Note 4 — Fair Value Accounting

The amounts reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, 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 JUNE 30, 2013				AT DEC. 31, 2012
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash and cash equivalents	$	7,567	$	7,567	$	31,020	$	31,020
Restricted cash and cash equivalents	$	12,490	$	12,490	$	14,221	$	14,221
Short-term debt, excluding debt issuance costs	$	3,000	$	3,000	$	—	$	—
Long-term debt, excluding debt issuance costs	$	1,338,069	$	1,455,061	$	1,345,198	$	1,579,674



Cleco Power
	AT JUNE 30, 2013				AT DEC. 31, 2012
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash and cash equivalents	$	2,743	$	2,743	$	23,368	$	23,368
Restricted cash and cash equivalents	$	12,394	$	12,394	$	14,124	$	14,124
Short-term debt, excluding debt issuance costs	$	3,000	$	3,000	$	—	$	—
Long-term debt, excluding debt issuance costs	$	1,313,069	$	1,430,061	$	1,320,198	$	1,554,674

At June 30, 2013, 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 $16.3 million ($3.9 million of cash equivalents and $12.4 million of restricted cash equivalents) in short-term investments in institutional money market funds. Cleco Power had $12.6 million ($0.3 million of cash equivalents and $12.3 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.

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 June 30, 2013, the investments included cash and cash equivalents and debt securities.

The cash and cash equivalents are reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2013, as restricted cash and cash equivalents and approximate fair value because of their short-term nature.

The debt securities are recorded at fair value on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2013, as restricted investments. The investments in debt securities include municipal bonds, corporate bonds, and commercial paper with original maturity dates of more than three months and are classified as available-for-sale securities and reported at fair value. Because Cleco Power’s investment strategy for these investments is 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 determines that an other-than-temporary decline in value exists on its debt securities, the investments would be written down to fair value with a new 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 June 30, 2013, 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 June 30, 2013.

The following table provides a reconciliation of Cleco Power’s available-for-sale debt securities from amortized cost to fair value at June 30, 2013 and December 31, 2012:



	AT JUNE 30, 2013								AT DEC. 31, 2012
(THOUSANDS)	AMORTIZED COST		TOTAL UNREALIZED GAINS ⁽¹⁾		TOTAL UNREALIZED LOSSES ⁽¹⁾		FAIR VALUE		AMORTIZED COST		TOTAL UNREALIZED GAINS ⁽¹⁾		TOTAL UNREALIZED LOSSES ⁽¹⁾		FAIR VALUE
Municipal bonds	$	9,774	$	3	$	23	$	9,754	$	10,228	$	3	$	28	$	10,203
Corporate bonds	516		—		4		512		—		—		—		—
Commercial paper	2,282		—		—		2,282		649		—		—		649
Total available-for-sale debt securities	$	12,572	$	3	$	27	$	12,548	$	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 unrealized mark-to-market losses and less than $0.1 million unrealized mark-to-market gains in the restricted storm reserve for the three and six months ended June 30, 2013, respectively.

The following table summarizes the debt securities that were in an unrealized loss position at June 30, 2013, 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	$	23	$	5,528	$	—	$	—
Corporate bonds	4		512		—		—
Total	$	27	$	6,040	$	—	$	—

At June 30, 2013, the fair value of Cleco Power’s available-for-sale debt securities by contractual maturity was:



(THOUSANDS)	AT JUNE 30, 2013
One year or less	$	6,191
Over one year through five years	6,357
Total fair value	$	12,548

There were no realized gains or losses on Cleco Power’s available-for-sale debt securities during the three and six months ended June 30, 2013. 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 had 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 was earlier. The forward starting interest rate swap met the criteria of a cash flow hedge under the authoritative guidance as it related to derivatives and hedging and was carried on the balance sheet at its fair value. Because of the inputs and common techniques used to calculate fair value, the swap valuation was considered Level 2.

During the first quarter of 2013, Cleco determined that the forward starting interest rate swap ceased to be highly effective in offsetting changes in the cash flows of the forecasted coupon payments and discontinued hedge accounting prospectively. The forward starting interest rate swap was settled on May 7, 2013, upon pricing of the 2008 Series B GO Zone bonds. Cleco Power settled the forward starting interest rate swap at a loss of $3.3 million. In March 2013, a $0.4 million loss on the forward starting interest rate swap was recorded in accumulated other comprehensive income. At June 30, 2013, Cleco Power deferred $2.9 million of losses as a regulatory asset related to the settlement of the forward starting interest rate swap as a result of management’s assessment that it is probable that the losses will be recovered through the rate-making process. In May 2013, Cleco Power began amortizing these amounts over the 25-year term of the related debt. For more information about the 2008 Series B GO Zone bonds, see Note 5 — “Debt.”

