Note 4 — Regulatory Assets and Liabilities

Cleco capitalizes or defers certain costs for recovery from customers and recognizes a liability for amounts expected to be returned to customers based on regulatory approval and management’s ongoing assessment that it is probable these items will be recovered or refunded through the ratemaking process.

Under the current regulatory environment, Cleco believes these regulatory assets will be fully recoverable; however, if in the future, as a result of regulatory changes or competition, Cleco’s ability to recover these regulatory assets would no longer be probable, then to the extent that such regulatory assets were determined not to be recoverable, Cleco would be required to write-down such assets. In addition, potential deregulation of the industry or possible future changes in the method of rate regulation of Cleco could require discontinuance of the application of these authoritative guidelines.

The following table summarizes Cleco Power’s regulatory assets and liabilities:



(THOUSANDS)	AT JUNE 30, 2016		AT DEC. 31, 2015
Regulatory assets – deferred taxes, net	$	230,523	$	236,941
Mining costs	7,647		8,921
Interest costs	5,041		5,221
AROs	1,789		2,462
Postretirement costs	145,667		150,274
Tree trimming costs	4,960		6,318
Training costs	6,785		6,863
Surcredits, net	7,878		9,661
Amended lignite mining agreement contingency	—		3,781
AMI deferred revenue requirement	5,045		5,318
Production operations and maintenance expenses	9,741		12,436
AFUDC equity gross-up	70,690		71,444
Acadia Unit 1 acquisition costs	2,495		2,548
Financing costs	8,847		9,032
Biomass costs	34		50
MISO integration costs	1,872		2,340
Coughlin transaction costs	1,014		1,030
Corporate franchise tax	2,616		373
Acadia FRP true-up	—		377
MATS costs	5,694		—
Other	944		357
Total regulatory assets	288,759		298,806
PPA true-up	—		(312		)
Fuel and purchased power	19,543		12,910
Total regulatory assets, net	$	538,825	$	548,345

The following table summarizes Cleco’s net regulatory assets and liabilities:



	SUCCESSOR ⁽¹⁾		PREDECESSOR
(THOUSANDS)	AT JUNE 30, 2016		AT DEC. 31, 2015
Total Cleco Power regulatory assets, net	$	538,825	$	548,345
Cleco Holdings’ Merger adjustments
Fair value of long-term debt	185,113		—
Postretirement costs	20,513		—
Financing costs	9,138		—
Debt issuance costs	8,795		—
Total Cleco regulatory assets, net	$	762,384	$	548,345

⁽¹⁾Cleco Holdings’ regulatory assets include acquisition accounting adjustments as a result of the Merger.

Amended Lignite Mining Agreement Contingency

The provisions of the Amended Lignite Mining Agreement between Cleco Power, SWEPCO and DHLC include a requirement that if DHLC is unable to pay for loans and lease payments when due, Cleco Power and SWEPCO each will pay 50% of the amounts due. Any payments under this provision will be considered a prepayment of lignite to be delivered in the future and will be credited to future invoices from DHLC. Previously, Cleco Power recorded a liability of $3.8 million related to the amended agreement with an offsetting regulatory asset due to Cleco Power’s ability to recover prudent fuel costs from customers through the FAC. Management determined that it does not expect to be required to pay DHLC under this guarantee. As a result of this determination, the liability and the offsetting regulatory asset were remeasured to zero.

Corporate Franchise Tax

As part of the FRP extension approved by the LPSC in June 2014, Cleco Power was authorized to recover through a rider the retail portion of state corporate franchise taxes paid. The retail portion of state corporate franchise taxes paid each year is recovered over a 12-month period beginning on July 1. Cleco Power’s retail portion of state corporate franchise taxes paid in April 2016 was $2.5 million. Additionally, Cleco Power had a regulatory asset of $0.3 million for amounts undercollected. The undercollection at June 30, 2016, and the 2016 retail portion of state corporate franchise taxes are being recovered from customers beginning July 1, 2016. These amounts were partially offset by $0.6 million of amortization for the 2015 corporate franchise taxes regulatory asset.

MATS Costs

On February 1, 2016, the LPSC approved Cleco Power’s request to recover the revenue requirements associated with the installation of MATS equipment. The MATS rule, finalized in February 2012, required affected EGUs to meet specific emission standards and work practice standards to address hazardous air pollutants by April 16, 2015. The LPSC approval also allowed Cleco Power to record a regulatory asset of $7.1 million representing the unrecovered revenue requirements of the MATS equipment placed into service in the years prior to the LPSC review and approval. This amount is being amortized over three years beginning on January 1, 2016.

Other

Cleco Power’s other regulatory assets increased during the six months ended June 30, 2016 as a result of the LPSC’s approval for Cleco Power to recover costs associated with its IRP report filing and its most recently completed fuel audit. Cleco Power incurred $0.6 million of costs related to the IRP report. In April 2016, the LPSC approved Cleco Power’s IRP report filed under the IRP Order No. R-30021, which fostered a collaborative working process for the development of Cleco Power’s long-term resource plan covering the planning period of 2015 through 2034. Cleco Power incurred $0.1 million of costs during the audit of fuel and purchased power expenses for the years 2009 through 2013. In October 2015, the LPSC approved the audit report. Cleco Power is recovering both of these regulatory assets over a three-year period beginning on July 1, 2016.

Fuel and Purchased Power

The cost of fuel used for electric generation and power purchased for utility customers are recovered through the LPSC-established FAC or related wholesale contract provisions, which enable Cleco Power to pass on to its customers substantially all such charges. For the three and six months ended June 30, 2016, approximately 77% and 76%, respectively, of Cleco Power’s total fuel cost was regulated by the LPSC.

Fuel and purchased power increased $6.6 million during the six months ended June 30, 2016. Of this amount, $9.1 million was due to higher fuel costs and power purchases, the timing of collections, and customer usage, partially offset by a $2.5 million decrease in the mark-to-market value on FTRs.

Cleco Holdings’ Merger Adjustments

As a result of the Merger, Cleco implemented acquisition accounting, which eliminated AOCI at the Cleco Holdings consolidated level. Cleco will continue to recover expenses related to certain postretirement costs; therefore, Cleco recognized a regulatory asset based on its determination that these costs can continue to be collected from customers. These costs will be amortized to Other operations expense over the average remaining service period of participating employees. Cleco will also continue to recover financing costs associated with the settlement of two treasury rate locks and a forward starting swap contract that were previously recognized in AOCI. Additionally, as a result of the Merger, a regulatory asset was recorded for debt issuance costs that were eliminated at Cleco Holdings and a regulatory asset was recorded for the difference between the carrying value and the fair value of long-term debt. These regulatory assets will be amortized over the terms of the related debt issuances.