Note 4 — Fair Value Accounting

The amounts reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, for cash equivalents, restricted cash equivalents, accounts receivable, other accounts receivable, and accounts payable 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 Condensed Consolidated Balance Sheets.



Cleco
	AT SEPT. 30, 2014				AT DEC. 31, 2013
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash equivalents	$	4,400	$	4,400	$	22,204	$	22,204
Restricted cash equivalents	$	18,802	$	18,802	$	14,019	$	14,019
Long-term debt, excluding debt issuance costs	$	1,338,354	$	1,534,758	$	1,331,230	$	1,420,048



Cleco Power
	AT SEPT. 30, 2014				AT DEC. 31, 2013
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash equivalents	$	1,000	$	1,000	$	14,900	$	14,900
Restricted cash equivalents	$	18,781	$	18,781	$	13,998	$	13,998
Long-term debt, excluding debt issuance costs	$	1,301,354	$	1,497,758	$	1,326,230	$	1,415,048

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 SEPT. 30, 2014		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		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)
Asset Description
Institutional money market funds	$	23,202	$	—	$	23,202	$	—	$	36,100	$	—	$	36,100	$	—
Commercial paper	—		—		—		—		1,483		—		1,483		—
Municipal bonds	—		—		—		—		9,831		—		9,831		—
Corporate bonds	—		—		—		—		515		—		515		—
Federal agency mortgage-backed securities	—		—		—		—		1,000		—		1,000		—
FTRs	18,504		—		—		18,504		9,020		—		—		9,020
Total assets	$	41,706	$	—	$	23,202	$	18,504	$	57,949	$	—	$	48,929	$	9,020
Liability Description
Long-term debt	$	1,534,758	$	—	$	1,534,758	$	—	$	1,420,048	$	—	$	1,420,048	$	—
FTRs	1,732		—		—		1,732		382		—		—		382
Total liabilities	$	1,536,490	$	—	$	1,534,758	$	1,732	$	1,420,430	$	—	$	1,420,048	$	382



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT SEPT. 30, 2014		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		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)
Asset Description
Institutional money market funds	$	19,781	$	—	$	19,781	$	—	$	28,775	$	—	$	28,775	$	—
Commercial paper	—		—		—		—		1,483		—		1,483		—
Municipal bonds	—		—		—		—		9,831		—		9,831		—
Corporate bonds	—		—		—		—		515		—		515		—
Federal agency mortgage-backed securities	—		—		—		—		1,000		—		1,000		—
FTRs	18,504		—		—		18,504		9,020		—		—		9,020
Total assets	$	38,285	$	—	$	19,781	$	18,504	$	50,624	$	—	$	41,604	$	9,020
Liability Description
Long-term debt	$	1,497,758	$	—	$	1,497,758	$	—	$	1,415,048	$	—	$	1,415,048	$	—
FTRs	1,732		—		—		1,732		382		—		—		382
Total liabilities	$	1,499,490	$	—	$	1,497,758	$	1,732	$	1,415,430	$	—	$	1,415,048	$	382

The following tables summarize the net changes in the fair value of FTR assets and liabilities classified as Level 3 in the fair value hierarchy:



(THOUSANDS)
Beginning balance at July 1, 2014	$	42,972
Unrealized losses*	(6,190		)
Purchases and settlements	(20,010		)
Ending balance at Sept. 30, 2014	$	16,772
* Unrealized gains and losses are reported in Accumulated deferred fuel on the balance sheet.



(THOUSANDS)
Beginning balance at January 1, 2014	$	8,638
Unrealized losses*	(9,610		)
Purchases and settlements	17,744
Ending balance at Sept. 30, 2014	$	16,772
* Unrealized gains and losses are reported in Accumulated deferred fuel on the balance sheet.

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions at September 30, 2014 and December 31, 2013:



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

FTRs at Sept. 30, 2014	$	18,504	$	1,732	Discounted cash flow	Estimated auction price	$	(5.73	)	$	5.62
FTRs at Dec. 31, 2013	$	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 United States 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 occur in 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 September 30, 2014, 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 Condensed Consolidated Balance Sheet in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $4.4 million, $3.5 million, and $15.3 million, respectively, at September 30, 2014. 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, and non-current restricted cash and cash equivalents of $1.0 million, $3.5 million, and $15.3 million, respectively, at September 30, 2014. 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 in order to maintain liquidity and achieve the goal of a net asset value of a dollar. The risk associated with this class is 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 Condensed 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. During the first quarter of 2014, Cleco ended its relationship with its outside investment manager and liquidated all holdings in these restricted investments. The Level 2 commercial paper, municipal bonds, corporate bonds, and federal agency mortgage-backed securities consisted of a single class. In order to maximize income, meet the requirements established by the LPSC for the restricted reserve fund, and maintain safety and liquidity, restricted cash and cash equivalents were invested in short-term, fixed-income debt instruments. The risk associated with this class was price volatility associated with the commercial paper, municipal bonds, corporate bonds, and federal agency mortgage-backed securities. Quarterly, Cleco received reports from the trustee for the investment manager which provided the fair value measurement. Cleco performed an evaluation of those reports to verify the fair value of the securities.

