LOUISIANA PUBLIC SERVICE COMMISSION ADMINISTRATIVE HEARINGS DIVISION DOCKET NUMBER U-33434 CLECO POWER LLC, EX PARTE In re: Joint Application of Cleco Power LLC and Cleco Partners L.P. for: (i) Authorization ‘for the Change of Ownership and Control of Cleco Power LLC and (ii) Expedited Treatment. ‘The findings and conclusions recommended by the administrative law judge in this proceeding are contained within the Draft Order following this cover page. This recommendation is being issued and forwarded to the Commissioners pursuant to Rule 56 of the Rules of Practice and Procedure of the Louisiana Public Service Commission. ‘The recommendation will be considered and voted on by the Commissioners at an upcoming monthly Commission meeting. All parties are advised to familiarize themselves with the Commission's Rules of Practice and Procedure, including provisions within Rule 56 which permit parties to request (within five working days of issuance of the final recommendation) the opportunity to present oral argument at the Commission meeting at which this recommendation will be considered. Copies of the Rules of Practice and Procedure of the Louisiana Public Service Commission are available from the Records and Recording Division which can be reached at (225) 342-3157. All parties are further advised that they may ascertain whether this recommendation will be considered at the Commission’s next monthly meeting by accessing the Commission’s web page at http://www.lpse.org and “clicking” on Official Business to view the Agenda for the Commission’s upcoming monthly meeting. Alternatively, parties may obtain this information by calling the Commission’s Administrative Hearings Division at either of the following telephone numbers: (225) 219-9417 or (800) 256-2397. Baton Rouge, Louisiana, this 17" day of February, 2016. Signed by: ‘Alicia Whee sith permision Chief Administrative Law Judge ce: Official Service List Louisiana Public Service Commission ‘Administrative Hearings Division 602 North Fifth Street Galvez Building, 11° Floor Post Office Box 91154 Baton Rouge, Louisiana 70821-9154 Telephone (225) 219-9417Service List for U-33434 as of 2/17/2016 Commissioners Clyde C. Holloway, Commissioner Scott A. Angelle, Commissioner Foster L. Campbell, Commissioner Lambert C Boissiere I11., Commissioner Eric Skrmetta, Commissioner LPSC Staff Counsel Lauren Temento, LPSC Staff Attorney LPSC Staff Donnie Marks, LPSC Utilities Division LPSC Consultant Paul Thomas Chastant II, Vice President of Project Development 201 St. Charles Avenue, Ste. 4240 ‘New Orleans, LA 70170 Email(s): paul@sisung.com Mobile:(337)298-1693; Telephone 1:(504)544-7730; Lane Sisung, 201 St. Charles Avenue, Suite 4240 New Orleans, LA 70170 Email(s): lane@sisung.com Telephone 1:(504)544-7700; LPSC Special Counsel Noel Darce 546 Carondelet St. New Orleans, LA 70130 Email(s): ndarce@stonepigman.com Fex:(504)581-3361; Telephone 1:(504)581-3200; Paul Zimmering 546 Carondelet Street, New Orleans, LA 70130-3588 Email(s): pzimmering@stonepigman.com Fax:(504)581-3361; Telephone 1:(504)581-3200;Petitioner: Cleco Partners L.P. James L. Ellis Taylor, Porter, Brooks & Phillips, LLP P.O. Box 2471 Baton Rouge, LA 70821 Email(s): jim.ellis@taylorporter.com Fax:(225)346-8049; Telephone 1:(225)387-3221; Kari A. Bergeron Taylor, Porter, Brooks & Phillips LLP PO BOX 2471 Baton Rouge, LA 70821 Email(s): kari. bergeron@taylorporter.com Telephone 1:(225)387-3221; Robin P. Toups Taylor, Porter, Brooks & Phillips LLP P.O. Box 2471 Baton Rouge, LA 70821 Email(s): robin.toups@taylorporter.com Fax:(225)215-8711; Telephone 1:(225)387-3221; ‘Thomas D. Gildersleeve Taylor Porter Attorneys at Law P.O. Box 2471 Baton Rouge, LA 70821 Email(s): tommy. gildersteeve@taylorporter.com Telephone 1 (225)387-3221; Fax:(225)215-8711; Cleco Power LLC Alan C. Wolf Phelps Dunbar 365 Canal Street, Suite 2000 ‘New Orleans, LA 70130-6534 Email(s): wolfa@phelps.com Fax:(504)568-9130; Telephone 1:(504)566-131 1; Dan Zimmerman Phelps Dunbar LLP 365 Canal Street, Suite 2000 New Orleans, LA 70130 Email(s): dan.zimmerman@phelps.com Telephone 1:(504)566-1311;Intervenor: Daniel T. Pancamo Phelps Dunbar 365 CANAL ST STE 2000 New Orleans, LA 70130-6534 Email(s): dan paneamo@phelps.com Fax:(504)568-9130; Telephone 1:(504)584-9265; Julia E, Callis, Associate General Counsel Cleco Power LLC 2030 Donahue Ferry Road Pineville, LA 71360 Email(s): julia.callis@cleco.com Fax:(318)484-7685; Telephone 1:(318)484-7675; Mary Ellen Roy Phelps Dunbar LLP 365 Canal Street,, Suite 2000 New Orleans, LA 70130 Email(s): maryellen.roy@phelps.com Telephone 1:(504)566-1311; Nathan G. Huntwork Phelps Dunbar 365 CANAL ST STE 2000 New Orleans, LA 70130-6534 Email(s): nathan.huntwork@phelps.com Fax:(504)568-9130; Telephone 1:(504)566-1311; Alliance for Affordable Energy Brian Burke Anzelmo, Milliner & Burke, L.L.C. 4035 Washington Avenue New Orleans, LA 70125 Email(s): brianjudeburke@yahoo.com Fax:(504)835-9951; Telephone 1:(504)835-9951; Casey DeMoss, Executive Director Alliance for Affordable Energy 2372 St. Claude Ave., #3004 New Orleans, LA 70001 Email(s): casey@allenergy.orgMichael J. Laughlin Alliance for Affordable Energy 3636 S. 1-10 Service Rd. W. Suite 206 Metairie, LA 70001 Email(s): laughlinmichael@hotmail.com Telephone 1:(504)835-9951; Thomas W. Milliner Anzelmo, Milliner & Burke, LLC 4035 Washington Avenue New Orleans, LA 70125 Email(s): tommymilliner@all4energy.org Fax:(504)208-9768; Telephone 1:(504)835-9951; Boise Packaging & Newsprint, LLC Ronald Williams Williams Bradbury, P.C, 1015 W. Hays Street Boise, ID 83702 Telephone 1:(208)344-6633; Cabot Corporation David L. Guerry Long Law Firm, LLP One United Plaza, Suite 500 4041 Essen Lane Baton Rouge, LA 70809 Email(s): dig@longlaw.com Fax:(225)922-5105; Telephone 1:(225)922-5110; Jamie Hurst Watts, Attomey Long Law Firm, LLP 4041 ESSEN LN STE 500 ONE UNITED PLAZA, Baton Rouge, LA 70809 Email(s): jhw@longlaw.com Fax:(225)922-5105; Telephone 1:(225)922-5110;,Calvin I. Trahan, Andrew J. Gibson Kahn Swick & Foti, LLC 206 Covington Street Madisonville, LA 70447 Email(s): andrew.gibson@ksfeounsel.com Fax:(504)455-1498; Telephone 1:(504)455-1400; Entergy Louisiana, LLC and Entergy Gulf States Louisiana, LLC (EGSL) Jason M. Bilbe Entergy Services, Inc. 639 Loyola Avenue Mail Unit L-ENT-26E New Orleans, LA 70113 Email(s): jbilbe@entergy.com Fax:(504)576-5579; Telephone 1:(504)576-4235; Karen H. Freese Entergy Services, Inc. Mail Unit L-ENT-26-E 639 Loyola Avenue New Orleans, LA 70113 Email(s): kfreese@entergy.com Fax:(504)576-5579; Telephone 1:(504)576-2648; Kathryn L. Lichtenberg Entergy Services Mail Unit L-ENT-26-E 639 Loyola Avenue ‘New Orleans, LA 70113 Email(s): klichten@entergy.com Fax:(504)576-5579; Telephone 1:(504)576-2648; Kimberly A. Fontan, Director, Louisiana Regulatory Affairs Entergy Services, Inc. 4809 Jefferson Hwy. Mail Unit L-JEF-357 Jefferson, LA 70121 Email(s): kfontan@entergy.com Fax:(504)840-2681; Telephone 1: 104)840-2528;Lawrence J. Hand Entergy Services, Inc. 639 Loyola Avenue Mail Unit L-ENT-26E New Orleans, LA 70113 Email(s): thand@entergy.com Fax:(504)576-5579; Telephone 1:(504)576-6825; Helen Moore and Lawrence E. L'Herisson Mazwell R. Huffman Robbins Geller Rudman & Dowd LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Email(s): mhuffinan@rgrdlaw.com Fax:(619)231-7423; Telephone 1:(619)231-1058; Helen Moore, and Calvin I. Trahan and Lawrence E. L'Herisson David A. Knotts Robbins Geller Rudman & Dowd LLP 655 West Broadway, Suitel 900 San Diego, CA 92101 Email(s): dknotts@rgrdlaw.com Fax:(619)231-7423; Telephone 1:(619)231-1058; David T. Wissbroecker Robbins Geller Rudman & Dowd LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Email(s): DWissbroecker@rgrdlaw.com Fax:(619)231-7423; Telephone 1:(619)231-1058; Edmond H. Knoll The Knoll Law Firm 233 South Main Street Marksville, LA 71351 Email(s): sonny@knolllawfirm.com Telephone 1:(318)253-6200; Jerold Edward Knoll, Sr. The Knoll Law Firm 233 South Main Street Marksville, LA 71351 Email(s): eddie@knolllawfirm.com Telephone 1:(318)253-6200;Lewis Kahn Kahn Swick & Foti, LLC 206 Covington Street Madisonville, LA 70447 Email(s): lewis.kahn@ksfeounsel.com Fax:(504)455-1498; Telephone 1:(504)455-1400; Michael J. Palestina Kahn Swick & Foti, LLC 206 Covington Street Madisonville, LA 70447 Email(s): michael palestina@ksfcounsel.com Fax:(504)455-1498; Telephone 1:(504)455-1400; Lafayette Utilities System and Boise Packaging & Newsprint, LLC Carrie Tournillon, Associate Kean Miller LLP 909 Poydras Street, Suite 3600 New Orleans, LA 70112 Email(s): carrie.tournillon@keanmiller.com ‘Telephone 1:(504)585-3050; Katherine W. King Kean Miller LLP 400 Convention Street, Suite 700 PO Box 3513 Baton Rouge, LA. 70821-3513 Email(s): Katherine. King@keanmiller.com Fax:(225)388-9133; Telephone 1:(225)387-0999; Randy Young Kean Miller, LLP 400 Convention Street, Suite 700 P.O. Box 3513 Baton Rouge, LA 70821-3513 Email(s): randy.young@keanmiller.com ‘Telephone 1:(225)387-0999; Louisiana Cable & Telecommunications Association A. Aaron George Sheppard Mullin Richter & Hampton LLP 2099 Pennsylvania Avenue Suite 100 Washington, DC 20006 Email(s): ageorge@sheppardmullin.com Fax:(202)747-1901; Telephone 1:(202)747-1900;Cheryl P. McCormick LCTA 763 North Street Baton Rouge, LA 70802 Email(s): cme@lacable.org Fax:(225)383-6705; Telephone 1:(225)387-5960; J.D, Thomas SHEPPARD MULLIN RICHTER & HAMPTON LLP 1300 I Street, N.W. 1th Floor East Washington, DC 20005 Email(s): dthomas@sheppardimullin.com Telephone 1:(202)218-0000; Fax:(202)218-0020; Rebecca G. Smith Adams and Reese LLP 450 Laurel Street, Suite 1900 Baton Rouge, LA 70801 Email(s): rebecea.smith@erlaw.com Fax: (225)336-5220; Telephone 1:(225)336-5200; Robert L. Rieger Jr, ‘Adams and Reese, LLP 450 Laurel St Suite 1900 Baton Rouge, LA 70801-1820 Email(s): Robert. Rieger@arlaw.com Fax:(225)336-5220; Telephone 1:(225)336-5200; Scott M. Levy Adams and Reese LLP 430 Laurel Street Suite 1900 Baton Rouge, LA 70801 Email(s): scott.levy@arlaw.com Fax:(225)336-5200; Telephone 1:(225)336-5220; Susan M, Stith SHEPPARD MULLIN RICHTER & HAMPTON LLP 1300 I Street, N.W., 11th Floor East Washington, DC 20005 Email(s): sstith@sheppardmullin.com Fax:(202)218-0020; Telephone 1:(202)218-0000;Interested Party: Sierra Club Joshua Smith, Staff Attorney Sierra Club 85 Second Street, 2nd Floor San Francisco, CA 94105 Email(s): joshua smith@sierraclub.org, Fax:(415)977-5793; Telephone 1:(415)977-5560; Southwestern Electric Power Company (SWEPCO) Bobby S. Gilliam Wilkinson, Carmody & Gilliam PO Box 1707 Shreveport, LA 71166 Email(s): bgilliam@weglawfirm.com Fax:(318)221-3705; Telephone 1:(318)221-4196, Jonathan P. McCartney Wilkinson, Carmody & Gilliam: 400 Travis Street P. O. Box 1707 Shreveport, LA. 71166 Email(s): jmecartney@weglawfirm.com Fax:(318)221-3705; Telephone 1:(318)221-4196; Harold Schoeffler 3502 E. Simooe St. Lafayette, LA 70501 Email(s): cadistyle@aol.com Telephone 1:(337)234-4042;, J. Guillory A Concerned Citizen NO ADDRESS INFORMATION FOUND ‘No Address Information Found, LA Kevin Barnes TITN. Union Street, #78 Wilmington, DE 19805 Email(s): kb@deeplakepartners.com Telephone 1:(646)265-9535;Marionneaux Kantrow, LLC Kara B. Kantrow Marionneaux Kantrow, LLC 10101 Siegen Lane Building 2, Suite A Baton Rouge, LA 70810 Email(s): kara@milawla.com Fax:(225)757-1709; Telephone 1:(225)769-7473; Kyle C. Marionneaux Mationneaux Kantrow, LLC 10101 Siegen Lane Building 2, Suite A Baton Rouge, LA 70809-4982 Email(s): kyle@mklawla.com Fax:(225)757-1709; Telephone 1:(225)769-7473;LOUISIANA PUBLIC SERVICE COMMISSION ADMINISTRATIVE HEARINGS DIVISION DOCKET NUMBER U-33434 CLECO POWER LLC, EX PARTE In re: Joint Application of Cleco Power LLC and Cleco Partners L.P. for: (i) Authorization for the Change of Ownership and Control of Cleco Power LLC and (ii) Expedited Treatment. RECOMMENDATION OF THE ADMINISTRATIVE LAW JUDGE Synopsis In this proceeding, Cleco Power LLC (“Cleco Power”), a public utility under the jurisdiction of the Louisiana Public Service Commission, and Cleco Partners L.P. (“Cleco Partners”), a partnership comprised of three private investment firms (together, the “Applicants”) seek approval from the Louisiana Public Service Commission (the “Commission” or “LPSC”) for Cleco Partners to acquire ownership and control of Cleco Power through a purchase of all outstanding shares of stock of Cleco Power's parent company, Cleco Corporation. The Applicants contend that the proposed acquisition satisfies the 18-factor test of the Commission's 1994 General Order (In re: Commission Approval Required of Sales, Leases, Mergers, Consolidations, Stock Transfers, and All Other Changes of Ownership or Control of Public Utilities Subject to Commission Jurisdiction), issued March 18, 1994 (the “1994 General Order”). Pursuant to the 1994 General Order, the Commission has great discretion in determining whether a proposed merger or acquisition involving a public utility should be grantedApplicable Law The Commission’s regulatory authority over electric utilities is derived directly from the Louisiana Constitution, which provides at Article IV, Section 21: The Commission shall regulate all common carriers and public utilities and have such other regulatory authority as provided by law. It shall adopt and enforce reasonable rules, regulations, and procedures necessary for the discharge of its duties, and shall have other powers and perform other duties as provided by law. This delegation of Constitutional authority over electric utilities has been described in Louisiana jurisprudence as “broad and independent” (Entergy Gulf States, Inc. v. Louisiana Pub. Serv. Comm'n, 98-0881 (La. 1/20/99), 726 So. 2d 870, 873), and “plenary” (Entergy Louisiana, LLC & Entergy Gulf States Louisiana, L.L.C. Ex Parte, U-33605, 2016 WL 97686, at *2 (Jan. 6, 2016). Pursuant to its Constitutional authority, the Commission issued the 1994 General Order to address mergers, acquisitions, and various other changes to the control of public utilities subject to the Commission’s jurisdiction. The Order requires Commission approval (or official action of non-opposition) prior to consummation of a transfer of control or ownership of a public utility, in order that the Commission may carry out its Constitutional responsibility to regulate the rates and services provided by public utilities. The 1994 General Order explains the Commission’s reasoning in requiring prior approval of mergers and acquisitions: Prior Commission approval to such changes is vital, The Commission is the Constitutionally created body authorized to regulate the rates charged and services rendered by all utilities and common carriers subject to its jurisdiction. As such, the Commission must be able to ensure safe, efficient and reliable services at reasonable rates, and that ratepayers will not be harmed as result of change in ‘ownership or control. Therefore, scrutiny and prior approval of these changes is essential, Docket No, U-32434 Cleco Power LLC, ex parte Recommendation of the ‘Administrative Law Judge Page?The 1994 General Order provides the Commission with broad discretion in determining whether to approve a proposed transfer of ownership of a public utility. The Order lists 18 public interest “factors” (the “18 Factors”) which the Commission “shall take into account” in determining whether to approve a transfer of ownership, but leaves to the Commission full discretion to determine whether the proposed acquisition is in the public interest and should be approved. The 1994 General Order further specifies that the entity seeking acquisition or control ofa public utility “shall have the burden of proving that the requirements of the Order have been satisfied.” The 18 Factors are as follows: 1) Whether the transfer is in the public interest. 2) Whether the purchaser is ready, willing and able {o continue providing safe, reliable and adequate service to the wility's ratepayers. 3) Whether the transfer will maintain or improve the financial condition of the resulting public utility. 4) Whether the proposed transfer will maintain or improve the quality of service to public utility ratepayers. 5) Whether the transfer will provide net benefits to ratepayers in both the short term and the Jong term and provide a ratemaking method that will ensure, to the fullest extent possible, that ratepayers will receive the forecasted short and long term benefit 6) Whether the transfer will adversely affect competition. 7) Whether the transfer will maintain or improve the quality of management of the resulting public utility doing business in the State, 8) Whether the transfer will be fair and reasonable to the affected public utility employees. 9) Whether the transfer will be fair and reasonable to the majority of all affected public utility shareholders. 10) Whether the transfer will be beneficial on an overall basis to State and local economies and to the communities in the area served by the public utility. Docket No, Us (Cleco Power LLC, ex pare Recommendation of the Administrative Law Judge Page 311) Whether the transfer will preserve the jurisdiction of the Commission and the ability of the Commission to regulate and audit effectively the resulting public utility's operations in the State. 12) Whether conditions are necessary to prevent adverse consequences which may result from the transfer. 13)The history of compliance or noncompliance of the proposed acquiring entity or principals or affiliates have had with regulatory authorities in this State or other jurisdictions, 14) Whether the acquiring entity, persons, or corporations have the financial ability to operate the system and maintain or upgrade the quality of the physical system. 15) Whether any repairs and/or improvements are required and the ability of the acquiring entity to make those repairs and/or improvements. 16) The ability of the acquiring entity to obtain all necessary health, safety and other permits. 17) The manner of financing the transfer and any impact that may have on encumbering the assets of the entity and the potential impact on rates. 18) Whether there are any conditions which should be attached to the proposed acquisition. Overview The Applicants in this proceeding are Cleco Power and Cleco Partners. Cleco Power is an integrated electric public utility engaged in the generation, transmission, and distribution of electricity at retail and wholesale in Louisiana, The company is subject to the jurisdiction of the Commission and has its corporate headquarters in Pineville, Louisiana. Cleco Power serves approximately 284,000 customers in Louisiana and owns or has an interest in eleven generating units,’ ‘Direct Testimony of Keith D. Crump, at p. 4 Docket No, U-33434 (Cleeo Power LLC, ex pate Recommendation of the Administrative Law Judge Page 4Cleco Power is a wholly-owned subsidiary of Cleo Corporation, a public utility holding company. Cleco Corporation is a public investor-owned company, whose common shares are traded on the New York Stock Exchange. It owns various subsidiaries which would be acquired by Cleco Partners in the proposed transaction.” ‘The would-be acquirer in the proposed transaction is Cleco Partners (the “Purchasers”), a Delaware partnership formed solely for purposes of the proposed transaction.’ It is comprised of three private investment firms, more fully described herein: (1) MIP Cleco Partners L.P. (MIP Cleco Partners” or “Macquarie” ; the investment vehicle through which Macquarie Infrastructure Partners IIT L.P. (“MIP III") and investors that co-invest with Macquarie Infrastructure and Real Assets (“MIRA”) will fund their investment in Cleco Corporation; (2) beIMC Como Investment Limited Partnership and beIMC Como GP Ine. (“beIMC”), affiliated entities of British Columbia Investment Management Corporation; and (3) JH Como Investments, LLC, an affiliated entity of John Hancock Financial (“John Hancock”). If the transaction is approved, Cleco Corporation would cease to be a publicly traded company, and its common stock would no longer be traded on the New York Stock Exchange. Cleco Group, a wholly-owned direct subsidiary of Cleco Partners, would receive all of the stock in Cleco Corporation. Cleco Partners would indirectly own all of the stack in Cleco Corporation by virtue of its ownership of Cleco Group. Cleco Corporation would continue to own Cleco * id. atp.6 * Direct Testimony of J. Andrew Murphy, Adopted by Andrew Chapman, ap. 5. ‘Cleco Partners was formerly known as Como 1 L-P. Como 1 LP. was formed for purposes of the propased ‘wansaction, and after the transaction was announced, Como I L-P changed its name to Cieo Partners L.P. Joint Application of Cleco Power and Clece Pariners, filed on February 10, 2015. Docket No, U-33 Cleco Power LLC, ex pare Recommendation of the Administrative Law Judge Page 5Power as it does today.* Accordingly, the chain of ownership would be Cleco Partners ~ Cleco Group — Cleco Corporation - Cleco Power The Applicants submit that the proposed transaction “merely replaces the public shareholder ownership of Cleco Corporation with @ group of institutional investors (primarily pension funds) secking long term investments in infrastructure assets.* The investors, according to the Applicants, are “experienced, committed owners with a long-term vision for Cleco Power and successfull track record of owning regulated utilities.” The Applicants submit that Cleco Power and Cleco Corporation will be “bolstered” by the intrinsic nature of Cleco Partners’ private infrastructure ownership as compared to its current ownership as @ public company: “{plublic company shareholders are notoriously focused on the short-term, expecting regular increases in their stock price and uninterrupted dividends,” while “experienced private infrastructure owners, such as Cleco Partners, are more patient investors, who are better able to focus on long-term growth opportunities, rather than on short-term gains.”” As part of the transaction, the Applicants are proposing a set of 77 regulatory commitments (the “Regulatory Commitments” or the “Commitments”), which, according to the Applicants, will provide “compelling net benefits that will strengthen Cleco Power's financial integrity, maintain Cleco Power's investment in the communities it serves, and protect Cleco’s many stakeholders,”® including customers, employees, retirees, sharcholders, local communities, * Joint Application at pp. 11, 12. $ Joint Application at p. 2. See also, Direct Testimony of J. Andrew Murphy, Adopted by Andrew Chapman, at p. 4 © Applicants’ Initial Post-Hearing Brief at p. 2. Td. at pp. 13-14, * The Applicants’ offering of the Regulatory Commitments is conditioned upon the acceptance of the entire package of commitments, without modification or additional conditicas. Applicants’ Post-Hearing Brief at i. 5. The Regulatory Commitments were revised subsequent to the hearing to address some of the concerns raised by the Staff and others during the hearing. ” Applicants’ Initial Post-Hearing Brief at p.11. Docket No, U-33434 loco Power LLC, ex parte Recommendation of the Administrative Law Judge Page 6and the Commission. The full text of the Regulatory Commitments is attached to this Recommendation, In brief summary however, Cleco Corporation shareholders will be paid a 15% premium for their shares, while Cleco Power's ratepayers will receive $125 million in rate credits ($8.33 million per year) over a 15-year period (the “Rate Credits”)!", as well as yearly cost of service rate reductions of approximately $1.2 million.'’ The Regulatory Commitments also provide for a Service Quality Program; a low income assistance program; maintenance of the current employee head count, salaries, and benefits for at least five years; maintenance of retiree benefits for five years; maintenance of company headquarters in Pineville, Louisiana and operational management in Louisiana; and continuation of community charitable and economic development contributions. Other Regulatory Commitments contain “ring-fencing” provisions, designed to protect Cleco Power in the event that Cleco Corporation or Cleco Power begins to experience distress,'? while others prevent or limit the payment of distributions from Cleco Power to Cleco Corporation and from Cleco Corporation to the owners under certain pre-defined circumstances."? Other Regulatory Commitments address the Commission’s jurisdiction and stipulate to the Commission’s enforcement authority (regarding the Commitments) over Cleco Power and its upstream owners,'* ‘The Applicants assert that the Regulatory Commitments and the Rate Credits will assure to the Commission, Cleco Power’s customers, employees, and the public that "Cleco Power's safe and reliable service, its dedication to the communities it serves, and its sound financial ' Aficr the hearing, the Applicants agreed to increase the rate credit amount from $65 million to $125 million. See Regulatory Committuent No, 25. Applicants’ Initial Post-Hearing Brief at p. 2. See Regulatory Commitment No. 20 " ya. atp. 12. 2 fd atp. 28. "7a. atp 61 Docket No, U-33434 (Cleco Power LLC, ex parte Recommendation of the Administative Law Judge Page 7integrity will be maintained or improved,”!* and that “the Commission’s ability to effectively regulate Cleco Power (and its upstream ownership) will be meaningfully enhanced.”’* Accordingly, the Applicants submit, the proposed transaction is in the public interest and should be approved by the Commission. The Louisiana Public Service Commission Staff (the “Commission Staff” or the “Staff”) expresses serious reservations about the proposed transaction. ‘The Staff acknowledges that the Regulatory Commitments address and mitigate many of the issues which concer the Staff, The Staff contends, however, that the Regulatory Commitments do not provide adequate value to Cleco Power's ratepayers to fully mitigate the risks to which they will be exposed as a result of the proposed transaction, ‘The Staff asserts that the risks to Cleco Power are largely financial, due to the structure of the proposed transaction as a “leveraged buyout.”"” “Cleco Partners will borrow $1.35 billion in new debt to be placed on the books of Cleco Corporation, (along with approximately $2.17 billion from the Purchasers) to fund the acquisition of Cleco Corporation stock.”'® Cleco Partners will also assume $1.354 billion in currently outstanding Cleco Power debt.'? The Comission Staff argues that the increased debt on the books of Cleco Corporation will damage the financial integrity of both Cleco Power and Cleco Corporation and will “negatively impact ratepayers, putting them at risk of significantly higher rates and potential impairment of service in the future." As explained by the Staff, the current net operating revenue of Cleco Power will wld "7 Commission Staff's Initial Post-Hearing Brief at p, 9. Merriam Webster Dictionary defines a “leveraged buyout” as the purchase of a company made with borrowed money secured by the assets ofthe company being bought. '8 id, citing Direct Testimony of John Mayeaux, at pp. 4-5, 8 a atp.7. 1d. Docker No. U-33434 Clevo Power LLC, ex parte Recommendation of the Administrative Law Judge Page 8have to support the debt service on (1) the current Cleco Power debt amount of $1.35 billion, (2) the $1.35 billion in new debt, and (3) the return to the Purchasers who will be putting up $2.17 billion in equity.’ The Staff submits that the proposed acquisition through a leveraged buyout, “is specifically designed to earn excess returns for Cleco Partners by double-leveraging debt; ie., by taking advantage of the higher returns on the “equity” investment in Cleco Power versus the lower interest rate being paid on the debt issued by Cleco Corporation used to finance the equity.”” Further, the Staff points out, the Applicants plan to utilize a tax structure ~ by which a non-deductible dividend becomes a deductible interest payment - that will result in retail ratepayers paying in rates up to $30 million per year in taxes that may never be paid to the state and federal taxing authorities.” The Staff contends that through the implementation of double- leveraging and this tax structure, Cleco Partners will be using ratepayer money for financial gain, and Cleco Pariners’ proposed $125 million in Rate Credits over fifteen years are insufficient to compensate ratepayers.”* ‘The Staff contends that the leveraged transaction will result in a considerably lower equity ratio and weaker credit metrics, leading to various risks, including: (1) the likelihood that Cleco Corporation's credit rating will be downgraded to below investment grade by credit rating agencies; (2) the possibility that Cleco Power and Cleco Corporation will have difficulty in addressing future financial matters arising from circumstances outside its control (e.g. declining revenues, hurricane damage); and (3) necessary cost-cutting measures which could impair Cleco 2 id, at p33, 2 Fd. at pp. 10-1 id atp. id Docket No, U-33434 Cleco Power LLC, ex parte Recommendation of the -Adminstative Lae Jade Page 9Power's ability to deliver safe, reliable service. The significant financial weakening of Cleco, according to the Staff, will also create a “ risk,” at the point when Macquarie, the 54% owner of Cleco Partners, exits the deal as early as eight years from now. At that point, none of the other members of Cleco Partners will be required to remain as owners, and, in 2025, “the Applicants project that Cleco Corporation will have an equity capitalization in the 33% range. This will make Cleco a far less attractive target for any prospective purchaser, could drive off possible suitors, could force potential buyers to make less attractive offers with fewer ratepayer benefits, or could cause the need for immediate and or frequent rate increases at the time of the sale and thereafter.”** It is significant, the Staff submits, that Cleco Power is currently a financially sound and extremely well-run utility; thus, this is not a situation in which a badly managed and operated utility proposes an acquisition by a well-run utility to “fix” the problems.** According to the Staff, many of the Regulatory Commitments are designed to simply maintain the status quo at Cleco Power; “[nJo operational or service benefits are being brought to the table by the Purchasers.”*” Thus, it is the Staff's position that the proposed transaction, even considering the Regulatory Commitments and the Rate Credits agreed to by the Applicants, is not in the public interest and does not meet the requirements of the 1994 General Order2* “Cleco will be far weaker financially, and the Applicants’ proposed Regulatory Commitments do not adequately compensate for that risk."°? * Ia atp. 10. 2 Fd ae 12613, * dat 14 Id. ap. 2 id. ati Docket No, U-33434 ‘Cleso Power LLC, ex parte Recommendation of the Administrative Law Judge Page 10Nevertheless, the Staff acknowledges that the question of whether the Commission should approve the proposed transaction is “fundamentally a policy issue for the Commission” and that the Commission has broad discretion to determine whether the proposed transaction should be approved. *” Should the Commission determine that the proposed transaction is in the public interest, the Staff urges the Commission to adopt the Regulatory Commitments as a whole and as modified by the Staff. Specifically, the Staff urges that the Commission take one or more of the following courses of action if the Commission determines that the proposed transaction is in the public interest: (1) increase the Rate Credit amount above the $125 million currently offered by Cleco Partners to balance the double-leveraging and tax structure benefits to the Purchasers; (2) determine that the proposed Rate Credit amount of $125 million is sufficient to address perceived near term and tail-end risks, but make a further determination that compensation should be made to the ratepayers to balance the double-leveraging and tax structure benefits to the Purchasers, deferring only the quantification of the year-by-year compensation amount until future annual rate proceedings; (3) determine that the proposed Rate Credit amount of $125 million is sufficient to address perceived near term and tail-end risks and defer treatment of the double-leveraging and tax structure issues, specifically reserving the right to address those matters in a future rate proceeding; or (4) address the double-leveraging issue by requiring that Cleco Corporation maintain an equity to total capitalization ratio of at least 45%! After reviewing the Staff's options, as stated in the Staff's Initial Post-Hearing Brief, the Applicanis state in their Post-Hearing Brief that Option 3 presents a “balanced result" and is acceptable to them. id. atp. 5. 3 Ud. at pp. 57-58. Decker No, U-33434 Cleco Power LUC, ex pate Recormention ofthe Administrative Law Judge Page IiThe three intervenors who filed posts-hearing briefs - Shareholder-Intervenors Helen Moore, Calvin I. Trahan, and Lawrence E. L’Herisson (together, the “Shareholder-Intervenors”); Alliance for Affordable Energy (“Alliance”); and Sierra Club — concur with the Commission Staff's concerns regarding the proposed transaction, The Sharcholder-Intervenors further argue that the proposed transaction is the result of a flawed, “self interested” process which is unfair to most of Cleco Corporation's shareholders and will benefit only two groups: (1) Cleco Partners and (2) “Company insiders who approved the transaction and stand to reap a multi-million dollar cash payday if the deal is completed." The Shareholder-Intervenors contend that Cleco does not need Cleco Partners to maintain its high quality operations, customer service, workforce, and facilities, or its economic development and chatitable contributions to the community. While bringing no benefits, the Shareholder- Intervenors argue, the transaction will leave Cleco Corporation highly leveraged and financially vulnerable and expose Cleco Power's ratepayers, employees, and surrounding community to significant and unnecessary financial risks. The Shareholder-Intervenors submit that the Regulatory Commitments are largely aimed at maintaining the status quo with respect to operations and service and are “insufficient to protect ratepayers, employees, and the local community, or satisfy the Joint Applicants’ burden under the 1994 General Order.”** Alliance submits that the overriding failure of the proposed transaction lies in the fact that the transaction places the private interests of the Applicants (the buyers and sellers) ahead of the interests of captive Cleco customers. Alliance contends that “consumers are best served by @ utility whose unconflicted purpose is to serve consumers,” as opposed to financial companies, % Shareholder-Intervenors” Initial Post-Hearing Brief at pp. 1,2. id, atp. 11. lez Pe LL; pate Recommendation of the Administrative Law Judge Page 12who assess financial prospects, then buy and sell those prospects - all with the aim of maximizing gain.“ According to Alliance, the proposed transaction brings harm from five sources: (1) Cleco Power’s importance to its holding company is diminished; (2) Cleco Power’s Louisiana-based operational decisions could be subordinated to Cleco Partners’ globally-based strategic decisions; (3) Cleco Partners’ business activities bring risks to Cleco Power's customers; (4) the investment goals of Cleco Partners, and the resulting pressures put on Cleco Power will change in unknown ways; and (5) Cleco Partners’ business model ~ buying regulated monopolies and protecting their revenue stream ~ could impede the Commission’s future policies on market structure.** Alliance urges the Commission to withhold its approval of the proposed transaction, as it imposes risks on ratepayers to create gain for shareholders.* Alliance further “urges the Commission to recognize that the 1994 General Order does not adequately address the issues raised by the proposed transaction, and should be modified to address those issues. Sierra Club agrees that Cleco Corporations’ shareholders will benefit from the transaction to the detriment of Cleco Power's customers. Sierra Club asserts that the 14.8% acquisition premium to be paid to shareholders in the deal translates into approximately $435 million in value above and beyond Cleco Corporation’s current stock price that will be transferred to Cleco Corporation’s shareholders, rather than Cleco Power's ratepayers. Sierra Club argues that this significant premium is “above and beyond the ‘just and reasonable’ return that Cleco 237 shareholders are entitled to receive from rates lawfully set by the Commission."” Meanwhile, according to Sierra Club, Cleco will see no benefits from the transaction - no new assets, no new Alliance’s Initial Post-Trial Brief at pp. 1,3. id. ap. 45. ig. 57 Sierra Club's Initial Post-Hearing Brief at p. 3, citing Direct Testimony of Scott Hempling, at pp. 7-8. Decket No, U-33434 Cteco Power LLC, ex parte Recornendation ote Admintstative Law ade Page 13capacity, no new customers, no new load commitments, no new transmission needs, and no new operating revenues, and the promised Rate Credits do not adequately compensate the ratepayers and in fact bear no rational relationship to the negative impacts the transaction will bring to bear on the Cleco enterprise. “In exchange for virtually no structural benefit or improvement in financial health, the Company's ratepayers will effectively be committed to paying off the approximately $1.4 billion acquisition loan that is financing the transaction.”** Further, according to Sierra Club, the increased debt on Cleco Corporation’s books creates an incentive for the company to avoid, defer, or minimize capital investments in infrastructure that will improve the system and help the utility transition to lower emitting generation, so that it can generate enough profits to cover the increased debt service while also meeting the expectations of its investors.* As a result, Sierra Club contends, “the transaction appears to reward the company’s continuing dependence on its existing coal-fired generation fleet despite a long future of mounting capital and operational costs associated with those sources, and despite increasing customer demand for, and decreasing cost of, alternative generation resources.” Procedural History On February 10, 2015, Cleco Power and Cleco Partners filed a Joint Application of Cleco Power and Cleco Partners L.P. for Authorization for the Change of Ownership and Control of Cleco Power LLC and Expedited Treatment (the Joint Application”). In support of the Joint Application, Cleco Power attached the Direct Testimonies of Darren J. Olagues and Keith 3 Jd. at pp.3,21 ya. at p.4. "a, Docker No. U.33434 ‘Cleso Power LLC, ex parte Recommendation ofthe Adminitrative Law Judge Page 14Douglas Crump, and Cleco Partners attached the direct testimonies J. Andrew Murphy, Andrew M. Chapman, Christopher J. Leslie, and Lincoln H. Webb. The Joint Application was published in the February 13, 2015 edition of the Commission's Official Bulletin, and the matter was assigned to Chief Administrative Law Judge Valerie Seal Meiners. Timely interventions were filed by the Shareholder-Intervenors, Alliance, Sierra Club, Cabot Corporation (“Cabot”), Boise Packaging & Newsprint, LLC (“Boise”), Southwestern Electric Power Company (“Swepco”), Entergy Louisiana, LLC (“ELL”), Entergy Gulf States Louisiana, L.L.C. (“EGSL”), and Lafayette Utilities System (“LUS”). On March 16, 2015, Louisiana Cable & Telecommunications Association and Member Companies (“LCTA”) filed a Motion for Approval of Late Intervention and Inclusion on Service List. At a March 25, 2015 status conference, no one objected to LCTA’s intervention and LCTA’s motion was granted. Interested Party Status was granted to Harold Schoeffler, Kevin Barnes, and the Marrioneaux and Kantrow Law Firm Pursuant to the procedural schedule established for the proceeding, the Commission Staff filed the Direct Testimonies of Lawrence J. Sisung (July 28, 2015) and James Thomas McGuckin, John E. Mayeaux, Paul Thomas Chastant, and Robert Lane Sisung (all on July 29, 2015). Alliance filed the Direct Testimony of Scott Hempling on July 29, 2015 and filed the Cross-Answering Testimony of Scott Hempling on August 24, 2015. On October 2, 2015, Cleco Power filed the Rebuttal Testimony of Darren J. Olagues, and Cleco Partners filed the Rebuttal Testimony of Andrew M. Chapman. A Joint Pre-Hearing Statement was filed on November 4, 2015, and Pre-Hearing Briefs were filed on the same date by the Applicants, the Commission Staff, the Shareholder-Intervenors, Alliance, Sierra Club, Boise, and LUS. Docket No. U-33434 (Cleco Power LLC, ex pare Recommendation of the ‘Ackninistrative Law Iudge Page 15The hearing was convened on Monday, November 9, 2015, and continued through ‘Thursday, November 12, 2015, in Pineville, Louisiana. The witnesses for the Applicants, the Commission Staff, and Alliance were presented for cross-examination. At the conclusion of the hearing, the administrative Jaw judge established a post-hearing filing schedule for the simultaneous filing of Initial Post-Hearing Briefs (initially December 22, 2015, but extended to December 29, 2015) and simultaneous Reply Briefs (January 12, 2016). The Applicants, the Commission Staff, Alliance, and Sierra Club filed Initial and Reply Briefs. On January 15, 2015, the administrative law judge issued a Ruling on Commission Staff's Request for Public Disclosure of Certain Information Produced in Discovery." The Ruling granted the Staff's request that the following information, provided to the parties by the Applicants during discovery pursuant to a confidentiality agreement, be made public in this proceeding: (1) indicative Credit Ratings of Cleco Power and its parent company, Cleco Corporation, obtained by Cleco Partners from credit rating agencies; and (2) the outputs of financial modeling and analysis performed by Cleco Partners, projecting the capital structure of ‘Cleco Power and Cleco Corporation from 2016 through 2025 and from 2026 through 2035. On January 25, 2016, the Applicants filed a motion for immediate review of the Ruling by the Commissioners. The Commission Staff and the Shareholder-Intervenors filed briefs in opposition on January 28, 2016 and January 29, 2016, respectively. On January 29, 2016, the Applicants moved to withdraw their motion for review of the Ruling. “' The Commission Staff mede its request for public disclosure of certain information at the beginning of the hearing ‘on November 9, 2015. Docket No. U-33434 CCleoo Power LLC, ex parte Recommendation of the Administrative Law Judge Page 16On February 17, 2016, the administrative law judge issued a Recommendation to the Commissioners.” Findings of Fact The evidence and testimony presented at hearing support the following Findings of Fact: ‘The Parties to the Proposed Transaction A Cleco Power Company Organization L. Cleco Power is an electric public utility engaged primarily in the generation, transmission, distribution, and sale of electricity at retail and wholesale primarily in Louisiana. (Joint Application at p. 5). Cleco Power has been an electric retail service provider in Louisiana for approximately 80 years, (Tr. 11/11/15 at 155. (Chapman)). Cleco Power is a wholly owned subsidiary of Cleco Corporation, a public utility holding company. (Joint Application at p. 5). Cleco Power is a transmission-owning member of the Midcontinent Independent System Operator, Inc. (“MISO”), and Cleco Power’s transmission system is operated by MISO, pursuant to MISO’s FERC-authorized transmission tariff. (Direct Testimony of Darren Olagues, at p. 12). Cleco Power serves approximately 284,000 customers in Louisiana through its retail business and supplies wholesale power in Louisiana and Mississippi. (Direct Testimony of Keith Crump, at p. 4). Cleco Power employs 999 persons in and around its central Louisiana service territory, including 292 persons in Pineville, Louisiana, its corporate headquarters. There are 978 retirees receiving benefits from various retirement and pension plans. (Direct Testimony of Keith Crump, at p. 5). “ In order to have this matter before the Commissioners in February, 2016, the parties waived procedures in Rule 57 of the Commission's Rules of Practice and Procedure witich provide for the issuance of both a proposed and final reconimendatioa by the administrative lave judge. Docket No, U-33434 CCleco Power LLG, ex pare Recoarinendation of the ‘Administeative Law Judge Page 17Cleco Power's Current Financial Condition 7. Cleco Power is currently in strong financial health. (Direct Testimony of R. Lane Sisung, at p52). 8. Today, Cleco Power has unusually high credit ratings with a lower business risk profile than the company has seen in years. This is because Cleco Power recently invested in new generating facilities, transmission reliability and distribution technology, exited the unregulated business by divesting the assets of Cleco Midstream, and eliminated debt at the holding company. (Tr. 11/09/15 at p. 122 (Olagues)); (Tr. 1V/10/15 at p. 199 (Olagues)). 9, Cleco Power currently has a credit rating of A3 from Moody’s, and a credit rating of BBB+ from Standard and Poor’s. (Commission Staff Exh.4; Tr. LI/II/IS at p. 165 (Chapman); Commission Staff Exhibit 5; Tr. 11/11/15 at pp. 170-171 (Chapman). 10. Cleco Power has never had a credit rating below investment grade from either Moody's or Standard and Poor’s. (Tr. 11/10/15 at p. 190 (Olagues); Tr. 11/11/15 at p. 163 (Chapman). 11, Cleco has recently taken numerous steps to position itself for future growth and financial stability, (Tr. 11/10/15 at pp. 172-173 (Olagues)) 12. For example, in late 2013, Cleco Power completed its successful integration into the Midcontinent Independent System Operator, Inc. (“MISO”) market. MISO is a transmission organization that manages operating reserves markets and provides for a mole efficient use of resources for its members. (Tr. 11/10/15 at p. 30 (Olagues)). 13. For Cleco, participation in MISO helps support investment opportunities in new transmission projects and ensure the efficient deployment of the Company's output by providing a market for excess power generation. (Tr. 11/10/15 at pp. 33-37 (Olagues)). 14, As of the time that the Board approved the execution of the Merger Agreement, Cleco planned for a $500 million investment in “MISO reliability and expansion,” with certain of these projects already being underway. (Tr. 11/10/15 at pp. 33-34 (Olagues)). 15, With its participation in MISO, Cleco management has forecasted that the Company’s wholesale business would double by 2025. (Tr. 11/10/15 at p. 20 (Olagues)). 16. As part of this plan, Cleco entered into a new wholesale power agreement with Dixie Electric Membership Corporation (“DEMCO”), which became effective in mid-2014 and rruns through 2024. (Tr. 11/10/15 at pp. 56-57 (Olagues)). 17. By virtue of the DEMCO contract, Cleco was able to increase its load by approximately 20%, which provided significant financial benefits to the Company and allowed for Cleco Docket No, U33434 Cleco Power LC, ex pate Recommendation of the Administrative Lav Judge Page 18to “bring another power plant into {the Company's] fleet” that provides that additional transmission for DEMCO. (Tr. 11/10/15 at pp. 58-60 (Olagues)). 18. Madison 3 is a generating unit owned by Cleco Power capable of burning coal, lignite, or a combination of those fuel as well as wood waste. (Tr. 11/11/15 at 158 (Chapman)) ‘The Madison 3 generating unit cost approximately $1 billion, (Tr. 11/LO/I5 at p. 175 (Olagues)). Cleco had no difficulty in financing the construction of the Madison 3 generating unit, (Tr. 11/10/15 at p. 175 (Olagues)). 19, Over the past 30 years neither the Cleco Corporation nor Cleco Power has ever had any difficulty in financing new generation, transmission or distribution. (Tr. 11/10/15 at 172 (Olagues); Tr. 11/11/15 at pp. 158-159 (Chapman)). Cleco Power’s Formula Rate Plan and Capital Structure 20. On June 18, 2014, the LPSC voted to approve the Company's application to extend its formula rate plan, which helped solidify the Company's financial position for the following five years by locking in a positive rate structure. Shareholder-Intervenors’ Hearing Exhibit I (“Ex. 1”) at p. 34; Tr. 11/10/15 at 61:16-22 (Olagues)). 21, Cleco Power's target rate of return on equity level is 10.0% under its Formula Rate Plan ("FRP"). (Direct. Testimony of Thomas MeGuckin, at p. 11). 22. The rate of return on debt is lower than the return on equity. (Direct Testimony of Thomas McGuckin, at 18). 23. Cleco Power's jurisdictional capital structure is set at $1% equity and 49% debt. (Direct Testimony of Thomas McGuckin, at 12). 24. Cleco Power's current actual capital structure is 57 percent equity and 43 percent debt. (Tr. LI/LO/1S at p. 189 (Olagues). Company Management. Facilities, and Service 25. Currently Cleco Power is a well-managed company (Tr. 11/10/15 at p. 167 (Olagues); Tr. LI/LI/IS at p. 149 (Chapman). 26. Cleco is in the top tier of locally managed public utilities. (Tr. 11/11/15 at p. 150 (Chapman)). 21. fo significant repairs or improvements to Cleco Power's electric generation, distribution, or transmission facilities are required that are not currently underway or planned by Cleco Power. (Direct Testimony of Drew Murphy, at p. 44). Docket No, U-33434 Cleco Power LLC, ex pare Recommendation of the Adminisative Law Judge Page 1928. Representatives of Cleco Partners have spent considerable time over the past year traveling around Cleco Power. They have visited Cleco Power's distribution centers and its call center, they have listened in on customer calls, met with people in their meter shop and have watched performance in the field and have been impressed with the work of the Cleco Power employees. (Tr. 11/11/15 at p. 150 (Chapman), 29. Cleco Partners has becn impressed not only with the people but with the systems and the processes that the Cleco Power employees utilize to do their jobs (Tr. 11/11/15 at p. 150. (Chapman)). 30. Cleco Partners is impressed with Cleco Power's safety practices which are also a matter of major importance to Cleco Partners (Tr. 11/11/15 at pp. 150-151 (Chapman)). 31, Cleco's current management team lives and works in the Cleco Power service territory, is running a good company, is providing good service, and is committed to that service territory (Tr. 11/11/15 at p. 151, (Chapman)). 32. Cleco Power currently has well-maintained facilities. (Tr. 1/10/15 at p. 158 (Olagues); Tr. 11/11/15 at p. 151 (Chapman) 33. Cleco Partners is unaware of anything about the physical delivery of electricity or electric service at Cleco Power that is not well-maintained. (Tr. 11/11/15 at pp. 151-152 (Chapman). 34,Cleco Power provides excellent service to its customers. (Tr. 11/10/15 at p. 168 (Olagues); (Tr. 11/11/15 at p. 152 (Chapman). 35. There is no backlog or delay that Cleco Power has experienced or is experiencing in hooking up new customers. (Tr. 11/10/15 at p. 172 (Olagues); see also Tr. 11/11/15 at p. 157 (Chapman). 36. There are no backlogs or delays that Cleco Power has experienced or is experiencing in performing repairs or making replacements on its system for generation, transmission or distribution. (Tr, 11/11/15 at p. 157 (Chapman)). 37. Cleco Partners is unaware of any backlog or delay that Cleco Power has experienced or is experiencing regarding any physical plant or customer facilities. (Tr. 11/11/15 at pp. 157-158 (Chapman). 38. Cleco Partners is unaware of anything that Cleco Power is not doing today thet it should be doing in order to bring better service quality or performance to its customers. (Tr. 1/11/15 at p. 157 (Chapman). Docket No, U-33434 Cleco Power LLC, ex parte Recommendation of the Administrative Law Judge Page 2039, Cleco does not need Macquarie to maintain its high quality operations, customer service, workforce, facilities, economic development activity, or charitable endeavors in the local community. (Tr. 11/10/15 at pp. 165-167, 169 (Olagues)) Cleco Power's Current Role as a Corporate Citizen 40. Cleco Power currently supports economic development in the municipalities and parishes in which it operates. (Tr. 11/10/15 at p. 168 (Olagues); Tr. II/II/IS at p. 152 (Chapman)). 41. Cleco Power's customers view Cleco Power to be a good corporate citizen that assists with the economic development in its service termitory, (Tr. 11/11/15 at p. 152 (Chapman)), 42, Cleco Power currently supports charities in the municipalities and parishes in which it operates. (Tr, 11/10/15 at p. 168 (Olagues); Tr. 11/11/15 at p. 152 (Chapman)).. 43.Cleco Power currently provides assistance to low-income rate payers in the municipalities and parishes in which it operates. (Tr. 11/10/15 at p. 169 (Olagues); Tr. I1/11/15 at p. 153 (Chapman)). B. Cleco Corporation 44, Cleco Corporation, the parent company of Cleco Power, is a public utility holding company. (Joint Application at p. 5). 45. Cleco Power makes up 95% or more of Cleco Corporation. (Tr. 11/11/15 at pp. 180-181 (Chapman). 46. In addition to Cleco Power, Cleco Corporation owns, directly or indirectly, the following, subsidiaries, upstream ownership and control of which would also be acquired by Cleco Partners as a part of the proposed transaction: Cleco Support Group LLC; Attala Transmission LLC; Cleco Midstream Resourees LLC; Perryville Energy Partners, L.L.C.; Diversified Lands LLC; Cleco Evangeline LLC; Cleco Generation Services LLC; and CLE Intrastate Pipeline Company LLC. Cleco Power also has two subsidiaries: Cleco Katrina/Rita Hurricane Recovery Funding LLC, which is wholly owned by Cleco Power, and Oxbow Lignite Company, which is 50% owned by Cleco Power. (Joint Application at p. 5). 47. Historically, Cleco Corporation's shareholders are made up of approximately 80% institutional investors (i.e, Black Rock, Fidelity, Vanguard, etc.) and 20% retail investors. (Tr. 11/10/15 at pp. 216-217 (Olagues)) Docket No, U-33434 ‘Cleso Power LLC, ex parte Recommendation of the Administrative Law Judge Page 2148. Cleco Corporation is profitable for its shareholders (Tr, 11/10/15 at 167 (Olagues); Tr. 11/11/15 at p. 149 (Chapman)). 49, Because Cleco Power makes up 95% or more of Cleco Corporation, Cleco Corporation’s equity capitalization today is close to what Cleco Power’s equity capitalization is - 57%. (Tr. IW/L1/15 at pp. 180-181 (Chapman)), 50, Cleco Corporation’s current, pre-transaction credit grade rating from Moody’s is Baal; its current credit rating from Standard and Poor's is BBB+. (Commission Staff Exh. 4; Tr. 11/11/15 at p. 168 (Chapman); Commission Staff Exhibit 5; Tr. 11/11/15 at p. 167 (Chapman). 51. Prior to the proposed transaction, Cleco Corporation has never had a credit rating below investment grade from either Moody's or Standard and Poor's, (Tr. 11/10/15 at p.190 (Olagues); Tr. 11/11/15 at p.163 (Chapman). C. Cleco Partners Member Entities 52. Cleco Partners was formed solely for the purpose of the proposed transaction and has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions related to the proposed transaction. (Direct Testimony ‘of Drew Murphy, at p. 5). 53. Cleco Partners is a partnership of experienced infrastructure owners consisting of (1) MIP Cleco Partners LP. (“MIP Cleco Partners"), (2) British Columbia Investment Management Corporation (“bcIMC”), and (3) John Hancock Financial (“John Hancock”). (Joint Application at p. 1). 