Fair Value Accounting

6 Months Ended

Jun. 30, 2011

Note 4 — Fair Value Accounting

The amounts reflected in Cleco Corporation and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2011, and December 31, 2010, for cash and cash equivalents, accounts receivable, other accounts receivable, accounts payable, and short-term debt approximate fair value because of their short-term nature. Estimates of the fair value of Cleco and Cleco Power’s long-term debt and Cleco’s nonconvertible preferred stock are based upon the quoted market price for the same or similar issues or by a discounted present value analysis of future cash flows using current rates obtained by Cleco and Cleco Power for debt and by Cleco for preferred stock with similar maturities. In June 2011, Cleco Corporation redeemed all of its outstanding preferred stock. For more information on the preferred stock redemption, see Note 1 — “Summary of Significant Accounting Policies — Preferred Stock Redemption.” The following charts summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments subject to fair value accounting.

Cleco

	AT JUNE 30, 2011				AT DECEMBER 31, 2010
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash and cash equivalents	$	162,126	$	162,126	$	191,128	$	191,128
Restricted cash	$	35,199	$	35,199	$	41,048	$	41,048
Long-term debt, excluding debt issuance costs	$	1,392,553	$	1,496,438	$	1,403,836	$	1,462,063
Preferred stock not subject to mandatory redemption	$	-	$	-	$	1,029	$	844

Cleco Power

	AT JUNE 30, 2011				AT DECEMBER 31, 2010
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash and cash equivalents	$	149,841	$	149,841	$	184,912	$	184,912
Restricted cash	$	35,103	$	35,103	$	40,951	$	40,951
Long-term debt, excluding debt issuance costs	$	1,382,553	$	1,486,438	$	1,388,836	$	1,447,063

At June 30, 2011, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash. Cleco had $192.6 million ($157.4 million of cash and $35.2 million of restricted cash) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investment, Cleco would be exposed to a loss of the invested amounts. Cleco Power had $180.8 million ($145.7 million of cash and $35.1 million of restricted cash) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investments, Cleco Power would be exposed to a loss of the invested amounts. Collateral on these types of investments is not required by either Cleco or Cleco Power. In order to mitigate potential credit risk, Cleco and Cleco Power have established guidelines for short-term investments. Money market funds must have at least $1.0 billion in assets under management; must have been in existence for not less than two years; must have portfolios not comprised of more than 50% of securities issued by foreign entities; and must be rated in the top two ratings categories by at least one nationally recognized rating agency. Commercial paper must be issued by a company with headquarters in the U.S. and rated not less than A1 by Standard & Poor’s or P1 by Moody’s. For split-rated issuers, the second rating must not be lower than either A2 or P2; the issuer’s long-term debt must be rated not lower than A by Standard & Poor’s or A2 by Moody’s; and the issuer cannot be on negative credit watch. Investments in commercial paper rated A2 by Standard & Poor’s or P2 by Moody’s may be made if approved by the appropriate level of management.

Interest Rate Swap

In August 2009, Cleco Power entered into a $50.0 million bank loan with variable interest, paid monthly, and calculated at 3.00% plus the one-month LIBOR. In order to mitigate the risk of future floating interest rates, Cleco Power entered into an interest rate swap in the third quarter of 2009. Based on the notional amount of the bank loan, the swap required a monthly net settlement between Cleco Power’s fixed payment of 1.84% and the swap counterparty’s floating payment of the one-month LIBOR. Both the bank loan and the swap were effective the same day and required monthly payments on the same day near the end of the month. From the inception of the loan to the termination of the loan, Cleco Power recognized net interest expense equal to an annual rate of 4.84% on the bank loan. Since both the bank loan and the swap required payments on the same day near the end of the month, the cash payments were materially close to the interest expense recognized.

The swap met the criteria of a cash flow hedge under the authoritative guidance as it related to derivatives and hedging. Changes in the swap’s fair value related to the effective portion were recognized in other comprehensive income. As settlements were made, the swap’s other comprehensive income fair values were reclassified into earnings as a component of interest expense. In November 2010, Cleco Power terminated the interest rate swap and repaid in full the associated $50.0 million bank loan and all remaining losses in accumulated other comprehensive loss were reclassified to other expense. For the three and six months ended June 30, 2010, there were $0.2 million and $0.4 million, respectively, of reclassification adjustments from accumulated other comprehensive loss to interest expense as a result of monthly settlements. There was no impact to earnings due to ineffectiveness for the three and six months ended June 30, 2010.

Fair Value Measurements and Disclosures

The authoritative guidance on fair value measurements requires entities to classify assets and liabilities measured at their fair value according to three different levels depending on the inputs used in determining fair value.

