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Capstone Infrastructure’s (MCQPF) CEO Mike Bernstein on Q1 2015 Results – Earnings Call Transcript

Executives Aaron Boles – VP, Communications & IR Mike Bernstein – CEO Mike Smerdon – CFO Analysts Kelsey Roste – RBC Capital Markets Capstone Infrastructure Corp. ( OTCPK:MCQPF ) Q1 2015 Results Earnings Conference Call May 15, 2015 8:30 AM ET Operator Thank you for standing by. This is the Chorus Call Conference Operator and welcome to the Capstone Infrastructure Corporation First Quarter 2015 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Aaron Boles, Senior Vice President, Communications and Investor Relations. Please go ahead sir. Aaron Boles Thank you. Good morning, everyone. Thank you for joining on Friday before a long weekend, good for you, to discuss Capstone Infrastructure Corporation’s financial results for the first quarter of 2015 ended March 31. Today’s call is hosted by Mike Bernstein, Chief Executive Officer. Also on the call is Michael Smerdon, Chief Financial Officer. Our News Release was issued after market closed yesterday and is available on our website at www.capstoneinfrastructure.com. Today’s conference call is being webcast live with accompanying slides and will be archived on our website along with a transcript of the event. Following management’s remarks, we will hold a Q&A session as usual. During the Q&A, we would like to ask that you limit your questions to two before re-entering the queue so that everyone has a chance to participate. Before we begin, I would like to remind everyone that during the course of this conference call, we may make various forward-looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially. For information about such risks and uncertainties, I refer you to the MD&A and our Quarterly Report and to our most recent AIF dated March 24, 2015. And with that, I’ll turn the call over to Mike Bernstein. Mike Bernstein Thanks Aaron. Good morning and welcome to Capstone’s quarterly conference call. Thank you for joining us. The first three months of 2015 marked the start of a busy transitional period to a new phase of growth for Capstone. Two of our heritage power assets began operating under contracts. Our 24-megawatt wind facility reached commercial operations and another 25-megawatt project neared completion. We received key approvals for the next stage of wind developments and Cardinal made substantial progress on its $30 million refurbishment and life extension work. Bristol Water successfully completed its previous five-year 560 million asset management program and also initiated a challenge to the subsequent five-year plan. As we noted in the forecast we issued at the end of last year, our mid to long-term prospects remain very positive though the changes at our businesses will exert downward pressure on some of our financials in the near term. Adjusted EBITDA was 29.1% lower than the first quarter of 2014 at $29.5 million, primarily reflecting the new long-term contracts at Cardinal and Whitecourt and reduced production at our operating wind facilities. These declines were partially offset by contributions from our new Skyway 8 and Saint-Philémon assets. Bristol Water also provided a lift in the final quarter of higher tariffs from asset management plan 5 and favorable currency exchange rates. The factors impacting adjusted EBITDA also resulted in lower adjusted funds from operations, which came in at $6.6 million. We expect these figures to improve as we build out our current wind development portfolio over the next two years. We remain committed to our current dividend policy as we continue to build our portfolio, look to improve the performance of our existing assets and execute Capstone’s growth strategy. Organic growth is progressing steadily. In the first quarter we commissioned the 24-megawatt Saint-Philémon site in Quebec and made good progress on the 25-megawatt Goulais facility near to Saint Marie. Construction is now complete. The facility is energized and we expect it to be commissioned within the next week. In the first quarter, we received approvals for the Grey Highlands ZEP and Ganaraska Development sites and recently Settlers Landing and Grey Highlands Clean also received their approvals. Typically, the last step before construction is a six-month review process. We’re also making important investments in our operating assets. The technology improvements we’re investigating or installed at our wind assets including wind boost, Vortex Generators and improved the effectiveness of the blades, turbine pitch optimization and condition based monitoring are all designed to maximize the generating capacity of the turbines. With a $30 million refurbishment at Cardinal nearly complete, including the installation of a new gas turbine roader, the plant will be ready to supply power to the Ontario Grid this summer when it makes economic sense to do so. Under its 20-year contract the plant received escalating monthly capacity payments and provides electricity during peak demand periods. The warm months are typically when additional power is required. Consequently, Cardinal did not produce electricity in the first three months of this year. We’ve engaged consulting engineers to explore the potential for additional new streams for Whitecourt. The new contract there with Millar Western took effect in January of this year and the facility generated electricity consistently and profitably in the first quarter. However, low Alberta Power Pool prices resulted in reduced revenue during the first three months. Bristol Water has now concluded the Amp 5 business plan which expands from April 1, 2010 to March 31, 2015. The total expense on investments was $567 million, which translates into cumulative regulated capital value today of £418 million or roughly $770 million. It’s important to recall that this strong position at the end of the five-year plan came as a result of Bristol Water challenging the final determination set by the economic regulator Ofwat in 2009. Bristol Water is once again challenging the 2014 final determination to the competition markets authority. I’ll update the progress of the CMA review later in this call. At the end of the first quarter of 2015, following a strong finish to 2014, Capstone is in solid shape. We’re going through our contracted wind development projects, investing in our operating assets and are positioning ourselves for a better outcome for Bristol Water for the CMA review. Now I’ll turn to Mike Smerdon for a financial review. Mike? Mike Smerdon Thanks Mike. Following on Mike’s discussion of Capstone’s adjusted EBITDA and AFFO, I’ll cover our revenue expenses, capital structure and outlook for the balance of 2015. First quarter revenues were $90.2 million, which is 21% lower than in 2014. The factors driving this result were the 51% decrease from the power segment as a result of old contracts expiring at Cardinal and Whitecourt. Poor wind conditions affected most of our wind assets, but were partially mitigated by new