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Cleco’s (CNL) CEO Bruce Williamson on Q3 2015 Results – Earnings Call Transcript

Cleco Corporation (NYSE: CNL ) Q3 2015 Earnings Conference Call October 29, 2015 8:30 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-Cleco Power Analysts Paul Ridzon – Keybanc Tom Shuwet – RBC Operator Welcome to the Cleco Corporation 2015 Third-Quarter Earnings Call. My name is Sylvia, 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 third quarter earnings call. You can access this call and slide presentation live via the Internet from Cleco’s website at www 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 38458260. 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 this 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 reports, 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 October 29, 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 the presentation, for those of you following along via the webcast. This morning, we’ll begin the call with a summary of third quarter earnings, followed by an update on the merger transaction. Tom will then provide an overview of third quarter and year-to-date financial results, and we’ll move to Q&A. Please turn with me to slide 4. Even though we had somewhat warmer summer weather for the quarter, our year-over-year results were negatively affected by the loss of a wholesale customer late last year and the third-quarter 2014 favorable multiyear tax settlement. With that said, we are maintaining the 2015consolidated operational earnings guidance range of $2.28 to $2.38 per diluted share. As a reminder, this earnings guidance is based on normal weather over the remainder of 2015, reflects a full year of operations under the formula rate plan extension, assumes an effective tax rate of approximately 36%, and excludes adjustments related to life insurance policies and merger-transaction costs. Regarding the merger, we continue to work with our state’s regulatory process to gain approval for our strategic transaction, led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation. Earlier this month, we distributed a press release that announced the filing of our response addressing the Louisiana Public Service Commission, or LPSC, staff advisors testimony. LPSC staff advisors filed testimony in July in response to the original commitments that the new owners made late last year, when we announced the transaction. This filing was our first opportunity to understand the thought process of the staff advisors regarding the commitments. In our recently filed testimony, we believe that together with the new owner group, we’ve addressed all 77 commitments stated in the staff advisors testimony. Specifically, the enhanced commitments now offer substantial rate credits to retail customers; ensure continued service and power-quality delivery; provide financial stability; and significantly extend protections for employees, retirees, and communities. The transaction is a good deal that is now even stronger for these stakeholder groups because of the regulatory process. The next step in the regulatory process is a hearing with the Administrative Law Judge, or ALJ, that is scheduled to begin on November 9. As previously stated, we expect the transaction to close in the first quarter of 2016. And with that, I will turn call over to Tom to discuss third quarter and year-to-date financial results Tom Miller Thank you, Bruce, and good morning, everyone. Please turn to slide 5 for a review of our third-quarter financial results. GAAP earnings for the quarter were $0.90 per diluted share, $0.27 lower than the third quarter of last year. Third quarter operational earnings were $0.92 per share or $0.25 lower than the third quarter of 2014, 2015 operational guidance in our operational earnings for the quarter exclude $0.02 per share of losses on life insurance policy, $0.02 per share of merger transaction costs, and $0.02 per share of tax-levelization benefit. Looking from left to right on the chart, Power’s non-fuel revenue was up $0.05 per share from this period last year. Higher revenues from warmer summer weather increased earnings by $0.09 per share. The annual adjustment to the formula rate plan increased earnings by $0.06 per share and lower sights specific refunds increased earnings by $0.01. These increases were partially offset by lower sales to wholesale customer, including the expiration of a wholesale contract – decreased earnings by $0.11 per share. Other revenue increased earnings by $0.01 per share, primarily related to higher transmission and distribution revenue. Other expenses decreased earnings by $0.10 per share, primarily due to $0.06 per share of higher taxes other than income, related to the absence of the 2014 favorable tax settlements; $0.03 per share of higher pension expense due to lower discount rates and the adoption of a new mortality table; and $0.01, related to higher depreciation and amortization expense. Higher interest expense decreased earnings by $0.06 per share related to the absence of favorable tax settlements. And finally, higher income taxes decreased earnings by $0.15 per share, primarily due to $0.10 per share related to the absence of our 2014 favorable tax settlements, $0.02 per share related to lower tax credits, $0.02 per share of tax returns filed, and $0.01 related to other miscellaneous items. Now please turn to slide 6 for a review of the year-to-date results. GAAP earnings were $1.84 per