The amounts reflected in Cleco Corporation and Cleco Power’s Consolidated Balance Sheets at December 31, 2012 and December 31, 2011, for cash and cash equivalents, restricted 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 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 with similar maturities. The following tables summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments subject to fair value accounting.



Cleco
					AT DEC. 31,
			2012				2011
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash and cash equivalents	$	31,020	$	31,020	$	93,576	$	93,576
Restricted cash and cash equivalents	$	14,221	$	14,221	$	35,828	$	35,828
Long-term debt, excluding debt issuance costs	$	1,345,198	$	1,579,674	$	1,354,567	$	1,542,867



Cleco Power
					AT DEC. 31,
			2012				2011
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash and cash equivalents	$	23,368	$	23,368	$	67,458	$	67,458
Restricted cash and cash equivalents	$	14,124	$	14,124	$	35,731	$	35,731
Long-term debt, excluding debt issuance costs	$	1,320,198	$	1,554,674	$	1,344,567	$	1,532,867

At December 31, 2012, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash equivalents. Cleco had $38.8 million ($24.7 million of cash equivalents and $14.1 million of restricted cash equivalents) in short-term investments in institutional money market funds. Cleco Power had $32.6 million ($18.6 million of cash equivalents and $14.0 million of restricted cash equivalents) in short-term investments in institutional money market funds. If the money market funds failed to perform under the terms of the investments, Cleco and 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 May 2012, Cleco and Cleco Power revised their guidelines for short-term investments in order to mitigate credit risk. Qualifying investments include:


•	U.S. treasury securities,


•	U.S. federal agency and U.S. government-sponsored entity debt,


•	Tax-exempt short-term securities of a state, territory, or a possession of the U.S.,


•	Certificates of deposit, banker’s acceptances and time deposits,


•	Corporate notes and bonds, fixed or floating rate, and covered bonds,


•	Commercial paper,


•	Asset backed securities with a minimum long-term rating of AA by Standard & Poor’s and Aaa by Moody’s,


•	U.S. government mortgage securities with a short average life with a minimum long-term rating of AA by Standard & Poor’s and Aaa by Moody’s,


•	Repurchase agreements with the primary government securities dealers or financial institutions in which Cleco deposits and/or concentrates cash, and


•	Money market funds which must have at least $15.0 billion in assets under management; must have been in existence for not less than two years; must have a minimum rating of AAA by Standard & Poor’s and Aaa by Moody’s and must be compliant with the SEC rule 2a-7 which restricts the quality, maturity, and diversity of investments by money market funds.

The minimum acceptable short-term credit rating must be A-1 by Standard & Poor’s and P-1 by Moody’s. The maximum maturity of any instrument must be 36 months, and the maximum portfolio duration must be 12 months.

Diversification of holdings must be stressed recognizing the total amount of the portfolio. Investments in securities of any one issuer will be limited to 5%at the time of purchase except for U.S. Treasury and Agency Securities and money market funds. No more than 50% of the portfolio at the time of purchase will be invested in any single Federal Agency/Government Sponsored Enterprise.

Restricted Investments

In September 2007, the LPSC authorized the funding and securitization of a $50.0 million reserve for Cleco Power’s future storm costs. On July 1, 2012, Cleco Power transferred $13.0 million of the related restricted cash and cash equivalents to an outside investment manager. Investments made by the investment manager are restricted to the criteria established by management in Cleco Power’s guidelines for short-term investments. At December 31, 2012, the investments included cash and cash equivalents and debt securities.

The cash and cash equivalents are reflected in Cleco and Cleco Power’s Consolidated Balance Sheets at December 31, 2012, as restricted cash and cash equivalents and approximate fair value because of their short-term nature.

The debt securities were recorded at fair value on Cleco and Cleco Power’s Consolidated Balance Sheets at December 31, 2012, as restricted investments. The investments in debt securities include municipal bonds and commercial paper with original maturity dates of more than three months and are classified as available-for-sale securities and are marked-to-market at least quarterly. Because Cleco Power’s investment strategy for these investments fits within the requirements established by the LPSC for the restricted reserve fund, realized and unrealized gains and losses, interest income, investment management fees and custody fees are recorded directly to Cleco Power’s restricted storm reserve rather than in earnings or other comprehensive income. As a result, no amounts will be recorded to other comprehensive income for these investments.

Quarterly, Cleco Power’s available-for-sale, debt securities are evaluated on an individual basis to determine if a decline in fair value below the carrying value is other-than-temporary.

Management determines whether it intends to sell or if it is more likely than not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity and regulatory requirements. For Cleco Power’s impaired debt securities for which there was no intent or expected requirement to sell, the evaluation assesses whether it is likely the amortized cost will be recovered considering the nature of the securities, credit rating, financial condition of the issuer or the extent and duration of the unrealized loss and market conditions. If Cleco Power determined that an other-than-temporary decline in value existed on its debt securities, the investments would be written down to fair value with a new cost basis established. Declines in fair value below cost basis that are determined to be other-than-temporary would be recorded to Cleco Power’s restricted storm reserve. The unrealized losses on Cleco Power’s debt securities as of December 31, 2012, were caused by interest rate movements. Cleco Power does not intend to sell the debt securities and has determined it is more likely than not that it will not be required to sell the investments before recovery of the amortized cost value. Cleco Power determined there were no material other-than-temporary impairments on its debt securities at December 31, 2012.