54, MIP Cleco Partners, a Delaware limited partnership, is the investment vehicle through whieh Macquarie Infrastructure Partners III L.P. (“MIP III”) and investors that co-invest capital alongside Macquarie Infrastructure and Real Assets (“MIRA”) will fund their ‘investment in Cleco Corporation. MIP III will manage and control MIP Cleco Partners. (Joint Application at p. 6). 55. MIP IIL, a Delaware limited partnership based in New York, is a diversified, unlisted private equity fund focusing on infrastructure investments in the United States and Canada, MIP III is managed by MIRA, a division of Macquarie Group Limited. (Joint Application at p. 6) 56. The MIRA team responsible for this transaction is based in New York and is comprised of approximately 60 professionals who are organized by sector expertise. ‘These sector teams are responsible for executing the management and ownership strategy in their Docket No. U-33436 Ceeo Power LLC, ex parte Recammendation oF the ‘Administrative Lav Judge Page 2257. 58. 59, 60. 61. respective sectors. The MIRA team’s most experienced senior professionals in the U.S. each have, on average, over 20 years of infrastructure experience. Further, the team’s sector expertise is augmented by the significant ownership and management experience of the MIRA platform globally and also draws upon the considerable finance, tax, risk management, compliance, information technology and other resources of Macquarie. (Direct Testimony of Christopher Leslie, at p. 3) MIRA js the infiastructure funds management division of Macquatie Group Limited, a provider of banking, financial advisory, investment and fund management services. MIRA manages more than 50 public and private funds with over $100 billion in assets globally. MIRA is a market leader in investing in infrastructure and infrastructure-like businesses. MIRA manages more than $45 billion in equity in infrastructure assets globally as of September 30, 2014, MIRA-managed funds have extensive infrastructure holdings in natural gas, electric, water, and wastewater utilities, roads, rail, airports, parking, marine terminals, and other essential services businesses. MIRA-managed finds own more than 100 businesses worldwide and through the businesses it manages, is a global provider of essential services. (Direct Testimony of Christopher Leslie at pp. 3-4) Every day, approximately 100 million people are provided essential services by MIRA- managed businesses. This includes over 2 million customers served by electric utilities owned by MIRA-managed funds, 22 million customers served by gas utilities owned by MIRA-managed funds, and 4 million customers served by water utilities owned by MIRA-managed funds. (Direct Testimony of Drew Murphy, at p. 8). MIRA manages more than 50 public and private funds with over $100 billion of assets under management invested in 120 businesses as of June 30, 2014. MIRA, through MIP IMT and other funds MIRA manages, has acquired more than 20 infrastructure companies in the United States and Canada, including the acquisition of the following utilities for over $11 billion: Puget Energy (“Puget”) in Washington (acquired in 2009), Duquesne Light Holdings (“Duquesne”) in Pennsylvania (acquired in 2007), Aquarion Water Company (“Aquarion Water”) in Connecticut, New Hampshire and Massachusetts (acquired in 2007), and Hawaii Gas Company (“Hawaii Gas”) in Hawaii (acquired in 2006), as well as port terminals, toll roads, telecommunications towers, and waste collection and disposal businesses. (Joint Application at pp. 6-7). Puget Sound Energy (“PSE”), the operating subsidiary of Puget, is a Bellevue, ‘Washington-based electric and natural gas utility that provides service to approximately 1.1 million electric customers and approximately 700,000 natural gas customers. It is regulated by the Washington Utilities and Transportation Commission (“WUTC”) and the Federal Energy Regulatory Commission (“FERC”). (Direct Testimony of Christopher Leslie, at p. 7). Duquesne Light Company (“Duquesne Light”), the operating subsidiary of Duquesne, provides transmission and distribution of electric energy to approximately 600,000 customers in southwestern Pennsylvania. It is regulated by the Pennsylvania Public Docket No, U33434 ‘Clo Power LLC, ex pate ‘Reconsmendation of he Adininsrtve Law Judge Page 23‘Utility Commission (“PaPUC”) and FERC. (Direct Testimony of Christopher Leslie, at p. nD. 62. Aquarion Water is a water utility that provides water distribution and supply services to 233,180 customers in Connecticut, Massachusetts, and New Hampshire. Its operating uiilities are regulated by the utility commissions in the respective states. (Direct Testimony of Christopher Leslie, at p. 7). 63. Hawaii Gas is a utility that produces, stores, and distributes natural gas and propane in Hawaii. Its regulated operations are regulated by the Hawaii Public Utilities Commission. (Direct Testimony of Christopher Leslie, at p. 7). 64, beIMC is based in British Columbia and invests on behalf of its clients, including public sector pension plans, government bodies, and publicly administered trust funds in British Columbia. (Joint Application at p. 7). 65. beIMC is one of Canada's largest institutional investors and invests on behalf of public sector pension funds, including university and college instructors and staff, municipal employees, healthcare workers, teachers, firefighters, police officers, and public servants, as well as other clients in British Columbia. beIMC’s investment activities finance the retirement benefits of more than 522,000 public sector pension plan members, as well as the insurance and benefit funds, covering over 2.2 million workers in British Columbia bcIMC currently has a global investment portfolio with more than $114.0 billion in assets under management. (Direct Testimony of Lincoln Webb, at p. 5) 66. beIMC’s ownership of assets includes both controlling and non-controlling interests in regulated utility companies in the energy generation, transmission and distribution, water and wastewater sectors, as well as transportation. As of March 31, 2014, beIMC had assets under management of approximately $91 billion, (Joint Application at p. 7). 67. beIMC has made important investments in utilities, which are core long-term ownership positions in its global infrastructure program. beIMC has gained extensive knowledge of the strategic management of utilities through its experience as owners of a number of global utilities, including: Puget in Washington; Aquarion Water in Connecticut, New Hampshire, and Massachusetts, Transelec (elecitic utility) in Chile; Corix Utilities in Canada and the United States; Open Grid Europe (ges transmission utility) in Germany; and Thames Water (water and waste water utility) in the United Kingdom. (Direct Testimony of Lincoln Webb, at p. 3) 68. beIMC is the largest infrastructure investor in North America, and belMC invests for decades, not years. (Tr. 11/12/15 at pp. 257-258 (Webb)). 69. beIMC considers core infrastructure assets to be a very good fit for its pension clients who have long-standing liabilities and long-running liabilities. beIMC has not sold any of its utility investments. (Tr. 11/12/15 at pp. 261-262 (Web)). Docket No, 35434 ‘Cleco Power LLG, ex parte Recommendation of the Adiinisative Law Judge Page 2470, John Hancock is a division of Manulife, a financial services group with operations in both the United States and Canada, Operating primarily as John Hancock in the United States and as Manulife in Canada, the group of companies offers clients a diverse range of financial protection products and wealth management services. (Joint Application at pp. 7-8), 71. Funds under management by Manulife and its subsidiaries were approximately $509 billion as of June 30, 2014. (Joint Application at pp. 7-8). Experience and Expertise 72. MIRA is a committed, long-term owner in infrastructure that seeks to own, develop and responsibly manage investments in the infrastructure sector that are financially stable and predictable over the long-term. From these investments, it seeks to effectively manage and grow the businesses its funds own. The companies in which MIRA-managed funds invest typically retain senior management to run the day-to-day business of the company and MIRA exercises oversight through representation on the company’s board of directors. (Direct Testimony of Christopher Leslie, at p. 6). 73, As it relates to employees, MIRA strives to maintain staffing levels at the companies that it acquires. In its other transactions, salaries and wages have increased after acquisition at rates comparable to other utilities in the overall industry. Additionally, medical and retirement plans remain largely unchanged. (Direct Testimony of Christopher Leslie, at p. 9). 74, MIRA works to emphasize employee safety. As measured by Lost Time Injury Frequency Ratio (LTIFR) relative to industry norms, its current utilities are typically in the top quartile, (Direct Testimony of Christopher Leslie, at p. 9). 75, As it relates to service, MIRA aims to meet or exceed customer services targets, and it has established a solid track record in this regard. Furthermore, MIRA strives to create an environment where management can find ways to reduce outage frequency and outage duration, (Direct Testimony of Christopher Leslie, at p. 9). 76. As it relates to investments in communities it serves, MIRA has historically created charitable foundations to contribute to the local communities within the utility service territories. (Direct Testimony of Christopher Leslie, at p. 9). 77. As it relates to safe and reliable service, MIRA is @ provider of essential services to customers worldwide and specifically over 2 million electric customers globally. MIRA takes its responsibility for the provision of safe and reliable service very seriously. Through MIRA’s board oversight of the companies its funds own, MIRA establishes policies to incentivize management to meet or exceed customer service and reliability targets. MIRA encourages management to reduce outage frequency and outage duration. Docket No, U-33434 Clevo Power LLC, ex parte Recommendation ofthe Administrative Law Judge Page 25Utilities owned by MIRA-managed funds have performed well with respect to service levels and reliability. For example, Puget’s operating subsidiary, PSE, reports performance relative to nine Service Quality Indicators (SQIs) set by the WUTC. PSE hhas met or exceeded each of the nine SQI targets in each year since the 2009 acquisition except for two instances in which one of the targets was missed in a particular year. Duquesne Light, which is Duquesne’s operating subsidiary, reports network reliability performance to the PaPUC, and it has met or exceeded the PaPUC’s service reliability targets in each year since the 2007 acquisition. At Aquarion Water, the customer complaint ratio (number of complaints filed with the Connecticut Public Utility Regulatory Authority (“PURA”) per 100,000 customers) has been the lowest of all regulated utilities in Connecticut for the last eight years. (Direct Testimony of Christopher Leslie, at p. 8) 78. The utilities owned by MIRA-managed funds heve a sound track record of compliance with regulatory requirements and have positive relationships with their regulators. MIRA’s reputation is important to MIRA, and MIRA strives to maintain positive relationships with its regulators. (Cleco Partners Ex. No. 6, Direct Testimony of Christopher Leslie at p. 9). When the Commission Staff contacted two current regulators of Macquarie investments Duquesne and Puget, the regulators gave them positive feedback. Both regulators indicated that Macquarie had satisfactorily met all regulatory requirements of their transactions and had otherwise, generally, ranked favorably among their peers in their interactions with the regulators. (Direct Testimony of Lane Sisung, at pp. 56-57). 79. MIRA generally seeks ownership in well-run and well-managed utilities that produce appropriate and predictable returns over the long term. MIRA generally seeks to retain the senior management teams of such utilities to run the day-to-day business, and MIRA oversees the ownership interests of its fund through representation on the company's board of directors. (Direct Testimony of Drew Murphy, at p. 8) 80, beIMC is supportive of management teams building relationships with its communities and recognizes that engagement with community and stakeholders is an integral part of regulated businesses’ activities. Ultimately, belMC’s clients are supportive of investments that are managed in a sustainable manner for all stakeholders as part of a responsible investing philosophy. (Direct Testimony of Lincoln Webb, at p. 9). 81. beIMC’s corporate governance strategy is also similar to MIRA’s in that both companies engage in active board participation, while enabling the local management team to make direct decisions on the operations of the business. (Direct Testimony of Lincoln Webb, at p. 10). 82. Cleco Partners brings to Cleco Power significant experience in dealing with industry issues and also brings a greater governance strategy outlook to Cleco Power than what exists today. (Tr. 11/09/15 at p. 231 (Olagues)) Docket Ne. U-33434 (Cleco Power LLC, ex parte Recommendation of the Administrative Law Judge Page 2683. Cleco Partners understands and has experience dealing with information technology, cyber security, talent retention, talent attraction, human resources, and aging workforce challenges. Cleco Partners is also on the boards of multiple utilities, which is a value that Cleco Power does not have today. (Tr. 11/09/15 at p. 233 (Olagues)); (Tr. 11/10/15 at p. 219 (Olagues)). 84. Cleco Partners brings broad board and industry expertise. Serving on the boards of other utilities, such as at Puget, Duquesne, and others, has exposed Cleco Partners to knowledge that is important to the industry, such as information technology and cyber security. Cleco Partners helps guide their companies to upgrade their information systems, get fully integrated information technology platforms that link up a call center with a maintenance management system, with finances, with human resources, a billing system, ete, The implementation of those projects can be quite complex and risky and can take an enormous amount of management time. Cleco Partners has the experience to assess the quality of the project management capabilities of a company and guide it in a way so that those projects can be effectively undertaken. (Tr. 11/12/15 at p. 221 (Chapman). 85. Cleco Partners has increased its focus on cyber security issues and has been able to bring better and more effective programs to their utilities. Utility companies, like Cleco, can be targets to people trying to disrupt operations or obtain customer data for their own purposes. Cleco Partners wants to protect customer data and prevent disruptions to operations, and this experience and perspective is an important part of what Cleco Partners brings to the transaction, (Tr. 11/12/15 at pp. 221-222 (Chapman). 86. Cleco Partners has experience with project planning, manegement of big capital expenditures, and financing long-term projects as board members of other capital- intensive utilities. This experience has helped them be able to identify risks, know about business cases, and become proficient at overseeing project planning and implementation. (Tr. 11/12/15 at pp. 222-293 (Chapman). 87. At the operational level, while Cleco Partners are not operational experts, they actively encourage the managers of the utilities they own to collaborate confidentially with their counterparts in the field and to discuss important issues such as risks, project planning, project implementation, etc. For example, Cleco Partners runs a conference for safety directors once a year. At this conference, the safety directors across all of Cleco Partners’ businesses meet at a private conference and share their best practices confidentially with each other. (Tr. 11/12/15 at pp. 223-225 (Chapman)).. 88. Cleco Partners is not an expert with respect to the technical aspects of running an electric utility system or in generating power. (Tr. 11/11/15 at p. 155 (Chapman) Docket No. U-33434 CCleco Power LLC, ex pare ‘Recommendation of the ‘Administrative Law Judge Page 2789. Cleco Partners has no technical expertise to bring to the table that Cleco does not already have to improve the reliability performance of Cleco Power. (Tr. 11/10/15 at p. 171 (Olagues); Tr. 11/11/15 at pp. 155-156 (Chapman)).. 90. What Cleco Partners would bring to the table to improve the manner in which Cleco performs any of the functions regarding generation, transmission and distribution of electricity is to allow Cleco to continue to perform the functions the way it does. (Tr. Li/L1NS at p. 153 (Chapman). 91. Cleco Power's approach to this transaction is that "Cleco should continue to be Cleco” (Tr. 11/11/15 at p. 156 (Chapman) Il. The Proposed Transaction A. Structure of the Proposed Transaction 92. On October 17, 2014, Cleco Corporation entered into a Merger Agreement with Cleco Partners and Cleco MergerSub Inc. (the “Merger Agreement”). (Direct Testimony of Drew Murphy, at p. 14 and Merger Agreement, Exhibit JAM-1, attached to Testimony of Drew Murphy), 93. The proposed transaction would replace the public shareholder ownership of Cleco Corporation with a group of institutional investors (primarily pension funds) secking long term investments in infrastructure assets, (Testimony of Drew Murphy, at p. 4). 94, Cleco Partners would acquire all of the stock in Cleco Corporation at an agreed-upon price and would become the new owner of Cleco Corporation via an intermediate holding company, Cleco Group. (Joint Application at p. 11). 95. Cleco Corporation's common stock would be converted into the right to receive an amount in cash equal to $55.37 per share. (Joint Application at p. 11). 96. Cleco Corporation would cease to be a publicly traded company, and its common stock would no longer be traded on the New York Stock Exchange (“NYSE”). (Joint Application at p. 11). 97. Cleco Group, a wholly-owned direct subsidiary of Cleco Partners, would receive all of the stock in Cleco Corporation. Thus, Cleco Partners would indirectly own all of the stock in Cleco Corporation via its ownership of Cleco Group, which would directly own all of the stock in Cleco Corporation. (Joint Application at pp. 11-12). Docket No. U-33434 ‘Clevo Power LLC, ex parte ‘Recommendation of the Administrative Law Judge Page 2898. Upon closing of the transaction, Cleco Corporation would become a Louisiana limited liability company and change its name to Cleco Corporate Holdings LLC. (Direct Testimony of Drew Murphy, at p. 15). 99. After the proposed transaction, Cleco Power would remain a wholly-owned subsidiary of Cleco Corporation. (Direct Testimony of Drew Murphy, at p. 4). 100. MIP III, the member of Cleco Partners (Macquarie’s interest) that will own 54% of Cleco Corporation, is a “closed-end fund,” which means that the fund is set up with a planned termination date. MIP III is scheduled to be liquidated in 2024, with a potential for extensions of that date, but with a stated intention for expeditious liquidation soon after the planned termination date. Accordingly, MIP III may exit the deal as soon as eight years from now. Thus, the Macquarie enterprise being considered for approval in this proceeding will no longer be the primary party in ownership of Cleco in less than nine years. (Tr. 11/12/15 at p. 327 (Lane Sisung); Direct Testimony of Lane Sisung, at p. 15). 101.At the time it exits the deal, Macquarie must offer its co-owners, beIMC and John Hancock the opportunity to purchase its interest before offering it to third parties. While beIMC and John Hancock have a right of first refusal to purchase Macquarie’s interest, they are under no obligation to do so nor to stay in the transaction. beIMC and John Hancock can sell at any time subject to Commission approval. beIMC has an indefinite time horizon in terms of its investments and infrastructure programs, and its priority is to own the assets for a long period of time. (Tr. 11/12/15 at pp. 263-264 (Webb)). Funding of the Proposed Transaction 102. The proposed transaction has an estimated value of $4.9 billion. $3.53 billion in funds are necessary to complete the transaction, plus there is an estimated assumed debt of $1.35 billion. (Direct Testimony of Drew Murphy, at p. 15); (Tr. I1/LI/15 at p. 174 (Chapman) 103. The proposed transaction will be financed as a leveraged buyout designed to earn excess returns for the Purchasers by taking advantage of the higher returns on their investment in Cleco versus the lower interest rate being paid on the debt used to finance the transaction. (Direct Testimony of John Mayeaux, at p. 4), 104.$1.35 billion of new debt will be sold in order to finance the transaction, and that debt will be placed on the books of Cleco Corporation. (Tr. 11/11/15 at p. 174 (Chapman); Direct Testimony of John Mayeaux, at p. 4); (Tr. 11/10/15 at pp. 194-195 (Olagues)); Tr. LI/IV/15 at p. 181 (Chapman) 105.In addition, the new owners will provide $2.17 billion in capital to fund the purchase of outstanding Cleco Corporation stock from the current public shareholders, with MIP Cleco Partners providing 54%, beIMC providing 37%, and John Hancock providing 9%. Docket No. U-33434 (Cleco Power LLC, ex parte Revomnmendation of the ‘Administrative Law Judge Page 29Antitrust Improvements Act (“HSR Act”) of 1976. (Direct Testimony of Paul Chastant, at pp. 17-18). 114. The transaction has been approved by FERC. On July 17, 2015, FERC issued an Order approving the merger without prejudice to any approvals required by other regulators. [152 FERC $62,038, 64,074 (7/17/2015)]. The transaction has also received clearance from the CFIUS, the FCC has consented to the Transaction, and the waiting period under the HSR Act has expired. (Direct Testimony of Paul Chastant, at pp. 18-19). IV. The Regulatory Commitments (The findings of fact regarding the Regulatory Commitments do not address all aspects of the ‘Comumitinents, which are attached, in full, to this Recommendation.) 115. As part of the proposed transaction, Cleco Power and Cleco Partners propose and agree to be bound by 77 Regulatory Commitments if the Commission authorizes the proposed transaction and accepts the entire package of the 77 Commitments. The Applicants revised their original Regulatory Commitment package after the hearing to address concerns raised by the Staff during the hearing. The Regulatory Commitments are organized into 9 subject areas: (1) Enforcement and Compliance; (2) Organizational and Operational Continuities; (3) Officers and Directors: (4) Economic and Financial; (5) Ring Fencing and Inter-Affiliate Accounting and Conduct; (6) Capital Structure and Distributions; (7) Changes of Control; (8) Reporting; and (9) Additional Comments. Enforcement and Compliance 116. The Commitments confirm that Cleco Power will remain jurisdictional to the Commission and further provide unprecedented rights to seck injunctive relief against certain upstream entities (Cleco Group, Cleco Corporation, Cleco Partners and its members) to ensure compliance with the Commitments. ( Rebuttal Testimony of Andrew Chapman, at p. 34); (Commitment No. 1). 117. The Commitments confirm that all existing orders of the Commission with respect to Cleco Power will remain in full effect and are not limited or modified by the transaction to ensure that the Commission is able to fulfill all of its jurisdictional responsibility over rates, charges, service and reliability. (Rebuttal Testimony of Andrew Chapman at p. 34); (Commitment Nos. 2 and 3). 118. Cleco Power commits not to apply to increase its current rates except as provided under Commission Order U-32779, issued June 27, 2014 and Special Orders 44-2014 and 45- 2014 issued July 24, 2014, which rate-setting determinations have 4-year terms. Cleco Power further commits to its understanding that no ratemaking issues are being resolved in this proceeding and that the parties reserve their rights with respect to such ratemaking issues in any fitture proceedings before the Commission. (Commitment No. 4). Decket No, U33434 Cleeo Power LLC, ex pate ‘Recammendation a he Adiniisrative Law Judge Page 31Organizational and Operational Contimuities 119.Cleco Power and Cleco Corporation will both remain Louisiana entities. (Tr. 11/12/15 at p. 102 (Chapman)); (Commitment No. 6). 120.Cleco’s corporate headquarters will remain in Pineville, Louisiana. (Rebuttal Testimony of Andrew Chapman, at p. 4); (Commitments No. 6). 121. Should Cleco want to relocate the headquarters outside of Pineville, Cleco must provide the Commission with notice and receive formal Commission approval. (Rebuttal Testimony of Andrew Chapman, at p. 14); (Commitment No. 6). 122.Cleco Power and Cleco Corporation commit to provide the same safe, reliable, and adequate service to its customers after the transaction that it does today. There will be no degradation in the safety, reliability, or adequacy of service as a result of the proposed transaction. Cleco Power will maintain and comply with provisions of the Service Quality Program. (Direct Testimony of Drew Murphy, at p. 35); (Commitment Nos. 7, 8, and 14). 123. The Applicants commit that they will maintain staffing and presence in the communities in which Cleco Power operates at levels appropriate to maintain the provision of safe and reliable service and efficient operations; maintain employee headcount, salaries, and benefits substantially consistent with or higher than current levels for at least five years; retain current senior management; and will make no adverse material change in Cleco Power’s pension plans or pension design or in current benefits for retiree medical plan participants for at least five years. (Rebuttal Testimony of Andrew Chapman, at p. 29); (Commitment Nos. 7, 8, 9, 10, 11) 124.The Regulatory Commitments continue Cleco’s operating practices, storm and emergency management practices, and customer service that Cleco’s customers have come to expect. (Tr. 11/09/15 at p. 124 (Olagues)). 125, The SQP assures all stakeholders of the maintenance of Cleco Power's excellent quality and reliability of service, and includes retaining management. (Direct Testimony of Keith Crump, at p. 30 and Exhibit KDC-2); (Commitment Nos. 7, 8, 9, 10, and 14). 126.The SQP provides a minimum base level of funding for vegetation management and a performance-based vegetation management program. (Direct Testimony of Keith Crump, at p. 35). Docket No. U-33434 Cleeo Power LLC, ex parte Recemmiendation of the Administrative Law Judge Page 32127. The SQP provides that Cleco Power will devote all reasonable efforts to ensuring that its rolling 10-year SAIDI and SAIFI values for its Louisiana operations are maintained (Direct Testimony of Keith Crump, at pp. 35-36). 128, The SQP provides that Cleco Power will continue to maintain its current 10-year pole inspection and replacement program, as well as undertake all reasonable expenditures to achieve the goal of limiting customer outages. (Direct Testimony of Keith Crump, at p. 36). 129. The SQP also includes the following: that Cleco will continue its on-site line mechanic training school, including its apprentice line mechanic training program; that there shall ‘be no net reduction in the total number of field personnel; and that Cleco will continue to actively participate in national and regional forums regarding best utility practices in all significant areas of Cleco Power’s operations and incorporate such best practices where appropriate. (Exhibit KDC-2 attached to Direct Testimony of Keith Crump). 