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, 2013 and 2012.



	FOR THE THREE MONTHS ENDED SEPT. 30,				FOR THE NINE MONTHS ENDED SEPT. 30,
	2013		2012		2013		2012
Cleco	34.1	%	24.0	%	33.0	%	27.8	%
Cleco Power	35.0	%	25.5	%	34.6	%	31.0	%

Effective Tax Rates

For the three and nine months ended September 30, 2013 and 2012, the effective income tax rate for Cleco was different than the federal statutory rate due to permanent tax deductions, flowthrough benefits associated with AFUDC equity, tax benefits delivered from Cleco’s investment in the NMTC Fund, an increase in the liability for uncertain tax positions, a favorable settlement with taxing authorities, adjustments for tax returns as filed, and state tax expense.

For the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, the effective income tax rate for Cleco increased due to a decrease in permanent tax deductions, a decrease in flowthrough benefits associated with AFUDC equity, a decrease in tax benefits delivered from Cleco's investment in the NMTC Fund, an increase in the liability for uncertain tax positions, and the absence of a favorable settlement with taxing authorities.

For the three and nine months ended September 30, 2013 and 2012, the effective income tax rate for Cleco Power was different than the federal statutory rate due to permanent tax deductions, flowthrough benefits associated with AFUDC equity, a decrease in the liability for uncertain tax positions, a favorable settlement with taxing authorities, adjustments for tax returns as filed, and state tax expense.

For the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, the effective income tax rate for Cleco Power increased due to a decrease in permanent tax deductions, a decrease in flowthrough benefits associated with AFUDC equity, and the absence of a favorable settlement with taxing authorities.

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, 2013 and December 31, 2012, Cleco had a deferred tax asset resulting from NMTC carryforwards of $91.2 million and $78.8 million, respectively. If the NMTC 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 NMTC carryforwards will be realized; therefore, no valuation allowance has been recorded.

Net Operating Losses

As of September 30, 2013, Cleco had a net operating loss carryforward primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. Cleco considers it more likely than not that these income tax losses generated will be utilized to reduce future income taxes. Cleco 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 and Cleco Power’s Condensed Consolidated Balance Sheets and Statements of Income, are shown in the following tables.



(THOUSANDS)	AT SEPT. 30, 2013		AT DEC. 31, 2012
Interest payable
Cleco	$	2,069	$	1,420
Cleco Power	$	3,712	$	3,358

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, 2013 and December 31, 2012, are $8.4 million and $6.2 million, respectively.



	FOR THE THREE MONTHS ENDED SEPT. 30,					FOR THE NINE MONTHS ENDED SEPT. 30,
(THOUSANDS)	2013		2012			2013			2012
Interest charges
Cleco	$	174	$	(121	)	$	(116	)	$	(8,477	)
Cleco Power	$	113	$	133		$	354		$	(9,504	)

The interest charges reflect the amount of interest anticipated to be paid to or received from taxing authorities. These amounts do not include any offset for the amounts that may be recovered from or owed to customers under the existing rate orders.

The federal income tax years that remain subject to examination by the IRS are 2007 through 2012. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2002 through 2011. At December 31, 2012, Cleco had $60.4 million deposited with the IRS, of which $43.5 million remained to either offset tax and interest liabilities for tax years subsequent to 2003 or to be refunded. 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 2010 through 2012. During the third quarter of 2013, Cleco increased its liability for uncertain tax positions. In addition, Cleco reclassified all uncertain tax positions to current from noncurrent as it expects to settle all outstanding audits within the next 12 months. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of September 30, 2013, could decrease by a maximum of $4.6 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.

Cleco classifies income tax penalties as a component of other expense. During 2013 and 2012, the amount of penalties recognized was immaterial.