revenue from Skyway 8 and Saint-Philémon. And declines in power were somewhat offset by gains in utilities with a 9% increase from Bristol Water through a combination of higher regulated rates and favorable current foreign currency translation. Expenses for the quarter came in at $49 million or 19% lower than in 2014. This result reflected lower operating expenses at Cardinal from reduced production requiring less fuel, the absence of administrative cost related to acquisition integration and these were partially offset by higher project development costs and higher expenses at Bristol Water related to foreign currency appreciation, a restructuring program developed as part of the PR14 business plan and cost associated with the current regulatory review. At the end of the first quarter, Capstone had unrestricted cash and cash equivalents of $55.3 million. This includes $38.3 million from the power segment, $11.1 million from Bristol Water and approximately $6 million at corporate. Of our total cash and equivalents $24.2 million is available for general corporate purposes and our undrawn corporate revolver’s capacity stands at over $39 million. Capstone’s long term debt at quarter end was approximately $929 million including debt at corporate and our proportionate share of debt at the power assets as well as Bristol Water. Our outstanding debt remains predominately fixed rate or linked to inflation and is largely secured at the operating business level and non-recourse to corporate. Approximately 98% of the long term debt at our power facilities is scheduled to fully amortize over the PPA terms. At Bristol Water, approximately 78% of the long-term debt has maturity longer than 10 years. This debt level represents a debt-to-capitalization ratio of 70.8%, which is slightly lower than at the end of our last fiscal year. In general, our capital structure aligns with the cash flow profile and duration of our businesses giving us the flexibility to pursue new investments. With the first quarter of 2015 complete, we affirm our outlook for adjusted EBITDA in 2015 of between $115 million and $125 million. We’ve planned carefully to ensure that we have the liquidity to maintain Capstone’s dividend, while our wind project developments are showing good progress. With the eminent commissioning of Goulais, we will have completed three wind projects in the past nine months with renewable energy approvals from the Ministry of Environment and Climate Change now in hand for four more. We’ve invested in new equipment, leading edge technology and refurbishments to maximize the productivity of our businesses to ensure that they can provide diversified and stable cash flow that meet our business and financial requirements and we’ve taken steps at Bristol Water to position the company for an improved business plan that meets the needs of customers and investors. Mike will speak more about that now. Mike Smerdon Thanks Mike. Capstone has a clear set of priorities for the balance of this year. The first is to achieve a successful outcome for Bristol Water. The CMA is guided by statute and therefore has a defined schedule to conclude its Bristol Water review with a firm deadline of September 3 though we expect it will be delivered in August. The process is now at about the halfway mark with the first main party hearings taking place in early June. Up to this point, both sides have made their respective cases with a series of written submissions including a statement of case from Bristol Water, our reply from Ofwat and a response to that reply from Bristol Water. These documents are publicly available on the CMA website. The prevailing opinion among experts who’ve reviewed the submissions is that Bristol has made a number of persuasive arguments for an improved outcome. And CMA’s following the termination, our provisional determination is expected to be released and made public in early July. That interim document will be subject to further refinement with more input and representations from both sides to follow, that will provide useful insights about where the CMA is likely to settle in its review. Our next priority is to continue to achieve organic growth through the development of our wind projects. We anticipate that Goulais will be commissioned within the next week and we have approvals in hand as Mike mentioned for four additional facilities in Ontario. Construction is expected to start on the first of these by the end of 2015. We’re also preparing to engage in the appeal of an Ontario Superior Court decision from March 12, 2015, which found that the Ontario Electricity Financial Corporation did not properly calculate the price paid in payable for electricity produced under PPAs with Capstone and other power producers in Ontario. On April 10, 2015, the OEFC served a Notice of Appeal in respect of the March 12 decision. Capstone intends to defend the appeal, which could take as long as 16 months. If the decision is upheld following appeal, Capstone would receive about $25 million net, representing retroactive adjustments for revenue claims from the OEFC. In addition the future price paid for electricity at Capstone’s Wawatay and Dryden Hydro facilities is expected to be calculated in accordance with the original pre-2011 methodology into respective PPAs, resulting in higher future power rates. This could result in a gain of almost $900,000 per year for the duration of the Power Purchase Agreements at these hydro facilities. Developments in public policy have also drawn our attention. The Ontario Government has recently announced plans to join with Quebec in California in a cap-and-trade system under the Western Climate Initiative. The details haven’t been finalized, but this system will be designed to reduce the amount of green-house gas produced in the province by setting a limit on emissions and creating a market for trading credits. We continue to evaluate perspective investments across our four targeted pillars of power, utilities, public private partnerships and transportation. The uncertainty surrounding Bristol Water has affected our share price and made it more challenging in the short term to complete acquisitions. However, we know that the CMA decision will remove that uncertainty this summer and we’ve continued to set this foundations for new opportunities. Capstone will hold its Annual Meeting of Shareholders on Wednesday, June 17 at the Ivey Tangerine Leadership Centre in Toronto. We encourage our shareholders to attend and look forward to speaking with you there or to join our live webcast from the event for those unable to attend. At the end of the first quarter, Capstone is tracking to plan for 2015. Our organic development projects have been completed. Our operating portfolio is performing well and the Bristol Water regulatory review is progressing towards satisfaction and will be concluded over the coming summer and we look forward to moving ahead with our growth strategy with more certainty for our company and our shareholders. Thank you for your continued support