

Note 5 — Fair Value Accounting

The amounts reflected in Cleco and Cleco Power’s Consolidated Balance Sheets at December 31, 2013 and December 31, 2012, for cash equivalents, restricted cash equivalents, accounts receivable, other accounts receivable, accounts payable, and short-term debt approximate fair value because of their short-term nature.

The following tables summarize the carrying value and estimated market value of Cleco and Cleco Power’s financial instruments not measured at fair value in Cleco and Cleco Power’s Consolidated Balance Sheets.



Cleco
					AT DEC. 31,
			2013				2012
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash equivalents	$	22,204	$	22,204	$	25,911	$	25,911
Restricted cash equivalents	$	14,019	$	14,019	$	14,221	$	14,221
Long-term debt, excluding debt issuance costs	$	1,331,230	$	1,420,048	$	1,345,198	$	1,579,674



Cleco Power
					AT DEC. 31,
			2013				2012
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market
Cash equivalents	$	14,900	$	14,900	$	18,600	$	18,600
Restricted cash equivalents	$	13,998	$	13,998	$	14,124	$	14,124
Long-term debt, excluding debt issuance costs	$	1,326,230	$	1,415,048	$	1,320,198	$	1,554,674

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, 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	$	36,100	$	—	$	36,100	$	—	$	38,840	$	—	$	38,840	$	—
Commercial paper	1,483		—		1,483		—		649		—		649		—
Municipal bonds	9,831		—		9,831		—		10,203		—		10,203		—
Corporate bonds	515		—		515		—		—		—		—		—
Federal agency mortgage-backed securities	1,000		—		1,000		—		—		—		—		—
FTRs	9,020		—		—		9,020		—		—		—		—
Total assets	$	57,949	$	—	$	48,929	$	9,020	$	49,692	$	—	$	49,692	$	—
Liability Description
Interest rate derivative	$	—	$	—	$	—	$	—	$	2,627	$	—	$	2,627	$	—
Long-term debt	1,420,048		—		1,420,048		—		1,579,674		—		1,579,674		—
FTRs	382		—		—		382		—		—		—		—
Total liabilities	$	1,420,430	$	—	$	1,420,048	$	382	$	1,582,301	$	—	$	1,582,301	$	—



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT DEC. 31, 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	$	28,775	$	—	$	28,775	$	—	$	32,643	$	—	$	32,643	$	—
Commercial paper	1,483		—		1,483		—		649		—		649		—
Municipal bonds	9,831		—		9,831		—		10,203		—		10,203		—
Corporate bonds	515		—		515		—		—		—		—		—
Federal agency mortgage-backed securities	1,000		—		1,000		—		—		—		—		—
FTRs	9,020		—		—		9,020		—		—		—		—
Total assets	$	50,624	$	—	$	41,604	$	9,020	$	43,495	$	—	$	43,495	$	—
Liability Description
Interest rate derivative	$	—	$	—	$	—	$	—	$	2,627	$	—	$	2,627	$	—
Long-term debt	1,415,048		—		1,415,048		—		1,554,674		—		1,554,674		—
FTRs	382		—		—		382		—		—		—		—
Total liabilities	$	1,415,430	$	—	$	1,415,048	$	382	$	1,557,301	$	—	$	1,557,301	$	—

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions as of December 31, 2013.



(THOUSANDS, EXCEPT DOLLAR PER MWh)	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
	Assets		Liabilities				Low			High

FTRs	$	9,020	$	382	Discounted cash flow	Estimated auction price	$	(4.88	)	$	33.75

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 are determined by obtaining the closing price of similar assets and liabilities from published indices in active markets and then discounted to the current period using a U.S. Treasury published interest rate as a proxy for a risk-free rate of return. Cleco has consistently applied the Level 2 fair value technique from fiscal period to fiscal period. Level 3 fair values are situations in which there is little, if any, market activity for the asset or liability at the measurement date and therefore estimated prices are used in the discounted cash flow approach.

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.

At December 31, 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. The institutional money market funds were reported on the Cleco Consolidated Balance Sheet in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $22.2 million, $8.9 million, and $5.0 million, respectively, at December 31, 2013. 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, and non-current restricted cash and cash equivalents of $14.9 million, $8.9 million, and $5.0 million, respectively, at December 31, 2013. 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. 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 commercial paper, municipal bonds, corporate bonds, and federal agency mortgage-backed securities were reported on Cleco and Cleco Power’s Consolidated Balance Sheets in restricted investments in the amount of $1.5 million, $9.8 million, $0.5 million, and $1.0 million at December 31, 2013, respectively. The Level 2 commercial paper, the Level 2 municipal bonds, the Level 2 corporate bonds, and the Level 2 federal agency mortgage-backed securities 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 commercial paper, municipal bonds, corporate bonds, and federal agency mortgage-backed securities. 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 3 FTRs consisted of a single class. As part of Cleco Power’s integration into MISO, Cleco Power was awarded FTRs in November 2013. The FTRs were priced using MISO’s monthly estimated auction prices. The monthly estimated auction prices are discounted to net present value to determine fair value. FTRs are categorized as Level 3 fair value measurements because the only relevant pricing available comes from MISO auctions, which trade infrequently. For more information about FTRs, see “— Derivatives and Hedging.”

