Fair Value Accounting and Financial Instruments

9 Months Ended

Sep. 30, 2021

Fair Value Accounting and Financial Instruments


Note 6 — Fair Value Accounting and Financial Instruments

The amounts reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2021, and December 31, 2020, 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, 2021				AT DEC. 31, 2020
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	3,550,179	$	3,836,960	$	3,230,500	$	3,541,349

* The carrying value of long-term debt does not include deferred issuance costs of $14.1 million at
September 30, 2021, and $13.4 million at December 31, 2020.


Cleco Power
	AT SEPT. 30, 2021				AT DEC. 31, 2020
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,820,177	$	2,100,029	$	1,494,947	$	1,794,799

* The carrying value of long-term debt does not include deferred issuance costs of $8.5 million at
September 30, 2021, and $7.0 million at December 31, 2020.

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. Cleco elects not to designate derivatives as cash flow or fair value hedges, as allowed by accounting guidance. Cleco utilizes a mark-to-market approach recognizing changes in the fair value of FTRs and commodity derivatives at Cleco Cajun in earnings and changes in the fair value of FTRs at Cleco Power as a component of deferred fuel assets and liabilities. Cleco utilizes different valuation techniques for fair value measurements under a fair value hierarchy. Assets and liabilities classified as Level 1 under the hierarchy utilize observable inputs that reflect quotable prices in active markets. Assets and liabilities classified as Level 2 are measured through proxy inputs of similar index or composite pricing. Assets and liabilities classified as Level 3 under the hierarchy are valued based on unobservable inputs, such as internally generated valuation models or valuations obtained in inactive markets where there is no readily available information. 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. During the nine months ended September 30, 2021, and the year ended December 31, 2020, Cleco did not experience any transfers between levels within the fair value hierarchy.

The following tables disclose for Cleco and Cleco Power the fair value of financial assets and liabilities measured on a recurring basis. These amounts are presented on a gross basis before consideration of amounts netted under master netting agreements and the application of collateral received or paid:


Cleco
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT SEPT. 30, 2021		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2020		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	$	252,807	$	—	$	252,807	$	—	$	86,001	$	—	$	86,001	$	—
FTRs	9,338		—		—		9,338		4,805		—		—		4,805
Natural gas derivatives*	132,892		—		132,892		—		8,599		—		8,599		—
Total assets	$	395,037	$	—	$	385,699	$	9,338	$	99,405	$	—	$	94,600	$	4,805
Liability description
FTRs	$	1,589	$	—	$	—	$	1,589	$	1,625	$	—	$	—	$	1,625
Natural gas derivatives*	—		—		—		—		1,612		—		1,612		—
Total liabilities	$	1,589	$	—	$	—	$	1,589	$	3,237	$	—	$	1,612	$	1,625

* Natural gas derivatives include fixed price physical forwards and swap transactions.


Cleco Power
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT SEPT. 30, 2021		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2020		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	$	135,763	$	—	$	135,763	$	—	$	25,357	$	—	$	25,357	$	—
FTRs	6,028		—		—		6,028		4,337		—		—		4,337
Total assets	$	141,791	$	—	$	135,763	$	6,028	$	29,694	$	—	$	25,357	$	4,337
Liability description
FTRs	$	1,330	$	—	$	—	$	1,330	$	1,121	$	—	$	—	$	1,121
Total liabilities	$	1,330	$	—	$	—	$	1,330	$	1,121	$	—	$	—	$	1,121

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)	2021		2020		2021		2020
Beginning balance	$	7,501	$	8,040	$	3,180	$	5,778
Unrealized gains (losses)*	3,955		4		18,861		(736)
Purchases	619		443		11,426		10,175
Settlements	(4,326)		(3,160)		(25,718)		(9,890)
Ending balance	$	7,749	$	5,327	$	7,749	$	5,327
* Cleco Power’s unrealized gains (losses) are reported through Accumulated deferred fuel on Cleco’s Condensed Consolidated Balance Sheet. Cleco Cajun’s unrealized gains (losses) 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)	2021		2020		2021		2020
Beginning balance	$	5,990	$	7,511	$	3,216	$	5,725
Unrealized gains*	1,196		426		545		1,355
Purchases	619		443		9,236		8,219
Settlements	(3,107)		(2,968)		(8,299)		(9,887)
Ending balance	$	4,698	$	5,412	$	4,698	$	5,412
* Unrealized gains are reported through Accumulated deferred fuel on Cleco Power’s Condensed Consolidated Balance Sheet.

