Cleco Corporation, Q3 2008 Earnings Call Transcript

Nov. 6.08 | About: Cleco Corporation (CNL)

Cleco Corporation (NYSE:CNL)

Q3 2008 Earnings Call

November 6, 2008 11 am ET

Executives

Ryan Gunter - IR

Michael Madison - CEO

Russell Davis – Vice President and Chief Accounting Officer

Dilek Samil - President and Chief Operating Officer, Cleco Power LLC

Darren Olagues - Senior Vice President, Cleco Midstream Resources LLC

Analysts

Paul Ridzon – KeyBanc

Michael Lapides – Goldman Sachs

Justin Maurer – Lord Abbett

Bob Bridges – Sterling Capital

Phyllis Gray – White Asset Management

Operator

Good morning ladies and gentlemen and welcome to the Cleco Corporation’s third quarter 2008 earnings conference call. (Operator Instructions) I will now turn the call over Mr. Ryan Gunter. Mr. Gunter, you may begin.

Ryan Gunter

Thank you. Good morning everyone and welcome to Cleco Corporation’s third quarter 2008 earnings conference call. With me on the call today are Mike Madison, President and CEO of Cleco Corporation, who will update you on current events and Russell Davis, our Vice President, Chief Accounting Officer and interim Chief Financial Officer, who will cover our financial results for the quarter and the year. We also have with us today other executives who will be available to answer your questions following the prepared remarks.

Before we begin, please keep in mind that during the conference call we will make some forward-looking statements. These statements are subject to many risks and uncertainties. Actual results may differ materially.

Please refer to the risk factors and our cautionary note regarding forward-looking statements and various reports filed with the Securities and Exchange Commission, including our 2007 annual report on Form 10-K and our first, second, and third quarter 2008 quarterly reports on Form 10-Q.

And now, with that, I’ll turn it over to Mike.

Mike Madison

Thanks, Ryan and good morning everyone. Let me start off by first saying how very pleased I am to report that the turmoil in the financial markets and the slowdown in our economy are having minimal impacts on Cleco. As stated in our earnings release, we are still pursuing our major initiative and we are very confident that we will meet our 2008 financial and operating goals.

Once again, in Cleco’s history, during the third quarter our biggest challenges were hurricanes, this time, Gustav and Ike. These storms hit within days of each other during the month of September and both storms damaged our infrastructure. However, it was Gustav that caused the most damage, leaving 90% or approximately 246,000 customers without electricity. This is the largest number of outages in our 73 year history.

The good news is that we’ve recovered from these back to back storms and we have reached an agreement with the Louisiana Public Service Commission, or LPSC, on the handling of our storm restoration costs, which we estimated to be approximately $85 million.

In October, the LPSC approved our request to capitalize approximately $45 million of the $85 million estimate and charge the remaining $40 million to our storm reserve as operations and maintenance or O&M expenses.

If you recall, we completed the securitization of our Katrina and Rita storm costs by issuing storm recovery bonds in March of 2008. We also created a $51 million restricted storm reserve to pay for future storm damage.

I’m pleased to report there will be approximately $19 million remaining in the reserves after we take out the 40 million in O&M expenses. This is because we had approximately $6 million left over from a previous reserve and we have collected approximately $2 million in earned interest. In addition, storm related tax benefits are expected to significantly fund the $45 million in capitalized costs.

While meeting the challenges of the two hurricanes, we completed a major milestone in the overall construction of our Rodemacher 3 Project. In early October, we celebrated the completion of the unit’s fuel offloading facility.

The primary fuel for Rodemacher 3, I remind everybody is petroleum caulk and it will be barged to the offloading facility and transported to the new unit by a 1.5 mile pipe conveyor system. The dedication of the facility brings us one step closer to our summer 2009 start up.

As of September 30, we have spent approximately $816 million on this project. With less than 12 months to go, Rodemacher 3 is on schedule and on budget. With that said, our progress over the next several months will be crucial to the start up of this unit.

And I do want to point out that the credit crunch in financial markets will not be a factor in our construction process because we essentially completed the financing of Rodemacher 3 during the development phase of this project.

