel transportation agreement with Savage Services.

Other
Cleco has accrued for liabilities related to third parties, employee medical benefits, and AROs.


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Risks and Uncertainties
Cleco could be subject to possible adverse consequences if Cleco’s counterparties fail to perform their obligations or if Cleco or its affiliates are not in compliance with loan agreements or bond indentures.
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. On April 7, 2017, Moody’s updated its credit ratings by maintaining Cleco Holdings at Baa3 (stable) and Cleco Power at A3 (stable). On May 30, 2017, S&P affirmed Cleco Holdings’ and Cleco Power’s credit ratings at BBB- (stable) and BBB+ (stable), respectively.
Changes in the regulatory environment or market forces could cause Cleco to determine its assets have suffered an other-than-temporary decline in value, whereby an impairment would be required and Cleco’s financial condition could be materially adversely affected.
Cleco Power is a participant in the MISO market. Energy prices in the MISO market are based on Locational Marginal Price (LMP), which includes a component directly related to congestion on the transmission system. Pricing zones with greater transmission congestion may have a higher LMP. Physical transmission constraints present in the MISO market could increase energy costs within Cleco Power’s pricing
 
zones. Cleco Power uses FTRs to mitigate transmission congestion risk. Changes to anticipated transmission paths may result in an unexpected increase in energy costs to Cleco Power.
Note 13 — Affiliate Transactions
Cleco Power has balances that are payable to or due from its affiliates. The following table is a summary of those balances:
 
AT SEPT. 30, 2017
 
 
AT DEC. 31, 2016
 
(THOUSANDS)
ACCOUNTS
RECEIVABLE

 
ACCOUNTS
PAYABLE

 
ACCOUNTS
RECEIVABLE

 
ACCOUNTS
PAYABLE

Cleco Holdings
$
282

 
$
526

 
$
3

 
$
119

Support Group
1,262

 
7,767

 
1,402

 
7,071

Other (1)
1

 

 
1

 

Total
$
1,545

 
$
8,293

 
$
1,406

 
$
7,190

(1) Represents Attala and Perryville.
Note 14 — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following tables for Cleco and Cleco Power. All amounts are reported net of income taxes. Amounts in parentheses indicate losses.
Cleco
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30, 2017
 
 
FOR THE NINE MONTHS ENDED SEPT. 30, 2017
 
(THOUSANDS)
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

 
POSTRETIREMENT
BENFIT
NET GAIN (LOSS)

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

Balances, beginning of period
$
(631
)
 
$

 
$
(631
)
 
$
1,500

 
$

 
$
1,500

Other comprehensive loss before reclassifications
 
 
 
 
 
 
 
 
 
 
 
Postretirement benefit adjustments during the period

 

 

 
(2,065
)
 

 
(2,065
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
Amortization of postretirement benefit net gain
(44
)
 

 
(44
)
 
(110
)
 

 
(110
)
Net current-period other comprehensive loss
(44
)
 

 
(44
)
 
(2,175
)
 

 
(2,175
)
Balances, Sept. 30, 2017
$
(675
)
 
$

 
$
(675
)
 
$
(675
)
 
$

 
$
(675
)
 
FOR THE THREE MONTHS ENDED SEPT. 30, 2016
 
(THOUSANDS)
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

Balances, beginning of period
$

 
$

 
$

Other comprehensive loss before reclassifications
 
 
 
 
 
Postretirement benefits adjustment during the period
(2,308
)
 

 
(2,308
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
Amortization of postretirement benefit net loss
3

 

 
3

Net current-period other comprehensive loss
(2,305
)
 

 
(2,305
)
Balances, Sept. 30, 2016
$
(2,305
)
 
$

 
$
(2,305
)

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CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

 
FOR THE NINE MONTHS ENDED SEPT. 30, 2016
 
(THOUSANDS)
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

PREDECESSOR
 
 
 
 
 
Balances, beginning of period
$
(20,857
)
 
$
(5,728
)
 
$
(26,585
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
Amortization of postretirement benefit net loss
587

 

 
587

Reclassification of net loss to interest charges

 
60

 
60

Net current-period other comprehensive income
587

 
60

 
647

Balances, Apr. 12, 2016
$
(20,270
)
 
$
(5,668
)
 
$
(25,938
)
SUCCESSOR(1)
 
 
 
 
 
Balances, Apr. 13, 2016
$

 
$

 
$

Other comprehensive loss before reclassifications
 
 
 
 
 
Postretirement benefits adjustment during the period
(2,308
)
 

 
(2,308
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 


Amortization of postretirement benefit net loss
3

 

 
3

Net current-period other comprehensive loss
(2,305
)
 

 
(2,305
)
Balances, Sept. 30, 2016
$
(2,305
)
 
$

 
$
(2,305
)
(1) As a result of the Merger, accumulated other comprehensive income was reduced to zero on April 13, 2016, as required by acquisition accounting.
 
 
 
 
 
Cleco Power
 
 
 
 
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30, 2017
 
 
FOR THE NINE MONTHS ENDED SEPT. 30, 2017
 
(THOUSANDS)
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

 
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

Balances, beginning of period
$
(8,132
)
 
$
(5,411
)
 
$
(13,543
)
 
$
(7,905
)
 
$
(5,517
)
 
$
(13,422
)
Other comprehensive loss before reclassifications
 
 
 
 
 
 
 
 
 
 
 
Postretirement benefit adjustments during the period

 

 

 
(584
)
 

 
(584
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Amortization of postretirement benefit net loss
167

 

 
167

 
524

 

 
524

Reclassification of net loss to interest charges

 
53

 
53

 

 
159

 
159

Net current-period other comprehensive income (loss)
167

 
53

 
220

 
(60
)
 
159

 
99

Balances, Sept. 30, 2017
$
(7,965
)
 
$
(5,358
)
 
$
(13,323
)
 
$
(7,965
)
 
$
(5,358
)
 
$
(13,323
)
 
FOR THE THREE MONTHS ENDED SEPT. 30, 2016
 
 
FOR THE NINE MONTHS ENDED SEPT. 30, 2016
 
(THOUSANDS)
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

 
POSTRETIREMENT
BENEFIT
NET LOSS

 
NET LOSS
ON CASH FLOW
HEDGES

 
TOTAL AOCI

Balances, beginning of period
$
(10,983
)
 
$
(5,622
)
 
$
(16,605
)
 
$
(11,364
)
 
$
(5,728
)
 
$
(17,092
)
Other comprehensive income before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
Postretirement benefit adjustments during the period
2,013

 

 
2,013

 
2,013

 

 
2,013

Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Amortization of postretirement benefit net loss
167

 

 
167

 
548

 

 
548

Reclassification of net loss to interest charges

 
53

 
53

 

 
159

 
159

Net current-period other comprehensive income
2,180

 
53

 
2,233

 
2,561

 
159

 
2,720

Balances, Sept. 30, 2016
$
(8,803
)
 
$
(5,569
)
 
$
(14,372
)
 
$
(8,803
)
 
$
(5,569
)
 
$
(14,372
)

Note 15 — Subsequent Event
On October 10, 2017, Cleco Power, Attala, Perryville, Entergy Louisiana, and Entergy Mississippi completed a joint filing with FERC. The filing requested approval for Cleco Power and Perryville to sell certain transmission assets to Entergy Louisiana and for Attala to sell certain transmission assets to Entergy Mississippi. The filing requested an approval date by December 18, 2017. If approved, the parties will enter into binding agreements for the sale of the assets. The parties expect completion of the agreements by the end of 2017.


47


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

ITEM 2.      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 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 informational purposes and does not intend for the address to be an active link. The contents of the website are not incorporated into this Combined Quarterly Report on Form 10-Q.
The following discussion and analysis should be read in combination with the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and Cleco and Cleco Power’s Condensed Consolidated Financial Statements contained in this Combined Quarterly Report on Form 10-Q. The information included therein is essential to understanding the following discussion and analysis. Below is information concerning the consolidated results of operations of Cleco for the three and nine months ended September 30, 2017, and 2016.
OVERVIEW
Cleco is a regional energy company that conducts substantially all of its business operations through its primary subsidiary, Cleco Power. Cleco Power is a regulated electric utility company that owns nine generating units with a total nameplate capacity of 3,310 MW and serves approximately 288,000 customers in Louisiana through its retail business and supplies wholesale power in Louisiana and Mississippi.

Merger
On April 13, 2016, Cleco Holdings completed its merger with Merger Sub whereby Merger Sub merged with and into Cleco Corporation, with Cleco Corporation surviving the Merger, and Cleco Corporation converting to a limited liability company and changing its name to Cleco Holdings, as a direct, wholly owned subsidiary of Cleco Group and an indirect, wholly owned subsidiary of Cleco Partners. For more information on the Merger, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 2 — Business Combinations.”

Enterprise Business Applications Project
The Enterprise Business Applications project includes replacement of and improvement to Cleco’s enterprise business applications. The project’s objectives are to gain efficiencies through consistent, industry leading work processes and practices; enable better decision making through data transparency across business functions; mitigate risk through knowledge transfer and better process documentation; provide a modernized, flexible platform to support future growth and changing business models; and provide customer-centric focus through technology and flexibility. Management expects the project to be complete by the third quarter of 2019. The total estimated project cost is $130.0 million. As of September 30, 2017, Cleco had spent $18.3 million on the project.

Cleco Power
Many factors affect Cleco Power’s primary business of generating, delivering, and selling electricity. These factors include weather and the presence of a stable regulatory environment, which impacts cost recovery and the ROE, 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; the ability to reliably deliver power to its jurisdictional customers; the ability to comply with increasingly stringent regulatory and environmental standards; and the ability to successfully perform in MISO while subject to the related operating challenges and uncertainties, including increased wholesale competition. Key initiatives on which Cleco Power is currently working include continuing construction on the Cenla Transmission Expansion project and the St. Mary Clean Energy Center project; initiating construction of the Terrebonne to Bayou Vista Transmission project and the Coughlin Pipeline project; and maintaining and growing its wholesale and retail business. These initiatives are discussed below.

Cenla Transmission Expansion Project
The Cenla Transmission Expansion project includes the construction of transmission lines and a transmission substation within the central Louisiana area. The project is expected to improve reliability to customers by relieving forecasted overloads and mitigating potential load shedding events while providing flexibility to allow routine maintenance outages and serve future growth in the central Louisiana area. The substation construction is complete and has been placed in service. New line construction is complete and the re-conductor portion of the project is in progress. The project is expected to be complete by the end of 2017 with an estimated cost of $31.4 million. As of September 30, 2017, Cleco Power had spent $29.5 million on the project.