Cleco Power and Cleco Cajun’s FTRs are valued 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 value available

comes from MISO auctions, which occur monthly in the Multi-Period Monthly Auction.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions for

Cleco and Cleco Power as of September 30, 2021, and December 31, 2020:


Cleco
	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW		HIGH
FTRs at Sept. 30, 2021	$	9,338	$	1,589	RTO auction pricing	FTR price - per MWh	$	(8.18)	$	9.16
FTRs at Dec. 31, 2020	$	4,805	$	1,625	RTO auction pricing	FTR price - per MWh	$	(3.49)	$	4.36


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, 2021	$	6,028	$	1,330	RTO auction pricing	FTR price - per MWh	$	(3.26)	$	9.16
FTRs at Dec. 31, 2020	$	4,337	$	1,121	RTO auction pricing	FTR price - per MWh	$	(3.34)	$	4.36

As a result of the 2016 Merger, fair value adjustments were recorded on Cleco’s Condensed Consolidated Balance Sheet for the valuation of a finite intangible asset relating to the Cleco Power trade name. In August 2021, a wholesale customer that is currently under contract with Cleco Power through March 31, 2024, informed Cleco Power that it was not selected through its RFP process as a provider of load after the first quarter of 2024. Cleco considered this to be a triggering event and determined that the carrying value of the trade name intangible asset may not be recoverable. Therefore, a valuation of the Cleco Power trade name was conducted to test for impairment. A discounted cash flow model utilizing an estimated weighted average cost of capital of 8% was used to determine the fair value of the Cleco Power trade name. As a result, Cleco determined that the fair value of the Cleco Power trade name was less than its carrying value and an impairment of $3.8 million was recognized reducing the carrying value to zero. The fair value measurement of the intangible asset is classified as Level 3 in the fair value hierarchy. For more information on the Cleco Power trade name intangible asset, see Note 15 — “Intangible Assets and Liabilities.”

Concentrations of Credit Risk

At September 30, 2021, 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 following tables present the institutional money market funds in cash and cash equivalents and restricted cash and cash equivalents as recorded on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets at September 30, 2021, and December 31, 2020:


Cleco
(THOUSANDS)	AT SEPT. 30, 2021		AT DEC. 31, 2020
Cash and cash equivalents	$	249,711	$	80,712
Current restricted cash and cash equivalents	$	2,352	$	4,545
Non-current restricted cash and cash equivalents	$	744	$	744


Cleco Power
(THOUSANDS)	AT SEPT. 30, 2021		AT DEC. 31, 2020
Cash and cash equivalents	$	133,411	$	20,812
Current restricted cash and cash equivalents	$	2,352	$	4,545

Institutional money market fund assets are discounted to the current period using a published U.S. Treasury interest rate as a proxy for a risk-free rate of return. 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.

Cleco may be required to provide credit support or pay liquidated damages with respect to any open trading contracts that Cleco has entered into or may enter into in the future. The amount of credit support that Cleco may be required to provide at any point in the future is dependent on the amount of the initial contract, changes in the market price, changes in open contracts, and changes in the amounts counterparties owe to Cleco. Changes in any of these factors could cause the amount of requested credit support to increase or decrease.

