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Their dispute over the acquisition of electricity generation, transmission and distribution company Cleco Corp. offers a rare glimpse at the challenges that can bedevil large infrastructure deals at a time when pension funds and other institutional investors are competing aggressively for assets worldwide.

Luke Sharett/Bloomberg

Canadian and Australian investors stymied in their bid for a Louisiana utility company are trying to convince a state regulator to reconsider.

Their dispute over the acquisition of electricity generation, transmission and distribution company Cleco Corp. offers a rare glimpse at the challenges that can bedevil large infrastructure deals at a time when pension funds and other institutional investors are competing aggressively for assets worldwide.

This tug-of-war in the deep south began in 2014 with a $4.7-billion (U.S.) offer, including debt, to privatize the company from divisions of Macquarie Group Ltd., Canadian pension plan British Columbia Investment Management Corp. and Manulife Financial Corp.'s subsidiary John Hancock Financial.

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Investors have been drawn to the stable cash flows provided by quality infrastructure assets, especially in the low interest rate environment. Deals in the utility sector have also heated up in the past few months. Recent announcements include the Caisse de dépôt et placement du Québec's proposed $1.15-billion investment in an electricity distribution business in the Australian State of New South Wales. And Ontario utility Hydro One hit the Toronto Stock Exchange last November in one of Canada's largest initial public offerings.

Many shareholders liked the look of the Cleco deal, and the proposal soon won their approval, as well as a thumbs up from the Federal Energy Regulatory Commission and others. But months later, the state regulator Louisiana Public Service Commission said it had some "serious reservations" about the leveraged buyout, and the $1.35-billion in additional debt that would be saddled on the books. The group of five elected commissioners from different districts voted against the merger, saying it wasn't in the public interest.

The Commission's concerns included a possible downgrade to Cleco's credit rating, that cost-cutting could impact service or that there could be unforeseen drops in revenues or natural disaster damages.

The regulator's criticisms also raise a more challenging question about the stability of these long-term investors. Pension funds are fond of touting their long-dated liabilities as an indication that they will invest for many years. In the case of Cleco, the bidders said private ownership offered "more patient investors, who are better able to focus on long-term growth opportunities, rather than on short-term gains."

But Louisiana Public Service Commission Staff worries that's only a guarantee for eight years – when Macquarie, which would own over 54 per cent of the company, could exit the investment. No other investors will be obligated to stay either. At that point, the higher debt levels could make the asset less attractive to other purchasers, they said.

On Tuesday, the investment consortium asked for a rehearing of the decision to "correct a number of inaccurate claims." The bidders have already made dozens of promises to ensure the Pineville, La.-based utility continues its services, keeps employee jobs and pays shareholders a healthy premium for their shares. They've improved on their original offer twice already. If the rehearing doesn't convince the Commission, the last recourse would be to appeal the issue with the state's District Court.

The precedent in Louisiana is that public utilities most often buy each other, said Colby Cook, press secretary for the Louisiana Public Service Commission. But even then, not every deal is approved. In 2013, the Mississippi Public Service Commission voted unanimously to block a $1.8-billion merger between electric power company Entergy Corp. and transmission business ITC Holdings Corp., and the deal dissolved.

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After investing so much time and energy to get this utility deal over the finish line, the investors will fight to show regulators that their deal "lays the groundwork for bringing additional investment, economic development and jobs to Louisiana."

But all parties will soon have the option to walk away, since the merger agreement expires April 17. Spokespeople form Macquarie, BCIMC and Cleco declined to comment on the process, or whether they will extend their agreement.

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