-- 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.
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.
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
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.
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
-- 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.
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 Affirmed; Outlook Action
Corporate Credit Rating BBB/Positive/-- BBB/Stable/--
Cleco Power LLC
Corporate Credit Rating BBB/Positive/-- BBB/Stable/--
Senior Unsecured BBB