What Cleco deal could mean to ratepayers

courtesy Gannett

Multiple experts have told the Louisiana Public Service Commission that the proposed sale of Cleco Corp. exposes ratepayers to risks in the future.

How well Cleco and the prospective new owners address those concerns over the next few months is likely the key to whether the deal happens. Pineville-based Cleco agreed in October to a sale proposal for nearly $5 billion from an investment group led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation, together with John Hancock Financial.

The sale has received other regulatory clearance and was approved by Cleco stockholders in February, leaving PSC approval as the last significant hurdle before the deal can be closed. Commissioners have heard direct testimony and will hold hearings in November to consider approval.

“What we’ve been told is, ‘we don’t think you went far enough in addressing some of these (concerns),'” said Darren Olagues, president of Cleco Power. “We’re going to work with commission staff to try to get to a mutual agreement on these main four or five points.”

 

The sudden and unexpected nature and the potential size of any storm damage costs only exacerbates the risks.

Lawrence Sisung, Corporate Director of Sisung Securities Corporation

The main concern is debt and how it will affect Cleco’s operations and financial health. In addition to $2.17 billion in equity and $1.35 billion in assumed debt, the buyers are proposing using $1.35 billion in new debt to finance the sale.

“The overall result is a more highly leveraged company that has weaker credit metrics, lower ratings and increased risk,” said John Mayeaux, senior vice president with The Sisung Group, in testimony on behalf of PSC staff.

Mayeaux testified that the additional debt is expected to result in a credit rating downgrade, which could downgrade further if more debt is added in the future (to add needed new assets, for example) or the cost of financing debt goes up. The effects of lowered credit rating could cost the company in numerous ways, including a difficulty in raising low cost debt capital. While debt costs would not directly be passed on to ratepayers, they could lead to measures that cost ratepayers or impact service in the future, staff experts testified.

One fear is Cleco revenues won’t be enough return to justify the debt and equity costs incurred by the buyers. The new owners could delay future capital expenditures, seek to implement cost-cutting measures or sell the company in that case. Staff experts also testified that added debt costs could impact Cleco’s ability to maintain a reserve fund or incur additional costs associated with a major storm.

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