Commodity Contracts

On Cleco’s Condensed Consolidated Balance Sheets, the fair value of amounts associated with Cleco Cajun’s derivative instruments are offset with related cash collateral balances with the same counterparty. There were no offsetting amounts at December 31, 2020. 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, 2021, and December 31, 2020:


Cleco
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
		AT SEPT. 30, 2021												AT DEC. 31, 2020
				GROSS AMOUNTS OFFSET ON THE BALANCE SHEET						GROSS AMOUNTS NOT OFFSET ON THE BALANCE SHEET (1)
(THOUSANDS)	BALANCE SHEET LINE ITEM	GROSS ASSET (LIABILITY)		CONTRACT NETTING		COLLATERAL		NET ASSET (LIABILITY) ON THE BALANCE SHEET		COLLATERAL		NET AMOUNT		NET ASSET (LIABILITY) ON THE BALANCE SHEET (2)
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	9,338	$	—	$	—	$	9,338	$	—	$	9,338	$	4,805
Current	Energy risk management liabilities	(1,589)		—		—		(1,589)		—		(1,589)		(1,625)
Natural gas derivatives
Current	Energy risk management assets	59,648		(1,283)		(8,900)		49,465		(41,098)		8,367		8,276
Non-current	Energy risk management assets	83,427		—		—		83,427		(13,902)		69,525		323
Current	Energy risk management liabilities	(1,283)		1,283		—		—		—		—		(828)
Non-current	Other deferred credits	—		—		—		—		—		—		(784)
Commodity-related contracts, net		$	149,541	$	—	$	(8,900)	$	140,641	$	(55,000)	$	85,641	$	10,167

(1) Represents letters of credit by counterparties.

(2) There were no offsetting amounts on or off Cleco’s Condensed Consolidated Balance Sheet at December 31, 2020.


Cleco Power
	DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
(THOUSANDS)	BALANCE SHEET LINE ITEM	AT SEPT. 30, 2021		AT DEC. 31, 2020
Commodity-related contracts
FTRs
Current	Energy risk management assets	$	6,028	$	4,337
Current	Energy risk management liabilities	(1,330)		(1,121)
Commodity-related contracts, net		$	4,698	$	3,216

At September 30, 2021, cash collateral received from counterparties by Cleco was $8.9 million, all of which was netted against the current portion of Energy risk management assets on Cleco’s Condensed Consolidated Balance Sheet. At December 31, 2020, there was no cash collateral paid or received by Cleco.

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 three and nine months ended September 30, 2021, and 2020:


Cleco
	AMOUNT OF GAIN(LOSS) ON DERIVATIVES RECOGNIZED IN INCOME
		FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2021		2020		2021		2020
Commodity-related contracts
FTRs(1)	Electric operations	$	1,959	$	3,013	$	11,167	$	6,262
FTRs(1)	Purchased power	(874)		(763)		(8,730)		(1,053)
Natural gas derivatives	Fuel used for electric generation	107,687		20,307		165,584		22,515
Total		$	108,772	$	22,557	$	168,021	$	27,724

(1) For the three and nine months ended September 30, 2021, unrealized gains associated with FTRs for Cleco Power of $1.2 million and $0.5 million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the three and nine months ended September 30, 2020, unrealized gains associated with FTRs for Cleco Power of $0.4 million and $1.4 million, respectively, were reported through Accumulated deferred fuel on the balance sheet.


Cleco Power
	AMOUNT OF GAIN(LOSS) ON DERIVATIVES RECOGNIZED IN INCOME
		FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	INCOME STATEMENT LINE ITEM	2021		2020		2021		2020
Commodity-related contracts
FTRs(1)	Electric operations	$	1,959	$	3,013	$	11,167	$	6,262
FTRs(1)	Purchased power	(822)		(2,326)		(9,236)		(4,397)
Total		$	1,137	$	687	$	1,931	$	1,865

(1) For the three and nine months ended September 30, 2021, unrealized gains associated with FTRs of $1.2 million and $0.5 million, respectively, were reported through Accumulated deferred fuel on the balance sheet. For the three and nine months ended September 30, 2020, unrealized gains associated with FTRs of $0.4 million and $1.4 million, respectively, were reported through Accumulated deferred fuel on the balance sheet.

The following table presents the volume of commodity-related derivative contracts outstanding at September 30, 2021, and December 31, 2020, for Cleco and Cleco Power:

Cleco

TOTAL VOLUME OUTSTANDING

(THOUSAND)

UNIT OF MEASURE

AT SEPT. 30, 2021

AT DEC. 31, 2020

Commodity-related contracts

FTRs

MWh

22,794

15,269

Natural gas derivatives

MMBtus

118,712

73,000

Cleco Power