Cleco

For the years ended December 31, 2012 and 2011, 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 DEC. 31,
(THOUSANDS, EXCEPT FOR %)	2012			2011			2010
Income before tax	$	228,975		$	298,745		$	397,889
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	80,141		$	104,561		$	139,261
Increase (decrease):
Plant differences, including AFUDC flowthrough	(1,222		)	(1,758		)	(7,757		)
Amortization of investment tax credits	(1,180		)	(1,238		)	(1,285		)
State income taxes	(218		)	2,155			11,897
Tax settlement	—			10,782			—
New Markets Tax Credits	(9,261		)	(4,697		)	—
Other	(2,933		)	(6,908		)	382
Total taxes	$	65,327		$	102,897		$	142,498
Effective Rate	28.5		%	34.4		%	35.8		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2012			2011			2010
Current federal income tax expense	$	47,768		$	77,659		$	75,337
Deferred federal income tax expense	21,724			26,577			56,047
Amortization of accumulated deferred investment tax credits	(1,180		)	(1,238		)	(1,285		)
Total federal income tax expense	$	68,312		$	102,998		$	130,099
Current state income tax (benefit) expense	(1,192		)	2,857			13,572
Deferred state income tax benefit	(1,793		)	(2,958		)	(1,173		)
Total state income tax (benefit) expense	$	(2,985	)	$	(101	)	$	12,399
Total federal and state income tax expense	$	65,327		$	102,897		$	142,498
Items charged or credited directly to shareholders’ equity
Federal deferred	(2,386		)	(8,908		)	2,210
State deferred	(385		)	(1,439		)	357
Total tax expense (benefit) from items charged directly to shareholders’ equity	$	(2,771	)	$	(10,347	)	$	2,567
Total federal and state income tax expense	$	62,556		$	92,550		$	145,065

The $7.6 million change in total tax benefit from items charged directly to shareholders’ equity in 2012 compared to 2011 was primarily due to the tax effect of other post-employment benefit adjustments booked to accumulated other comprehensive income and interest rate derivatives.

Cleco recognizes the amortization of the NMTC Fund investment and the related interest on the liability as a component of current tax expense. The amount of amortization and interest recognized in 2012, 2011, and 2010 was $38.6 million, $27.5 million, and $44.1 million, respectively.

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2012 and 2011 was comprised of the following.



	AT DEC. 31,
(THOUSANDS)	2012			2011
Depreciation and property basis differences	$	(822,831	)	$	(594,135	)
Net operating loss carryforward	139,036			18,542
New Markets Tax Credits	82,584			36,398
Fuel costs	(9,400		)	(6,135		)
Deferred carrying charges	1,369			11,327
SERP – other comprehensive income	19,392			16,621
Regulated operations regulatory liability, net	(75,046		)	(83,965		)
Postretirement benefits other than pension	(2,275		)	(9,486		)
Other	(16,468		)	(9,844		)
Accumulated deferred federal and state income taxes	$	(683,639	)	$	(620,677	)

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 December 31, 2012, Cleco had a deferred tax asset resulting from New Markets Tax Credit carryforwards of $78.8 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 recorded a $477.7 million increase to its net operating loss carryforward in 2012. The increase was primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. On July 3, 2012, Cleco and Cleco Power filed a PLR request with the IRS in order to determine the appropriateness and timing of the special allowance for depreciation for Madison Unit 3. On December 28, 2012, Cleco received a favorable PLR from the IRS, consistent with the request allowing for the additional first year depreciation deduction in the amount of $411.0 million as reflected on Cleco Corporation’s 2011 federal income tax return. Cleco considers it more likely than not that these income tax losses generated on the 2011 income tax return will be utilized to reduce future income taxes and Cleco expects to utilize the entire net operating loss carryforward within the statutory deadlines.

