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Executives

Michael Madison – Chief Executive Officer and President

Kathleen Nolen – Senior Vice President and Chief Financial Officer

Darren Olagues – Senior Vice President, Cleco Midstream Resources

Ryan Gunter – Manager of Investor Relations, Strategy and Budget

Analysts

Michael Lapides - Goldman Sachs

Neil Stein - Levin Capital

Paul Ridzon – KeyBanc

Becca Followill - Tudor Pickering

Gordon Howald - Calyon Securities

Timothy Yee - KeyBanc

Maurice May - Power Insights

Patrick McGlinchey - Sidoti

Robert Chewning - Davenport & Company

Cleco Corporation (CNL) Q4 2007 Earnings Call February 28, 2008 11:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Cleco Corporation fourth quarter 2007 earnings conference. 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 will now turn the call over to Mr. Ryan Gunter.

Ryan Gunter

Thanks Rosa. Good morning everyone and welcome to Cleco Corporation’s fourth quarter 2007 earnings conference call and year-end results. On the call today, I have with me Mike Madison, President and CEO of Cleco Corporation, who will update you on current events, and Kathleen Nolen, our Senior Vice President, Chief Financial Officer and Treasurer, who will cover financial results for the quarter and 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 today, 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 Notice of Disclosure regarding forward-looking statements and various reports filed with the Securities and Exchange Commission, including our recently filed 2007 Annual Report on Form 10-K.

And with that, I will turn it over to Mike.

Michael H. Madison

Thanks Ryan and good morning everyone. I am very pleased to report 2007 was a very good year. Not just based on our financial results, but also because of the resolution of the Calpine bankruptcy and of course the continued excitement we enjoy with the implementation of our growth strategy.

Kathleen is going to go into the details of our financial results in a moment. So let me start by giving you an update on our Rodemacher 3 project. First I want to remind you that this $1 billion investment is going to:

Diversify our fuel portfolio;

Reduce our use of natural gas, which as you know has experienced extreme volatility;

Stabilize our fuel costs;

Make us more competitive;

And probably most importantly, it will double the size of our utility, Cleco Power LLC.

Shaw, our EPC contractor is halfway through the 42-month construction schedule. Specifically, this means that they are 21 months into the 42 months as of February of this year.

We continue to work with Shaw to accelerate the completion of the project. But I must remind everybody, that our contractual commercial operations target is no later than the fourth quarter of 2009.

Also, we plan to file our base rate case for Rodemacher 3, with the Louisiana Public Service Commission by the end of the second quarter of this year.

Since we haven’t had a rate case in more than 20 years, not only will we be seeking approval to recover our Rodemacher 3 construction costs, we will also be making a rate case to better reflect our current business expenses.

And as I have said before, this will be a unique rate case, because if we are successful, we will recover the Rodemacher 3 investment, lower customer fuel costs, and earn an equitable return. It is very rare that a company can increase its rates and lower customer overall costs at the same time.

While I am proud of our Rodemacher 3 construction process, I am equally proud of how we have successfully navigated our way through Calpine’s bankruptcy. Our year end financial results reflect the settlement agreement we reached with Calpine.

We’ve been through the details before, but I want to reemphasize the fact that our risk management of this project, which drove us to completely contract the unit before it was completed, paid off this year, just like it did with the Perryville project two years ago.

Our settlement with Calpine brought a $72.2 million in net income this year, basically representing the value of the off-take contracts we had with them. And we still own 50% of the assets.

Following the Calpine’s bankruptcy auction and Cajun’s third-party acquisition of Calpine’s 50% interest in Acadia, Midstream assumes the day-to-day management of Acadia including plan operations, marketing, and administration.

Midstream and Cajun strategy is to more aggressively market Acadia’s output, which was previously significantly constrained due to Calpine’s financial situation. We, along with Cajun, have gained a consistent understanding of the market fundamentals, pricing, participants, risk, and opportunities.

To that end, Acadia has participated in a number of RFPs, both directly and indirectly, and continues to pursue other bilateral agreements with load serving entities and other market participants.

Acadia also continues to engage a third party energy marketer for short-term and real time sales opportunities. Our intent is a balance of short, mid- and long-term agreements that create the best sales and risk profile.

With that said, I must add that achieving this in 2008 may be difficult. This is because the nature of the market is such that load serving entities are most always the buyers of Acadia’s output. And these decisions usually occur 6 to 12 months in advance.

Notwithstanding that, we believe that the outlook for Acadia and merchant gas fired generation in the region is slowly improving, and Acadia’s value will continue to increase as a result. In short, Acadia is well-positioned for new opportunities.

Speaking of new opportunities, as you recall, Cleco Power issued another RFP in October of 2007, for up to 600 megawatts of intermediate and peaking capacity, beginning in 2010, because even when Rodemacher 3 comes online, we are still going to be short of capacity.

Proposals were received in December of 2007, and we are analyzing them now, which means Cleco Power self-build proposals will be tested against market proposals.

The review is being overseen by an independent monitor appointed by the Louisiana Public Service Commission, just like it was for the RFP process that produced Rodemacher 3. We plan to announce the short list in April and the winning bids in August.

