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Cleco Corporation (NYSE:CNL)

Q2 2014 Earnings Conference Call

July 31, 2014 08:30 ET

Executives

Bruce Williamson - Chairman, President and Chief Executive Officer

Tom Miller - Senior Vice President and Chief Financial Officer

Darren Olagues - President, Cleco Power

Analysts

Paul Ridzon – KeyBanc

Andy Levi – Avon Capital Advisors

Brian Russo – Ladenburg Thalmann

Eric McCarthy – Balyasny

Vedula Murti – CBP Capital

Neil Kalton – Wells Fargo Securities

Operator

Good morning. And welcome to Cleco Corporation’s 2014 Second Quarter Earnings Call. You can access this call and slide presentation live via the internet from Cleco’s website www.cleco.com/investors. Telephone and internet replays can be accessed through our website. The dial-in number for this telephone replay is 888-843-7419, if in the U.S. or 630-652-3042 if outside the US. The conference ID is 36518745. With me on the call today is Bruce Williamson, Chairman, President and Chief Executive Officer of Cleco Corporation, Tom Miller, Senior Vice President and Chief Financial Officer; and Darren Olagues, President of Cleco Power, 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 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 reports on Form 10-Q. In addition, please note that the date of this conference is July 31, 2014, and any forward-looking statements that we may make today are based on assumptions as of this date.

With that, I will turn the call over to Bruce Williamson.

Bruce Williamson - Chairman, President and Chief Executive Officer

Thanks Robbyn. Good morning and thank you for joining us. Please turn to 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 highlights from the second quarter. Then Tom will provide a more detailed overview of the financial results. Given the significance of the formula rate plan extension, which was completed in the second quarter, we’re bringing Darren back to walk you through some of the mechanics of the extension and what it means going forward.

I’ll conclude the call with a few comments on our strategic outlook and then we’ll take your questions. Before I start discussing our financial results, I’d like to take a couple of minutes to address the press release we issued on June 23rd. In that release, we stated that we have received indications of interest with respect to a strategic transaction. Consistent with the board and management’s fiduciary duties, we’re working with financial and legal advisors to consider and evaluate these indications of interest and other potential opportunities in comparison to our standalone long-term strategic plan.

I would stress that as we undertake this review, we will do so while considering the interest of all of Cleco’s stakeholders, including our retail customers, ratepayers of all types, employees, retirees, communities we serve and the overall economic vitality of the region and the state. We are committed continuing to serve their best interest. We do not have a definitive timeline for the review process. And we do not intend to make any further announcements regarding the review until the board has either approved a specific transaction or affirmed another course of action that requires disclosure.

Accordingly, we ask that you focus your questions today on our second quarter results. In addition, there can be no assurance that the review will result in a business combination or a path different from our current strategic plan. We remain focused on operating a operating a well-maintained utility and providing our customers with safe, reliable power, especially during the hot summer months.

Moving on, I will now turn to Slide 4 to recap second quarter and year-to-date earnings. We produced the strong quarter and reported operational earnings of $0.57 per share, down $0.05 per share compared to the second quarter of 2013. Operational earnings this quarter included a one-time charge of $0.22 per share related to the customer refund associated with the FRP extension excluding the current refund, we produced a solid quarter consistent with our guidance. Setting aside the charge related to the FRP, the main revenue driver for the quarter was the start of our contract with Dixie Electric Membership Corporation, one of the electric cooperatives in Louisiana. Our contract with them, which began on April 1st, has created unprecedented load growth for the Company.

Year-to-date, we produced operational earnings of $1 per share, down $0.06 per share compared to this time last year and Tom will provide more details later in the call. As we turn to the last half of the year, we continue to monitor our progress and ability to deliver earnings within guidance range. Despite the one-time earnings adjustment related to the FRP customer refund, we’re affirming our 2014 consolidated earnings guidance range of 265 to 275 per diluted share. Factors that could potentially impact 2014 earnings guidance include tax negotiations regarding historical tax items as well as obviously summer weather. And to give you some insight into the third quarter weather, the month of July has been fairly mild in Louisiana, with temperatures mainly in the upper 80s and only low 90s and only occasionally exceeding 95 degrees.