St. Mary Clean Energy Center Project
The St. Mary Clean Energy Center project includes Cleco Power constructing, owning, and operating a 50-MW generating unit to be fueled by waste heat from Cabot Corporation’s carbon black manufacturing plant in Franklin, Louisiana. Construction began in October 2016 and the unit is expected to be commercially operational by the third quarter of 2018 at an estimated cost of $99.8 million. The project is expected to generate more than 300,000 MWh of zero additional carbon emitting energy each year. As of September 30, 2017, Cleco Power had spent $62.6 million on the project.

Terrebonne to Bayou Vista Transmission Project
The Terrebonne to Bayou Vista Transmission project includes the construction of additional transmission interconnection facilities south of Teche Power Station. The project is expected to increase reliability, reduce congestion, and provide hurricane hardening of the 230 kilovolt transmission system for customers in south Louisiana. The project team is finalizing negotiations on the right-of-way and land acquisition agreements. Cleco Power’s portion of the joint project with Entergy Louisiana is expected to cost $48.0 million. Construction is expected to be complete by the fourth quarter of 2018. As of September 30, 2017, Cleco Power had spent $6.5 million on the project.

Coughlin Pipeline Project
The Coughlin Pipeline project includes construction of a pipeline directly connecting the Pine Prairie Energy Center to

48


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Cleco’s Coughlin Power Station. The project is expected to increase reliability for fuel delivery and mitigate exposure to transportation cost increases. On June 28, 2017, the LPSC approved the establishment of a regulatory asset for the revenue requirement associated with the Coughlin Pipeline project until Cleco Power seeks recovery in its next rate case. The project is expected to be complete in the second quarter of 2019 with an estimated cost of $29.4 million. As of September 30, 2017, Cleco Power had spent $0.2 million on the project.

Other
Cleco Power is working on securing load growth opportunities that include renewing existing franchises and wholesale contracts, pursuing new wholesale contracts and franchises, and adding new retail load opportunities with large industrial, commercial, and residential load. The retail opportunities include sectors such as agriculture, oil and gas, chemicals, metals, national accounts, government and military, wood and paper, health care, information technology, transportation, and other manufacturing.
RESULTS OF OPERATIONS
All of Cleco’s financial information for the nine months ended September 30, 2017, and 2016 is presented such that pre-merger activity is shown as “Predecessor” and post-merger activity is shown as “Successor.” The purchase price of the Merger was allocated to the related assets and liabilities based on their respective estimated fair values on the Merger date, with the remaining consideration recorded as goodwill. The fair values of assets are being amortized over their estimated useful lives in a manner that best reflects the economic benefits derived from such assets. Goodwill is not amortized, but is subject to impairment testing, annually, during the third quarter. Such adjustments to fair value and the allocation of purchase price between identifiable intangibles and goodwill will have an impact on Cleco’s expenses and profitability. For more information on Goodwill, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Polices — Goodwill.”

Comparison of the Three Months Ended September 30, 2017, and 2016
Cleco
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2017

 
2016

 
VARIANCE

 
CHANGE

Operating revenue, net
$
338,499

 
$
342,860

 
$
(4,361
)
 
(1.3
)%
Operating expenses
243,387

 
249,717

 
6,330

 
2.5
 %
Operating income
$
95,112

 
$
93,143

 
$
1,969

 
2.1
 %
Allowance for equity funds used during construction
$
2,096

 
$
1,308

 
$
788

 
60.2
 %
Other income, net
$
1,258

 
$
410

 
$
848

 
206.8
 %
Interest charges
$
30,462

 
$
31,858

 
$
1,396

 
4.4
 %
Federal and state income tax expense
$
23,054

 
$
23,700

 
$
646

 
2.7
 %
Net income
$
45,304

 
$
39,621

 
$
5,683

 
14.3
 %

Operating revenue, net decreased $4.4 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to lower base revenue partially offset by higher
 
fuel cost recovery revenue and higher other operations revenue at Cleco Power.
Operating expenses decreased $6.3 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to lower other operations expenses at Cleco Power, lower merger transaction and commitment costs at Cleco Holdings, and lower maintenance expenses at Cleco Power. These decreases were partially offset by higher recoverable fuel and power purchased at Cleco Power.
Other income, net increased $0.8 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to the increase in the cash surrender value of life insurance policies at Cleco Holdings due to favorable market conditions, higher mutual assistance income at Cleco Power, and higher royalty income at Cleco Power. These increases were partially offset by the absence of a death benefit recognized on life insurance policies and higher mutual assistance expenses at Cleco Power.
Interest charges decreased $1.4 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to long-term debt redeemed and replaced with lower interest rate debt in the fourth quarter of 2016 at Cleco Power, partially offset by higher interest rates on Cleco Holdings’ $300.0 million long-term variable rate bank term loan.
Federal and state income tax expense decreased $0.6 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $4.4 million to record tax expense at the consolidated projected annual effective tax rate and $1.3 million for adjustments for permanent tax differences. These decreases were partially offset by $2.6 million for the flowthrough of state tax benefits, $2.2 million for the change in pretax income, excluding AFUDC equity, and $0.3 million for miscellaneous tax items. The effective income tax rate for the third quarter of 2017 and 2016 was 33.7% and 37.4%, respectively. The estimated annual effective income tax rate used during the third quarter of 2017 and 2016 for Cleco might not be indicative of the full-year income tax rate.
Results of operations for Cleco Power are more fully described below.

49


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Cleco Power
 
 
 
 
 
 
 
 
 
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2017

 
2016

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Base
$
187,149

 
$
198,448

 
$
(11,299
)
 
(5.7
)%
Fuel cost recovery
132,860

 
127,833

 
5,027

 
3.9
 %
Electric customer credits
(372
)
 
177

 
(549
)
 
(310.2
)%
Other operations
20,768

 
18,460

 
2,308

 
12.5
 %
Affiliate revenue
209

 
213

 
(4
)
 
(1.9
)%
Operating revenue, net
340,614

 
345,131

 
(4,517
)
 
(1.3
)%
Operating expenses
 

 
 

 


 


Recoverable fuel and power purchased
132,866

 
127,834

 
(5,032
)
 
(3.9
)%
Non-recoverable fuel and power purchased
9,706

 
10,132

 
426

 
4.2
 %
Other operations
28,680

 
35,886

 
7,206

 
20.1
 %
Maintenance
17,812

 
19,326

 
1,514

 
7.8
 %
Depreciation and amortization
40,049

 
40,353

 
304

 
0.8
 %
Taxes other than income taxes
12,008

 
12,180

 
172

 
1.4
 %
Total operating expenses
241,121

 
245,711

 
4,590

 
1.9
 %
Operating income
$
99,493

 
$
99,420

 
$
73

 
0.1
 %
Allowance for equity funds used during construction
$
2,096

 
$
1,308

 
$
788

 
60.2
 %
Interest charges
$
17,141

 
$
19,177

 
$
2,036

 
10.6
 %
Federal and state income tax expense
$
30,092

 
$
29,427

 
$
(665
)
 
(2.3
)%
Net income
$
54,852

 
$
52,572

 
$
2,280

 
4.3
 %

Cleco Power’s net income in the third quarter of 2017 increased $2.3 million compared to the third quarter of 2016 primarily as a result of the following factors:

lower other operations expense,
higher other operations revenue,
lower interest charges, and
lower maintenance expense.

These increases were partially offset by lower base revenue.
The following table shows the components of Cleco Power’s retail and wholesale customer sales related to base revenue:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(MILLION kWh)
2017

 
2016

FAVORABLE/
(UNFAVORABLE)
 
Electric sales
 
 
 
 
 
Residential
1,113

 
1,225

 
(9.1
)%
Commercial
771

 
813

 
(5.2
)%
Industrial
535

 
504

 
6.2
 %
Other retail
35

 
35

 
 %
Total retail
2,454

 
2,577

 
(4.8
)%
Sales for resale
924

 
949

 
(2.6
)%
Total retail and wholesale customer sales
3,378

 
3,526

 
(4.2
)%






 
The following table shows the components of Cleco Power’s base revenue:
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

FAVORABLE/
(UNFAVORABLE)
 
Electric sales
 
 
 
 
 
Residential
$
92,782

 
$
100,775

 
(7.9
)%
Commercial
49,848

 
52,082

 
(4.3
)%
Industrial
21,690

 
21,215

 
2.2
 %
Other retail
2,732

 
2,812

 
(2.8
)%
Surcharge
5,507

 
6,080

 
(9.4
)%
Total retail
172,559

 
182,964

 
(5.7
)%
Sales for resale
14,590

 
15,484

 
(5.8
)%
Total base revenue
$
187,149

 
$
198,448

 
(5.7
)%

Cleco Power’s residential customers’ demand for electricity is affected largely 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 readily available, and winter energy is typically 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.
The following chart shows how cooling degree-days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine cooling and heating degree-days.
 
FOR THE THREE MONTHS ENDED SEPT. 30,
 
 
 
 
 
 
 
 
2017 CHANGE
 
 
2017

 
2016

 
NORMAL

 
PRIOR YEAR

 
NORMAL

Cooling degree-days
1,519

 
1,744

 
1,511

 
(12.9
)%
 
0.5
%

Base
Base revenue decreased $11.3 million during the third quarter of 2017 compared to the third quarter of 2016 due to $9.2 million of lower usage as a result of milder summer weather and lower sales to wholesale customers, $1.9 million due to lower rates to a site specific industrial customer, $0.7 million due to lower revenue related to MATS, and $0.2 million of lower other revenue. These decreases were partially offset by $0.7 million due to an annual rate adjustment that began on July 1, 2017.
Cleco Power expects increased base revenue of $8.0 million in 2018 and an additional $8.6 million in 2019 through an FRP rider associated with the recovery of expenditures for capital projects. For information on the effects of future energy sales on the results of operations, financial condition, or cash flows of Cleco Power, see Part I, Item 1A, “Risk Factors — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


50


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

Fuel Cost Recovery/Recoverable Fuel and Power Purchased
Changes in fuel costs historically have not significantly affected Cleco Power’s net income. Generally, fuel and purchased power expenses are recovered through the LPSC-established FAC, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 75% of Cleco Power’s total fuel cost during the third quarter of 2017 was regulated by the LPSC. Recovery of FAC costs is subject to periodic fuel audits by the LPSC which may result in a refund to customers. Generally, fuel and purchased power expenses are impacted by customer usage, the per unit cost of fuel used for electric generation, and the dispatch of Cleco Power’s generating facilities by MISO. For more information on fuel audits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Fuel Audit.”

