

Note 9 — Income Taxes

Cleco

For the years ended December 31, 2014, 2013, and 2012, 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 %)	2014			2013			2012
Income before tax	$	221,855		$	240,260		$	228,975
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	77,649		$	84,091		$	80,141
Increase (decrease):
Plant differences, including AFUDC flowthrough	462			427			(1,222		)
Amortization of investment tax credits	(983		)	(1,108		)	(1,180		)
State income taxes	23			1,094			(218		)
Settlement with taxing authorities	(9,106		)	—			—
New markets tax credits	(754		)	(4,806		)	(9,261		)
Other	(175		)	(123		)	(2,933		)
Total taxes	$	67,116		$	79,575		$	65,327
Effective Rate	30.3		%	33.1		%	28.5		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2014			2013			2012
Current federal income tax expense	$	11,082		$	15,672		$	47,768
Deferred federal income tax expense	71,061			65,237			21,724
Amortization of accumulated deferred investment tax credits	(983		)	(1,108		)	(1,180		)
Total federal income tax expense	$	81,160		$	79,801		$	68,312
Current state income tax benefit	(6,580		)	(978		)	(1,192		)
Deferred state income tax (benefit) expense	(7,464		)	752			(1,793		)
Total state income tax benefit	$	(14,044	)	$	(226	)	$	(2,985	)
Total federal and state income tax expense	$	67,116		$	79,575		$	65,327
Items charged or credited directly to shareholders’ equity
Federal deferred	(3,656		)	3,497			(2,386		)
State deferred	(590		)	565			(385		)
Total tax (benefit) expense from items charged directly to shareholders’ equity	$	(4,246	)	$	4,062		$	(2,771	)
Total federal and state income tax expense	$	62,870		$	83,637		$	62,556

The $8.3 million decrease in total tax expense from items charged directly to shareholders’ equity in 2014 compared to 2013 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, 2014, 2013, and 2012 was $3.4 million, $13.3 million, and $38.6 million, respectively.

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2014 and 2013 was comprised of the following:



	AT DEC. 31,
(THOUSANDS)	2014			2013
Depreciation and property basis differences	$	(892,725	)	$	(878,298	)
Net operating loss carryforward	56,315			95,360
New markets tax credits	84,504			99,782
Fuel costs	(11,686		)	(7,229		)
Other comprehensive income	19,576			15,330
Regulated operations regulatory liability, net	(90,135		)	(84,702		)
Postretirement benefits other than pension	812			(5,075		)
Other	(8,734		)	(10,139		)
Accumulated deferred federal and state income taxes	$	(842,073	)	$	(774,971	)

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. Cleco had a deferred tax asset resulting from NMTC carryforwards of $95.4 million as of December 31, 2014 and $95.4 million as of December 31, 2013. 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 December 31, 2014, Cleco had a federal net operating loss carryforward of $303.9 million primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. Cleco considers it more likely than not that the income tax losses generated 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 %)	2014			2013			2012
Income before tax	$	231,290		$	229,791		$	214,981
Statutory rate	35.0		%	35.0		%	35.0		%
Tax at federal statutory rate	$	80,952		$	80,427		$	75,243
Increase (decrease):
Plant differences, including AFUDC flowthrough	462			427			(1,222		)
Amortization of investment tax credits	(983		)	(1,108		)	(1,180		)
State income taxes	351			730			(705		)
Settlement with taxing authorities	(2,320		)	—			—
Other	(1,488		)	(1,095		)	(4,003		)
Total taxes	$	76,974		$	79,381		$	68,133
Effective Rate	33.3		%	34.5		%	31.7		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2014			2013			2012
Current federal income tax (benefit) expense	$	(197	)	$	(33	)	$	13,008
Deferred federal income tax expense	83,676			81,188			59,008
Amortization of accumulated deferred investment tax credits	(983		)	(1,108		)	(1,180		)
Total federal income tax expense	$	82,496		$	80,047		$	70,836
Current state income tax benefit	(4,161		)	(1,012		)	(1,060		)
Deferred state income tax (benefit) expense	(1,361		)	346			(1,643		)
Total state income tax benefit	$	(5,522	)	$	(666	)	$	(2,703	)
Total federal and state income taxes	$	76,974		$	79,381		$	68,133
Items charged or credited directly to members’ equity
Federal deferred	(1,137		)	2,824			20
State deferred	(184		)	456			3
Total tax (benefit) expense from items charged directly to member’s equity	$	(1,321	)	$	3,280		$	23
Total federal and state income tax expense	$	75,653		$	82,661		$	68,156