Let me assure you, that while we are very focused on Rodemacher 3, it’s just the first step in our growth strategy. Also, I have mentioned in the past that we believe there are investment opportunities in transmission.

To that end, we have developed a number of projects to pursue, have conditional approval from our Board for these investments, and are now working through the consensus process needed before we can proceed.

Finally, I would like to bring you up-to-date on where we are on our 2005 storm recovery plan. During 2007, the LPSC approved first, the recovery of $158 million of storm costs from Hurricane Katrina and Rita, which essentially covers all our expenses.

Second, the creation of a $50 million funded reserve for future storm damage and the securitization of our un-recovered storm costs and storm reserve, through the sale of securitized storm recovery bonds, which has never been done in Louisiana before.

Issuing these bonds will speed up our cash flow, let us set aside funds for future storms and lower our customers’ storm surcharge. Customers will repay storm costs over time through a storm recovery surcharge, while the securitization structure will minimize the amount customers pay.

We are pleased to be leading the way on the first use of securitization in Louisiana and working hand-in-hand with the Louisiana Public Service Commission to create this effective financing structure.

So as you can see, we accomplished a lot in 2007. We did what we said we would do, and as this year gets underway, we plan to continue executing our growth strategy.

In summary, on the electric utility side of our business, our focus will be one, keeping our major solid fuel generation project Rodemacher 3 within budget and to begin commercial operation no later than the fourth quarter of 2009.

Next, filing our base rate case with the LPSC to recover our Rodemacher 3 investment, as well as earn a reasonable return on the rest of our business. Also working to secure additional generation capacity needed to meet the long-term power needs of our utility customers and pursuing possible investments in transmission.

On the wholesale side of our business, we will work to secure short-term and long-term capacity contracts for Acadia output, and continue the efficient management of the operation and maintenance of Evangeline.

With that, I will now turn it over to Kathleen for the details of our fourth quarter and year-end financial results.

Kathleen F. Nolen

Thanks Mike and good morning everyone. I will start with the fourth quarter results and remind you the fourth quarter did not include any of the Acadia-Calpine settlement transactions.

For the quarter, net income was $11.9 million; that was up $1.1 million compared to the fourth quarter of 2006. On an EPS basis, fourth quarter earnings were $0.20 per diluted share and that’s up a penny compared to $0.19 recorded in the fourth quarter of 2006.

Quarter-over-quarter, the major factor in Cleco Power’s improved earnings was higher AFUDC. We saw $0.12 per share in higher AFUDC equity and $0.03 per share from higher AFUDC debt. Overall, non-fuel revenue was about the same quarter-over-quarter.

Interest expense was $0.03 lower and that was primarily due to a reversal of interest that we had accrued on uncertain tax positions, and was partially offset by the effect of the higher debt balances.

The interest accrual for taxes was reversed due to successful settlement discussions we have had with the IRS on the issue of mix service costs, which we settled according to industry settlement guidelines in January of this year.

Other expenses were at the total of about $0.07 and you can see from our press release that this increase was the combination of $0.01 and $0.02 increases in a number of operating areas, so I won’t go over those on the call.

Both Midstream projects contributed to higher fourth quarter results. Acadia’s results were up $0.02, that’s mainly due to lower interest paid to the holding company, partially offset by some higher turbine maintenance. Evangeline results were $0.03 higher, largely due to absence of a 2006 depreciation adjustment on that project.

For the quarter corporate earnings were $0.15 per share lower. Now, $0.09 of the decline was due to lower proceeds from corporate-owned life insurance policies. In fourth quarter of 2006, we received significant proceeds from a policy.

Again I will refer you to the press release for the detail on the other factors at the holding company level, which on a relative basis were smaller variances in interest income, taxes and other expenses.

Now turning to the entire year, as Mike said, we had a good year both with and without the benefit of the Acadia settlement transaction. While the Acadia settlement contributed just over $72 million to our 2007 net income of $151 million, our net income was still up $6.2 million compared to 2006, excluding the Acadia transaction.

On an EPS basis, we reported $2.54 a diluted share, and if you take out the $1.22 per share from the Acadia transaction, we have recorded $1.32. Now that’s down $0.04 from a $1.36 per share we recorded in 2006, but after taking into account about $0.10 of dilution from our 2006 common stock sale, that’s a pretty good result year-over-year.

Cleco Power’s AFUDC for 2007 was up $0.53 compared to 2006 due to our increasing investment in Rodemacher. That’s $0.42 of AFUDC equity and $0.11 in higher AFUDC debt.

Revenue at Cleco Power was up $0.12 year-over-year, but we saw expenses at the total of $0.34. Sales revenue was about $0.04 higher for the year; weather was just a little bit stronger for sale in 2007 than 2006.

Transmission and other miscellaneous revenue was down about $0.01 year-over-year and the rest of the variance, which was $0.09, was primarily due to higher storm surcharge collections, mark-to-market gains on our wholesale contract gas hedges, partially offset by the absence of a customer refund accrual reversal in 2006. So those were less ongoing.

On the expense side, the Katrina and Rita storm amortization and accounting factors increased expenses about $0.10 compared to 2006. Interest costs were up about $0.06, that’s net of interest income as we had higher debt levels and lower levels of cash on hand.