The Level 2 interest rate derivative was one forward starting interest rate swap liability that consisted of a single class that only contained one instrument. The risks were changes in the three-month LIBOR rate and counterparty risk. This instrument was with a direct counterparty and was not traded through an exchange. For some options, Cleco uses the Black-Scholes model using observable and available inputs to calculate the fair value, consistent with the income approach.

The Level 2 long-term debt liability consists of a single class. In order to fund capital requirements, Cleco issues long-term, fixed and variable rate debt with various tenors. The fair value of this class fluctuates as the market interest rates for fixed and variable 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.

During the years ended December 31, 2013 and 2012, Cleco did not experience any transfers between levels.

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, 2013, 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, 2013, as restricted cash and cash equivalents at its approximate fair value because of its short-term nature.

The debt securities were recorded at fair value on Cleco and Cleco Power’s Consolidated Balance Sheets at December 31, 2013, as restricted investments. The investments in debt securities include municipal bonds, corporate bonds, federal agency mortgage-backed securities, 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 OCI. As a result, no amounts will be recorded to OCI 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 gains and losses on Cleco Power’s debt securities as of December 31, 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 other-than-temporary impairments on its debt securities at December 31, 2013.

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



	AT DEC. 31, 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	$	9,838	$	8	$	15	$	9,831	$	10,228	$	3	$	28	$	10,203
Corporate bonds	513		2		—		515		—		—		—		—
Federal agency mortgage-backed securities	1,000		—		—		1,000		—		—		—		—
Commercial paper	1,483		—		—		1,483		649		—		—		649
Total available-for-sale securities	$	12,834	$	10	$	15	$	12,829	$	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 gains in the restricted storm reserve for the year ended December 31, 2013. Cleco Power recognized less than $0.1 million 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, 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	$	9	$	3,156	$	6	$	2,622

At December 31, 2013, the fair value of Cleco Power’s available-for-sale debt securities by contractual maturity was:



(THOUSANDS)	AT DEC. 31, 2013
One year or less	$	5,702
Over one year through five years	7,127
Total fair value	$	12,829

There were no realized gains or losses on Cleco Power’s available-for-sale debt securities for the year ended December 31, 2013 and 2012. Realized gains and losses will be determined on a specific identification basis.

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.

Commodity Contracts

The following table presents the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Consolidated Balance Sheets as of December 31, 2013 and 2012:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT DEC. 31, 2013		AT DEC. 31, 2012
Commodity contracts
FTRs:
Current	Energy risk management assets	$	9,020	$	—
Current	Energy risk management liabilities	382		—
Total		$	8,638	$	—

The following table presents the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Consolidated Statements of Income for the years December 31, 2013, 2012, and 2011.



					FOR THE YEAR ENDED DEC. 31,
		2013			2012			2011
(THOUSANDS)	DERIVATIVES LINE ITEM	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES			AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES			AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
Fuel cost hedges⁽¹⁾	Fuel used for electric generation	$	—		$	(8,277	)	$	(18,119	)
FTRs⁽²⁾	Electric operations	243			—			—
FTRs⁽²⁾	Power purchased for utility customers	(19		)	—			—
Total		$	224		$	(8,277	)	$	(18,119	)

⁽¹⁾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, 2013, and no unrealized losses and no deferred losses as of December 31, 2012, and $5.3 million of unrealized losses and $1.2 million of deferred losses associated with fuel costs hedges as of December 31, 2011. As gains and losses are realized in future periods, they will be recorded as Fuel used for electric generation on the income statement.

⁽²⁾ At December 31, 2013, $8.6 million unrealized gains associated with FTRs were reported in Accumulated deferred fuel on the balance sheet.

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

As part of the integration into MISO, Cleco Power was awarded FTRs in November 2013. FTRs provide a financial hedge to manage the risk of congestion cost in the Day-Ahead Energy Market. FTRs represent rights to congestion credits or charges along a path during a given time frame for a certain MW quantity. At December 31, 2013, Cleco Power had 6.8 million MWh of FTRs hedged. At December 31, 2012, Cleco Power had no open FTR positions.

Interest Rate Derivatives

In November 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. In May 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. Of this amount, Cleco Power deferred $2.9 million as a regulatory asset and recognized $0.4 million in OCI. In May 2013, Cleco Power began amortizing these losses over the 25-year term of the related debt. For more information about the 2008 Series B GO Zone bonds, see Note 6 — “Debt.”

The following table presents the effect of derivatives designated as hedging instruments on Cleco and Cleco Power’s Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011.



											FOR THE YEAR ENDED DEC. 31,
			2013					2012						2011
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF NET LOSS 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)			AMOUNT OF LOSS RECOGNIZED IN OCI			AMOUNT OF NET GAIN RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives	$	2,202	$	(251	)*	$	704	$	(60	)*	$	(25,661	)	$	334	*

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

At December 31, 2013, Cleco Power expects $0.3 million of net losses related to interest rate derivatives to be reclassed from accumulated other comprehensive income into earnings over the next 12 months.