130.The SQP will remain in effect for five years after the closing of the transaction. Prior to the expiration of the five year SQP term, a new five year SQP must be negotiated and submitted to the Commission for approval. (Tr. 11/09/15 at pp. 124, 154-155 (Olagues)); (Commitment No. 7). 131.To the extent Cleco Power seeks to change the SQP, the proposed change must be submitted to the Commission at least 120 days in advance of the proposed change. Such notification shall include the proposed date of the change, reasons for the change, the expected cost savings from the change, the manner in which those cost savings will be flowed through to ratepayers, the relocation of the impacted employees, and the anticipated impact on Cleco Power's reliability and quality of service. No such change shall be made, without formal Commission authorization (i.e., by a majority vote of the Commission). (Commitment No. 8). 132.Cleco will maintain or increase its existing level of corporate contributions. and ‘community support (approximately $600,000 per year) for at least five years and will pre- fund the foundation within 60 days after the closing of the transaction. (Rebuttal Testimony of Andrew Chapman, at p. 14); (Commitment No. 12) 133.Cleco will maintain or increase its economic development funding of no less than $500,000 per year for Louisiana state and local organizations for at least five years following the close of the transaction, (Rebuttal Testimony of Andrew Chapman, at p. 15); (Commitment No. 13). 134.Cleco Power will maintain its existing or comparable voluntary low-income assistance program for a minimum of five years following the close of the transaction. (Rebuttal Testimony of Andrew Chapman, at p. 15); (Commitment No. 15) Docker No, U-33434 Clevo Power LLC, ex parte Recommendation of the ‘Administrative Law Judge Page 33Officers and Directors 135.For a minimum of 5 years from the close of the transaction, Cleco Power will be led by executives who live and work in the region being served. (Rebuttal Testimony of Andrew Chapman, at p. 4); (Commitment No. 16). 136. The boards of directors of Cleco Corporation, Cleco Power, and Cleco Group will be the same people and will include at least 4 Louisiana resident directors, including the chairman and Cleco Power CEO. No board action will be effective unless at least one Louisiana resident director (other than the CEO) supports the action, (Rebuttal Testimony of Andrew Chapman, at p. 5); (Tr. 11/11/13 at p. 268 (Chapman); (Commitment No. 17). 137. The Louisiana board members, other than the CEO, shall be independent. “Independent” means: (i) they are not representatives or advisors to Cleco Power, Cleco Corporation, Cleco Group, Cleco Partners or any affiliate of any of these entities; (ii) they are not and have not been within the last three years employees of any of the foregoing entities or their affiliates; and (iii) they have no ownership interest in any of the foregoing entities or any of their affiliates, (Tr. 11/11/15 at pp. 268-270 (Chapman)); (Commitment No. 17). 138.The purpose of the independent resident board members is to have local input when making difficult decisions regarding business plans, personnel, and the like. ‘The board is set up to be a collaboration between Louisianans who are experienced being on boards, who understand what it is to actually sit on a board of a complicated business, who understand what the investors are trying to accomplish and understand what a public utility needs to accomplish for the communities it serves in order to benefit all of its stakeholders. Puget’s board has independent resident directors, and they have made huge contributions to the company. (Tr. 11/11/15 at pp. 269-270, 290-291 (Chapman)) Economie and Finaneial 139. Cleco Power will not seek recovery of any transaction-related costs. (Commitment No. 18). 140, Estimated cost of service savings expected as a result of the transaction in the amount of $1,211,000 per year between closing and the effectiveness of new base rates for Cleco Power will be flowed back to ratepayers. (Commitment No. 19). 141.Cleco Power commits to maintain investment grade credit ratings with two of Moody’s, Standard & Poor's, and Fitch and will seek to improve its credit ratings over time. Cleco Power commits to hold ratepayers harmless from any increase in the cost of debt to Cleco Power caused by credit downgrades. (Commitment No. 21). Docket Na, U-33434 Cleeo Power LLC, ex pare ‘Recommendation of the ‘Administrative Law Judge Page 34142, Cleco Power commits to using alternative financing strategies pursuant to Act 64 and or Act 55 to address substantial storm damage unless it is demonstrated to the satisfaction of the Commission that another financing methodology is less costly. The Applicants shall obtain an opinion letter that the proposed transaction would not cause Cleco Power to be in violation of Commission Orders and Act 64 regarding storm damage recovery. (Commitment Nos. 23 and 24). 143. The Applicants will provide Rate Credits in the amount of $125 million over a 15-year period ($8.33 million per year), which will be flowed back to ratepayers outside of any sharing mechanism and not subject to Cleco Power's Formula Rate Plan dead band. (Commitment No. 25). Ring-Fencing and Inter-A fliliate Accounting and Conduct 144, Pursuant to the Commitments, there will be no recourse to Cleco Power assets as collateral or security for debt issued by Cleco Corporation without prior Commission authorization. Cleco Power's jurisdictional rates shall not include any obligations arising fiom any non-Cleco Power business activity of Cleco Corporation or Cleco Group and Cleco Power’s customers shall be held harmless for ratemaking purposes from such non- Cleco Power business activity. (Commitment Nos. 30 and 31). 145. Under the Regulatory Commitments, Cleco Corporation’s debt is not the responsibility of Cleco Power. The holding company’s debt is non-recourse and is ring-fenced away from the utility. None of Cleco Power's assets are pledged for Cleco Corporation’s debt, The risk and responsibility to make payment on the holding company’s debt is solely on the backs of the new owners, not on Cleco Power's customers. (Tr. 11/10/15 at p. 213 (Olagues)); (Tr. 11/11/15 at pp. 247-248 (Chapman) 146. The purpose of ring-fencing provisions is to attempt to preserve the viability of Cleco Power as a stand-alone entity by isolating it fiom the credit risks of Cleco Corporation, or from its other affiliates, should they be faced with bankruptcy or some other financial distress. (Direct Testimony of Paul Chastant, at p. 23). 147.Cleco Power commits to obtsining and submitting to the Commission a “non- consolidation opinion,” which concludes that the ring-fencing commitments are sufficient such that a bankruptcy court would not order the substantive consolidation of the assets and liabilities of Cleco Power with those of Cleco Corporation. The Applicants agree that a Commission Order approving the proposed transaction would be contingent upon the Commission’s timely receipt of the non-consolidation opinion, (Commitment No. 44), 148, The Applicants agree that a Commission Order approving the transaction will not limit the Commission’s supervisory authority over Cleco Power or Cleco Corporation. (Commitment No. 43). Docket No. U-33434 Cleso Power LLC, ex parte Recommendation of the Administrative Law ude Page 35149.Under the Commitments, Cleco Power, Cleco Corporation, and Cleco Group will not assert in any future proceedings, that, by virtue of the transaction and the resulting corporate structure, the Commission is without jurisdiction over any transaction that results in a change of control of Cleco Power. (Commitment No. 38). 150. The Commitments provide specific book-keeping and reporting obligations for Cleco Power and Cleco Corporation, including reports regarding compliance with all of the commitments agreed upon in the transaction. (Rebuttal Testimony of Andrew Chapman, at p. 34); (Commitment Nos. 26 - 29, 34, 46). 151.The Commitments require the Applicants to notify the Commission of any material change in the administration, management, or condition of Cleco Power's or Cleco Corporation’s books and records within ten days prior to such change. (Commitment No. 36). Capital Structure and Distributions 152. The Regulatory Commitments include restrictions on distributions by Cleco Power and Cleco Corporation (which, if triggered, result in cash being reinvested in the business or debt reduced), maximum debt to EBITDA ratios at Cleco Corporation, limitation of borrowing by Cleco Corporation in certain circumstances without LPSC approval, and restrictions on Cleco Corporation’s ability to invest in other businesses. None of these protections are in place today. (Rebuttal Testimony of Andrew Chapman, at p. 29); (Tr. 11/11/15 at pp. 129-130 (Chapman)); (Commitment No. 49). 153.Rather than use the restrictive term “dividend”, Cleco Partners stipulated that every use of “dividend” in the commitments instead be replaced with the broader term, “distribution.” Distribution is defined as any payment of dividends or return of capital, other than for expenses. (Commitment No. 48); (Tr. 11/12/15 at p. 78 (Chapman). 154, The Regulatory Commitments prevent Cleco Power from making any distributions unless Cleco Power has a minimum equity ratio greater than or equal to 45%. (Rebuttal Testimony of Andrew Chapman, at pp. 21-22); (Commitment No. 49). 155, The Regulatory Commitments allow Cleco Power to make limited distributions only to pay service on debt if it has at least one investment grade rating and a minimum equity ratio of not less than 40%, (Rebuttal Testimony of Andrew Chapman, at p. 22); (Commitment No. 49). 156. The Regulatory Commitments prevent Cleco Corporation fom making distributions unless (a) Cleco Corporation has at least one investment grade rating, and (b) Cleco Corporation has @ debt to EBITDA ratio less than or equal to 6.5, and (c) Cleco Power has two investment grade ratings, and (4) Cleco Power has an equity ratio greater than or Docket No. U-33434 Cleco Power LLC, ex parte Recommendation of the Administrative Law Judge Page 36Reporting 165. The Commitments require Cleco Power to file by October 31, 2016, and each October 31 thereafter, through October 31, 2020, a report with the Commission regarding. the implementation of the Regulatory Commitments as of June 30 of that same year, providing proposed corrective measures for Commitments that have not been met (Commitment No. 61). 166.The Commitments provide the Commission with unprecedented access to information and financial reports from Cleco Power's upstream owners. Cleco Group, Cleco Corporation’s parent company, will provide the Commission with audited financial reports, including consolidating balance sheets, income statements, and cash flow statements. Cleco Group will also allow the Commission access to its annual federal income tax retums. Cleco Partners will make available to the Commission its owners’ annual audited accounts and other financial information, (Commitment No. 64). 167.Even though Cleco Corporation will no longer be @ publicly traded company, the Applicants agree to comply with many of the reposting requirements and provisions of the Securities and Exchange Commission (“SEC”), the New York Stock Exchange NYSE”) and the Sarbanes-Oxley Act, which they otherwise would not be required to do. (Commitment Nos. 63, 65, and 66). 168. Cleco Power will provide to the Commission copies of all FERC reports and copies of all ‘ransaction-related filings made with other federal or state regulatory agencies as soon as those filings are made. (Commitment No. 68). Additional Commitments 169.Cleco Power, Cleco Corporation, and Cleco Group commit to undertake all necessary actions to ensure that low cost financing to securitize Hurricane Katrina costs is not jeopardized. Cleco Power commits to verifying that a Commission Order approving the proposed transaction will not cause Cleco Power to be in violation of current storm damage financing Orders and legislation. Finally, Cleco Power commits to abide by Commission Order X-33325 and its obligations with regard to Dolet Hill Lignite Plant, the Acadia One generating unit and Acadia Energy Center, its franchise agreements, and its obligations in connection with its membership in the Midcontinent Independent ‘System Operator (MISO). (Commitment Nos. 71 through 77). Docket No, U-33434 ‘Clevo Power LLC, ex parte ‘Recommendation of the Adninistrative Law Judge Page 38IV. Impacts of the Proposed Transaction A. Additional Debt 170. Although the $1.35 billion acquisition loan will technically be the debt of Cleco Corporation and will sit on the books of Cleco Corporation, the cash to pay off the acquisition loan comes from Cleco Power. (Tr. 11/11/15 at p. 235 (Chapman)). 171. Post-transaction, the existing net operating revenues of Cleco Power will have to support the $1.35 billion of existing pre-transaction debt, the new $1.35 billion in acquisition debt. as well as provide a retum to the Purchasers who will supply up to $2.17 billion in "equity." (Direct Testimony of John Mayeaux at p. 5). 172.As a result of the transaction, Cleco Corporation will go from having no debt to approximately $1.4 billion in debt (Tr. 11/10/15 at p. 192 (Olagues)). 173. Immediately after the transaction closes, Cleco Corporation's consolidated debt ratio will increase to approximately 57% from its current 43% level, resulting in Cleco Power and Cleco Corporation having weaker credit metrics, lower credit ratings and increased risk. Direct Testimony of John Mayeaux, at p.5; Tr. 11/11/15 at p. 180 (Chapman). 174.MIP Partners III undertook analyses to value Cleco as a potential acquisition. (Commission Staff Exh. 6; Tr. 11/11/15 at p. 182 (Chapman)). 175. This modeling was utilized to value the Cleco business in the Hart Scott Rodino filing ‘made with the United States Department of Justice. (Tr. 11/11/15 at p. 184 (Chapman). 176.The summary of outputs fiom this modeling is contained in the document entitled "Strong Forecasted Credit Metrics." The modeling was performed by the Purchasers’ financial advisor and the "Strong Credit Metrics" document was crested by the Purchasers. (Commission Staff Exh, No. 6; Tr. 11/11/15 at pp. 182-183 (Chapman). 177. While the outputs of this modeling that are not a result of any actual business plan for Cleco, the outputs represent Cleco Partners’ best projections based on Cleco Partners’ best assumptions around load, costs, rate case outcomes, wholesale market wins, financing cost, structure, and so forth. They represent the Purchasers’ best projections based on the Purchasers’ best assumptions utilized in the model. (Tr. 11/11/15 at pp. 186- 188, (Chapman); Commission Staff Exh. No. 6). 178.Commission Staff Exhibit No. 6 reflects analyses of two alternative scenarios, one in which the Purchasers are successful in obtaining and retaining wholesale contracts (the "base case") and the other in which they are not (the "low growth" case). (Commission Staff Exh. 6). Docket No, 33434 ‘Cleco Power LLC, ex pare ‘Recommendation of the Administrative Law Judge Page 39179. Outputs of the modeling reflect that in 2016, Cleco Corporation's equity capitalization will fall to 43% and by 2020 it will drop to 40%. (Tr. 1/11/15 at pp. 196-197 (Chapman) 180, Under the base case and the low growth case, the outputs of the Purchasers’ modeling reveal that the equity capitalization for Cleco Corporation in 2025 is projected to be 33.8% (base case) and 33.2% (low growth case). (Commission Staff Exh. 6). 181. The Applicants project that by 2025 Cleco Corporation will have an equity capitalization of approximately 33% (Commission Staff Exhs. 6, 7); it will have a rate base of approximately $5.8 billion with 73% of all capital expenditures between 2019 and 2025 fanded with debt (Commission Staff Exh. 11, Direct Testimony of Thomas McGuckin, at pp. 29-30). 182. An additional risk of the Purchasers’ business plan is inherent in its expectation that Cleco will extend existing wholesale contracts and/or acquire additional contracts. The projected growth in rate base from $2.9 billion to $5.8 billion is driven by increases in wholesale contracts and maintenance of existing contracts. If those contracts do not materialize the costs associated with the excess generating capacity built to serve those contracts. would ultimately be borne mostly by jurisdictional ratepayers (Direct Testimony of Thomas MeGuckin, at p. 31). 183.If the new wholesale contracts do not materialize to finance a distribution to the owners, in 2024 Cleco will borrow $326 million to make a distribution in that amount to the owners. (Commission Staff Exhs. 6, 7; Tr. 11/11/15 at p. 226 (Chapman)).. 184, This $326 million in borrowing will further increase the leverage of Cleco. ‘The fact that 73% of the financing for new CAPEX will be debt decreases the equity/debt ratio and increases the financial risk of Cleco (Direct Testimony of Thomas McGuckin, at p. 30). 185. Absent this transaction, Cleco Corporation would likely reduce the equity ratio of Cleco Power by issuing additional debt. (Tr. 11/09/15 at p. 133 (Olagues)). 186, Cleco Corporation’s Board of Direetors recently considered a plan to issue $600 million in debt in the event that this transaction is not approved. (Tr. 11/10/15 at p. 198 (Olagues)). Absent the transaction, if Cleco Corporation repurchases $600 million in shares or uses Cleco’s debt capacity for other investments, causing Cleco Power's ratings to decline, there will be no commitments in place to shelter ratepayers fiom rate increases resulting from future inereases in Cleco Power's cost of capital. (Tr. 11/09/15 at p. 133 (Olagues)). 187. Absent the transaction, Cleco would likely bring its current 57% equity level down towards the 51% equity level through additional debt as allowed and prescribed in the target capital structure of the Commission, which may, in and of itself, lower the credit Docket No, U-33434 (Cleco Power LLC, ex pare Recommendation of the Administrative Law Judge Page 40rating of Cleco Power and potentially Cleco Corporation in the future. (Tr. 11/09/15 at pp. 130-131 (Olagues)). B. Changes to Credit Ratings 188.Cleco Power and Cleco Corporation are rated by both Moody's and Standard and Poor's. (Tr. 11/11/15 et p. 161 (Chapman) 189. The purpose of a credit rating from one of the three major credit rating agencies is for an objective third party to give its own assessment of the credit worthiness of a seourity. (Tr. LI/M1AS at p. 161 (Chapman)). 190. Credit ratings give the market an objective third party indication as to the credit quality of the particular security. (Tr. 11/11/15 at p. 161 (Chapman). 191.A company’s credit ratings are the de fueto measure of a company's finaneial strength as far as the capital markets are concerned. (Direct Testimony of John Mayeaux, at p. 11). 192. The eredit rating determines a company’s ability to raise debt capital. (Direct Testimony of John Mayeaux, at p. 11). 193.If a company’s ratings and financial metrics are out of line with its industry peers, then the company is at risk of not being able to access debt on reasonable terms. This could have an impact on the cost of future debt of Cleco Power. (Direct Testimony of John Mayeaux, at pp. 11, 13). 194, The credit ratings at Cleco Corporation and Cleco Power are absolutely linked. Rating downgrades at Cleco Corporation can result in ratings downgrades at Cleco Power. Financial distress at Cleco Corporation could impact the equity value at Cleco Power, leading to negative consequences for ratepayers. (Tr. 11/12/15 at pp. 312-314 (Mayeaux)). 195.Prior to the announcement of the transaction, analyses were performed by Macquarie Capital (serving as the financial advisor to Cleco Partners) as well as by Moody's and Standard and Poor's, to determine what would happen to the credit ratings of Cleco Corporation and Cleco Power as a result of the transaction, (Tr. 11/11/15 at p. 163 (Chapman)). 196. The Purchasers were aware, prior to the announcement of the transaction, and prior to the signing of the merger agreement, that they should expect the rating downgrades for both Cieco Corporation and Cleco Power that are indicated on Commission Staff Exhibit 1. (Tr. 11/11/15 at pp. 168-169 (Chapman); Commission Staff Exh. 1). Docket No, U-33434 (Cleco Power LLC, ex parte Recommendation of the ‘Adiministrative Law Judge Page 41197. Immediately after the announcement of the transaction, both Moody's and Standard and Poor's issued public statements that the transaction would negatively affect the credit ratings of Cleco Corporation and Cleco Power. (Direct Testimony of John Mayeaux, at p.6). 198. On October 21, 2014, Moody's lowered its credit rating outlook for Cleco Corporation and Cleco Power from "stable" to “negative.” ‘The Moody's credit report stated: "We anticipate [Cleco] Power's financial metrics to weaken from current levels" due to the transaction and that "a significant increase in leverage could pressure [Cleco] Corp. and [Cleco] Power's ratings." (Direct Testimony of John Mayesux, at p. 6) 199. On October 21, 2014, Standard and Poor's downgraded its outlook for Cleco Corporation and Cleco Power from "developing" to "negative credit watch," stating in its credit report that the transaction "could result in lower ratings if [Macquarie] uses additional leverage to finance the purchase.” (Direct Testimony of John Mayeaux, at p. 6). 200. Moody's indicated that as a result of the transaction, Cleco Corporation would be downgraded from its current, pre-transaction investment grade rating of Baal to Bal That would be a downgrade of three notches and the post-transaction rating of Bal would not be investment grade. (Commission Staff Exh. 4; Tr. 11/11/15 at p.168 (Chapman); Direct Testimony of John Mayeaux, at pp. 6-7; Rebuttal Testimony of Andrew Chapman, at pp. 29-30) 201.Standard and Poor's indicated that as a result of the transaction, Cleco Corporation's credit rating which is currently BBB+ would be downgraded to BBB or BBB-, a downgrade of one to two notches. BBB- is the lowest investment grade rating. (Commission Staff Exh. 5; Tr. 11/11/15 at p. 167 (Chapman); Direct Testimony of John Mayeaux, at pp. 6-7; Rebuttal Testimony of Andrew Chapman, at 29-30). 202. Prior to this transaction neither Cleco Corporation nor Cleco Power ever had a rating below investment grade from either Moody's or Standard and Poor's. (Tr. 11/10/15 at p. 190 (Olagues); Tr. 11/11/15 at p. 163 (Chapman)). 203. Moody's indicated that, as a result of the transaction, it would downgrade Cleco Power fiom its current level of A3 to Baal, or one notch. (Commission Staff Exh. 4; Tr. 11/11/15 at p. 165 (Chapman); Direct Testimony of John Mayeaux, at pp. 6-7; Rebuttal Testimony of Andrew Chapman, at pp. 29-30). 204. Standard and Poor's indicated that as a result of the transaction, Cleco Power's securities would be downgraded fiom BBB+ to BBB or one notch. (Commission Staff Exh. 5; Tr. LI/LI/15 at pp. 170-171 (Chapman); Direct Testimony of John Mayeaux, at pp. 6 Rebuttal Testimony of Andrew Chapman, at pp. 29-30). 205. The one-notch downgrade of Cleco Power to Baal and BBB is consistent with what Cleco Power has operated at for decades and is consistent with the credit ratings of Docket No. U-33434 Cleeo Power LLC, ex parte Recommendation ofthe ‘Administrative Law Judge Page d2Entergy Louisiana and SWEPCO, other public utilities in Louisiana. (Tr. 11/10/15 at pp. 193-195 (Olagues)). 206. The $1.35 billion in acquisition debt sold to finance the transaction and residing on the books of Cleco Corporation will be sold after the downgrading of Cleco Corporation to Bal by Moody's and either BBB or BBB- by Standard and Poor's. (Tr. 11/11/15 at p. 175 (Chapman). 207. The cost of the acquisition financing bonds will be higher after the Moody's and Standard and Poor's downgrades than they would have been had those downgrades not taken place. (Tr. 11/11/15 at p. 176 (Chapman) 208. The additional financing debt on Cleco Corporation's books after the transaction takes place contributes to the downgrades of Cleco Power from A3 to Baal by Moody's and BBB+ to BBB by Standard and Poor's, (Tr. 11/11/15 at p. 177 (Chapman). 209.Cleco Power's credit ratings will be negatively impacted by Cleco Corporation's credit rating, (Tr. 11/10/15 at p. 194 (Olagues); Tr. 11/11/15 at pp. 179-180 (Chapman). 210. The lowered credit ratings at Cleco Power reflect the additional $1.35 billion in debt on Cleco Corporation's books. (Tr. 11/10/15 at pp. 194-195 (Olagues)). C. Macquarie’s Exit — the “Tail-End Risk” 211.MIP III, the member of Cleco Partners (Macquarie’s interest) that will own 54% of Cleco Corporation, is a “closed-end fund,” which means that the fund is set up with a planned termination date, MIP II is scheduled to be liquidated in 2024, with a potential for extensions of that date, but with a stated intention for expeditious liquidation soon after the planned termination date. Accordingly, MIP III may exit the deal as soon as eight years from now. Thus, the Macquarie enterprise being considered for approval in this proceeding will no longer be the primary party in ownership of Cleco in less than nine years. (Tr. 11/12/15 at p. 327 (Lane Sisung); Direct Testimony of Lane Sisung at p. 15). & At the time it exits the deal, Macquarie must offer its co-owners, bcIMC and John Hancock the opportunity to purchase its interest before offering it to third parties, While beIMC and John Hancock have a right of first refuusal to purchase Macquarie’s interest, they are under no obligation to do so nor to stay in the transaction. beIMC and John Hancock can sell at any time subject to Commission approval. beIMC has an indefinite time horizon in terms of its investments and infrastructure programs, and its priority is to own the assets for a long period of time. (Tr. 11/12/15 at pp. 263-264 (Webb)). 213.If the investment in Cleco underperforms it is possible that some of the owners of Cleco Pariners could choose to sell and re-deploy their capital to other investments. Selling Decket No, U-33434 Cleco Power LUC, ex pate Recommendation ofthe Adninsrative Lae Judge Page 43Cleco in a time of distress would leave any new owners in an extremely strong negotiating position. (Tr. 11/12/15 at pp. 316-317 (Mayeaux)). D. Tax Issue 214.Cleco Partners intends to treat a large portion of their equity investment in Cleco Group as an intercompany loan for tax purposes only, thereby creating tax deductions for interest payments by Cleco Group that are not available to normal equity investments. Direct Testimony of Lane Sisung, at p. 51). 215. These deductions will reduce the overall tax liability of Cleco Group and will allow the investors to retain portions of the taxes paid in retail rates by Cleco Power customers to enhance those investors! returns. (Direct Testimony of Lane Sisung, at p. 51). 216. These tax savings could amount to as much as $30 million per year. (Direct Testimony of Lane Sisung, at p. 51). 217.The result is that the ratepayers of Cleco Power will be paying as much as $30 million pet year in rates for taxes that will never be paid to the taxing entities. (Direct Testimony of Lane Sisung, at p. 51). 