Of course, connected to the Rodemacher 3 Project is our pending rate case. In order to recover our $1 billion investment, address our increased operating expenses, and insure our customers reap the fuel savings from the unit, we had to file a new rate plan for both. We completed the first step of this year long regulatory process on July 14. Since the filing, we have been working with the LPSC to complete the discovery phase of these proceedings.

The remaining three phases, settlement discussions, the hearing, and LPSC approval, will all take place over the next several months, with a final decision with the LPSC expected in May of next year. If approved, our proposed plan will enable Cleco Power to improve its allowed rate of return to shareholders and at the same time, lower customer’s bills. We are requesting a 12.25% return on equity.

Another major initiative is our 2007 long term request for proposals, or RFP, for intermediate and peaking capacity. Our integrated resource planning process revealed that even with Rodemacher 3 in operation, Cleco Power will need up to 600 megawatts of additional capacity beginning in 2010.

This capacity could come in the form of purchased power agreements or additional rate based investments. Currently, the goal is to have an executed agreement with the winning bidder by the end of this year or in early 2009 and to file for approval with the LPSC during the first quarter of next year.

Let me once again remind everybody, that as required by the LPSC, this RFP process is being overseen by an independent monitor who is acting on their behalf. Therefore, we are very limited regarding what we can say about the process.

Now let me update you on where things stand with our joint transmission upgrade project. For months, we have been working with two neighboring utilities, La Fayette utility system, which is a municipal utility and Energy Gulf States Louisiana, of course a subsidiary of Entergy Corporations.

To upgrade our interconnected transmission grids and improve electric service reliability in south Louisiana, an area referred to as the Acadia load pocket, I am pleased to report that all parties have signed a memorandum of understanding and the construction schedules for the project are being finalized as we speak.

Under the agreement, each utility will be responsible for specific upgrades. Cleco Power estimates it will spend approximately $150 million and has filed for approval of this proposed investment with the LPSC. If approved, all upgrades are expected to be completed between 2010 and 2012.

Let’s now talk about our midstream business. Evangeline, our first wholesale power plant, continues to perform under its 20 year totaling agreement with Bear Energy, a subsidiary of JP Morgan Chase.

Also, as you read in our earnings release, Evangeline recently went through an unplanned outage during this quarter and I’ll remind everybody that we still have their first major outage scheduled for the fall of this year.

Acadia, our jointly owned wholesale power plant, was notified in May that the proposal it submitted into Cleco Power’s 2008 short term RFP, which was issued in 2008 for 2009 reserve, was the winning bid.

The contract is for 235 megawatts beginning March of ’09 and ending September 30, 2009. The agreement still needs to be approved by the LPSC and the Federal Energy Regulatory Commission.

Acadia also submitted several proposals into Cleco Power’s 2007 long term RFP and into Entergy’s 2008 limited and long term RFP. As discussed earlier, the results of the Cleco Power long term RFP are not yet public.

And we also recently learned that Entergy suspended its RFP due to general uncertainty about the economy. However, Entergy said it's still seeking one to five year deals beginning in 2009. Entergy is scheduled to notify the winner of the one year deal in December of this year.

I’ll wrap up my remarks by reminding you that while we are indeed focused on the Rodemacher 3 Project, there is more to our growth strategy. As I have discussed, we are pursuing other projects that will grow Cleco Power.

These additional regulated investments, when complete and moved into our rate base, will increase our cash flow and position Cleco Power for continued success. We are also putting our generation expertise to use through Cleco Midstream and working diligently to maximize the cash flow and earnings from these two highly efficient natural gas fired power plants.

With that, Russell will discuss our financial results for the third quarter of this year.

Russell Davis

Thanks, Mike and good morning everyone. For the third quarter of 2008 we recorded net income of $37.1 million, which equates to diluted earnings of $0.62 per share. We are down from our third quarter 2007 net income of $68 million in diluted earnings of $1.13 per share. Those earnings included a $24.1 million or $0.41 per share gain from the Acadia settlement with Calpine.

At the subsidiary level, Cleco Power recorded third quarter earnings of $0.51 per share, down $0.06 per share from last year’s third quarter. Revenue is down $0.08 per share, primarily due to lower kilowatt hour sales, as a result of cooler weather and hurricanes Gustav and Ike, lower storm surcharge collections and losses on energy hedging.