Other Operations Revenue
Other operations revenue increased $2.3 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $2.2 million of higher forfeited discounts and reconnect fees mostly due to the absence of the 2016 customer rate credits as a result of the Merger and the absence of LPSC executive orders relating to 2016 flooding, $1.2 million of generation revenue from SSR payments, and $0.2 million of higher miscellaneous other operations revenue. These increases were partially offset by $1.3 million of lower net transmission revenue. For more information on the SSR, see “Financial Condition — Regulatory and Other Matters — Retail Rates of Cleco Power — SSR.”

Non-recoverable Fuel and Power Purchased
Non-recoverable fuel and power purchased decreased $0.4 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $1.9 million of lower net MISO transmission expenses due to lower usage and rates and $0.3 million due to the absence of a reserve for uncollectible transmission expenses. These decreases were partially offset by $0.8 million of higher miscellaneous expenses, $0.6 million of MISO SSR transmission expenses, and $0.4 million of expenses related to flood damages. For more information on the SSR, see “Financial Condition — Regulatory and Other Matters — Retail Rates of Cleco Power — SSR.”

Other Operations Expense
Other operations expense decreased $7.2 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $2.1 million of higher capitalized administrative and general expenses, $1.3 million of lower salaries, $1.1 million of lower fees for outside services, $1.1 million of flood related uncollectible accounts deferred to regulatory assets, $0.7 million of lower employee benefit expenses, $0.5 million of higher administrative and general costs billed to joint owners, and $0.5 million of lower generation operations expenses. These decreases were partially offset by $0.1 million of higher miscellaneous other operations expenses.
 
Maintenance
Maintenance expense decreased $1.5 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $1.2 million of lower net generating station routine maintenance expenses, $0.2 million of lower distribution
 
routine maintenance expenses, and $0.1 million of lower administrative and general maintenance expenses.

Allowance for Equity Funds Used During Construction
Allowance for equity funds used during construction increased $0.8 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to higher costs related to the St. Mary Clean Energy Center project and other capital projects.

Interest Charges
Interest charges decreased $2.0 million during the third quarter of 2017 compared to the third quarter of 2016 due to long-term debt redeemed and replaced with lower interest rate debt in the fourth quarter of 2016.

Income Taxes
Federal and state income tax expense increased $0.7 million during the third quarter of 2017 compared to the third quarter of 2016 primarily due to $2.6 million for the flowthrough of state tax benefits, $1.4 million for the change in pretax income, excluding AFUDC equity, and $1.1 million for tax returns as filed. These increases were partially offset by $4.4 million to record tax expense at the projected annual effective tax rate.
The effective income tax rate for the third quarter of 2017 and 2016 was 35.4% and 35.9%, respectively. The estimated annual effective income tax rate used during the third quarter of 2017 and 2016 for Cleco Power might not be indicative of the full-year income tax rate.

Comparison of the Nine Months Ended September 30, 2017, and 2016
Cleco
 
 
 
 
 
 
SUCCESSOR
 
PREDECESSOR
(THOUSANDS)
FOR THE NINE MONTHS ENDED SEPT. 30, 2017

 
APR. 13, 2016 - SEPT. 30, 2016

 
JAN. 1, 2016 - APR. 12, 2016

Operating revenue, net
$
897,662

 
$
586,363

 
$
299,870

Operating expenses
693,501

 
603,368

 
279,507

Operating income (loss)
$
204,161

 
$
(17,005
)
 
$
20,363

Interest income
$
1,046

 
$
515

 
$
265

Allowance for equity funds used during construction
$
4,446

 
$
2,057

 
$
723

Other income, net
$
2,569

 
$
1,960

 
$
280

Interest charges
$
92,800

 
$
58,323

 
$
22,123

Federal and state income tax expense (benefit)
$
42,381

 
$
(28,502
)
 
$
3,468

Net income (loss)
$
77,041

 
$
(42,294
)
 
$
(3,960
)

Cleco’s net income attributable to the successor period for the nine months ended September 30, 2017, was $77.0 million. There were no significant changes in the underlying trends impacting net income. The effective income tax rate for the period was 35.5%.
Cleco’s net loss attributable to the successor period April 13, 2016, through September 30, 2016, was $42.3 million. There were no significant changes in the underlying trends impacting net loss with the exception of the change in pretax loss primarily related to:

$173.2 million of merger transaction and commitment costs,
$21.6 million of interest costs related to debt obtained as a result of the Merger,
$4.8 million of an offset to operating revenue related to the amortization of the intangible asset recorded for the fair

51


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

value adjustment of wholesale power supply agreements as a result of the Merger, and
$4.6 million of amortization of the fair value adjustment made as a result of the Merger to record the stepped-up basis for the Coughlin assets.

The effective income tax rate for the period was 40.3%.
Cleco’s net loss attributable to the predecessor period January 1, 2016, through April 12, 2016, was $4.0 million. There were no significant changes in the underlying trends impacting net loss with the exception of the change in pretax loss primarily related to $34.9 million of merger transaction costs. The effective income tax rate for the period was (704.9)%.
The estimated annual effective income tax rate used during the nine months ended September 30, 2017, and 2016 for Cleco might not be indicative of the full-year income tax rate.
Results of operations for Cleco Power are more fully described below.
Cleco Power
 
 
 
 
 
 
 
 
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
 
 
 
 
 
FAVORABLE/(UNFAVORABLE)
 
(THOUSANDS)
2017

 
2016

 
VARIANCE

 
CHANGE

Operating revenue
 
 
 
 
 
 
 
Base
$
498,417

 
$
515,294

 
$
(16,877
)
 
(3.3
)%
Fuel cost recovery
349,000

 
324,299

 
24,701

 
7.6
 %
Electric customer credits
(1,045
)
 
(745
)
 
(300
)
 
(40.3
)%
Other operations
58,083

 
50,638

 
7,445

 
14.7
 %
Affiliate revenue
649

 
669

 
(20
)
 
(3.0
)%
Operating revenue, net
905,104

 
890,155

 
14,949

 
1.7
 %
Operating expenses
 
 
 
 


 


Recoverable fuel and power purchased
348,853

 
324,305

 
(24,548
)
 
(7.6
)%
Non-recoverable fuel and power purchased
26,885

 
27,920

 
1,035

 
3.7
 %
Other operations
90,453

 
94,566

 
4,113

 
4.3
 %
Maintenance
66,496

 
71,818

 
5,322

 
7.4
 %
Depreciation and amortization
118,280

 
115,196

 
(3,084
)
 
(2.7
)%
Taxes other than income taxes
35,412

 
36,096

 
684

 
1.9
 %
Merger commitment costs

 
151,501

 
151,501

 
100.0
 %
Gain on sale of asset

 
(1,095
)
 
(1,095
)
 
(100.0
)%
Total operating expenses
686,379

 
820,307

 
133,928

 
16.3
 %
Operating income
$
218,725

 
$
69,848

 
$
148,877

 
213.1
 %
Allowance for equity funds used during construction
$
4,446

 
$
2,780

 
$
1,666

 
59.9
 %
Other income (expense), net
$
6

 
$
(254
)
 
$
260

 
102.4
 %
Interest charges
$
52,654

 
$
57,777

 
$
5,123

 
8.9
 %
Federal and state income tax expense
$
63,010

 
$
2,965

 
$
(60,045
)
 
*

Net income
$
108,439

 
$
12,222

 
$
96,217

 
787.2
 %
* Not meaningful
 
 
 
 
 
 
 

Cleco Power’s net income in the first nine months of 2017 increased $96.2 million compared to the first nine months of 2016 primarily as a result of the following factors:

the absence of merger commitment costs,
higher other operations revenue,
 
lower maintenance expense,
lower interest charges,
lower other operations expense,
higher allowance for equity funds used during construction, and
lower non-recoverable fuel and power purchased.

These increases were partially offset by:

higher income taxes,
lower base revenue,
higher depreciation and amortization, and
the absence of a gain on sale of asset.

The following table shows the components of Cleco Power’s retail and wholesale customer sales related to base revenue:
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(Million kWh)
2017

 
2016

FAVORABLE/
(UNFAVORABLE)
 
Electric sales
 
 
 
 
 
Residential
2,692

 
2,920

 
(7.8
)%
Commercial
2,026

 
2,110

 
(4.0
)%
Industrial
1,529

 
1,471

 
3.9
 %
Other retail
99

 
103

 
(3.9
)%
Total retail
6,346

 
6,604

 
(3.9
)%
Sales for resale
2,256

 
2,385

 
(5.4
)%
Total retail and wholesale customer sales
8,602

 
8,989

 
(4.3
)%

The following table shows the components of Cleco Power’s base revenue:
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
(THOUSANDS)
2017

 
2016

FAVORABLE/
(UNFAVORABLE)
 
Electric sales
 
 
 
 
 
Residential
$
221,689

 
$
232,430

 
(4.6
)%
Commercial
143,549

 
147,837

 
(2.9
)%
Industrial
64,778

 
64,395

 
0.6
 %
Other retail
7,980

 
8,189

 
(2.6
)%
Surcharge
16,241

 
16,771

 
(3.2
)%
Total retail
454,237

 
469,622

 
(3.3
)%
Sales for resale
44,180

 
45,672

 
(3.3
)%
Total base revenue
$
498,417

 
$
515,294

 
(3.3
)%

The following chart shows how cooling and heating degree-days varied from normal conditions and from the prior period. Cleco Power uses weather data provided by the National Oceanic and Atmospheric Administration to determine degree-days.
 