diluted share for the first 9 months of 2015, a decrease of $0.36 per share compared to the same period last year. Operational earnings were $1.92 per diluted share for the first 9 months of 2015, a decrease of $0.26 per share. Year-to-date operational earnings exclude $0.06 of merger-transaction costs, $0.02 of losses of life insurance policies. Looking from left to right on the earnings waterfall chart, Cleco Power’s non-fuel base revenue was up $0.01 from this time last year. This increase was the result of the absence of the 2014 formula rate plan customer refund that increased earnings by $0.22 per share. Higher revenues from warmer summer weather and higher usage increased earnings by $0.10 per share and lower specific refunds increased earnings by $0.02 per share. These increases were partially offset by lower net sales to wholesale customers, including the expiration of a wholesale contract, which decreased earnings by $0.25 per share. The FRP annual adjustment decreased revenue by $0.04 per share and provisions for customer credits related to the energy efficiency program and the FERC review of transmission return on equity decreased earnings by $0.04 per share. Other revenue increased earnings by $0.05 per share primarily related to higher transmission and distribution revenue. Higher expenses decreased earnings by $0.01 per share, primarily due to $0.09 per share of higher pension expenses due to lower discount rates and the adoption of a new mortality table, $0.06 per share of higher taxes other than income, related to the absence of the 2014 favorable tax settlements, $0.05 per share related to higher non-recoverable fuel expense, related to MISO transmission expenses. As a result, of a new wholesale customer and higher administrative fees, $0.04 per share from the absence of the recovery of capacity expense, related to the Coughlin tolling agreement and $0.01 per share of higher miscellaneous expenses. These decreases were partially offset by $0.20 per share related to fewer planned outages at our generation facilities and $0.04 per share related to lower depreciation and amortization. Higher interest expenses decreased earnings by $0.04 per share, primarily due to $0.07 per share related to the absence of 2014 favorable tax settlements. This decrease was partially offset by $0.02 per share related to the absence of a customer surcredit and $0.01 per share related to retirement of long-term debt. AFUDC decreased earnings by $0.04, primarily due to completion of our MATS projects. And finally, higher income tax decreased earnings by $0.23 per share, primarily due to $0.16 per share, related to the absence of 2014 favorable tax settlements, $0.02 per share related to lower tax credits, $0.02 per share of tax returns filed, $0.02 per share of lower permanent items; and $0.01 per share, related to miscellaneous tax items. Operator, at this time, we’ll open the call for questions. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from Paul Ridzon from Keybanc. Paul Ridzon Good mornings guys, how are you? Bruce Williamson Good morning, Paul. Paul Ridzon Just a quick question, I don’t see much in the press, but any commentary on the tone locally regarding the transaction? Anybody making any noise? Bruce Williamson Darren is on the call on a speaker line. I’ll let Darren comment, if he’d like to. Paul Ridzon Yes. Darren Olagues Paul, we have – ever since we announced – provided our rebuttal testimony, where we essentially agreed to the recommendations of the roadmap that was put in the staff testimony, we have been out in the communities, meeting with politicians, community leaders, our employees, making sure they understand the breadth and depth of commitments that have been made as part of the transaction. And the support has been great. And that support is funneling its way back to the commissioners to make sure that it’s clear that we have widespread support from the community and our employees for the transaction. Paul Ridzon Sounds good, thank you very much. Darren Olagues Okay. Operator Questions comes from Tom Shuwet from RBC Tom Shuwet Hi, good mornings guys. Darren Olagues Good morning. Bruce Williamson Good morning. Tom Shuwet Just speaking of the rebuttal that you folks filed – and it does seem – as you mentioned earlier, you met probably all the requests of the staff, and I’m curious as to why, or if there’s any reason why there wasn’t a stipulation agreement with staff. Because it seems like you folks are both on the same page at this point. Bruce Williamson Well, there are other interveners, and I think there are other interveners, and I think we’ve mentioned this before, that the Commission – look, this is a big deal, and the Commission wants to make sure that there’s – the full process has gone through, including an ALJ hearing. But that doesn’t mean that our goal isn’t to be as aligned as we can with the Public Service Commission staff as we walk into the hearing. Tom Shuwet Okay, thanks. Operator We have no further question at this time. A – Paul Ridzon Okay, then this concludes the question-and-answer portion of the call, and I’d just like to close by thanking 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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On Babies And Bathwater