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 DEC. 31,
(THOUSANDS, EXCEPT FOR %)	2012			2011			2010
Income before tax	$	214,981		$	212,244		$	222,512
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	75,243		$	74,285		$	77,879
Increase (decrease):
Plant differences, including AFUDC flowthrough	(1,222		)	(1,758		)	(7,757		)
Amortization of investment tax credits	(1,180		)	(1,238		)	(1,285		)
State income taxes	(705		)	(853		)	5,798
Other	(4,003		)	(1,027		)	472
Total tax expense	$	68,133		$	69,409		$	75,107
Effective Rate	31.7		%	32.7		%	33.8		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2012			2011			2010
Current federal income tax expense	$	13,008		$	23,347		$	35,132
Deferred federal income tax expense	59,008			47,763			40,237
Amortization of accumulated deferred investment tax credits	(1,180		)	(1,238		)	(1,285		)
Total federal income tax expense	$	70,836		$	69,872		$	74,084
Current state income tax (benefit) expense	(1,060		)	1,691			6,704
Deferred state income tax benefit	(1,643		)	(2,154		)	(5,681		)
Total state income tax (benefit) expense	$	(2,703	)	$	(463	)	$	1,023
Total federal and state income taxes	$	68,133		$	69,409		$	75,107
Items charged or credited directly to shareholders’ equity
Federal deferred	20			(8,580		)	2,532
State deferred	3			(1,386		)	409
Total tax expense (benefit) from items charged directly to shareholders’ equity	$	23		$	(9,966	)	$	2,941
Total federal and state income tax expense	$	68,156		$	59,443		$	78,048

The $10.0 million change in total tax benefit from items charged directly to shareholders’ equity in 2012 compared to 2011 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, 2012 and 2011, was comprised of the following.



	AT DEC. 31,
(THOUSANDS)	2012			2011
Depreciation and property basis differences	$	(804,133	)	$	(592,634	)
Net operating loss carryforward	127,742			16,390
Fuel costs	(9,389		)	(6,125		)
Deferred carrying charges	1,369			11,327
SERP - other comprehensive income	11,961			11,984
Regulated operations regulatory liability, net	(75,046		)	(83,965		)
Postretirement benefits other than pension	(13,442		)	(22,461		)
Other	2,455			9,478
Accumulated deferred federal and state income taxes	$	(758,483	)	$	(656,006	)

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.

Net Operating Losses

Cleco Corporation filed its 2011 federal income tax return and recorded a $477.7 million increase to its net operating loss carryforward in 2012. The increase was primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. On July 3, 2012, Cleco and Cleco Power filed a PLR request with the IRS in order to determine the appropriateness and timing of the special allowance for depreciation for Madison Unit 3. On December 28, 2012, Cleco received a favorable PLR from the IRS, consistent with the request allowing for the additional first year depreciation deduction in the amount of $411.0 million as reflected on Cleco Corporation’s 2011 federal income tax return.Cleco Power considers it more likely than not that these income tax losses generated on the 2011 income tax return will be utilized to reduce future income taxes and Cleco Power expects to utilize the entire net operating loss carryforward within the statutory deadlines.

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 DEC. 31,
(THOUSANDS)	2012		2011
Interest payable
Cleco Corporation	$	1,420	$	13,843
Cleco Power	$	3,358	$	17,327

The interest payable reflects the amount of interest anticipated to be paid to taxing authorities. These amounts do not included 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 December 31, 2012 and December 31, 2011, are $6.2 million and $9.3 million, respectively.



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2012			2011			2010
Interest charges
Cleco Corporation	$	(9,223	)	$	(27,175	)	$	3,930
Cleco Power	$	(11,648	)	$	2,116		$	(5,448	)

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 existing rate orders. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders at December 31, 2012 and December 31, 2011, are $3.0 million and $1.4 million, respectively.

The total liability for unrecognized tax benefits for Cleco and Cleco Power at December 31, 2012, 2011, and 2010 is shown in the following table:



Cleco
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2010	$	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
Reduction for tax positions of current period	—
Additions for tax positions of prior years	—
Reduction for tax positions of prior years	—
Reduction for settlement with tax authority	(53,109		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2012	$	3,126



Cleco Power
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2010	$	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
Reduction for tax positions of current period	—
Additions for tax positions of prior years	—
Reduction for tax positions of prior years	—
Reduction for settlement with tax authority	(52,310		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2012	$	248

The federal income tax years that remain subject to examination by the IRS are 2004 through 2011. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2002 through 2011. In December 2010, Cleco deposited $52.2 million with the IRS associated with the years currently under audit. 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. At December 31, 2012, Cleco had $60.4 million deposited with the IRS, of which Cleco received a refund of tax and interest in January 2013 from the IRS of $42.3 million relating to tax years 2001 through 2008.

Cleco is currently under audit by the IRS for the years 2004 through 2009. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 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 a settlement 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.

Cleco classifies income tax penalties as a component of other expenses. During 2012, 2011, and 2010, the amount of penalties recognized was immaterial.