 
 
 
 
FOR THE NINE MONTHS ENDED SEPT. 30,
 
 
 
 
 
 
 
 
2017 CHANGE
 
 
2017

 
2016

 
NORMAL

 
PRIOR YEAR

 
NORMAL

Heating degree-days
440

 
755

 
942

 
(41.7
)%
 
(53.3
)%
Cooling degree-days
2,675

 
2,885

 
2,531

 
(7.3
)%
 
5.7
 %

Base
Base revenue decreased $16.9 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to $13.9 million of lower usage as a result of milder weather and lower sales to wholesale customers, $4.0 million due to lower rates to a site specific industrial customer,

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and $0.1 million of lower other revenue. These decreases were partially offset by $1.0 million for annual rate adjustments and $0.1 million due to higher revenue related to MATS.
For information on the effects of future energy sales on the results of operations, financial condition, or cash flows of Cleco Power, see Part I, Item 1A, “Risk Factors — Future Electricity Sales” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Fuel Cost Recovery/Recoverable Fuel and Power Purchased
Changes in fuel costs historically have not significantly affected Cleco Power’s net income. Generally, fuel and purchased power expenses are recovered through the LPSC-established FAC, which enables Cleco Power to pass on to its customers substantially all such charges. Approximately 76% of Cleco Power’s total fuel cost during the first nine months of 2017 was regulated by the LPSC. Recovery of FAC costs is subject to periodic fuel audits by the LPSC which may result in a refund to customers. Generally, fuel and purchased power expenses are impacted by customer usage, the per unit cost of fuel used for electric generation, and the dispatch of Cleco Power’s generating facilities by MISO. For more information on fuel audits, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Fuel Audit.”

Other Operations Revenue
Other operations revenue increased $7.4 million during the first nine months of 2017 compared to the first nine months of 2016 primarily related to $6.3 million of generation revenue from SSR payments, $2.0 million of higher forfeited discounts and reconnect fees mostly due to the absence of the 2016 customer rate credits as a result of the Merger and the absence of LPSC executive orders relating to 2016 flooding, $1.0 million of higher net transmission revenue, and $0.4 million of higher miscellaneous revenue. These increases were partially offset by $2.3 million of lower transmission revenue from wholesale customers as a result of issuing customer credits relating to the MISO ROE complaints. For more information on the SSR, see “Financial Condition — Regulatory and Other Matters — Retail Rates of Cleco Power — SSR.”

Non-recoverable Fuel and Power Purchased
Non-recoverable fuel and power purchased decreased $1.0 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to a $2.3 million refund from MISO for wholesale customers relating to the MISO ROE complaints, $1.6 million for the absence of a reserve for uncollectible transmission expenses, and $1.3 million due to the absence of expenses related to fuel accounting software. These decreases were partially offset by $2.7 million of MISO SSR transmission expenses, $0.8 million of higher miscellaneous expenses, $0.4 million of expenses related to flood damages, and $0.3 million of higher net MISO transmission expenses due to higher usage and rates. For more information on the SSR, see “Financial Condition — Regulatory and Other Matters — Retail Rates of Cleco Power — SSR.”

Other Operations Expense
Other operations expense decreased $4.1 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to $2.1 million of higher capitalized
 
administrative and general expenses, $1.4 million of lower salaries, $1.1 million of the flood related uncollectible accounts deferred to regulatory assets, $1.1 million of lower generation operations expenses, $0.7 million of lower employee benefits expenses, and $0.7 million of higher company use of electricity. These decreases were partially offset by $1.3 million of higher fees for outside services, $0.9 million for higher uncollectible accounts, and $0.8 million of higher customer service expenses.

Maintenance Expense
Maintenance expense decreased $5.3 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to $4.7 million of lower net generating station outage and routine maintenance expenses and $1.0 million of lower transmission and distribution routine maintenance expenses. These decreases were partially offset by $0.4 million of higher administrative and general maintenance expenses.

Depreciation and Amortization
Depreciation and amortization expense increased $3.1 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to $3.6 million of normal recurring additions to fixed assets and $1.8 million of lower deferrals of corporate franchise taxes to regulatory assets. These increases were partially offset by $1.7 million due to the absence of amortization related to transition assets, $0.5 million of lower amortization of intangible assets, and $0.1 million of lower miscellaneous amortization.

Merger Commitment Costs
Merger commitment costs decreased $151.5 million during the first nine months of 2017 compared to the first nine months of 2016 due to the close of the Merger in April 2016.

Allowance for Equity Funds Used During Construction
Allowance for equity funds used during construction increased $1.7 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to higher costs related to the St. Mary Clean Energy Center project and other capital projects.

Other Income (Expense), Net
Other income, net increased $0.3 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to $0.9 million of higher mutual assistance income, $0.3 million of higher royalty income, $0.3 million due to the absence of a decrease in cash surrender value of life insurance policies, and $0.1 million due to lower miscellaneous expenses. These increases were partially offset by $0.9 million of higher mutual assistance expenses and $0.4 million due to the absence of a death benefit recognized on life insurance policies.

Interest Charges
Interest charges decreased $5.1 million during the first nine months of 2017 compared to the first nine months of 2016 primarily due to long-term debt redeemed and replaced with lower interest rate debt in the fourth quarter of 2016.

Income Taxes
Federal and state income tax expense increased $60.0 million during the first nine months of 2017 compared to the first nine

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months of 2016 primarily due to $60.3 million for the change in pretax income, excluding AFUDC equity, $1.2 million to record tax expense at the projected annual effective tax rate, and $1.1 million for tax returns as filed. These increases were partially offset by $2.5 million for the flowthrough of state tax benefits and $0.1 million for miscellaneous tax items.
The effective income tax rate for the nine months ended September 30, 2017, and 2016 was 36.8% and 19.5%, respectively. The estimated annual effective income tax rate used during the first nine months of 2017 and 2016 for Cleco Power might not be indicative of the full-year income tax rate.
FINANCIAL CONDITION
 
Liquidity and Capital Resources
 
General Considerations and Credit-Related Risks

Credit Ratings and Counterparties
Financing for operational needs and capital expenditure requirements not satisfied by operating cash flows depends upon the cost and availability of external funds through both short- and long-term financing. The inability to raise capital on favorable terms could negatively affect Cleco’s ability to maintain or expand its businesses. Access to funds is dependent upon factors such as general economic and capital market conditions, regulatory authorizations and policies, Cleco Holdings’ and Cleco Power’s credit ratings, cash flows from routine operations, and credit ratings of project counterparties. After assessing the current operating performance, liquidity, and credit ratings of Cleco Holdings and Cleco Power, management believes that Cleco will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. The following table presents the credit ratings of Cleco Holdings and Cleco Power at September 30, 2017:
 
SENIOR UNSECURED DEBT
 
CORPORATE CREDIT
 
MOODY’S
 
S&P
 
S&P
Cleco Holdings
Baa3
 
BBB-
 
BBB-
Cleco Power
    A3
 
BBB+
 
BBB+

On April 7, 2017, Moody’s updated its credit ratings by maintaining Cleco Holdings at Baa3 (stable) and Cleco Power at A3 (stable). On May 30, 2017, S&P affirmed Cleco Holdings’ and Cleco Power’s credit ratings at BBB- (stable) and BBB+ (stable), respectively.
Cleco notes that credit ratings are not recommendations to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
Cleco Holdings and Cleco Power pay fees and interest under their bank credit agreements based on the highest rating held. Savings are dependent upon the level of borrowings. If Cleco Holdings or Cleco Power’s credit ratings were to be downgraded by S&P or Moody’s, Cleco Holdings and/or Cleco Power would be required to pay additional fees and incur higher interest rates for borrowings under their respective credit facilities.
With respect to any open power or natural gas trading positions that Cleco Power may initiate in the future, Cleco Power may be required to provide credit support or pay liquidated damages. The amount of credit support that Cleco Power may be required to provide at any point in the future is
 
dependent on the amount of the initial transaction, changes in the market price of power and natural gas, changes in open power and gas positions, and changes in the amount counterparties owe Cleco Power. Changes in any of these factors could cause the amount of requested credit support to increase or decrease.
Cleco Power participates in the MISO market, which operates a fully functioning RTO market with two major market processes: the Day-Ahead Energy and Operating Reserves Market and the Real-Time Energy and Operating Reserves Market. Both use market-based mechanisms to manage transmission congestion across the MISO market area. MISO required Cleco Power to provide credit support which may increase or decrease due to the timing of the settlement schedules. At September 30, 2017, Cleco Power had a $2.0 million letter of credit to MISO pursuant to the credit requirements of FTRs. The letter of credit automatically renews each year. For information about MISO, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Transmission Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
 
Global and U.S. Economic Environment
Global and domestic economic conditions may have an impact on Cleco’s business and financial condition. Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. During periods of capital market volatility, the availability of capital could be limited and the costs of capital may increase for many companies. Although the Registrants have not experienced restrictions in the financial markets, their ability to access the capital markets may be restricted at a time when the Registrants would like, or need, to do so. Any restrictions could have a material impact on the Registrants’ ability to fund capital expenditures or debt service, or on their flexibility to react to changing economic and business conditions. Credit constraints could have a material negative impact on the Registrants’ lenders or customers, causing them to fail to meet their obligations to the Registrants or to delay payment of such obligations. The lower interest rates to which the Registrants have been exposed have been beneficial to debt issuances; however, these rates have negatively affected interest income for the Registrants’ short-term investments.

Fair Value Measurements
Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power are required to disclose the fair value of certain assets and liabilities by one of three levels. Other financial assets and liabilities are reported at their carrying values on the consolidated balance sheets with their fair values as of the balance sheet date disclosed within the three levels. For more information about fair value levels, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 5 — Fair Value Accounting.”


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2017 3RD QUARTER FORM 10-Q

Cash Generation and Cash Requirements
 
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 SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,798

 
$
9,213

Cleco Power’s charitable contributions
1,200

 
1,200

Cleco Power’s rate credit escrow
3,876

 
12,671

Total current
8,874

 
23,084

Non-current
 
 
 
Diversified Lands’ mitigation escrow
21

 
21

Cleco Power’s future storm restoration costs
17,999

 
17,379

Cleco Power’s charitable contributions
3,640

 
4,179

Cleco Power’s rate credit escrow
2,887

 
1,831

Total non-current
24,547

 
23,410

Total restricted cash and cash equivalents
$
33,421

 
$
46,494

Cleco Power
 
 
 
(THOUSANDS)
AT SEPT. 30, 2017

 
AT DEC. 31, 2016

Current
 
 
 
Cleco Katrina/Rita’s storm recovery bonds
$
3,798

 
$
9,213

Charitable contributions
1,200

 
1,200

Rate credit escrow
3,876

 
12,671

Total current
8,874

 
23,084

Non-current
 
 
 
Future storm restoration costs
17,999

 
17,379

Charitable contributions
3,640

 
4,179

Rate credit escrow
2,887

 
1,831

Total non-current
24,526

 
23,389

Total restricted cash and cash equivalents
$
33,400

 
$
46,473


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, 2016, to September 30, 2017, was due to Cleco Katrina/Rita using $17.9 million for scheduled storm recovery bond principal payments and $3.6 million for related interest payments, partially offset by collections of $16.1 million net of administration fees.
Included in the Merger Commitments were $6.0 million of charitable contributions to be disbursed over five years and $136.0 million of rate credits to eligible customers. In April 2016, in accordance with the Merger Commitments, Cleco Power established the charitable contribution fund and deposited the rate credit funds into an escrow account. In April 2016, the LPSC voted to issue the rate credits equally to customers with service as of June 30, 2016, beginning in July 2016. As of September 30, 2017, $1.2 million of the charitable contributions and $129.4 million of the rate credits had been released from restricted cash.

