| CLECO CORP ITEM 1A RISK FACTORS Rodemacher Unit 3 Construction Cleco Power is exposed to certain risks related to the design, construction and operation of Rodemacher Unit 3 |
| This project has technology risk, fuel supply risk and general contractor and certain material subcontractor performance risk, each of which could have a material adverse impact on Cleco Powerapstas financial condition, results of operations and cash flows |
| Rodemacher Unit 3 is designed to utilize circulating fluidized-bed (CFB) generating technology and will be 10prca larger than any other CFB unit in operation today |
| Cleco Power engaged Shaw Constructors, Inc |
| (Shaw) under an engineering, procurement and construction (EPC) contract |
| Shaw is liable for liquidated damages due to their non-performance in the EPC; however, Cleco Powerapstas ability to collect these damages for breach is contingent on the demonstration of such damages and on Shawapstas financial abilities |
| Failure by Shaw to perform its obligations under the EPC contract could have a material adverse impact on the plantapstas efficiency, in-service date, and final cost |
| The EPC does not protect Cleco Power against potential force majeure events or design/specification oversight which may result in increased and potentially unrecoverable costs to Cleco Power |
| Although Cleco Power currently delivers coal via rail to the Rodemacher facility, plans are for Rodemacher Unit 3 to primarily use petroleum coke, which can be most economically delivered via barges on the Mississippi and Red Rivers, requiring a conveyor system which has to cross a major interstate highway |
| Cleco Power does not have experience transporting fuel by barge |
| Calpine Bankruptcy CESapstas bankruptcy and failure to perform its obligations under the Calpine Tolling Agreements will likely have a material adverse impact on Clecoapstas results of operations and cash flows |
| A substantial portion of Midstreamapstas earnings and cash flow is derived from the Calpine Tolling Agreements with CES On December 20, 2005, the Calpine Debtors filed for protection under Chapter 11 of the US Bankruptcy Code in the Calpine Debtors Bankruptcy Court, and on December 21, 2005, the Calpine Debtors filed a motion with the court seeking to reject the Calpine Tolling Agreements |
| The issue was referred to the US District Court for the Southern District of New York where on January 27, 2006, a federal judge dismissed the Calpine Debtors &apos motion to reject eight power supply contracts, including the Calpine Tolling Agreements |
| The federal judge ruled that the FERC, not the bankruptcy court, has exclusive jurisdiction over the disposition of the energy contracts |
| Calpine has appealed this ruling to the US Court of Appeals for the Second Circuit |
| CES has failed to pay pre-petition (dlra3dtta5 million) and post-petition (dlra2dtta0 million and dlra5dtta4 million as of December 31, 2005, and January 31, 2006, respectively) amounts under the Calpine Tolling Agreements |
| Payments by CES under the Calpine Tolling Agreements are Acadiaapstas sole source of revenue, and continued failure by CES to pay the amounts due under the Calpine Tolling Agreements will result in operating losses and reduced cash flow |
| If the Calpine Tolling Agreements are rejected, Acadia would need to arrange for replacement customers for its capacity in order to generate revenue, and there is no assurance that any such customers could be obtained |
| Moreover, since current market conditions are not as favorable as the terms of the Calpine Tolling Agreements, Acadiaapstas results of operations and cash flows likely would be significantly reduced |
| A dlra14dtta0 million priority distribution to APH was established when CES entered into the second Acadia tolling agreement in May 2003 |
| As part of the August 2005 restructuring of the Calpine Tolling Agreements, APH is entitled to receive guaranteed cash payments from CES through 2022 |
| In the event of a CES default, these payments are guaranteed by Calpine Acadia Holdings (CAH) and Acadia |
| In the event CES defaults in making such payments and CAH defaults under its guarantee, APH will receive guaranteed and priority annual cash payments from Acadia totaling dlra19dtta0 million through 2011 and dlra21dtta0 million thereafter through 2022 |
| Acadia will make these annual cash payments to APH only when cash is available, and any unpaid amounts will accumulate to APH Regardless of whether the payments are made to APH, Acadia must continue to perform its operational obligations under the Calpine Tolling Agreements until the bankruptcy or other litigation process allows CES to reject the Calpine Tolling Agreements |
| Although Cleco has not been required to record an impairment with respect to Acadia as a result of the Calpine bankruptcy proceedings, future events such as a decline in the anticipated market value of energy in relation to natural gas values could cause Acadiaapstas carrying value to exceed its market value, requiring an impairment charge |
| Such a charge could adversely affect Clecoapstas financial condition by reducing consolidated common shareholders &apos equity, could cause Cleco to incur increased interest cost on future debt issuances, and could cause an adverse change in Clecoapstas credit ratings |
| Storm Damage Costs The LPSC may reduce the amount recoverable by Cleco Power in respect of storm restoration costs |
| The LPSC has approved interim revenue relief associated with the recovery of storm restoration costs from Hurricanes Katrina and Rita |
| The interim rate increase becomes effective upon the beginning of physical construction for Rodemacher Unit 3 (Phase I) and remains in effect until the LPSC completes a review to verify and approve the total amount of storm restoration costs to be recovered (Phase II) |