218. These amounts instead will be kept by Cleco Partners to enhance the returns to its investors, (Direct Testimony of Lane Sisung, at p. 51), Consideration of the 18 Factors of the 1994 General Order Consideration of the 18 Factors of the 1994 General Order not proceed in the sequential path set out in the Order, Some Factors are related and will be grouped for consideration, Factors 1, 2 and 18 will be reserved for last, as they ask the conclusory questions of whether the proposed transfer is in the public interest and whether, if approved, the Commission should attach conditions to the transaction. Docket No. U-33434 (Cleeo Power LLC, ex parte Recommendation of the Administrative Law Judge Page dsFactor 2: Whether the purchaser is ready, willing and able to continue providing safe, reliable and adequate service to the utility's ratepayers. Factor 4: Whether the proposed transfer will maintain or improve the quality of service to public utility ratepayers. Factors 2 and 4 question whether safe, reliable, high-quality service will be maintained post-transaction, The evidence and testimony presented at the hearing firmly establish, and, in fact, no party disputes, that Cleco Power is a well-managed company (Finding of Fact (“FOF”) 25); has been a retail electric service provider in Louisiana for about 80 years (FOF 2); provides excellent service to its customers (FOF 34); employs impressive safety practices (FOF 30); has an excellent management team that provides good service, runs a good company, and is committed to its service territory (FOF 31); has well-maintained facilities (FOF 32); has no backlog or delay in hooking up new customers (FOF 35); and has no backlogs in performing repairs or making replacements on its system for generation, transmission, or distribution (FOF 36 and FOF 37). Cleco Partners does not claim to be an expert in running an electric utility system or in generating power (FOF 88) and has no technical expertise to bring to the table that Cleco does not already have to improve the reliability performance of Cleco Power (FOF 89), Instead, Cleco Partners’ plan is to allow Cleco Power to continue performing its finctions the way it currently does (FOF 91). The record establishes that Cleco Partners has committed, through its Regulatory Commitments, to preserve the proven and successful status quo at Cleco Power, by maintaining and complying with the Service Quality Program (FOFs 122, 125-131); maintaining staffing and presence in communities in which Cleco Power operates at levels appropriate to Docket No, U-33434 Clevo Power LLC, ex pare Recommendation of the Administrative Law Judge Page 4Smaintain the provision of safe and reliable service (FOF 123); and continuing Cleco’s operating practices, storm and emergency management practices, and customer services that Cleco’s customers have come to expect (FOF 124). ‘What Cleco Partners does bring to the table is broad organizational, supervisory, and industry expertise, through its ownership of Puget, Duquesne, and other utilities (FOF 84), experience and focus on cyber security issues (FOF 85), and experience with project planning (FOF 86). While the Purchasers acknowledge that they are not operational experts, in terms of the technical aspects of operating an eleciric utility, they facilitate collaboration between the managers of the utilities and their counterparts in the field to discuss safety issues, risks, project planning, and project implementation (FOF 87). ALJ Recommendation With Regard to Factors 4 The Administrative Law Judge concludes that, if the transaction is approved, the Purchasers are ready, willing, and able to continue providing safe, reliable, and adequate service to the utility’s ratepayers, and will maintain or improve the quality of service. The record establishes that Cleco Power is currently providing safe, reliable, and high-quality service to its ratepayers, and that, if the transaetion is approved, Cleco Partners will be able to maintain the positive status quo by (1) allowing Cleco Power to continue performing its functions the way it currently does; (2) committing itself to the service standards already put in place by Cleco Power, and (3) providing organizational, supervisory, and industry expertise and support. Docket No, U-38434 ‘Cleeo Power LLC, ex parte ‘Recommendation of the Administrative Law JudgeFactor 3: Whether the transfer will maint resulting publie utility. or improve the financial condition of the Factor 14: Whether the acquiring entity, persons, or corporations have the financial ability to operate the system and maintain or upgrade the quality of the physical system. Factor 15: Whether any repairs and/or improvements are required and the ability of the acquiring entity to make those repairs and/or improvements. Factor 17: The manner of financing the transfer and any impact that may have on encumbering the assets of the entity and the potential impact on rates. These four factors focus attention on the most debated issue in this proceeding ~ the proposed transaction’s impact on the financial condition of Cleco Power. The Commission Staff and some of the intervenors raise concerns about what they see as significant financial risks which cannot be adequately mitigated by Cleco Partners’ Regulatory Commitments.*? They contend that the proposed transaction will negatively impact Cleco Power's financial condition and harm ratepayers by (1) over-leveraging the Cleco enterprise, (2) lowering Cleco Corporation’s and Cleco Power's credit ratings; and (3) increasing interest rate risks. The financial risks to Cleco Power and its ratepayers caused by these interrelated issues will be both short and long-term, according to the Staff, as over-leveraging and lowered credit ratings make access to capital more difficult and more expensive. This financial weakening could also make a sale of the company more difficult when Macquarie, who owns a 54% interest in Cleco Partners, exits the deal as soon as eight years from now — what the Staff refers to as the “tail-end risk” (FOF 211). ‘The Staff submits that the proposed Regulatory Commitments, including the ® Arguments by the intervenors which concur with those of the Commission Staff will be presented as “Staff” arguments for purposes of simplicity Docket No, U-33434 ‘Cleso Power LLC, ex pare Recommendation of the Administrative Law Judge Page 47$125 million in Rate Credits, do not sufficiently reduce the financial risks of the proposed transaction, and urges the Commission to require additional commitments from Cleco Partners. The Applicants contend that the Staff's and Intervenors’ concerns about financial risks are exaggerated and unfounded. They submit that Cleco Power will be in stronger financial shape after the transaction that it would be absent the transaction, because of the Regulatory Commitments. The Applicants contend that specific Regulatory Commitments (1) restrict Cleco Corporation’ ability to incur long-term debt unless certain financial criteria are met; (2) utilize “ring-fencing” measures to isolate Cleco Corporation’s debt at the holding company level; (3) ensure that any further reduction in Cleco Corporation’s credit ratings will be “self-correcting” by tying distributions to maintenance of investment grade credit ratings at Cleco Corporation and Cleco Power; and (4) shield Cleco Power's ratepayers fiom interest rate risk, Further, the Applicants point to the fact that the proposed transaction will provide $125 million over 15 years ($8.33 million per year) in Rate Credits to Cleco Power’s customers (FOF 143) and ratepayers will further benefit from estimated cost of service savings in the amount of $1.2 million per year (FOF 140). ‘The Leveraging Issue and Capital Structure ‘The record demonstrates that Cleco Power is currently in strong financial health (FOF 7), with an actual capital structure of 57% equity and 43% debt (FOF 24). Cleco Power's jurisdictional capital structure is set at $1% equity and 49% debt (FOF 23). Its parent company, Cleco Corporation, has a similar equity capitalization currently of 57% equity and 43% debt, due to the fact that Cleco Power makes up 95% or more of Cleco Corporation (FOF 49). ‘The record Docket No, U-33434 CCleco Power LLC, ex pare Recommendation ofthe ‘Administrative Law Judge Page 48reflects that if the transaction is not approved, Cleco will likely bring its current 57% equity level down towards the 51% equity level through additional debt as allowed and prescribed in the target capital structure of the Commission (FOF 187). The proposed transaction has an estimated value of $4.9 billion (FOF 102). The Purchasers will provide $1.195 billion in true equity and $975 million in owner-provided debt, will assume the existing $135 billion in existing Cleco Power debt, and will sell $1.35 billion of new debt (acquisition debt) in order to fund the transaction (FOFs 104-107). The $1.35 billion in new debt will be placed on the books of Cleco Corporation (FOF 104). Although the $1.35 billion acquisition loan will technically be the debt of Cleco Corporation, the cash to pay off the acquisition Joan will come from Cleco Power (FOF 170). Post-transaction, the existing net operating revenues of Cleco Power will have to support the $1.35 billion of existing pre- transaction debt, the new $1.35 billion in acquisition debt, and a retum to the Purchasers who will supply up to $2.17 billion in "equity" (FOF 171), ‘As a result of the transaction, Cleco Corporation will go fiom having no debt to approximately $1.4 billion in debt (FOF 172). Cleco Corporation’s consolidated debt to equity ratio will increase to approximately 57% debt/43% equity from its current 43% debt/57% equity level (FOF 173). An analysis that MIP Partners undertook for purposes of evaluating Cleco as a potential acquisition in the Hart Scott Rodino filing made with the United States Department of Justice ((FOFs 174, 175) projects future changes to Cleco Power's and Cleco Corporation's equity capitalization through 2035. The analysis produces projections under two scenarios, one in which Cleco is successful in obtaining and retaining wholesale contracts (the “base case”) and one in which they are not (the “low growth case”) (FOF 178). Projections from that analysis are that, under the base case scenario, Cleco Corporation’s equity capitalization will fall to 43% in Docket No. U-38434 Cleco Power LLC, ex pate Recommendation ofthe Administrative Law Judge Page 492016, after the transaction is closed, will drop to 40% by 2020 (FOF 179), and by 2025, will drop 10 33% (FOF 180). The Credit Ratings Issue ‘The purpose of a credit rating from one of the three major credit rating agencies is for an objective third party to give its own assessment of the credit worthiness of security (FOF 189). Credit ratings give the market an objective third party indication as to the credit quality of the particular security (FOF 190). A company’s credit ratings are the de facto measure of a company’s financial strength as far as the capital markets are concerned (FOF 191). ‘The credit rating determines a company’s ability to raise debt capital (FOF 192). If a company’s ratings and financial metries are out of line with its industry peers, then the company is at risk of not being able to access debt on reasonable terms (FOF 193). The credit ratings at Cleco Corporation and Cleco Power are absolutely linked. Rating downgrades at Cleco Corporation can result in ratings downgrades at Cleco Power. Financial distress at Cleco Corporation could impact the equity value at Cleco Power, leading to negative consequences for ratepayers (FOF 194), Both Cleco Power and Cleco Corporation have high credit ratings currently, and neither Cleco Power nor Cleco Corporation has ever had a credit rating below investment grade from either Moody’s or Standard & Poor's (FOFs 8, 10, 50, 51). Cleco Power has a lower business risk profile than the company has seen in years, and has recently taken numerous steps, notably successful integration into the Midcontinent Independent System Operator, Ine. (“MISO”) market, to position itself for future growth and financial stability (FOFs 7-19). Docket No, U-33434 CCleeo Power LLC, ex parte ‘Recommendation ofthe ‘Administrative Lav Judge Page 50Immediately after the proposed transaction was announced, both Moody's and Standard & Poor's issued public statements that the transaction would negatively affect the credit ratings of Cleco Corporation and Cleco Power (FOF 197). On October 21, 2014, Moody's lowered its credit rating outlook for Cleco Corporation and Cleco Power fiom "stable" to "negative." The Moody's credit report stated: "We anticipate [Cleco] Power's financial metrics to weaken from current levels" due to the transaction and that "a significant increase in leverage could pressure [Cleco] Corp. and [Cleco] Power's ratings" (FOF 198). Also on October 21, 2014, Standard and Poor's downgraded its outlook for Cleco Corporation and Cleco Power from "developing" to “negative credit watch," stating in its credit report that the transaction "could result in lower ratings if [Macquarie] uses additional leverage to finance the purchase” (FOF 199). Based upon information supplied by Cleco Partners, Moody's indicated that as a result of the transaction, Cleco Corporation would be downgraded three notches from its current, pre- transaction investment grade rating of Baal to Bal. Bal is not investment grade (FOF 200). Standard and Poor's indicated that as a result of the transaction, Cleco Corporation's credit rating, which is currently BBB+, would be downgraded one to two notches to BBB or BBB-. BBB- is the lowest investment grade rating (FOF 201). Moody's indicated that, as a result of the transaction, it would downgrade Cleco Power by one notch, from its current level of A3 to Baal (FOF 203). Standard and Poor's indicated that as a result of the transaction, Cleco Power's securities would be downgraded one notch from BBB+ to BBB (FOF 204), While it is a downgrade, the one-notch downgrade of Cleco Power to Baal and BBB is consistent with what Cleco Power has operated at for decades and is consistent with the credit ratings of Entergy Louisiana and SWEPCO, other public utilities in Louisiana (FOF 205). However, the additional financing debt on Cleco Corporation’s books after the transaction Docket No, U-33434 ‘Cleca Power LLC, ex pate ‘Recommendation of the Adminitrative Law Judge Page 51takes place (the $1.35 billion acquisition debt) contributes to the credit rating downgrades of Cleco Power (FOFs 208, 210). The Interest Rate Issue The $1.35 billion in acquisition debt which will be sold to finance the transaction and will reside on the books of Cleco Corporation will be sold after the downgrading of Cleco Corporation to Bal by Moody's and either BBB or BBB- by Standard and Poor's (FOF 206). The cost of the acquisition financing bonds will be higher after the Moody's and Standard and Poor's downgrades than they would have been had those downgrades not taken place (FOF 207). Further, the $1.35 billion in acquisition debt is short-term and has a variable rate. Thus the cost of financing that debt will remain an issue until it is paid. The cost of future debt may be impacted as well. The Applicants’ project that by 2025, Cleco Corporation will have a rate base of approximately $5.8 billion with 73% of all capital expenditures between 2019 and 2025 fianded with debt (FOF 181). Regulatory Commitments Addressing the Financial Risks The Applicants have addressed financial risks in its Regulatory Commitments. The Commitments include “ring-fencing” provisions as a way of preserving the viability of Cleco Power as a stand-alone entity by isolating it from the credit risks of Cleco Corporation, or from its other affiliates, should they be faced with bankruptey or some other financial distress (FOF 146). Pursuant to the ring-fencing provisions, there will be no recourse to Cleco Power assets as collateral or security for debt issued by Cleco Corporation without prior Commission authorization. Cleco Power's jurisdictional rates shall not include any obligations arising from a Docket No, U-33434 (Cleco Power LLC, ex pare Recommendation of the Administrative Law Judge Page 52non-Cleco Power business activity of Cleco Corporation or Cleco Group (FOF 144). The risk and responsibility to make payment on the holding company’s debt is solely on the backs of the new owners, not on Cleco Power’s customers (FOF 145), ‘The Regulatory Commitments also utilize financial formulas to limit the addition of long- term debt on Cleco Corporation’s books. Cleco Corporation is prohibited som incurring additional long-term debt unless Cleco Corporation’s debVEBITDA ratio (on 2 consolidated basis, excluding non-recourse debt) is no more than 6.25 until 2020 and no more than 6.00 after 2020 (FOF 159). ‘The Regulatory Commitments contain “distribution traps,” designed to keep cash in the business if certain financial ratios are not met. The distribution traps limit distributions from Cleco Power if it does not have a minimum equity ratio greater than or equal to 45% (FOF 154) The distribution traps allow Cleco Power to make limited distributions only to pay service on debt if it has at least one investment grade rating and a minimum equity ratio of not less than 40% (FOF 155). The traps prevent Cleco Corporation fiom making distributions unless (a) Cleco Corporation has at least one investment grade rating, and (b) Cleco Corporation has a debt to EBITDA ratio less than or equal to 6.5, and (c) Cleco Power has two investment grade ratings, and (d) Cleco Power has an equity ratio greater than or equal to 48% (FOF 156). If the distribution traps are actually triggered, this means that the new owners are not getting paid a teturn on their $2.17 billion investment, and the new owners would have an extremely strong incentive to fix the financial ratios (FOF 157). No other Louisiana utility has committed to eliminate distributions if certain bond ratings and financial ratios are not met (FOF 158). Pursuant to the Regulatory Commitments, the Applicants commit that Cleco Power will maintain investment grade credit ratings with two of Moody's, Standard & Poor's, and Fitch and Docket No, U-33434 (Cleco Power LLC, ex pare Recernmendation of the Administrative Law Judge Page 53will seek to improve its credit ratings over time. Cleco Power commits to hold ratepayers harmless ftom any increase in the cost of debt to Cleco Power caused by credit downgrades (FOF 141). ‘The Regulatory Commitments require Cleco Corporation to refinance acquisition debt with medium-term and/or long term financing to mitigate any interest rate risk. The Regulatory Commitments also require Cleco Corporation to stagger the refinancing of the acquisition term loans such that no more than 40% of the total debt issued will have a maturity date within a 24 month period (FOF 161). Cleco Partners shall bear any future costs associated with the interest rate risk attributable to the refinancing of the acquisition debt (FOF 162). ‘The Applicants will hold ratepayers harmless from any increase in the cost of debt to Cleco Power, if there is any increase, caused by the transaction or by any credit rating downgrades (FOF 160). The Regulatory Commitments also provide for Rete Credits in the amount of $125 million over 15 years ($8.33 million per year), which will be flowed back to ratepayers outside of any sharing mechanism (FOF 143) and expected cost of service savings estimated to be $1.2 million per year, which will be flowed back to the ratepayers each year between closing of the transaction and the effective date of new base rates for Cleco Power (FOF 140). ALJ Conclusion With Regard to Factors 3, 14, 15. and The Administrative Law Judge finds that the proposed transaction brings substantial financial risks to Cleco Power and its ratepayers thet are not sufficiently mitigated by the Regulatory Commitments. Cleco Power is currently in sound financial condition (FOF 7); Cleco Power's and Cleco Corporation’s actual capital structure consists of 57% equity and 43% debt (FOFs 24, 49), Both Docket No. U-33434 Clevo Power LLC, ex parte ‘Recommendation of the ‘Administrative Law Judge Page 54Cleco Power and Cleco Corporation have solid, investment grade credit ratings, and neither has ever had a credit rating below investment grade (FOFs 10, 50, 51). Cleco Power has taken numerous steps to position itself for future growth and financial stability, including successful integration into MISO; with its participation in MISO, Cleco management has forecasted that the company’s wholesale business would double by 2025 (FOFs 11-15). Cleco has entered into a new wholesale power agreement with Dixie Electric Membership Company which runs through 2024, and by virtue of that contract has been able to increase its load by approximately 20% - providing significant financial benefits to Cleco and allowing Cleco to bring another power plant in the company’s fleet (FOF 17). Cleco had no difficulty in financing the construction of the Madison 3 generating unit, at a cost of approximately $1 billion, and over the past 30 years, neither Cleo Power or Cleco Corporation hes ever had any difficulty in financing new ‘generation, transmission, or distribution (FOFs 18-19). ‘The record demonstrates that the proposed transaction will have significant impacts on the current, stable and positive financial condition of Cleco Power and Cleco Corporation. The transaction, structured as a leverage buyout, will immediately place $1.35 billion in acquisition debt on the books of Cleco Corporation, and that over-leveraging will produce lower credit ratings, weakened credit metri , and interest rate risks. Further, the plans for Macquarie (54% owner in Cleco Partners) to exit the deal in as short a time as 8 years, and Cleco Partners’ modeling outputs which indicate increasing levels of debt over the next ten years, raises questions concerning Cleco Power’s long term financial condition. The Administrative Law Judge acknowledges the efforts of the Applicants to create Regulatory Commitments (and Rate Credits) to protect against and mitigate those real financial concerns, but does not find that those efforts adequately allay our real concerns that the proposed Docket No. U33434 CCleco Power LLC, ex pare ‘Recommendation ofthe Administrative Law Judge Page 55transaction will lead to a degradation of Cleco Power's and Cleco Corporation’s financial condition, While there are meaningful protections in the Commitments ~ ring-fencing to isolate Cleco Power from credit risks of Cleco Corporation, distribution traps, limits on adding long- term debt, protections against increases in the cost of debt, and Rate Credits — they do not eliminate the risks. It appears that over-leveraging of Cleco Corporation through $1.35 billion in acquisition debt is the driver of the financial risks, and while the Commitments attempt to address the risks resulting from the over-leveraging, there is no offer, currently, to address the driver of those risks. There is no offer to restructure the transaction so that Cleco Corporation is not over- leveraged as soon as the transaction closes, there is no offer to invest more real equity, and no ‘commitment that Cleco Power's and Cleco Corporation's credit ratings will be returned to their current levels. The reality is that the need for serious mitigation arises fiom the fact that the proposed transaction will produce such serious financial impacts, and at this point, the Administrative Law Judge cannot conclude that the Commitments sufficiently re-cast the proposed transaction into a transfer that “will maintain or improve the financial condition” of Cleco Power. Factor Whether the transfer will provide net benefits to ratepayers in both the short term and the long term and provide a ratemaking method that will ensure, to the fullest extent possible, that ratepayers will receive the forecasted short and long term benefit. The Applicants contend that this Factor is unquestionably met through Regulatory ‘Commitments that provide for the flow back of Rate Credits to the ratepayers each year, provide for the flow back of cost of service savings to the ratepayers each year, and accept the current Docket No, U-33434 (Cleco Poser LLC, ex parte Revomnnendation of the Adminisearive Law Judge Page 56Formula Rate Plan as is. Pursuant to the Regulatory Commitments, Rate Credits in the amount of $125 million over fifteen years ($8.33 million per year) will be flowed back to the ratepayers, dollar for dollar, outside of any sharing mechanism and not subject to the dead band in Cleco Power’s Formula Rate Plan (FOF 143). In addition, an additional $1.2 million per year in cost of service savings resulting ftom the proposed transaction will be flowed to the ratepayers during the time period between the closing of the transaction and the effective date of new base rates for Cleco Power (FOF 140). And, as the Applicants assert, they are accepting Cleco Power's current Formula Rate Plan without change, with the result that the ratepayers will not pay a penny more in rates as a result of the transaction than they are paying now (FOFs 117, 118). ‘The Commission Staff contends that Cleco Power's customers will be harmed by (1) the Purchasers’ double-leveraging of the $1.35 billion in acquisition debt borrowed by the Purchasers; (2) a proposed tax structure that will result in ratepayers paying in their rates taxes that will never be paid to government entities, effectively transforming taxes paid by ratepayers into distributions to the owners; and (3) the financial risks imposed by the transaction, discussed in connection with Factor 3. The record reflects that the proposed transaction will be financed as # leveraged buyout (FOF 103). Merriam Webster Dictionary defines a “leveraged buyout” as the purchase of a company made with borrowed money secured by the assets of the company being bought.” With double-leveraging, the debt is invested as common equity in order to recover the higher return allowed for common equity investments in the capital structure.* The proposed transaction will be financed as a leveraged buyout designed to earn excess returns for the Purchasers by taking advantage of the higher returns on their investment in Cleco versus the lower interest rate being * See, Ohio Edison Co., 24 FERC 463,068 (1983) at p.65,092) Docket No. U-33434 ‘Cleso Power LLC, ex parte Recommendation o the Administrative Law Judge Page S7paid on the debt used to finance the transaction (FOF 103). Cleco Partners will borrow $1.35 billion in new debt to be placed on the books of Cleco Corporation (along with approximately $2.17 billion from the Purchasers) to fund the acquisition of Cleco Corporation stock (FOFs 104, 105). Cleco Partners will also assume $1.35 billion in currently outstanding Cleco Power debt (FOF 107). The Commission Staff submits that it is not uncommon for some double-leveraging to occur with regulated utilities, because their actual and jurisdictional capital structures may not be exactly the same, Ifa utility’s actual equity ratio is lower that its jurisdictional equity ratio, the ifferential will allow the utility to earn an equity return (which is higher that the return on debt) ‘on some of its debt investment, What the Staff is concerned about here is the problem of excessive double-leveraging, which occurs when the differential between the actual and jurisdictional equity ratios is significant. The Staff has asked the Applicants to agree with a requirement that Cleco Corporation maintain a 45% equity ratio in order to avoid excessive double-leveraging, but the Applicants have refused.