Cleco's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Cleco Corporation (CNL)

Cleco Corporation (NYSE:CNL)

Q1 2014 Earnings Conference Call

April 29, 2014 8:30 am ET

Executives

Robbyn Cooper - IR

Bruce Williamson - President and CEO

Thomas Miller - SVP and CFO

Darren Olagues - President of Cleco Power LLC

William G. Fontenot - SVP of Utility operations for Cleco Power LLC

Analysts

Paul Ridzon - KeyBanc Capital Markets

Michael J. Lapides - Goldman Sachs

Brian J. Russo - Ladenburg Thalmann

Operator

Welcome to the Cleco Corporation First Quarter 2014 Earnings Call. My name is Katrina, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Robbyn Cooper. Ms. Cooper, you may begin.

Robbyn Cooper

Good morning, and welcome to Cleco Corporation's 2014 first quarter earnings call. You can access this call and slide presentation live via the Internet from Cleco's Web-site at www.cleco.com\investors. Telephone and Internet replays can be accessed through our Web-site. The dial-in number for the telephone replay is 888-843-7419 if in the U.S., or 630-652-3042 if outside the U.S. The conference ID is 36518739.

With me on the call today is Bruce Williamson, Chairman, President and Chief Executive Officer of Cleco Corporation; and Tom Miller, Senior Vice President and Chief Financial Officer, along with other members of Cleco management.

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 from those contemplated in our forward-looking statements. Please refer to our cautionary note regarding forward-looking statements and risk factors in various reports filed with the U.S. Securities and Exchange Commission, including our 2013 annual report on Form 10-K and our 2014 quarterly report on Form 10-Q. In addition, please note that the date of this conference call is April 29, 2014, and any forward-looking statements that we make today are based on assumptions as of this date.

And with that, I will turn the call over to Bruce.

Bruce Williamson

Thanks Robbyn. Good morning and thank you for joining us. Let's start with the agenda for today's call which is on Slide 3 of our presentation, for those of you following along via the webcast. I'll begin today's call with some operational and financial highlights from the first quarter, Tom will then provide an overview of the results, and after the financial review I'll address some key takeaways and we'll move on to Q&A.

We had a strong first quarter with consolidated operational earnings of $0.42 per share, down $0.02 per share from the first quarter of 2013. As a quick overview of earnings drivers, cold winter weather and increased rates of our Formula Rate Plan helped to offset higher expenses related to planned outages at several of our generating facilities. Tom will provide some more detail on this later in the call.

Last week we also announced a 10% increase to our quarterly dividend and a 5% increase to our target range for our dividend payout ratio. As stated before, we evaluate the dividend on a quarterly basis with the goal of providing a competitive dividend to deliver a strong total shareholder return package. The new dividend amount on an annualized basis totals $1.60 per share, a $0.15 increase for the year. This marks the fifth time we've raised the dividend in three years for a total increase of 60%.

We also announced last week, we increased the target range of the payout ratio to 55% to 65% from 50% to 60%. Based on the midpoint of our current year's earnings guidance, the new $1.60 dividend puts us at a payout ratio of 59% or roughly at the midpoint of the increased range and reflects our commitment to deliver continued dividend growth.

Please turn to Slide 5 where we'll discuss some additional highlights for the first quarter. I'm pleased to announce that on March 15, we completed the transfer of the Coughlin power station from Cleco Midstream to Cleco Power. The transfer of Coughlin is a major milestone for the Company and a result of several years of hard work as we completed the necessary regulatory approvals to transfer the asset.

As an efficient combined cycle gas-fired unit, Coughlin increases fuel flexibility and adds diversity to our regulated generation fleet. Coughlin provides capacity to support new load growth, including our contract with Dixie Electric Membership Corporation which began on April 1. We plan to settle the rate treatment for Coughlin in the ongoing FRP extension filing.

Completing our FRP extension is undeniably the most important near term initiative we face. The most recent action regarding this filing is our supplemental testimony we filed on March 26. The updated testimony is based on our discussions with the LPSC and we believe it will aid us in securing a final outcome, which we continue to expect by the end of the second quarter.

