

Note 17 — Intangible Assets and Goodwill

During 2008, Cleco Katrina/Rita acquired a $177.5 million intangible asset which includes $176.0 million for the right to bill and collect storm recovery charges from customers of Cleco Power and $1.5 million of financing costs. This intangible asset is expected to have a life of 12 years, but may have a life of up to 15 years depending on the time period required to collect the required amount from Cleco Power’s customers. The intangible asset’s expected amortization expense is based on the estimated collections from Cleco Power’s customers. At the end of its life, the asset will have no residual value. At the date of the Merger, the gross balance of the Cleco Katrina/Rita intangible asset for Cleco was adjusted to be net of accumulated amortization, as no accumulated amortization existed on the date of the Merger. During the years ended December 31, 2017, 2016, and 2015, Cleco Katrina/Rita recognized amortization expense of $16.8 million, $16.5 million, and $15.7 million, respectively, based on actual collections.

As a result of the Merger, fair value adjustments were recorded on Cleco’s Consolidated Balance Sheet for the valuation of the Cleco trade name and long-term wholesale power supply agreements. At the end of their life, these intangible assets will have no residual value. The trade name intangible asset is being amortized over its estimated economic useful life of 20 years. During the successor year ended December 31, 2017, Cleco recognized amortization expense of $0.3 million on the trade name intangible asset. For the successor period April 13, 2016, through December 31, 2016, Cleco recognized amortization expense of $0.2 million on the trade name intangible asset.

The intangible assets related to the power supply agreements are being amortized over the remaining life of each applicable contract ranging between 5 years and 17 years. During the successor year ended December 31, 2017, Cleco recognized a reduction of revenue of $10.8 million on the intangible assets for the power supply agreements. For the successor period April 13, 2016, through December 31, 2016, Cleco recognized a reduction of revenue of $7.5 million on the intangible assets for the power supply agreements. There were no impairments recorded for 2017 and 2016.

The following tables summarize the balances for intangible assets subject to amortization for Cleco and Cleco Power as of December 31, 2017, and 2016:



Cleco
	AT DEC. 31,
(THOUSANDS)	2017			2016
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	70,594		$	70,594
Power supply agreements	85,104			86,726
Trade name	5,100			5,100
Gross carrying amount	160,798			162,420
Accumulated amortization	(45,948		)	(19,786		)
Net intangible assets subject to amortization	$	114,850		$	142,634



Cleco Power
	AT DEC. 31,
(THOUSANDS)	2017			2016
Cleco Katrina/Rita right to bill and collect storm recovery charges	$	177,537		$	177,537
Accumulated amortization	(135,836		)	(119,064		)
Net intangible assets subject to amortization	$	41,701		$	58,473

The following tables summarize the amortization expense related to intangible assets expected to be recognized in Cleco and Cleco Power’s Statements of Income:



Cleco
EXPECTED AMORTIZATION EXPENSE	(THOUSANDS)
For the year ending Dec. 31,
2018	$	29,247
2019	$	32,324
2020	$	9,935
2021	$	9,935
2022	$	9,935
Thereafter	$	23,474



Cleco Power
EXPECTED AMORTIZATION EXPENSE	(THOUSANDS)
For the year ending Dec. 31,
2018	$	19,312
2019	$	22,389

On April 13, 2016, in connection with the completion of the Merger, Cleco recognized goodwill of $1.49 billion. Management assigned goodwill to Cleco’s reportable segment, Cleco Power. Goodwill is required to be tested for impairment at the reporting segment level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying value. Application of the goodwill impairment test requires significant judgments, including the identification of reporting segments, assignments of assets and liabilities to reporting segments, assignment of goodwill to reporting segments, and the determination of the fair value of the reporting segments. Management has determined that Cleco Power is Cleco’s only reporting segment.

Cleco conducted its 2017 annual impairment test using an August 1, 2017, measurement date. The fair value of Cleco’s reporting segment, Cleco Power, was estimated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. Significant assumptions used in these fair value estimates include estimation of future cash flows, long-term rate of growth, the selection of comparable companies, and weighted-average cost of capital (WACC) or discount rate. Changes in these assumptions could materially affect the determination of fair value and goodwill impairment at Cleco Power. Based on the tests performed, management has determined that there was no impairment of Cleco Power’s goodwill as of August 1, 2017.

Management estimated the fair value of Cleco Power’s equity to be $3.34 billion at the August 1, 2017, measurement date. The carrying value of Cleco Power’s equity was approximately $3.25 billion with the excess of the fair value over the carrying value representing 3% or $89.5 million. There were no accumulated impairment charges.

The fair value estimate is particularly sensitive to WACC. WACC takes into account both the after-tax cost of debt and the cost of equity. WACC used for calculating the fair values as of August 1, 2017, was 5.2%. A downgrade in Cleco Power’s debt ratings could increase Cleco Power’s after-tax cost of debt. In addition, an increase in interest rates or return required by investors in equity markets could increase Cleco Power’s cost of equity. Any increase in the cost of equity or the cost of debt could materially impact Cleco Power’s fair value estimate. A WACC of 5.1% or 5.3% would have resulted in fair value calculations of $3.43 billion and $3.25 billion, respectively.

The fair value estimate is also sensitive to long-term cash flow growth rates applicable to periods beyond management’s five-year business plan. Management assumed a long-term cash flow growth rate of 2.5% based on historical and projected consumer price inflation, economic indicators, and projected industry growth. Any change in the expected terminal cash flow growth rate could materially impact Cleco Power’s fair value estimate. A terminal cash flow growth rate of 2.4% or 2.6% would have resulted in a fair value calculation of $3.25 billion and $3.43 billion, respectively. There were no impairments recorded for goodwill for 2017 and 2016.

For more information about the Merger related adjustments, see Note 3 — “Business Combinations.”