and now we’ll be happy to take your questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today is from Kelsey Roste with RBC Capital Markets. Please go ahead. Kelsey Roste Good morning, everyone. Mike Bernstein Good morning. Kelsey Roste I had a question in respect to the four development facilities that you received approval. You had mentioned it was with Grey Highlands Clean Energy as well as Grey Highlands ZEP, what were the other two projects? Mike Bernstein Ganaraska and Settlers yeah, and we’re hoping for snowy imminently. Kelsey Roste And snowy imminently and all of those are expected to achieve CPD in 2016. Are any of them expected to have a material contribution in 2016? Mike Bernstein Not material in 2016, no. Kelsey Roste Thank you. And then just kind of turning to the M&A market, so solar and wind developments M&A still seems to be pretty hot in North America and if you had mentioned the negative pressure on your share prices, put some pressure on your ability to do acquisitions. Are you guys still actively looking in North America for wind and solar? Are you more learning towards P3, there can you provide a little bit more additional color on your acquisition strategy? Mike Bernstein Yeah, I think overall I’d say not just in the solar and wind sector, but generally for operating assets where we’re seeing it is a pretty frothy market. So we’re focusing a lot of our efforts right now on the development side. So looking particularly in the U.S. on gas development and this is with our CPD team and we’re also evaluating opportunities with the upcoming LRP in Ontario. On the P3 side, it’s a combination of partnering with established players at the — again probably at the earlier phases, but that also could involve looking at portfolios that include some operating assets, but you’re quite right. Even with the strong currency it is more of a seller’s market than a buyer’s market on the M&A front. Kelsey Roste Great, thank you. That’s all my questions. Mike Bernstein You’re welcome. Operator [Operator Instructions] There are no more questions at this time. I’ll hand the conference over to Mr. Aaron Boles for closing comments. Aaron Boles All right. Thank you for joining us this morning and everybody have a great long weekend. Okay. Thank you. Operator Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. 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Cleco (CNL) Bruce A. Williamson on Q4 2014 Results – Earnings Call Transcript

Cleco Corp. (NYSE: CNL ) Q4 2014 Earnings Call March 02, 2015 9:30 am ET Executives Robbyn Cooper – Manager, Investor and Public Relations Bruce A. Williamson – Chairman, President & Chief Executive Officer Thomas R. Miller – Senior Vice President and Chief Financial Officer Darren J. Olagues – President, Cleco Power LLC Analysts Paul T. Ridzon – KeyBanc Capital Markets, Inc. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Operator Welcome to the Cleco Corporation Fourth Quarter 2014 Earnings Call. My name is Laura, 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 Ms. Robbyn Cooper, Manager of Investor and Public Relations. Robbyn, you may begin. Robbyn Cooper – Manager, Investor and Public Relations Good morning, and welcome to Cleco Corporation’s 2014 fourth quarter and year-end 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 38458256. 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 risk and uncertainties. Actual results may differ materially from these contemplated in our forward-looking statements. Please refer to our cautionary note regarding forward-looking statements and risk factors in various reports filed with the U.S. Securities and Exchange Commission, including our 2014 Annual Report on Form 10-K and current reports on Form 8-K. In addition, please note that the date of this conference call is March 2, 2015, and any forward-looking statements that we may make today are based on assumptions as of this date. And with that, I will turn the call over to Bruce. Bruce A. Williamson – Chairman, President & Chief Executive Officer Thanks, Robbyn. Good morning and thank you for joining us. This morning, we’ll review the 2014 fourth quarter and full year results. Let’s start with the agenda for today’s call, which is on slide 3 of our presentation for those of you following along via the webcast. I’ll begin today’s call with an update on the merger transaction and a recap of 2014 accomplishments. Tom will then discuss fourth quarter and year-end financial results and I’ll finish up the call with a discussion of our objectives for 2015 and then we’ll move to Q&A. Please turn to slide 4. As discussed in our previous call last October, the company announced an agreement to be acquired by a group of North American-based long-term infrastructure investors led by Macquarie Infrastructure and Real Assets or MIRA and British Columbia Investment Management Corporation, also known as BCIMC. In February, we were pleased to receive notification that all four corporate governance and shareholder advisory firms had joined our board in recommending that both the merger-related votes be approved. Last Thursday, we held a meeting of our shareholders to vote on the proposals related to the merger. I’m pleased to report that our shareholders overwhelmingly approved the merger transaction. The merger proposal passed with a vote of more than 94% of votes cast, which is equal to approximately 77% of all shares outstanding. This overwhelming vote of confidence for management, the board of directors and the transaction shows that we structured a transaction that our shareholders see value in. We’ll now turn our focus towards the remaining regulatory approvals needed to close the transaction. On February 10, we filed our merger application with the Louisiana Public Service Commission and that filing can be found on our homepage. Independent consultants and legal counsel selected by the LPSC in December will help them review the application. The LPSC staff has begun the discovery phase of the review and, in the coming months, an administrative law judge will set a procedural schedule for the timetable for the application process. The remaining applications, including among others the Federal Energy Regulatory Commission or FERC, Hart-Scott-Rodino or HSR are expected to be filed later this month. In structuring the merger agreement, we work to ensure that Cleco will remain a Louisiana-based company with local operations and local management. We believe our proposed regulatory commitments address the LPSC’s concerns and represent our commitment to our employees, retirees, customers, and the communities we serve. We’re exceptionally pleased with the outcome of the shareholder vote and will continue to work through the approval process to obtain the remaining regulatory approvals. We still expect the transaction to close in the second half of 2015. I’ll now turn to slide 5 to recap 2014 accomplishments. In addition to announcing the strategic transaction, we also delivered on key regulatory and strategic initiatives. We produced