As always, we’ll continue to monitor the appropriateness of our guidance range, as we continue through the year. Looking ahead, we plan to issue 2015 consolidated earnings guidance and capital expenditures in the fourth quarter 2014 consistent with our usual practice. Please turn with me to Slide 5. Turning now to operational highlights, the LPSC voted in mid-June to approve the FRP extension. This approval concluded a lengthy regulatory process and wraps up one of our three primary goals for 2014. We view the results of the rate plan extension as both favorable and balanced, providing rate stability for customers and reliable cost recovery for the company. And Darren will go into more details later in the call.

You’ve often heard me discuss our long-term strategy to target new wholesale opportunities in order to build our – grow our load and ultimately, accelerate the generation build cycle. In several earnings calls, we’ve highlighted our new wholesale power contracts to show our efforts in advancing this strategy. Equally important, however, is the retention of existing contracts. We recently extended power agreements with existing customers which helps support our wholesale power efforts. These new contracts demonstrate that municipalities and cooperatives continue to view our competitively priced agreements and diverse generation fleet favorably. And we remain committed not only targeting new wholesale contracts, but also pursuing renewals of existing contracts.

I would also highlight our recent upgrade by Moody’s Investor Services. Following the June settlement of the FRP, Moody’s raised Cleco’s senior unsecured rating from Baa1 – to Baa1 from Baa2, and Cleco Power’s senior unsecured rating to 83 from Baa1 and both companies have stable outlooks. In upgrading our ratings, Moody’s has highlighted our recently settled FRP extension, noting it offers rate stability and certainty surrounding cost recovery. The rating upgrade also reflects a lower risk profile due to our exit from the unregulated business as a result of the transfer of Coughlin to the regulated utility.

And with that, I’ll turn the call over to Tom to discuss our second quarter and year-to-date financial results in more detail.

Tom Miller - Senior Vice President and Chief Financial Officer

Thank you and good morning. Please turn to Slide 6 for review of our second quarter operational results. GAAP earnings were $0.60 per share for the second quarter of 2014, a decrease of $0.09 per share compared to the second quarter of 2013. Operational earnings for the second quarter were $0.57, a decrease of $0.05 per share compared to the second quarter of 2013. For GAAP and operational earnings include one-time adjustment of $0.22 per share related to the customer refund associated with the FRP extension settlement.

As always, operational earnings exclude items associated with life insurance policies, tax levelization and the Acadia Unit 2 indemnifications. Looking from left to right on the operational earnings reconciliation chart, Cleco Power’s non-fuel base revenue was up $0.02 per share from this time last year. This include comes from a $0.17 increase per share from higher revenues in our wholesale business primarily from the DEMCO contract, an increase of $0.06 per share relating – reflecting the July 2013 FRP increase.

The absence of a customer refund related to the construction financing cost for Madison Unit 3 increased earnings by a $0.01. These increases were offset by the $0.22 one-time customer refund as part of the FRP extension. Other expenses decreased earnings by $0.10 per share primarily due to $0.06 per share from the absence of the recovery of a capacity expense related to the Coughlin tolling agreement, which was terminated in March, $0.03 per share related to higher depreciation expense, $0.02 per share related to higher taxes other than income and $0.01 per share related to higher capacity cost associated with wholesale contracts.

These decreases were partially offset by $0.02 per share of lower miscellaneous expenses. AFUDC earnings increased by $0.03 per share primarily due to increased matched capital spend. Now, if you’d turn to Slide 7, we will review our year-to-date results. GAAP earnings were $1.30 per diluted share for the first six months of 2014 and a $0.11 decrease compared to the same period last year. Operational earnings were$1 per diluted share for the first six months of 2014, down $0.06 compared to the first six months of 2013.

These amounts exclude on operational items associated with life insurance policies, and the Acadia Units 2 indemnifications. Again looking from left to right on the operational earnings reconciliation chart, Cleco Power’s non-fuel based revenue was up $0.21 per share from this time last year. Higher revenues from residential and commercial growth, wholesale business growth including the contract with DEMCO, and colder winter weather, increased earnings by $0.27 per share. An increase of $0.13 per share reflecting the July 2013 FRP adjustment and the absence of customer refunds related to the construction costs of Madison 3, that was $0.03.