We've addressed a number of items in the testimony including our requested direct allocation treatment related to Coughlin. In addition, the addition of projects into rate base and the continuation of our FRP rider for future projects. We view the terms as favorable exceeding numerous positives. We believe we have effectively addressed the key issues and will continue to work through the regulatory process. If you want additional detail about the supplemental testimony, you can go to the LPSC Web-site or contact a member of our Investor Relations team.

Next I would like to discuss a proposed joint transmission project with AEPs regulated utility SWEPCO which serves customers in Northwest Louisiana. Last month we filed with the LPSC to approve the construction and operation of a new substation. The project includes construction also of additional transmission interconnection facility. The Layfield/Messick project has an estimated cost of about $52 million with Cleco's portion of the project being approximately $35 million. We believe the transmission project will benefit customers of both companies by increasing reliability and improving dispatch availability at our jointly owned Dolet Hills Power Plant.

And with that, I'll turn the call over to Tom to discuss first quarter results in more detail.

Thomas Miller

Thank you, Bruce, and good morning everyone. Please turn to Slide 6 for a review of our first quarter operational results. As you can see, GAAP earnings were $0.43 per diluted share for the first quarter, a decrease of $0.02 per share compared to the first quarter 2013. Operational earnings for the first quarter were $0.42 per share, also a $0.02 decrease compared to last year. This amount excludes operational items associated with life insurance policy.

Looking from left to right on the operational earnings chart, Cleco Power's non-fuel base revenue was $0.19 per share, was up $0.19 per share from this time last year. Higher revenue due to favorable weather and residential and commercial growth increased earnings by $0.10 per share. The effect of the Formula Rate Plan adjustment increased earnings by $0.07 per share. The absence of customer refunds related to the construction financing costs of Madison Unit 3 increased earnings by $0.02 per share.

Other revenue increased earnings by $0.03 per share, primarily due to $0.02 per share of higher transmission revenue as a result of joining MISO and $0.01 per share of higher miscellaneous revenue. Other expenses decreased earnings by $0.24 per share, primarily due to $0.15 per share related to higher planned outages at our generation facilities, $0.08 per share related to higher depreciation expense and $0.02 per share related to higher taxes other than income. This decrease was partially offset by $0.01 per share related to a lower loss on disposal of assets related to the Coughlin outage.

Interest expense was lower. It increased earnings by $0.02 per share, primarily due to $0.01 per share related to lower interest due to the retirement of senior notes last year and $0.01 per share related to a surcredit customer giveback. AFUDC increased earnings by $0.01 per share, primarily due to increased MATS capital spend. And finally, higher income taxes decreased earnings by $0.03 per share, primarily due to lower tax credits. Bruce?

Bruce Williamson

Thanks Tom. Before going into Q&A, I'll discuss a few takeaways for the year at this point. We saw the completion of two major projects this year. Coughlin and its employees are now part of our utility after 14 years of operating outside of Cleco Power. And transitioning Coughlin to our Utility is beneficial for both the retail and wholesale customers. We're also now serving DEMCO through a 10-year full requirements contract, which creates unprecedented load growth for the Utility.

While pleased with their success, we're still focused on the completion of other projects which will add value to the Company. Much of our continued focus for the second quarter will be working with state regulators to reach an outcome on the FRP extension and adapting the new processes associated with our membership in MISO.

In addition, we remain focused on modernizing our generation fleet as we work to complete the MATS infrastructure project and settle MATS recovery. We've already started work on one of our facilities and ultimately will install equipment at two more facilities prior to the April 2015 compliance deadline.

As we work to achieve these major initiatives, we have not lost sight of our low-risk regulated growth strategy, using the DEMCO contract as our model. We continue to pursue both additional wholesale load growth and future transmission projects like that of Layfield/Messick which will drive earnings. As we seek opportunities to grow, we remain committed to making wise investments and also maintaining our strong financial position.

Ultimately, our goal is to deliver a strong total value to our shareholders and provide reliable power at a fair price to our customers. A recent dividend increase highlights our commitment to consistent dividend returns, while our stock's strong performance enhances our total shareholder return.