another strong year and reported operational earnings of $2.74 per share, up $0.21 per share when compared to 2013, which puts us near the top-end of our earnings guidance range of $2.65 per share to $2.75 per share. Positive drivers for the year included higher revenues associated with the start of the wholesale contract with Dixie Electric Membership Corporation or DEMCO, a favorable multi-year settlement with taxing authorities and ongoing cost management efforts. These positive drivers helped to offset mild weather for the year, and the rate decrease and customer refund associated with our formula rate plan extension that began in July. Our strong financial position prompted us to raise the annual dividend on the company’s common stock to $1.60 per share, which represents a 10% increase. This marks the sixth dividend increase in the last 4.5 years. Finalizing the formula rate plan was perhaps the most important regulatory accomplishment. The rate plan extension, which went into effect July 1, extends our previous rate plan design by four years. The extension did reduce our target ROE to 10% from 10.7%, but it also retained some customer sharing provisions. Importantly, the extension finalized the rate treatment of the Coughlin Power Station, which we transferred to our regulated utility in March. And overall it reduced forward rates to customers by about $34 million annually, which is in large part due to cost management efforts of the last 3.5 years along with the reduction in target ROE and thereby reset our earnings downward to the guidance range that we issued in late 2014. Coughlin Power Station was the last remaining asset in our unregulated business. Following the completion of the transfer, our company is streamlined to focus on the regulated utility subsidiary. Coughlin is a combined cycle gas-fired unit and it increases the efficiency of the generation fleet and provides low-cost power for all retail and wholesale customers. Moving on, last year we were successful in negotiating a tax settlement with a state taxing authority. The settlement produced a benefit to earnings that was recorded in the third quarter of 2014 and the settlement is favorable for both the company and the state, and will provide clarity on future tax treatment of agreed-upon items. And with that, I’ll now turn the call over to Tom to discuss our fourth quarter and year-end financial results. Thomas R. Miller – Senior Vice President and Chief Financial Officer Thanks, Bruce. (7:24-7:29) of our fourth quarter operational results. GAAP earnings were $0.35 per share for the fourth quarter of 2014, a $0.06 decrease compared to the fourth quarter of 2013. Operational earnings for the quarter were $0.60 per diluted share, a $0.19 increase compared to the fourth quarter of 2013. Lower O&M related to outages at our generation facilities and a gain on the sale of property drove operational earnings for the quarter. Operational earnings exclude items associated with tax levelization expense, which was $0.05, and merger transaction cost, which were $0.20 in the fourth quarter. Looking from left to right on the operational reconciliation chart, Cleco Power’s non-fuel base revenue declined $0.09 per share from this time last year. Higher revenues primarily to a new wholesale customer increased earnings by $0.06 per share. A lower rate refund associated with site specific customers increased earnings by a $0.01. These increases were offset by $0.09 per share as a result of lower retail customer usage and milder weather. And the 2014 formula rate plan extension decreased revenue by $0.07 per share. Other expenses increased earnings by $0.21 per share due to $0.13 per share related to fewer planned outages at our generation facilities this past quarter compared to the fourth quarter last year; $0.06 per share related to a gain on the sale of property, $0.05 per share of lower taxes other than income and $0.03 per share related to lower depreciation and amortization expense. These increases were partially offset by $0.03 per share from the absence of the recovery of capacity expense related to the Coughlin tolling agreement, $0.02 per share related to higher capacity cost associated with wholesale contracts and $0.01 per share of higher miscellaneous expenses. Interest expense was lower and increased earnings by $0.03 per share. $0.02 were related to the absence of a surcredit customer giveback, which is now included in base rates as a result of the FRP extension, and $0.01 per share of lower miscellaneous charges. And finally, lower income taxes increased earnings by $0.04 per share due to $0.03 per share of miscellaneous tax items and $0.02 per share of tax expense to reflect the annual projected tax rate. This was partially offset by $0.01 per share due to lower tax credits. Now, please turn to slide 7 for a review of year end results. For 2014, GAAP earnings were $2.55 per diluted share, a $0.10 decrease compared to 2013. Operational earnings for 2014 were $2.74 per share, a $0.21 increase compared to 2013. As a reminder, operational earnings exclude non-operational items associated with $0.01 benefit from Acadia Unit 2 indemnifications, a $0.03 gain from insurance policies and $0.23 associated with the merger. Again, looking from left to right on the reconciliation chart, Cleco Power’s non-fuel base revenue was up $0.08 per share from this time last year. Higher revenues primarily from wholesale business growth including the contract with DEMCO increased the earnings by $0.35 per share. These increases were offset by a $0.22 decrease related to the one-time customer refund in September as part of the formula rate plan extension and $0.05 per share related to lower customer usage and mild weather for the year. Other revenue increased earnings by $0.03 per share due to transmission revenue as a result of joining MISO. Other expenses decreased earnings by $0.15 per share, primarily due to $0.18 per share from the absence of the recovery of capacity expense related to the Coughlin tolling agreement. As Bruce stated earlier in the call, Coughlin Power Station has now included base rates as part of the FRP extension. $0.04 per share related to higher depreciation and amortization expense, $0.04 per share related to higher capacity cost associated with wholesale contracts, and $0.02 per share related to higher planned outages at our generation facilities. These decreases were partially offset by $0.06 per share of lower taxes other than income, and lower taxes related to favorable settlement with taxing authorities. $0.06 per share related to the gain on the sale of property, and $0.01 per share, related to lower loss on disposal of assets related to the Coughlin outage. Interest expense was lower and increased earnings by $0.11 per share due to $0.06 per share from favorable settlements with taxing authorities, $0.04 related to the absence of a surcredit credit customer give back, and $0.01 per share of lower miscellaneous charges. AFUDC earnings – increased earnings by $0.02 per share due to MATS