These increases were offset by the $0.22 per share related to the one-time customer refund as part of the FRP extension. Other revenue increased by $0.03 per share primarily due to $0.02 per share of higher transmission revenue as a result of joining MISO and a penny of higher miscellaneous revenue. Other expenses decreased earnings by $0.35 per share primarily due to $0.15 per share related to higher planned outages at our generation facilities, $0.11 per share related to higher depreciation expense, $0.06 per share from the absence of the recovery of capacity expense related to the Coughlin tolling agreement, $0.03 per share related to the higher taxes other than income, and $0.02 per share related to higher capacity cost associated with the wholesale contracts.

This was partially offset by $0.01 per share related to a lower loss on disposal of assets related to the Coughlin outage and a penny of lower miscellaneous expense. Interest expense was lower and 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, $0.01 per share related to a surcredit customer give back and $0.01 per share of miscellaneous charges. This was partially offset by $0.01 of interest related to uncertain tax positions. AFUDC increased earnings by $0.04 per share primarily due to increased matched capital spend.

And finally, higher income taxes decreased earnings by $0.01 per share primarily due to $0.06 per share of lower tax credit. This decrease was partially offset by $0.04 per share of lower taxes due to a favorable settlement with taxing authorities and $0.01 per share of miscellaneous tax items.

With that, I’ll turn the call over to Darren to provide more detail about the FRP extension as well as Cleco Power’s earnings outlook.

Darren Olagues - President, Cleco Power

Thanks, Tom. Please turn with me to Slide 8 to discuss highlights from our formula rate plan extension. As Bruce stated earlier, the LPSC voted in mid-June to prove our FRP extension. This rate plan which became effective July 1st, extends our previous plan by four years. The extension includes many of the features of our original rate plan, including capital structure, customer sharing band and the ability to add LPSC approved projects to the rate structure through FRP riders. The rate extension resets our target ROE to 10% from 10.7%, resets our cost of service and has a 100% retention band to 90 basis points before retail customer sharing.

A summary of the new target ROE and associated sharing bands is included on Slide 8. In addition, we now have an approved rate treatment of Coughlin Power Station, which we transferred into the utility in March, and clarity on the treatment of wholesale contract. This important rate making treatment should enable us to advance our wholesale growth strategy and provides a mutually beneficial result for our customers and shareholders.

Next, I’d like to take a few minutes to provide some additional clarify on Cleco Power’s earnings outlook given the recent extension of our formula rate plan. Please turn to Slide 9. The amounts on this slide incorporate the new 10% target ROE as part of the FRP extension and reflect a 2015 test year data that supported the FRP extension also included our capital additions format’s compliance. We also assume the utility have a capital structure of 51% equity, 49% debt and a full statutory effective tax of 38.5%.

As you know, due to the addition of Coughlin and the funding of matched capital with internally generated funds, the utility has an equity ratio closer to 58%. That being said, the amounts on the slide assume Cleco Power has borrowed the requisite amount to bring the capital structure in line with a 51, 49 capital structure and dividend this amount and any other internally generated cash up to Cleco Corporation. As you can see on this slide, we broke down Cleco Power’s business into it’s three rate base components also included our additional corporate variables to consider. The first column shows the retail rate base as regulated by the LPSC. The new two columns are wholesale allocated rate base and non-retail FERC transmission rate base that is associated with the wholesale side of our business. The last column again shows corporate variables that need to be considered as part of any outlook for the consolidated company.

It is important to note that the earnings impact of the cash of Cleco Corporation in any tax funding that will reduce the effective tax rate or non-incorporated in our assumptions on the slide. I’ll now walk through some of the details around each of the three-rate base components. First, the retail jurisdictional portion of rate base. At the bottom of the slide, you’ll see a graph noting the historical earned retail ROE. It’s important to note that the earned retail ROE in past years is higher than the previous target ROE of 10.7% due to various initiatives that improved utility margins.

