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, 2014 and 2013.



	FOR THE THREE MONTHS ENDED JUNE 30,				FOR THE SIX MONTHS ENDED JUNE 30,
	2014		2013		2014		2013
Cleco	28.4	%	31.6	%	31.1	%	32.0	%
Cleco Power	33.0	%	34.3	%	33.9	%	34.1	%

Effective Tax Rates

For the three and six months ended June 30, 2014 and 2013, the effective income tax rate for Cleco was different than the federal statutory rate due to permanent tax differences, the flowthrough of tax benefits associated with AFUDC equity, tax benefits delivered from Cleco’s investment in the NMTC Fund, a settlement with taxing authorities, and state tax expense.

For the three and six months ended June 30, 2014 and 2013, the effective income tax rate for Cleco Power was different than the federal statutory rate due to permanent tax differences, the flowthrough 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 June 30, 2014 and December 31, 2013, Cleco had a deferred tax asset resulting from NMTC carryforwards of $97.6 million and $95.4 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 June 30, 2014, 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, and 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 interest payable and interest expense related to uncertain tax positions, 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, 2014			AT DEC. 31, 2013
Interest payable
Cleco	$	(136	)	$	88
Cleco Power	$	13		$	11

The interest payable reflects the amount of interest anticipated to be paid to or received from 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 June 30, 2014 and December 31, 2013, are $7.2 million and $8.4 million, respectively.



	FOR THE THREE MONTHS ENDED JUNE 30,						FOR THE SIX MONTHS ENDED JUNE 30,
(THOUSANDS)	2014			2013			2014			2013
Interest charges
Cleco	$	(594	)	$	(221	)	$	(565	)	$	(290	)
Cleco Power	$	1		$	121		$	2		$	242

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 customers under the existing rate orders. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders at June 30, 2014 increased by $0.6 million from December 31, 2013. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders at June 30, 2013 increased by $1.4 million from December 31, 2012.

The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2005 through 2012. At December 31, 2012, Cleco deposited $60.4 million with the IRS for outstanding audits. Upon settlement with the IRS, Cleco received a refund of tax and interest in January 2013 of $42.3 million relating to tax years 2001 through 2008.

The IRS has concluded its audit for the years 2010 through 2012. Years 2010 and 2011 were sent to the Joint Committee on Taxation for approval. The 2012 tax year did not require Joint Committee on Taxation approval. In 2013, Cleco reclassified all uncertain tax positions to current from noncurrent as it expected to settle all outstanding audits within the next 12 months. During 2014, Cleco decreased its liability for uncertain tax positions as a result of settlements with taxing authorities. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of June 30, 2014, could decrease by a maximum of $0.7 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 state tax authorities. The settlement 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. For the three and six months ended June 30, 2014 and 2013, the amount of penalties recognized was immaterial.