capital spend. And finally, lower income taxes increased earnings by $0.12 per share, primarily due to $0.18 per share of lower taxes due to favorable settlements with taxing authorities, and $0.02 per share of lower miscellaneous tax items. These benefits were partially offset by a $0.08 per share due to lower tax credit. I will now turn to slide 8 to discuss our 2015 earnings guidance. On last quarter’s earnings call, we issued our 2015 consolidated operational earnings guidance of $2.28 to $2.38 per diluted share. This earnings guidance is based on normal weather, reflects a full year of operations under the new FRP extension, assumes an effective tax rate of approximately 36%, and excludes adjustments related to life insurance policies and merger transaction cost. Cleco will continue to operate in the ordinary course of business until the merger closes. Prior to the closing of the transaction, Cleco’s ability to buy back stock or make tax-based investments without the consent of the new owners is generally limited to the ordinary course of business. Bruce will give some closing marks. Bruce A. Williamson – Chairman, President & Chief Executive Officer Thanks, Tom. Before going to Q&A, I want to take a few minutes to address our near-term strategic objectives and then we’ll take your questions. Our most important task for 2015 is obviously to finalize the regulatory and other approvals required to complete the merger transaction. As I stated earlier on the call, we anticipate a closing date in the second half of 2015. Over the last four years, our shareholders have received an exceptional return on their investment as shown by an approximate 90% total shareholder return, including the premium associated with the upcoming merger. Another way to think about the value of the transaction is when you apply 2015 earnings to the offered share price of $55.37, we’re trading CNL through the transaction at a PE multiple of approximately 23.8 times the midpoint of our 2015 operational earnings guidance, which is about 50% to 60% higher than where the electric utility industry trades today. Lastly, another way to think about it is our earnings or rate base which drives the earning power would need to be 50% to 60% higher than what it is today to realize enough earnings to support this price point. In summary, we achieved a very full valuation for our public shareholders and their support of the merger vote shows they understand this. Importantly, however, this transaction also benefits all of our stakeholders. Our new owners will ensure that Cleco remains to be locally managed and operated, and the transition for our customers and communities will be seamless. Our employees and retirees will retain the same pay and benefits and Cleco will remain dedicated to its core business of safe operations and reliable power and prompt customer service. And with that, we’ll open the call for questions. Question-and-Answer Session Operator And our first question comes from Paul Ridzon. Paul, your line is open. Paul T. Ridzon – KeyBanc Capital Markets, Inc. When do you expect the procedural schedule to be filed? I’m sorry, I missed that. Bruce A. Williamson – Chairman, President & Chief Executive Officer Paul, I’ll let Darren answer that one. Darren J. Olagues – President, Cleco Power LLC Paul, we have to get through the intervention period first, right, which ends on March the 10. Then we’ll proceed towards that as part of the next step. So I don’t have a specific answer for you right now, but I guess the next milestone, if you will, now that the application has been filed with the 30-day window for the interveners, is this March 10 date. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Okay. And then, is there some weather sensitivity at the industrial side? They were down I think 13% this quarter or is that just some planned outage or something? Bruce A. Williamson – Chairman, President & Chief Executive Officer One of our customers has a planned outage that brought down some of the industrial use, that is true. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Okay. Thank you. Operator And our next question comes from Brian Russo. Brian, your line is now open. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Hi. Good morning. Bruce A. Williamson – Chairman, President & Chief Executive Officer Hey, Brian. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Just curious on the independent consultant review of the merger agreement. Is there some sort of formal process there, meaning will that analysis be made public and/or be discussed in some sort of upcoming open meeting? Bruce A. Williamson – Chairman, President & Chief Executive Officer Darren? Darren J. Olagues – President, Cleco Power LLC Yeah. I mean, ultimately we – like our past practices, we hope to have a settlement proceed towards the commission ultimately for the vote. And in that, there is testimony that’s provided by the consultants in that, and so, the essence of their analysis will be reflected in that testimony. Brian J. Russo – Ladenburg Thalmann & Co., Inc. (Broker) Got it. Okay. Great. Thank you very much. Operator Okay. And I’m actually seeing no questions at this time. Bruce A. Williamson – Chairman, President & Chief Executive Officer Okay. Thank you for your questions this morning. As we close this investor call, I’d like to recognize the work of Sybil Montegut and Mallory Biegler who comprise our investor team. They were nominated as finalists by institutional investors to be an all American IR team, and it’s an honor to have them be named as finalists by the input and voting of our largest institutional investors. Obviously, if anyone has any questions after the call today, please give Mallory or Sybil a call. I’d also like to commend (19:38) and the rest of the safety department along with all of our employees for their continued focus on employee safety. We initiated a complete top to bottom rework of our safety program in late 2011 and they’ve continued to seek best practices over historic practices in all facets of safety, and today we’re firmly among the best performing utilities in terms of safety performance. We do not take this performance improvement lightly, however, and we want every employee to continue to focus in 2015 and strive for Target Zero. I also would like to end the day with just a final thanks for our shareholders to their resounding support for the strategic transaction with Macquarie and the BCIM led investor group. Thank you. 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. 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Northwest Natural Gas’ (NWN) CEO Gregg Kantor on Q4 2014 Results – Earnings Call Transcript

