TEXT-S&P revises Cleco Corp outlook

Fri Aug 24, 2012 3:29pm EDT

Overview
     -- U.S. energy company Cleco Corp.'s business risk profile has 
strengthened due to reduced merchant power exposure and constructive 
regulatory outcomes while its financial performance has continued to improve.
     -- We are affirming the 'BBB' corporate credit rating on Cleco Corp. 
(Cleco) and its subsidiary, Cleco Power LLC (Cleco Power), and we are revising 
the outlook to positive from stable.
     -- The positive outlook on both entities reflects the potential for 
higher ratings over the next 12 to 18 months if the company is able to 
maintain its excellent business risk profile while continuing to improve its 
credit protection metrics.

Rating Action
On Aug. 24, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' 
corporate credit rating on Cleco Corp. (Cleco) and subsidiary Cleco Power LLC 
(Cleco Power) and revised the outlook to positive from stable.

Rationale
The outlook revision on Cleco based on the company's efforts to reduce its 
merchant generation exposure while at the same time increasing the regulated 
rate base and reaching constructive regulatory outcomes. The positive outlook 
reflects the potential for higher ratings over the next 12 to 18 months if the 
company is able to maintain its "excellent" business risk profile, under our 
criteria, while preserving the improvements in its financial performance which 
would move the financial risk profile to the "significant" category from the 
"aggressive" category on a consistent basis.

The ratings on Cleco reflect the company's "excellent" business risk profile 
and "aggressive" financial risk profile. Cleco owns Cleco Power, a regulated 
electric utility, and Cleco Midstream Resources LLC, a merchant generation 
subsidiary.

Cleco Power is Cleco's largest subsidiary, serving about 281,000 customers, 
mainly in western and central Louisiana, a service territory that is largely 
residential and commercial and demonstrating only modest customer growth. The 
company has been able to achieve constructive regulatory outcomes that 
generally support the consolidated credit profile. Cleco Power currently 
operates under a four-year settlement agreement, entered into in October 2009, 
which increased base rates by $173.3 million, effective from February 2010, to 
account for the inclusion of the new Madison Unit 3 generation facility, in 
rate base. Somewhat mitigating the benefit of the base-rate increase is Cleco 
Power's agreement to refund the previously collected financing costs of 
Madison Unit 3. The company issued the highest amount of refunds in 2010, and 
these amounts decline from 2011 to 2013.

In addition to increasing the rate base, Madison Unit 3 addressed the 
utility's shortfall in owned generation capacity, reduced reliance on power 
purchases, and diversified the company's fuel mix. To further enhance its 
resource mix Cleco Power acquired one-half (Acadia Unit 1) of the Acadia Power 
Station, at a cost of about $300 million, adding 580 megawatts (MW) to its 
generation fleet. Cleco Power recovers the investment in Acadia through a 
capital recovery rider effective July 1, 2010. In a separate transaction, 
Cleco sold the remaining half of the Acadia generation facility, Acadia Unit 
2, to Entergy Louisiana LLC.

Subsequent to the transfer and sale of Acadia Units 1 and 2, Cleco's remaining 
merchant generation asset consists of the 775 MW Coughlin facility (formerly 
known as Evangeline), which has no debt and is now operating under a 
three-year tolling agreement with Cleco Power. The tolling agreement was 
approved by the Louisiana Public Service Commission (LPSC) in March 2012. 
Cleco's merchant generation exposure would be completely eliminated if the 
company is successful in transferring Coughlin into the utility's rate base. 
Cleco Power has provisionally accepted to acquire the Coughlin unit subject to 
LPSC approval, as a result of an earlier request-for-proposal process that the 
company expects will complete in the fourth quarter of 2012.

