

Note 5 — 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 of regulated operations.

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



Cleco Power
	AT DEC. 31,						REMAINING RECOVERY PERIOD (YRS.)
(THOUSANDS)	2018			2017			REMAINING RECOVERY PERIOD (YRS.)
Regulatory (liabilities) assets - deferred taxes, net
Total federal regulatory liability — income taxes	$	(55,922	)	$	(64,205	)
Total state regulatory asset — income taxes	141,136			142,788
TCJA	(374,961		)	(348,590		)
AFUDC	134,369			129,953
Total investment tax credit	(159		)	(372		)
Total regulatory (liabilities) assets — deferred taxes, net	$	(155,537	)	$	(140,426	)	*
Regulatory liabilities - other	(4,992		)	—			*
Regulatory Assets
Mining costs	1,274			3,823			0.5
Interest costs	4,208			4,499			*
AROs ⁽¹⁾	3,099			2,762			*
Postretirement costs ⁽¹⁾	140,245			142,764			*
Tree trimming costs	9,069			7,193			*
Training costs	6,396			6,552			41
Surcredits, net ⁽²⁾	289			2,173			*
AMI deferred revenue requirement	3,681			4,227			7
Emergency declarations	2,980			4,131			1.5
Production operations and maintenance expenses	12,245			8,625			*
AFUDC equity gross-up ⁽²⁾	71,952			71,205			*
Acadia Unit 1 acquisition costs	2,230			2,336			21
Financing costs	7,923			8,293			*
MISO integration costs	—			468			—
Coughlin transaction costs	938			968			30.5
Corporate franchise tax, net	1,416			153			*
MATS Costs	—			2,564			—
Non-service cost of postretirement benefits	4,629			—			*
Energy Efficiency	2,585			—			*
Other	13			484			*
Total regulatory assets	275,172			273,220
Accumulated deferred fuel	20,112			13,980			*
Total regulatory assets, net	$	134,755		$	146,774
⁽¹⁾Represents regulatory assets in which cash has not yet been expended and the assets are offset by liabilities that do not incur a carrying cost. ⁽²⁾Represents regulatory assets for past expenditures that were not earning a return on investment at December 31, 2018, and 2017, respectively. All other assets are earning a return on investment. * For information related to the remaining recovery periods, refer to the following disclosures for each specific regulatory asset.

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



Cleco
	AT DEC. 31,
(THOUSANDS)	2018		2017
Total Cleco Power regulatory assets, net	$	134,755	$	146,774
Cleco 2016 Merger adjustments ⁽¹⁾
Fair value of long-term debt	138,701		147,145
Postretirement costs	19,387		21,375
Financing costs	8,279		8,623
Debt issuance costs	6,252		6,665
Total Cleco regulatory assets, net	$	307,374	$	330,582

⁽¹⁾Cleco regulatory assets include acquisition accounting adjustments as a result of the 2016 Merger.

Income Taxes

The regulatory assets and liabilities recorded for deferred income taxes represent the effect of tax benefits or detriments that must be flowed through to customers as they are received or paid. The amounts deferred are attributable to differences between book and tax recovery periods. On December 22, 2017, the President signed the TCJA. Changes in the IRC, as amended, from the TCJA, had a material impact on the Registrants’ financial statements in 2017. Tax effects of changes in tax laws must be recognized in the period in which the law is enacted. Also, deferred tax assets and liabilities must be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. At December 31, 2017, Cleco and Cleco Power made an estimate for the remeasurement of ADIT based upon the new tax rate, which resulted in a provisional regulatory liability of $348.6 million. During the fourth quarter of 2018, Cleco Power recorded the final remeasurements, which resulted in an additional regulatory liability of $26.4 million. At December 31, 2018, the final regulatory liability for the remeasurement of accumulated deferred income taxes was $375.0 million. For more information on the TCJA, see Note 11 — “Income Taxes.”

Regulatory Liabilities - Other

On July 1, 2018, Cleco Power began collecting the revenue requirement related to the St. Mary Clean Energy Center project based on an expected commercial operation date in the third quarter of 2018. The project is now expected to be commercially operational in the second quarter of 2019. Cleco Power recorded a regulatory liability for the over collections and will continue to increase the regulatory liability until the project is in service. Cleco Power expects to return the total over collection as part of the July 1, 2019, FRP rate adjustment.

Mining Costs

Cleco Power operates a generating unit jointly owned with SWEPCO that uses lignite as its primary fuel source.

Cleco Power, along with SWEPCO, maintains a lignite mining agreement with DHLC, the operator of the Dolet Hills Mine. As ordered by the LPSC, Cleco Power’s retail customers received fuel cost savings through the year 2011, while actual mining costs above a certain percentage of the benchmark price were deferred. These deferred costs could be recovered from retail customers through the FAC only when the actual mining costs were below a certain percentage of the benchmark price.

