Note 7 — Income Taxes

The following table summarizes the effective income tax rates for Cleco and Cleco Power for the three and six month periods ended June 30, 2012, and 2011.



	FOR THE THREE MONTHS ENDED JUNE 30,				FOR THE SIX MONTHS ENDED JUNE 30,
	2012		2011		2012		2011
Cleco	30.5	%	34.2	%	30.7	%	32.9	%
Cleco Power	35.5	%	30.8	%	35.3	%	31.5	%

Effective Tax Rates

For the three and six months ended June 30, 2012, and 2011, the effective income tax rate for Cleco was different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, benefits associated with tax credits primarily delivered from Cleco’s investment in USB NMTC Fund 2008-1 LLC, and state tax expense.

For the three and six months ended June 30, 2012 and 2011, the effective income tax rate for Cleco Power was different than the federal statutory rate due to permanent tax deductions, flow-through of tax benefits associated with AFUDC equity, and state tax expense.

Valuation Allowance

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 Cleco and Cleco Power’s Condensed Consolidated Balance Sheets. 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 June 30, 2012, Cleco had a deferred tax asset resulting from new markets tax credit carryforwards of $68.5 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.

Net Operating Losses

As of June 30, 2012, Cleco generated cumulative federal net operating losses and state net operating losses of $60.3 million and $53.4 million, respectively, which will begin to expire in 2031 and 2026. Cleco Power generated cumulative federal net operating losses and state net operating losses of $16.9 million and $9.6 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

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 and Cleco Power’s Condensed Consolidated Balance Sheets and Statements of Income, are shown in the following tables.



(THOUSANDS)	AT JUNE 30, 2012		AT DECEMBER 31, 2011
Interest payable
Cleco	$	2,287	$	13,843
Cleco Power	$	5,369	$	17,327



	FOR THE THREE MONTHS ENDED JUNE 30,					FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2012			2011		2012			2011
Interest charges
Cleco	$	(2,716	)	$	1,326	$	(8,355	)	$	2,861
Cleco Power	$	(2,271	)	$	938	$	(9,636	)	$	1,776

The total liability for unrecognized tax benefits for Cleco and Cleco Power at June 30, 2012, and December 31, 2011, are shown in the following tables.



Cleco
LIABILITY FOR UNRECOGNIZED
(THOUSANDS)	TAX BENEFITS
Balance at December 31, 2011	$	56,235
Additions for tax positions of current period	480
Reductions for tax positions of current period	—
Additions for tax positions of prior periods	1,946
Reduction for tax positions of prior periods	(44,475		)
Reduction for settlement with tax authority	—
Reduction for lapse of statute of limitations	—
Balance at June 30, 2012	$	14,186



Cleco Power
LIABILITY FOR UNRECOGNIZED
(THOUSANDS)	TAX BENEFITS
Balance at December 31, 2011	$	52,558
Additions for tax positions of current period	480
Reductions for tax positions of current period	—
Additions for tax positions of prior periods	1,946
Reduction for tax positions of prior periods	(43,384		)
Reduction for settlement with tax authority	—
Reduction for lapse of statute of limitations	—
Balance at June 30, 2012	$	11,600

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 under audit. In February 2011, Cleco deposited an additional $8.2 million with the IRS associated with the years currently under audit. Of the $60.4 million deposited, $43.2 million remains to offset tax and interest liabilities for tax years subsequent to 2003.

Cleco is currently under audit by the IRS for the years 2001 through 2009 which has proposed adjustments to taxes for various issues, including but not limited to, 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 June 30, 2012, could decrease by a maximum of $11.0 million for Cleco and $11.3 million for Cleco Power in the next 12 months as a result of reaching settlements with the IRS and state tax authorities. The settlements 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.