| The LPSCapstas decision to grant revenue relief to Cleco Power for storm restoration costs becomes final and non-appealable 45 days after the issuance of the executed order from the LPSC Based upon the results of the Phase II review of storm restoration costs, expected to be completed in late 2006, the 16 _________________________________________________________________ LPSC could decrease the amount Cleco Power could recover |
| In addition, someone could request a rehearing of or appeal the interim relief or the final relief approved by the LPSC A change made in Phase II by the LPSC resulting in a delay in receipt of or timing of any revenue relief associated with the recovery of the storm restoration costs from Hurricanes Katrina and Rita or any request for rehearing or appeal of any revenue relief could have a material adverse impact on Cleco and Cleco Powerapstas results of operations, financial condition, and cash flows compared to the recovery amounts authorized by the LPSC in Phase I LPSC Regulation If Cleco Power is unable to extend the current RSP or if the LPSC makes modifications to Cleco Powerapstas retail rates subsequent to September 2006, the earnings of Cleco Power could be reduced |
| Cleco Powerapstas retail rates for residential, commercial, and industrial customers and other retail sales are regulated by the LPSC On February 22, 2006, the LPSC required that effective immediately, any Cleco Power earnings above the current 12dtta25prca allowed return on equity be credited against outstanding Hurricanes Katrina and Rita storm restoration costs, rather than being shared 50/50 between shareholders and customers |
| Previously, Cleco Power was allowed to realize a regulatory return on equity of up to 12dtta625prca through September 30, 2006, with returns above that level being refunded to customers in the form of billing credits |
| On December 19, 2005, Cleco Power filed an application with the LPSC to extend the current RSP through the expected fourth quarter of 2009 in-service date of the proposed Rodemacher Unit 3 power plant |
| Preliminary testimony filed by the LPSCapstas independent consultant recommended that the LPSC modify the current RSP beginning on October 1, 2006 decreasing the allowed return on equity that can be realized by Cleco Power to 11dtta65prca |
| This assumes a return on equity of 11dtta25prca, with any earnings between 11dtta25prca and 12dtta25prca shared between shareholders and customers in a 40/60 ratio, respectively, and all earnings over 12dtta25prca returned to customers |
| There is no assurance that the LPSC will approve this recommendation and grant Cleco Power this extension |
| Upon expiration of the current RSP, the LPSC could choose to approve a lower rate of return for Cleco Power, which would reduce Cleco Powerapstas base revenue and profitability and could have a material adverse impact on Cleco Powerapstas results of operations, financial condition, and cash flows |
| Fuel Costs The LPSC conducts fuel audits that could result in Cleco Power making substantial refunds of previously recorded revenue |
| Generally, fuel and purchased power expenses are recovered through the LPSC-established fuel adjustment clause, which enables Cleco Power to pass on to its customers substantially all such charges |
| Recovery of fuel adjustment clause costs is subject to refund until monthly approval is received from the LPSC; however, all amounts are subject to a periodic fuel audit by the LPSC The most recent audit by the LPSC covered 2001 and 2002 and resulted in a refund of dlra16dtta0 million to Cleco Powerapstas retail customers |
| This refund was credited against customer bills in the first quarter of 2005 |
| In November 2005, due to the increased price of natural gas and its effect on the cost of generating fuel and purchased power, the LPSC ordered a review of each investor-owned utilityapstas fuel and purchased power costs incurred during the period January 1, 2005, through October 31, 2005 |
| Cleco Power could be required to make a substantial refund of previously recorded revenue as a result of this review or any future LPSC audits |
| Furthermore, Clecoapstas cash flows can be impacted by differences between the time period when gas is purchased and the ultimate recovery from customers |
| Rodemacher Unit 3 CCN A successful request for rehearing or appeal of Cleco Powerapstas CCN could have a material adverse impact on Cleco Powerapstas financial condition and cash flows |
| On February 22, 2006, the LPSC approved Cleco Powerapstas CCN to construct, own, and operate Rodemacher Unit 3 |
| The LPSCapstas decision to grant Clecoapstas CCN request will become final and non-appealable 45 days after the issuance of the executed order from the LPSC Without adequate ratemaking treatment and assurances of recovery for Rodemacher Unit 3 from the LPSC, management believes it would be difficult for Cleco Power to construct the plant while maintaining its credit rating |
| Purchased Power Nonperformance of Cleco Powerapstas power purchase agreements and transmission constraints could have a material adverse impact on Cleco Powerapstas results of operations, financial condition, and cash flows |
| Cleco Power does not supply all of its customers &apos power requirements from the generation facilities it owns and must purchase additional energy and capacity from the wholesale power market |
| During 2005, Cleco Power met approximately 49prca of its energy needs with purchased power |
| Two power purchase agreements with Williams and CES provided approximately 29dtta6prca of Cleco Powerapstas capacity needs in 2005 |
