Income Taxes

Cleco

For the years ended December 31, 2011, and 2009, income tax expense was lower than the amount computed by applying the statutory federal rate to income before tax. For the year ended December 31, 2010, income tax expense was higher than the amount computed by applying the statutory federal rate to income before tax. The differences are as follows.



	FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS, EXCEPT FOR %)	2011			2010			2009
Income before tax	$	298,745		$	397,889		$	115,886
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	104,561		$	139,261		$	40,560
Increase (decrease):
Plant differences, including AFUDC flowthrough	(1,758		)	(7,757		)	(30,212		)
Amortization of investment tax credits	(1,238		)	(1,285		)	(1,332		)
State tax expense	2,155			11,897			4,763
Audit settlement	10,782			—			—
Other	(11,605		)	382			(4,200		)
Total taxes	$	102,897		$	142,498		$	9,579
Effective Rate	34.4		%	35.8		%	8.3		%

Information about current and deferred income tax expense is as follows.



	FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS)	2011			2010			2009
Current federal income tax expense	$	77,659		$	75,337		$	16,080
Deferred federal income tax expense (benefit)	26,577			56,047			(9,880		)
Amortization of accumulated deferred investment tax credits	(1,238		)	(1,285		)	(1,332		)
Total federal income tax expense	$	102,998		$	130,099		$	4,868
Current state income tax expense	2,857			13,572			814
Deferred state income tax (benefit) expense	(2,958		)	(1,173		)	3,897
Total state income tax (benefit) expense	$	(101	)	$	12,399		$	4,711
Total federal and state income tax expense	$	102,897		$	142,498		$	9,579
Items charged or credited directly to shareholders’ equity
Federal deferred	(8,908		)	2,210			(1,200		)
State deferred	(1,439		)	357			(194		)
Total tax benefit from items charged directly to shareholders’ equity	$	(10,347	)	$	2,567		$	(1,394	)
Total federal and state income tax expense	$	92,550		$	145,065		$	8,185

The $12.9 million change in total tax benefit from items charged directly to shareholders' equity in 2011 compared to 2010 was primarily due to the tax effect of other post-employment benefit adjustments booked to accumulated other comprehensive income and interest rate derivatives.

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2011, and 2010 was comprised of the following.



	AT DECEMBER 31,
(THOUSANDS)	2011			2010
Depreciation and property basis differences	$	(594,135	)	$	(527,014	)
Net operating loss	18,542			—
Fuel costs	(6,135		)	(6,500		)
Mark-to-market	—			1,845
Deferred carrying charges	11,327			26,567
SERP – other comprehensive income	16,621			6,274
Regulated operations regulatory liability	(83,965		)	(75,080		)
Postretirement benefits other than pension	(9,486		)	9,902
New markets tax credit	36,398			16,667
Other	(9,844		)	(1,766		)
Accumulated deferred federal and state income taxes	$	(620,677	)	$	(549,105	)

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In 2010, a $1.2 million valuation allowance against the $2.7 million deferred tax asset on capital loss carryforwards was reflected on the Consolidated Balance Sheet of Cleco. The previously recorded $1.2 million valuation allowance was reversed in the second quarter of 2011 due to capital gains generated by the disposition of Acadia Unit 2. In addition, as of December 31, 2011, Cleco had a deferred tax asset resulting from new markets tax credit carryforwards of $55.2 million. If the new markets tax credit carryforwards are not utilized, they will begin to expire in 2029. Management considers it more likely than not that all deferred tax assets related to new markets tax credit carryforwards will be realized; therefore, no valuation allowance has been recorded.

As of December 31, 2011, Cleco generated federal net operating losses and state net operating losses of $47.3 million and $40.1 million, respectively, which will expire in 2031 and 2026. Cleco considers it more likely than not that these losses will be utilized to reduce future income taxes.

Cleco Power

Income tax expense is lower than the amount computed by applying the statutory rate to income before tax, as follows.



	FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS, EXCEPT FOR %)	2011			2010			2009
Income before tax	$	212,244		$	222,512		$	126,463
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	74,285		$	77,879		$	44,262
Increase (decrease):
Plant differences, including AFUDC flowthrough	(1,758		)	(7,757		)	(30,212		)
Amortization of investment tax credits	(1,238		)	(1,285		)	(1,332		)
State tax expense	(853		)	5,798			5,131
Other	(1,027		)	472			(2,552		)
Total tax expense	$	69,409		$	75,107		$	15,297
Effective Rate	32.7		%	33.8		%	12.1		%

Information about current and deferred income tax expense is as follows.



	FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS)	2011			2010			2009
Current federal income tax expense	$	23,347		$	35,132		$	11,920
Deferred federal income tax expense	47,763			40,237			912
Amortization of accumulated deferred investment tax credits	(1,238		)	(1,285		)	(1,332		)
Total federal income tax expense	$	69,872		$	74,084		$	11,500
Current state income tax expense	1,691			6,704			1,480
Deferred state income tax (benefit) expense	(2,154		)	(5,681		)	2,317
Total state income tax (benefit) expense	$	(463	)	$	1,023		$	3,797
Total federal and state income taxes	$	69,409		$	75,107		$	15,297
Items charged or credited directly to shareholders’ equity
Federal deferred	(8,580		)	2,532			(620		)
State deferred	(1,386		)	409			(100		)
Total tax benefit from items charged directly to shareholders’ equity	$	(9,966	)	$	2,941		$	(720	)
Total federal and state income tax expense	$	59,443		$	78,048		$	14,577

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2011, and 2010 was comprised of the following.



	AT DECEMBER 31,
(THOUSANDS)	2011			2010
Depreciation and property basis differences	$	(592,634	)	$	(551,909	)
Net operating loss	16,390			—
Fuel costs	(6,125		)	(6,490		)
Mark-to-market	—			1,628
Deferred carrying charges	11,327			26,567
SERP - other comprehensive income	11,984			2,019
Regulated operations regulatory liability	(83,965		)	(75,080		)
Postretirement benefits other than pension	(22,461		)	(2,503		)
Other	9,478			7,005
Accumulated deferred federal and state income taxes	$	(656,006	)	$	(598,763	)

As of December 31, 2011, Cleco Power generated federal net operating losses and state net operating losses of $43.7 million and $36.0 million, respectively, which will expire in 2031 and 2026. Cleco Power considers it more likely than not that these losses will be utilized to reduce future income taxes.

Uncertain Tax Positions

Cleco classifies 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 Consolidated Balance Sheets and Statements of Income, are shown in the following tables:



	AT DECEMBER 31,
(THOUSANDS)	2011		2010
Interest payable
Cleco Corporation	$	13,843	$	41,018
Cleco Power	$	17,327	$	15,211



	FOR THE YEAR ENDED DECEMBER 31,
(THOUSANDS)	2011			2010			2009
Interest charges
Cleco Corporation	$	(25,795	)	$	3,930		$	8,239
Cleco Power	$	3,495		$	(5,448	)	$	3,336

The total liability for unrecognized tax benefits for Cleco and Cleco Power at December 31, 2011, 2010, and 2009 is shown in the following table:



Cleco
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2009	$	84,918
Reduction for tax positions of current period	(15,126		)
Additions for tax positions of prior years	59,443
Reduction for tax positions of prior years	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2009	$	129,235
Reduction for tax positions of current period	(5,738		)
Additions for tax positions of prior years	511
Reduction for tax positions of prior years	(6,146		)
Reduction for settlement with tax authority	(15,077		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2010	$	102,785
Reduction for tax positions of current period	(4,129		)
Additions for tax positions of prior years	11,031
Reduction for tax positions of prior years	(8,670		)
Reduction for settlement with tax authority	(44,782		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2011	$	56,235



Cleco Power
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2009	$	60,536
Reduction for tax positions of current period	(11,499		)
Additions for tax positions of prior years	35,323
Reduction for tax positions of prior years	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2009	$	84,360
Reduction for tax positions of current period	(2,202		)
Additions for tax positions of prior years	3
Reduction for tax positions of prior years	(6,109		)
Reduction for settlement with tax authority	(15,077		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2010	$	60,975
Reduction for tax positions of current period	(4,018		)
Additions for tax positions of prior years	4,271
Reduction for tax positions of prior years	(8,670		)
Reduction for settlement with tax authority	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2011	$	52,558

The federal income tax years that remain subject to examination by the IRS are 2001 through 2011. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2001 through 2011. 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. Of the $60.4 million deposited, $42.8 million remains to offset tax and interest liabilities for tax years subsequent to 2003.

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 estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2011, could decrease by a maximum of $27.2 million for Cleco and $27.5 million for Cleco Power 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.

On October 13, 2011, Cleco entered into an agreement to settle the 2001 through 2003 audit cycle with the IRS. As a result of the agreement, Cleco made a miscellaneous other federal income tax payment in accordance with Revenue Procedure 2001-18 in the amount of $13.2 million, and no interest was assessed. Cleco has reversed $31.6 million of previously accrued federal and state interest expense and the corresponding deferred tax benefit of $12.1 million.