Cleco Power 10-K2021 FY Annual report

see Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Comparison of the Years Ended December 31, 2021, and 2020 — Cleco Power — Significant Factors Affecting Cleco Power” in this Annual Report on Form 10-K.

behalf, are expressly qualified in their entirety by the factors identified above.

Cleco’s key human capital management objectives are to attract, retain, and develop top talent while providing a diverse, inclusive, healthy, and safe workplace. Cleco’s programs are designed to create a high-performing, diverse workforce; reward and support employees through competitive pay and benefits, as well as safety and wellness programs; enhance culture through efforts aimed at making the workplace more engaging and inclusive; facilitate programs that build connections between employees and communities; and evolve and invest in technology, tools, and resources to enable employees at work.

Cleco believes that diverse teams working in an inclusive environment are the primary drivers of better employee engagement, increased innovation, and higher customer satisfaction. With greater workplace diversity and inclusion, Cleco seeks to create the conditions for high performing teams to do their best work. Cleco’s recent efforts have been focused in three areas: building awareness and skills of the Cleco Diversity and Inclusion Council; making observable changes in leadership diversity and inclusion behaviors; and strengthening diversity and inclusion communication and messaging. The following are some of Cleco’s diversity and inclusion achievements related to such focus areas:

Cleco is committed to offering market-competitive compensation and benefits. Its incentive plan reinforces and rewards individuals for achievement of specific company goals. This may include involvement of outside compensation advisors or use of benchmarking data. Cleco’s benefit offerings are designed to meet the varied and evolving needs of a diverse workforce and offer choice where possible so employees can customize their benefits to meet their needs and the needs of their families. These offerings include a 401(k) Plan, healthcare benefits, health savings and flexible spending accounts, and a variety of insurance options.

Cleco prioritizes investing in the attraction and development of the talent needed to build a sustainable workforce. Cleco has revamped its recruiting and hiring practices, technologies, and resources and has also expanded its focus on continuous learning and development. Cleco has implemented industry-leading methodologies to assess performance and potential, provide coaching and feedback, and develop talent. Cleco provides a series of targeted management workshops to address leadership skill and competency gaps. Additionally, its performance management program provides an ongoing opportunity for employees and managers to engage in continuous dialogue and coaching aligned with its annual performance review process. Cleco also has a multitude of resources, such as online learning platforms, that provide quick access to learning resources, tuition reimbursement, and executive talent and succession planning paired with a differentiated development approach. Cleco also encourages employees to engage in external workshops and organizations to address individualized development needs and stay abreast of industry and position-specific best practices.

Employee sentiment is important to Cleco. The company measures this throughout the year via an employee engagement survey. One of the key metrics used is the Employee Net Promoter Score (eNPS), which is an indicator of employees’ likelihood to recommend Cleco as a place of employment to friends and/or family. Cleco strives to consistently receive a strong eNPS score year over year. Other important areas measured on the employee engagement survey include future outlook, leadership, safety, diversity and inclusion, communications, vibrancy, and goals.

Cleco believes that building connections between its employees and its communities creates a more meaningful, fulfilling, and enjoyable workplace. Cleco is committed to being a responsible company in the communities where it does business. Through Cleco’s technology platforms for

more information on these factors, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Comparison of the Years Ended December 31, 2021, and 2020 — Cleco Power — Significant Factors Affecting Cleco Power.”

As of December 31, 2021, Cleco Power’s aggregate net electric generating capacity was 2,889 MW. This amount reflects the maximum production capacity these units can sustain over a specified period of time under certain conditions. On December 31, 2021, Cleco Power retired the Dolet Hills Power Station. On January 31, 2022, Cleco Power filed an application with the LPSC requesting approval of the regulatory treatment and recovery of the stranded and decommissioning costs associated with the retirement of the Dolet Hills Power Station. For more information regarding the Dolet Hills Power Station retirement, see Part II, Item 8, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 6 — Regulatory Assets and Liabilities — Dolet Hills Power Station Closure Costs.”

generated may be greater than or less than total energy requirements. Generating units are dispatched by referencing each unit’s economic efficiency as it relates to the overall MISO market. For more information on 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.”

