Note 4 — Fair Value Accounting

The amounts reflected in Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at March 31, 2015, and December 31, 2014, 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 MAR. 31, 2015				AT DEC. 31, 2014
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash equivalents	$	48,800	$	48,800	$	39,700	$	39,700
Restricted cash equivalents	$	18,611	$	18,611	$	24,001	$	24,001
Long-term debt, excluding debt issuance costs	$	1,345,300	$	1,587,097	$	1,368,354	$	1,601,816



Cleco Power
	AT MAR. 31, 2015				AT DEC. 31, 2014
(THOUSANDS)	CARRYING VALUE		ESTIMATED FAIR VALUE		CARRYING VALUE		ESTIMATED FAIR VALUE
Financial instruments not marked-to-market:
Cash equivalents	$	47,300	$	47,300	$	34,700	$	34,700
Restricted cash equivalents	$	18,590	$	18,590	$	23,980	$	23,980
Long-term debt, excluding debt issuance costs	$	1,283,300	$	1,525,097	$	1,311,354	$	1,544,816

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 MAR. 31, 2015		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2014		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	$	67,411	$	—	$	67,411	$	—	$	63,701	$	—	$	63,701	$	—
FTRs	2,245		—		—		2,245		10,776		—		—		10,776
Total assets	$	69,656	$	—	$	67,411	$	2,245	$	74,477	$	—	$	63,701	$	10,776
Liability Description
Long-term debt	$	1,587,097	$	—	$	1,587,097	$	—	$	1,601,816	$	—	$	1,601,816	$	—
FTRs	432		—		—		432		827		—		—		827
Total liabilities	$	1,587,529	$	—	$	1,587,097	$	432	$	1,602,643	$	—	$	1,601,816	$	827



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT MAR. 31, 2015		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2014		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	$	65,890	$	—	$	65,890	$	—	$	58,680	$	—	$	58,680	$	—
FTRs	2,245		—		—		2,245		10,776		—		—		10,776
Total assets	$	68,135	$	—	$	65,890	$	2,245	$	69,456	$	—	$	58,680	$	10,776
Liability Description
Long-term debt	$	1,525,097	$	—	$	1,525,097	$	—	$	1,544,816	$	—	$	1,544,816	$	—
FTRs	432		—		—		432		827		—		—		827
Total liabilities	$	1,525,529	$	—	$	1,525,097	$	432	$	1,545,643	$	—	$	1,544,816	$	827

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



(THOUSANDS)
Beginning balance at Dec. 31, 2014	$	9,949
Unrealized losses*	(1,710		)
Net purchases and settlements	(6,426		)
Ending balance at Mar. 31, 2015	$	1,813
* Unrealized gains and losses are reported in Accumulated deferred fuel on the balance sheet.



(THOUSANDS)
Beginning balance at Dec. 31, 2013	$	8,638
Unrealized losses*	(1,060		)
Net purchases and settlements	(3,670		)
Ending balance at Mar. 31, 2014	$	3,908
* 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 March 31, 2015, and December 31, 2014:



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

FTRs at Mar. 31, 2015	$	2,245	$	432	Discounted cash flow	Estimated auction price	$	(2.36	)	$	4.11
FTRs at Dec. 31, 2014	$	10,776	$	827	Discounted cash flow	Estimated auction price	$	(4.12	)	$	7.76

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 discounting the price 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. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.

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 March 31, 2015, 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 $48.8 million, $3.2 million, and $15.4 million, respectively, at March 31, 2015. 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 $47.3 million, $3.2 million, and $15.4 million, respectively, at March 31, 2015. 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 United States Treasury 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 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 by which the debt was issued.

During the three months ended March 31, 2015, and the year ended December 31, 2014, 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.

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 March 31, 2015, and December 31, 2014:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT MAR. 31, 2015		AT DEC. 31, 2014
Commodity contracts
FTRs:
Current	Energy risk management assets	$	2,245	$	10,776
Current	Energy risk management liabilities	432		827
Commodity contracts, net		$	1,813	$	9,949

The following table presents the effect of derivatives not designated as hedging instruments on Cleco and Cleco Power’s Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014:



	FOR THE THREE MONTHS ENDED MAR. 31,
		2015			2014
(THOUSANDS)	DERIVATIVES LINE ITEM	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES			AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts
FTRs	Electric operations	$	15,508		$	3,965
FTRs	Power purchased for utility customers	(8,037		)	(1,115		)
Total		$	7,471		$	2,850

At March 31, 2015, and December 31, 2014, Cleco Power had no open positions hedged for natural gas.

Cleco Power 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. FTRs represent rights to congestion credits or charges along a path during a given time frame for a certain MW quantity. FTRs are not designated as hedging instruments for accounting purposes. At March 31, 2015, and December 31, 2014, Cleco Power had 3.3 million MWh and 8.9 million MWh, respectively, of FTRs hedged.