At this time, we'll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Paul Ridzon. You may begin.

Paul Ridzon - KeyBanc Capital Markets

As far as MISO, can you kind of give us a sense of the timing of when we could see a pipeline of transmission opportunities start to build?

Bruce Williamson

Yes, Darren is here as well. I'll give an overview. I think 2014 is really a year of transitioning into MISO, learning how things are going to operate, learning how plans are going to dispatch, and learning how power flows and the overall supply/demand balance is going to exist between – across MISO South as well as between MISO South and MISO North or MISO Classic, whichever you want to call it. And so I think we worked through that in 2014, focused on really operating well, and you'll see some projects like domestic project that we talked about earlier and we've talked about with investors on the road so far this past quarter, but as we learn what is really needed within MISO in 2014, I think the work will then commence on identifying those projects in the latter half of '14 as we go into '15, and then from there you'll see filings and things like that. Darren?

Darren Olagues

Bruce, the only thing I'd add is that, look, it's ultimately a process that requires an education of the commissioners to make sure they understand the cost-benefit of reliability or efficiency projects. So as Bruce said, we are looking at potential projects, Messick obviously being one of them, a joint one, but at the same time as we think about and look at possible opportunities, we're at the same time educating staff and the commissioners about what we're seeing is ultimately 60% of our transmission assets load through base rates and not sort of through the MISO wholesale tariff. So there is ultimately a regulatory process that's required with the LPSC for recovery.

Paul Ridzon - KeyBanc Capital Markets

And should we think about the size?

Bruce Williamson

Paul, you want us to identify projects that will make the system more efficient but you also want us to identify projects that makes sense for our customers and adds value and that we can recover on.

Paul Ridzon - KeyBanc Capital Markets

Should we think about the size being the same as the Layfield/Messick or bigger than that?

Bruce Williamson

I think we'll have to see how the opportunities lay out. I mean I think the more bite-sized things like Messick are things you'll probably see earlier. I think in terms of very large-scale projects, I think those come a little bit later.

Darren Olagues

I mean, Paul, you know there's the FERC Order 1000 threshold which is still under some debate with MISO. In general, those ones that meet the sort of the competition threshold are by definition larger projects, higher voltage projects, higher cost projects. So the ones we're talking about now are not those.

Paul Ridzon - KeyBanc Capital Markets

Okay. And then second question, Bruce, in the past you talked about capital allocation, the three things you could do are maybe some new generation, boost the dividend payout ratio or buy stock. Given that you've boosted the payout ratio target, how should we think about maybe any implications of what that means for your prospects of getting more load?

Bruce Williamson

I don't think it gets factored into it. I mean what will drive new load is both our organic load growth across our retail system plus DEMCO as well as wholesale capture. The dividend increase we think is a strong move to demonstrate to shareholders our confidence in our earnings and our financial position. A $0.15 increase that we just did is about $9 million round figures. And so it's not like it's foreclosing growth options. I think it's really just getting our dividend up to more of a level that we think is appropriate to deliver a total shareholder return that we want to for our shareholders.

Paul Ridzon - KeyBanc Capital Markets

Okay, great. Thank you very much.

Operator

Our next question comes from Michael Lapides. You may begin.

Michael J. Lapides - Goldman Sachs

Congrats on a good quarter. Couple of questions. Just when you think about long-term O&M, kind of what a normalized level is at Power, what roughly thinking about a dollar millions range is normal? I mean the last year, year and a half, you've had some moving parts on the O&M line, including the planned outages this quarter. I'm just trying to think about what you view as normal.

Bruce Williamson

I'll start and then I'll let Darren or Tom jump in. The first quarter was higher because of just the sheer number of outages that we had. We had major outage. It was beyond anything we've done at Dolet. We had [eight year out] (ph). We had primary…

Darren Olagues

O&M dollar consumption.

Bruce Williamson

So first quarter was a much higher level than what would be a normal run rate. Is your question more on the first quarter or on an annualized basis?

Michael J. Lapides - Goldman Sachs

Annualized please.