Changes in fuel expenses reflect fluctuations in the amount, type, and pricing of fuel used for electric generation; fuel transportation and delivery costs; and deferral of expenses for recovery from customers through Cleco Power’s FAC in subsequent months. Changes in purchased power expenses are a result of the quantity and price of economic power

evergreen extension of a previous agreement or a negotiated agreement for one year ending on December 31, 2021. For 2022, Cleco has contracted for 880,000 tons of petroleum coke from multiple refineries located along the upper and lower Mississippi River through one-year agreements ending on December 31, 2022.

native load demand. Members of MISO submit their forecasted native load demand to MISO each year. During 2021, Cleco Power’s reserve margin was 22.5%, which was above MISO’s unforced planning reserve margin benchmark of 9.4%. During 2020, Cleco Power’s reserve margin was 30.5%, which was also above MISO’s unforced planning reserve margin benchmark of 8.9%. Cleco Power expects to meet or exceed MISO’s unforced planning reserve margin benchmark of 8.7% in 2022. For more information on 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.”

In 2021, a wholesale customer that is currently Cleco Power’s largest single customer, based on revenue, and is under contract with Cleco Power through March 31, 2024, conducted a request for proposal for capacity and energy beginning April 1, 2024, in which Cleco Power participated. In August 2021, the wholesale customer informed Cleco Power that it was not selected as a provider of capacity and energy after the first quarter of 2024 and filed a notice with the LPSC to certify the results of the request for proposal. Cleco Power subsequently filed a notice of intervention with the LPSC requesting further review prior to certifying the wholesale customer’s notice. The certification process is ongoing, and the LPSC procedural schedule extends into the third quarter of 2022. Cleco Power cannot predict the outcome of the process.

Cleco Power had one wholesale customer that accounted for 10.6% of its consolidated revenue in 2021. In 2021, this wholesale customer informed Cleco Power that it was not selected as a provider of load after the first quarter of 2024 and filed a notice with the LPSC to certify the results of the request for proposal. For more information, see “— Competition” above, and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Cleco Power — Other.” Cleco Power did not have a significant customer that accounted for 10% or more of its consolidated revenue in 2020 or 2019.

and Capital Resources — Cash Generation and Cash Requirements — Capital Expenditures.”

On February 4, 2019, Cleco Cajun acquired from NRG Energy all of the outstanding membership interests in NRG South Central. As a result, Cleco Cajun became a reportable segment. For more information about the Cleco Cajun Transaction, see Part II, Item 8, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 3 — Business Combinations.”

group of electric cooperatives, which are currently under contract with Cleco Cajun through the first quarter of 2025, conducted a request for proposal for capacity, energy, and resources beginning in the second quarter of 2025 in which Cleco Cajun participated. In March 2021, the group of electric cooperatives informed Cleco Cajun that it was not selected as a provider and filed a notice with the LPSC to certify the results of the request for proposal. Cleco Cajun subsequently filed a notice of intervention with the LPSC requesting further review prior to certifying the electric cooperatives’ notice. On January 25, 2022, the LPSC certified the electric cooperatives’ request, which did not include any of Cleco Cajun’s assets or contracts.

2021, under the terms of the new retail rate plan, Cleco Power is allowed to earn a target ROE of 9.5%, while providing the opportunity to earn up to 10.0%. Additionally, 60.0% of retail earnings between 10.0% and 10.5% and all retail earnings over 10.5% 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 are ultimately subject to LPSC approval. Cleco Power’s next base rate case is required to be filed with the LPSC on or before March 31, 2023. For more information on the new FRP for Cleco Power, see Item 8, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 13 — Regulation and Rates — FRP.”

customers. If revenue relief were to be approved by the LPSC, then Cleco Power’s retail rates could increase. If the LPSC were to deny Cleco Power’s request to recover all or part of its environmental compliance costs, then Cleco Power would bear those costs directly. Such a decision could negatively impact the results of operations, financial condition, or cash flows of the Registrants. For Cleco Power’s expected capital expenditures related to environmental compliance in 2022, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources — Cash Generation and Cash Requirements — Capital Expenditures.”