*> Instead, the Applicants have included in the Regulatory Commitments a provision (Commitment No. 4) which provides that the Commission and the parties may raise “ratemaking issues” in future proceedings before the Commission (FOF 118). The Staff contends that other provisions in the Applicants’ Regulatory Commitments allow Cleco Partners to engage in excessive double-leveraging, and that the Applicants’ proposal to defer consideration of the double-leveraging to future proceedings does not protect ratepayers in the meantime. The Staff urges the Commission to require a Commitment in this proceeding that ratepayers will be reimbursed for this cost collected even if the quantification is to take place in + Transeript, 11/12/16 at p. 348 (Lane Sisung). Docket No, U-33434 Cleco Power LLG, ex parte Revoarinendation ofthe ‘Administrative Law Judge Page 58the future. At a minimum, the Staff urges the Commission to ensure that all issues associated with double-leveraging be reserved for future consideration by the Commission, The Staff is also concemed about a tax structure the Applicants propose that could result retail ratepayers paying in rates up to $30 million per year in taxes that may never be paid to the state and federal taxing authorities. The record reflects that Cleco Partners intends to treat a large portion of their equity investment in Cleco Group as an intercompany loan for tax purposes only, thereby creating tax deductions for interest payments by Cleco Group that are not available to normal equity investments (FOF 214). These deductions will reduce the overall tax liability of Cleco Group and will allow the investors to retain portions of the taxes paid in retail rates by Cleco Power customers to enhance those investors’ returns (FOF 215). These tax savings could amount to as much as $30 n lion per year (FOF 216). The result is that the ratepayers of Cleco Power will be paying as much as $30 million per year in rates for taxes that will never be paid to the taxing entities (FOF 217). These amounts instead will be kept by Cleco Partners to enhance the returns to its investors (FOF 218). The Staff submits that there is no valid rationale to allow Cleco Partners to retain this revenue from ratepayers that is collected to pay non-existent taxes, The Applicants do not offer protections to ratepayers to offset this tax structure in the Regulatory Commitments. As with the double-leveraging issue, the Applicants agree, pursuant to Commitment No. 4, that the Commission and the parties may raise “ratemaking issues” in future proceedings before the Commission (FOF 118). The Staff urges the Commission to determine, in this proceeding, at least that ratepayers should not pay for taxes not paid to the taxing authorities solely because of the Purchasers’ proposed tax structure, and reserve only the issue of quantification for later proceedings. Docket No. U-33434 ‘Cleco Power LLC, ex pare ‘Recommendation of the Administrative Law Judge Page 59The Staff contends that through the implementation of double-leveraging and the proposed tax structure, Cleco Partners will be using ratepayer money for financial gain. Further, according to the Staff, the ratepayers should be compensated for the financial risks associated with the transaction. It is Staff’s position that Cleco Partners’ proposed $125 million in Rate Credits over fifteen years ($8.33 million per year) and the cost of service savings (approximately $1.2 million per year) are insufficient to fully compensate ratepayers for the financial risks and the double-leveraging and tax structure impacts. The Staff urges that if the Commission finds the proposed transaction to be in the public interest, the Commission should condition its approval on a significant increase in the amount of Rate Credits to be provided each year. If the Commission determines that the Rate Credits are sufficient to compensate for the financial harms that may be caused by the transaction, the Staff urges that, in addition to the Rate Credits, the Commission should establish a mechanism to compensate Cleco Power customers for the double-leveraging and tax issues, even if precise quantification will take place in a future proceeding, The Staff urges that any future consideration of the issues should be scheduled no later than 2017, when Cleco Power files its next rate case and/or FRP extension, In their Post-Hearing Reply Brief, the Applicants express agreement with a deferral of these issues for now, with reservation of all rights for any future proceeding. ALJ Conclusion With Regard to Factor 5 ‘The Administrative Law Judge concludes that Cleco Partners’ proposed $125 million in Rate Credits over fifteen years ($8.33 million per year) and the cost of service savings (approximately $1.2 million per year) are insufficient to fully compensate ratepayers for the Docket No. U-33434 (Clevo Power LLC, ex pare Recommendation of the Administrative Law Judge Page 60financial risks and the double-leveraging and tax structure impacts which will accompany the proposed transaction. If, however, the Commission ultimately determines that the proposed transaction is in the public interest, the Administrative Law Judge recommends a conclusion that the $125 million in Rate Credits and $1.2 million in cost of service credits be deemed sufficient to compensate for financial harms, only, and that the Commission defer consideration of the double-leveraging and tax structure issues until a future proceeding to be scheduled no later than 2017, at which time those issues may be fully analyzed and quantified as appropriate. The Administrative Law Judge ‘finds that there is insufficient basis in the record for quantification of an increased level of Rate Credits to compensate for financial harms. Factor 6: Whether the transfer will adversely affect competition, The Staff and the Applicants agree that the proposed transaction should have little or no effect on competition, as the Purchasers are not a utility and do not own a competing utility in Cleco Power's market territory. ‘The parties further agree that wholesale competition should not be affected, as the wholesale market participants will be the same before and after the transaction. ALJ Conclusion With Regard to Factor 6 ‘The Administrative Law Judge concludes that, if approved, the proposed transfer will not adversely affect competition, Docket No. U.33434 (Cleco Power LLG, ex parte Recommendation of the Administrative Law Judge Page 61Factor 7: Whether the transfer will maintain or improve the quality of management of the resulting public utility doing business in the State, Factor 8: Whether the transfer w employees. ll be fair and reasonable to the affected public utility The evidence and testimony presented at the hearing firmly establish, and, in fact, no party disputes, that Cleco Power is a well-managed company (FOF) 25) and is in the top tier of locally managed public utilities (FOF 26). Cleco’s current management team lives and works in the Cleco Power service territory, is running a good company, is providing good service, and is committed to that service territory (FOF 31). Cleco Partners’ plan is to allow Cleco Power to continue to perform the functions the way it does now (FOF 90). Cleco Partners does not propose to make any major changes in management and employee levels. Pursuant to the Regulatory Commitments, the Applicants agree that they will maintain employee headcount, salaries, and benefits substantially consistent with or higher than current levels for at least five years (FOF 123), will retain current senior management (FOF 125); and will make no adverse material change in Cleco Power’s pension plans or pension design or in current benefits for retiree medical plan participants for at least five years (FOF 123), Cleco Partners brings to the table broad organizational, supervisory, and industry expertise, through its ownership of Puget, Duquesne, and other utilities (FOF 84), experience and focus on cyber security issues (FOF 85), and experience with project planning (FOF 86). While the Purchasers acknowledge that they are not operational experts, in terms of the technical aspects of operating an electric utility, they facilitate collaboration between the managers of the Derket No, U-3B34 Cteco Power LLC, ex pate Recommendation of he ‘Administrative Law Judge Page 62utilities and their counterparts in the field to discuss safety issues, risks, project planning, and project implementation (FOF 87). The Administrative Law Judge concludes that, if approved, the transfer of ownership will ‘maintain or improve the quality of management of the resulting public utility doing business i the State and will be fair and reasonable to the affected public utility employees. Factor 9: Whether the transfer will be fair and reasonable to the majority of all affected public utility shareholders. The record reflects that the outstanding common shares of Cleeo Corporation will be purchased at a price of $55.37 per share, a premium of approximately 15% versus Cleco Corporation’s closing price of $48.27 on October 17, 2014, the last trading day prior to the announcement of the transaction (FOF 108). Cleco Corporation's shareholders were required to vote to approve the Applicants’ Agreement and Plan of Merger; approve the compensation to named executive officers of Cleco in connection with the merger; and approve an adjournment of the special meeting called for the vote on the Applicants’ proposed transaction(FOF 110). The Merger Agreement received shareholder approval at a special meeting held on February 26, 2015 in Pineville, Louisiana. Shareholders approved of the merger by a vote of approximately 77% of the shares of common stock of Cleco Corporation with voting privileges (FOF 111). 94% of the Cleco Corporation shareholders who returned theit proxies voted in favor of the transaction (FOF 112). Docket No, U-33434 (Cleco Power LLC, ex parte Recommendation ofthe ‘Administrative Law Judge Page 63,ion With Rega nel to Factor 9 The Administrative Law Judge concludes from the record of this proceeding that the transfer of ownership will be fair and reasonable to the majority of all affected public utility shareholders. The Shareholder-Intervenors have argued in this proceeding that the proposed transaction is the result of a flawed, “self interested” process which is unfair to most of Cleco Corporation’s shareholders. However, the record of this proceeding does not establish that conclusion and a specific investigation and/or and analysis concerning the process by which the shareholders voted on the proposed merger is outside the parameters of this proceeding. Factor 10: Whether the transfer will be beneficial on an overall basis to State and local economies and to the communities in the area served by the public utility. The record demonstrates an intent on the part of Cleco Partners to contime Cleco Power’s close ties with and commitments to Pineville and the State of Louisiana. According to the Regulatory Commitments, Cleco Power and Cleco Corporation will both remain Louisiana entities, and Cleco’s corporate headquarters will remain in Pineville, Louisiana (FOFs 119-120). Cleco will maintain or increase its existing level of corporate contributions and community support (approximately $600,000 per year) for at least five years and will pre-fund the foundation within 60 days after the closing of the transaction (FOF 132). Cleco will maintain or increase its economic development funding of no less than $500,000 per year for Louisiana state and local organizations for at least five years following the close of the transaction (FOF 133), and Cleco Power will maintain its existing or comparable voluntary low-income assistance program for a minimum of five years following the close of the transaction (FOF 134). The Applicants commit that they will maintain staffing and presence in the communities in which Docket No, U-33434 ‘Cloco Power LLC, ex pare ‘Recomimencation ofthe Administrative Law Judge Page 64Cleco Power operates at levels appropriate to maintain the provision of safe and reliable service and efficient operations (FOF 123). ALJ Conclusion With Regard to Factor 10 The Administrative Law Judge concludes that, if approved, the transfer will be beneficial ‘on an overall basis to State and local economies and to the communities in the area served by the public utility. Factor 11: Whether the transfer will preserve the jurisdiction of the Commission and the ability of the Commission to regulate and audit effectively the resulting public utility's operations in the State. ‘The Commission Staff has pointed out in this proceeding that the nature of the proposed transaction — which will take Cleco Power from ownership by a publicly-traded company to ownership by a group of private investment firms — together with layers of ownership entities otherwise beyond the Commission jurisdiction, presents unique issues with regard to the ability of the Commission to effectively regulate and audit Cleco Power's operations in the State. To address that issue, the Staff proposed, and the Applicants accepted, changes to Regulatory Commitment 1, which memorialize the Commission's enforcement authority through injunctive relief over those otherwise non-jurisdictional entities that will form a chain of ownership of Cleco Power. The Applicants have also committed that Cleco Power will file annual reports regarding implementation of the Regulatory Commitments (FOF 165); that Cleco Group and Cleco Partners will provide access to informal and financial reports from Cleco Power's upstream Docket No, U-33434 Ceoo Pawwer LLC, ex pare Recommendation ofthe ‘Administrative Law Judge Page 65‘owners (FOF 166); and that even though Cleco Corporation will no longer be a publicly traded company, the Applicants will comply with many of the reporting requirements and provisions of the Securities and Exchange Commission, the New York Stock Exchange, and the Sarbanes- Oxley Act (FOF 167). ALJ Conclusion With Regard to Factor 11 ‘The Administrative Law Judge agrees with the Commission Staff thet, to a large extent, the transfer, if approved, will preserve the jurisdiction of the Commission and the abil y of the Commission to regulate and audit effectively the resulting public utility's operations in the State, due to the Applicants’ agreement to revisions to the language of Regulatory Commitment No. 1 and the Applicants’ agreement to other Regulatory Requirements which provide for certain reporting requirements, Factor 13: The history of compliance or noncompliance of the proposed acquiring entity or principals or affiliates have had with regulatory authorities in this State or other jurisdictions. The record indicates that the utilities owned by Macquarie-managed funds have a sound track record of compliance with regulatory requirements and have positive relationships with their regulators (FOF 78). When the Commission Staff contacted two current regulators of Macquarie investments Duquesne and Puget, the regulators gave them positive feedback. Both regulators indicated that Macquarie had satisfactorily met all regulatory requitements of their transactions and had otherwise, generally, ranked favorably among their peers in their interactions with the regulators (FOF 78). Docket No, U.33434 ‘Clevo Pawer LLC, ex parte Recommendation of the Administrative Law Judge Page 66ALJ Conclusion With Regard factor 13 From the record in this proceeding, the Administrative Law Judge concludes that the utilities owned by MIRA-maneged funds have a sound track record of compliance with regulatory requirements and have positive relationships with their regulators. Factor 16: The ability of the acquiring entity to obtain all necessa other permits. y health, safety and There is nothing in the record to dispute a conclusion that Cleco Partners will be able to obtain all necessary health, safety, and other permits Al onclusion With Regard to Factor 16 The Administrative Law Judge concludes that, if the transfer is approved, Cleco Partners will be able to obtain all necessary health, safety, and other permits. Other Issues Raised by Intervenors In addition to concerns the intervenors share with the Commission Staff, and addressed above, Sierra Club and Alliance have raised additional issues, Sierra Club argues that if the transaction is approved, it should be conditioned upon the Applicants’ increased commitment to promoting renewable energy. Sierra Club contends that such a commitment is necessary to protect Cleco Power customers from increased environmental compliance risks associated with Cleco’s continued dependence on coal. Alliance submits that the Commission should take steps Docket No, U-33434 CCleco Power LLC, ex parte ‘Recommendation ofthe ‘Administrative Law Judge Page 67to update its mergers and acquisitions policies, by modifying the 1994 General Order to address the vacuum created by the repeal of the Public Utility Holding Company Act (“PUHCA”). ‘The Administrative Law Judge concludes that both issues are outside the parameters of the 1994 General Order and this proceeding. Factor 1: Whether the transfer is in the public interest. Factor 12: Whether conditions are necessary to prevent adverse consequences which may result from the transfer. Factor 18: _ Whether there are any conditions which should be attached to the proposed acquisition. nelusion With Regard to Factors 1, 12, and 18 For the reasons provided in the discussion of Factors 3, 14, 15, and 17 (financial issues) and Factor 5 (benefits to ratepayer), the Administrative Law Judge concludes that the ‘transaction, as currently structured, is not in the public interest. However, if the Commissioners, within their broad discretion over mergers and acquisition, determine that the proposed transaction is in the public interest, the Administrative Law Judge recommends that approval of the transaction be conditioned upon the following: (1) The 77 Regulatory Commitments attached to this Recommendation be made part of the transaction; and Docket No. U-33434 ‘Clevo Power LLC, ex parte ‘Recommendation ofthe Adminis Law Judge Page 68(2) Consideration of the double-leveraging and tax structure issues be specifically deferred for consideration in a future ratemaking proceeding, no later than 2017, preserving to the parties their arguments until such time. CONCLUSION Based upon the record of this proceeding, the Administrative Law Judge recommends a conclusion that the transaction, as currently structured, is not in the public interest. However, if the Commissioners, within their broad discretion over mergers and acquisition, determine that the proposed transaction is in the public interest, the Administrative Law Judge recommends that approval of the transaction be conditioned upon the following: (1) The 77 Regulatory Commitments attached to this Recommendation be made part of the transaction; and (2) Consideration of the double-leveraging and tax structure issues be specifically deferred for consideration in a future ratemaking proceeding, no later than 2017, preserving to the parties their arguments until such time. Baton Rouge, Louisiana, this 17" day of February, 2016. Valerie Seal Meiners Chief Administrative Law Judge Docket No, U-33434 CCleco Power LLC, ex parte Recommendation of the Administrative Law Judge Page 69 ‘Alicia Whecle, Seth permissionPROPOSED REGULATORY COMMITMENTS TO THE COMMISSION Enforcement and Compliance 1, Cleco Power, as an electric public utility, will remain jurisdictional to the Commission, as it is now. Each of the new owners of Cleco Corporation, being MIP Cleco Partners, L.P.; beIMC Como Investment Limited Partnership and bel MC Como GP Inc.; and JH Como Investments, LLC (each, a "New Owner", and collectively, the "New Owners") as well as Cleco Power, Cleco Corporation, Cleco Group and Cleco Partners agtee to fully and in good faith support the implementation of all commitments herein of Cleco Corporation and Cleco Power and more specifically are obligated to take all steps necessary to allow Cleco Power and Cleco Corporation to fully comply with each of these commitments and to that end, to act consistently with, facilitate, and not interfere with the implementation of all commitments herein of Cleco Corporation and Cleco Power. Nothing herein, however, will serve to create Commission jurisdiction over Cleco Corporation, Cleco Group, Cleco Partners, or any of the New Owners, except to enforce the obligations as agreed to herein, Notwithstanding the foregoing, each of Cleco Power, Cleco Corporation, Cleco Partners, Cleco Group, and each New Owner agrees, to the extent this set of regulatory commitments creates an obligation as part of a regulatory commitment, and one or more of them is in breach thereof, that the Commission may seek to compel specific performance of said obligation ot otherwise utilize injunctive relief against such particular obligor(s) who undertook said obligation before the Commission, the FERC, or a court of competent jurisdiction. Each of Cleco Power, Cleco Corporation, Cleco Partners, Cleco Group, and each New Owner agrees that in seeking to invoke the use of specific performance or injunctive relief, the PD.18443849.7Commission will not be required to demonstrate: 1) that irreparable harm loss or damage will be suffered, absent the issuance of the injunction; 2) the lack of an adequate remedy at law or in damages; 3) that injunctive relief is necessary in the public interest; or 4) that the balance of harm favors the Commission. Further, each of Cleco Power, Cleco Corporation, Cleco Partners, Cleco Group, and each New Owner agrees, to the extent this set of regulatory commitments creates an obligation as part of a regulatory commitment, and one or more of them is in breach thereof, that it waives any objection based upon the Commission's lack of jurisdiction over it to the Commission's seeking such specific performance or injunctive relief, Further, Cleco Power, Cleco Corporation, Cleco Partners, Cleco Group and each New Owner consents to jurisdiction and venue in Louisiana State Court to the extent necessary to enforce the regulatory commitments via specific performance or injunction. Each of Cleco Power, Cleco Corporation, Cleco Partners, Cleco Group, and each New Owner, in connection with such requested specific performance or injunctive relief, retains the right to demonstrate that it has not committed to an obligation as part of a regulatory commitment or that it is not in breach of such obligation. 2. Cleco Power acknowledges that all existing orders issued by the Commission with respect to Cleco Power or its predecessors will remain in effect, and are not modified or otherwise affected by the Transaction or any order of the Commission authorizing the Transaction, except and unless specifically and expressly provided in the Commission's final order authorizing the Transaction. 3. Cleco Power will continue to comply with all Commission-issued orders and rules applicable to Cleco Power. Cleco Power will comply with all Commission orders and PD.18443840.7rules issued in the future. Cleco Power agrees that it will not contest the Commission's jurisdiction over its retail rates and provision of service. Cleco Power, whenever and wherever appropriate, will make timely and compliant filings with the Commission in accordance with the Commission’s rules and orders applicable to Cleco Power. Cleco Power's obligations in these regards are in no way diminished by the Transaction or any order of the Commission authorizing the Transaction. Cleco Power's compliance obligations before the Commission are subject to Cleco Power’s full procedural rights before the Commission and rights of judicial review 4, Cleco Power acknowledges that its Commission jurisdictional rates are specified in the overall retail rate-setting determinations, including rate reductions and refund requirements, contained in the Commission’s Order No, U-32779, issued June 27, 2014, and Special Order Nos, 44-2014 & 45-2014, issued July 24, 2014, which rate- setting determinations have approximate four year terms. Cleco Power commits not to apply to increase the rates, term, or other provisions of said governing Commission rate orders, except as already provided under said orders, including but not limited to Sections 3.4 (Exceptional Changes), 3.5 (Special Rate Filings), and 3.6 (Force Majeure) of the Formula Rate Plan specified in Order No. U-32779. Cleco Power also acknowledges that certain of its fuel and fire-related costs are recoverable under its Fuel Adjustment Clause pursuant to the Commission's FAC General Order of November 6, 1997; Cleco Power also specifically commits not to apply to adjust its compliance obligations under that general order, except as already permitted in the ‘general order, including but not limited to its Subsections IV(M) (Exceptions) and TV(N) (Treatment of Exceptions or Uncertainties). Unless expressly resolved in these PD.184438¢0.7commitments, no ratemaking issues are resolved herein and the parties reserve their rights with respect to such ratemaking issues in any future proceedings before the Commission. Neither Cleco Power, Cleco Corporation nor Cleco Group will advocate for a higher cost of debt or equity capital as compared to what Cleco Power’ cost of debt or equity would have been absent the Transaction. Organizational and Operational Continuities Cleco Power and Cleco Corporation will both remain Louisiana entities and both shall have their corporate headquarters remain in Pineville, Louisiana. Should Cleco Power or Cleco Corporation seek to relocate its corporate headquarters outside of Pineville, Louisiana, it will provide the Commission with a minimum of eighteen (18) months’ notice. Cleco Power and Cleco Corporation are prohibited from relocating their corporate headquarters outside of Pineville, Louisiana, without formal Commission approval (ie., by a majority vote of the Commission). Cleco Power and Cleco Corporation, as the parent company of Cleco Support Group LLC, will maintain staffing and presence in the communities in which Cleco Power operates at levels sufficient to maintain the provision of safe and reliable service and efficient operations. Cleco Power commits to maintain and comply with the provisions of the Service Quality Program (“SQP”) attached hereto as Exhibit A. The SQP will remain in effect for five (5) years after the closing of the Transaction. Prior to the expiration of the five (5) year term of the SQP, a new five (5) year SQP must be negotiated and submitted to the Commission for approval PD.18443849.78. With respect to all employees, including those employees covered under the SQP, (approximately 1,206 employees in total) Cleco Power and Cleco Corporation will maintain employee headcount, salaries, and benefits substantially consistent with or higher than current levels in the aggregate across Cleco Power and Cleco Corporation for at least five (5) years following closing of the Transaction. Employee headcounts may not drop more than two (2) percent from current levels, (including the benchmarks described in the SQP). The commitment to maintain headcounts does not mean that any particular individual is guaranteed to keep his or her job. Cleco Power and Cleco Corporation have the right to expect their employees to continue to operate according to the highest standards and if a termination for cause or performance is required, Cleco Power and Cleco Corporation retain that authority. To the extent that Cleco Power seeks to permanently eliminate any employees (i.e, positions, not individuals) or functions or seeks to permanently outsource or automate any functions beyond the threshold specified above within that five (5) year period, the proposed change must be submitted to the Commission at least 120 days in advance of the proposed change; provided, however, that the foregoing requirement shall not apply to, and shall not impair, Cleco Power's ability to utilize the netting mechanism established and defined in Article XII of the SQP. Such notification shall include the proposed date of the change, the reasons for the change, the expected cost savings from the change, the manner in which those cost savings will be flowed through to ratepayers, the relocation of the impacted employees, and the anticipated impact on Cleco Power's reliability and quality of service. No such change shall be made, without formal Commission authorization (ie., by a majority vote of the Commission). PD18443869.79. In the event Cleco proposes any change in the organizational structure of Cleco’s field personnel workforce, resulting in a permanent reduction of the total number of field personnel workforce below the baseline, as set forth on Exhibit A, (including, but not limited to, reduced employee levels attributable to layoffs, outsourcing and/or additional reliance on contract personnel), Cleco shall make a filing with the Commission at least 120 days in advance of the proposed change, describing all proposed changes, the reasons for said modifications or reduction, the expected cost savings fiom such a change and the manner in which those cost savings will be flowed through to ratepayers. No such change shall be made without affirmative Commission approval. Any such reduction in the total number of field personnel workforce below the baseline, if any, shall be identified in Exhibit A, as necessary and the reason for such reduction stated. This does not preclude Cleco from "netting" positions. “Netting” is defined as eliminating one employee position for efficiency purposes and filling a comparable position in another area of the Company to meet a specific need. Upon receipt of the filing, the Commission may take all appropriate actions to ensure that proposed management or employee changes do not adversely affect the provision, reliability, and cost of service to Louisiana customers. If retail aecess is mandated by the Commission, or through action by the Federal Energy Regulatory Commission or federal legislation, the Company must submit any proposed management changes to the Commission no less than 120 days in advance of the effective date of such changes. 