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 the authoritative guidance on regulated operations.

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



(THOUSANDS)	AT SEPT. 30, 2016		AT DEC. 31, 2015
Regulatory assets – deferred taxes, net	$	234,128	$	236,941
Mining costs	7,010		8,921
Interest costs	4,951		5,221
AROs	1,942		2,462
Postretirement costs	158,374		150,274
Tree trimming costs	4,893		6,318
Training costs	6,747		6,863
Surcredits, net	6,767		9,661
Amended lignite mining agreement contingency	—		3,781
AMI deferred revenue requirement	4,909		5,318
Production operations and maintenance expenses	8,245		12,436
AFUDC equity gross-up	70,464		71,444
Acadia Unit 1 acquisition costs	2,468		2,548
Financing costs	8,755		9,032
Biomass costs	26		50
MISO integration costs	1,637		2,340
Coughlin transaction costs	1,007		1,030
Corporate franchise tax	1,962		373
Acadia FRP true-up	—		377
MATS costs	4,982		—
Other	828		357
Total regulatory assets	295,967		298,806
Power purchase agreement true-up	—		(312		)
Fuel and purchased power	23,472		12,910
Total regulatory assets, net	$	553,567	$	548,345

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



	SUCCESSOR ⁽¹⁾		PREDECESSOR
(THOUSANDS)	AT SEPT. 30, 2016		AT DEC. 31, 2015
Total Cleco Power regulatory assets, net	$	553,567	$	548,345
Cleco Holdings’ Merger adjustments
Fair value of long-term debt	179,931		—
Postretirement costs	23,859		—
Financing costs	9,053		—
Debt issuance costs	8,577		—
Total Cleco regulatory assets, net	$	774,987	$	548,345

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

Tree Trimming Costs

As a result of increased vegetation growth and to remain in compliance with regulatory requirements, Cleco Power anticipates the need to spend $20.8 million through December 2020 in tree and vegetation management costs. In September 2016, Cleco Power requested approval from the LPSC to defer a portion of these costs utilizing the same accounting treatment of similar costs approved in Dockets U-30689 and U-32779. In October 2016, the LPSC approved additional deferment of up to $10.9 million. Of the remaining costs, $4.0 million will be expensed to Maintenance on Cleco Power’s Condensed Consolidated Statements of Income, and $5.9 million will be deferred and recovered in current base rates through June 2020.

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 during the second quarter of 2016.

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 required affected EGUs to meet specific emission standards and work practice standards to address hazardous air pollutants by April 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 in service in the years prior to the LPSC review and approval. This amount is being amortized over three years beginning on January 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 nine months ended September 30, 2016, approximately 74% and 75%, respectively, of Cleco Power’s total fuel cost was regulated by the LPSC.

Fuel and purchased power increased $10.6 million during the nine months ended September 30, 2016. Of this amount, $13.6 million was due to higher fuel costs and power purchases, the timing of collections, and customer usage, partially offset by a $3.0 million decrease in the mark-to-market value of FTRs.

Cleco Holdings’ Merger Adjustments

As a result of the Merger, Cleco implemented acquisition accounting, which eliminated AOCI at the Cleco Holdings consolidated level on the date of the Merger. 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.