Air emissions from each of Cleco’s generating units are strictly regulated by the EPA and the LDEQ. The LDEQ has authority over and implements certain air quality programs established by the EPA under the federal CAA, as well as its own air quality regulations. The LDEQ establishes standards of performance and requires permits for EGUs in Louisiana. All of Cleco’s generating units are subject to these requirements.

The CAA contains a regional haze program with the goal of returning Class I Federal areas of the nation to natural visibility by 2064. States are required to develop a SIP and revise it every ten years. The SIP must include requirements for the installation of Best Available Retrofit Technology (BART) for applicable EGUs in Louisiana. The EPA issued a final approval of the Louisiana SIP for the first planning phase in December 2017. Although the approval was appealed to the U.S. Court of Appeals for the Fifth Circuit by multiple organizations, the court denied all the challenges to the EPA’s approval of the Louisiana Regional Haze SIP. Because the Louisiana SIP mandates use of existing controls and participation in the CSAPR as BART, Cleco does not believe the Louisiana SIP will have a material impact on the results of operations, financial condition, or cash flows of the Registrants. The second planning period for the regional haze program covers the period from 2018 through 2028 and requires states to adopt SIPs that make reasonable further progress toward achieving natural visibility conditions in Class I Federal areas. The LDEQ published a proposed SIP for the second planning period in April 2021 for public comment and it may be subject to revision upon further review by the LDEQ before it is submitted to the EPA. The proposal does not call for new controls on any state sources, but instead, it relies upon existing consent decrees and expected source retirements to achieve reasonable progress in reducing emissions and improving visibility in Class I Federal areas. The SIP for the second planning phase has not been submitted to the EPA. Until the LDEQ determines what the reasonable progress requirements are for Cleco units and completes its update of the SIP and the EPA approves the SIP, Cleco is unable to predict if the second phase SIP will have a material impact on the results of operations, financial condition, or cash flows of the Registrants.

For information about MATS, see Part II, Item 8, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 15 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — LPSC Audits — Environmental Audit.”

On April 12, 2019, the EPA published in the Federal Register proposed amendments to the National Emission Standards for Hazardous Air Pollutants for Stationary Combustion Turbines to address the results of the required periodic residual risk and technology review of the regulations. The EPA proposed to find that risks from this source category due to air toxics emissions are acceptable and that the existing rule provides an adequate margin of safety to protect public health. The EPA also identified no new cost-effective controls under the technology review that would achieve further emissions reductions from the source category. In addition, the EPA proposed to remove the stay of effectiveness of the emission standards for new lean premix and diffusion flame gas-fired turbines that had been promulgated in 2004. If the stay were lifted as proposed, emission limits could be applied to new or reconstructed lean premix and diffusion flame turbines. In the final rule, which was published in the Federal Register on March 9, 2020, the EPA did not take final action to lift the stay of effectiveness. However, on August 13, 2020, the EPA granted a petition for reconsideration of certain aspects of the EPA’s residual risk and technology review. The EPA indicated it will undertake a rulemaking to address issues in the petition, but also noted that a petition to delist the entire source category remains pending and their decision on that petition could impact this planned rulemaking. Until the EPA responds to the petitions, Cleco cannot determine if the rule will have a material impact on the results of operations, financial condition, or cash flows of the Registrants.

legislation has been enacted in many states, and Congress is considering various bills that would create a national RPS. Cleco continues to evaluate the impacts of potential RPS legislation on its business based on the RPS programs in other states.

predict what the final standards will entail, what controls the EPA and the state of Louisiana may require of Cleco, or if the rule will have a material impact on the results of operations, financial condition, or cash flows of the Registrants.