10. As part of the Transaction, Cleco Power will retain current senior management (specifically President Olagues, Senior Vice President Crump, and Senior Vice President Fontenot), to the extent those individuals agree to that retention. This PD.18443849.7commitment will not limit the ability of Cleco Power, subject to the provisions of the SQP, to determine its organizational structure and select and retain personnel best able to meet Cleco Power’s needs over time. 11. There will be no adverse material change in Cleco Power's pension plans or pension design or in current benefits for retiree medical plan participants for at least five (5) years. 12. Cleco Power and Cleco Corporation, as the parent company of Cleco Support Group LLC, will maintain or increase the existing level of corporate contributions and community support in Louisiana. To this end, Cleco Power will establish a charitable foundation to make charitable contributions within Louisiana consistent with Cleco Power’s and Cleco Corporation's current practices. Annual charitable contributions made by the foundation will be at the same or higher levels as are currently made (about $600,000 per year) for at least five (5) years following the closing of the Transaction. Within sixty (60) days after the closing of the Transaction, Cleco Power will pre-fund the foundation at a level of $3,000,000. 13. Cleco Power and Cleco Corporation, as the parent company of Cleco Support Group LLC, will maintain a level of economic development funding of no less than $500,000/year for Louisiana state and local organizations for at least five (5) years following the closing of the Transaction. 14, Cleco Power commits to continue the reliability and quality of service measures currently in place for Cleco Power or as may be modified in this or in any other future Commission proceeding. To this end, Cleco Power will maintain its customer call PD,18443849.7center in Pineville, Louisiana for a minimum of five (5) years and also will maintain management of generation, transmission, distribution, retail sales, and storm restoration, in Louisiana. If Cleco determines that a call center is no longer the most efficient means to handle communications with its customers, and Cleco desires to replace the current call center with some other system, then Cleco must file with the Commission, at least six (6) months prior to the date of eny such proposed change, a detailed description of the proposed system, the reasons the proposed system is believed to be more efficient than the call center, the net difference in cost of the proposed system, and the anticipated impact on Cleco 's ability to receive, process, and address customer communications. The Commission will utilize its best efforts to rule within 120 days of such a filing, on whether Cleco may replace the call center with the new system; provided, however, that the foregoing requirement shall not apply to, and shall not impair, Cleco Power fom “netting” positions. “Netting” is defined as eliminating one employee position for efficiency purpose and filling a comparable position in another area of the Company to meet a specific need. Further, Cleco Power will maintain or improve its current capital investment, operating and maintenance and procurement practices, Also, Cleco Power’s current pole replacement and vegetation management practices will be continued or improved in order to maintain service reliabi ity. Cleco Power will continue to actively participate in national and regional forums regarding best utility practices in all significant areas of Cleco Power's operations and incorporate such best utility practices as determined to be reasonably appropriate by Cleco Power, subject to any Commission review allowed by law. In addition, Cleco Power will PD,18443860.7comply with the SQP, including ongoing adjustments pursuant to the provisions of this, paragraph as may be made appropriate under the SQP. 15, Cleco Power commits to maintain its existing (or a comparable), voluntary low-income 16. 17. assistance program, ic, its Cleco Alternative Rate for Electricity (CARE), for a minimum of five (5) years following the closing of the Transaction, Officers and Directors For a minimum of five (5) years from the close of the Transaction, Cleco Group's chief executive officer, senior management responsible for Cleco Power's operations (e.g., generation, distribution, transmission, regulatory and commercial), and senior management of corporate support fictions (¢.g., financial, human resources, and legal) will have their principal places of residence in Louisiana. (@ A minimum of four (4) directors of Cleco Group’s board will have their principal places of residence in Louisiana, with one (1) of those four (4) being the chairman and ‘one (1) of those four (4) being the chief executive officer.' The chief executive officer of Cleco Group will also serve on the boards of Cleco Corporation and Cleco Power. The affirmative vote of at least one of the Louisiana resident directors, except the Chief Executive Officer of Cleco Power, shall be required for all resolutions of the boards of Cleco Group, Cleco Corporation or Cleco Power to be effective. The votes of the For purposes of this regulatory commitment no. 17, each of the resident directors, other than the CEO, shall be ‘an individual who (i) is nota representative of or advisor to Cleco Power, Cleco Corporation, Cleeo Group, ‘Cleco Partners, LP. (including the general partner of Cleco Partners, L.P.), or any afiliate of any of the foregoing named entities; (ii) is not, and has not been within the last three (3) years, an employee of any of the foregoing named entities or any of their affiliates; and (i) has no ownership interest in any of the foregoing named entities or any of their afiliates. PD.18443840.718. 19. individual directors on all resolutions adopted by such boards shall be recorded and such voting records shall be available on request fo the Commission. (b) Subject to general supervision of the board of directors, including the New Owners’ directors and Louisiana resident directors, Cleco Power’s senior management shall have full authority to manage the daily operations of Cleco Power in full accordance with its commitments and obligations herein and with its public service obligations generally, and specifically with respect to the management of storm and other emergency responses and related service restorations. Economic and Financial Cleco Power will not seek, nor will the Commission authorize recovery of any Transaction-related costs or costs incurred after the Transaction closes that are caused or required by the Transaction, whether internal or external and which would be in addition to those costs that would be borne by Cleco Power absent the Transaction. These include costs incurred in connection with seeking approvals from the Commission and/or any other regulatory, governmental or quasi-governmental authority for the Transaction. Without limitation, there will be no rate recovery, directly or indirectly, by Cleco Power of Iegal and financial advisory fees associated with the Transaction, no rate recovery of the acquisition premium, no rate recovery of regulatory casts, and no rate recovery of any executive change-of-control or severance compensation of any kind, including medical obligations, as a result of the Transaction, Estimated cost of service savings expected as a result of the Transaction in an amount of $1,211,000 per year between closing and the effectiveness of new base rates in Cleco -10- PD,18443800.720. a. Power's next rate case will be flowed back to ratepayers, dollar for dollar (i. outside of any sharing mechanism and not subject to the dead band, in Cleco's Formula Rate Plan) allocated in a manner and at such time as ordered by the Commission in its final order authorizing the Transaction. Cleco Power will issue and maintain its own debt and preferred stock (if any) pursuant to the Commis jon’s existing blanket financing authorization for Cleco Power or pursuant to any supplementary or superseding financing authorizations by the Commission. Cleco Power commits to maintain investment grade credit ratings with two (2) of Moody’s Investors Service, Standard & Poor's Ratings Services, or Fitch Ratings and, farther, will seck to improve such credit ratings over time, Nothing in these commitments will limit the Commission's authority to set rates or establish conditions to protect ratepayers from the consequences of any potential credit downgrades resulting from the Transaction, and Cleco Power commits to hold ratepayers harmless from any increase in the cost of debt to Cleco Power caused by such potential credit downgrades. Cleco Power shall provide notice to the Commission of any changes to the credit rating of Cleco Power within five (5) business days of Cleco Power’s receipt of notice of such change to the credit rating, Cleco Power is not requesting in this proceeding a determination of the prudence, just and reasonable character, rate or ratemaking treatment, or public interest of the investments, expenditures or actions referenced in these regulatory commitments, and the parties in appropriate proceedings may take such positions regarding the prudence, just and reasonable character, rate or ratemaking treatment, or public interest of the -l- PD.L8443849.724. investments, expenditures or actions as they deem appropriate. However, to the extent that the Commission does make determinations regarding certain Transaction-related issues (e.g, the requirement that all costs of the Transaction must be borne by shareholders, not ratepayers), those determinations are final and determinative in future proceedings. Cleco Power shall use alternative financing strategies pursuant to Act 64 and or Act 55 to address substantial storm damage (and reserves) unless it is demonstrated to the satisfaction of the Commission that another methodology of financing storm damages and reserves is a less costly option, Joint Applicants shall obtain an opinion letter that the Transaction: (a) would not cause Cleco to be in violation of Commission Order No. U-29157-A; (b) would not cause Cleco to be in violation of Act 64 of the Louisiana Legislature of 2006; (c) would not cause Cleco Power to be in violation of Commission Order No. U-29157- B; and (d) would not jeopardize any terms of the bonds sold pursuant to Commission Order No. U-29157-B. Joint Applicants shall provide rate credits of $125 million ($8.33 million per year for a 15-year period) commencing at the closing of the Proposed Transaction. These rate credits will be flowed back to ratepayers, dollar for dollar (i.e. outside of any sharing mechanism and not subject to the dead band, in Cleco’s Formula Rate Plan) allocated in a manner and at such time as ordered by the Commission in its final order authorizing the Transaction. PD.18443849.7Ring Fencing and Inter-Affiliate Accounting and Conduct 26. Cleco Power will maintain separate books, records, and documents so as to provide an audit trail to the Commission for all affiliate transactions of Cleco Power and all activities of Cleco Power that may result in affiliate costs that may be allocable to Cleco Power Any affiliate transactions of Cleco Power, and all activities of Cleco Power, that may result in affiliate costs should be adequately documented and performed to comply with the Commission’s affiliate rules made applicable to Cleco Power in the Commission’s 27. Cleo Power will provide the Commission access to Cleco Power’s and Cleco Corporation's books, records, and documents, as well as their employees, officers and directors (collectively "personnel", as well as any other information required to be accessed by the Commission to verify or examine affiliate transactions of Cleco Power and all activities of Cleco Power that may result in affiliate costs that may be allocable to Cleco Power. That access will remain available for the Commission to fulfill all of its jurisdictional responsibilities over Cleco Power's rates, charges, service quality and reliability. The Transaction will not result in reduced access by the Commission to Cleco Power's or Cleco Corporation's books, records, documents and personnel, including but not limited to Cleco Power's and Cleco Corporation's books, records and documents deseri 1g any affiliate transactions regarding Cleco Power and any activities of Cleco Power that may result in the allocation of affiliate costs to Cleco Power. The Transaction and resulting corporate structure will not be used by Cleco Power as a basis to oppose Red Simpson, Inc, v. Cleco Corporation, Order No. U-24064, dated Nov. 20, 2000 (“Red Simpson”). -13- PD.18443849.728. 29. 30. Sta. requests for such books, records, documents or personnel of Cleco Corporation or Cleeo Power made by the Commission or its Staff, Subject to an appropriate confidentiality agreement, Cleco Power will provide the Commission with access to written information provided by Cleco Power, Cleco Corporation or Cleco Group to credit rating agencies that pertains to Cleco Power or Cleco Corporation. Cleco Power agrees (i) to submit to the Commission in this proceeding, for approval, generic cost allocation methodologies used to allocate affiliate-related costs to Cleco Power; (ii) to comply with the Commission’s requirements governing affiliate transactions in the Red Simpson’ order governing Cleco Power; (iii) that there will be no cross-subsidization by Cleco Power Commission-jurisdictional customers of unregulated activities, or of the activities of any affiliate, parent, or subsidiary entity; and (iv) to abide by all lawfully adopted Commission requirements regarding the treatment of costs associated with affiliate transactions and the costs of unregulated activities. Cleco Power will not loan or pledge utility assets to Cleco Corporation, or any of its other subsidiaries or affiliates, without prior Commission approval; there will be no recourse to Cleco Power assets as collateral or security for debt issued by Cleco Corporation, without Commission prior authorization. Cleco Power shall not issue any security for or become liable for another entity's obligations, without the Commission's prior authorization. Cleco Power's jurisdictional rates shall not include any obligations arising from any non-Cleco Power business -14- PD.18443809.732. 33, 34, 35. activity of Cleco Corporation or Cleco Group, without the Commission’s prior authorization, and Clea Power’s customers shall be held harmless for ratemaking purposes from such non-Cleco Power business activity. Cleco Power will notify the Commission, in advance, of any proposed change in Cleco Power’s corporate and affiliate cost allocation methodologies. Those changes shall not be effective without prior Commission approval. Cleco Power will bear the burden of proof in any general rate case, FRP ot other proceeding, that any intercorporate and/or affiliate cost allocation methodology it proposes is reasonable for ratemaking purposes. Cleco Power acknowledges and will not contest the Commission’s authority to disallow, for retail ratemaking purposes, ‘unsupported, unreasonable, or misallocated costs, imprudently incurred costs, or any costs unrelated to the provision of retail electric service in Louisiana from any source, including any affiliates, to Cleco Power's regulated utility operations. Cleco Power will adopt measures providing for separate financial and accounting treatment for any non-LPSC jurisdictional business activity. Cleco Power's jurisdictional rates shall not include any costs arising from any obligations of Cleco Partners, Cleco Group, or Cleco Corporation engaging in the permitted lines of ‘business listed in Commitment No. 56, without the Commission's prior authorization. In any proceeding before the Commission involving rates of Cleco Power, the fair rate of return for Cleco Power will be determined without regard to any adverse consequences that are attributable to such listed lines of business, and Cleco Power's customers shall be held harmless for ratemaking purposes fiom the liabilities of such listed business age PD.18443849.736. 37. 39. activities. Any new subsidiary will be established as a subsidiary of either Cleco Partners, Cleco Group, or Cleco Corporation, rather than as a subsidiary of Cleco Power, unless the Commission authorizes otherwise. Measures providing for separate financial and accounting treatment will be established for each such subsidiary. The Joint Applicants also agree to notify the Commission of any material change in the administration, management or condition of either Cleco Power's or Cleco Corporation’s ‘books and records within ten days prior to such event. Cleco Partners, Cleco Group, and Cleco Power will notify the Commission subsequent to Cleco Group’s board approval and as soon as practicable following any public announcement of any aequisition of regulated or unregulated business representing 5% or more of the capital of Cleco Group. Cleco Power, Cleco Corporation, and Cleco Group will not assert in any future proceedings, that, by virtue of the Transaction and the resulting corporate structure, the Commission is without jurisdiction over any transaction that results in a change of control of Cleco Power. At least one (1) director of Cleco Power will be an independent director who is not a member, officer, or employee of Cleco Power, Cleco Partners, or any of their affiliates and whose affirmative approval must be obtained for Cleco Power to initiate bankruptey proceedings (“special independent director”), ‘The organizational documents of Cleco Power will not permit Cleco Power, without the unanimous consent of al its directors, including the special independent director, to consent to the institution of bankruptcy proceedings or the inclusion of Cleco Power in bankruptcy proceedings. tgs PD.18443849.740, 4. The Joint Applicants agree to implement the ring-fencing and corporate governance measures set out above at the closing of the Transaction for the purpose of providing protections to customers, Compliance with said implementation shall be reported to the Commission, as provided in Commitment No, 61, below. The Joint Applicants represent that they have no intent to petition the Commission to change the ringfencing and corporate governance measure. Joint Applicants may seek the Commission's consideration and prior authorization to revise any ring-fencing provision, and would have the burden of proof in demonstrating the public interest would be served in any such revision. In addition, the Joint Applicants agree that the Commission at any time may initiate its own review or investigation regarding ring-fencing measures and order modifications that it deems to be appropriate, in the public interest and the best interests of Cleco Power customers. Cleco Corporation shall not engage in any material internal corporate reorganization relating to Cleco Corporation or Cleco Power, without 90 days prior written notification to the Commission. Such notification shall include: (a) an officer’s certificate from an officer of Cleco Corporation and an officer’s certificate from an officer of Cleco Power that the reorganization does not materially impact the effectiveness of Cleco Power's existing ring-fencing; and (b) either (i) an opinion of outside counsel to Cleco Corporation and Cleco Power confirming that the reorganization does not alter the conclusion expressed by such counsel in the non-consolidation opinion previously delivered with respect to the Transaction or (ii) a description by such counsel of the changes to such reorganization that would be required to permit such counsel to deliver the opinion described in the preceding clause (b)(i) and a written commitment from Cleco -1T- PD.18443849.742. 43. Corporation to take all such steps (and, thereafter, delivery by such counsel of an opinion of the type described in clause (b)(i)). In addition, Cleco Power will not object and will cooperate if the Commission opens an investigation examining the internal reorganization, The Joint Applicants shall not materially alter the ring-fencing plan adopted in this proceeding, without first obtaining an authorization-order from the Commission. At the time the Proposed Transaction is approved, and every year thereafter, the Joint Applicants shall provide the Commission with a certificate from an officer of Cleco Power certifying: (a) Cleco Power shall maintain the requisite legal separateness in the corporate reorganization structure; (b) the organization structure serves important business purposes for Cleco Power; and (c) Cleco Power acknowledges that subsequent creditors of Cleco Corporation and Cleco Power may rely upon the separateness of Cleco Corporation and Cleco Power and would be significantly harmed in the event separateness is not maintained and a substantive consolidation of Cleco Corporation or Cleco Power were to occur. The Joint Applicants agree that nothing in the Commission’s Order approving the Transaction limits the Commission’s general supervisory authority over Cleco Power or Cleco Corporation in the future to enforce the regulatory commitments herein or its ability to initiate further supervisory proceedings over Cleco Power or Cleco Corporation if and when appropriate to enforce the regulatory commitments herein. Should the Commission approve the Joint Applicants’ Proposed Transaction, its Order doing so should state “Nothing in this Order should be read as: 1) a decision not to exercise in the future (a) our jurisdiction over Cleco Power or (b) our supervisory authority over Cleco -18- PD18443849.745. Corporation as provided herein; or 2) a decision that we will not initiate farther supervisory proceedings over Cleco Power or Cleco Corporation, if end when appropriate.” Within thirty (30) days of any Commission Order approving the Transaction, Cleco Power will submit to the Commission a copy of the form of Cleco Power's non- consolidation opinion which concludes, subject to customary assumptions and exceptions, that the ring fencing provisions herein (and such other ring fencing provisions as may be required for purposes of receiving a non-consolidation opinion) are sufficient such that a bankruptcy court would not order the substantive consolidation of the assets and liabilities of Cleco Power with those of Cleco Corporation, At the same time, Cleco Corporation will file an affidavit with the Commission stating that neither Cleco Corporation, nor any of its subsidiaries, will seck to include Cleco Power in a bankruptcy, without the unanimous consent of Cleco Power's board of directors including the special independent director referenced in paragraph 39, above. Any Commission Order approving the Transaction shall be contingent upon the timely receipt of the non-consolidation opinion and the affidavit described in this paragraph. If the ring-fencing provisions proposed under the Joint Applicants’ Proposed Transaction are found to be insufficient to obtain a non-consolidation opinion, Cleco Corporation and Cleco Power agree to promptly undertake the following actions: (1) Notify the Commission of this inability to obtain a non-consolidation opinion and (2) Propose and implement, upon Commission approval, such additional ring-fencing provisions sound Cleco Power as are sufficient to obtain a non-consolidation opinion subject to customary assumptions and exceptions. -19- pb.18443849.746, 41. 