Production maintenance costs were up $0.06, and that’s primarily due to a major plant maintenance outage at our Dolet Hills plant this past spring, that we have discussed in earlier calls.

Capacity payments were about $0.03 higher in 2007, and that’s primarily due to the March 2006 termination of the power purchase agreement with Calpine Energy Services, when that entity declared bankruptcy. And $0.08 of the expense increase was fairly evenly spread between transmission, distribution, customer and miscellaneous, and we were $0.01 down due to higher depreciation.

Now absent the Calpine settlement benefit, Midstream’s contribution to 2007 was lower than in 2006, but that’s primarily due to the absence of the Acadia letter of credit. In 2006, we drew on a letter of credit that contributed $0.15 to earnings for that year.

In 2007, Acadia’s merchant revenue was down and expenses were up slightly. While Evangeline results were up $0.03 year-over-year and that’s mainly due to lower depreciation and tax adjustments, as opposed to operations.

For the year, at the corporate level, results were $0.10 lower and $0.08 of that is again due to lower corporate owned life insurance policy proceeds, as compared to 2006.

In terms of earnings guidance, for this year we are targeting consolidated 2008 earnings in the range of $1.60 to $1.70 a share. This estimate first includes increased Cleco Power results of approximately $1.60 to $1.70 per share. That does include about $1.05 of AFUDC equity.

In comparison with 2007, there are two major factors that are driving Cleco Power’s 2008 earnings targets. First, AFUDC equity is expected to be about $0.50 higher. And then securitization will lower earnings about $0.20.

When we securitized our storm costs, we are going to be removing all of the Katrina, Rita storm effects our corporate statement, and that means, first of all, we will no longer be earning an equity return on the unamortized portion of our storm costs, and that takes EPS down compared to 2006 about $0.10.

Secondly, because we are securitizing gross of tax, we’ll be passing back to the customers a carrying cost on the tax benefits we’ll be receiving on our storm related costs, and that will reduce EPS about $0.10.

So again from 2007 to 2008, the securitization structure will reduce earnings about $0.20, but it holds us neutral compared to the pre-storm situation and it passes the benefits on the financing completely to the customers.

In terms of Midstream guidance, we are targeting a Midstream loss a $0.10 a share; now that includes the contribution of about $0.05 from Evangeline, which is lower this year than in previous year because we had a planned, major maintenance outage scheduled at the project.

We anticipate that Evangeline’s contribution will be offset by about $0.15 of a loss from Acadia and then other Midstream expenses. I want to remind you that Acadia’s earnings per share do include an imputed interest cost from Holding company of about $0.10 a share.

Of the $0.15 loss we are projecting for Acadia, $0.10 is imputed interest to Holding company. Then at the corporate level, we expect positive results of about $0.10 a share that’s primarily that imputed interest form Acadia.

Now I need to remind you that Cleco Power earnings are based on normal weather assumptions. They are based on approximately $265 million in capital expenditures on Rodemacher 3 constructions during 2008, and that number does include AFUDC and the continuation of our current rate plan.

We are assuming in our estimates that our counterparty and Evangeline project continues to perform under that tolling agreement and we’ve made assumptions about the Acadia plant operations and the market conditions for Acadia. Mike spoke a little bit to that earlier.

I want to remind you that although we are giving 2008 earnings guidance, because that’s expected of us, 2008 and 2009 are still stepping stones to 2010 when Rodemacher 3 is in operation and in rate base, and we expect to be earning a full return on our entire business. That continues to be the basis on which we think investors should be valuing Cleco.

Last before wrapping up I want to comment on the capital markets. It’s been a rather exciting time to be a CFO raising capital in the last few months, but I am pleased to report that we’ve been hindered very little by the storms in the capital market.

We’ve been working about two years to put the framework in place to issue securitization bonds related to storm costs as Mike told you earlier. We were ready to issue and would have liked to have gone to the market before the end of 2007, but basically the assets backed market packed up and went home early for a holiday near the end of the year.

We did go to market with that issue this week, and I am really pleased to report that just this morning, we priced $180 million of bonds with a seven year average life at a rate of 4.87%. And this is a big win for our customers to be able to achieve such an attractive rate in a very volatile marketplace.

We look for that deal to close on March 6. And this will give us approximately $130 million in cash proceeds plus a $50 million funded reserve that will support future storm restoration efforts.

The credit markets have challenged us on one other issue, and that’s our solid waste disposal bonds. We issued $60 million in tax exempt, insured option right securities in early November, and timing is everything.

As you all know very shortly after we issued, issues with the credit ratings of the monoline insurers, pretty much began to squeeze the liquidity out of the auction market, and there is very little liquidity in that market today. We are actively working to convert those securities to a fixed rate, and we look to accomplish that by the end of the quarter.

In terms of financing for the rest of the year, we do plan to issue additional Cleco Power debt to continue Rodemacher 3 construction and we’ll also need to refund the $100 million of bonds that will be maturing at Cleco Corp in May. So we are targeting a debt financing for the second quarter timeframe.

And with that, we will take questions you have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Robert Chewning - Davenport & Company.