In the course of operations, Cleco’s facilities generate solid and hazardous waste materials requiring eventual disposal. The Solid Waste Division of the LDEQ has adopted a permitting system for the management and disposal of solid waste generated by power stations. Cleco has received all required permits from the LDEQ for the on-site disposal of solid waste from its generating stations.

fisheries and wetlands located on the site, but no final listing decision has been made. The EPA issued a Unilateral Administrative Order to two PRPs, Clean Harbors, Inc. and Baton Rouge Disposal, to conduct an RI/FS in 2009. The Tier 1 part of the study was completed in June 2012. The tier 2 remedial investigation report was made public in December 2015. In September 2019, the EPA publicly announced a proposed cleanup strategy for the Superfund Site. Until a final plan is presented by the EPA, management is unable to determine how significant Cleco’s share of the costs associated with a possible response action at the site, if any, may be and whether this will have a material impact on the results of operations, financial condition, or cash flows of the Registrants.

Section 313 of the EPCRA requires certain facilities that manufacture, process, or otherwise use minimum quantities of listed toxic chemicals to file an annual report with the EPA called a Toxic Release Inventory (TRI) report. The TRI report requires industrial facilities to report on approximately 650 substances that the facilities release into the air, water, and land. The TRI report ranks companies based on the amount of a particular substance they release on a state and parish (county) level. Annual reports are due to the EPA on July 1 following the reporting year-end. Cleco has submitted required TRI reports on its activities, and the TRI rankings are available

to the public. The rankings do not result in any federal or state penalties.

The possibility that exposure to EMFs emanating from electric power lines, household appliances, and other electric devices may result in adverse health effects and damage to the environment has been a subject of some public attention. Lawsuits alleging that the presence of electric power transmission and distribution lines has an adverse effect on health and/or property values have arisen in several states. Neither Cleco nor Cleco Power are parties in any lawsuits related to EMFs.

Severe weather, including hurricanes, winter storms, tropical storms, and other natural disasters, such as floods, can affect transportation of fuel to plant sites and can be destructive, causing outages, blackouts or disruptions of interconnected transmission systems, and property damage that can potentially result in additional expenses, lower revenue, and additional capital restoration costs. Extreme drought conditions can impact the availability of cooling water to support the operations of generating plants, which can also result in additional expenses and lower revenue. Extreme weather conditions could also increase commodity prices, including fuel, which could have a material adverse effect on Cleco’s results of operations, financial condition, or cash flows.

Registrants are unable to successfully attract, retain, and develop an appropriately qualified workforce, the results of operations, financial condition, or cash flows of the Registrants could be materially adversely affected.

economy, the capital markets, its suppliers, or customers. Any of the foregoing events or other unforeseen consequences could have a material adverse effect on the results of operations, financial condition, cash flows, or liquidity of the Registrants.

Energy prices in the MISO market are based on 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 and Cleco Cajun’s pricing zones or result in transmission curtailments. Cleco Power and Cleco Cajun are awarded and/or purchase FTRs in auctions facilitated by MISO. However, insufficient FTR allocations or increased FTR costs, due to negative congestion flows, may result in an unexpected increase in energy costs to Cleco’s customers. For Cleco Power, if a disallowance of additional fuel costs associated with congestion is ordered by the LPSC resulting in a refund to Cleco Power’s customers, any such refund could have a material adverse effect on the results of operations, financial condition, or cash flows of the Registrants.

Power and Cleco Cajun separately, which may result in increased capital expenditures and operating expenses. Failure to comply with these standards can result in the imposition of material fines and civil penalties.