| On January 1, 2006, Cleco Power began its four-year, 500-MW contract with Williams and its one-year, 200-MW contract with CES If Williams and CES do not perform under their respective contracts, Cleco Power would have to replace these supply sources with alternate market options, which may not be on as favorable terms and conditions and could increase the ultimate cost of power to its customers |
| Because of Cleco Powerapstas location on the transmission grid, Cleco Power relies on two main suppliers of electric transmission when accessing external power markets |
| At times, constraints limit the amount of purchased power these transmission providers can deliver into Cleco Powerapstas service territory |
| The Williams and CES contracts, as well as spot market power purchases, may be affected by these 17 _________________________________________________________________ transmission constraints |
| If the amount of purchased power actually delivered into Cleco were less than the amount of power contracted for delivery, Cleco Power may rely on its own generation facilities to meet customer demand |
| Cleco Powerapstas incremental generation cost, at that time, may be higher than the cost to purchase power from the wholesale power market, therefore increasing its customers &apos ultimate cost |
| In addition, the LPSC may not allow Cleco Power to recover its incremental generation cost |
| These unrecovered costs could be substantial |
| Cleco Credit Rating A downgrade in Cleco Corporationapstas or Cleco Powerapstas credit rating could result in an increase in their respective borrowing costs and a reduced pool of potential investors and funding sources |
| While the senior unsecured debt ratings of Cleco Corporation and Cleco Power are "e investment grade, "e in recent years such ratings have been downgraded or put on negative watch by Standard & Poorapstas and Moodyapstas |
| Cleco Corporation or Cleco Power cannot assure that its debt ratings will remain in effect for any given period of time or that one or more of its debt ratings will not be lowered or withdrawn entirely by a rating agency |
| Credit ratings are not recommendations to buy, sell, or hold securities |
| Each rating should be evaluated independently of any other rating |
| If Moodyapstas or Standard & Poorapstas was to downgrade Cleco Corporationapstas long-term rating or Cleco Powerapstas long-term rating, particularly below investment grade, the value of any of its debt securities would likely be adversely affected, and the borrowing cost of Cleco Corporation or Cleco Power would increase |
| In addition, Cleco Corporation or Cleco Power would likely be required to pay higher interest rates in future debt financings, and its pool of potential investors and funding sources could decrease |
| Regulatory Compliance Clecoapstas costs of compliance with environmental laws, regulations and permits are significant, and the costs of compliance with new environmental laws, regulations and permits could be significant and reduce Clecoapstas profitability |
| Cleco is subject to extensive environmental regulation by federal, state and local authorities and is required to comply with numerous environmental laws and regulations |
| Cleco is also required to obtain and to comply with numerous governmental permits in operating its facilities |
| Existing environmental laws, regulations and permits could be revised or reinterpreted, new laws and regulations could be adopted or become applicable to Cleco, and future changes in environmental laws and regulations could occur |
| Cleco may incur significant additional costs to comply with these revisions, reinterpretations and requirements |
| If Cleco fails to comply with these revisions, reinterpretations and requirements, it could be subject to civil or criminal liabilities and fines |
| Midstream Plant Performance Evangeline and Acadia have certain plant performance obligations under their respective tolling agreements |
| Failure to perform these obligations could expose each entity to adverse financial penalties |
| Performance requirements include, but are not limited to, maintaining plant performance characteristics such as heat rate and demonstrated generation capacity and maintaining specified availability levels with a combination of plant availability and replacement power |
| Obligations under the respective tolling agreements include, but are not limited to, maintaining various types of insurance, maintaining power and natural gas metering equipment, and paying scheduled interest and principal payments on debt |
| In addition to the performance obligations by Evangeline and Acadia, there are various guarantees and commitments required by Cleco Corporation |
| If Evangeline or Acadia fails to operate within specified requirements, the respective facilities may purchase replacement power on the open market and provide it to the tolling counterparties in order to meet contractual performance specifications |
| Providing replacement power maintains availability levels, but exposes Evangeline or Acadia to power commodity price volatility and transmission constraints |
| If availability targets under the tolling agreements are not met and economical purchased power and transmission are not available, Evangeline and Acadiaapstas financial condition and results of operations could be materially adversely affected |
| Williams Failure by Williams to perform its obligations under the Evangeline Tolling Agreement would likely have a material adverse impact on Clecoapstas results of operations, financial condition, and cash flows |
| The credit ratings of the senior unsecured debt of The Williams Companies, Inc |