Higher expenses in the amount of $0.14 per share also contributed to the decline in Cleco Power’s third quarter earnings. Of this amount, $0.05 per share was due to higher interest on solid waste disposal bonds and senior notes.

$0.02 per share was due to the issuance of senior secured storm recovery bonds and $0.03 per share was related to the LPSC Customer Bill Credit for the carrying cost associated with tax benefits resulting from hurricanes Katrina and Rita, partially offset by $0.02 per share of lower interest related to draws against Cleco Power’s credit facility.

Adjustments and trills related to income taxes reduced earnings by $0.07 per share. Those adjustment and true offs taken in 2007 primarily relate to 2005 and 2006 returns. Partially offsetting the increased expenses is AFUDC, which contributed $0.16 to EPS and other expenses which were $0.01 per share lower.

Midstream recorded earnings of $0.08 per share for the third quarter, down $0.43 per share from the same quarter a year ago, which included the $0.41 per share gain from the Acadia settlement with Calpine excluding the Acadian settlement midstream was down $0.02 compared to the same quarter a year ago.

Evangeline was down $0.03 per share primarily due to an unplanned outage in the third quarter of 2008. Acadia has $0.01 per share lower losses primarily due to lower interest paid to the holding company, partially offset by the absence of a breakup fee paid to Acadia Power

Holdings in 2007. Corporate, which is primarily the holding company, recorded third quarter earnings of $0.03 per share down $0.02 per share from last year’s third quarter primarily due to low affiliate interest from Acadia lower other interest income and a reduction in the cash surrender values of corporate owned life insurance policies. These decreases were partially offset by lower interest expense and adjustments and true-ups to income taxes.

Turning to year-to-date result for the first nine months of 2008 net income was $88.6 million and diluted earnings were $1.47 per share down $0.87 per share from the same period in 2007. Included in a nine month comparison are $0.41 per share from the Acadia settlement of Calpine and $0.81per share from Calpine Bankruptcy claim.

Excluding these two Acadian transactions, earning were up $0.35 per share compared to the same period a year ago primarily on higher AUFDC of $0.48 per share. Lower losses of $0.08per share at Midstream also contributed to higher results. Partially offsetting the improved results at both Cleco Power and Midstream were lower corporate results of $0.15per share.

At the subsidiary level Cleco Power recorded earnings of $1.51 per share for the first nine months of 2008 up $0.42 per share compared to the same period a year ago primarily due to $0.48 per share of AFUDC associated with the Rodemacher 3 projects.

Adjustments and true-ups related to income taxes reduced earnings by $0.06 per share. The other primary earnings drivers for Cleco Power were other expenses which were $0.11 per share lower and interest expense which is $0.11 per share higher.

Midstream recorded a loss of $0.05 per share for the first nine months of 2008 down $1.14 per share compared to the same period a year ago. Excluding the 2007 Acadian transactions, Midstream’s results showed and $0.08 per share improvement compared to the same period a year ago.

Acadia had $0.08 per share of lower losses primarily due to lower interest paid to the holding company partially offset by the absence of the break-up free paid to Acadia Power Holding in 2007 due to the sale of Calpine interests in the Acadian project. Evangeline was down $0.02 per share for the year primarily due to higher maintenance expenses.

Corporate recorded earnings of $0.01 per share for the first nine months of 2008 down $0.15 per share compared to the same period a year ago primarily due to $0.11 per share lower affiliate interest income from Acadia.

In terms of earnings guidance with the plan fall outage of Evangeline we’re still targeting consolidated earnings in the $1.60 to $1.70 per share range. Our current guidance also assumes 2008 capital expenditures of about $265 million on the Rodemacher 3 project including AFUDC.

Normal weather for the remainder of the year, the continuation of current rate plan, continued performance by our counter-party under the Evangeline Towing Agreement and certain assumptions about plant operations and market conditions with regard to Acadia.

Now I’ll turn the call back to Ryan for questions.

Question-and-Answer Session

Ryan Gunter

Thanks, Russell. We will now begin taking questions.

Operator

We will not begin the question and answer Session. (Operator Instructions) Our first question from Paul Ridzon from KeyBanc please go ahead.