Cleco may guarantee the performance of all or some of its commercial transaction obligations and may also be required to provide counterparty credit support in the form of cash or cash equivalent collateral or margin to secure all or part of those obligations. Downgrades in Cleco’s credit quality or changes in the market prices of transaction-related energy commodities could increase the collateral or margin required to be on deposit with the counterparty or clearing house. The required credit support or increase in credit support could have a material adverse effect on the Registrants’ liquidity.

Counterparties may fail to perform on their physical or financial obligations. Currently, Cleco has industry accepted master agreements in place with counterparties that provide credit default language. Some master agreements with counterparties contain provisions that require the counterparties to provide credit support to secure all or part of their obligations to Cleco. If the counterparties to these arrangements fail to perform, Cleco may enforce and recover the proceeds from the credit support provided; however, in the event of a default, credit support may not always be adequate to cover the related obligations. In such event, Cleco may incur losses in excess of amounts already paid, if any, to the counterparties or due to an adverse replacement cost of the transaction.

Performance of the capital markets affects the value of assets

The Presidential administration may propose substantial changes to environmental, fiscal, and tax policies, which may include comprehensive tax reform, more stringent requirements for reducing GHG emissions and other air pollutants from existing fossil fuel-fired power plants, and other objectives that may impact the results of operations, financial condition, or cash flows of the Registrants. Since taking office in January 2021, the current President has issued several executive orders designed to address climate change and GHG emissions, as well as an executive order requiring agencies to review past environmental actions. Furthermore, the current President has recommitted the U.S. to the Paris Agreement and announced the U.S.’ nationally determined contribution under the Paris Agreement at the summit on climate change on April 22, 2021. The target aims to reduce U.S. emissions by 50-52% compared to a 2005 baseline by 2030. The Presidential administration has also issued a memorandum to departments and agencies to refrain from proposing or issuing rules until a departmental or agency head appointed or designated by the administration has reviewed and approved the rule. The executive orders may result in the development of additional regulations or changes to existing regulations and it is possible that these changes could adversely affect Cleco’s business. Until any such changes are enacted, management is unable to determine the impact of any such changes on the Registrants’ business, results of operations, financial condition, or cash flows.

circuit miles of 230-kV lines; 678 circuit miles of 138-kV lines; and 29 circuit miles of 69-kV lines. Cleco Power’s distribution system consisted of 3,412 circuit miles of 34.5-kV lines and 8,780 circuit miles of other lines.

Cleco Power owns various properties throughout Louisiana, which include a headquarters office building, regional offices, service centers, telecommunications equipment, and other general-purpose facilities.

Cleco Power’s electric generating plants and certain other principal properties are owned in fee simple. Electric transmission and distribution lines are located either on private rights-of-way or along streets or highways by public consent.

located in Louisiana as well as four combined cycle units located in Texas. These generating facilities have a combined rated capacity of 3,379 MW. For more information on Cleco Cajun’s generating facilities, see Item 1, “Business — Operations — Cleco Cajun.”

Cleco Cajun owns various properties throughout Louisiana, which include a regional office, telecommunications equipment, and other general-purpose assets.

Cleco Cajun’s assets are owned in fee simple and are not subject to non-ordinary course of business liens or encumbrances.

For information on legal proceedings affecting Cleco Power, see Item 1, “Business — Environmental Matters — Air Quality” and Part II, Item 8, “Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 15 — Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation.”

by Cleco Holdings. Distributions on Cleco Power’s membership interests are paid when and if declared by Cleco Power’s Board of Managers. Any future distributions also may be restricted by any credit or loan agreements into which Cleco Power may enter.

During 2020 and 2021, Cleco Power’s distribution and transmission systems sustained substantial damage from four separate hurricanes and two severe winter storms. The damage to equipment from the hurricanes required replacement, as well as repair of existing assets. The winter storms caused Cleco’s service territory to experience extreme and unprecedented winter weather that resulted in damage to Cleco Power’s distribution assets, electricity generation supply shortages, natural gas supply shortages, and increases in prices of natural gas in the U.S., primarily due to prolonged freezing temperatures.

