Note 7 — Income Taxes

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



	FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
	2012		2011		2012		2011
Cleco	24.0	%	27.3	%	27.8	%	30.8	%
Cleco Power	25.5	%	37.0	%	31.0	%	34.1	%

Effective Tax Rates

For the three and nine months ended September 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, tax benefits delivered from Cleco’s investment in the NMTC Fund, other credits, favorable settlements with taxing authorities, and state tax expense.

For the three and nine months ended September 30, 2012 and 2011, the effective income tax rate for Cleco Power was different than the federal statutory rate due to permanent tax deductions, other credits, favorable settlements with taxing authorities, 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. As of September 30, 2012, Cleco had a deferred tax asset resulting from New Markets Tax Credit carryforwards of $75.2 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.

Net Operating Losses

Cleco Corporation filed its 2011 federal income tax return and generated a $477.7 million net operating loss carryforward. Of the $477.7 million net operating loss carryforward generated, $436.9 million is attributable to Cleco Power. The net operating loss carryforward was primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. On July 3, 2012, Cleco filed a Private Letter Ruling request with the IRS in order to determine the appropriateness and timing of taking this special depreciation deduction for Madison Unit 3. The IRS is expected to take up to six months to consider the ruling request and issue a final ruling on the matter. Cleco and Cleco Power consider it more likely than not that these losses will be utilized to reduce future income taxes and both Cleco and Cleco Power expect to utilize the entire net operating loss carryforward within the next four years.

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 SEPT. 30, 2012		AT DEC. 31, 2011
Interest payable
Cleco	$	2,166	$	13,843
Cleco Power	$	5,502	$	17,327

The interest payable reflects the amount of interest anticipated to be paid to taxing authorities. These amounts do not include any offset for amounts that may be recovered from customers under existing rate orders. The amounts expected to be recoverable from Cleco Power's customers under existing rate orders at September 30, 2012 and December 31, 2011, are $6.0 million and $9.3 million, respectively.



	FOR THE THREE MONTHS ENDED SEPT. 30,						FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	2012			2011			2012			2011
Interest charges
Cleco	$	(121	)	$	93		$	(8,477	)	$	2,954
Cleco Power	$	133		$	(420	)	$	(9,504	)	$	1,356

The interest charges reflect the amount of interest anticipated to be paid to taxing authorities. These amounts do not include any offset for the amounts that may be recovered from customers under the existing rate orders. The amounts expected to be recoverable from Cleco Power's customers under existing rate orders at September 30, 2012 and December 31, 2011, are $3.3 million and $1.6 million, respectively.

The total liability for unrecognized tax benefits for Cleco at September 30, 2012 and December 31, 2011, is shown in the following table.



Cleco
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at December 31, 2011	$	56,235
Additions for tax positions of current period	640
Reductions for tax positions of current period	—
Additions for tax positions of prior periods	—
Reduction for tax positions of prior periods	22,418
Reduction for settlement with tax authority	32,062
Reduction for lapse of statute of limitations	—
Balance at September 30, 2012	$	2,395

The total liability (asset) for unrecognized tax benefits for Cleco Power at September 30, 2012 and December 31, 2011, is shown in the following table.



Cleco Power
(THOUSANDS)	LIABILITY (ASSET) FOR UNRECOGNIZED TAX BENEFITS
Balance at December 31, 2011	$	52,558
Additions for tax positions of current period	640
Reductions for tax positions of current period	—
Additions for tax positions of prior periods	—
Reduction for tax positions of prior periods	21,327
Reduction for settlement with tax authority	32,062
Reduction for lapse of statute of limitations	—
Balance at September 30, 2012	$	(191	)

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, $43.5 million remains to either offset tax and interest liabilities for tax years subsequent to 2003 or to be refunded.

Cleco is currently under audit by the IRS for the years 2001 through 2009. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of September 30, 2012, could decrease by a maximum of $0.6 million for Cleco and the balance for Cleco Power would be unchanged 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.