Paul Ridzon – KeyBanc

Can you give more detail on the short-term Acadian contract is that I assume a capacity contract for six months and is that an undivided interest with your partner, Cajun Gas?

Russell Davis

Morning, Paul.

Paul Ridzon - KeyBanc

Morning.

Russell Davis

Well, it is, I mean, to get to your question it’s both our Cajun Gas and Cleco Midstream will share in the benefits of that contract equally.

Paul Ridzon - KeyBanc

And can you give us any look at the economics of that?

Russell Davis

That was for competitive reasons that is confidential price point that was redacted from the filing so it’s not something we can talk about.

Paul Ridzon - KeyBanc

And is Evangeline back?

Russell Davis

Evangeline is back. Well, you know, as Mike noted there is a fall outage. The outage is ongoing. The outage is on Unit 7 so that plant is undergoing the major outage but Unit 6 is up and running.

Paul Ridzon - KeyBanc

And what was hurt from the unplanned outage of Evangeline?

Russell Davis

There were some damaged blades, unfortunately, you know, it got to a point that we thought was too problematic to continue to run from August when we saw the issue getting worse. We thought we might be able to get to the major outage but we couldn’t and had to take the plant down. So it primarily had to do with damaged blades.

Paul Ridzon - KeyBanc

Can you kind of quantify what you think that did to the quarter on an EPS basis?

Russell Davis

Well, you saw in the earnings release we talked about a total of $0.03.

Paul Ridzon - KeyBanc

Okay.

Russell Davis

And it’s primarily due to that.

Paul Ridzon - KeyBanc

Given the economy do you still foresee the need 010 Cleco Power Contract or could that 600 megawatts come down a bit?

Dilek Samil

Paul, good morning, this is Dilek. Let me take that one. You’ll probably remember that when we started our initial integrated resource planning process some years ago, we were looking at the need to replace on a long-term basis about a third of our capacity needs that were coming from the market so were buying roughly a third of our capacity from the market. And the RSP that generated the Rodemacher 3 project as well as the 2007 RSP that’s for our needs in 2010 and beyond, that’s to replace our short position.

Paul Ridzon - KeyBanc

Okay so that’s pretty secure?

Dilek Samil

I’m not sure what you mean by the word secure but we need that capacity, we are short capacity.

Russell Davis

Traditionally most commissions treating vertically integrated utilities allow them to plan for or contract for not only their current load but forecasted but also cover a sum (ph) percentage from a reliability standpoint and I think that still remains true today.

Paul Ridzon - KeyBanc

And then can you quantify the potential size of the Acadiana transmission investment?

Russell Davis

We’re looking roughly at Cleco Powers piece of that in the roughly $150 million range.

Paul Ridzon - KeyBanc

And that is LLPCS jurisdiction, correct.

Russell Davis

Yes.

Paul Ridzon - KeyBanc

Any trends on Petco pricing?

Dilek Samil

This is Dilek again. Petco pricing continues to be higher then we’d like to see it. We think some of that is driven by Gustof and Ike which shut down the refineries for a period of time. Our expert forecasters assure us that the price is coming down, we’ll see. The thing that we continue to remind everybody is that it still significantly less expensive then the natural gas that we’re currently using to generate the energy.

Michael Madison

Let me also add to that the technology that we selected here, not only allows us to burn petroleum coke but just about any other type of solid fuel that ranges any from the Powder River Basin coal that we’re already getting at Rodemacher 2 to possibly blending Louisiana lignite, we can also do Appalachian coal, Illinois coal, again it’s one of the reasons why we picked this technology it gives us the most flexibility to go after the lowest cost solid fuel we can possibly find.

And I’m going to go ahead and add this in there again, one of the other reason that we picked the technology is that gives us the opportunity to burn some percentage of renewable fuels. And right now I can tell you how glad we are that we picked the technology.

Paul Ridzon - KeyBanc

Any movement in Louisiana towards renewables or do you anticipate something on the federal level?

Michael Madison

I think it’s the federal level. I think the state has done some internal research in the state and the appetite from the state is not really huge so I think the movement of the state from a renewable standpoint will be that comes from the federal government.

