Note 7 — Fair Value Accounting

The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2019, and December 31, 2018, 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 SEPT. 30, 2019				AT DEC. 31, 2018
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	3,191,452	$	3,407,190	$	2,889,631	$	2,859,924

* The carrying value of long-term debt does not include deferred issuance costs of $14.2 million at September 30, 2019, and $10.3 million at December 31, 2018.



Cleco Power
	AT SEPT. 30, 2019				AT DEC. 31, 2018
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,380,605	$	1,625,480	$	1,400,930	$	1,517,152

* The carrying value of long-term debt does not include deferred issuance costs of $7.6 million at September 30, 2019, and $8.3 million at December 31, 2018.

Long-term debt liability consists of a single class. In order to fund capital requirements, Cleco issues fixed and variable rate long-term debt with various tenors. The fair value of this class fluctuates as the market interest rates for fixed and variable rate debt with similar tenors and credit ratings change. The fair value of the debt could also change from period to period due to changes in the credit rating of the Cleco entity by which the debt was issued. The fair value of long-term debt is classified as Level 2 in the fair value hierarchy.

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
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT SEPT. 30, 2019		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2018		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	$	111,885	$	—	$	111,885	$	—	$	133,722	$	—	$	133,722	$	—
FTRs	9,926		—		—		9,926		23,355		—		—		23,355
Other commodity derivatives	745		—		745		—		—		—		—		—
Total assets	$	122,556	$	—	$	112,630	$	9,926	$	157,077	$	—	$	133,722	$	23,355
Liability description
FTRs	$	1,257	$	—	$	—	$	1,257	$	468	$	—	$	—	$	468
Other commodity derivatives	41		—		41		—		—		—		—		—
Total liabilities	$	1,298	$	—	$	41	$	1,257	$	468	$	—	$	—	$	468



Cleco Power
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT SEPT. 30, 2019		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2018		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	$	76,947	$	—	$	76,947	$	—	$	55,900	$	—	$	55,900	$	—
FTRs	8,601		—		—		8,601		23,355		—		—		23,355
Total assets	$	85,548	$	—	$	76,947	$	8,601	$	79,255	$	—	$	55,900	$	23,355
Liability description
FTRs	$	577	$	—	$	—	$	577	$	468	$	—	$	—	$	468
Total liabilities	$	577	$	—	$	—	$	577	$	468	$	—	$	—	$	468

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
	FOR THE THREE MONTHS ENDED SEPT. 30,						FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	2019			2018			2019			2018
Beginning balance	$	14,665		$	25,133		$	22,887		$	7,044
Unrealized (losses) gains*	(1,234		)	4,520			(4,488		)	6,153
Purchases	557			1,251			26,401			26,734
Settlements	(5,319		)	(8,644		)	(36,131		)	(17,671		)
Ending balance	$	8,669		$	22,260		$	8,669		$	22,260
* Cleco Power’s unrealized (losses) gains are reported through Accumulated deferred fuel on Cleco’s Condensed Consolidated Balance Sheet. Cleco Cajun’s unrealized (losses) gains are reported through Purchased power on Cleco’s Condensed Consolidated Income Statement.



Cleco Power
	FOR THE THREE MONTHS ENDED SEPT. 30,						FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	2019			2018			2019			2018
Beginning balance	$	13,910		$	25,133		$	22,887		$	7,044
Unrealized (losses) gains*	(1,700		)	4,520			(3,644		)	6,153
Purchases	1,133			1,251			20,961			26,734
Settlements	(5,319		)	(8,644		)	(32,180		)	(17,671		)
Ending balance	$	8,024		$	22,260		$	8,024		$	22,260
* Unrealized (losses) gains are reported through Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheet.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions as of September 30, 2019, and December 31, 2018:



Cleco
	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW			HIGH
FTRs at Sept. 30, 2019	$	9,926	$	1,257	RTO auction pricing	FTR price - per MWh	$	(2.29	)	$	3.14
FTRs at Dec. 31, 2018	$	23,355	$	468	RTO auction pricing	FTR price - per MWh	$	(4.40	)	$	15.10