Cleco is incorporating sustainability into its operations by establishing a combination of ESG goals. Cleco is accelerating efforts to protect the environment, manage social relationships, govern responsibly, and ensure accountability. To protect the environment, Cleco is planning to increase electrification initiatives and reduce GHG emissions by incorporating renewable energy resources into the generating fleet, as it replaces coal-fired generation units retired after serving their useful lives. Cleco’s target is to sustainably reduce GHG emissions 60.0% by 2030 with aspirations of net zero emissions by 2050. To manage social relationships, Cleco plans to ensure that the electricity that it generates is affordable, reliable, and sustainable, as well as support community investment opportunities across its service territory and create a workforce culture that rewards inclusion, safety, and innovation. To govern responsibly, Cleco plans to continue operating according to the governance framework. To ensure accountability, Cleco has created an ESG Steering Committee and has appointed a Chief Sustainability Officer to oversee the continued implementation of the ESG goals. Currently, management is unable to predict the impact of implementing these ESG goals on the Registrants. For more information on these ESG goals, see Part I, Item 1, “Business — Human Capital — Diversity and Inclusion,” “— Communities,” and “— Oversight and Governance.”

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 impact the ROE, as well as the recovery of costs related to storms, 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 related operating challenges and uncertainties, including increased wholesale competition. Cleco Power’s current key initiatives are continuing the DSMART project and maintaining and growing its wholesale and retail businesses. These and other initiatives are discussed below.

that it was not selected as a provider of capacity and energy after the first quarter of 2024 and filed a notice with the LPSC to certify the results of the request for proposal. Cleco Power subsequently filed a notice of intervention with the LPSC requesting further review prior to certifying the wholesale customer’s notice. The certification process is ongoing, and the LPSC procedural schedule extends into the third quarter of 2022. Cleco Power cannot predict the outcome of the process. Failure to recontract this or other agreements may affect jurisdictional retail rates that will be subject to review by the LPSC in conjunction with Cleco Power’s next rate case.

Cleco Cajun currently has power purchase agreements totaling approximately 2,100 MW with 12 wholesale customers, which consist of a mixture of electric cooperatives, municipal bodies, and a utility. Cleco Cajun routinely seeks to grow the amount of power sold pursuant to these existing agreements. These contracts provide Cleco Cajun with predictable cash flow and market risk mitigation through at least the first quarter of 2025 but may prevent Cleco Cajun from taking advantage of rising market rates for power.

higher non-recoverable fuel and purchased power expense, $6.5 million of higher depreciation expense, $5.0 million of higher taxes other than income taxes, and $2.1 million of higher other operations and maintenance expense at Cleco Power. Also contributing to the increase was $69.7 million of higher purchased power expense, $8.1 million of higher depreciation and amortization expense, and $2.2 million of higher other operations and maintenance expense at Cleco Cajun. These increases were partially offset by $80.4 million of lower fuel used for electric generation at Cleco Cajun.

Other expense, net increased $1.5 million during 2021 as compared to 2020 primarily due to $6.3 million of higher pension non-service costs at Cleco Power and $1.0 million of disallowed costs as a result of the settlement of Cleco Power’s new retail rate plan. These increases were partially offset by $5.7 million for the increase in cash surrender value of certain trust-owned life insurance policies at Cleco Holdings as a result of more favorable market conditions.

Interest charges decreased $3.5 million during 2021 as compared to 2020 primarily due to $4.3 million of lower rates on Cleco Holdings’ variable rate debt incurred in connection with the 2016 Merger and the Cleco Cajun Transaction and $1.3 million of higher allowance for borrowed funds used during construction at Cleco Power. These amounts were partially offset by $1.7 million of lower capitalized interest at Cleco Cajun.