Northwest Natural Gas Co. (NYSE: NWN ) Q4 2014 Earnings Conference Call February 27, 2015 11:00 AM ET Executives Robert Hess – IR Gregg Kantor – President and CEO Steve Feltz – SVP and CFO Analysts Derek Walker – Bank of America Operator Good morning, and welcome to the Northwest Natural Gas Company’s Fourth Quarter Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Mr. Bob Hess. Please go ahead, Mr. Hess. Robert Hess Thank you, Dana. Good morning, everybody, and welcome to our fourth quarter and full year 2014 earnings call. As a reminder some of the things that will be said this morning contain forward-looking statements. They are based on management’s assumptions, which may or may not come true, and you should refer to the language at the end of our press release for the appropriate cautionary statements and also to our SEC filings for additional information. We do expect to file our 10-K later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note that these calls are designed for the financial community. If you are an individual investor and have questions, please contact me directly at area code 503-220-2388. Media please can contact, Melissa Moore at area code 503-220-2436. Speaking this morning are Gregg Kantor, President and Chief Executive Officer and Steve Feltz, Senior Vice President and Chief Financial Officer. Gregg and Steve have some opening remarks, and then will be available to answer your questions. Also joining us today are other members of our executive team, who will help answer any questions you may have. With that, let me turn it over to Gregg for his opening remarks. Gregg Kantor Thanks Bob. Good morning, everyone and welcome to fourth quarter and year-end review. I’ll begin today with an overview of 2014 and then turn it over to Steve to provide the financial details for the quarter and the year. I’ll wrap up the call with a look-forward. For Northwest Natural 2014 was a year of both opportunity and challenge. Last year our utility performance was solid, with improvements in customer growth and margin. However, those results were offset by losses associated with our gas cost sharing mechanism and the impact of natural gas prices. We also continued to see weakness in the California storage market hampering the financial returns from our Gill Ranch storage facility. In the midst to be varying factors, we delivered earnings of $2.16 per share and 2014 while providing a total shareholder return of approximately 22%. On the growth front, the Northwest economy made positive gains last year with Oregon’s employment rebounding to prerecession levels and unemployment rates continuing to fall. In 2014, we saw a healthy increase in commercial margins and an uptick in commercial new construction activity. The housing sector also improved with Portland home sales up nearly 4% and the average sale price up 7% last year compared to 2013. In addition, United Van Lines ranged Oregon its top moving destination last year, a positive indicator for future housing sector growth. And in Clark County in Washington, the fastest growing county in our service territory, home sales increased 8% with the average sale price increasing about 10%. These improvements help drive up our customer growth rate to 1.4% last year, and in the process we reached a new milestone adding our 700,000 customer. We believe last year’s healthy market improvements coupled with our substantial price advantage over electricity and oil put us in a strong position for additional customer growth going forward. In 2014 we made significant investments in safety and in reliability of our system. We completed several system reinforcement and facility upgrade projects and we continued our aggressive pipe replacement efforts. In fact we plan to remove the last three miles of bare steel pipe in 2015 making us one of the first utilities in the nation to eliminate both cast iron and bare steel pipe throughout our distribution system. In 2014, we reaped the advantages of having a more modern and robust system when extreme winter weather put us in the test. Last February we set a company record with a send out volume hitting 9 million firms in a 24 hour period. That’s almost double the normal send out for a typical winter day. And I’m pleased to report our pipeline system and storage facilities performed very well. I’m also pleased to report that for the fifth time in eight years we ranked first in the west in the annual J. D. Power Gas Utility Residential Customer Satisfaction Study. Last year also marks the seventh time in eight years that we were among the two highest scoring gas utilities in the nation. Now let me shift to the status of our regulatory agenda. Last year we continued to work through three remaining dockets carried over from our 2012 Oregon rate case. Just last week the OPUC issued its decision regarding how the Company’s environmental site remediation and recovery mechanism would be implemented. In the final order the commission found that all but $33,000 of the $114 million of environment remediation expenses incurred from 2003 through March of 2014 were proved. However due to the application of an earnings test from 2003 through 2012 the OPUC disallowed recovery of expenses totaling $15 million. At the same time the order specifies that insured settlements totaling over $150 million were entered into prudently by the Company. Steve will provide more details on how the mechanism works but let me just say that while the write down is disappointing we view our ability to fully recover future environmental cleanup cost as the key issue in a very complex and tough docket and we’re pleased the environmental spend and insurance settlements were deemed prudent. We do have some questions and implementation issues that we will be working on with the commission, but overall we believe the order provides us with a reasonable path forward. We expect the last two proceedings from our 2012 rate case to also be decided on this year. These are the interstate storage sharing and pension dockets. As you know, last year we amended our gas reserves agreement with Encana in response to their sale of the Jonah field. While the new arrangement ended the original drilling program, it also increased our working interest in Jonah and allows us to continue to invest in the field on a well by well basis. Under the new agreement, in 2014 we invested in seven wells and yesterday we filed with the OPUC to recover those costs as part of our utility hedge portfolio. A final important regulatory milestone last year was the filing of our integrated resource plan in Oregon and Washington. The plan covers a variety of issues associated with our ability to serve customers, including the need for additional system investments in Clark County, Washington and at our Newport LNG plant in Oregon. Just a few days ago we received acknowledgement on the IRP from the Oregon commission and we expect to receive notification from the Washington commission by this summer. With that let me turn it over to Steve. Steve Feltz Thank you, Gregg and good morning everyone. In 2014 we made significant progress on a number of fronts, including operational improvements and some important long term growth initiatives in both the utility and gas storage businesses. Additionally as you’ve heard earlier we received an order from the OPUC on how we would recover future environmental costs, which