The following table provides a reconciliation of Cleco Power’s available-for-sale debt securities from cost basis to fair value at December 31, 2012.



	AT DEC. 31, 2012
(THOUSANDS)	AMORTIZED COST		TOTAL UNREALIZED GAINS ⁽¹⁾		TOTAL UNREALIZED LOSSES ⁽¹⁾		FAIR VALUE
Municipal bonds	$	10,228	$	3	$	28	$	10,203
Commercial paper	649		—		—		649
Total available-for-sale securities	$	10,877	$	3	$	28	$	10,852

⁽¹⁾ Unrealized gains and losses are recorded to the restricted storm reserve.

Cleco Power recognized less than $0.1 million of unrealized mark-to-market losses in the restricted storm reserve for the year ended December 31, 2012. The following table summarizes the debt securities that were in an unrealized loss position at December 31, 2012, but for which no other-than-temporary impairment was recognized:



			LESS THAN 12 MONTHS		12 MONTHS OR LONGER
(THOUSANDS)	AGGREGATE UNREALIZED LOSS		AGGREGATE RELATED FAIR VALUE		AGGREGATE UNREALIZED LOSS		AGGREGATE RELATED FAIR VALUE
Municipal bonds	$	28	$	8,359	$	—	$	—

At December 31, 2012, the fair value of Cleco Power’s available-for-sale debt securities by contractual maturity was:



(THOUSANDS)	AT DEC. 31, 2012
One year or less	$	6,204
Over one year through five years	4,648
Total fair value	$	10,852

There were no realized gains or losses on Cleco Power’s available-for-sale securities for the year ended December 31, 2012. Realized gains and losses will be determined on a specific identification basis.

Interest Rate Derivatives

Forward Starting Interest Rate Swap

On November 14, 2011, Cleco Power entered into a pay fixed/receive variable forward starting interest rate swap contract in order to mitigate the interest rate exposure on coupon payments related to the remaining $50.0 million fixed-rate forecasted debt issuance. The forward starting interest rate swap has a spot 30-year all-in swap rate of 3.05%, notional amount of $50.0 million, with the pricing date of May 14, 2013, or the issuance of the notes, whichever is earlier. The forward starting interest rate swap meets the criteria of a cash flow hedge under the authoritative guidance as it relates to derivatives and hedging and is carried on the balance sheet at its fair value. The fair market value of the forward starting interest rate swap is calculated by the net of the present value of the fixed payments to be paid by Cleco Power and the present value of the three-month LIBOR payments to be received by Cleco Power. Since future LIBOR rates are not available for each month until termination, quoted LIBOR rates from an active exchange for observable time periods were used to create a forward LIBOR curve for all months until termination. Because of the inputs and common techniques used to calculate fair value, the swap valuation was considered Level 2. Cleco Power recognized $1.2 million unrealized mark-to-market gains and $3.3 million unrealized mark-to market losses in other comprehensive income for the years ended December 31, 2012 and 2011, respectively. The fair market value of $2.6 million and $3.3 million for the forward starting interest rate swap was recorded on Cleco and Cleco Power’s Consolidated Balance Sheets as an interest rate risk management liability as of December 31, 2012 and December 31, 2011, respectively. There was no impact to earnings due to ineffectiveness for the year ended December 31, 2011. There were $0.5 million of deferred losses due to ineffectiveness for the year ended December 31, 2012.

Fair Value Measurements and Disclosures

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

The following tables disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured or disclosed 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 DEC. 31, 2012		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2011		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset Description
Institutional money market funds	$	39,489	$	—	$	39,489	$	—	$	118,951	$	—	$	118,951	$	—
Municipal bonds	10,203		—		10,203		—		—		—		—		—
Total assets	$	49,692	$	—	$	49,692	$	—	$	118,951	$	—	$	118,951	$	—
Liability Description
Energy market derivatives	$	—	$	—	$	—	$	—	$	5,336	$	—	$	5,336	$	—
Interest rate derivatives	2,627		—		2,627		—		3,330		—		3,330		—
Long-term debt	1,579,674				1,579,674				1,542,867				1,542,867
Total liabilities	$	1,582,301	$	—	$	1,582,301	$	—	$	1,551,533	$	—	$	1,551,533	$	—



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT DEC. 31, 2012		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2011		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset Description
Institutional money market funds	$	33,292	$	—	$	33,292	$	—	$	99,955	$	—	$	99,955	$	—
Municipal bonds	10,203		—		10,203		—		—		—		—		—
Total assets	$	43,495	$	—	$	43,495	$	—	$	99,955	$	—	$	99,955	$	—
Liability Description
Energy market derivatives	$	—	$	—	$	—	$	—	$	5,336	$	—	$	5,336	$	—
Interest rate derivatives	2,627		—		2,627		—		3,330		—		3,330		—
Long-term debt	1,554,674				1,554,674				1,532,867				1,532,867
Total liabilities	$	1,557,301	$	—	$	1,557,301	$	—	$	1,541,533	$	—	$	1,541,533	$	—

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 energy 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.