Summary I like distressed investments, but love distressed investors. Confusion and cross ownership can drive down prices. Sometimes this happens in perfectly healthy securities. Risk I’m a complete and utter coward. I have always thought that the typical mutual fund company investor surveys were utterly inane to ask “how much risk” you want. I despise risk. I want no, or as close as possible to no, risk in the portfolio ever if one means the risk of overpaying. I want risk like I want a masseuse with leprosy. Instead of risk, I want free money or at least want reward that’s uncoupled with commensurate risk. Distressed Investors When it comes to market upheaval, there are often opportunities in distressed investments where one can scoop up assets at 10 or 20 cents on the dollar. However, while these can be rewarding, they are often messy situations. A lot can go wrong. Instead of diving head first into a distressed situation, one opportunity can be to seek out distressed investors and then to see what else they own and where they will be forced to liquidate. Hedge Fund Concentration As discussed in M&A Daily , high hedge fund cross ownership can drive down prices when there’s a market dislocation. In a recent example, there was a utility deal blocked by a regulator. When the deal target’s stock plummeted, unrelated utility deal targets traded off. These other companies had only the most tangential relationship to the blocked deal target. Cleco (NYSE: CNL ) in particular is a safe exposure with little regulatory risk. What’s the connection with Pepco (NYSE: POM )? Mostly, the connection is the shareholder cross ownership. Subjective dread associated with large drawdowns just leads many investors to lighten up elsewhere. In extreme cases, investors hit with large drawdowns may reduce other position to make up for their newly lower asset base. Drawdowns lead to redemptions, redemptions lead to selling liquid names, and the cycle continues. Ticker Confusion I have always thought that ticker confusion makes for a particularly hard case for proponents of the strong form of the efficient market theory. I have lived through many cases of dramatic ticker confusion where a company’s news directly impacts the stock price of similarly named but substantively irrelevant companies. These cases are sometimes lucrative but always hilarious. Many have involved companies too small and illiquid to exploit, but occasionally, they are actionable. When Twitter (NYSE: TWTR ) released its IPO plans, Tweeter (then TWTRQ)’s stock jumped 700% the next day. Tweeter was a consumer electronics chain from Boston. In its heyday, the center now named after Comcast’s (NASDAQ: CMCSA ) (NASDAQ: CMCSK ) Xfinity was the “Tweeter Center.” Tweeter filed for Chapter 11 in 2007 and liquidated in 2008. The equity was worthless but still traded over the counter by the time stock traders got so hot and bothered to buy Twitter shares that they could not even wait for the IPO. This one was particularly amusing in that the “I” of “IPO stands for “initial,” meaning that one would be hard pressed to find a publicly traded Twitter stock before its IPO. When Google ( GOOG / GOOGL ) announced that it was buying thermostat maker Nest Labs for $3.2 billion, unrelated Nestor (then NEST) popped by 1,900%. When Rubbermaid’s (NYSE: NWL ) Graco Children’s Products was hit by a product recall, shares of unrelated Graco Inc (NYSE: GGG ) took a hit. In terms of dollars, the biggest opportunity was between MCI (then MCIC) and the unrelated Massmutual Corporate Investors, now Babson Capital Corporate Investors, (NYSE: MCI ). Whenever MCI would have good news such as a potential buyout, Massmutual would race and whenever MCI had problems, Massmutual would fall. Unlike the others, these were liquid, tradable names with a statistically significant correlation on substantively unrelated news items. Conclusion One can occasionally exploit such ridiculous failures in the price system by tracking who owns what and reacting to cross correlations that lack a substantive business rationale. Last year, when AbbVie (NYSE: ABBV ) abandoned their acquisition of Shire (NASDAQ: SHPG ) due to political harassment, similar tax inversion deal targets imploded… but so did other popular event driven hedge fund holdings, even ones without any substantive connections to tax inversion. Eventually, SHPG fully recovered, many other tax inversions succeeded , and the unrelated selloffs recovered by the year end. This year, there are a number of deals with serious antitrust issues, none more serious than the Ball (NYSE: BLL ) acquisition of Rexam (OTCQX: REXMD ). It appears highly probable that the antitrust enforcers will bring at least one high profile antitrust suit this year against the BLL deal or one of the others. When it happens, it will probably pay to have a shopping list ready. Even safer deal targets and other securities owned by major REXMD holders will sell off without sensitivity to price, risk or even relevance to the news. Be prepared. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long CNL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

Safe 11% Annual Return With Cleco