Robert Chewning - Davenport & Company

If I look at the quarter, even taking out the I think $0.03 of reversal on interest expense, it looked to be a lot lower than your run rate prior to the quarter; and I was wondering what else might have been in there. And secondly, if you can give guidance for 2008 in terms of where interest should be gross and also net of AFUDC on debt.

Kathleen Nolen

You are asking a comparison for the quarter. AFUDC, which was a major item for the quarter-over-quarter on run rate, that’s about $0.15. The next largest item was the corporate owned life insurance proceeds; it’s about $0.09 on the 2006 quarter, one there on the 2007 quarter. And then we have some higher expenses at both Power and corporate. Is that what you are asking, Bob?

Robert Chewning - Davenport & Company

No. If I look at interest expenses on a quarterly basis, they were averaging roughly $14 million a quarter.

Kathleen Nolen

Okay. You are specifically looking at interest?

Robert Chewning - Davenport & Company

Yes.

Kathleen Nolen

That is the reversal of our interest accruals we had on an uncertain tax position.

Robert Chewning - Davenport & Company

Okay. But would that explain all of it? Even if I take that out, it would appear to have been a little bit low. And the more pertinent question is what should be the run rate for interest in 2008? And I realize that you have securitization interest expense that will be in there. You are also going to have additional debt financing. Where should that be coming out in 2008?

Kathleen Nolen

Your quarterly effect from your unwind of the tax position was really about $0.04. It was most of your interest movement for the quarter, Bob.

Robert Chewning - Davenport & Company

Okay.

Kathleen Nolen

If you look forward to 2008, you are going to have the interest on the securitization bonds that will be part of a special purpose entity, although it will consolidate from a GAAP standpoint. And we are looking at additional financing, and I’d say very roughly perhaps in the $200 million range by the end of the second quarter, and you can look to interest costs there.

Robert Chewning - Davenport & Company

Okay. And in terms of calculating allowance for borrowed funds, that should be roughly at the same run rate that it was in the fourth quarter?

Kathleen Nolen

AFUDC debt should accrue at the same rate.

Robert Chewning - Davenport & Company

Okay.

Kathleen Nolen

Your AFUDC debt is going to accrue at the same rate as your AFUDC equity based on your capital expenditures.

Robert Chewning - Davenport & Company

Okay.

Kathleen Nolen

Does that make sense?

Robert Chewning - Davenport & Company

Yes. Thank you very much.

Operator

Our next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Two questions, a little unrelated to each other. First question, on Evangeline. Can you talk a little bit about the outage that’s occurring this year, meaning when it’s occurring, what you are doing etcetera. And then what’s your normal expectation for earnings out of Evangeline when you don’t have a maintenance outage? That’s question one.

Question two: the $130 million of cash coming into Cleco Power with the securitization, what’s your plan for that?

Kathleen Nolen

Michael, let’s take Evangeline first. I can’t really give you specific on timing there for FERC and affiliate reasons, I apologize. But it’s the first major outage cycle we had for Evangeline, hence the significance of costs. And so the run rate absent this major cycle is closer to the $0.10 range.

Michael Lapides - Goldman Sachs

Closer to the $0.10 range; I thought historically you all had talked about that being a little bit higher of a number?

Kathleen Nolen

It does depend somewhat on the operating characteristics of the plan, right now. If you remember Bear Stearns has a PPA with Cleco Power and based on that capacity contract, we would expect the plant to run a fair amount.

The operating characteristics of the plant post 2009, when that PPA goes away, will depend upon what type of capacity contracts going forward. And the more the unit runs, the more we have the incremental maintenance costs, the less the unit runs, the less incremental maintenance we have and that does affect earnings a little bit as you recall.

Michael Lapides - Goldman Sachs

Okay. And the second question regarding plans for the $130 million of proceeds coming in the Cleco Power on the securitization?

Kathleen Nolen

We will pay down draws right now under our short term credit facility, and essentially that’s going to fund Rodemacher construction and working capital needs.

Michael Lapides - Goldman Sachs

Got it, okay thank you.

Operator

Our next question comes from Patrick McGlinchey - Sidoti.

Patrick McGlinchey - Sidoti

Good morning everyone, it was another good quarter. Just a quick question on Acadia, and a number of RFPs that you either have or plan on bidding into and the timetables that are set up there?

Darren Olagues

We have directly and indirectly bidding to four different RFPs, and as Mike said, we continue to talk to other bilateral parties about long term PPAs and tolling agreements. I think, in looking at the second quarter, summer period, to have a better feel for execution ability and so forth on those items.

Kathleen Nolen

Patrick, that was Darren Olagues, who is our Senior Vice President and manages the Midstream.

Darren Olagues

And unfortunately or maybe fortunately the control of those dates are the ones who have issued the RFP and while they put out a preliminary or a targeted announcement date, it doesn’t always work out that way. And so that’s why it’s hard for us to say what we should know the answer of ABCs of RFP by this date or XYZs by that one because we don’t have control of that.

Patrick McGlinchey - Sidoti

Completely understand, all right. Congratulations on a successful year.

Operator

Our next question comes from Maurice May - Power Insights.