The institutional money market funds were reported on the Cleco Consolidated Balance Sheet in cash and cash equivalents, current restricted cash and cash equivalents, non-current restricted cash and cash equivalents, and restricted investments of $24.7 million, $8.8 million, $5.4 million, and $0.6 million respectively, at December 31, 2012. At Cleco Power, the institutional money market funds were reported on the consolidated balance sheet in cash and cash equivalents, current restricted cash and cash equivalents, non-current restricted cash and cash equivalents, and restricted investments and were $18.6 million, $8.8 million, $5.3 million, and $0.6 million, respectively, as of December 31, 2012.

The municipal bonds were reported on Cleco and Cleco Power’s Consolidated Balance Sheets in restricted investments in the amount of $10.2 million at December 31, 2012.

The forward starting interest rate swap was reported on Cleco and Cleco Power’s Consolidated Balance Sheets as a current liability in the line item interest rate risk management liability at December 31, 2012 and 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 December 31, 2012 or 2011.

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 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 mark-to-market value of 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 the mark-to-market value of the 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.

The Level 2 municipal bonds consisted of a single class. In order to maximize income and to meet the requirements established by the LPSC for the restricted reserve fund, restricted cash and cash equivalents were invested in short-term, fixed-income, debt instruments in order to maintain safety and liquidity. The risks associated with this class are counterparty risk of the fund manager and risk of price volatility associated with the municipal bonds. Quarterly, Cleco receives reports from the trustee for the investment manager which provides the fair value measurement. Cleco performs an evaluation of those reports to verify the fair value of the securities.

The Level 2 interest rate derivative was one forward starting interest rate swap liability that consisted of a single class that only contains one instrument. The risks are changes in the three-month LIBOR rate and counterparty risk. This instrument is with a direct counterparty and not traded through an exchange.

The Level 2 long-term debt liability consists of a single class. In order to fund capital requirements, Cleco issues long-term, fixed rate debt with various tenors. The fair value of this class fluctuates as the market interest rates for fixed rate debt with similar tenors and credit ratings changes. The fair value of the debt could also change from period to period due to changes in the credit rating of the Cleco entity that issued the debt.

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 years ended December 31, 2012, 2011, and 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 and quantitative 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 Consolidated Balance Sheets as of December 31, 2012 and 2011:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
	LIABILITY DERIVATIVES
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT DEC. 31, 2012		AT DEC. 31, 2011
Commodity contracts
Fuel cost hedges:
Current	Energy risk management liabilities, net	$	—	$	(5,336	)
Total		$	—	$	(5,336	)

The following table presents the effect of derivatives not designated as hedging instruments on Cleco Corporation and Cleco Power’s Consolidated Statements of Income for the years December 31, 2012, 2011, and 2010.



					FOR THE YEAR ENDED DEC. 31,
		2012			2011			2010
(THOUSANDS)	LOSS IN INCOME OF DERIVATIVES LINE ITEM	AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES			AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES			AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
Economic hedges	Other operations revenue	$	—		$	—		$	(667	)	⁽¹⁾
Fuel cost hedges⁽²⁾	Fuel used for electric generation	(8,277		)	(18,119		)	$	(36,818	)
Total		$	(8,277	)	$	(18,119	)	$	(37,485	)

⁽¹⁾For the year ended December 31, 2010, Cleco recognized a $0.4 million mark-to-market gain, related to economic hedges.

⁽²⁾In accordance with the authoritative guidance for regulated operations, no unrealized losses and no deferred losses associated with fuel cost hedges are reported in Accumulated Deferred Fuel on the balance sheet as of December 31, 2012, compared to $5.3 million of unrealized losses and $1.2 million of deferred losses as of December 31, 2011, and $15.1 million of unrealized losses and $1.6 million of deferred losses associated with fuel costs 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 December 31, 2012, Cleco Power had no open positions hedged for natural gas fuel costs. At December 31, 2011, Cleco Power had 2.2 million MMBtus hedged or approximately 3% 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 Consolidated Statements of Income for the years ended December 31, 2012, 2011, and 2010:



												FOR THE YEAR ENDED DEC. 31,
			2012						2011					2010
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF NET LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF NET GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF NET LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives⁽¹⁾	$	704	$	(60	)*	$	(25,661	)	$	334	*	$	4,739	$	(512	)*

* The (loss) gain reclassified from accumulated OCI into income is reflected in interest charges.

⁽¹⁾ In November 2010, an interest rate swap was terminated. The remaining $1.1 million of losses in accumulated OCI was reclassified to other expense.

At December 31, 2012, Cleco Power expected $0.4 million of net losses related to interest rate derivatives to be reclassed from accumulated other comprehensive income into earnings over the next 12 months.