Paul Ridzon – KeyBanc

I know you can’t talk about contract terms, but can you kind of quantify potential ’09 earnings benefit from the Acadia short term deal?

Michael Madison

Not at this time.

Paul Ridzon – KeyBanc

Okay. Thank you very much.

Michael Madison

Thank you, Paul.

Operator

Our next question comes from Michael Lapides from Goldman Sachs. Please go ahead.

Michael Lapides – Goldman Sachs

Good morning guys. Congratulations on a good nine months and obviously for your financial stability right now compared to some of your peers. Quick question for you, when thinking about the rate case, who do you view as kind of the major interveners in the case and what are the areas of push back you could anticipate they may provide once they start filing testimony?

Dilek Samil

Good morning, Michael, this is Dilek again. The interveners in the rate case are big industrial customers, no surprise to anyone. Of course, the commission hires consultants to supplement its staff. So, we’re working with all the parties, just like we always do.

We think the perspective of the industrial customers who’ve intervened going to be around the cost of service, to cost allocation issues. And, like I said before, we will work with them to see if we can come up with a settlement that makes sense for everybody.

Michael Lapides – Goldman Sachs

Are there likely to be formal settlement dates in the procedural schedules set out by the LPSC? Meaning, settlement talks, or settlement conference dates set up in the procedural schedule?

Dilek Samil

We don’t have formal dates in the procedural schedule, Michael. But, when we have the procedural schedule all of the parties committed to making themselves available for settlement discussion, that’s the objective that everybody has in this process.

Michael Lapides – Goldman Sachs

And, are the industrials likely to file separately? Meaning, the big paper companies as a group, and big chemical and the refiners as another group? Or will they get it all straight from the industry trade group?

Dilek Samil

Right now our objective is to settle this case so that nobody has to file.

Michael Lapides – Goldman Sachs

Okay.

Dilek Samil

With the exception of the commission staff.

Michael Lapides – Goldman Sachs

Got it. On the non-regulated side, can you talk a little more in detail about the lay of the land in Louisiana, especially after Entergy postponed or canceled its long-term RFPs? Just, in terms of what that may mean since they’re obviously the biggest buyer of power in the state, what that may mean for merchant combined cycles?

Darren Olagues

Well, Michael, this is Darren, look, I think the best way to answer that is looking back at this past summer. Transmission in south Louisiana was worse than it’s ever been. In fact, I would say there were times that, even at 100° days, that we couldn’t sell the power off Acadia at any price. Simply it wasn’t transmission available.

Entergy, we’re disappointed obviously that they’ve suspended the RFP. What does it mean? I suspect it means that people will get more competitive in the one to five year bids that they’re still going to look at. But, I think in general, Michael, the trend clearly is to try and match a regulated load up with IPP assets.

And, that’s what we’re trying to do, that’s what every IPP is trying to do. I don’t think that the market, that people are relying on the day to day market to provide a lot of uplift in value.

Michael Lapides – Goldman Sachs

Got it. Okay. Thank you guys.

Operator

Our next question comes from Justin Maurer from Lord Abbett. Please go ahead.

Justin Maurer – Lord Abbett

Good morning guys. Just a follow up on Paul’s question on Evangeline and the $0.03. What’s the mechanics of, you know, that it went down, are you guys required just to make whole to them financially, or do you actually go out and purchase power on their behalf, or how does that work?

Darren Olagues

We have the option, in concert with working with Bear Energy; if we can find acceptable replacement power we have the option to do that. And, we did do that in this case. Obviously, with the amount of tolling payments that get made an August, or, given the critical time of year it’s a sizable amount. And, given the thin pricing on wholesale power in the region, it made sense for us to go out and buy replacement power and that’s what we did.

Justin Maurer – Lord Abbett

Got you. And, that, all things being equal with input prices down and what not this summer, was it, not that you wanted it to happen, but was it better this year relative to the last couple in terms of what you would have been on the hook for?

Darren Olagues

I’ll tell you one thing we did this summer that wasn’t in place last summer was we did sign up some term deals just for the summer months. And, thankfully so because I think transmission would have really caused a problem and that we may not have been dispatching at all in August as a result. So, I would say on balance it was worse this summer.