Maurice May - Power Insights

First of all, I am a little confused on the Acadia interest payments to parent, because I thought those interest payments were fixed by the parent level debt that’s outstanding on behalf of Acadia, which is $100 million at 7%. Why would that have changed in 2007? Why would that not have changed after May 1, 2008?

Kathleen Nolen

At the time we completed construction of Acadia, Maury, we basically had invested about $250 million of equity in the project and that was the level of the debt initially set between Holding and Acadia, because we were going to contribute all the capital costs for that $250 million to the project.

And so we’ve been paying that internal loan down with cash dividends from the projects, since the project went commercial and in fact in 2007 with the settlement from the claim and the preferred distribution settlement, we used that dividend from Acadia − Acadia received those dollars − dividend to parent and that lowered the outstanding loan between Holding and Corp.

So any of the cash that Acadia has contributed to the corporation since commercial operation has lowered the level of that internal loan.

Maurice May - Power Insights

Okay. So you paid down project level debt.

Kathleen Nolen

Internal. Now remember, there is no external project level debt at Acadia. It’s all imputed internally

Maurice May - Power Insights

Okay.

Kathleen Nolen

And so what we are telling you is for 2008, it will be about $0.10 a share.

Maurice May - Power Insights

Okay. But you haven’t paid off any of the $100 million due May 1, 2008 yet?

Kathleen Nolen

No. We will pay that off at maturity.

Maurice May - Power Insights

Okay. Second of all, what was the weather impact in the fourth quarter?

Kathleen Nolen

Fourth quarter really was pretty flat at the end of the day. There wasn’t much of a weather impact.

Maurice May - Power Insights

Okay. Flat to year-over-year but versus normal, what was it, also flat?

Kathleen Nolen

In terms of the quarter we had year-over-year higher cooling and lower heating which would tell you it’s pretty warm and same thing compared to normal. You had a fairly mild fourth quarter.

Maurice May - Power Insights

Next question on your consolidated numbers that you put out. The expenses, other operations and maintenance were up, together these were two items, but up $8.4 million. I was just wondering, why? I think you made some reference to some outage, but could you give us little more detail there?

Kathleen Nolen

Okay clarify, we are talking quarter?

Maurice May - Power Insights

The quarter, up $8.4 million, these two items, other operations and maintenance, those two expense items were up $8.4 million in the fourth quarter and I was just wondering why?

Kathleen Nolen

Okay. We had $0.01 each in distribution, generation, and transmission expenses, about $0.03 of that. We had an increase in damage claims and other miscellaneous items, that went up about $0.03 and that’s really because of positive expense trend in fourth quarter 2006; we settled a significant damage claim more positively than we had accrued. So again, it wasn’t necessarily a trending upward in expense this year, it just reflected a very positive quarter in 2006.

Maurice May - Power Insights

Okay.

Kathleen Nolen

And we had capacity payments of about $0.01, so it was fairly spread there across various categories.

Maurice May - Power Insights

Okay. On the current RFP pending for 600 megawatts, is there anything that you can give us on that? You have already gotten the initial bids. Can you tell us say, how many bids or where they are coming from or can you confirm that Cleco Midstream may have put in one of those bids? Can you give us anything?

Kathleen Nolen

We really can’t give you anything on how many bids. In fact, the team that is working on the analysis in conjunction with the Commission monitor is the only group that has that information. So we can’t tell you at all what the bids look like. I think we have confirmed that Acadia had planned to bid into the RFP and we can confirm that they bid multiple products in.

Maurice May - Power Insights

Okay and how about the Teche expansion. Can you confirm that that’s been bid in?

Kathleen Nolen

We did bid in self-filled projects and those are detailed on our website. So those are public, Maury.

Maurice May - Power Insights

Okay.

Michael Madison

It was a combination of conversion of Teche as well as some peaking units as well.

Maurice May - Power Insights

Okay and then when the short list is determined in, I think you said, April.

Michael Madison

That’s right.

Maurice May - Power Insights

Is there anything that you plan on telling us about the short list when it’s determined?

Kathleen Nolen

Not a lot.

Michael Madison

We are very limited, because again the process is controlled by an independent monitor, who basically says okay we’ve narrowed it down to whatever number that is and really that’s when the negotiations begin and that’s about what we will be able to say is that the list has gone from A to B and here is the next steps that we will go through. And really we don’t control that. It’s really controlled by the independent monitor.

Maurice May - Power Insights

Okay good. Thank you, folks.

Operator

Our next question comes from Timothy Yee - KeyBanc.

Timothy Yee - KeyBanc

Morning. Mike, earlier in your prepared remarks, you mentioned that you’ve tried to accelerate Rodemacher construction with Shaw, so that Rodemacher could come online early. Is that still a possibility?

Michael Madison

I think it is. We have done lots of things that I think are good to do. In fact I was just out at the site yesterday and there was a couple of issues that Shaw had and it was working with our team out there that we have come up with some solutions that actually should accelerate some of the timeframes.

But with that said, we still got half of the construction cycle left to do and that means we have tremendous amount of opportunities to move that schedule, notwithstanding startup itself. But we are doing everything we can to help them. And I have to give Shaw credit, they’ve got a really good construction site. But we have been working with them to try to get it done as early as possible.

