Fair Value Accounting Instruments

6 Months Ended

Jun. 30, 2023


Note 6 — Fair Value Accounting Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable inputs. Cleco makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risks such as the risks inherent in valuation techniques and risks associated with inputs to those valuation techniques. Credit risk of Cleco and its counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which were immaterial at June 30, 2023, and December 31, 2022. Cleco’s valuation techniques maximize the use of observable market-based inputs and minimize the use of unobservable inputs.

A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices, unadjusted, in active markets for

identical assets or liabilities and the lowest priority to unobservable inputs. In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. Significant increases or decreases in any of those inputs in isolation could result in a significantly different fair value measurement. Cleco classifies fair value balances based on the fair value hierarchy defined as follows:

•Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities that Cleco can observe as of the reporting date.

•Level 2 — inputs other than quoted prices included within Level 1 that are similar and directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

•Level 3 — unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

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. For information on the impairment related to discontinued operations, see Note 3 — “Discontinued Operations.”

Fair Value Measurements on a Recurring Basis

The amounts reflected in Cleco’s and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2023, and December 31, 2022, 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.

The following tables disclose the fair value of financial assets and liabilities measured on a recurring basis on Cleco’s and Cleco Power’s Condensed Consolidated Balance Sheets. These amounts are presented on a gross basis.


Cleco
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT JUNE 30, 2023		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2022		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset description
Short-term investments	$	199,672	$	199,672	$	—	$	—	$	172,741	$	172,741	$	—	$	—
FTRs	7,330		—		—		7,330		2,570		—		—		2,570
Natural gas derivatives	916		—		916		—		—		—		—		—
Total assets	$	207,918	$	199,672	$	916	$	7,330	$	175,311	$	172,741	$	—	$	2,570
Liability description
FTRs	$	871	$	—	$	—	$	871	$	294	$	—	$	—	$	294
Natural gas derivatives	648		—		648		—		4,570		—		4,570		—
Total liabilities	$	1,519	$	—	$	648	$	871	$	4,864	$	—	$	4,570	$	294


Cleco Power
	FAIR VALUE MEASUREMENTS AT REPORTING DATE
(THOUSANDS)	AT JUNE 30, 2023		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		AT DEC. 31, 2022		QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
Asset description
Short-term investments	$	158,483	$	158,483	$	—	$	—	$	139,752	$	139,752	$	—	$	—
FTRs	7,330		—		—		7,330		2,570		—		—		2,570
Natural gas derivatives	916		—		916		—		—		—		—		—
Total assets	$	166,729	$	158,483	$	916	$	7,330	$	142,322	$	139,752	$	—	$	2,570
Liability description
FTRs	$	871	$	—	$	—	$	871	$	294	$	—	$	—	$	294
Natural gas derivatives	648		—		648		—		4,570		—		4,570		—
Total liabilities	$	1,519	$	—	$	648	$	871	$	4,864	$	—	$	4,570	$	294

Cleco has consistently applied the Level 2 and Level 3 fair value techniques between comparative fiscal periods. During the six months ended June 30, 2023, and the year ended December 31, 2022, Cleco did not experience any transfers into or out of Level 3 of the fair value hierarchy.

Short-term Investments

At June 30, 2023, Cleco and Cleco Power had short-term investments in money market funds and treasury bills that have a maturity of three months or less when purchased. At December 31, 2022, Cleco and Cleco Power had short-term investments in money market funds that had a maturity of three months or less when purchased.

The following tables present the short-term investments as recorded on Cleco’s and Cleco Power’s Condensed Consolidated Balance Sheets at June 30, 2023, and December 31, 2022:


Cleco
(THOUSANDS)	AT JUNE 30, 2023		AT DEC. 31, 2022
Cash and cash equivalents	$	65,894	$	39,779
Current restricted cash and cash equivalents	$	22,671	$	23,548
Non-current restricted cash and cash equivalents	$	111,107	$	109,414


Cleco Power
(THOUSANDS)	AT JUNE 30, 2023		AT DEC. 31, 2022
Cash and cash equivalents	$	24,727	$	6,813
Current restricted cash and cash equivalents	$	22,671	$	23,548
Non-current restricted cash and cash equivalents	$	111,085	$	109,391

FTRs

FTRs are financial instruments used to provide a financial hedge to manage the risk of transmission congestion charges between MISO nodes in MISO’s Day-Ahead Energy Market. Cleco is awarded and/or purchases FTRs in auctions facilitated by MISO. FTRs are derivatives not designated as hedging instruments for accounting purposes.