was a significant financial issue carried over from our last rate case in 2012. I’ll talk more about the financial implications of that order later on. But first let me turn your attention to 2014 results. Earnings for the fourth quarter were $1.04 per share on net income of $28.5 million. That was down slightly from $1.07 per share on $29 million a year ago. Results for the quarter reflect an increase in utility earnings largely due to higher margin and lower operating and maintenance expense. The utility increase was more than offset by a decrease from our gas storage segment which was driven by the re-contracting of Gill Ranch capacity at lower prices due to the depressed market conditions in California. The utility realized margin gains despite significantly warmer weather and lower customer usage. During the quarter, temperatures were 25% warmer than average and delivered volumes were down 13% compared to a year ago. The steady margin gains from our utility reflect our consistent customer growth and the effectiveness of our weather normalization and decoupling mechanisms. Now turning to full year results, consolidated earnings were $2.16 per share on net income of $58.7 million in 2014, as compared to $2.24 per share on $60.5 million a year ago. From the utility, net income for 2014 was $58.6 million, up from $54.9 million a year ago. A $12 million increase in margin was driven by customer growth, incremental use by commercial customers on higher margin rate schedules and added rate base recovery from new investments. These margin gains more than offset the impact of weather, a $2.1 million loss from our regulatory gas cost incentive sharing mechanism in Oregon and a $3.2 million increase in depreciation expense. From an operational standpoint, total gas delivery by the utility decreased 5% to 1.09 billion terms. The decrease was largely driven by 13% warmer than average weather and by declining average use for the customer. Despite the 5% decrease in volumes, utility margin increased by more than 3% over last year, including adjustments totaling $19 million from our weather normalization and decoupling mechanisms in Oregon. From our gas storage segment, net income in 2014 was a loss of $400,000, as compared to a gain of $5.6 million a year ago. The $6 million decrease in storage net income primarily reflect an $8.9 million decrease in operating revenues and a $1.8 million increase in operating expenses. As mentioned earlier, the decline in storage revenues was largely tied to lower prices at our Gill Ranch facility in California. Meanwhile, operating expenses at that facility increased, partly due to higher power cost for storage resale following significant withdrawals from last year and higher repair cost. Recently we’ve seen some improvement in summer-winter spreads for the upcoming storage year and because we have short-term contracts for a majority for our capacity, we should realize slightly higher prices in California this year compared to last year. But despite this improvement, we expect continuing challenges in 2015 as current storage values remain lower than the pricing on our original multi-year contract. With regard to operating expenses, for the quarter our O&M costs were 8% or $3.1 million lower than the same period last year. On a full year basis, O&M increased by less than 1% compared to a year ago. The year-over-year increase was mostly attributed to the previously mentioned higher power and repair cost at Gill Ranch, but that was largely offset by lower payroll and other cost savings at the utility. Cash provided by operations during 2014 was $216 million, up from $176 million in 2013. The main differences from year ago were the receipt of $103 million from insurance proceeds partly offset by increases in the deferred gas cost due to higher prices and other changes to working capital accounts. The insurance proceeds in particular helped to improve our liquidity position. With respect to our gas reserves program, we invested $27 million in 2014. Of that total $10 million was under the new amended ownership agreement with Jonah Energy, which we refer to as our post carry well. We recently filed with the OPUC a request to recover the revenue requirement associated with the post carry wells, thereby adding these gas reserves to our utility gas hedge portfolio. Our investment in gas reserves, both from the original contract with Encana and under the new agreement with Jonah Energy totaled $187 million since inception. Before providing earnings guidance for 2015, I’d like to explain some of the financial impacts of the recently issued regulatory order on the recovery of past and future environmental costs. First, the order results in an immediate onetime $15 million pre-tax charge for past environmental costs which we’ll record in the first quarter of 2015. The Oregon commission disallowed this amount based on its determination of how an earnings test should apply to past years from 2003 through 2012. As part of its review, the commission ruled that all but $33,000 of the $114 million in total cost through March 2014 or were deemed to be prudently incurred. Second, the commission ordered that the insurance proceeds received by the Company which amount to about $150 million in total be allocated to past and future costs with one-third of the total supplied for the recovery of past costs through December 2012. The remaining two-thirds would be placed into a secure account earning interest with those amount supplied for the recovery of future cost. In the order, the commission also concluded that all insurance settlement entered into by the Company through March of 2014 for were deemed prudent. After applying roughly $50 million of insurance proceeds towards past costs and deducting the $15 million disallowance, the commission order allows for full recovery of the remaining balance of past cost through 2012, which amount to roughly $30 million. The $30 million of past cost will go into the recovery mechanism which allows for these costs to be collected from customers over a rolling five year amortization period beginning this year. In addition to recovery in our past cost from customers and insurance, the commission also ordered the full recovery of future environmental cost as follows. First, the company will recover the first $5 million each year from customers through a tariff writer effective 2013. The Company will then apply an additional $5 million from the insurance account plus interest accrued on the account during the year to the next portion of environmental cost also effective 2013. If our environmental costs are less than $10 million plus interest, then any unused insurance will roll forward into the next year. If however our annual environment costs exceed the $10 million plus any insurance roll forward from the prior year then the excess will be fully revered through the environmental recovery mechanism. However if the Company earns above its authorized ROE, then the Company would be required to use the amount of earnings above its