Federal and state income tax expense decreased $22.6 million during 2021 as compared to 2020 primarily due to $20.6 million for the amortization of excess ADIT, $11.1 million for adjustments to tax returns as filed, and $3.1 million for the flowthrough of tax benefits. These decreases were partially offset by $8.2 million for the change in pretax income, excluding AFUDC equity, $2.4 million for state tax expense, and $1.1 million for an adjustment for state tax rate change.

As an electric utility, Cleco Power is affected, to varying degrees, by a number of factors influencing the electric utility industry. These factors include, among others, an increasingly competitive business environment; the ability to recover costs through rate-setting proceedings; the ability to successfully

The majority of Cleco Power’s non-fuel cost recovery expenses consist of other operations, maintenance, depreciation and amortization, and taxes other than income taxes. Other operations expenses are affected by, among other things, the cost of employee benefits, insurance expense, and the costs associated with energy delivery and customer service. Annual maintenance expenses associated with Cleco Power’s plants generally depend upon their physical characteristics, maintenance practices, and the effectiveness of their preventive maintenance programs. Transmission and distribution maintenance expenses are generally affected by the level of repair and rehabilitation of lines to maintain reliability. Depreciation and amortization expense is primarily affected by the cost of the facilities in service, the time the facilities were placed in service, and the estimated useful life of the facilities. Taxes other than income taxes generally include payroll taxes, franchise taxes, and property taxes. Cleco Power anticipates certain non-fuel cost recovery expenses to be higher in 2022 as compared to 2021. These expenses include higher administration and general operations expense, higher depreciation and amortization expense, higher taxes other than income taxes, and higher interest expense.

Base revenue decreased $1.8 million in 2021 as compared to 2020 primarily due to $15.6 million of lower rates as a result of the implementation of Cleco Power’s new retail rate plan. The lower rates are largely due to TCJA bill credits for the retail portion of the unprotected excess ADIT. Prior to the implementation of Cleco Power’s new retail rate plan, these credits were recorded in Electric customer credits on Cleco Power’s Consolidated Statement of Income. Also contributing to the decrease is the absence of $2.4 million of Cleco Katrina/Rita storm restoration surcharge revenue as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in March 2020. These decreases were partially offset by $9.5 million of new interim rate recovery for certain storm costs relating to Hurricanes Laura, Delta, and Zeta, $3.6 million of higher revenue due to the absence of impacts from lower usage as a result of Hurricanes Laura, Delta, and Zeta in 2020, and $3.2 million of higher usage from colder winter weather.

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 2021 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

related to employee benefits, and $6.7 million of lower generation operations expenses.

Depreciation and amortization increased $6.5 million during 2021 as compared to 2020 primarily due to $5.3 million of higher normal recurring additions to fixed assets and $3.1 million for the amortization of regulatory assets relating to Hurricanes Laura, Delta, and Zeta. These amounts were partially offset by $2.1 million for the absence of amortization of storm damages as a result of the final principal and interest payments on the Cleco Katrina/Rita bonds in 2020.

Taxes other than income taxes increased $5.0 million during 2021 as compared to 2020 primarily due to $3.2 million of higher property taxes, $0.9 million of higher franchise taxes, and $0.6 million of higher payroll taxes.

Allowance for equity funds used during construction increased $8.9 million during 2021 as compared to 2020 primarily due to higher AFUDC rates driven by the timing of the election and LPSC approval of the FERC modified formula authorized in March 2020.

Other expense, net increased $7.3 million during 2021 as compared to 2020 primarily due to $6.3 million of higher pension non-service costs and $1.0 million of disallowed costs as a result of the settlement of Cleco Power’s new retail rate plan.

Federal and state income taxes decreased $36.2 million during 2021 as compared to 2020 primarily due to $20.6 million for the amortization of excess ADIT, $10.9 million for adjustments to tax returns as filed, $3.1 million for the flowthrough of tax benefits, and $2.1 for the change in pretax income, excluding AFUDC equity.