FTRs are valued using MISO’s monthly auction prices as a price index reference (Level 3). Unrealized gains or losses are deferred as a component of Accumulated deferred fuel on the balance sheet in accordance with regulatory policy, and at settlement, realized gains or losses are included in Cleco Power’s FAC and reflected on customers’ bills as a component of the fuel charge.

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)	2023		2022		2023		2022
Balances, beginning of period	$	633	$	567	$	2,276	$	4,918
Unrealized (losses) gains*	(211)		4,267		(211)		4,267
Purchases	8,087		6,577		8,023		6,869
Settlements	(2,050)		(1,273)		(3,629)		(5,916)
Balances, June 30, 2023	$	6,459	$	10,138	$	6,459	$	10,138
* Unrealized gains (losses) are reported through Accumulated deferred fuel on Cleco’s and Cleco Power’s Condensed Consolidated Balance Sheet.

The following table quantifies the significant unobservable inputs used in developing the fair value of Level 3 positions for Cleco and Cleco Power as of June 30, 2023, and December 31, 2022:


	FAIR VALUE				VALUATION TECHNIQUE	SIGNIFICANT UNOBSERVABLE INPUTS	FORWARD PRICE RANGE
(THOUSANDS, EXCEPT FORWARD PRICE RANGE)	ASSETS		LIABILITIES				LOW		HIGH
FTRs at June 30, 2023	$	7,330	$	871	RTO auction pricing	FTR price - per MWh	$	(5.40)	$	8.06
FTRs at Dec. 31, 2022	$	2,570	$	294	RTO auction pricing	FTR price - per MWh	$	(5.11)	$	13.65

Natural Gas Derivatives

Cleco may enter into physical and financial fixed price or options contracts that financially settle or are delivered at a future date. Management has not elected to apply hedge accounting to these contracts as allowed under applicable accounting standards. Cleco Power’s natural gas derivative contracts are marked-to-market with the resulting unrealized gain or loss recorded as a component of Accumulated deferred fuel on the balance sheet. At settlement, realized gains or losses are included in Cleco Power’s FAC and reflected on customer’s bills as a component of the fuel charge.

Fair Value Measurements on a Nonrecurring Basis

The following tables summarize the carrying value and estimated market value of Cleco’s and Cleco Power’s financial instruments not measured at fair value on Cleco’s and Cleco Power’s Condensed Consolidated Balance Sheets:


Cleco
	AT JUNE 30, 2023				AT DEC. 31, 2022
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	3,475,808	$	3,185,371	$	3,482,556	$	3,180,208

* The carrying value of long-term debt does not include deferred issuance costs of $15.0 million at June 30, 2023, and $16.2 million at December 31, 2022.


Cleco Power
	AT JUNE 30, 2023				AT DEC. 31, 2022
(THOUSANDS)	CARRYING VALUE*		FAIR VALUE		CARRYING VALUE*		FAIR VALUE
Long-term debt	$	1,892,462	$	1,834,453	$	1,895,508	$	1,825,192

* The carrying value of long-term debt does not include deferred issuance costs of $11.6 million at June 30, 2023, and $12.3 million at December 31, 2022.

In order to fund capital requirements, Cleco may issue 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.

Concentrations of Credit Risk

At June 30, 2023, and December 31, 2022, Cleco and Cleco Power were exposed to concentrations of credit risk through their short-term investments classified as cash equivalents and restricted cash equivalents. If the short-term investments 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. In order to capture interest income and minimize risk, cash is invested primarily in short-term securities issued by the U.S. government to maintain liquidity and achieve the goal of a net asset value of a dollar.

When Cleco enters into commodity derivative or physical commodity transactions directly with market participants, Cleco may be exposed to counterparty credit risk. Cleco is exposed to counterparty credit risk when a counterparty fails to meet their financial obligations causing Cleco to potentially incur replacement cost losses. Cleco enters into master agreements with counterparties that govern the risk of credit default and allow for collateralization above prenegotiated thresholds to help mitigate potential losses. Alternatively, Cleco may be required to provide credit support 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, changes in the amounts counterparties owe to Cleco, and any prenegotiated unsecured thresholds agreed to in the master contract. Changes in any of these factors could cause the amount of requested credit support to increase or decrease.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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