Bruce Williamson

I think on an annualized basis, Michael, we give guidance for the year and we've given earnings guidance for the year as we came into this year and as we did the fourth quarter call, Tom, of $2.45 to $2.50 – I'm sorry, $2.65 to $2.75 and we are unchanged on that guidance. I don't think we've tried to break down components of that between revenue and O&M.

Darren Olagues

Michael, in this FRP exercise, the rate setting process include providing test year data on O&M spend, and so ultimately, there's a baseline reset if you will that will be incorporated into our revised rate coming out of this FRP extension. So I don't know that I would look to the first quarter necessarily as a guide to anything because ultimately taking as a run rate O&M levels will be reset, but it will continue as we've requested to have this generation O&M deferral mechanism to allow for when we have lots of generation O&M due to increased outage year that it would get deferred on the balance sheet and collected over time.

Michael J. Lapides - Goldman Sachs

Got it. And for the testimony that's filed should have kind of a forecast O&M level, I could probably refer back to that and think of that as a normalized run rate?

Darren Olagues

That's what I would suggest, Michael.

Michael J. Lapides - Goldman Sachs

Got it. Bruce, one strategic question. Just what we should be thinking regarding your mix of really fuel diversity in terms of source of supply and exposure to coal, petcoke and lignite?

Bruce Williamson

We've got a pretty good mix right now. I mean Madison runs on a blend of petcoke in Illinois basin. Bill, roughly 80/20, 75/25?

William G. Fontenot

80/20, yes.

Bruce Williamson

80/20 petcoke Illinois basin with that PRB at Rotomaker and we've got lignite basically I guess, lignite at Dolet. And so I think having three different sources like that plus the natural gas plants, I think that's a very diverse division. We're not reliant on any one basin, like on PRB or on trains getting out of the PRB or things like that. So I think we're in a really good position. I mean clearly when you look at gas prices today and probably for the foreseeable future, adding natural gas capacity like we just did with Coughlin is really the biggest step you can do to make the overall fleet more competitive on a marginal fuel cost basis.

Michael J. Lapides - Goldman Sachs

Got it. Thanks guys. I'll follow-up offline.

Operator

Our next question comes from Brian Russo. You may begin.

Brian J. Russo - Ladenburg Thalmann

I just want to be clear. Are you reaffirming your 2014 guidance, and I ask only because on Slide 9 there's a footnote that says the guidance is as of February 25?

Bruce Williamson

Yes, we are reaffirming our guidance.

Brian J. Russo - Ladenburg Thalmann

Okay, great. And is it related to isolate the planned outage costs that fit the income statement in the first quarter?

Thomas Miller

You know, Brian, the exact answer is that probably not, but I would point you to the difference in our – we talked about how much operating expenses are up. You know a large portion of that would be associated with the outage. Dolet is still in outage. So it will be a little bit high, but that's where we are right now.

Darren Olagues

Brian, I'll just remind you, and we've talked about this on prior calls, I know the first quarter was up, but under the existing rate plan that if we incur non-payroll generation O&M, which is O&M outage cost, in excess of roughly $26 million a year, that we then put that up on the balance sheet. So you're right, we spend a lot certainly year-over-year due to delay in Acadia primarily in the first quarter but that is really just pushing us up towards that cap. If we hit the cap, which is ultimately embedded in our earnings guidance, it won't run through the income statement and we seek recovery of that separately through sort of a deferred asset recovery mechanism.

Brian J. Russo - Ladenburg Thalmann

Understood. Can you identify what the impact of weather versus normal was in the first quarter?

Thomas Miller

We talk about weather and customer load growth which is on a quarter over quarter basis, it's difficult, but that was $0.10 a share for the quarter.

Brian J. Russo - Ladenburg Thalmann

Versus last year, right, year-over-year, or was it $0.10 versus a baseline or was it $0.10 versus the first quarter of last year?

Thomas Miller

First quarter last year.

Brian J. Russo - Ladenburg Thalmann

Okay. And then…

Bruce Williamson

Colder winter this year than last year which was colder than the year before, I guess – I mean generally speaking, I guess I would say, if you went to last three winters starting with three years ago, that was a below normal winter, last winter was – I don't know, Keith, maybe last winter was roughly a normal winter, normal to slightly above, maybe very slightly above, and then this winner obviously was a very cold winter.

