Note 7 — Income Taxes

The following table summarizes the effective income tax rates for Cleco Corporation and Cleco Power for the three- and six-month periods ended June 30, 2011, and 2010.

	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
	2011			2010			2011			2010
Cleco Corporation		34.2	%		33.1	%		32.9	%		34.4	%
Cleco Power		30.8	%		33.0	%		31.5	%		30.8	%

Effective Tax Rates

For the three and six months ended June 30, 2011, the effective income tax rates for Cleco Corporation and Cleco Power are different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a reversal of the valuation allowance on the deferred tax asset for a capital loss carryforward due to capital gains generated in 2011 as discussed below, and state tax expense.

For the three months ended June 30, 2010, the effective income tax rates for Cleco Corporation and Cleco Power were different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a valuation allowance on the deferred tax asset for a capital loss carryforward, and state tax expense.

For the six months ended June 30, 2010, the effective income tax rates for Cleco Corporation and Cleco Power were different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, a valuation allowance on the deferred tax asset for a capital loss carryforward, an adjustment for Medicare Part D from health care legislation enacted in the first quarter of 2010, an adjustment for the implementation of new retail rates, and state tax expense.

Valuation Allowance

During 2010, a $1.2 million valuation allowance against the $2.7 million deferred tax asset on capital loss carryforwards was reflected on Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. This $1.2 million valuation allowance was reversed in the second quarter of 2011 due to capital gains generated in 2011 by the disposition of Acadia Unit 2.

Net Operating Losses

As of June 30, 2011, Cleco generated federal net operating losses and state net operating losses of $97.4 million and $90.0 million, respectively, which will begin to expire in 2031 and 2026. Cleco Power generated federal net operating losses and state net operating losses of $88.7 million and $81.3 million, respectively, which will begin to expire in 2031 and 2026. Cleco and Cleco Power consider it more likely than not that these losses will be utilized to reduce future income taxes. Cleco Power expects to utilize the entire net operating loss carryforward in 2012, while Cleco expects to utilize the entire net operating loss by the end of 2013.

Uncertain Tax Positions

Effective January 1, 2007, Cleco adopted the provisions of the authoritative guidance on accounting for uncertain tax positions. With this adoption, Cleco classified all interest related to uncertain tax positions as a component of interest payable and interest expense. The total amount of interest associated with uncertain tax positions at June 30, 2011, and December 31, 2010, recognized on Cleco Corporation’s Condensed Consolidated Balance Sheets was $43.9 million and $41.0 million, respectively. The total amount of interest associated with uncertain tax positions at June 30, 2011, and December 31, 2010, recognized on Cleco Power’s Condensed Consolidated Balance Sheets was $17.0 million and $15.2 million, respectively. The total amount of interest expense related to uncertain tax positions for the three months ended June 30, 2011 and 2010, recognized on Cleco Corporation’s Condensed Consolidated Statements of Income was $1.3 million and $2.1 million, respectively. The total amount of interest expense related to uncertain tax positions for the three months ended June 30, 2011 and 2010, recognized on Cleco Power’s Condensed Consolidated Statements of Income was $0.9 million and $1.3 million, respectively. The total amount of interest expense related to uncertain tax positions for the six months ended June 30, 2011, and 2010, recognized on Cleco Corporation’s Condensed Consolidated Statements of Income was $2.9 million and $4.0 million, respectively. The total amount of interest expense related to uncertain tax positions for the six months ended June 30, 2011, and 2010 recognized on Cleco Power’s Condensed Consolidated Statements of Income was $1.8 million and $2.5 million, respectively. The total liability for unrecognized tax benefits for Cleco Corporation and Cleco Power at June 30, 2011, and December 31, 2010, are shown in the following tables:

Cleco

(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at December 31, 2010	$	102,785
Reduction for tax positions of current period		(1,813	)
Additions for tax positions of prior periods		4,312
Reduction for tax positions of prior periods		(876	)
Reduction for settlement with taxing authority		-
Reduction for lapse of statute of limitations		-
Balance at June 30, 2011	$	104,408

Cleco Power

(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at December 31, 2010	$	60,975
Reduction for tax positions of current period		(1,774	)
Additions for tax positions of prior periods		-
Reduction for tax positions of prior periods		-
Reduction for settlement with taxing authority		-
Reduction for lapse of statute of limitations		-
Balance at June 30, 2011	$	59,201

The federal income tax years that remain subject to examination by the IRS are 2001 through 2010. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2001 through 2010. In December 2010, Cleco deposited $52.2 million with the IRS associated with the years currently under audit, of which $45.9 million reduced accrued income taxes payable and $6.3 million reduced accrued interest payable. In February 2011, Cleco deposited an additional $8.2 million with the IRS associated with the years currently under audit, which reduced income taxes payable.

Cleco is currently under audit by the IRS which has proposed adjustments to taxes for various issues, including but not limited to, depreciable tax lives, bonus depreciation, deductible storm costs, research and experimentation costs, and repair allowance deductions. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2011, could decrease by a maximum of $33.5 million for Cleco Power and $73.3 million for Cleco in the next 12 months as a result of reaching a settlement with the IRS. The settlement could involve the payment of additional taxes, the adjustment of deferred taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective tax rate.