Cleco Corp. last Thursday said that it has identified so-called “round trip” trades, as well as transactions that may have violated affiliate regulations established by FERC and the Louisiana Public Service Commission (PSC), after a review initiated by its board of directors of certain energy trading activities over the past three years.

Cleco said that it is in the process of notifying the appropriate regulatory authorities of its findings, including the Federal Energy Regulatory Commission and the PSC. Cleco has pledged to cooperate with these agencies and has taken steps to strengthen its internal controls.

The review identified round trip trades, as well as transactions that may have violated affiliate regulations established by FERC and the PSC. The affiliate transactions involved power sales from one Cleco affiliate to a third party and then back to another Cleco affiliate. The affiliates involved were Cleco Marketing & Trading LLC, Cleco Power LLC and Cleco Evangeline LLC.

The transactions accounted for less than 1% of corporate revenue during the three-year period, totaling $4.4 million in revenues in 2000, $13.1 million in 2001 and $5.6 million in 2002.

The review was ordered by the board of directors in August 2002 after members received an anonymous complaint of certain improper trading activities within the company. Cleco’s directors immediately formed a special committee to look into the claims and engaged outside counsel, working with senior management and internal auditors, to investigate the allegations.

“Anything less than strict compliance with all rules and regulations is unacceptable at Cleco,” said David Eppler, the utility’s CEO. “Appropriate disciplinary action has been taken with individuals involved in this trading activity. Employees directly involved with the transactions have either been reassigned or have left the company.”

Eppler said that in light of this discovery, Cleco has “reviewed and strengthened our oversight and control for all operations and have increased the planned frequency of reviews of our business processes. In addition, we will be rolling out a new, ongoing education program for all employees to make sure everyone in the company maintains heightened awareness of regulatory requirements and compliance issues.”

At the direction of the board and Eppler, Cleco has consolidated the responsibility for legal and compliance functions under one senior officer, Neal Chadwick, who as vice president and general counsel will report directly to the CEO. In addition, Michiele Shaw, a company vice president who has been appointed head of the ethics office, will work in concert with Chadwick to expand companywide ethics policies, training and compliance programs.

“We plan to present all of the findings of our review to the appropriate regulatory agencies, and we will work with them to resolve any issues they may have,” Eppler said. “While we can’t predict the response of the regulatory agencies to these transactions, the company’s third quarter results included a reserve that reflected management’s estimate of the potential regulatory impact.”

The company also reported that it is significantly reducing its energy trading operation. “We were already in the process of exiting the speculative energy trading business based on market conditions. Historically, trading was not a significant part of our business and was established primarily to optimize Cleco’s wholesale generating assets and hedge fuel and power prices,” Eppler said.

“We own three state-of-the-art wholesale power plants in our Midstream subsidiary and operate a healthy, competitive regulated utility, with a rich history of commitment to power reliability and customer service. Our core skills are the generation and distribution of power, and we will continue to build the value of these businesses,” the executive went on to say.

In response to Cleco’s announcement, Moody’s Investors Service placed the long term and short term ratings assigned to Cleco Power LLC on review for potential downgrade. Ratings under review include the A2 secured rating assigned to secured first mortgage bonds, the A3 unsecured rating and the P-1 short-term rating assigned to commercial paper.

The review will focus upon the negative ramifications associated with finding the inappropriate transactions such as fines or penalties or the impact of revocation by the FERC of power market authorizations.

The ratings assigned to Cleco Corp. and Cleco Evangeline are already on review by Moody’s for potential downgrade given the deterioration in credit profiles of counterparties and joint venture partners.

Cleco’s discovery of round trip trades is the latest in a string of similar announcements that have rocked the energy industry over the past year. Revelations of such activity at CMS Energy Corp. last spring forced the resignation of long-time Chairman and CEO William T. McCormick, along with Tamela Pallas, CEO of the CMS-Marketing, Services and Trading (MST) unit. Duke Energy last month revealed that the Securities and Exchange Commission’s inquiry into its round trip trading practices, which began in June, has progressed to the formal stage.

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