The FRP extension effectively sweeps the financial benefits of those initiatives into the utilities new baseline cost of service rates. Accordingly, the impact on earnings due to the retail ROE reset is reflective of going from an estimate of around 11% earned ROE to the 10% target ROE. When applied to the test year retail jurisdictional rate base of approximately $2.3 billion, the 10% ROE results in earnings of a $1.96 per share. As noted earlier, the extension allows us to further improve operating margins and earn an additional 90 basis points on the retail ROE for customer sharing. Although not easy, we think that through above average loan growth, both on the retail and wholesale side, and ongoing efforts to control OEM, we can increase earned ROE beyond the 10%.

Second is the range of 5% to 10% ROE on rate base allocated to wholesale contracts. As we stated in prior discussions, we often employ a pricing structure that is back-end loaded whereby the pricing and returns increased overtime, but always with a goal of providing regulated like returns. The DEMCO pricing structure has that feature and with 2015 being the first full year of the DEMCO contract, we had projected lower wholesale returns. In addition, it’s important to note that the FRP extension supports a retail wholesale allocation of approximately 80% retail, 20% wholesale.

Accordingly, 20% of the rate base associated with the generation length is also allocated to the wholesale bucket and this will have a further effect of lowering overall wholesale ROEs. Third, is the non-retail transmission rate base, rate base that is FERC jurisdictional, and has an ROE range of 10.5% to 12.38%, the allocation of transmission rate base is between retail and non-retail is dictated largely by the volume of flows for over our transmission system associated with serving retail load versus wholesale load whether served by Cleco or others.

The general rule of thumb is 55% is allocated to retail and 45% to non-retail. We expect our planned Layfield/Messick transmission project would be generally treated in this manner. Finally, additional corporate variables to consider are the sources and uses of cash, the tax rate, which is currently projected at approximately 34% in 2014, balance sheet items and overhead expenses. We hope this slide provides greater inside in the Cleco Power’s earnings potential inclusive of the new target ROE following the FRP extension.

I want to reiterate that we are pleased with the outcome of the FRP extension and that it provides regulatory certainty for our shareholders and rate reductions and refunds to our retail customers. Also I want to emphasize and then providing you with an outlook for Cleco Power’s earnings capacity, we are not forecasting 2015 earnings guidance at this time. As stated earlier in the call, we plan to issue 2015 consolidated operational earnings guidance for Cleco Corporation in the fourth quarter of 2014 as is our usual practice.

Accordingly in the Q&A session and after the call, we will be unable to answer detailed questions that would result in a forecast of 2015 guidance. Bruce?

Bruce Williamson - Chairman, President and Chief Executive Officer

Thanks, Darren. Before going into Q&A, I want to take few minutes to discuss our outlook going forward. Then our management team will join me in answering your questions. Our goal has been, and continues to be strengthening our business through our low-risk regulated growth strategy. To do this, we remain focused on our core fundamentals of our business namely, maintaining a strong and flexible financial position to support future growth when it occurs installing the latest pollution controls to ensure a viable generation fleet and serving our customers efficiently and safely.

By ensuring that the fundamentals of our company are strong, we’re better able to focus our resources on advancing strategic goals as they occur on an opportunistic basis. We’re on schedule to complete environmental upgrades in order to comply with math and we continue to gain valuable experience from our participation in the MISO market. And we believe this business model positions us well for the remainder of the year and into the future.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Then our first question comes from Paul Ridzon from KeyBanc. Paul, please go ahead.

Paul Ridzon – KeyBanc

Just wanted to clarify your 2014 guidance includes the negative impact of $0.22?

Tom Miller

Yes, it does.

Paul Ridzon – KeyBanc

What – I imagine when you first issued the guidance, you didn’t contemplate the refund as a result of the settlement? Where did the upside come from or did you contemplate it?

Tom Miller

No, you’re right with that – that statement, you’re starting statement there, Paul. We assumed when we gave guidance would be similar to what we had last year. The $0.22 and for that matter, the ROE will be addressed through certainly first quarter weather was up and we believe that there may be other one timers that we will keep our eye on and at this point, we’re maintaining the guidance of 265 to 275.

Paul Ridzon – KeyBanc

Okay, thank you.

Operator

And our next question comes from Joe Zhou from Avon Capital Advisors. Joe, please go ahead.

Andy Levi – Avon Capital Advisors

It’s Andy Levi, you’re lucky.

Bruce Williamson

Hi, Andy.

Andy Levi – Avon Capital Advisors

How are you doing?

