Note 7 — Income Taxes

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

	FOR THE THREE MONTHS ENDED SEPTEMBER 30,		FOR THE NINE MONTHS ENDED SEPTEMBER 30,
	2011	2010	2011	2010
Cleco Corporation	27.3%	37.8%	30.8%	35.2%
Cleco Power	37.0%	33.7%	34.1%	32.1%

Effective Tax Rates

For the three months ended September 30, 2011, 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, and state tax expense.

For the nine months ended September 30, 2011, 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 reversal of the valuation allowance on the deferred tax asset for a capital loss carryforward due to capital gains generated in 2011, and state tax expense.

For the three months ended September 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, and state tax expense.

For the nine months ended September 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 September 30, 2011, Cleco generated federal net operating losses and state net operating losses of $51.7 million and $45.2 million, respectively, which will begin to expire in 2031 and 2026. Cleco Power generated federal net operating losses and state net operating losses of $48.2 million and $41.4 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 and Cleco Power expect to utilize the entire net operating loss carryforward in 2012.

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 amounts of uncertain tax positions and related interest payable and interest expense, as reflected on Cleco Corporation and Cleco Power’s Condensed Consolidated Balance Sheets and Statements of Income, are shown in the following tables:

(THOUSANDS)	AT SEPTEMBER 30, 2011		AT DECEMBER 31, 2010
Interest payable
Cleco Corporation	$	43,972	$	41,018
Cleco Power	$	16,567	$	15,211

	FOR THE THREE MONTHS ENDED SEPTEMBER 30,						FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(THOUSANDS)	2011			2010			2011		2010
Interest charges
Cleco Corporation	$	93		$	2,518		$	2,954	$	6,504
Cleco Power	$	(420	)	$	(5,091	)	$	1,356	$	(2,613	)

The total liability for unrecognized tax benefits for Cleco Corporation and Cleco Power at September 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		(3,116	)
Additions for tax positions of prior periods		10,585
Reduction for tax positions of prior periods		(9,546	)
Reduction for settlement with taxing authority		-
Reduction for lapse of statute of limitations		-
Balance at September 30, 2011	$	100,708

Cleco Power

(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at December 31, 2010	$	60,975
Reduction for tax positions of current period		(3,032	)
Additions for tax positions of prior periods		3,634
Reduction for tax positions of prior periods		(8,670	)
Reduction for settlement with taxing authority		-
Reduction for lapse of statute of limitations		-
Balance at September 30, 2011	$	52,907

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, domestic production activities deduction, and repair allowance deductions. Cleco expects that the balance of unrecognized tax benefits as of September 30, 2011, will decrease by a maximum of $42.7 million for Cleco and $2.6 million for Cleco Power in the next 12 months as a result of reaching a settlement with the IRS. This settlement will result in the payment of additional taxes, the adjustment of deferred taxes, and the recognition of tax benefits which will affect Cleco’s effective tax rate.

On October 13, 2011, Cleco settled the 2001 through 2003 audit cycle with the IRS. For additional information on the settlement, see Note 16 — “Subsequent Event.”