Note 5 — Fair Value Accounting

The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2018, and December 31, 2017, for cash equivalents, restricted cash equivalents, accounts receivable, other accounts receivable, short-term debt, and accounts payable approximate fair value because of their short-term nature. Cleco applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including business combinations, as well as impairment related to goodwill and other long-lived assets.

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 JUNE 30, 2018				AT DEC. 31, 2017
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	2,903,190	$	2,865,196	$	2,866,955	$	2,921,325

* The carrying value of long-term debt does not include deferred issuance costs of $11.1 million and $11.6 million at June 30, 2018, and December 31, 2017, respectively.



Cleco Power
	AT JUNE 30, 2018				AT DEC. 31, 2017
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,410,267	$	1,518,752	$	1,369,810	$	1,535,234

* The carrying value of long-term debt does not include deferred issuance costs of $8.8 million and $9.1 million at June 30, 2018, and December 31, 2017, respectively.

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
(THOUSANDS)	AT JUNE 30, 2018		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2017		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	$	141,290	$	—	$	141,290	$	—	$	144,302	$	—	$	144,302	$	—
FTRs	26,077		—		—		26,077		7,396		—		—		7,396
Total assets	$	167,367	$	—	$	141,290	$	26,077	$	151,698	$	—	$	144,302	$	7,396
Liability description
FTRs	$	944	$	—	$	—	$	944	$	352	$	—	$	—	$	352
Total liabilities	$	944	$	—	$	—	$	944	$	352	$	—	$	—	$	352



Cleco Power
	CLECO POWER FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT JUNE 30, 2018		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2017		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	$	96,568	$	—	$	96,568	$	—	$	95,681	$	—	$	95,681	$	—
FTRs	26,077		—		—		26,077		7,396		—		—		7,396
Total assets	$	122,645	$	—	$	96,568	$	26,077	$	103,077	$	—	$	95,681	$	7,396
Liability description
FTRs	$	944	$	—	$	—	$	944	$	352	$	—	$	—	$	352
Total liabilities	$	944	$	—	$	—	$	944	$	352	$	—	$	—	$	352

The following table summarizes 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:



	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2018			2017			2018			2017
Beginning balance	$	4,283		$	4,418		$	7,044		$	7,683
Unrealized gains (losses)*	2,420			(2,460		)	2,420			(2,460		)
Purchases	25,112			22,843			25,483			23,118
Settlements	(6,682		)	(6,858		)	(9,814		)	(10,398		)
Ending balance	$	25,133		$	17,943		$	25,133		$	17,943
* Unrealized gains and losses are reported through Accumulated deferred fuel on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets.

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions as of June 30, 2018, and December 31, 2017:



	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW			HIGH
FTRs at June 30, 2018	$	26,077	$	944	RTO auction pricing	FTR price - per MWh	$	(3.84	)	$	7.42
FTRs at Dec. 31, 2017	$	7,396	$	352	RTO auction pricing	FTR price - per MWh	$	(2.95	)	$	6.33

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. Cleco’s 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. 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. Cleco’s Level 3 assets and liabilities are valued using RTO auction prices. Cleco has consistently applied the Level 2 and Level 3 fair value techniques from fiscal period to fiscal period. 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 June 30, 2018, 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 $112.5 million, $9.9 million, and $18.9 million, respectively, at June 30, 2018, and $111.1 million, $13.1 million, and $20.1 million, respectively, at December 31, 2017. 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 $67.8 million, $9.9 million, and $18.9 million, respectively, at June 30, 2018, and $62.5 million, $13.1 million, and $20.1 million, respectively, at December 31, 2017. 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 is 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 six months ended June 30, 2018, and the year ended December 31, 2017, 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 June 30, 2018, and December 31, 2017:



	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT JUNE 30, 2018		AT DEC. 31, 2017
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	26,077	$	7,396
Current	Other current liabilities	944		352
Commodity-related contracts, net		$	25,133	$	7,044

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 six months ended June 30, 2018, and 2017:



	AMOUNT OF GAIN(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	DERIVATIVES LINE ITEM	2018			2017			2018			2017
Commodity contracts
FTRs⁽¹⁾	Electric operations	$	17,841		$	11,947		$	35,991		$	21,110
FTRs⁽¹⁾	Power purchased for utility customers	(7,027		)	(6,327		)	(12,693		)	(10,992		)
Total		$	10,814		$	5,620		$	23,298		$	10,118

⁽¹⁾ For the three and six months ended June 30, 2018, unrealized gains associated with FTRs of $2.4 million were reported through Accumulated deferred fuel on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2017, unrealized losses associated with FTRs of $2.5 million were reported through Accumulated deferred fuel on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets.

The total volume of FTRs that Cleco Power had outstanding at June 30, 2018, and December 31, 2017, was 19.3 million MWh and 9.0 million MWh, respectively.