The tables below disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured on a recurring basis and within the scope of the authoritative guidance for fair value measurements and disclosures.

Cleco

	CLECO CONSOLIDATED FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT JUNE 30, 2011		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DECEMBER 31, 2010		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset Description
Energy market derivatives	$	-	$	-	$	-	$	-	$	97	$	-	$	97	$	-
Institutional money market funds		192,599		-		192,599		-		229,748		-		229,748		-
Total assets	$	192,599	$	-	$	192,599	$	-	$	229,845	$	-	$	229,845	$	-
Liability Description
Energy market derivatives	$	7,665	$	1,532	$	6,133	$	-	$	15,245	$	3,317	$	11,928	$	-
Total liabilities	$	7,665	$	1,532	$	6,133	$	-	$	15,245	$	3,317	$	11,928	$	-

Cleco Power

	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT JUNE 30, 2011		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DECEMBER 31, 2010		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset Description
Energy market derivatives	$	-	$	-	$	-	$	-	$	97	$	-	$	97	$	-
Institutional money market funds		180,802		-		180,802		-		224,451		-		224,451		-
Total assets	$	180,802	$	-	$	180,802	$	-	$	224,548	$	-	$	224,548	$	-
Liability Description
Energy market derivatives	$	7,665	$	1,532	$	6,133	$	-	$	15,245	$	3,317	$	11,928	$	-
Total liabilities	$	7,665	$	1,532	$	6,133	$	-	$	15,245	$	3,317	$	11,928	$	-

The derivative assets and liabilities are classified as either current or non-current depending on when the positions close. All energy market derivative current assets and current liabilities are reported as a net current risk management asset or liability. All energy market derivative non-current assets and non-current liabilities are reported net in other deferred charges or other deferred credits. Net presentation is appropriate due to the right of offset included in the master netting agreements. On the balance sheet, the net current and net non-current derivative positions are netted with the applicable margin deposits. At June 30, 2011, a net current risk management liability of $5.7 million represented the current derivative positions of $7.6 million reduced by current margin deposits of $1.8 million and option premiums that were less than $0.1 million. The non-current liability derivative positions of $0.1 million were recorded in other deferred credits. The institutional money market funds were reported on the Cleco Condensed Consolidated Balance Sheet in cash and cash equivalents, current restricted cash, and non-current restricted cash of $157.4 million, $8.1 million, and $27.1 million, respectively. At Cleco Power, cash and cash equivalents, current restricted cash, and non-current restricted cash were $145.7 million, $8.1 million, and $27.0 million, respectively, as of June 30, 2011.

Cleco utilizes different valuation techniques for fair value calculations. In order to measure the fair value for Level 1 assets and liabilities, Cleco obtains the closing price from published indices in active markets for the various instruments and multiplies this price by the appropriate number of instruments held. Level 2 fair values for assets and liabilities are determined by obtaining the closing price from published indices in active markets for instruments that are similar to Cleco’s assets and liabilities. The fair value obtained is then discounted to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. For some options, Cleco uses the Black-Scholes model using observable and available inputs to calculate the fair value, consistent with the income approach. These techniques have been applied consistently from fiscal period to fiscal period. Level 3 fair values allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Cleco had no Level 3 assets or liabilities at June 30, 2011, or December 31, 2010.

The assets and liabilities reported at fair value are grouped into classes based on the underlying nature and risks associated with the individual asset or liability. Level 1 of energy market derivative assets and liabilities consists of a single class that includes natural gas futures with quoted prices on a liquid, national exchange. As the future price of natural gas is affected by market expectations, such as the supply of natural gas relative to demand, the fair value of Cleco’s natural gas futures fluctuates.

Level 2 of energy market derivative assets and liabilities consists of two classes. The first class contains natural gas swaps which fluctuate in value as the underlying natural gas futures fair value changes, and as market interest rates change. Cleco records the natural gas swaps at the net present value. The second class consists of natural gas options. The fair value of natural gas options fluctuates with the volatility in the fair value of natural gas, the number of days until the options expire, the underlying natural gas futures price fluctuations, and market interest rates. Cleco records natural gas options at the net present value. Both of these energy market derivative classes also contain counterparty execution risk because the transactions are entered into with a direct counterparty and are not traded through an exchange.

The Level 2 institutional money market funds asset consists of a single class. In order to capture interest income and minimize risk, cash is invested in money market funds that invest primarily in short-term securities issued by the U.S. Treasury in order to maintain liquidity and achieve the goal of a net asset value of a dollar. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the underlying securities of the fund.