| (Moodyapstas - B1; Standard & Poorapstas - B+), the parent company of Williams under the Evangeline Tolling Agreement, remain below "e investment grade "e |
| If Williams were to fail to perform its obligations under the Evangeline Tolling Agreement, such failure would have a material adverse impact on Clecoapstas results of operations, financial condition and cash flow for the following reasons, among others: * If Williams &apos failure to perform constituted a default under the tolling agreement, the holders of the Evangeline bonds would have the right to declare the entire outstanding principal amount (dlra191dtta8 million at December 31, 2005) and interest to be immediately due and payable, which could result in: * Cleco seeking to refinance the bonds, the terms of which may be less favorable than existing terms; * Cleco causing Evangeline to seek protection under federal bankruptcy laws; or * the trustee of the bonds foreclosing on the mortgage and assuming ownership of the Evangeline plant; 18 _________________________________________________________________ * Cleco may not be able to enter into agreements in replacement of the Evangeline Tolling Agreement on terms as favorable as that agreement or at all; * Clecoapstas equity investment in Evangeline may be impaired, requiring a write-down to its fair market value, which could be substantial; and * Clecoapstas credit ratings could be downgraded, which would increase borrowing costs and limit sources of financing |
| Energy Sales Cleco Powerapstas future electricity sales could be adversely impacted by high energy prices and other economic factors affecting its customers |
| Within the past several years, Cleco Powerapstas customers have experienced a substantial increase in their utility bills, largely as a result of substantial increases in the cost of natural gas |
| These increases may also cause Cleco Powerapstas customers to more aggressively pursue energy conservation efforts or could result in increased bad debt expense due to the non-payment of bills |
| In addition, the high cost of energy, in general, has become problematic in many industries and has increased interest by industrial customers in on-site generation of their own power |
| Recently, four of Cleco Powerapstas largest customers who manufacture paper products have experienced a downturn in their markets, and decreased crop yields from hurricane damage in 2005 have resulted in economic difficulties for customers in the agricultural industry |
| The four manufactures of paper products customers generated base revenues of approximately dlra21dtta0 million for 2005 |
| Developments in conservation efforts or on-site generation could have a further negative impact on Cleco Powerapstas long-term electricity sales and base revenue |
| Cleco Power Generation Facilities Cleco Powerapstas generation facilities are subject to unplanned outages and significant maintenance requirements |
| The operation of power generation facilities involves many risks, including the risk of breakdown or failure of equipment, fuel interruption and performance below expected levels of output or efficiency |
| Some of Cleco Powerapstas facilities were originally constructed many years ago |
| Older equipment, even if maintained in accordance with good engineering practices, may require significant expenditures to operate at peak efficiency or availability |
| If Cleco Power fails to make adequate expenditures for equipment maintenance, Cleco risks incurring more frequent unplanned outages, higher than anticipated operating and maintenance expenditures, increased fuel or power purchase costs and potentially the loss of revenues related to competitive opportunities |
| Holding Company Cleco Corporation is a holding company, and its ability to meet its debt obligations and pay dividends on its common stock is dependent on the cash generated by its subsidiaries |
| Cleco Corporation is a holding company and conducts its operations primarily through its subsidiaries |
| Substantially all of Clecoapstas consolidated assets are held by its subsidiaries |
| Accordingly, Clecoapstas ability to meet its debt obligations and pay dividends on its common stock is largely dependent upon the cash generated by these subsidiaries |
| Clecoapstas subsidiaries are separate and distinct entities and have no obligation to pay any amounts due on Clecoapstas debt or to make any funds available for such payment |
| In addition, Clecoapstas subsidiaries &apos ability to make dividend payments or other distributions to Cleco may be restricted by their obligations to holders of their outstanding securities and to other general business creditors |
| Moreover, Cleco Power, Clecoapstas principal subsidiary, is subject to regulation by the LPSC, which may impose limits on the amount of dividends that Cleco Power may pay Cleco |
| FERC Regulation The FERC regulates Cleco Powerapstas transmission service and other wholesale rates |
| If the FERC were to substantially change Cleco Powerapstas rates for these services, the results of operations and cash flows of Cleco Power could be adversely affected |
| On September 16, 2005, the FERC issued a Notice of Inquiry inviting comments on reforming FERCapstas pro forma OATT to ensure the provision of transmission service is reasonable and not unduly discriminatory or preferential |
| The FERC is seeking responses to a series of specific questions which could be incorporated into the revised OATT The FERCapstas potential changes to the OATT could have a material effect on the revenue and methodology of implementing transmission service offered to Clecoapstas retail and wholesale transmission and energy customers |
| The magnitude of the impact on revenue will not be known until the FERC issues a final order, which is expected in 2006 |