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Cleco Corporation (NYSE: CNL ) Q2 2015 Earnings Conference Call July 28, 2015 9:30 AM ET Executives Sybil Montegut – Senior Investor Relations Analyst Bruce Williamson – Chairman, President and Chief Executive Officer Tom Miller – Senior Vice President and Chief Financial Officer Darren Olagues – President of Cleco Power Analysts Paul Ridzon – Keybanc Brian Russo – Ladenburg Thalmann Kent Escalera – RBC Capital Markets Operator Welcome to the Cleco Corporation Second Quarter 2015 Earnings Call. My name is Sophia, 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 will now turn the call over to, Sybil Montegut, Senior Investor Relations Analyst. Sybil, you may begin. Sybil Montegut Good morning, and welcome to Cleco Corporation’s 2015 second quarter earnings call. You can access this call and slide presentation live via the Internet from Cleco’s website at www.cleco.cominvestors. Telephone and Internet replays can be accessed through our website. 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 38458259. With me on the call today is Bruce Williamson, Chairman, President and Chief Executive Officer of Cleco Corporation; and Tom Miller, Senior Vice President, Chief Financial Officer and Treasurer, 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, or SEC, including our 2014 Annual Report on Form 10-K, our 2015 Quarterly Report on Form 10-Q, current reports on Form 8-K and other reports filed with the SEC. In addition, please note that the date of this conference call is July 28, 2015, and any forward-looking statements that we make today are based on assumptions as of this date. With that, I will turn the call over to Bruce. Bruce Williamson Thanks, Sybil. 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 with a quick recap of second quarter earnings, followed by an update on the merger transaction. Tom will then provide an overview of second quarter and year-to-date financial results and then we’ll move to Q&A. Please turn with me to Slide 4. We continue to be impacted in 2015 with lower rates that came about as a result of the formula rate plan extension that began July 1 of last year and the loss of a wholesale customer late last year. That said, we had slightly warmer weather and fewer planned outages this quarter. Tom will provide more detail on second quarter results and our year-to-date earnings later in the call. Please turn to Slide 5 for the transaction update. As many of you are aware, last week we released an update regarding our strategic transaction. Since receiving Federal Energy Regulatory Commission or FERC approval, we are now within one approval of finalizing the merger led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation, in order to deliver exceptional value to our public shareholders. In addition to FERC, we’ve received approval from the committee on foreign investment in the United States, the Federal Communications Commission has also granted consent to the merger. We filed applications with both of these agencies during the second quarter and I told you on our call last quarter that we filed for approval into the Hart-Scott-Rodino Act and I am happy to report that the waiting period has expired. And as I stated before on the previous calls, we received outstanding shareholder support for the transaction at a Special Shareholder Meeting in February. This now only leaves the Louisiana Public Service Commission or LPSC as our final approval to obtain. Recently, we’ve been working with the LPSC Staff’s counsel and consultants and interveners by answering their remaining beta request, as they may submit their testimony on the transaction. As many of you are aware the commission’s staff requested two extensions to the front-end of the full procedural schedule in order to allow time and work needed to review the final beta request and complete the analysis and prepare their testimony. However, the extension did not impact the end date of the full litigated schedule. We expect the LPSC staff and potentially any interveners to file their testimony later this week with the documents typically becoming available on the LPSC’s website a few days later. We will also post links for the testimony on our website. If you have any questions or need additional information, please contact our Investor Relations department. We have been and will continue to work closely with the staff, their counsel and their consultants and any interveners to resolve remaining items in an expeditious manner. So we expect the merger transaction to close later this year. And with that, I will turn the call over to Tom to discuss financial results in more detail. Tom Miller Thanks, Bruce. Good morning, everyone. Please turn to Slide 6 for a review of our second quarter operational results. GAAP earnings for the quarter were $0.50 per share, or $0.10 lower than the second quarter last year. Second quarter operational earnings were $0.53 per share, or $0.04 lower than the second quarter of 2014. 