 
Debt

Cleco Consolidated
At September 30, 2017, Cleco had $6.5 million of short-term debt outstanding on Cleco Power’s $10.0 million uncommitted line of credit, at an all-in interest rate of 2.98%. Cleco had no short-term debt outstanding at December 31, 2016. Cleco Holdings and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short-term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
At September 30, 2017, Cleco’s long-term debt outstanding was $2.73 billion, of which $19.2 million was due within one year. The long-term debt due within one year at September 30, 2017, represents principal payments for the Cleco Katrina/Rita storm recovery bonds. For Cleco, long-term debt decreased $25.5 million from December 31, 2016, primarily due to $17.9 million of scheduled payments made on Cleco Katrina/Rita storm recovery bonds, $6.5 million for amortizations of long-term debt fair value adjustments related to the Merger, and a $1.8 million decrease in capital lease obligations. These decreases were partially offset by $0.7 million of debt issuance cost and debt discount amortizations.
In May 2016, Cleco Holdings completed the private sale of $535.0 million aggregate principal amount of its 3.743% senior notes due May 1, 2026, and $350.0 million aggregate principal amount of its 4.973% senior notes due May 1, 2046. Cleco Holdings used the proceeds from the issuance and sale of these notes to repay a portion of the $1.35 billion Acquisition Loan Facility entered into in connection with the completion of the Merger. On April 28, 2017, Cleco Holdings completed an exchange offer for all of its then outstanding 3.743% and 4.973% senior notes, which were not registered under the Securities Act of 1933, as amended, for an equal principal amount of newly issued 3.743% senior notes due May 1, 2026, and 4.973% senior notes due May 1, 2046, that were so registered. Cleco Holdings did not receive any proceeds from the exchange offer.
On March 1, 2017, Cleco completed the repayment of the first of two tranches of its Cleco Katrina/Rita storm recovery bonds issued in March 2008. For more information, see “—- Cleco Power” below.
Cash and cash equivalents available at September 30, 2017, were $6.1 million combined with $400.0 million credit facility capacity ($100.0 million from Cleco Holdings and $300.0 million from Cleco Power) for total liquidity of $406.1 million.
At September 30, 2017, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents. In order to mitigate potential credit risk, Cleco and Cleco Power have established guidelines for short-term investments. For more information on the concentration of credit risk through short-term investments classified as cash equivalents, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 5 — Fair Value Accounting.”
At September 30, 2017, and December 31, 2016, Cleco had a working capital surplus of $162.3 million and $174.9 million, respectively. The $12.6 million decrease in working capital is primarily due to:

a $23.9 increase in interest accrued primarily due to timing of interest payments,

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2017 3RD QUARTER FORM 10-Q

a $22.9 million increase in taxes payable primarily due to timing of property tax payments, partially offset by lower income taxes,
a $17.0 million decrease in cash and cash equivalents,
a $14.2 million decrease in restricted cash and cash equivalents,
a $6.5 million increase in short-term debt primarily due to outstanding borrowings on Cleco Power’s uncommitted line of credit, and
a $6.5 million increase in other current liabilities primarily due to accruals for SSR payments received for capital expenditures, and timing of benefits and incentives.

These decreases in working capital were partially offset by:

a $26.2 million increase in customer accounts receivable and unbilled revenue primarily due to the normal seasonal fluctuations in retail revenue, timing of receipts from a wholesale customer and additional deferred arrangements due to the LPSC executive orders,
a $21.0 million decrease in accounts payable primarily due to the timing of property tax and vendor payments,
a $14.2 million increase in other accounts receivable primarily due to higher receivables for a lignite fuel credit, an insurance reimbursement, SSR payments, and timing of pole attachment receivables,
a $9.4 million decrease in provision for merger commitments primarily due to the issuance of Merger rate credits, and
a $5.4 million increase in fuel inventory primarily due to higher petroleum coke and limestone due to lower plant operations and higher coal purchases, partially offset by lower lignite purchases.

Cleco Holdings (Holding Company Level)
Cleco Holdings had no short-term debt outstanding at September 30, 2017, and December 31, 2016. Cleco Holdings and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short-term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
Cash and cash equivalents available at September 30, 2017, were $1.8 million, combined with the $100.0 million credit facility capacity for total liquidity of $101.8 million.

Cleco Power
At September 30, 2017, Cleco Power had $6.5 million of short-term debt outstanding on an uncommitted line of credit at an all-in interest rate of 2.98%. Cleco Power had no short-term debt outstanding at December 31, 2016. Cleco Holdings and Cleco Power have uncommitted lines of credit with a bank that allow up to $10.0 million each in short-term borrowings, but no more than $10.0 million in aggregate, to support their working capital needs.
At September 30, 2017, Cleco Power’s long-term debt outstanding was $1.24 billion, of which $19.2 million was due within one year. The long-term debt due within one year at September 30, 2017, represents principal payments for the Cleco Katrina/Rita storm recovery bonds. For Cleco Power, long-term debt decreased $18.6 million from December 31, 2016, primarily due to $17.9 million of scheduled payments made on Cleco Katrina/Rita storm recovery bonds and a $1.8 million decrease in capital lease obligations. These decreases
 
were partially offset by $1.1 million of debt issuance cost and debt discount amortizations.
On March 1, 2017, Cleco Power completed the repayment of the first of two tranches of its Cleco Katrina/Rita storm recovery bonds issued in March 2008. The total principal amount for both tranches was $180.6 million. The first tranche had an initial principal amount of $113.0 million at an interest rate of 4.41%, and a final maturity date of March 1, 2020. As part of the early redemption on March 1, 2017, Cleco Power paid $1.1 million in principal and less than $0.1 million in accrued interest.
Cash and cash equivalents available at September 30, 2017, were $4.2 million, combined with $300.0 million credit facility capacity for total liquidity of $304.2 million.
At September 30, 2017, and December 31, 2016, Cleco Power had a working capital surplus of $131.6 million and $149.1 million, respectively. The $17.5 million decrease in working capital is primarily due to:

a $32.0 million increase in taxes payable primarily due to timing of property tax payments, partially offset by lower income taxes,
a $17.3 million decrease in cash and cash equivalents,
a $14.2 million decrease in restricted cash and cash equivalents,
a $13.2 increase in interest accrued primarily due to timing of interest payments,
a $6.5 million increase in short-term debt primarily due to outstanding borrowings on an uncommitted line of credit, and
a $5.7 million increase in other current liabilities primarily due to accruals for SSR payments received for capital expenditures, and timing of benefits and incentives.

These decreases in working capital were partially offset by:

a $26.2 million increase in customer accounts receivable and unbilled revenue primarily due to the normal seasonal fluctuations in retail revenue, timing of receipts from a wholesale customer and additional deferred arrangements due to the LPSC executive orders,
a $17.4 million decrease in accounts payable primarily due to the timing of property tax and vendor payments,
a $14.2 million increase in other accounts receivable primarily due to higher receivables for a lignite fuel credit, an insurance reimbursement, SSR payments, and timing of pole attachment receivables,
a $9.4 million decrease in provision for merger commitments primarily due to the issuance of Merger rate credits, and
a $5.4 million increase in fuel inventory primarily due to higher petroleum coke and limestone due to lower plant operations and higher coal purchases, partially offset by lower lignite purchases.

Credit Facilities
At September 30, 2017, Cleco Holdings had a $100.0 million credit facility. The credit facility includes restricted financial covenants and expires in 2021. At September 30, 2017, Cleco Holdings was in compliance with the covenants of its credit facility. The borrowing costs under Cleco Holdings’ credit facility are equal to LIBOR plus 1.75% or ABR plus 0.75%, plus commitment fees of 0.275%. If Cleco Holdings’ credit ratings were to be downgraded one level by either agency, Cleco

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Holdings would be required to pay higher fees and additional interest of 0.075% and 0.50%, respectively, under the pricing levels of its credit facility.
At September 30, 2017, Cleco Power had a $300.0 million credit facility The credit facility includes restricted financial covenants and expires in 2021. At September 30, 2017, Cleco Power was in compliance with the covenants of its credit facility. The borrowing costs under Cleco Power’s credit facility are equal to LIBOR plus 1.125% or ABR plus 0.125%, plus commitment fees of 0.125%. If Cleco Power’s credit ratings were to be downgraded one level by either agency, Cleco Power would be required to pay higher fees and additional interest of 0.05% and 0.125%, respectively, under the pricing levels of its credit facility.
If Cleco Holdings or Cleco Power were to default under the covenants in their respective credit facilities or other debt agreements, they would be unable to borrow additional funds under the facilities and the lenders could accelerate all principal and interest outstanding. Further, if Cleco Power were to default under its credit facility or other debt agreements, Cleco Holdings would be considered in default under its credit facility.

Debt Limitations
The Merger Commitments include provisions limiting the amount of distributions that can be made from Cleco Holdings to Cleco Group or Cleco Partners, depending on Cleco Holdings’ debt to EBITDA ratio and its corporate credit ratings. Additionally, in accordance with the Merger Commitments, Cleco Power is subject to certain provisions limiting the amount of distributions that may be paid to Cleco Holdings, depending on Cleco Power’s common equity ratio and its corporate credit ratings. The Merger Commitments also prohibit Cleco from incurring additional long-term debt, excluding non-recourse debt, unless certain financial ratios are achieved. At September 30, 2017, and December 31, 2016, Cleco Holdings and Cleco Power were in compliance with the provisions of the Merger Commitments that could restrict the amount of distributions available. For more information on the Merger Commitments, see Part I, Item 1A, “Risk Factors — Regulatory Compliance” and “— Holding Company” in the Registrants’ Combined Quarterly Report on Form 10-K for the year ended December 31, 2016.

