Note 5 — Fair Value Accounting

The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at March 31, 2017, and December 31, 2016, 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 on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets:



Cleco
	AT MAR. 31, 2017				AT DEC. 31, 2016
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	2,756,889	$	2,766,056	$	2,768,149	$	2,754,518

* The carrying value of long-term debt does not include deferred issuance costs of $11.7 million at March 31, 2017, and $11.7 million at December 31, 2016.



Cleco Power
	AT MAR. 31, 2017				AT DEC. 31, 2016
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,253,410	$	1,418,027	$	1,262,373	$	1,418,693

* The carrying value of long-term debt does not include deferred issuance costs of $8.8 million at March 31, 2017, and $9.4 million at December 31, 2016.

Fair Value Measurements and Disclosures

Cleco classifies assets and liabilities that are measured 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 on a recurring basis:



Cleco
	CLECO CONSOLIDATED FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT MAR. 31, 2017		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2016		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	$	56,624	$	—	$	56,624	$	—	$	66,410	$	—	$	66,410	$	—
FTRs	4,957		—		—		4,957		7,884		—		—		7,884
Total assets	$	61,581	$	—	$	56,624	$	4,957	$	74,294	$	—	$	66,410	$	7,884
Liability description
FTRs	539		—		—		539		201		—		—		201
Total liabilities	$	539	$	—	$	—	$	539	$	201	$	—	$	—	$	201



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE USING:
(THOUSANDS)	AT MAR. 31, 2017		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2016		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	$	56,598	$	—	$	56,598	$	—	$	65,089	$	—	$	65,089	$	—
FTRs	4,957		—		—		4,957		7,884		—		—		7,884
Total assets	$	61,555	$	—	$	56,598	$	4,957	$	72,973	$	—	$	65,089	$	7,884
Liability description
FTRs	539		—		—		539		201		—		—		201
Total liabilities	$	539	$	—	$	—	$	539	$	201	$	—	$	—	$	201

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 for Cleco and Cleco Power:



Cleco
	SUCCESSOR			PREDECESSOR
(THOUSANDS)	FOR THE THREE MONTHS ENDED MAR. 31, 2017			FOR THE THREE MONTHS ENDED MAR. 31, 2016
Beginning balance	$	7,683		$	7,398
Unrealized gains (losses)*	2,104			(832		)
Purchases	275			46
Settlements	(5,644		)	(4,746		)
Ending balance	$	4,418		$	1,866
* Unrealized gains and losses are reported through Accumulated deferred fuel on Cleco’s Condensed Consolidated Balance Sheet.



Cleco Power
	FOR THE THREE MONTHS ENDED MAR. 31,
(THOUSANDS)	2017			2016
Beginning balance	$	7,683		$	7,398
Unrealized gains (losses)*	2,104			(832		)
Purchases	275			46
Settlements	(5,644		)	(4,746		)
Ending balance	$	4,418		$	1,866
* Unrealized gains and losses are reported through Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheet.

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions as of March 31, 2017, and December 31, 2016:



	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW			HIGH
FTRs at Mar. 31, 2017	$	4,957	$	539	RTO auction pricing	FTR price - per MWh	$	(3.25	)	$	6.63
FTRs at Dec. 31, 2016	$	7,884	$	201	RTO auction pricing	FTR price - per MWh	$	(3.61	)	$	6.04

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 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 occur in situations in which there is little, if any, market activity for the asset or liability at the measurement date and therefore RTO auction prices are used. 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, 2017, 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 Cleco’s Condensed Consolidated Balance Sheets in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $19.0 million, $14.1 million, and $23.5 million, respectively, at March 31, 2017, and $20.0 million, $23.1 million, and $23.3 million, respectively, at December 31, 2016. At Cleco Power, the institutional money market funds were reported on Cleco Power’s Condensed Consolidated Balance Sheets in cash and cash equivalents, current restricted cash and cash equivalents, and non-current restricted cash and cash equivalents of $19.0 million, $14.1 million, and $23.5 million, respectively, at March 31, 2017, and $18.7 million, $23.1 million, and $23.3 million, respectively, at December 31, 2016. 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 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 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 auction prices. Forward seasonal periods are not included in every monthly auction; therefore, the average of the most recent seasonal auction prices are used for monthly valuation. 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.

During the three months ended March 31, 2017, and the year ended December 31, 2016, Cleco did not experience any transfers between levels within the fair value hierarchy.

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, 2017, and December 31, 2016:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT MAR. 31, 2017		AT DEC. 31, 2016
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	4,957	$	7,884
Current	Energy risk management liabilities	539		201
Commodity-related contracts, net		$	4,418	$	7,683

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 months ended March 31, 2017, and 2016:



Cleco
	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		SUCCESSOR			PREDECESSOR
(THOUSANDS)	DERIVATIVES LINE ITEM	FOR THE THREE MONTHS ENDED MAR. 31, 2017			FOR THE THREE MONTHS ENDED MAR. 31, 2016
Commodity contracts
FTRs⁽¹⁾	Electric operations	$	9,163		$	8,520
FTRs⁽¹⁾	Power purchased for utility customers	(4,665		)	(5,723		)
Total		$	4,498		$	2,797

⁽¹⁾ For the period January 1, 2017 - March 31, 2017, unrealized gains associated with FTRs not recognized in income on derivatives of $2.1 million were reported through Accumulated deferred fuel on the balance sheet. For the period January 1, 2016 - March 31, 2016, unrealized losses associated with FTRs not recognized in income on derivatives of $0.8 million were reported through Accumulated deferred fuel on the balance sheet.



Cleco Power
	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		FOR THE THREE MONTHS ENDED MAR. 31,
(THOUSANDS)	DERIVATIVES LINE ITEM	2017			2016
Commodity contracts
FTRs⁽¹⁾	Electric operations	$	9,163		$	8,520
FTRs⁽¹⁾	Power purchased for utility customers	(4,665		)	(5,723		)
Total		$	4,498		$	2,797

⁽¹⁾ For the three months ended March 31, 2017, and 2016, unrealized gains (losses) associated with FTRs not recognized in income on derivatives of $2.1 million and ($0.8) million, respectively, were reported through Accumulated deferred fuel on the balance sheet.

At March 31, 2017, and December 31, 2016, Cleco Power had no open positions hedged for natural gas. In June 2015, the LPSC approved a long-term natural gas hedging pilot program that requires Cleco Power to establish a proposal for a program that will be designed to provide gas price stability for a minimum of five years. This proposal is currently scheduled to be submitted to the LPSC by June 30, 2017.

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. The total volume of FTRs that Cleco Power had outstanding at March 31, 2017, and December 31, 2016, was 3.6 million MWh and 9.0 million MWh, respectively.