Cleco has a policy which states that transfers between Levels 1, 2, and 3 are recognized at the end of a reporting period. During the six months ended June 30, 2011, and the year ended December 31, 2010, Cleco did not experience any transfers between levels.

Derivatives and Hedging

The authoritative guidance on derivatives and hedging requires entities to provide transparency disclosures about a company’s derivative activities and how the related hedged items affect a company’s financial position, financial performance, and cash flows. Cleco is required to provide qualitative disclosures about derivative fair value, gains and losses, and credit-risk-related contingent features in derivative agreements.

The following table presents the fair values of derivative instruments and their respective line items as recorded on Cleco Corporation and Cleco Power’s Condensed Consolidated Balance Sheets as of June 30, 2011, and December 31, 2010:

	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
	LIABILITY DERIVATIVES
(THOUSANDS) FAIR VALUE	BALANCE SHEET LINE ITEM	AT JUNE 30, 2011			DECEMBER 31, 2010
Commodity contracts
Fuel cost hedges:
Current	Risk management liability, net	$	(7,576	)	$	(13,497	)
Long-term	Other deferred credits		(89	)		(1,651	)
Total		$	(7,665	)	$	(15,148	)

The following table presents the effect of derivatives not designated as hedging instruments on Cleco Corporation and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, and 2010:

		FOR THE THREE MONTHS ENDED						FOR THE SIX MONTHS ENDED
		JUNE 30, 2011		JUNE 30, 2010				JUNE 30, 2011		JUNE 30, 2010
(THOUSANDS)	GAIN (LOSS) IN INCOME OF DERIVATIVES LINE ITEM	AMOUNT OF GAIN RECOGNIZED IN INCOME ON DERIVATIVES		AMOUNT OF GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES			GAIN (LOSS) IN INCOME OF DERIVATIVES LINE ITEM	AMOUNT OF GAIN RECOGNIZED IN INCOME ON DERIVATIVES		AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
Economic hedges	Other operations revenue	$	-	$	112	(1)	Other operations revenue	$	-	$	(491	) (2)
Fuel cost hedges(3)	Fuel used for electric generation		5,203		(14,402	)	Fuel used for electric generation		8,997		(22,215	)
Total		$	5,203	$	(14,290	)		$	8,997	$	(22,706	)
(1)For the three months ended June 30, 2010, Cleco recognized $0.4 million of mark-to-market gains related to economic hedges.
(2)For the six months ended June 30, 2010, Cleco recognized less than $0.1 million of mark-to-market gains related to economic hedges.
(3)In accordance with the authoritative guidance for regulated operations, an additional $7.7 million of unrealized losses and $2.1 million of deferred losses associated with fuel cost hedges are reported in Accumulated Deferred Fuel on the balance sheet as of June 30, 2011, compared to $15.1 million of unrealized losses and $1.6 million of deferred losses associated with fuel cost hedges as of December 31, 2010. As gains and losses are realized in future periods, they will be recorded as Fuel Used for Electric Generation on the Income Statement.

At June 30, 2011, Cleco Power had 5.5 million MMBtus hedged for natural gas fuel costs, which is approximately 7% of the estimated natural gas requirements for a two-year period. At December 31, 2010, Cleco Power had 9.4 million MMBtus hedged or approximately 11% of gas requirements for a two-year period.

The following table presents the effect of derivatives designated as hedging instruments on Cleco Corporation and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011, and 2010:

	FOR THE THREE MONTHS ENDED JUNE 30, 2011					FOR THE THREE MONTHS ENDED JUNE 30, 2010
(THOUSANDS)	AMOUNT RECOGNIZED IN OCI		AMOUNT OF GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF (LOSS) GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate swap(1)	$	-	$	-		$	(60	)	$	(197	)*
Treasury rate locks	$	-	$	89	*	$	-		$	42	*
* The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges.
(1) In November 2010, the interest rate swap was terminated.

	FOR THE SIX MONTHS ENDED JUNE 30, 2011					FOR THE SIX MONTHS ENDED JUNE 30, 2010
(THOUSANDS)	AMOUNT RECOGNIZED IN OCI		AMOUNT OF GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF (LOSS) GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate swap(1)	$	-	$	-		$	(341	)	$	(399	)*
Treasury rate locks	$	-	$	177	*	$	-		$	83	*
* The (loss) gain reclassified from accumulated OCI into income (effective portion) is reflected in interest charges.
(1) In November 2010, the interest rate swap was terminated.

At June 30, 2011, Cleco Power expected $0.4 million of the effective portion of treasury rate locks cash flow hedges to be reclassed from accumulated OCI to a reduction in interest charges over the next 12 months.