Bruce Williamson

Good, how are you?

Andy Levi – Avon Capital Advisors

I’m alright. Just want to clarify something. Again, I understand you’re not giving ‘15 guidance. But I guess what you had said last time in your release, that the new rate plan may cut yearly earnings potential by $0.25, not will. Is that kind of the way we should read it?

Bruce Williamson

Before I turn it to Darren, obviously, in any given year, there is a lot of variables whether being probably the biggest, I mean, you’ve been look back on one of Darren’s slides where he showed the ROEs for prior years, Andy, and then you can look back 2011 when we had 100 degree temperatures for 40 year some straight days something like that, I’m looking down at the table and I see not – it was at least 40 days. And obviously, that’s a big driver. So we’re just saying May at this time, I think it’s safe to say, if you assume all assumptions being the same sort of (indiscernible) everything forward with the same set of assumptions, Darren, I think that would be the projected reduction.

Darren Olagues

That’s right. That’s right, I mean, Andy, we have the 90 basis points right so, that provides obviously the opportunity to earn higher. The number that’s noted in the release is assumes that we don’t go into the share – into that 90 basis points and earned higher than the 10%.

Andy Levi – Avon Capital Advisors

Okay, got it, got it, okay. Then that was the easy question. Then the harder question is just trying to understand – because I felt it was somewhat unusual, why you’ve chose to file the 8-K indicating that there were interests as far as the company relative to just kind of staying silent and going through the process.

Bruce Williamson

Because of the news report that came out that week, I believe it was on Thursday or so of the prior week. We have unusual trading in our stock and in consultation with the New York Stock Exchange we felt that was the better course of action. Suffice to say, obviously, the stock exchange works hard to maintain – we should say, a very liquid and transparent trading of any stock that’s listed on the exchange when they are unusual patterns in the trading in both the volume as well as changes in price, they can call a company and they can, let’s just say encourage you to provide some additional disclosure that really was the driver for what happened on I believe it was June 23rd.

Andy Levi – Avon Capital Advisors

And then just strategically, and just in your thinking, is there any kind of parameters that you can share with us or just your thinking in general?

Bruce Williamson

With regard to what?

Andy Levi – Avon Capital Advisors

I’m sorry, with regard to the strategic review/indications that you’ve gotten.

Bruce Williamson

Really, Andy, the only thing I can say on that is what I said earlier in the prepared remarks is that as a board, I mean, first obviously unit of everyone listening on the call, a board and a management team have fiduciary duties to evaluate these when they come in. I guess that’s one message we are doing that. I think the other message clearly is – as we do so, we are looking at things relative to our standalone strategic alternatives or standalone plan. And in doing so we will also be comparing these alternatives and evaluating them relative to shareholders, our retail customers, ratepayers of all types, employees, retirees, the communities, and the economic region. Those are all stakeholders that are invested with a public utility. We will take them all into account and make a considered business decision using our best business judgment.

Andy Levi – Avon Capital Advisors

Okay. And just based – just to understand what you said in your 8-K, so you have more than one interest. Is that the kind of way to look at it?

Bruce Williamson

Not going to comment any further on that, we’ve got only, I mean, we’ve got Goldman Sachs, Tudor Pickering, Locke Lord and Hunton & Williams working with us that’s the only other thing I’ll add.

Andy Levi – Avon Capital Advisors

Okay, thank you very much.

Bruce Williamson

Thanks, Andy.

Operator

And our next question comes from Brian Russo from Ladenburg Thalmann. Brian, please go ahead.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Bruce Williamson

Hi, Brian.

Brian Russo – Ladenburg Thalmann

I just wanted to dig a little bit deeper in any offsets to the $0.25 negative impact on the FRP reset. You mentioned earlier it assumes that you’ll be at the optimal cap structure at the utility. However, it’s my understanding that you’re currently under leveraged. Why should we think differently?