In 2006, Cleco Power recognized that there was a possibility it may not recover all or part of the lignite mining costs it had deferred and sought relief from the LPSC. In December 2007, the LPSC approved a settlement agreement between Cleco Power, SWEPCO, and the LPSC Staff authorizing Cleco Power to recover the existing deferred mining cost balance, including interest, over 11.5 years. In connection with its 2009 approval of the Oxbow Lignite Mine acquisition, the LPSC agreed to discontinue benchmarking and the corresponding potential to defer future lignite mining costs while preserving the previously authorized recovery of the legacy deferred fuel balance.

Interest Costs

Cleco Power’s deferred interest costs include additional deferred capital construction financing costs authorized by the LPSC. These costs are being amortized over the estimated lives of the respective assets.

AROs

Cleco Power recorded an ARO liability for the retirement of certain ash disposal facilities. The ARO regulatory asset represents the accretion of the ARO liability and the depreciation of the related assets. For more information on the accounting treatment of Cleco Power’s AROs, see Note 2 — “Summary of Significant Accounting Policies — AROs.”

Postretirement Costs

Cleco Power recognizes the funded status of its postretirement benefit plans as a net liability or asset. The net liability or asset is defined as the difference between the benefit obligation and the fair market value of plan assets. For defined benefit pension plans, the benefit obligation is the projected benefit obligation. Historically, the LPSC has allowed Cleco Power to recover pension plan expense. Cleco Power, therefore, recognizes a regulatory asset based on its determination that these costs can be collected from customers. These costs are amortized to pension expense over the average service life of the remaining plan participants (approximately nine years as of December 31, 2018, for Cleco’s plan) when it exceeds certain thresholds. The amount and timing of the recovery will be based on the changing funded status of the pension plan in future periods. For more information on Cleco’s pension plan and adoption of these authoritative guidelines, see Note 10 — “Pension Plan and Employee Benefits.”

Tree Trimming Costs

In April 2013, the LPSC approved Cleco Power’s request to expend and defer up to $8.0 million in tree management costs. Cleco Power requested authorization to defer actual expenditures as a regulatory asset through the completion date of the tree extraction effort. In February 2015, Cleco Power completed the tree extraction and began amortizing the additional charges over a 3.5-year period. As of April 30, 2018, these costs were fully amortized.

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 previous dockets. In October 2016, the LPSC approved Cleco Power to defer an additional amount up to $10.9 million. Of the remaining costs, $4.0 million will be expensed to Operations and maintenance on Cleco Power’s Consolidated Statements of Income, and $5.9 million will be deferred and recovered in current base rates through June 2020.

Training Costs

In 2008, the LPSC approved Cleco Power’s request to establish a regulatory asset for training costs associated with existing processes and technology for new employees at Madison Unit 3. Recovery of these expenditures was approved by the LPSC in 2009. In 2010, Cleco Power began amortizing the regulatory asset over a 50-year period.

Surcredits, Net

Cleco Power has recorded surcredits as the result of a settlement with the LPSC that addressed, among other things, the recovery of the storm damages related to hurricanes and uncertain tax positions. In the settlement, Cleco Power was required to implement surcredits to provide ratepayers with the economic benefit of the carrying charges of certain accumulated deferred income tax liabilities at a rate of return which was set by the LPSC. The settlement, through a true-up mechanism, allows the surcredits to be adjusted to reflect the actual tax deductions allowed by the IRS.

Cleco Power recorded a true-up to the surcredits to reflect the actual tax deductions allowed by the IRS for storm damages and uncertain tax positions. As a result of the true-ups, Cleco Power recorded a regulatory asset that represents excess surcredits refunded to customers that were collected from ratepayers and amortized over a four-year period, through June 2018. Cleco Power expects to collect the balance as part of the July 1, 2019, FRP rate adjustment.

AMI Deferred Revenue Requirement

In February 2011, the LPSC approved Cleco Power’s stipulated settlement in Docket No. U-31393 allowing Cleco Power to defer, as a regulatory asset, the estimated revenue requirements for the AMI project. The amount of the regulatory asset, including carrying charges, is capped by the LPSC at $20.0 million. In June 2014, the LPSC approved Cleco Power’s FRP extension and the AMI regulatory asset and project capital costs were included in rate base. Cleco Power is recovering the AMI deferred revenue requirement over 11 years beginning July 2014.

Emergency Declarations

In August 2016, the LPSC issued emergency declaration executive orders following flooding events in south Louisiana which prohibited public utilities from disconnecting or charging late fees to customers for non-payment in affected parishes. In January 2017, the LPSC issued an order terminating those executive orders effective March 1, 2017. The January 2017 order also provided that public utilities were entitled to formally petition the LPSC to recover lost revenues as a result of the executive orders issued in August 2016. Beginning in July 2017, Cleco Power’s lost revenues are being recovered and amortized over a three-year period.

Production Operations and Maintenance Expenses

Annually, Cleco Power is allowed to defer, as a regulatory asset, production operations and maintenance expenses, net of fuel and payroll, above the retail jurisdictional portion of $45.0 million, adjusted annually for a growth factor (deferral threshold). The amount of the regulatory asset is capped at $23.0 million. The LPSC allows Cleco Power to recover the amount deferred in any calendar year over the following three year regulatory period, beginning on July 1, when the annual rates are set. In December 2018 and 2017, Cleco Power deferred $8.0 million and $0.4 million, respectively, as a regulatory asset.