Cleco Consolidated Cash Flows

Net Operating Cash Flow
Cleco’s net cash provided by operating activities for the successor period January 1, 2017, through September 30, 2017, was $246.9 million. There were no significant changes in the underlying trends impacting cash provided by operating activities.
Cleco’s net cash provided by operating activities for the successor period April 13, 2016, through September 30, 2016, was $66.7 million. There were no significant changes in the underlying trends impacting cash provided by operating activities with the exception of $23.9 million related to payments for merger transaction costs during the successor period.
Cleco’s net cash provided by operating activities for the predecessor period January 1, 2016, through April 12, 2016, was $129.8 million. There were no significant changes in the underlying trends impacting cash provided by operating activities.
 
Net Investing Cash Flow
Cleco’s net cash used in investing activities for the successor period January 1, 2017, through September 30, 2017, was $166.3 million. There were no significant changes in the underlying trends impacting cash used in investing activities.
Cleco’s net cash used in investing activities for the successor period April 13, 2016, through September 30, 2016, was $133.3 million. There were no significant changes in the underlying trends impacting cash used in investing activities with the exception of $147.8 million transferred into restricted cash and cash equivalents due to the funding of customer rate credits and charitable contributions as a result of the Merger Commitments. In addition, $113.9 million was transferred out of restricted cash and cash equivalents to pay for a portion of the Merger Commitments.
Cleco’s net cash used in investing activities for the predecessor period January 1, 2016, through April 12, 2016, was $36.8 million. There were no significant changes in the underlying trends impacting cash used in investing activities.

Net Financing Cash Flow
Cleco’s net cash used in financing activities for the successor period January 1, 2017, through September 30, 2017, was $97.6 million. There were no significant changes in the underlying trends impacting cash used in financing activities with the exception of Cleco Holdings no longer having dividends to stockholders after the Merger.
Cleco’s net cash provided by financing activities for the successor period April 13, 2016, through September 30, 2016, was $27.8 million. There were no significant changes in the underlying trends impacting cash provided by financing activities with the exception of $100.7 million in contributions from Cleco Group.
Cleco’s net cash used in financing activities for the predecessor period January 1, 2016, through April 12, 2016, was $40.9 million. There were no significant changes in the underlying trends impacting cash used in financing activities.

Cleco Power Cash Flows

Net Operating Cash Flow
Net cash provided by operating activities was $236.0 million and $214.5 million during the nine months ended September 30, 2017, and 2016, respectively. Net cash provided by operating activities increased $21.5 million primarily due to:

higher collections from customers of $101.9 million due to the absence of the Merger credits issued in 2016 and
higher net fuel and power purchase collections of $14.7 million primarily due to timing of recovery.

These increases were partially offset by:

higher payments for fuel inventory of $40.9 million primarily due to petroleum coke and coal purchases,
higher payments to vendors of $10.2 million primarily related to the timing of property taxes,
lower receipts of $7.9 million from joint owners’ portions of generating station expenditures,
lower collections of $7.3 million due to LPSC executive orders relating to 2016 flooding,

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lower receipts of advanced deposits for operations and maintenance costs on jointly owned generating units of $5.8 million, and
higher payments of $1.3 million related to storm restoration efforts.

Net Investing Cash Flow
Net cash used in investing activities was $164.9 million and $171.0 million during the nine months ended September 30, 2017, and 2016, respectively. Net cash used in investing activities decreased $6.1 million primarily due to lower transfers of cash to restricted accounts of $42.2 million due to funding the Merger Commitments in 2016. This decrease was partially offset by higher additions to property, plant, and equipment of $39.0 million.

Net Financing Cash Flow
Net cash used in financing activities was $88.4 million and $53.9 million during the nine months ended September 30, 2017, and 2016, respectively. Net cash used in financing activities increased $34.5 million. Included in this net increase was the absence of contributions from Cleco Holdings of $50.0 million to help fund the Merger Commitments, partially offset by lower distributions to Cleco Holdings of $10.0 million and $6.5 million for net borrowings on Cleco Power’s uncommitted line of credit.

Contractual Obligations
Cleco, in the normal course of business activities, enters into a variety of contractual obligations. Some of these result in direct obligations that are reflected in Cleco’s Condensed Consolidated Balance Sheets while others are commitments, some firm and some based on uncertainties, that are not reflected in the Condensed Consolidated Financial Statements.
For more information regarding Cleco’s Contractual Obligations, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Contractual Obligations” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Off-Balance Sheet Commitments and Guarantees
Cleco Holdings and Cleco Power have entered into various off-balance sheet commitments, in the form of guarantees and standing letters of credit, in order to facilitate their activities and the activities of Cleco Holdings’ subsidiaries and equity investees (affiliates). Cleco Holdings and Cleco Power have also agreed to contractual terms that require the Registrants to pay third parties if certain triggering events occur. These contractual terms generally are defined as guarantees. For more information about off-balance sheet commitments and guarantees, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Off-Balance Sheet Commitments and Guarantees.”

Regulatory and Other Matters

Environmental Matters
Cleco is subject to extensive environmental regulation by federal, state, and local authorities and is required to comply with numerous environmental laws and regulations, and to
 
obtain and comply with numerous governmental permits, in operating its facilities. In addition, existing environmental laws, regulations, and permits could be revised or reinterpreted; new laws and regulations could be adopted or become applicable to Cleco or its facilities; and future changes in environmental laws and regulations could occur, including potential regulatory and enforcement developments related to air emissions. Cleco may incur significant additional costs to comply with these revisions, reinterpretations, and requirements. Cleco Power would then seek recovery of additional environmental compliance costs as riders through the LPSC’s EAC or its FRP. If Cleco fails to comply with these revisions, reinterpretations, and requirements, it could be subject to civil or criminal liabilities and fines.
On March 28, 2017, the President signed a broad executive order. Among other measures, the order directed the EPA to review the Clean Power Plan (CPP), the proposed Federal Implementation Plan for the CPP, and the greenhouse gas new source performance standards (GHG NSPS). It also gave the U.S. Department of Justice discretion to request that the U.S. Court of Appeals of the D.C. Circuit stay or otherwise delay the litigation challenging the CPP and the GHG NSPS while the administrative review is underway. Until the directions of the executive order are carried out, management cannot predict what the final standards will entail or what controls the EPA and the state of Louisiana may require of Cleco in a final state implementation plan.
In the second quarter of 2015, Cleco Power began incurring additional environmental compliance expenses for reagents associated with compliance with MATS. For a discussion about MATS, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Environmental Audit.”
For a discussion of other Cleco environmental matters, see Part I, Item 1, “Business — Environmental Matters” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Retail Rates of Cleco Power
Generally, the cost of fuel used for electric generation and the cost of power purchased for utility customers are recovered through the LPSC-established FAC, that enables Cleco Power to pass on to its customers substantially all such charges. Recovery of FAC costs is subject to periodic fuel audits by the LPSC. The LPSC FAC General Order issued in November 1997, in Docket No. U-21497 provides that an audit of FAC filings will be performed at least every other year. In February 2016, the LPSC initiated an audit of Cleco Power’s fuel and purchased power expenses for the period January 2014 through December 2015. The total amount of fuel expense included in the audit was $582.6 million. On January 19, 2017, the LPSC Staff issued its audit report which recommended no disallowance of fuel costs. The report was approved by the LPSC on April 19, 2017. Cleco Power has FAC filings for January 2016 and thereafter that remain subject to audit. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings.
For information concerning Cleco Power’s current FRP and amounts accrued and refunded by Cleco Power as a result of the FRP, and information on the LPSC Staff’s FRP reviews, see

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Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 10 — Regulation and Rates.”
In July 2009, the LPSC issued Docket No. U-29380 Subdocket A, which provides for an EAC to recover from customers certain costs of environmental compliance. The costs eligible for recovery are prudently incurred air emissions credits associated with complying with federal, state, and local air emission regulations that apply to the generation of electricity reduced by the sale of such allowances. Also eligible for recovery are variable emission mitigation costs, which are the costs of reagents such as ammonia and limestone that are a part of the fuel mix used to reduce air emissions, among other things. In February 2016, the LPSC initiated an audit of Cleco Power’s environmental costs for the period November 2010 through December 2015. The total amount of environmental costs included in the audit was $81.2 million. In December 2016, the LPSC Staff issued its audit report which recommended a disallowance of environmental costs of less than $0.1 million. The report was approved by the LPSC on February 17, 2017. Cleco Power has EAC filings for January 2016 and thereafter that remain subject to audit. Management is unable to predict or give a reasonable estimate of the possible range of the disallowance, if any, related to these filings. In the second quarter of 2015, Cleco Power began incurring additional environmental compliance expenses for reagents associated with compliance with MATS. These expenses are eligible for recovery through Cleco Power’s EAC and are subject to periodic review by the LPSC. For more information on MATS, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Environmental Audit.”
In April 2016, the LPSC issued Docket No. R-34026 to investigate double leveraging issues for all LPSC-jurisdictional utilities whereby double leveraging is utilized to fund a utility’s capital structure, and to consider whether any costs associated with such double leveraging should be included in the rates paid by the utility’s retail customers. Cleco Power filed a motion to intervene in this proceeding along with other Louisiana utilities. In April 2016, the LPSC also issued Docket No. R-34029 to investigate tax structure issues for all LPSC-jurisdictional utilities to consider whether only the state and federal taxes included in a utility’s retail rate will be those that do not exceed the utility’s share of the actual taxes paid to those federal and state taxing authorities. Cleco Power filed a motion to intervene in this proceeding along with other Louisiana utilities. In October 2016, Cleco received the first set of data requests from the LPSC Staff for each of the above mentioned dockets. Cleco has filed responses to the non-confidential requests and is waiting on the completion of a confidentiality agreement to respond to the confidential requests. Cleco is unable to determine if or when the completion of this confidentiality agreement will occur. If the LPSC were to disallow such costs incurred by the utility to be included in retail rates, such disallowance could have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.
For information on certain other regulatory aspects of retail rates concerning Cleco Power, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Retail Rates of Cleco Power” in the
 
Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

SSR
In September 2016, Cleco Power filed an Attachment Y with MISO requesting retirement of Teche Unit 3 effective April 1, 2017. MISO conducted a study which determined the proposed retirement of Teche Unit 3 would result in violations of specific applicable reliability standards for which no mitigation is available. As a result, MISO designated Teche Unit 3 as an SSR unit until such time that an appropriate alternative solution can be implemented to mitigate reliability issues. One mitigating factor that has been identified is Cleco Power’s Terrebonne to Bayou Vista Transmission project, which is expected to be complete by the third quarter of 2018. Cleco Power has a 12-month SSR Agreement for the period April 1, 2017 to March 31, 2018. During this time, Cleco Power will continue to operate Teche Unit 3. Cleco Power has filed with FERC for its approval to collect $20.3 million annually in SSR payments from MISO which includes recovering operations and maintenance expenses, administrative and general expenses, taxes, depreciation, capital expenditures, and carrying charges, all of which are related to Teche Unit 3 for the period of the SSR Agreement. At the end of the agreement, when Teche Unit 3 is retired, any SSR payments received from MISO for capital expenditures paid by third parties will be credited to property, plant, and equipment. As of September 30, 2017, Cleco Power had $2.2 million accrued for SSR payments received for capital expenditures related to Teche Unit 3. In the second quarter of 2017, Cleco Power began receiving the monthly SSR payments from MISO, subject to refund pending review and approval by FERC. On July 20, 2017, Cleco Power, FERC staff, and intervenors met at the first settlement conference and set a procedural schedule for data requests between parties. On July 27, 2017, Cleco Power received five sets of informal data request from FERC staff and intervenors. The next settlement conference is scheduled for November 16, 2017. Cleco Power is unable to determine when a binding FERC order will be issued. Also in the second quarter of 2017, MISO began allocating SSR costs to the load serving entities that require the operation of the SSR unit for reliability purposes, including Cleco Power. In the first quarter of 2018, another study is expected to be performed by MISO to determine if an SSR Agreement will be needed after March 31, 2018. At the end of the SSR Agreement, Cleco Power will have the option to rescind the Attachment Y requesting retirement of Teche Unit 3. If this option is exercised, Cleco Power may be required to refund recoverable capital expenditures plus interest. Management does not expect to be required to refund any portion of these costs.

Energy Efficiency
In August 2009, the LPSC opened a docket to study the promotion of energy efficiency by jurisdictional electric and natural gas utilities. In September 2013, the LPSC issued a General Order adopting rules promoting energy efficiency programs. Cleco Power subsequently filed its formal intent with the LPSC to participate in the Phase I - Quick Start portion of the LPSC’s energy efficiency initiative, which began in November 2014, and has been extended through the start of Phase II, which is anticipated to be in 2019 or later. During Phase I, Cleco Power designed several energy efficiency programs and began offering these programs to customers in November 2014. In November 2014, Cleco Power began

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recovering approximately $3.3 million annually of estimated costs for the program though an approved rate tariff. In January 2017, the LPSC amended its Phase I — Quick Start program to allocate no less than 50% of its annual program budgets to applicable government and state agencies. Cleco Power’s participation in the amended program is also projected to be $3.3 million annually as approved by the LPSC in September 2017.
In September 2017, the LPSC approved a motion for additional energy efficiency programs for the exclusive benefit of school districts, local governments, state agencies, and higher education institutions or any other public entities. The recovery of approximately $3.3 million annually for estimated costs for the program is expected to begin in January 2018.

MISO Cost Benefit Analysis
Cleco Power entered into MISO in December 2013. Within five years of joining MISO, the LPSC required Cleco Power to conduct a study of the costs and benefits of its membership in MISO. During the second quarter of 2017, Cleco Power submitted an analysis with both a backward-looking, historical analysis and a forward-looking, prospective analysis of the costs and benefits of operating in MISO, as compared to a scenario where Cleco Power and Entergy Louisiana exit MISO and operate independently. Cleco Power’s analysis indicated that continued MISO membership would serve the public interest. Cleco Power has responded to four sets of data requests on the analysis. Management is unable to predict the outcome of this analysis or give a reasonable estimate of the possible range of disallowance of costs, if any.

Wholesale Rates of Cleco Power
The rates Cleco Power charges its wholesale customers are subject to FERC’s triennial market power analysis. FERC requires a utility to pass a screening test as a condition for securing and/or retaining approval to sell electricity in wholesale markets at market-based rates. An updated market power analysis is to be filed with FERC every three years or upon the occurrence of a change in status as defined by FERC regulation. In February 2014, FERC issued an order to accept Cleco’s substitute market power analysis and grant the power marketing entities the authority to continue to charge market-based rates for wholesale power. Cleco filed its triennial market power analysis with FERC in January 2015. In March 2016, FERC issued an order finding Cleco’s submittal satisfies its requirements for market-based rate authority regarding both horizontal and vertical market power. Cleco’s next triennial market power analysis will be filed by December 31, 2017.

Transmission Rates of Cleco Power
Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. For more information about the ROE complaints, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE”.
On May 1, 2017, Cleco Power filed a MISO Schedule 2 rate increase request with FERC. MISO Schedule 2 provides for compensation to Cleco Power for providing reactive power to MISO customers. On July 1, 2017, Cleco Power began collecting revenue at the requested rate, subject to refund.
 
Cleco Power is unable to determine when FERC will approve the rate increase and if any refund will be required.
For information about the risks associated with Cleco Power’s participation in MISO, see Part I, Item 1A, “Risk Factors — MISO” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
For information on transmission rates of Cleco Power, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Transmission Rates of Cleco Power” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Transmission and Generation Projects
Cleco Power is involved in several transmission projects, including the Cenla Transmission Expansion project and the Terrebonne to Bayou Vista Transmission project. Cleco Power is also currently involved in the St. Mary Clean Energy Center project, which is a waste heat generating unit, and the Coughlin Pipeline project. For information on these projects, see “— Overview — Cleco Power.”

Market Restructuring

Wholesale Electric Markets

RTO
For information on Cleco Power’s operations within MISO and for information on regulatory aspects of wholesale electric markets affecting Cleco, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Wholesale Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ERO
The Energy Policy Act of 2005 added Section 215 to the Federal Power Act, which provides for a uniform system of mandatory, enforceable reliability standards. In 2006, FERC named NERC as the ERO that will be required to develop and enforce the mandatory reliability standards.
The SPP Regional Entity (RE) conducts a NERC Reliability Standard audit every three years. Cleco Power’s next audit is scheduled to begin in April 2019. Management is unable to predict the outcome of this audit, or any future audits, or whether any findings will have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.
The SPP RE also conducts a NERC Critical Infrastructure Protection audit every three years. A NERC Critical Infrastructure Protection audit was conducted in February 2017. Based on the evidence provided, the SPP RE determined there were three instances of potential noncompliance. These findings are not expected to have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.
On July 23, 2017, the SPP RTO’s board of directors and members committee voted to authorize the SPP’s President and CEO to terminate the delegation agreement between the SPP and NERC, which will effectively dissolve the SPP RE by the end of 2018. On October 12, 2017, Cleco Power proposed a new RE to NERC. Once NERC approves a new RE, it will

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then need to be approved by FERC. Management does not expect this termination to have a significant impact on the results of operations, financial condition, or cash flows of the Registrants.
For a discussion of risks associated with FERC’s regulation of Cleco Power’s transmission system, see Part I, Item 1A, “Risk Factors — Reliability and Infrastructure Protection Standards Compliance” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Retail Electric Markets
For information on the regulatory aspects of retail electric markets affecting Cleco Power, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Market Restructuring — Retail Electric Markets” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Lignite Deferral
At September 30, 2017, and December 31, 2016, Cleco Power had $4.5 million and $6.4 million, respectively, in uncollected deferred lignite mining costs.
For more information on Cleco Power’s deferred lignite mining expenditures, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Regulatory and Other Matters — Lignite Deferral” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Integrated Resource Plan (IRP)
In accordance with the General Order in LPSC Docket No. R-30021, on October 20, 2017, Cleco Power filed a request with the LPSC to initiate an IRP process. The IRP process includes conducting stakeholder meetings and receiving feedback from stakeholders. The schedule outlined in the General Order calls for Cleco Power to file a draft IRP in October 2018, and a final report in May 2019.

Service Quality Program (SQP)
In October 2015, the LPSC proposed an SQP containing 21 requirements for Cleco Power. The SQP has provisions relating to employee headcount, customer service, reliability, vegetation management, and reporting. In April 2016, the SQP was approved by the LPSC. The SQP will remain in effect until 2021. Prior to the expiration of the SQP, a new five-year program must be negotiated and submitted to the LPSC for approval. Cleco Power filed its annual monitoring report on April 1, 2017.

Franchises
Cleco Power operates under nonexclusive franchise rights granted by governmental units, such as municipalities and parishes (counties), and enforced by state law. Cleco Power’s next municipal franchise expires in July 2021.
On April 11, 2017, the City of Slidell voted to approve a new franchise agreement with Cleco Power with an effective date of April 11, 2017. The franchise agreement is for 35 years until April 2052. Approximately 13,823 Cleco Power customers are located in the City of Slidell.
On July 13, 2017, the Town of Rosepine and the Town of Cheneyville voted to approve new franchise agreements with
 
Cleco Power with an effective date of July 13, 2017. Both franchise agreements are for 33 years until July 2050. Approximately 916 Cleco Power customers are located in the Town of Rosepine, and approximately 356 Cleco Power customers are located in the Town of Cheneyville.
On October 24, 2017, the Town of New Llano voted to approve a new franchise agreement with Cleco Power with an effective date of October 24, 2017. The franchise agreement is for 15 years until October 2032. Cleco Power currently serves seven customers located in the town of New Llano. This new franchise agreement provides Cleco Power the opportunity to compete for future growth opportunities in the town.
For more information on franchises, see Part I, Item 1, “Business Regulatory Matters, Industry Developments, and Franchises — Franchises” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recent Authoritative Guidance
For a discussion of recent authoritative guidance, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 3 — Recent Authoritative Guidance.”
CRITICAL ACCOUNTING POLICIES
Cleco’s critical accounting policies include accounting policies that are important to Cleco’s financial condition and results of operations and that require management to make difficult, subjective, or complex judgments about future events, which could result in a material impact to the financial statements of Cleco. The preparation of financial statements contained in this report requires management to make estimates and assumptions. Estimates and assumptions about future events and their effects cannot be made with certainty. These estimates involve judgments regarding many factors that in and of themselves could materially affect the financial statements and disclosures. On an ongoing basis, these estimates and assumptions are evaluated and, if necessary, adjustments are made when warranted by new or updated information or by a change in circumstances or environment. Actual results may differ significantly from these estimates under different assumptions or conditions.
For more information on Cleco’s critical accounting policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in the Registrant’s Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Business Combinations
On April 13, 2016, Cleco Holdings completed its merger with Merger Sub whereby Merger Sub merged with and into Cleco Corporation, with Cleco Corporation surviving the Merger, and Cleco Corporation converting to a limited liability company and changing its name to Cleco Holdings, as a direct, wholly owned subsidiary of Cleco Group and an indirect, wholly owned subsidiary of Cleco Partners. The merger transaction required the use of the acquisition method to account for business combinations. The objective of this method is to establish a new accounting basis for the acquiree. Cleco Holdings’ assets and liabilities were measured and recorded at fair value as of the acquisition date. Cleco Power’s assets and liabilities were recorded at historical cost since Cleco did not elect pushdown accounting at the Cleco Power level. The financial statements and accompanying footnotes for Cleco

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have been segregated to present pre-merger activity as the “Predecessor” and post-merger activity as the “Successor.” The predecessor period is not comparable to the successor period. For more information, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 2 — Business Combinations.”