Bruce Williamson

I think we’re – while Darren is providing, I’ll probably step in front of them this and just say, what Darren wanted to – what we ask Darren to provide just from a Cleco Power perspective, what could change and that is one of the assumptions that was made was that they do go ahead and get the capital structure in line, I guess I would say maybe rather than shifting one where not the optimal capital structure, but the regulatory capital structure and so, that assumption is made and what Darren went over with you and we’ll come out with full 2015 guidance later in the year like around the time we normally do, but I think what we’re just trying to triangulate too much like I think I just answered on Andy. If you hold all the other assumptions constant, I think directionally that’s the – that’s the change in earnings that you would get, if you assume all other assumptions being equal.

Brian Russo – Ladenburg Thalmann

Okay. So you’re going to issue roughly $200 million of debt at the utility prior to 2015?

Bruce Williamson

I didn’t – that’s the assumption that’s made in the modeling that Darren has, I mean, that sits right now that is obviously it is under-levered of utility. At some point, we need to get that capital structure in line for regulatory purposes.

Brian Russo – Ladenburg Thalmann

Okay, got it. And why should we assume you only earn 10% when historically, you’ve earned the high end of 10%, and in some years, over 11%, it looks like that could be about $0.15 of upside or offset to your $0.25 FRP reset assumption.

Bruce Williamson

I think corporately if you look in the past, the earnings upside above the 10.7% as it historically was – was largely driven by probably two items, one is obviously on the revenue side that was driven by weather more than anything probably in the last few years, and the other thing was driven by OEM cost reductions, I think an important variable for analysts taken into account that Darren highlighted and I’m trying to protect him here from not giving anything closed to guidance was that in the last three or so years as we’ve reduced OEM and focused on efficiencies on the cost side in the company, those in a fact get now sort of swept back into retail rates largely and we have to in effect – for lack of a better term, I guess I would say almost start over and that with that, I would just add, Darren, if you want to elaborate anything on that?

Darren Olagues

Great, I mean, those obviously whether further cost management that as you’ve heard us talk about over the last few years, we’ve taken a bunch of cost out of the business and that the customers now have seen the benefit of that in effect is the rate reset. The other areas of – the other primary area to see margin increase, ROE increase is going to be through above leverage low growth and you know that’s obviously something that we’re focused on. We’re not conceding 10%. We’re just, I think for illustrative purposes, we’re just trying to get the math clear both on the capital structure, Brian, point you’re making as well as just using the 10%.

Brian Russo – Ladenburg Thalmann

Great, I appreciate that. Any earning EPS sensitivity to 100 basis points of positive load growth?

Darren Olagues

Not at this time.

Brian Russo – Ladenburg Thalmann

Okay. That load growth would be another offset to the $0.25 FRP reset, right?

Darren Olagues

Sure.

Brian Russo – Ladenburg Thalmann

Yes.

Darren Olagues

Obviously, I mean, and we’ve talked in the past that historically our loan growth has been around 1% to 1.2%, I think historically. And you can make your own assumption going forward from there.

Brian Russo – Ladenburg Thalmann

Okay. And I just want to understand the 2014 guidance a little bit better. If you back out the $0.22 one-time refund, your adjusted guidance is based on the $2.70 midpoint, is $2.92. And that would be versus the $2.65 to $2.75 previously – previous guidance? Is that the way to look at it, or the $2.65 to $2.75 already included in the $0.22?

Darren Olagues

Tom?

Tom Miller

No, the $2.70 midpoint did not include $0.22 of a bad guy if you will so, one-time refund to your customers.

Brian Russo – Ladenburg Thalmann

But now, it does?

Tom Miller

It does.

Brian Russo – Ladenburg Thalmann

Okay. So then you must have had $0.22 of upside drivers relative to your original guidance. Is that the way to look at it?

Bruce Williamson

Brian, I would just – I’ll be a little more blunts than Tom was I guess on an earlier question. The $0.22 is a one-timer as I think Tom has picked up Darren’s former term, the $0.22 bad guy. We are working and that’s a one-timer in effect or a single event or single item. We’re working hard on some other one-timer is that would be good guys that would offset that, we would be mindful of that as we move through the third quarter. It’s also the quarter where we typically have the hardest weather and we’ll make adjustments as appropriate as we go throughout the rest of the year.

Brian Russo – Ladenburg Thalmann

Okay. So, assuming the FRP reset began July 1st, and it’s a $0.25 drag for a full year, that would imply a $0.125 drag in the second half of 2014. Is that included in the $2.70, which is really $2.92 without the one-time refund?

