Cleco

For the years ended December 31, 2013, 2012, and 2011, income tax expense was lower 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 %)	2013			2012			2011
Income before tax	$	240,260		$	228,975		$	298,745
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	84,091		$	80,141		$	104,561
Increase (decrease):
Plant differences, including AFUDC flowthrough	427			(1,222		)	(1,758		)
Amortization of investment tax credits	(1,108		)	(1,180		)	(1,238		)
State income taxes	1,094			(218		)	2,155
Tax settlement	—			—			10,782
New markets tax credits	(4,806		)	(9,261		)	(4,697		)
Other	(123		)	(2,933		)	(6,908		)
Total taxes	$	79,575		$	65,327		$	102,897
Effective Rate	33.1		%	28.5		%	34.4		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2013			2012			2011
Current federal income tax expense	$	15,672		$	47,768		$	77,659
Deferred federal income tax expense	65,237			21,724			26,577
Amortization of accumulated deferred investment tax credits	(1,108		)	(1,180		)	(1,238		)
Total federal income tax expense	$	79,801		$	68,312		$	102,998
Current state income tax (benefit) expense	(978		)	(1,192		)	2,857
Deferred state income tax expense (benefit)	752			(1,793		)	(2,958		)
Total state income tax benefit	$	(226	)	$	(2,985	)	$	(101	)
Total federal and state income tax expense	$	79,575		$	65,327		$	102,897
Items charged or credited directly to shareholders’ equity
Federal deferred	3,497			(2,386		)	(8,908		)
State deferred	565			(385		)	(1,439		)
Total tax expense (benefit) from items charged directly to shareholders’ equity	$	4,062		$	(2,771	)	$	(10,347	)
Total federal and state income tax expense	$	83,637		$	62,556		$	92,550

The $6.8 million change in total tax expense (benefit) from items charged directly to shareholders’ equity in 2013 compared to 2012 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 as of December 31, 2013, 2012, and 2011 was $13.3 million, $38.6 million, and $27.5 million, respectively.

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2013 and 2012 was comprised of the following.



	AT DEC. 31,
(THOUSANDS)	2013			2012
Depreciation and property basis differences	$	(878,298	)	$	(822,831	)
Net operating loss carryforward	95,360			139,036
New markets tax credits	99,782			82,584
Fuel costs	(7,229		)	(9,400		)
Deferred carrying charges	—			1,369
SERP – other comprehensive income	15,330			19,392
Regulated operations regulatory liability, net	(84,702		)	(75,046		)
Postretirement benefits other than pension	(5,075		)	(2,275		)
Other	(10,139		)	(16,468		)
Accumulated deferred federal and state income taxes	$	(774,971	)	$	(683,639	)

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, 2013, Cleco had a deferred tax asset resulting from NMTC carryforwards of $95.4 million. 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

Cleco filed its 2011 federal income tax return and recorded a $477.7 million increase to its net operating loss carryforward in 2012. This increase was primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. In July 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. In December 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’s 2011 federal income tax return. Cleco considers it more likely than not that the income tax losses generated on the 2011 income tax return will be utilized to reduce future payments of 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 %)	2013			2012			2011
Income before tax	$	229,791		$	214,981		$	212,244
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	80,427		$	75,243		$	74,285
Increase (decrease):
Plant differences, including AFUDC flowthrough	427			(1,222		)	(1,758		)
Amortization of investment tax credits	(1,108		)	(1,180		)	(1,238		)
State income taxes	730			(705		)	(853		)
Other	(1,095		)	(4,003		)	(1,027		)
Total taxes	$	79,381		$	68,133		$	69,409
Effective Rate	34.5		%	31.7		%	32.7		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2013			2012			2011
Current federal income tax (benefit) expense	$	(33	)	$	13,008		$	23,347
Deferred federal income tax expense	81,188			59,008			47,763
Amortization of accumulated deferred investment tax credits	(1,108		)	(1,180		)	(1,238		)
Total federal income tax expense	$	80,047		$	70,836		$	69,872
Current state income tax (benefit) expense	(1,012		)	(1,060		)	1,691
Deferred state income tax expense (benefit)	346			(1,643		)	(2,154		)
Total state income tax benefit	$	(666	)	$	(2,703	)	$	(463	)
Total federal and state income taxes	$	79,381		$	68,133		$	69,409
Items charged or credited directly to members’ equity
Federal deferred	2,824			20			(8,580		)
State deferred	456			3			(1,386		)
Total tax expense (benefit) from items charged directly to member’s equity	$	3,280		$	23		$	(9,966	)
Total federal and state income tax expense	$	82,661		$	68,156		$	59,443

The $3.3 million change in total tax expense from items charged directly to member’s equity in 2013 compared to 2012 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, 2013 and 2012, was comprised of the following.



	AT DEC. 31,
(THOUSANDS)	2013			2012
Depreciation and property basis differences	$	(836,771	)	$	(804,133	)
Net operating loss carryforward	81,102			127,742
Fuel costs	(7,229		)	(9,389		)
Deferred carrying charges	—			1,369
SERP - other comprehensive income	8,681			11,961
Regulated operations regulatory liability, net	(84,702		)	(75,046		)
Postretirement benefits other than pension	(19,056		)	(13,442		)
Other	(6,603		)	2,455
Accumulated deferred federal and state income taxes	$	(864,578	)	$	(758,483	)

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. Management considers it more likely than not that all deferred tax assets will be realized; therefore, no valuation allowance has been recorded.

Net Operating Losses

Cleco filed its 2011 federal income tax return and recorded a $477.7 million increase to its net operating loss carryforward in 2012. This increase was primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. In July 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. In December 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’s 2011 federal income tax return. Cleco Power considers it more likely than not that the income tax losses generated on the 2011 income tax return will be utilized to reduce future payments of 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 and Cleco Power’s Consolidated Balance Sheets and Statements of Income, are shown in the following tables:



	AT DEC. 31,
(THOUSANDS)	2013		2012
Interest payable
Cleco	$	88	$	1,420
Cleco Power	$	11	$	3,358

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2013		2012			2011
Interest charges
Cleco	$	154	$	(9,223	)	$	(27,175	)
Cleco Power	$	11	$	(11,648	)	$	2,116

The interest charges reflect the change in 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. There was no change to the amounts expected to be recoverable from Cleco Power’s customers under existing rate orders at December 31, 2013. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders at December 31, 2012, increased by $3.0 million.

The total liability for unrecognized tax benefits for Cleco and Cleco Power at December 31, 2013, 2012, and 2011 is shown in the following table:



Cleco
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2011	$	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
Reduction for tax positions of current period	—
Additions for tax positions of prior years	2,193
Reduction for tax positions of prior years	(248		)
Reduction for settlement with tax authority	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2013	$	5,071



Cleco Power
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2011	$	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
Reduction for tax positions of current period	—
Additions for tax positions of prior years	—
Reduction for tax positions of prior years	(248		)
Reduction for settlement with tax authority	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2013	$	—

The federal income tax years that remain subject to examination by the IRS are 2010 through 2012. The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2005 through 2012. 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 2010 through 2012. During 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 December 31, 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 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 2013, 2012, and 2011, the amount of penalties recognized was immaterial.