In connection with joining MISO, Cleco Power received a direct allocation of FTRs in November 2013. Cleco Power currently purchases the majority of its FTRs in auctions facilitated by MISO during the second quarter of each year and may also purchase additional FTRs in monthly auctions facilitated by MISO. Cleco Power’s 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 occur monthly in the Multi-Period Monthly Auction. For more information about FTRs, see “— Derivatives and Hedging.”

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 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.

During the nine months ended September 30, 2014, and the year ended December 31, 2013, Cleco did not experience any transfers between levels.

Restricted Investments

In 2007, the LPSC authorized the funding and securitization of a $50.0 million reserve for Cleco Power’s future storm costs. In July 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 were 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. During the first quarter of 2014, Cleco ended its relationship with this outside investment manager and liquidated all holdings in these restricted investments.

The cash and cash equivalents portion of the investments were reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at December 31, 2013, as restricted cash and cash equivalents at their approximate fair value because of their short-term nature.

The debt securities portion of the investments were recorded at fair value on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at December 31, 2013, as restricted investments. The investments in debt securities included municipal bonds, corporate bonds, federal agency mortgage-backed securities, and commercial paper with original maturity dates of more than three months and were classified as available-for-sale securities and reported at fair value. Because Cleco Power’s investment strategy for these investments was 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 were recorded directly to Cleco Power’s restricted storm reserve rather than in earnings or OCI. As a result, no amounts were recorded to OCI for these investments. The unrealized gains and losses on Cleco Power’s debt securities at December 31, 2013, were caused by interest rate movements.

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:



	AT DEC. 31, 2013
(THOUSANDS)	AMORTIZED COST		TOTAL UNREALIZED GAINS ⁽¹⁾		TOTAL UNREALIZED LOSSES ⁽¹⁾			FAIR VALUE
Municipal bonds	$	9,838	$	8	$	(15	)	$	9,831
Corporate bonds	513		2		—			515
Federal agency mortgage-backed securities	1,000		—		—			1,000
Commercial paper	1,483		—		—			1,483
Total available-for-sale debt securities	$	12,834	$	10	$	(15	)	$	12,829
⁽¹⁾ Unrealized gains and losses were recorded to the restricted storm reserve.

For the nine months ended September 30, 2014, Cleco Power recognized less than $0.1 million of realized gains as a result of the portfolio liquidation during the first quarter of 2014. Realized gains and losses were 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 Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT SEPT. 30, 2014		AT DEC. 31, 2013
Commodity contracts
FTRs:
Current	Energy risk management assets	$	18,504	$	9,020
Current	Energy risk management liabilities	1,732		382
Total		$	16,772	$	8,638

The following tables present the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014:



	FOR THE THREE MONTHS ENDED SEPT. 30, 2014
(THOUSANDS)	DERIVATIVES LINE ITEM	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
FTRs	Electric operations	$	27,618
FTRs	Power purchased for utility customers	(20,122		)
Total		$	7,496



	FOR THE NINE MONTHS ENDED SEPT. 30, 2014
(THOUSANDS)	DERIVATIVES LINE ITEM	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
FTRs	Electric operations	$	52,946
FTRs	Power purchased for utility customers	(30,871		)
Total		$	22,075

At September 30, 2014 and December 31, 2013, Cleco Power had no open positions hedged for natural gas.

In connection with joining MISO, Cleco Power received a direct allocation of FTRs in November 2013. Cleco Power currently purchases the majority of its FTRs in annual auctions facilitated by MISO during the second quarter of each year and may also purchase additional FTRs in monthly auctions facilitated by MISO. FTRs are derivative instruments which represent economic hedges of future congestion charges that will be incurred in serving Cleco Power’s customer load. They are not designated as hedging instruments. At September 30, 2014 and December 31, 2013, Cleco Power had 16.8 million MWh and 6.8 million MWh, respectively, of FTRs outstanding.

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 a 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.

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.

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 nine months ended September 30, 2014 and 2013.



	FOR THE THREE MONTHS ENDED SEPT. 30,
	2014					2013
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives ⁽¹⁾	$	—	$	(86	)*	$	—	$	(86	)*

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

⁽¹⁾ During the three months ended September 30, 2014 and 2013, Cleco had no ineffectiveness and losses related to the interest rate derivatives as a regulatory asset.



	FOR THE NINE MONTHS ENDED SEPT. 30,
	2014					2013
(THOUSANDS)	AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)			AMOUNT OF GAIN RECOGNIZED IN OCI		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION)
Interest rate derivatives ⁽¹⁾	$	—	$	(258	)*	$	1,762	$	(165	)*

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

⁽¹⁾During the nine months ended September 30, 2014, Cleco had no ineffectiveness and losses related to the interest rate derivatives as a regulatory asset. During the nine months ended September 30, 2013, Cleco recorded ineffectiveness and losses related to the interest rate derivatives as a regulatory asset of $3.3 million.

At September 30, 2014, 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.