Tom Miller

It does include the current rates so, we’ve look at all the facts and circumstances through June 30th and the dollar of earnings we think we have a way to get back into the $2.65 to $2.75 that we as Bruce pointed out, there is some one-time risk that we think can help to offset the number.

Brian Russo – Ladenburg Thalmann

Could you share with…

Bruce Williamson

We don’t necessarily sweep those in as ongoing operational.

Brian Russo – Ladenburg Thalmann

Okay. You can’t share what those pending one-timers might be?

Bruce Williamson

Not at this time.

Brian Russo – Ladenburg Thalmann

Okay. Would you consider share buybacks in 2015 to kind of augment the EPS trajectory?

Bruce Williamson

That’s really not on the table right now and as I said we’re looking at our overall plan relative to our alternatives and we’ll take those into account.

Brian Russo – Ladenburg Thalmann

Okay, thank you very much.

Bruce Williamson

Okay.

Operator

And our next question comes from Eric McCarthy from Balyasny. Eric, please go ahead.

Eric McCarthy – Balyasny

Hi, good morning.

Bruce Williamson

Hi.

Eric McCarthy – Balyasny

The retail rate reset that was disclosed last night, was that something that had been disclosed to and/or discussed with the potential buyers or was it news to them, like it was news to us?

Bruce Williamson

Not going to comment on anything related to this strategic process.

Eric McCarthy – Balyasny

Okay. It was worth a shot, thanks.

Bruce Williamson

Okay.

Operator

And our next question comes from Paul Ridzon from KeyBanc. Paul, please go ahead.

Paul Ridzon – KeyBanc

I think you just touched on this, but what are your priorities for any excess cash at this point?

Bruce Williamson

We will just evaluate that as part of our standalone strategic plan relative to the alternatives.

Paul Ridzon – KeyBanc

Okay, thank you.

Bruce Williamson

Okay.

Operator

And our next question comes from Vedula Murti from CBP Capital. Vedula, please go ahead.

Vedula Murti – CBP Capital

Good morning, Bruce.

Bruce Williamson

Hi, Vedula, how are you?

Vedula Murti – CBP Capital

I’m fine. Can you remind me, I’m trying to recall at this point whether you’re actually a cash taxpayer, given that thing is going to make or went on line 2009 to 2010. And you’re only about halfway through the 10-year accelerated tax depreciation makers, etcetera. And if you’re not a cash taxpayer, can you remind us when that kind of flips over?

Bruce Williamson

Tom?

Tom Miller

Yes, we are – we have not been a cash taxpayer as you point out for the last several years. We are as we keep pointing out our tax rate is going – is going up and we would expect to get back into paying taxes at some level. In the next couple of years, we still have new market tax credits to work off beyond that so, we won’t be a full taxpayer.

Vedula Murti – CBP Capital

But just in terms of not being a full cash taxpayer at the rates that we see on the income statement, but do you actually switch over to actually being a cash taxpayer soon as opposed to full or you still are not a cash taxpayer for another couple of years?

Tom Miller

No, no, no, I was talking – we would – full cash taxpayer in cash terms and we’ll move back into start paying tax is in the next year or two and then we’ll gradually work off the credits and then become a full taxpayer.

Vedula Murti – CBP Capital

Okay.

Tom Miller

We will start paying some cash taxes in 2015, correct, Chuck, yes.

Bruce Williamson

That’s correct.

Tom Miller

Yes.

Vedula Murti – CBP Capital

And then by, call it, ‘17 or ‘18, you’ll be full cash taxpaying at the statutory rates?

Tom Miller

Correct.

Vedula Murti – CBP Capital

Okay, great. Thank you very much.

Tom Miller

Okay.

Operator

Our next question comes from Neil Kalton from Wells Fargo Securities. Neil, please go ahead.

Neil Kalton – Wells Fargo Securities

Hi, good morning, everyone.

Bruce Williamson

Hi, Neil.

Neil Kalton – Wells Fargo Securities

Just a question on the wholesale ROE range in ’15, it’s pretty wide. What are the impacts there that get you to the – at the bottom and top of that range?