Summary CNL offers an escape from market volatility. It also offers a double digit arbitrage yield. Here is why I own it and you might want to, too. Safety first! Deal Target Description Cleco (NYSE: CNL ) is a public utility holding company with subsidiaries that provide retail and wholesale electricity in Louisiana and Mississippi. It owns natural gas pipelines and interconnections at all generating facilities. Deal Terms On October 20, 2014, CNL announced a definitive deal to be bought by a group led by Macquarie Infrastructure and Real Assets/MIRA and British Columbia Investment Management Corporation/bcIMC, along with John Hancock Financial and others for $55.37 per share in cash. Deal Financing The deal is not conditioned upon the receipt of financing. The target is working with Goldman Sachs (NYSE: GS ) on the deal. Deal Conditions The deal is subject to normal closing conditions, including the approval of CNL shareholders, the approvals of the Louisiana Public Service Commission/LPSC and the Federal Energy Regulatory Commission/FERC, and HSR antitrust clearance. Deal Price There is currently a net spread of about $1.63 which works out to an 11% annual return if the deal closes around early December 2015 as anticipated. The deal price was at a 15% premium to CNL’s previous market price. Deal History Bruce Williamson, CNL’s CEO, is a money maker and a deal guy. So after he was named CEO in 2011, deal speculation started to build. His stock price appreciated by about 30% in his first thirty months in command. Then he began to look to sell. He has a generous package in a change of control. He gets three times his base and bonus in a deal. This was my favorite utility takeover candidate for 2014. By April 2014, Williamson definitively decided to sell. By June, he had hired GS to manage the sale process. Once the LPSC approved CNL’s formula rate plan, there was strong interest in the company from potential buyers. CNL holders approved the deal in February 2015. CFIUS cleared the deal in June 2015. FERC approved the deal in July. The FCC has approved the requisite license transfers. HSR approval was secured. The gating regulatory approval remains LPSC clearance which is expected in the fourth quarter. The hearings are scheduled for November 9-13, 2015. Deal Alternatives If the current deal falls through, alternative buyers for CNL would include American Electric Power (NYSE: AEP ), NextEra (NYSE: NEE ), CenterPoint (NYSE: CNP ), and Iberdrola SA ( OTCPK:IBDRY ). Merger Agreement Specific Performance: The parties agree that irreparable damage may occur and that the parties may not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that, subject to Section 8.11(b) , in the event of any breach or threatened breach by any other party of any covenant or obligation contained in this Agreement, the non-breaching party shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, without the necessity of posting bonds or similar undertakings in connection therewith, this being in addition to any other remedy which may be available to such non-breaching party at law or in equity, including monetary damages. Material adverse effect on the Company means any change, effect, event, occurrence, development or state of facts (I) that is materially adverse to the business, financial condition, assets, liabilities, results of operations or properties of the Company and its subsidiaries, taken as a whole, but excluding any of the foregoing to the extent resulting from changes in international or national political or regulatory conditions generally (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes in the economy or the financial, commodities or securities markets in the United States or elsewhere in the world or the industry or industries in which the Company or any of its subsidiaries operates (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes or developments in national or regional wholesale or retail markets for electric power, capacity or fuel or related products (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes or developments in natural or regional electric transmission or distribution systems (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), any changes in law or GAAP or interpretations thereof (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), any weather-related or other force majeure event or outbreak or escalation of hostilities or acts of war or terrorism (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), the failure in and of itself of such person to meet any internal or published projections, forecasts or revenues predictions, provided that the exception in this clause (G) shall not prevent or otherwise affect a determination that any change, effect, event, occurrence, development or state of facts underlying such failure has resulted in, or contributed to, a material adverse effect on the Company, the negotiation, execution or announcement of, or compliance with, this Agreement in accordance with the terms hereof (including any adverse changes in the relationship of the Company or its subsidiaries with its employees, independent contractors, customers or suppliers resulting directly therefrom), provided that the exception in this clause (H) shall not apply to the representations and warranties contained in Section 3.01(d) to the extent that the negotiation, execution or announcement of, or compliance with, this Agreement would result in a breach or inaccuracy of the representations and warranties set forth in Section 3.01(d), or any taking of any action by the Company or its subsidiaries at the express written request of Parent, or (ii) that would prevent or materially delay the Company from performing its obligations under this Agreement or consummating the transactions contemplated hereby. Conclusion CNL offers a compelling long opportunity to capture a safe double digit annual return for the remainder of 2015. Disclosure: I am/we are long CNL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.