Fortunately we did, late last year we had put some summer deals in place and somewhat hedged our transmission risk. And, we have done that in some ways for ’09, both through our success with Cleco Power one year deal that Mike mentioned and through actually going out and procuring some transmission on a forward basis into other markets to avoid what happened this summer happening again to us.

Justin Maurer – Lord Abbett

And, what would’ve happened if you didn’t do that? I mean, are you under penalty then if transmission’s not available? (Inaudible) to get them the power or?

Darren Olagues

Yes, well, for Evangeline if we can’t find replacement power there is basically a reduction in the tolling price.

Justin Maurer – Lord Abbett

Okay.

Darren Olagues

So, there’s not some market penalty that’s a stated calculation.

Justin Maurer – Lord Abbett

I got you. Alright. And, was that on unit 6, you said? The (inaudible)?

Darren Olagues

It was on unit 7.

Justin Maurer – Lord Abbett

On 7, okay, which is going down anyway --

Darren Olagues

Right. Right.

Justin Maurer – Lord Abbett

-- for plant maintenance, okay, got it. Thank you.

Operator

(Operator Instructions) Our next question comes from Bob Bridges from Sterling Capital. Please go ahead.

Bob Bridges – Sterling Capital

On the transmission investment, what kind of rate of return should we expect that the LPSC is going to grant you on that? I mean, what’s a range, are there other data points from recent cases that others have brought?

Dilek Samil

Let me see if I can respond to that question, this is Dilek. In our general rate filing we requested a return on equity of 12 and a quarter. And, the way we have proposed the rate filing is a formula rate plan that would be in effect subsequent to the implementation date of this rate case. Part of that formula rate plan includes a mechanism that would allow the company to recover the revenue requirements of major capital projects that are approved by the PFC. So, it’s not a free pass.

What we would have to do, is if we have a major capital investment like this transmission project, first we would get it certified and, as I’m sure you’re aware, we do have a docket to get commission approval to get certification of this transmission project.

That’s step one, and the next step, assuming we get what we ask for in our rate filing, is once we start putting pieces of the transmission project in service, we would request recovery under this formula right plan mechanism. So, the return on equity that would govern would be whatever return on equity is approved in the overall rate case.

Bob Bridges – Sterling Capital

So, that will be known probably by summer to fall of 2009?

Dilek Samil

Yes. Right now we’re expecting our rate case to be considered by the commission around the May timeframe.

Bob Bridges – Sterling Capital

Oh, so this will be bubbled in with that same verdict that comes at that point in time?

Dilek Samil

Right. The return on equity will be determined in the overall rate filing.

Darren Olagues

That’s the plan.

Bob Bridges – Sterling Capital

The investment, I assume it’s going to be roughly a 50/50 split of debt and equity for the transmission investment?

Dilek Samil

That’s right.

Bob Bridges – Sterling Capital

And, in terms of the timing of the cap-ex flow, the completions will be sometime between 2010 and 2012, so does that imply a kind of 2009 to 2011 spending period?

Darren Olagues

That is correct.

Bob Bridges – Sterling Capital

Great, thanks a lot.

Operator

(Operator Instructions) Our next question comes from Phyllis Gray from White Asset Management. Please go ahead.

Darren Olagues

Good morning.

Phyllis Gray – White Asset Management

Good morning. I’m sorry, I’m joining a little late, did you provide a liquidity update?

Michael Madison

We did not provide a liquidity update on the conference call, there is a liquidity update in the 10Q addressing our liquidity position. But, we haven’t addressed it on the conference call or in our conference call notes. On the liquidity itself, we have approximately a total liquidity of $439 million right now. That’s coming directly out of the financial condition discussion in our 10Q.

Darren Olagues

Phyllis, if you missed my comments earlier, if part of your concern has to do with the financing of our Rodemacher 3, one of the things that we’ve already told everybody, the good part of this project is that we have had Rodemacher 3 financed since the development phase of this project.

Phyllis Gray – White Asset Management

Very good, thanks. That’s all I had.

Operator

(Operator Instructions) We have no further questions at this time.

Michael Madison

Alright, we’d like to thank everyone for your answers today and we hope you all have a wonderful evening.

Operator

Thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may all disconnect.

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