48. The Joint Applicants will file with the Commission an annus! compliance report with respect to the ring-fencing and other requirements, Cleco Power pledges that it will not, absent prior Commission approval, transfer its existing or to be acquired or built generation or bulk transmission facilities to any third party or any affiliate, parent or subsidiary entity, except pursuant to the Commission’s March 18, 1994 General Order. This pledge applies to any transfer of generation or bulk transmission assets from Cleco Power or from a subsidiary of Cleco Power. Capital Structure and Distributions In advance of the Commission’s consideration of the Transaction, Cleco Power will provide the Commission with a copy of the form of non-consolidation opinion described in paragraph 44 above. As of the closing of the Transaction, Cleco Power will have a common equity ratio of not less than fifty-five (55) percent, except (o the extent such ratio may be changed in the normal and ordinary business course of Cleco Power’s financing activities, as may be authorized under Cleco Power's blanket financing authority, as granted by the Commission, At all times thereafter, Cleco Power will have @ ‘common equity ratio of not less than forty-eight (48) percent, except to the extent a lower common equity ratio is established for ratemaking purposes by the Commission. To the extent Cleco Power’s common equity ratio is less than forty-eight (48) percent, the remedy shall be the distribution (defined for purposes of these regulatory commitments as any payment of dividends or return of capital, other than for expenses) restrictions in ‘Commitment No. 49 until such time Cleco Power's common equity ratio is equal to or greater than forty-eight (48) percent. Cleco Power acknowledges the Commission's -20- PD.18443849.749. authority to establish a capital structure for ratemaking purposes only, that is different from Cleco Power's actual capital structure. Cleco Corporation represents that it is not prohibited from issuing new equity to third parties; and the Transaction documents will not be amended to prohibit Cleco Corporation fiom issuing new equity to third parties (including public markets). The New Owners intend to manage Cleco Power in the normal and ordinary course of business such that the Cleco Power common equity ratio ‘would be no less than the common equity ratio established for ratemaking purposes by the Commission. Cleco Power shall not declare or make any distribution, unless on the date of such distribution: (a) Cleco Power's corporete credivissuer rating is at least investment grade with two (2) of Moody's Investors Service, Standard & Poor's Ratings Services or Fitch Ratings; and (b) the Cleco Power common equity ratio, after giving effect to such distribution, would not be less than forty-eight (48) percent, or any lower common equity ratio as may be established for ratemaking purposes by the Commission. However, if either condition (a) or (b) is not satisfied, Cleco Power shall be permitted to declare and make distributions in an amount sufficient (x) to service debt at Cleco Corporation provided such distribution to Cleco Power shall exclude any amounts required to service debt and satisfy financial covenants on the debt of Cleco Corporation funding investments outside of Cleco Power as measured on a proportionate basis in relation to the amount of Total Property, Plant and Equipment, Net (“P&E”) on Cleco -21- PD,18443809.7Corporation’s balance sheet that are not Cleco Power PP&E to the total amount of PP&E on Cleco Corporation's balance sheet, provided the excluded amounts do not include any non-recourse debt issued by Cleco Corporation, and (y) to satisfy financial covenants in the independent third-party credit facilities of Cleco Corporation, if Cleco Power satisfies, on the date of such distribution, conditions (c) and (d) below: (©) Cleco Power's corporate credit/issuer rating is at least investment grade with one or more of Moody's Investors Service, Standard & Poor’s Ratings Services or Fitch Ratings; and (@) the Cleco Power common equity ratio, after giving effect to such distribution, is less than forty-eight (48) percent, or to the extent a lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio, and not less than forty (40) percent, or to the extent 2 lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio. If Cleco Power is downgraded below investment grade with Moody's Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings but the Cleco Power common equity ratio, after giving effect to such distribution, is not less than forty-five (45) percent, or to the extent a lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio, Cleco Power shall be permitted, for a maximum period of nine months to declare and distribute an amount sufficient (x) to service debt at Cleco Corporation, provided such distributions by Cleco Power shall exclude any amounts require to service debt and satisfy financial covenants on the debt of Cleco Corporation funding investments outside of Cleco Power as -2- PD.18443849.7measured on a proportionate basis in relation to the amount of PP&E on Cleco Corporation’s balance sheet that are not Cleco Power PP&E to the total amount of PP&E on Cleco Corporation’s balance sheet, provided the excluded amounts do not include any nonrecourse debt issues by Cleco Corporation, and (y) to satisfy financial covenants in the independent third-party credit facilities of Cleco Corporation. If (X) Cleco Power’s corporate credit/issuer rating is subsequently upgraded to at least investment grade with two (2) of Moody's Investors Service, Standard & Poor’s Ratings Services or Fitch Ratings, and (y) the Cleco Power common equity ratio would subsequently, on the date of such distribution after giving effect to such distribution, not be less than forty-eight (48) percent, or fo the extent a lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio, Cleco Power shall not be subject to any distribution restriction pursuant to this commitment, If (x) Cleco Power's corporate credit/issuer rating is subsequently upgraded to at least investment grade with one (1) of Moody’s Investors Service, Standard & Poor's Ratings Services or Fitch Ratings, and (y) the Cleco Power common equity ratio would subsequently, on the date of such distribution after giving effect to such distribution, not bee Jess than forty (40) percent, or to the extent a lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio, Cleco Power shall be permitted to declare or make distributions pursuant to this commitment, Cleco Corporation may not declare or make any distribution, unless, on the date of such distribution: -23+ PD.18443849.7(i) Cleco Corporation's corporate ereditlissuer rating is at least investment grade with one or more of Moody's Inv tors Service, Standard & Poor’s Ratings Services or Fitch Ratings; and (ii the ratio of Cleco Corporation debt to EBITDA (on a consolidated basis) for the ‘most recently ended four fiscal quarter period prior to such date is equal to or less than 6.50 to 1.00; and (iii)the Cleco Power common equity ratio is no less than forty-eight (48) percent, or to the extent a lower common equity ratio is established for ratemaking purposes by the Commission such lower common equity ratio; and (iv)Cleco Power maintains investment grade credit ratings with two (2) of Moody's Investors Service, Standard & Poor's Ratings Services or Fitch Ratings. Further, until such time conditions (i), (ii), (iii) and (iv) are satisfied, Cleco Partners, Cleco Group, and Cleco Corporation shall not acquire or invest in any new business, other than those businesses then currently owned or operated by them or their respective subsidiaries. If Cleco Power or Cleco Corporation seck to make any distribution outside of those authorized above, Cleco Power and Cleco Corporation shall file a petition with the Commission to show cause why (x) Cleco Power should be permitted to make any distribution to Cleco Corporation in excess of such amount andlor (y) Cleco Corporation should be permitted to make any distribution to Cleco Group. It is the expectation of the Joint Applicants that the Commission within sixty (60) days after Cleco Power's and Cleco Coxporation’s filing of such petition will issue an order granting or denying such petition. In considering such petition, due consideration shall be given to the reasons for -24- PD.18443849.750. 51 the petition (e.g,, required storm relief) and to the financial performance and credit rating of Cleco Power and to whether Cleco Power has, and is expected to achieve, financial metrics that fall within the ranges used by Moody’s Investors Service, Standard & Poor’s Ratings Services, or Fitch Ratings fo: estment grade-rated utility companies and any changes in such ranges since the date of closing of the Transaction; provided that nothing in this commitment shall prohibit the parties from advancing any arguments regarding any other factors the Commission should consider, (©) Cleco Power shall provide rate credits for the period of time Cleco Power's actual common equity ratio is more than three (3) percent lower than the common equity ratio established for ratemaking purposes by the Commission. The rate credits shall be equal to the difference between the revenue requirement of Cleco Power, using such lower actual common equity ratio, and the revenue requirement of Cleco Power, using the common equity ratio that is three (3) percent lower than the common equity ratio established for ratemaking purposes, for such period of time that such lower actual ‘common equity ratio exists. Cleco Group LLC shall not issue any debt to any party other than Cleco Partners, without the Commission’s prior authorization. Cleco Corporation commits to maintain an investment grade credit rating with one or more of Moody's Investors Service, Standard & Poor’s Ratings Services, or Fitch Ratings at the closing of the Transaction. The New Owners agree to apply good faith efforts, after closing, such that Cleco Corporation will maintain an investment grade credit rating with one of Moody's Investors Service, Standard & Poor's Ratings Services, or Fitch PD.184438¢9.752, 53. Ratings. Further, for the period between closing and December 31, 2020, Cleco Corporation sball be prohibited from incurring additional long-term debt, excluding non- recourse debt, unless, after giving effect to such incurrence, the ratio of Cleco Corporation debt to EBITDA (on a consolidated basis and excluding non-recourse debt) for the most recently ended four (4) fiscal quarter period at the time of such incurrence is equal to or less than 6.25 to 1.00, and for the period after December 31, 2020, Cleco Corporation shall be prohibited from incurring additional long-term debt, excluding non- recourse debt, unless, after giving effect to such incurrence, the ratio of Cleco Corporation debt to EBITDA (on a consolidated basis and excluding non-recourse debt) for the most recently ended four (4) fiscal quarter period at the time of such incurrence is equal to or Jess than 6,00 to 1.00. Joint Applicants acknowledge that the cost of borrowing at Cleco Corporation will not impact Cleco Power’s cost of debt or equity capital for ratemaking purposes and further commit to not assert otherwise in a rate proceeding The objective of Joint Applicants is to refinance the proposed acquisition term loan of Cleco Corporation using medium-term and/or long-term financing as expeditiously as possible and within one year of closing the Transaction, if practicable under then current financial market conditions. Cleco Corporation commits that the term of the medium- term and/or long-term financing used to refinance the acquisition term loan be staggered such that no more than forty (40) percent of the total debt issued to refinance the acquisition term Joan have their maturity date be within a twenty-four month period. By the date of the closing of the Transaction, the Joint Applicants shall have developed and submitted to the Commission a plan to achieve such objective, subject to market -26- PD.1B4H3849.7$4, 55. conditions at the time or times the plan is intended to be implemented. Joint Applicants will maintain records of their activities and results in implementing said plan and such. records shall be available to the Commission, subject to agreed upon confidentiality, and provided further that the Joint Applicants shall report to the Commission their progress in implementing the refinancing plan every six months after the closing date of the Transaction until the acquisition term Joan is refinanced, subject to confidentiality protections for such reports. Cleco Partners shall bear any future costs associated with the interest rate risk attributable to such refinancing. See also Commitment No, 52. The Joint Applicants shall file into the record of this proceeding the terms and conditions of any related party debt involved in the Transaction. If the Commission authorizes the Transaction, the Joint Applicants may not close the Transaction, without submitting a compliance filing to the Commission certifying that said related party debt of the Transaction has undergone no material adverse change to the borrower thereunder relative to the stated terms and conditions of said related party debt that were before the ‘Commission when it authorized the Transaction. Joint Applicants represent that neither Cleco Group, Cleco Corporation nor Cleco Power is prohibited fiom issuing new equity to third parties. Joint Applicants will not amend any of the LLC Agreements of these entities or other transaction documents to prohibit these entities from issuing new equity to third parties (including public markets). If Cleco Group makes a new equity issuance for the purpose of (i) contributing the proceeds thereof (through its relevant subsidiaries) to Cleco Corporation or Cleco Power, or (ii) applying the proceeds thereof toward the purchase from Cleco Power of hybrid securities that are permitted to be issued under the transaction documents, the proceeds of any such -21- PD18443800.7new equity issuanees by Cleco Group shall be used for such purpose. If Cleco Corporation makes a new equity issuance for the purpose of (i) contributing the proceeds thereof (through its relevant subsidiaries) to Cleco Power, or (ii) applying the proceeds thereof toward the purchase from Cleco Power of hybrid securities that are permitted to be issued under the transaction documents, the proceeds of any such new equity issuances by Cleco Group shall be used for such purpose, Joint Applicants will provide an annual certificate of an officer of Cleco Group, Cleeo Corporation and Cleco Power certifying that neither Cleco Group, Cleca Corporation, nor Cleco Power is prohibited from undertaking the transactions described above. Cleco Power will not operate or own any business other than those businesses currently ‘owned or operated by Cleco Power, without prior Commission approval. Cleco Partners, Cleco Group, LLC, and Cleco Corporation will not operate or own any business other than those businesses currently owned or operated by Cleco Corporation, without at least sixty (60) days prior notice to the Commission of the material aspects thereof, subject to the Commission’s rules protecting the confidentiality of such notification-information. Cleco Partners, Cleco Group, LLC, and Cleco Corporation may invest in the business lines of utilities, electric power, energy, and related business lines that support the economic development of Cleco Power’s service area, provided that the book value of such investments shall not at any point in time exceed 20% of the rate base of Cleco Power, as set forth in Cleco Power's most recent rate case at the time of calculation, without prior LPSC authorization, -28- PD.18443849.751. 58. 59. Joint Applicants commit that all current and future capital expenditure credit facilities of the Cleco Enterprise will by their terms limit the use of such funds only for financing Cleco Power capital expenditures, unless the Commis ion approves otherwise. Quarterly officer certificates under each of the credit facilities of Cleco Corporation and Cleco Power will be filed with the Commission and served upon the Commission Staff and Intervenors in this Docket, subject to agreed-upon confidentiality provisions. Nothing in these commitments will limit the Commission's authority to set rates or establish conditions to protect ratepayers from any adverse impacts that may be caused by a change in the capital structure of Cleco Power as 4 result of the Transaction Changes of Control (a) Cleco Power acknowledges that itis obligated by, and commits to comply in the fature with, all requirements of the Louisiana Commission's March 18, 1994 General Order (as it may be amended from time to time). Specifically, and without limiting the Commission's authority or the requirements of the Commission's March 18, 1994 General Order (as it may be amended from time to time), Cleco Power commits that it will seek prior Commission authorization for any transfers of direct or indirect ownership and/or control of Cleco Power in accordance with that General Order. {b) Cleco Corporation, Cleco Group and Cleco Partners acknowledge that they are obligated by, and commit to comply in the future with, all requirements of the Louisiana Commission's March 18, 1994 General Order (as it may be amended from time to time). Specifically, and without limiting the Commission's authority or the requirements of the Commission's March 18, 1994 General Order (as it may be amended from time to time), PD.18443849.760. Cleco Corporation, Cleco Group and Cleco Partners commit that they will seek prior Commission authorization for any transfers of direct or indirect ownership and/or control of Cleco Power in accordance with that General Order. Nothing following in this commitment amends or limits the commitments and obligations specified in commitment 59, above. Each of Cleco Power, Cleco Corporation, Cleco Group, Cleco Partners, MIP Cleco Partners, beIMC Como Investment Limited Partnership, beIMC COMO GP Inc., JH Como Investments, LLC, and MIP Cleco Holdings LP (“MIP Cleco Hold despite not being utilities or common carriers subject to the direct jurisdiction of the Commission, commit that Cleco Power will seck prior Commission approval for the following: A. Any transfer of interests whereby Macquarie Infrastructure and Real Assets, Inc., Macquarie Infrastructure Partners III GP LLC or any other entities solely owned and/or controlled by Macquarie Infrastructure and Real Assets, Inc. do not own the general partnership interests in MIP IIT, Macquarie Infrastructure Partners III (PV), L.P. (“MIP III (PV)"), MIP Cleco Holdings, or MIP Cleco Partners; provided, that in the event Macquarie Inirastructure Pertners III GP LLC or its affiliate is removed and replaced as the general partner of MIP II and MIP III (PV) by the limited partners thereof or the occurrence of a disabling event, and the replacement general partner is not acceptable to the Commission, MIP Cleco Holdings shall sell its interest at fair value within a reasonable period of time to a buyer acceptable to the Commission. -30- PD,18443849.7B. Any transfers of interests whereby MIP Cleco Holdings no longer has a majority interest in MIP Cleco Partners. C. Any transfer of interests whereby MIP Cleco Partners does not have a membership interest in Cleco Partners GP LLC (“Cleco Partners GP”). D. Any transfer of interests whereby the general partner of MIP Cleco Partners no longer has the authority to appoint up to five board members (or a comparable percentage, to the number of permitted board members at closing) to the boards of directors of Cleco Corporation and Cleco Power. Any transfer of interests whereby beIMC, or a beIMC owned entity or subsidiary, does not have a membership interest in Cleco Partners GP. F. Any transfer of interests whereby beIMC, or a beIMC owned entity or subsidiary, no longer has the authority to appoint up to four board members (or a comparable percentage, to the number of permitted board members at closing) to the boards of directors of Cleco Corporation and Cleco Power. Further Cleco Partners, Cleco Partners GP, Cleco Group, Cleco Corporation and Cleco Power commit that any change in the control or proportionate ownership of Cleco Partners; Cleco Partners GP, Cleco Group, Cleco Corporation, and Cleco Power is subject to the prior authorization of the Commission. In addition, MIP Cleco Partners, belMC Como Investment Limited Partnership, beIMC COMO GP Inc., and JH Como Investments, LLC cach severally commit to seek the prior authorization of the Commission in connection with any change of control in any of them; provided, that in the event Macquarie Infrastructure Partners III GP LLC or its affiliate is aaa PD.18443849.7removed and replaced as the general partner of MIP III and MIP III (PV) by the limited partners thereof or the occurrence of a disabling event, and the replacement general partner is not acceptable to the Commission, MIP Cleco Holdings shall sell its interest at fair value within a reasonable period of time to a buyer acceptable to the Commission. 61 62. Repos By October 31, 2016, and each October 31 thereafter through October 31, 2020, Cleco Power will file a report with the Commission regarding the implementation of these regulatory commitments as of June 30 of that same year. The report, at a minimum, will provide a description of the performance of each of the commitments and the cost of service savings Cleco Power asserts are Transaction-related. If any commitment is not being met, relative to the specific terms of the commitment, the report will provide proposed corrective measures and target dates for completion of such measures. Cleco Power and the Commission Staff, with input from Intervenors in the Transaction docket, shall draft a plan setting forth the specifics of what is to be contained in the annual reports as well as the supporting information to be submitted. Cleco Power will publicly file in this docket at the Commission all non-confidential portions of the report. Confidential portions of the report will be filed with the Commission under seal, subject to the confidentiality provisions contained in the Commission's Rules of Practice and Procedure. Nothing in these regulatory commitments will be interpreted as a waiver of Cleco Power’s rights to request confidential treatment for information that is the subject of any of the commitments. 32+ PD.18443849.763. Cleco Corporation and Cleco Power commit to file all SEC financial reports consistent with the obligations of a public debt issuer, including Forms 10-K, 10-Q, and 8-K, and provide copies to the Commission as soon as they are filed. 64, Cleco Group commits to provide the Commission with audited financial reports within 120 days of the close of Cleco Group's fiscal year. Such financial reports shall include consolidating balance sheets, income statements, and statements of cash flow showing transactions among the entities within Cleco Group. In addition, and upon request of the Commission, Cleco Group shall provide the Commission with a copy of its annual federal income tax return. Further, Cleco Group commits to provide the Commission with the following financial information from the upstream ownership of Cleco Partners LP. within sixty (60) days of the information becoming available: (a) MIP Cleco Partners will provide: Annual audited accounts for MIP Cleco Partners; 2. Annual summary of financial information for MIP III and MIP III (PV). (b) beIMC Como Investment Limited Partnership and beIMC Como GP Ine. will provide: 1. Annual audited accounts for Strategic Inv 100 Foreign PP Fund, which is the beIMC entity that is providing ~85% of beIMC capital for the investment. 2. The beIMC annual report. (0) JH Como Investments, LLC will provide: 1. Annual audited accounts for John Hancock Life Insurance Company (U.S.A.). PD18443849.765. Cleco Power and Cleco Corporation, to the extent practical, will comply with the requirements applicable to a registrant under NYSE rules. Prior to the close of the ‘Transaction Joint Applicants shall provide the Commission with an analysis of Cleco Power's and Cleco Corporation’s present reporting and governance obligations under NYSE Corporate Governance Standards. Such analysis shall identify the applicable NYSE rule, describe the current requirements, describe the post-closing requirements, and set forth Cleco Power’s and Cleco Corporation’s post-closing commitments with respect to each requirement in the event a current requirement is not a continuing obligation. Such analysis shall detail the requirements of the NYSE with respect to the following: Annual report availability Interim Financial Statements. Independent Directors. Director executive sessions. ‘Communication with non-management directors. Nominating and governance committee matters. ‘Compensation committee matters ‘The audit committee and committee membership i. The internal audit fiction. J. Corporate governance guidelines. Kk. Code of business conduct and ethies. 1 Officer certification. amepe ge 66. Joint Applicants commit to the following post-closing commitments with respect to the Sarbanes-Oxley Act for both Cleco Power and Cleco Corporation: a. Section 201 guidance on the use of outside auditors. ‘b. Section 202 pre-approval requirements with respect to the engagement and compensation of auditors. ¢. Section 203 requirements with respect to audit partner rotation. 34. PD,18443840.74. Section 204 guidance with respect to the requirements of auditor reports to audit committees, e. Section 206 guidance with respect to auditor conflicts of interest, £ Section 301 requirements with respect to audit committee requirements, g. Section 302 requirements with respect to corporate responsibility for financial reports, h. Section 401 requirements with respect to the form and content of periodic and annual reports, i. Section 403 requirements with respect to disclosures of certain, transactions involving management and shareholders, j. Section 404 requirements with respect to management assessment of internal controls, k. Section 406 requirements with respect to the code of ethics for senior financial officers, 1. Section 407 requirements with respect to disclosure of audit committee financial expert, and 1m, Section 906 requirements with respect to corporate responsibility for financial statements. 67. Cleco Power will continue to meet ell applicable FERC reporting requirements, including annual reports (FERC Form 1) and quarterly reports (FERC Form 3-Q), after closing of the Transaction and provide copies to the Commission as soon as they are filed, 68. Cleco Power will provide to the Commission and its counsel and consultants copies of all Transaction-related filings made with other feders! or state regulatory agencies (e.g., the Securities and Exchange Commission, the FERC, etc.), as soon as those filings are made. Cleco Power will provide to the Commission and its counsel copies of all Transaction related orders of those regulatory agencies as soon as they are received by Cleco Power. 69. Cleco Power and/or Cleco Corporation will provide to the Commission and its counsel and consultants, subject to appropriate confidentiality agreement, copies of all filings -35- PD.18443849.770. n. 2B. made in the consolidated lawsuits entitled Moore v. Macquarie Infrastructure et. al., Nos 251,417,251,451 and 251,515 (Ninth J.D.C., Parish of Rapides). The Commission order approving the Transaction shall be expressly made effective upon its issuance. Additional Commitments Cleco Power, Cleco Corporation and Cleco Group will undertake all actions necessary to ensure that the low cost financing obtained pursuant to Commission Order No. U-29157- B (to securitize Cleco Power's Hurricane Katrina/costs) is not jeopardized. In that regerd, Cleco Power, Cleco Corporation and Cleco Group will undertake all acti necessary to ensure that Cleco Power remains in compliance with: a) Commission Order No. U- 29157-A; b) all provisions of Act 64 of the Louisiana Legislature of 2006; and c) Commission Order No. U-29157-B. Cleco Power must obtain an opinion letter verifying that any order of the Commission approving the proposed Transaction: 1) would not cause Cleco Power to be in violation of Commission Order No. U-29157-A; b) would not cause Cleco Power to be in violation of any provision of Act 64 of the Louisiana Legislature of 2006, c) would not cause Cleco Power to be in violation of Commission Order No. U-29157-B; and d) would not jeopardize any terms of the bonds sold pursuant to Order No. U-29157-B. Cleco Power will continue to abide by all of its obligations as part owner and operator of the Dolet Hill Lignite Plant located in DeSoto Parish as well as its obligations of the lignite reserves utilized to fuel that plant. -36- Pp.18443849.774, 75. 16. 71. Cleco Power will take all actions necessary to comply with all final Commission orders arising out of Docket No. X-33325 including compliance with any Commission order requiring that refunds and/or adjustments in that docket be flowed back to ratepayers dollar for dollar, through Cleco Power's fuel adjustment clause, or as otherwise ordered by the Commission, Cleco Power will continue to abide by all of its obligations in connection with its ‘ownership and operation of the Acadia One generating unit as well as its 50% interest in the common facilities of Acadia Energy Center. Cleco Power will continue to honor and abide by all of its obligations associated with its various franchise agreements and to assume and abide by all of the health safety and other permits it must obtain and keep current as required by state, parish and local laws, ordinances and regulations. Cleco Power will continue to abide by all of its obligations in connection with joining and being a member of the Midcontinent Independent System Operator as contained in Commission Order Nos. U-32631 (July 12, 2013) and U-32839 (December 13, 2013) and as otherwise ordered by the Commission. -37- PD.18443849.7