Bruce Williamson

It really relates to the structures that’s underpin really the long dated contracts right we have some 10 years, we have some 20 years, we have some of that shorter. The escalating aspect or profile of the contracts are reflect really the short-term current market conditions and the expectation and acceptance by the counterparty that pricing will insure increased overtime and so, what happens is there is a certain amount of rate base that’s allocated over to those contracts. But the revenue stream is, as I had mentioned in the prepared remarks, backend loaded so, we get the front end pricing looks attractive and then an increases overtime, but what so when you take a snapshot of an individual year, let’s say the first year of the contract, you’re going to see a snapshot of a lower earned ROE and our point is that – of the range, Neil, is that – overtime that will increase and there is various ways we get to that increased price structure, I won’t go into but we’re taking a snapshot.

When you take a snapshot of one individual year especially the front end of the contracts, you’re going to get a lower ROE. The other part – and that’s on individual contract structures, the other part I mentioned that I think is often overlook is that, we reflect here sort of this 80-20 breakdown on the generation related rate base between retail and wholesale and we often – we also talk about this 250 to 300 megawatts of excess capacity we have that we’re trying to market. Well, there’s rate base associated with that 250 to 300. And so in the rate setting process, that rate base that is – that underpinned the excess capacity that we go to market, it’s also allocated 80-20. And so there is 20% of let’s say, non-revenue producing rate base associated with that excess that is put over into the wholesale bucket. That will have the impact of drawing down, not necessarily an individual contracts ROE, but the ROE of the wholesale bucket in total.

Neil Kalton – Wells Fargo Securities

Okay. I think I get that, thanks.

Bruce Williamson

Happy to follow up if you need it.

Neil Kalton – Wells Fargo Securities

I might need to, yes, but thank you.

Bruce Williamson

Okay.

Operator

And our last question comes from Brian Russo from Ladenburg Thalmann. Brian, please go ahead.

Brian Russo – Ladenburg Thalmann

Hi, thanks for the follow-up.

Bruce Williamson

Hi, Brian.

Brian Russo – Ladenburg Thalmann

I just want to be clear. Is it your goal to earn near 10.9% versus the 10% reset target in the FRP and will that be considered when you issue 2015 guidance?

Bruce Williamson

It will be our goal to as we between now and roughly October like it is every year in the company will look at budgets, there were a lot of people in the company in a very lengthy meeting, I saw yesterday doing capital budgeting. We’ll move from there to looking at the OEM budgets, we’ll look at other elements that all rollup into the plan and then we’ll put in what we think is the right level of stretch in terms of what we can actually earned. As Darren said, when as part of this process really a lot of the saving in OEM that we’ve done over the last few years gets swept back into rates. That was good for the retail customer and it was good to run the business that way and we’ll need to really go hard after things again to see what upside we can achieve, I mean, obviously we’re not intent to just sit and say, okay, 10% or number in that fit. I think it would probably be very aggressive to say that what’s total possible upside, we can work at under the new plan, I mean, the 90 basis points and then there we go into the sharing and…

Tom Miller

It’s 11.24%.

Bruce Williamson

I mean, yes, so the ultimate final bookend is 11.24%. If 10% is too low, 11.24%, it would be exceedingly aggressive including whether upside and all sorts of things like that. Obviously we want to run a business and try to make the maximum return for our shareholders that we can on the sustainable basis. It would be somewhere between 10% and 11.24%.

Brian Russo – Ladenburg Thalmann

Okay. But are you conveying a base case of 10% or is the base case somewhere between 10% and 11.24%.

Bruce Williamson

I think the main thing – if I said there was a main takeaway in Darren slide in my mind and again try to protect him here from all of you guys, although you know him well from his former days of CFO. It’s probably that red line graph at the bottom that shows historically we’ve been making a 11% or 11.1% type returns. And in fact, that’s getting swept back down to 10% and we reset and we start from there.

Brian Russo – Ladenburg Thalmann

Okay, thank you.

Bruce Williamson - Chairman, President and Chief Executive Officer

Okay. That concludes the Q&A portion of our call this morning. Obviously, I know some of you were frustrated that we’re restricted on what we can comment on at this time. We have not been out on the road and so, I’ll conclude just by saying, I look forward to seeing many of you later this year and I thank you for your continued 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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