But again as I said in the beginning, the contract we signed with Shaw has the contractual obligation by the fourth quarter. And they want to. If you think about it, it’s a fixed price contract. So the faster they get the unit online, the better off they are. So they have an incentive to do it, and of course, we do as well.

Timothy Yee - KeyBanc

So, do you think maybe a few months benefit? We are looking what, late summer or early fall of 2009?

Michael Madison

Hopefully, it could be anywhere from two to three months prior to the end of the fourth quarter. It’s very hard for me to really say I’m targeting X date in advance. I just really can’t do it. All I can tell you is we are doing everything we can to work with Shaw to get it done.

As I said, they have a built-in incentive to do it, because they want to reduce their cash flow as soon as possible on this project. So, they have a target schedule that is faster than the contract schedule. And again we are doing everything we can to help them get that accelerated schedule.

Timothy Yee - KeyBanc

And could you review your exposure to cost overruns?

Michael Madison

We don’t really have any cost overrun with one exception, and that is when we signed the EPC contracts, we did talk with Shaw about a contingency with respect to labor. If you remember, at the time we signed the EPC contract, it was in the first quarter of 2006, which was following the fourth quarter of 2005, remember what happened then and that was Katrina, Rita.

Those two storms pushed a huge demand on labor, and when that happened, the ability to get labor and the cost to get labor went up significantly, and because of that, we talked with Shaw about a contingency fund associated with labor. But that contingency would only be paid if Shaw can show that labor is not available or is not available based on the price they have in their fixed bid.

Timothy Yee - KeyBanc

Okay. Thank you. And what was the earned ROE at the utility for 2007, excluding AFUDC and Rodemacher impact?

Kathleen Nolen

On a regulatory basis, for the 12 months ended September 30, if you recall, we are on a different regulatory year than calendar year. The earnings were 9.65%, the regulated return on equity.

Timothy Yee - KeyBanc

Okay. And lastly, given your 2008 guidance then, what’s the implied ROE of the utility this year, excluding AFUDC and Rodemacher?

Kathleen Nolen

It’s at a very similar level.

Timothy Yee - KeyBanc

All right, thank you.

Operator

Our next question comes from Gordon Howald - Calyon Securities.

Gordon Howald - Calyon Securities

Good morning. Can you maybe comment on your borrowing costs given the interest rate environment? Are you seeing any cost savings and how does this affect your AFUDC recovery or does it affect? Thank you.

Kathleen Nolen

The only thing we’ve priced in this environment would be the securitization bonds, which we did price very positively. In fact, the 4.87% is where we’ve been targeting for the two years we’ve been working on this.

The pressure we’ve seen on borrowing costs has been on $60 million of auction rate securities. We’ve paid as high as 12% for seven-day period on those securities. Again, there is just no liquidity there and banks aren’t able to hold the paper. That’s a short-term issue with us, and again in the next month, we want to have those fixed and interest costs at a more reasonable level.

We’ve seen corporate spreads widen, but the underlying rates decline, and it looks like we still have access to fairly reasonable rates. But I don’t see a tremendous difference coming in embedded debt costs, just just higher level of debt.

Gordon Howald - Calyon Securities

Okay. All right. Thank you.

Operator

Our next question comes from Neil Stein - Levin Capital.

Neil Stein - Levin Capital

Wanted to make sure I understand what’s going on with debt at the Holding company. So first, this maturity in May, you are not going to be re-financing it, you are going to be just retiring that security?

Kathleen Nolen

We’ll be financing both that maturity as well as construction costs in one financing. That’s our plan, Neil. And that will be at the Cleco Power level.

Neil Stein - Levin Capital

So if I understand correctly, you’ll be issuing debt to the utility that in part will help repay debt at the Holding company?

Kathleen Nolen

I am sorry, I misspoke. I see where you are going. We do have a cash balance at the Holding company to repay that.

Neil Stein - Levin Capital

I see, okay.

Kathleen Nolen

So what I am thinking is that I will be unable to use that cash balance currently at Holding for Rodemacher construction. So, I’ll have to finance an equal amount plus additional amount of debt to finance Rodemacher. So thank you for that clarification.

Neil Stein - Levin Capital

Okay. That’s important.

Kathleen Nolen

That was a messy way to put it, but you are right. We will use the cash balance to refund those core funds.

Neil Stein - Levin Capital

Okay. And then how much additional remaining debt do you have at the Holding company?

Kathleen Nolen

That’s it. Other than our short-term credit facility, which we may use as an equity source for Rodemacher until the project’s complete.

Neil Stein - Levin Capital

Many of your peers in your market cap classification with similar business mixes do carry some debt at the holding company, which I think is important for equity holders. What’s your plan in the future with respect to issuing debt from the holding company, either from the utility or also just, you could carry debt at the holding company and give the money back to shareholders?

Kathleen Nolen

That’s right. We need additional capital on a consolidated basis in 2009. And we will look at the mix between Power and Holding at that point. Right now, we need to issue the debt at the Cleco Power level to keep capitalization ratios where they need to be. But we will explore that in 2009.