Cleco Power
	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW			HIGH
FTRs at Sept. 30, 2019	$	8,601	$	577	RTO auction pricing	FTR price - per MWh	$	(1.67	)	$	2.79
FTRs at Dec. 31, 2018	$	23,355	$	468	RTO auction pricing	FTR price - per MWh	$	(4.40	)	$	15.10

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. Institutional money market funds assets are discounted 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 September 30, 2019, 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 $91.5 million, $5.4 million, and $15.0 million, respectively, at September 30, 2019, and $103.8 million, $11.2 million, and $18.7 million, respectively, at December 31, 2018. 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 $57.4 million, $5.4 million, and $14.1 million, respectively, at September 30, 2019, and $26.1 million, $11.2 million, and $18.6 million, respectively, at December 31, 2018. 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 either 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.

The other commodity derivatives are fixed price forwards that fluctuate in value as underlying prices change. These contracts contain counterparty credit risk because they are transacted directly with a counterparty and are not cleared on an exchange. These other commodity derivatives are recorded at fair value and categorized as Level 2 because pricing is indexed to other contracts.

Cleco Power and Cleco Cajun’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 nine months ended September 30, 2019, and the year ended December 31, 2018, Cleco did not experience any transfers between levels within the fair value hierarchy.

Commodity Contracts

The following tables present the fair values of derivative instruments and their respective line items as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2019, and December 31, 2018:



Cleco
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT SEPT. 30, 2019		AT DEC. 31, 2018
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	9,926	$	23,355
Current	Energy risk management liabilities	1,257		468
Other commodity derivatives
Current	Energy risk management assets	745		—
Current	Energy risk management liabilities	41		—
Commodity-related contracts, net		$	9,373	$	22,887



Cleco Power
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT SEPT. 30, 2019		AT DEC. 31, 2018
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	8,601	$	23,355
Current	Energy risk management liabilities	577		468
Commodity-related contracts, net		$	8,024	$	22,887

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 nine months ended September 30, 2019, and 2018:



Cleco
	AMOUNT OF GAIN(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
		FOR THE THREE MONTHS ENDED SEPT. 30,						FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2019			2018			2019			2018
Commodity-related contracts
FTRs⁽¹⁾	Electric operations	$	1,997		$	7,241		$	12,396		$	32,407
FTRs⁽¹⁾	Purchased power	(2,648		)	(1,587		)	(12,985		)	(3,288		)
Other commodity derivatives	Fuel used for electric generation	3,474			—			704			—
Total		$	2,823		$	5,654		$	115		$	29,119

⁽¹⁾ For the three and nine months ended September 30, 2019, unrealized losses associated with FTRs for Cleco Power of $1.7 million and $3.6 million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the three and nine months ended September 30, 2018, unrealized gains associated with FTRs for Cleco Power of $4.5 million and $6.2 million, respectively, 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 SEPT. 30,						FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2019			2018			2019			2018
Commodity-related contracts
FTRs⁽¹⁾	Electric operations	$	1,997		$	7,241		$	12,400		$	32,407
FTRs⁽¹⁾	Purchased power	(1,828		)	(1,587		)	(4,800		)	(3,288		)
Total		$	169		$	5,654		$	7,600		$	29,119

⁽¹⁾ For the three and nine months ended September 30, 2019, unrealized losses associated with FTRs of $1.7 million and $3.6 million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the three and nine months ended September 30, 2018, unrealized gains associated with FTRs of $4.5 million and $6.2 million, respectively, were reported through Accumulated deferred fuel on the balance sheet.

The total volume of FTRs that Cleco Power had outstanding at September 30, 2019, and December 31, 2018, was 14.6 million MWh and 8.7 million MWh, respectively. The total volume of FTRs that Cleco had outstanding at September 30, 2019, and December 31, 2018, was 23.4 million MWh and 8.7 million MWh, respectively. The total volume of other commodity derivatives Cleco had outstanding at September 30, 2019, was 18.4 million MMBtus.