Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Summary of Significant Accounting Policies

Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements of Cleco include the accounts of Cleco Holdings and its majority-owned subsidiaries after elimination of intercompany accounts and transactions.

Cleco’s condensed consolidated financial statements include the financial results of Cleco Cajun from the closing of the Cleco Cajun Transaction on February 4, 2019, through June 30, 2019. For more information about the Cleco Cajun Transaction, see Note 2 — “Business Combination.”

Basis of Presentation

The condensed consolidated financial statements of Cleco and Cleco Power have been prepared in accordance with GAAP for interim financial information and with the instructions to the Form 10-Q and Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements. Because the interim condensed consolidated financial statements and the accompanying notes do not include all of the information and notes required by GAAP for annual financial statements, the condensed consolidated financial statements and other information included in this quarterly report should be read in conjunction with the consolidated financial statements and accompanying notes in the Registrants’ Combined Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to fairly state the financial position and results of operations of Cleco and Cleco Power. Amounts reported in Cleco and Cleco Power’s interim financial statements are not necessarily indicative of amounts expected for the annual periods due to the effects of seasonal temperature variations on energy consumption, regulatory rulings, the timing of maintenance on electric generating units, changes in mark-to-market valuations, changing commodity prices, discrete income tax items, and other factors.

In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. For information on recent authoritative guidance and its effect on financial results, see Note 3 — “Recent Authoritative Guidance.”

Restricted Cash and Cash Equivalents

Various agreements to which Cleco is subject contain covenants that restrict its use of cash. As certain provisions under these agreements are met, cash is transferred out of related escrow accounts and becomes available for its intended purposes and/or general corporate purposes.

Cleco and Cleco Power’s restricted cash and cash equivalents consisted of the following:



Cleco
(THOUSANDS)	AT JUNE 30, 2019		AT DEC. 31, 2018
Current
Cleco Katrina/Rita’s storm recovery bonds	$	8,715	$	9,505
Cleco Power’s charitable contributions	1,200		1,200
Cleco Power’s rate credit escrow	777		536
Total current	10,692		11,241
Non-current
Diversified Lands’ mitigation escrow	21		21
Cleco Cajun’s defense fund	715		—
Cleco Power’s future storm restoration costs	15,879		15,391
Cleco Power’s charitable contributions	2,296		2,753
Cleco Power’s rate credit escrow	—		505
Total non-current	18,911		18,670
Total restricted cash and cash equivalents	$	29,603	$	29,911



Cleco Power
(THOUSANDS)	AT JUNE 30, 2019		AT DEC. 31, 2018
Current
Cleco Katrina/Rita’s storm recovery bonds	$	8,715	$	9,505
Charitable contributions	1,200		1,200
Rate credit escrow	777		536
Total current	10,692		11,241
Non-current
Future storm restoration costs	15,879		15,391
Charitable contributions	2,296		2,753
Rate credit escrow	—		505
Total non-current	18,175		18,649
Total restricted cash and cash equivalents	$	28,867	$	29,890

Cleco Katrina/Rita has the right to bill and collect storm restoration costs from Cleco Power’s customers. As cash is collected, it is restricted for payment of administration fees, interest, and principal on storm recovery bonds. The change from December 31, 2018, to June 30, 2019, was due to Cleco Katrina/Rita using $10.4 million for scheduled storm recovery bond principal payments and $0.9 million for related interest payments, partially offset by collections of $10.5 million net of administration fees.

As part of the Cleco Cajun Transaction, Cleco acquired restricted cash of $0.7 million to be used by Cleco Cajun’s cooperative customers for defense funds in the event of potential takeovers. There is no further obligation of Cleco with respect to such expenses, including the replenishment of the fund.

Leases

Cleco accounts for leases in accordance with accounting guidance effective January 1, 2019. For more information on this guidance, see Note 3 — “Recent Authoritative Guidance.”

Cleco determines if a contract is a lease at its inception. If a contract is determined to be a lease, Cleco recognizes a ROU asset and lease liability at the commencement date based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit interest rate if readily determinable. Cleco’s incremental borrowing rate for a term similar to the duration of the lease based on information available at the commencement date is used if the implicit interest rate is not readily determinable.

Cleco recognizes ROU assets and lease liabilities for leasing arrangements with terms greater than one year. Except for the marine transportation asset class, Cleco accounts for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. Cleco’s marine transportation contracts, which include barges and towboats, contain non-lease components, such as maintenance and labor. Cleco allocates the consideration in these contracts between lease and non-lease components based on estimates of fair value from third parties that typically execute leases for this class of assets.

Expense for a lessee operating lease is recognized as a single lease cost on a straight-line basis over the lease term and reflected in the appropriate income statement line item based on the leased asset’s function. Income for a lessor operating lease is recognized as a single lease income item on a straight-line basis over the lease term and reflected in the appropriate income statement line item based on the lease asset’s function.

Fair Value Measurements and Disclosures

Various accounting pronouncements require certain assets and liabilities to be measured at their fair values. Some assets and liabilities are required to be measured at their fair value each reporting period, while others are required to be measured only one time, generally the date of acquisition or debt issuance. Cleco and Cleco Power disclose the fair value of certain assets and liabilities by one of three levels when required for recognition purposes. For more information about fair value levels, see Note 7 — “Fair Value Accounting.”

Derivatives and Other Risk Management Activity

Cleco’s Energy Market Risk Management Policy authorizes hedging of commodity price risk with physical or financially settled derivative instruments. Some of these contracts may qualify for the normal purchase, normal sale (NPNS) exception under derivative accounting guidance. Contracts that do not qualify for NPNS accounting treatment or are not elected for NPNS accounting treatment are marked-to-market and recorded on the balance sheet at their fair value.

Cleco Power and Cleco Cajun are awarded and/or purchase FTRs in auctions facilitated by MISO. The majority of these FTRs are purchased in annual auctions during the second quarter, but additional FTRs may be purchased in monthly auctions. FTRs represent economic hedges of future congestion charges that will be incurred in serving customer load. FTRs are derivatives not designated as hedging instruments for accounting purposes.

Cleco Power’s FTRs are marked-to-market with the resulting unrealized gains or losses deferred as a component of deferred fuel assets or liabilities in accordance with regulatory policy. At settlement, realized gains or losses are included in the FAC and reflected on customers’ bills as a component of the fuel charge.

Cleco Cajun’s FTRs are marked-to-market with the resulting unrealized gains and losses recorded on the income statement as a component of power purchase expense. At settlement, realized gains or losses are also recorded on the income statement as a component of power purchase expense.

Cleco Cajun entered into other commodity derivative contracts during the six months ended June 30, 2019, that did not qualify as hedging instruments for accounting purposes. When these contracts are marked-to-market, the resulting unrealized gain or loss is recorded on the income statement as a component of fuel expense. At settlement, realized gains or losses will also be recorded on the income statement as a component of fuel expense.

For more information on FTRs and other commodity derivatives, see Note 7 — “Fair Value Accounting — Commodity Contracts.”

Cleco may also enter into contracts to mitigate the volatility in interest rate risk. These contracts include, but are not limited to, interest rate swaps and treasury rate locks. For each reporting period presented, the Registrants did not enter into any contracts to mitigate the volatility in interest rate risk.