ROE to cover environmental expenses greater than the $10 million plus any insurance roll forward. In effect the company is provided full recovery of its environmental cost going forward. Today the Company is initiating its 2015 earnings guidance in the range of $1.77 to $1.97 per share for 2015. After adjusting for the one-time $15 million pretax charge previously discussed our earnings guidance for 2015 is $2.10 to $2.30 per share. The Company’s 2015 guidance assumes customer growth from our Utility segment, average weather conditions, slow recovery of the gas storage market in California and no significant changes in prevailing legislative and regulatory policies or outcomes. With that I’ll turn the call back over to Gregg for his concluding remarks. Gregg Kantor Thanks Steve. In 2014 our utility performance was solid with improvements in customer growth and added rate based returns on gas reserves and other system investments. We also made progress on our other growth initiatives. Earlier this month we received approval from Portland General Electric to move forward with the permitting demand acquisition work required for a potential expansion project at Mist, our underground gas storage facility. The project would be designed to provide no notice storage services to PGE’s natural gas bio-generating plants at Port Westward in Oregon. The potential expansion would include a new reservoir providing up to 2.5 billion cubic feet of available storage, an additional compressor station with design capacity of 120,000 dekatherms of gas per day and a 13 mile pipeline to connect the PGE’s gas plants at Port Westward. In 2015 our team will be working to obtain all the required permits and certain property rights and assuming successful completion of those necessary elements the current estimated cost of the expansion is approximately $125,000 million with a potential in service date in the 2018, 2019 winter season, depending on I should say the permitting process in construction schedule. As you may recall Oregon passed a bill effective last year that allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions. We view this legislation as an exciting opportunity to make a positive environmental impact while potentially serving our customers and communities in new ways. In 2014 we worked through a rulemaking effort with the OPUC staff and customer advocates rules for what we are referring to as the carbon solutions program were then passed by the Oregon Commission this past December. In parallel to that rulemaking effort last year we began assessing a number of possible projects spanning several areas. Examples of potential projects involve reducing methane emissions during pipeline maintenance and repair, residential oil conversion program and distributed generation projects that use natural gas to increase energy efficiency. At this point, we are refining concepts and meeting with interested stakeholders to discuss our ideas, including the OPUC staff, customer advocates and energy efficiency groups. Our goal this year is to file several projects with the Oregon Commission to consider and hopefully to approve. In my view the carbon solutions program offers an excellent opportunity for us to demonstrate our spirit of innovation to showcase the important role natural gas can play in helping our region meet its environmental goals and add to the Company’s bottom line. In the months ahead we intend to make progress in a number of areas as I’ve said, continuing to grow our utility customer base, completing the last two remaining dockets from our 2012 rate case proceedings, advancing the north Mist expansion project, and doing all of this while continuing to provide safe and reliable service to our customers. Thanks again for joining us this morning and now I’d be happy to open it up for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session (Operator Instructions). Gregg Kantor It’s hard to believe we were that clear on all of this stuff, but it doesn’t appear there are any questions. We’ll wait another few seconds here. Operator Our first question is from Derek Walker of Bank of America. Mr. Walker? Derek Walker Just I appreciate the color going through the order on the environmental piece here. Just a quick follow-up and there was a lot of nuances to it about conditions associated with it, but I think in general in the past or at least at times you’ve been able to achieve little bit above sort of allowed ROE, but does this new mechanism effectively to limit your ability to go slightly above that, the 9.5%? Gregg Kantor It does in those instances where we spend more than what is in the in the tariff writer and the insurance. So we’re spending more than that amount, which is $10 million, it will limit going above our allowed return on equity. Derek Walker And as far as the — just given on the commodity backdrop, as far as additional wells being drilled is there — I guess what you’re seeing on that development side? Gregg Kantor Well, as I said in the remarks we do have the ability to drill on a well-by-well basis. But the way that works though is that Jonah Energy Inc. proposes wells to us and then we get to evaluate and make a decision about on a well-by-well basis whether we’re going to proceed with those wells. Right now there haven’t been any proposed to us, not exactly certain if there will be this year and again we take them on a well-by-well basis. I don’t expect that there will be — even if they do propose wells that they will be large. Again last year there were 10 that were proposed to us. So I don’t think that’s going to be a very large amount if there are wells proposed. The other part of it is that we continue to look at a second overall gas reserve deal as part of a discussion we’re having with the commission on what’s the right amount of gas reserves to have. We call that our hedging docket which was — is going to be open this year and hopefully completed this year and that will tell us whether we’ve got the right amount of gas reserves in our portfolio or not and hopefully we’ll get through that this year and it will give us some direction on a future deal. Maybe just a little bit more follow-up on the first part of your question Derek, which was about over earning, it does in most cases where we’re as I said spending more than $10 million, prevent us from over earning in those years. But I would also say that the important part of this docket I kind of want to underscore was the costs of this are large for the company in the future and our goal here was to make sure we got full recovery and the order does do that and we really believe that this is a very reasonable path forward for us. Operator (Operator Instructions). Gregg Kantor Well, if there are no other questions, thank you all for joining us this morning. We really appreciate your interest in our Company and look forward to seeing you down the road. Thanks. Operator The conference is now concluded. Thank you for attending today’s presentation. 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!