Brian J. Russo - Ladenburg Thalmann

Okay, great. And the transmission projects, you filed for the joint venture with AEP, when might that spend start and when would that be operational?

Bruce Williamson

The spend on that will probably – there'll be a very little bit that's in 2014, it will then build into 2015, kind of wind down in '16 and be operational in '16, in the latter part of '16.

Brian J. Russo - Ladenburg Thalmann

Okay, great. And then just lastly, in prior settlements with the LPSC staff, did that occurred anytime or the staff preferred to file testimony prior to settling on key issues?

Bruce Williamson

The way the process works in the state is, there is monthly meetings that take place to approve matters before the Commission. They take place once a month. The next two in the second quarter are May 8 and June 18, and I think you would see settlement filings that would take place at least a few weeks to maybe as much as three or four weeks prior to one of those meetings. And so that's your timing for that sort of thing for information to come out.

Brian J. Russo - Ladenburg Thalmann

Okay, great. Thank you very much.

Operator

Our last question comes from [Jesse Landon] (ph). You may begin.

Unidentified Analyst

I just wanted to ask about to the wholesale aggregation strategy, if there are any sort of customers or systems that you are currently looking at and any key dates we can look for, for updates on that process?

Bruce Williamson

Yes, there are. We've traditionally said that we don't really want to talk about the individual wholesale customer opportunities until they are announced, unless like last year when in the summertime City of Alexandria had some public discussion by their city administration and we did not comment on it until the transaction was announced. Similar items would I think basically will follow a similar path to that. We don't see a point in really trying to forecast pursuing this opportunity or that opportunity. There are several that are out there, Keith and his team are working hard on those, and they take a long time and there's almost as much work that goes into one when they're like a 20 or a 15 or a 30 megawatt deal as much it took to do probably the 600 megawatt deal with DEMCO. So a lot of work goes into it and we'll announce transactions when they are complete.

Unidentified Analyst

Okay, great. And then just a follow-up on the deferral related to I guess generation outage cost, is it – in the event that you exceed the I guess 25 million for the year, the entire amount is deferred or only the amounts in excess of a cap?

Bruce Williamson

Darren will explain it.

Darren Olagues

Yes, only the amounts in excess of the cap.

Unidentified Analyst

Okay, great. Thank you very much.

Operator

Our next question comes from Paul Ridzon. You may begin.

Paul Ridzon - KeyBanc Capital Markets

I guess since no one else is asking, just do you have any comments on some of the rumors that circulated last week?

Bruce Williamson

Paul, ever since last fall when Nevada or NV Energy, there was a transaction there and then Unisource and then Philadelphia Gas Works and then Alabama Gas, utilities were a hot topic. Clearly we don't comment on rumors or speculation in the marketplace.

Operator

Our next question comes from [Andy Lessie] (ph). You may begin.

Unidentified Analyst

I'm all set, but thank you.

Operator

We have one more question that comes from Michael Lapides. You may begin.

Michael J. Lapides - Goldman Sachs

Just quick follow-up. How do you think about when it comes to the generation fleet, what your net length is now that you've integrated Coughlin but you've also got some wholesale deals like DEMCO in the city coming up? Like after you incorporate those kind of the puts and takes there, what's your net length with your existing fleet?

Bruce Williamson

It's about 250 megawatts.

Michael J. Lapides - Goldman Sachs

Got it. Thanks Bruce.

Operator

We have no further questions at this time. I would now like to turn the call back over to Bruce.

Bruce Williamson

Thank you for your questions this morning. I would like to briefly update all of you on some upcoming investor relations travel for the month of May. On Thursday, May 15, management will attend the Citi Utilities Conference in Boston and we plan to hold additional investor meetings in Boston on Wednesday and Friday of that week. During the last week of May, we'll have a couple of people in the New York area. Please contact our investor relations team if you'd like to setup a meeting. We look forward to seeing many of you throughout the remainder of the year and thank you for your interest in Cleco.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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