2015 operational earnings for the quarter exclude $0.02 per share of tax levelization and a penny a share of merger costs. Power’s non-fuel revenue was flat from this period last year. Lower net sales to wholesale customers including the exploration of a wholesale contract decreased earnings by $0.16 per share. The July 2014 FRP extension decreased revenue by $0.07 per share for the quarter. And anticipated refunds associated with FERC transmission, return on equity, and energy efficiency programs decreased earnings by $0.03 per share. These decreases were offset by $0.22 per share earnings increase related to the absence of the one-time customer refund in the second quarter last year that was part of the FRP extension. Warmer weather and higher customer usage in 2015 added $0.04 per share. Our other revenue increased earnings by $0.01 per share primarily related to higher transmission revenue. In terms of expenses, lower 2015 cost increased earnings by $0.02 per share, primarily due to $0.05 per share related to fewer planned outages at our generation facilities compared to second quarter last year and $0.01 per share related to lower depreciation and amortization expense and $0.01 per share of lower miscellaneous expense. These increases to earnings were partially offset by $0.03 per share of higher pension expense due to lower discount rates and the adoption of new mortality tables and $0.02 per share related to higher non-recoverable fuel expenses related to MISO transmission expenses as a result of the new wholesale customer and higher administrative fees. Lower interest expense increased earnings by $0.01 per share primarily related to the absence of a customer surcredit. AFUDC decreased earnings by $0.03, primarily due to the completion of MATS capital spend. And, finally, higher income taxes decreased earnings by $0.05 per share, $0.04 of those were related to the absence of a 2014 favorable settlement with taxing authorities and $0.01 per share to record tax expense at the projected annual effective tax rate. Now, please turn to Slide 7 for a review of year-to-date results. GAAP earnings were $0.94 for the first six months of 2015, a decrease of $0.09 per share compared to the same period last year. Operational earnings were $0.98 per diluted share for the first six months, a decrease of $0.02 per share compared to the first six months last year. Operational earnings exclude non-operational items associated with $0.04 of merger cost. Looking from left to right on the operational earnings reconciliation chart, power’s non-fuel base revenue was down $0.03 per share from this time last year. Lower net sales to wholesale customers including the expiration of a wholesale contract decreased earnings by $0.14 per share. The July 2014 FRP extension decreased revenues by $0.10 per share and anticipated refunds to customers associated with FERC transmission ROE and energy efficiency programs decreased earnings by $0.03 per share. Offsetting these decreases were an increase of $0.22 per share related to the absence of the one-time customer refunds in 2014 as part of the FRP extension, slightly more favorable weather contributed to earnings of $0.01 per share and lower site-specific refunds increased earnings by $0.01. Other revenue increased earnings by $0.04 per share primarily related to higher transmission revenue. Lower expenses increased earnings by $0.09 per share, primarily due to $0.20 per share related to fewer planned outages at our generation facilities for the first half of the year, $0.05 per share related to lower depreciation and amortization expense. These increases to earnings were partially offset by $0.06 of higher pension expense due to discount rates and the adoption of the new mortality tables. $0.05 per share related to higher non-recoverable fuel expense related to MISO transmission expenses. $0.04 per share from the absence of the recovery of capacity expense related to cost of tooling agreement and $0.01 per share of higher miscellaneous expenses. Lower interest expense increased earnings by $0.01 per share due to the absence of a customer surcredit, AFUDC decreased earnings by $0.04 per share primarily due to completion of MATS capital spend. And, finally, higher income taxes decreased earnings by $0.09 per share, $0.04 of these were related to the absence of a 2014 favorable tax settled – tax settlement with taxing authorities, $0.03 per share to record tax expense at the projected annual effective tax rate, and $0.02 per share related to a settlement with taxing authorities this year. Operator, at this time, we will open the call for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] And