Goodwill
On April 13, 2016, in connection with the completion of the Merger, Cleco recognized goodwill of $1.49 billion. Goodwill is required to be tested for impairment at the reporting segment level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying value. For more information on goodwill and its impairment testing, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies — Goodwill.”
 
CLECO POWER — NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Cleco Power meets the conditions specified in General Instructions H(1)(a) and (b) to Form 10-Q and is, therefore, permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, Cleco Power has omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures about Market Risk) of Part I of Form 10-Q and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds) and Item 3 (Defaults upon Senior Securities).
ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Overview
Market risk inherent in Cleco’s market risk-sensitive instruments and positions includes potential changes in value arising from changes in interest rates and the commodity market prices of power, FTRs, and natural gas in the industry on different energy exchanges.
Cleco evaluates derivatives and hedging activities to determine whether market risk-sensitive instruments and positions are required to be marked-to-market. When positions close, actual gains or losses are included in the FAC and reflected on customers’ bills as a component of the FAC.
Cleco’s exposure to market risk, as discussed below, represents an estimate of possible changes in the fair value or future earnings that would occur, assuming possible future movements in the interest rates and commodity prices of power, FTRs, and natural gas. Management’s views on market risk are not necessarily indicative of actual results, nor do they represent the maximum possible gains or losses. The views do represent, within the parameters disclosed, what management estimates may happen.
Cleco maintains a master netting agreement policy and monitors credit risk exposure through reviews of counterparty credit quality, aggregate counterparty credit exposure, and aggregate counterparty concentration levels. Cleco manages these risks by establishing appropriate credit and concentration limits on transactions with counterparties and requiring contractual guarantees, cash deposits, or letters of credit from counterparties or their affiliates, as deemed necessary. Cleco Power has agreements in place with various counterparties that authorize the netting of financial buys and sells and contract payments to mitigate credit risk for transactions entered into for risk management purposes.
Access to capital markets is a significant source of funding for both short- and long-term capital requirements not satisfied by operating cash flows. Future actions or inactions of the federal government, including a failure to increase the government debt limit, could increase the actual or perceived risk that the U.S. may not pay its obligations when due and may disrupt financial markets, including capital markets, potentially limiting availability and increasing costs of capital. The inability to raise capital on favorable terms could negatively affect Cleco’s ability to maintain and expand its
 
businesses. After assessing the current operating performance, liquidity, and credit ratings of Cleco Holdings and Cleco Power, management believes that Cleco will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. Cleco Holdings and Cleco Power pay fees and interest under their respective credit facilities based on the highest rating held. On April 7, 2017, Moody’s updated its credit ratings by maintaining Cleco Holdings at Baa3 (stable) and Cleco Power at A3 (stable). On May 30, 2017, S&P affirmed Cleco Holdings’ and Cleco Power’s credit ratings at BBB- (stable) and BBB+ (stable), respectively. If Cleco Holdings or Cleco Power’s credit ratings were to be downgraded by S&P or Moody’s, Cleco Holdings and/or Cleco Power would be required to pay additional fees and incur higher interest rates for borrowings under their respective credit facilities.

Interest Rate Risks
Cleco monitors its mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix, for example, refinancing balances outstanding under its variable-rate credit facility with fixed-rate debt. Calculations of the changes in fair market value and interest expense of the debt securities are made over a one-year period.
Sensitivity to changes in interest rates for variable-rate obligations is computed by assuming a 1% change in the current interest rate applicable to such debt.
At September 30, 2017, Cleco Holdings had no variable-rate debt outstanding under its $100.0 million credit facility. The borrowing costs under Cleco Holdings’ credit facility are equal to LIBOR plus 1.75% or ABR plus 0.75%, plus commitment fees of 0.275%.
At September 30, 2017, Cleco Holdings had a $300.0 million long-term variable rate bank term loan outstanding. Amounts outstanding under the bank term loan bear interest at LIBOR plus 1.625%. At September 30, 2017, the all-in rate was 2.87%. Each 1% increase in the interest rate applicable to such debt would result in a decrease in Cleco Holdings’ pretax earnings of $3.0 million.
For a discussion on the short- and long-term variable-rate debt related to Cleco Power, please refer to “— Cleco Power.”


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Commodity Price Risks
Management believes Cleco has controls in place to minimize the risks involved in its financial and energy commodity activities. Independent controls over energy commodity functions consist of a middle office (risk management), a back office (accounting), and regulatory compliance staff. All forward commodity positions have established risk limits and are monitored through a daily market report that identifies the VaR, current market conditions, and concentration of energy market positions.
Cleco Power provides fuel for generation and purchases power to meet the power demands of customers. Cleco Power may enter into positions to mitigate the volatility in customer fuel costs, as encouraged by various LPSC orders. These positions would be marked-to-market with the resulting gain or loss recorded on the balance sheet as a component of the accumulated deferred fuel asset or liability and a component of the energy risk management assets or liabilities. When these positions close, actual gains or losses would be included in the FAC and reflected in customers’ bills as a component of the fuel charge. There were no open natural gas positions at September 30, 2017. In June 2015, the LPSC approved a long-term natural gas hedging pilot program that requires Cleco Power to establish a proposal for a program that will be designed to provide gas price stability for a minimum of five years. This proposal was submitted to the LPSC on July 28, 2017. An ALJ was assigned to the docket and a status conference was held on October 3, 2017. A procedural schedule was determined and management expects a final determination in the second quarter of 2018.
Cleco Power purchases FTRs in auctions facilitated by MISO. The majority of its FTRs are purchased in annual auctions during the second quarter, but Cleco Power may purchase additional FTRs in monthly auctions. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving Cleco Power’s customer load. FTRs are not designated as hedging instruments for accounting purposes. Cleco Power records FTRs at their estimated fair value when purchased. Each accounting period, Cleco Power adjusts the carrying
 
value of FTRs to their estimated fair value based on the most recent MISO FTR auction prices. Unrealized gains or losses on FTRs held by Cleco Power are included in Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheets. Realized gains or losses on settled FTRs are recorded in Fuel used for electric generation on Cleco Power’s Condensed Consolidated Statements of Income. At September 30, 2017, Cleco Power’s Condensed Consolidated Balance Sheets reflected open FTR positions of $13.4 million in Energy risk management assets and $0.5 million in Energy risk management liabilities. For more information on FTRs, see Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 5 — Fair Value Accounting — Commodity Contracts.”
Cleco Power
Please refer to “— Risk Overview” for a discussion of market risk inherent in Cleco Power’s market risk-sensitive instruments.
Cleco Power may enter into various fixed- and variable-rate debt obligations. Please refer to “— Interest Rate Risks” for a discussion of how Cleco Power monitors its mix of fixed- and variable-rate debt obligations and the manner of calculating changes in fair market value and interest expense of its debt obligations.
At September 30, 2017, Cleco Power had $6.5 million of short-term variable-rate debt outstanding on an uncommitted line of credit at an all-in interest rate of 2.98%. Each 1% increase in the interest rate applicable to such debt would result in a decrease in Cleco Power’s pretax earnings of $0.1 million.
At September 30, 2017, Cleco Power had no debt outstanding under its $300.0 million credit facility. The borrowing costs under the Cleco Power credit facility are equal to LIBOR plus 1.125% or ABR plus 0.125%, plus commitment fees of 0.125%.
Please refer to “— Commodity Price Risks” for a discussion of controls, transactions, VaR, and market value maturities associated with Cleco Power’s energy commodity activities.
ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of September 30, 2017, evaluations were performed under the supervision and with the participation of Cleco Holdings and Cleco Power (individually, “Registrant” and collectively, the “Registrants”) management, including the Interim CEOs and CFO. The evaluations assessed the effectiveness of the Registrants’ disclosure controls and procedures. Based on the evaluations, the Interim CEOs and CFO have concluded that the Registrants’ disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in
 
SEC rules and forms; and that the Registrants’ disclosure controls and procedures are also effective in ensuring that such information is accumulated and communicated to the Registrants’ management, including the Interim CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting
There have been no changes in the Registrants’ internal control over financial reporting that occurred during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

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PART II — OTHER INFORMATION
ITEM 1.       LEGAL PROCEEDINGS 
CLECO
For information on legal proceedings affecting Cleco, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”
 
CLECO POWER
For information on legal proceedings affecting Cleco Power, see Part I, Item 1, “Notes to the Unaudited Condensed Consolidated Financial Statements — Note 12 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”
ITEM 1A.      RISK FACTORS

There have been no material changes from the risk factors disclosed in Part I, Item 1A, “Risk Factors” in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report on Form 10-K”). For risks that could affect actual results and cause
 
results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Registrants, see the risk factors disclosed under Part I, Item 1A, “Risk Factors” of the 2016 Annual Report on Form 10-K.
ITEM 4.       MINE SAFETY DISCLOSURES

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
 
and Item 104 of Regulation S-K is included in Exhibit 95 to this Combined Quarterly Report on Form 10-Q.

ITEM 6.      EXHIBITS
 
CLECO
12(a)
31.1
31.2
32.1
32.2
95
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
CLECO POWER
12(b)
31.3
31.4
32.3
32.4
95
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase

64


CLECO
 
 
CLECO POWER
 
2017 3RD QUARTER FORM 10-Q

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
CLECO CORPORATE HOLDINGS LLC
 
(Registrant)
 
 
 
 
By:
/s/ F. Tonita Laprarie                                         
 
 
F. Tonita Laprarie
 
 
Controller and Chief Accounting Officer

Date: November 9, 2017




Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
CLECO POWER LLC
 
(Registrant)
 
 
 
 
By:
/s/ F. Tonita Laprarie                                         
 
 
F. Tonita Laprarie
 
 
Controller and Chief Accounting Officer

Date: November 9, 2017












65