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 JUNE 30, 2013		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		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)
Asset Description
Institutional money market funds	$	18,672	$	—	$	18,672	$	—	$	39,489	$	—	$	39,489	$	—
Municipal bonds	9,754		—		9,754		—		10,203		—		10,203		—
Corporate bonds	512		—		512		—		—		—		—		—
Total assets	$	28,938	$	—	$	28,938	$	—	$	49,692	$	—	$	49,692	$	—
Liability Description
Interest rate derivatives	$	—	$	—	$	—	$	—	$	2,627	$	—	$	2,627	$	—
Long-term debt	1,455,061		—		1,455,061		—		1,579,674		—		1,579,674		—
Total liabilities	$	1,455,061	$	—	$	1,455,061	$	—	$	1,582,301	$	—	$	1,582,301	$	—



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT JUNE 30, 2013		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		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)
Asset Description
Institutional money market funds	$	14,976	$	—	$	14,976	$	—	$	33,292	$	—	$	33,292	$	—
Municipal bonds	9,754		—		9,754		—		10,203		—		10,203		—
Corporate bonds	512		—		512		—		—		—		—		—
Total assets	$	25,242	$	—	$	25,242	$	—	$	43,495	$	—	$	43,495	$	—
Liability Description
Interest rate derivatives	$	—	$	—	$	—	$	—	$	2,627	$	—	$	2,627	$	—
Long-term debt	1,430,061		—		1,430,061		—		1,554,674		—		1,554,674		—
Total liabilities	$	1,430,061	$	—	$	1,430,061	$	—	$	1,557,301	$	—	$	1,557,301	$	—

The institutional money market funds were reported on the Cleco Condensed 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 $3.9 million, $8.1 million, $4.4 million, and $2.3 million, respectively, at June 30, 2013. At Cleco Power, the institutional money market funds were reported on the Condensed 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 $0.3 million, $8.1 million, $4.3 million, and $2.3 million, respectively, at June 30, 2013.

The municipal and corporate bonds were reported on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets in restricted investments in the amount of $9.8 million and $0.5 million at June 30, 2013, respectively.

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, 2013 or December 31, 2012.

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.

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 and the Level 2 corporate 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 and corporate 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 contained only one instrument. The risks were changes in the three-month LIBOR rate and counterparty risk. This instrument was 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 change. 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 that transfers between Levels 1, 2, and 3 are recognized at the end of a reporting period. During the six months ended June 30, 2013, and the year ended December 31, 2012, Cleco did not experience any transfers between levels.

Derivatives and Hedging

The authoritative guidance on derivatives and hedging requires entities to provide transparent 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.

For the three and six months ended June 30, 2013, there was no effect on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for derivatives not designated as hedging instruments. For the three and six months ended June 30, 2012, Cleco and Cleco Power recognized losses of $4.1 million and $7.6 million, respectively, on derivatives not designated as hedging instruments. In accordance with the authoritative guidance for regulated operations, there were no unrealized gains or losses and no deferred losses associated with fuel cost hedges reported in Accumulated deferred fuel on the balance sheet as of June 30, 2013 and December 31, 2012. As gains and losses are realized in future periods, they will be reported as Fuel used for electric generation on Cleco and Cleco Power’s Condensed Consolidated Statements of Income.

At December 31, 2012, Cleco and Cleco Power’s Condensed Consolidated Balance Sheets had no derivative instruments not designated as hedging instruments.

At June 30, 2013 and December 31, 2012, Cleco Power had no open positions hedged for natural gas.

The following table presents the effect of derivatives designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012.



	FOR THE THREE MONTHS ENDED JUNE 30,
	2013					2012
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives ⁽¹⁾	$	—	$	(59	)*	$	(6,191	)	$	(57	)*

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

⁽¹⁾During the three months ended June 30, 2013, Cleco recorded $2.8 million of ineffectiveness and losses and for the three months ended June 30, 2012 Cleco had no ineffectiveness and losses related to the interest rate derivatives as a regulatory asset.



	FOR THE SIX MONTHS ENDED JUNE 30,
	2013					2012
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives ⁽¹⁾	$	1,762	$	(79	)*	$	(1,535	)	$	(57	)*

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

⁽¹⁾During the six months ended June 30, 2013 and 2012, Cleco recorded ineffectiveness and losses related to the interest rate derivatives as a regulatory asset of $3.3 million and $2.6 million, respectively.

At June 30, 2013, Cleco Power expected $0.3 million of the effective portion of deferred net losses related to interest rate derivatives to be reclassed from accumulated OCI to interest charges over the next 12 months.