AFUDC Equity Gross-Up

Cleco Power capitalizes equity AFUDC as a cost component of construction projects. Cleco Power has recorded a regulatory asset to recover the tax gross-up related to the equity component of AFUDC. These costs are being amortized over the estimated lives of the respective assets constructed.

Acadia Unit 1 Acquisition Costs

In 2009, the LPSC approved Cleco Power’s request to establish a regulatory asset for costs incurred as a result of the acquisition by Cleco Power of Acadia Unit 1 and half of Acadia Power Station’s related common facilities. The Acadia Unit 1 acquisition costs are being recovered over a 30-year period beginning February 2010.

Financing Costs

In 2011, Cleco Power entered into and settled two treasury rate locks. Of the $26.8 million in settlements, $7.4 million was deferred as a regulatory asset relating to ineffectiveness of the hedge relationships. Also in 2011, Cleco Power entered into a forward starting swap contract. These derivatives were entered into in order to mitigate the interest rate exposure on coupon payments related to forecasted debt issuances. In May 2013, the forward starting interest rate swap was settled at a loss of $3.3 million. Cleco Power deferred $2.9 million of the losses as a regulatory asset, which is being amortized over the terms of the related debt issuances.

MISO Integration Costs

In June 2014, the LPSC approved Cleco Power’s request to recover the non-capital integration costs associated with Cleco Power joining MISO. In July 2014, Cleco Power began recovering these MISO integration costs over a four-year period. As of June 30, 2018, these costs were fully recovered.

Coughlin Transaction Costs

In January 2014, the LPSC authorized Cleco Power to create a regulatory asset for the transaction costs related to the transfer of Coughlin from Evangeline to Cleco Power. The Coughlin transaction costs are being recovered over a 35-year period beginning July 2014.

Corporate Franchise Tax, Net

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 will be recovered over 12 months beginning July 1 of the following year.

MATS Costs

In February 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 MATS equipment placed in service in the years prior to the LPSC review and approval. As of June 30, 2018, these costs were fully amortized.

Non-service Cost of Postretirement Benefits

On January 1, 2018, FASB’s amended guidance related to defined benefit pension and other postretirement plans became effective. The amendment allows only the service cost component of net benefit cost to be eligible for capitalization within property, plant, and equipment. Beginning January 1, 2018, the non-service cost previously eligible for capitalization into property, plant, and equipment are being deferred to a regulatory asset and will be amortized over the estimated lives of the respective assets. For more information on FASB’s guidance related to defined benefit pension and other postretirement plans, see Note 2 — “Summary of Significant Accounting Policies — Recent Authoritative Guidance.”

Energy Efficiency

In 2013, the LPSC issued a General Order adopting rules promoting energy efficiency programs. Cleco Power participated in the Phase I program beginning in November 2014. Pursuant to the rules of the Energy Efficiency General Order, utility companies are allowed to recover from customers the accumulated decrease in revenues associated with the energy efficiency programs. In December 2018, Cleco Power filed a letter of intent with the LPSC to recover the accumulated decrease in revenues, also known as the Lost Contribution to Fixed Cost (LCFC). Beginning March 1, 2019, this amount will be recovered over approximately four years, subject to LPSC review and approval.

Other

In 2015, the LPSC approved the recovery of costs incurred as a result of Cleco Power’s 2009 through 2013 fuel audit. The 2009 through 2013 fuel audit costs and the IRP costs are being recovered over a three-year period beginning July 2016.

In March 2016, flooding occurred at the Toledo Bend Dam where Cleco Power receives capacity from the hydroelectric generators through a long-term contract. As part of the contract, Cleco Power is responsible for its allocated portion of the insurance deductible for flood damages. In July 2017, Cleco Power began amortizing the retail portion of $0.9 million over a 12-month period. As of June 30, 2018, these costs were fully amortized.

Accumulated Deferred Fuel

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 2018, approximately 76% of Cleco Power’s total fuel cost was regulated by the LPSC.

Accumulated deferred fuel increased $6.1 million from December 31, 2017. This increase was primarily due to $22.4 million for fuel surcharges, partially offset by $13.3 million for the mark-to-market value on FTRs and $4.3 million due to the timing of collections.

Cleco Holdings’ 2016 Merger Adjustments

As a result of the 2016 Merger, Cleco implemented acquisition accounting, which eliminated AOCI at the Cleco consolidated level on the date of the 2016 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 2016 Merger, a regulatory asset was recorded for debt issuance costs that were eliminated at Cleco and a regulatory asset was recorded for the difference between the carrying value and the fair value of long-term debt. These regulatory assets are being amortized over the terms of the related debt issuances, unless the debt is redeemed prior to maturity, at which time any unamortized related regulatory asset will be derecognized.