your first question comes from Paul Ridzon from Keybanc. Paul Ridzon Good morning. How are you? Bruce Williamson Good. Paul Ridzon I got a quick question, industrial sales were down, I think, 20% in the first quarter and then down again in this quarter. Is that one customer is that – kind of what’s going on there? Bruce Williamson Tom? Tom Miller Paul, that remains the same customer we talked about last year, the last quarter, pardon me. Paul Ridzon Good, Tom. Is this is – or are they coming back? Tom Miller We think they are going to be coming back, but it’s not a permanent loss. Darren Olagues Paul, it’s Darren, this is not a permanent loss as Tom said, we expect to see those industrial sales pick back up from that customer. Paul Ridzon And can you talk what sector they are? Darren Olagues Sorry, Paul, you broke up. Paul Ridzon Can you talk what sector they are at? Darren Olagues Paper products. Paul Ridzon Paper? And is there – call it that in the procedural schedule settlement timeline? Darren Olagues No, there is – if I understand your question, is there a procedural schedule for – with the settlement timeline to it? Paul Ridzon Yes. Darren Olagues There is not public – the only public schedule is the fully litigated schedule that I think is on the commission’s left side. Paul Ridzon And then lastly, are these higher pension costs captured in rates or will they be captured in July, when you – due to the annual rate proceeding? Darren Olagues Paul, they are not captured, we – at each rate case, costs are projected at the time to the test year and to that process, but there is no tracker or rider that trues that up, that will be at the next rate case reset in which we would recalibrate rates to reflect that. Paul Ridzon So it’s not part of the FRP? Darren Olagues It’s not part of the FRP. Paul Ridzon And then, what period does this FERC refund go back, does that all go back to 2012? Tom Miller Yes, it goes back to when we started in December 2013. Paul Ridzon Okay, thank you very much. Tom Miller Thank you very much. Operator And the next question comes from Brian Russo from Ladenburg Thalmann. Brian Russo Hi, good morning. Just to clarify, staff and intervener testimony is due tomorrow, July, 29, is that correct? Tom Miller Correct. Brian Russo Okay, and it will be posted shortly thereafter within a day or two or could we expect it tomorrow? Bruce Williamson I guess, in theory it’s expected tomorrow, but we try to always head this for when things get put on the calendars and then get ultimately uploaded to the website. So I would say, maybe by Friday. Darren? Brian Russo Okay. Darren Olagues Yes, that’s right. No later than Friday. Brian Russo Okay and then, when is hearing is scheduled to start? Bruce Williamson I mean, there is no – other than the schedule that’s been laid out, there is no specific hearing dates that have been set. I think tomorrow, Friday would be, we’ll set down the dues of staff as well as any interveners that file testimony. That will then drive the process, the process will be fluid from there. But there is no specific hearing date that has been scheduled other than what’s on the public schedule, again the fully litigated schedule that’s out there. Brian Russo Okay. Got it. That’s all I had. Thank you very much. Bruce Williamson Thanks, Brian. Operator And the following question comes from Kent Escalera from RBC. Kent Escalera Hey, good morning. I was just wondering if – sort of a follow-up on these other question, whether there have been any substantive issue that have come in your discussions so far with the PSC and whether you could speak to that dialogue at all? Bruce Williamson I’ll let Darren to have a word. Darren Olagues I mean, I wouldn’t want to go into the details of those discussions. I would tell you that, the commission staff and I guess, to a large degree any interveners are concerned with the same things that we have been concerned with is making sure that the employees, communities, that the health of the company, the health of the utility is all protected and strengthened through the regulatory commitment that we put out there. And we think we put forth a solid list of commitment. Those same concerns that we were trying to address are the same concerns I think what we are hearing from staff. So, we’ll get a view as to what of their assessment of that offering and that proposal we made tomorrow. But I’d rather not go in any details of the specific points. Kent Escalera Okay, thanks. Darren Olagues Okay. Operator And we have no further questions at this time. Bruce Williamson Okay, well, thank you for your questions this morning. I want to close the call today by thanking all of 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. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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