Some of it depends, Neil, on what we are doing in the Midstream business and what the capital needs are there. So, I hear you, and we’ll be looking at capital structure. What I want to do is refine it as we get to the end of the Rodemacher construction, and have a capital structure that’s the most efficient for our business plans moving forward.

Neil Stein - Levin Capital

Then just wanted to ask you on the Midstream business, and I might have missed it, if it came up earlier. Just, what are your plans? Are you more likely to get bigger or get smaller? Don’t say both.

Kathleen Nolen

I think we want to get bigger.

Michael Madison

We would love to get bigger. But I think right now, it’s going to be dependent on how we come out in some of these RFPs that we have right now, plus some of the discussions we have in the bilateral area as well. As I said earlier, I think the market for gas fired, especially combined cycle gas-fired generation in the region is getting better.

Quite frankly right now, it doesn’t really matter if a Democrat or the current Republican gets in the White House, there is going to be environmental issues, which is only going to make combined cycle gas-fired generation look better.

Neil Stein - Levin Capital

So the type of expansion you are contemplating would be more participating in these RFPs for the utility and building gas plants or on the risk spectrum, would you go into merchant plants, or what type of opportunities are you thinking about?

Michael Madison

I think certainly for the Power company, when we get done with Rodemacher 3, then we are going to have a pretty good generation mix of both solid fuel and natural gas. The natural gas blend of that as of today is really old gas, so the opportunities on Power would be new gas, which could factor into our Cleco Power opportunities going forward.

Then on the Midstream side, if you have utilities or load serving entities in the region that are more heavily dependent on solid fuel, then those assets are going to be very attractive to them.

So the first thing we would want to do is to protect or grow the opportunities with the existing assets and if that in fact turns out to be true, then naturally the next strategy would be to look at ‘do we want to grow that?’ That’s what I am waiting to see, which I think a whole lot of people are waiting to see.

Neil Stein - Levin Capital

And the idea with Acadia, over time, would you operate that as a merchant plant or you would want to get it contracted or if it came down to where it just would be operated as a merchant facility, would you contemplate selling it. I don’t understand the strategy?

Michael Madison

All of the above; our strategy as we said before is to maximize the value of these assets as best as we could. In the past it has been over built here, and then we have had the constraints of Calpine’s bankruptcy, which in my opinion lost us some opportunities to get some at least medium term PPAs.

So all of that has gone away, so now we have the opportunity to do that. As Darren, we have bid into three or four RFPs to-date, and they are a combination. There are short-term, medium-term, and long-term bids into. Say for example we get a long-term –PPA; that takes care of those assets for a long-term investment.

Now we got to evaluate, we believe that trend is going to continue, and therefore should we look at additional investments in that market. I don’t know the answer to that today. I really truly believe the number one input on that decision is going come as to who gets the White House in 2009.

Neil Stein - Levin Capital

Okay. Thank you very much.

Operator

Our next question comes from Becca Followill - Tudor Pickering.

Becca Followill - Tudor Pickering

I have one last question, after all these questions, and you may have already answered it; so, I apologize if you have. Kathleen, you talked about at the beginning a reversal of interest I think associated with taxes. How big was that with that fourth quarter?

Kathleen Nolen

That was in fourth quarter, and it was about $0.04.

Becca Followill - Tudor Pickering

Okay.

Kathleen Nolen

We have been having discussions with the IRS as has most of the utility industry, on tax position concerning mix service clause. And the IRS published settlement guidelines in middle of 2007. And so we were successful in settling that in January. But by the end of December, we had a pretty good idea of where the settlement discussions were leading us. And so we reversed the accrual we had for interest on that position.

Becca Followill - Tudor Pickering

So it’s about $4 million?

Kathleen Nolen

That’s correct.

Becca Followill - Tudor Pickering

Okay, thank you.

Operator

We have a question from Paul Ridzon - KeyBanc.

Paul Ridzon – KeyBanc

And just could you give us a walk on how you go from $0.22 loss in Midstream to $0.10 loss, what are the drivers there?

Kathleen Nolen

On an operational basis, we are looking for Acadia to perform a little bit better. We are looking for stronger revenues there. In fact, we are looking for about a $0.10 improvement there in general. And so Darren here has made a commitment to target some at least short-term capacity contracts in aggressive energy sales. And so the increase, Paul, is in our expectations are our own goals we have set for marketing Acadia.

Darren Olagues

Just to add to that on what Mike said, coming off of the Calpine bankruptcy and taking on the obligation to market having a new partner with our own new set of expectations on pricing and frankly (ace?) marketing strategy, which didn’t really exist for a long period of time with Calpine, given their condition.

In addition to these short, mid, long-term RFPs that Mike mentioned that we are working on, it’s a little bit of just getting a more defined and dynamic program to sell the output of Acadia beyond what were living with I think at the end of the Calpine days. And so Kathleen is right that our expectations are slightly higher, but we think it’s inline with where the market is.

All that being said and Mike hit on this point that coming into the engine into fourth quarter with our new partner in defining our view on pricing and the like, it’s tough to walk into 2008 at that point with so many megawatts merchant in a market that isn’t terribly liquid. And so, we are walking into I think a tough 2008, but we think we can improve on the 2007 results.