Cleco Power has entered into an agreement to supply all the power for Dixie 
Electric Membership Corp. (DEMCO, peak load of 578 MW) for 10 years starting 
2014. We expect the transaction to support credit quality as terms of the 
agreement are based on Cleco Power's existing rate structure and importantly 
provide for a complete pass through of all fuel costs. If Cleco is successful 
in transferring the Coughlin unit to Cleco Power's rate base at about the same 
time that the DEMCO contract starts, the utility expects to still have 
sufficient excess capacity even after reserve margins are met. The DEMCO 
transaction is contingent on Cleco Power receiving LPSC approval. We would 
expect that Cleco will not enter into any such long-term wholesale 
transactions without having available capacity to meet the contracted load, 
thereby mitigating any increase in business risk.

Cleco currently participates in a transaction that provides capital for 
investments to businesses in distressed or low-income areas and to qualifying 
renewable energy projects (New Markets Tax Credits, NMTC). In return for the 
investments, Cleco receives tax credits that reduce its federal income tax 
liability. We view this transaction as contributing to an aggressive financial 
policy, largely because it is outside Cleco's core line of business and the 
contracted payments as fixed obligations which reduce cash flow in every year.

For the 12 months ended June 30, 2012, Cleco's consolidated financial metrics 
have been strong, comfortably supporting current ratings. The company 
generated $394 million in funds from operations (FFO) and had total debt of 
$1.343 billion, leading to FFO to total debt of 29.4%. For the period, debt 
leverage improved to about 48.0% compared with 49.2% on Dec. 31, 2011, 
primarily due to the retirement of $67.9 million of long-term debt. We expect 
the financial performance to remain robust in 2012 but weaken somewhat in 2013 
due to the elimination of bonus depreciation and ongoing contributions to the 
NMTC fund. After 2013, we expect credit protection measures to benefit from 
the elimination of the financing cost refunds, the DEMCO contract and the 
recovery of invested capital, including any environmental compliance projects. 

Liquidity
Cleco Corp.'s liquidity is "strong" under Standard & Poor's corporate 
liquidity methodology criteria. We base our liquidity assessment on the 
following factors and assumptions:

     -- We expect the company's liquidity sources (including cash, FFO, and 
credit facility availability) over the next 12 months to exceed uses by more 
than 1.5x.
     -- Debt maturities for 2012-2014 are manageable.
     -- Even if EBITDA declines by 30%, we believe that net sources of cash 
will still exceed net uses.
     -- The company has good relationships with its banks, in our assessment, 
and has a good standing in the credit markets.

In our analysis, based on information as of June 30, 2012, we have assumed 
liquidity of about $850 million over the next 12 months, consisting primarily 
of FFO and availability under the revolving credit facilities. We estimate the 
company could use about $400 million during the same period, for capital 
spending, debt maturities, and shareholder dividends.

Cleco has no debt maturities in 2012, $75 million in long-term debt maturing 
in 2013 and no debt maturities in 2014, after excluding securitized debt 
maturities. We expect the company to refinance debt as it matures.

Cleco has a $250 million revolving credit facility and Cleco Power has a $300 
million revolving credit facility. Both facilities expire on on Oct. 7, 2016, 
and were completely undrawn as of June 30, 2012.

Outlook
The positive outlook on Cleco reflects the potential for higher ratings over 
the next 12 to 18 months if the improvement in the company's financial 
performance persists such that the financial risk profile is in the 
"significant" category on a consistent basis combined with the company 
maintaining its "excellent" business risk profile. Standard & Poor's base-case 
projections for Cleco anticipate that the financial risk profile will remain 
"aggressive" in the near term, but continue to improve during this period, 
with FFO to total debt of more than 17%, and total debt to total capital no 
higher than 52%. A one-notch upgrade is tied to sustained FFO to total debt 
that is greater than 20%. However, if business risk increases or the company 
is unable to generate sufficient cash flow such that FFO to total debt falls 
below 15% and debt leverage exceeds 55% on a sustained basis, then we will 
revise the outlook to stable.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed; Outlook Action
                                        To                 From
Cleco Corp.
 Corporate Credit Rating                BBB/Positive/--    BBB/Stable/--

Cleco Power LLC
 Corporate Credit Rating                BBB/Positive/--    BBB/Stable/--
 Senior Unsecured                       BBB
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