Paul Ridzon – KeyBanc

Thank you.

Operator

We have a follow up question from Neil Stein - Levin Capital.

Neil Stein - Levin Capital

I had a follow-up just related to my questions on Midstream. Could you lay out any goals like for example when you are managing the risk of the business and contemplating growing Midstream, what percentage of the earnings would you want Midstream to comprise no larger than; is there a cap?

I just want to understand how you are thinking about it, and when we look at investing what are we getting and we are getting today a nice growing utility with a couple of small plants, but might we also beginning a nice growing utility with large growing power plant development? I don’t quite understand what you are envisioning?

Kathleen Nolen

I think that’s a good question. I think you saw in the development of Midstream in 2000 that we build plants, but we fully contracted them. We are looking for investments that would provide returns and risks very similar to what we have in the utility subsidiary.

The industry has partially moved toward deregulation, it’s at various stages throughout the country and that’s not going back. And so we are going to have a wholesale market and the country is going to be using natural gas in that wholesale market and to the extent that we can invest in opportunities, there is going to need to be some contracts if not the majority of that capacity contracted.

We are not going to be taking a lot of commodity risk, if any in the business. It will be very similar to the way we approached the business now 8, 10 years ago. And Mike you want to add to that.

Michael Madison

I think you are right on target. Again if you break down Midstream in the two affiliates as we got left and look at Evangeline, Evangeline is performing exactly how we designed it to perform. We got a 20 year toll on it; the toll it continues to be paid even though Williams have sold that to Bear but they are still paying it.

Our challenge has always been to manage O&M and I think we have done that very well and we have produced during the first seven years, we have produced anywhere between $0.10 and $0.15 in earnings per share and that’s exactly what we designed it to do. What we designed Acadia to do exactly the same thing but it didn’t because of our tolling partner went bankrupt.

If I can do that again and get another 20, 30 year PPA out of Acadia and get the same type of results on it that would be great. If I can’t, then one of the things I would assume everybody would expect us to do, is first of all stop the bleeding on the plant and then see if we can do something either with the JV or sell the asset.

But remember we also have a 50% owner and it’s not necessarily Cleco’s decision by itself and that is the exercise we are going through with respect to Acadia.

Neil Stein - Levin Capital

I understand with Acadia and that makes a ton of sense. I am just trying to understand to the extent you are going to pursue new projects, how many new projects? And where is the limit and what’s the maximum you could do and then how do you arrive at that number?

Michael Madison

If I have implied that some time this year we are going to enter in to a new construction of a new project then I misspoke or I didn’t mean to imply that. We are not looking at this point in time, to do any more investments of standalone in any way, where Cleco would make anymore investments in it, because I believe that the key decisions on those investments rest with what’s going on with Washington.

And to me anybody that’s looking at an investment in this region, if they are doing it now, then their bet in their crystal ball as they know exactly what the environmental legislation is going to come out in 2009. I don’t have that clear of a crystal ball.

Neil Stein - Levin Capital

So to be clear, you are not investing in any new projects beyond what you have already got?

Michael Madison

Not right now, and again the only way we would do that is if a JV came along and there was a project that just made tremendous sense. I haven’t seen that yet and then the other one would be, I really believe for this region, what you are going to see is, if we get say a Leiberman-Warner Bill that’s currently out there now; remember it was originally McCain-Leiberman Bill.

So even if McCain gets the White House, we are going to have something on renewables and carbon, and that is only going to improve the value of new combined cycle gas plants, regardless of where they are located. And that may change the picture completely.

Neil Stein - Levin Capital

But then it comes back to you are a relatively small company and is this the right type of thing for you to be doing, given the size of your balance sheet…

Kathleen Nolen

But Neil, that gets back to my comment. It’s the same strategy we have always had. We are going to manage risk. You are right; we have to pay attention to our balance sheet. We are not going to expose ourselves to commodity risk. But we can effectively build and operate power plants and if we have that opportunity outside the base utility, there is no reason we shouldn’t pursue that.

Mike said, there is nothing right now on the drawing board, but we are envisioning a paradigm shift in the industry based on environmental consideration and if that’s the case, that may be the best business opportunity for this corporation. But you will continue to see the same risk profile.

Neil Stein - Levin Capital

Okay. Thank you.

Operator

We have a follow-up question from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Real quickly on the capital structure with the existing debt tranches. I want to make sure understood, because it’s a little bit confusing. The $100 million of Cleco Corp. notes that are coming due; are you going to redeem them or refinance these notes?

Kathleen Nolen

Those will be redeemed.

Michael Lapides - Goldman Sachs

Okay. So, you are going to use the cash on hand to redeem those notes and then have no debt at (inaudible)?

Kathleen Nolen

That’s right. For this year we will be raising capital only at Cleco Power.

Michael Lapides - Goldman Sachs

Okay thank you very much.

Operator

At this time we have no further questions.

Ryan Gunter

I would like to thank everyone for your interest today. We appreciate your calls and questions. If you have any additional questions, please feel free contact us at 1-800-235-2652. Thanks once again and have nice day.

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Source: Cleco Corporation Q4 2007 Earnings Call Transcript
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