The $4.6 million decrease in total tax expense from items charged directly to member’s equity in 2014 compared to 2013 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, 2014 and 2013, was comprised of the following:



	AT DEC. 31,
(THOUSANDS)	2014			2013
Depreciation and property basis differences	$	(890,030	)	$	(836,771	)
Net operating loss carryforward	12,323			81,102
Fuel costs	(11,686		)	(7,229		)
Other comprehensive income	10,002			8,681
Regulated operations regulatory liability, net	(90,135		)	(84,702		)
Postretirement benefits other than pension	(14,346		)	(19,056		)
Other	(10,735		)	(6,603		)
Accumulated deferred federal and state income taxes	$	(994,607	)	$	(864,578	)

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

As of December 31, 2014, Cleco had a federal net operating loss carryforward of $303.9 million primarily related to a tax accounting method change for bonus depreciation associated with Madison Unit 3. Cleco Power considers it more likely than not that the income tax losses generated 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 and Cleco Power’s Consolidated Balance Sheets and Statements of Income, are shown in the following tables:



	AT DEC. 31,
(THOUSANDS)	2014		2013
Interest payable
Cleco	$	—	$	88
Cleco Power	$	—	$	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 the existing rate orders. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders for settled positions at December 31, 2014 and December 31, 2013, are $5.2 million and $8.4 million, respectively.



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2014		2013		2012
Interest charges
Cleco	$	—	$	154	$	(9,223	)
Cleco Power	$	—	$	11	$	(11,648	)

The interest charges reflect the amount of interest anticipated to be paid 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. There was no change to the amounts expected to be recoverable from Cleco Power’s customers under existing rate orders for settled positions from December 31, 2014, to December 31, 2013. The amounts expected to be recoverable from Cleco Power’s customers under existing rate orders for settled positions at December 31, 2013, increased by $3.0 million from December 31, 2012.

The total liability for unrecognized tax benefits for Cleco and Cleco Power at December 31, 2014, 2013, and 2012 is shown in the following table:



Cleco
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2012	$	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
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	(5,071		)
Reduction for lapse of statute of limitations	—
Balance at December 31, 2014	$	—



Cleco Power
(THOUSANDS)	LIABILITY FOR UNRECOGNIZED TAX BENEFITS
Balance at January 1, 2012	$	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	$	—
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	—
Reduction for lapse of statute of limitations	—
Balance at December 31, 2014	$	—

The federal income tax year that remains subject to examination by the IRS is 2013. At December 31, 2012, Cleco deposited $60.4 million with the IRS for outstanding audits. Upon settlement with the IRS, in January 2013, Cleco received a refund of tax and interest of $42.3 million relating to tax years 2001 through 2008. The IRS has concluded its audit for the years 2010 through 2012. In August 2014, Cleco received approval from the Joint Committee on Taxation for tax years 2010 and 2011. The 2012 tax year did not require Joint Committee on Taxation approval.

The Louisiana state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2011 through 2013. In August 2014, Cleco reached a settlement for tax years 2001 through 2010. The favorable impact from the settlement was reflected in various line items in the financial statements.

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 favorable settlements with taxing authorities. Cleco estimates that it is reasonably possible that the balance of unrecognized tax benefits as of December 31, 2014, for Cleco and Cleco Power would be unchanged in the next 12 months as a result of reaching a settlement with taxing authorities. The settlement of open tax years 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.

In 2014, Cleco entered into the IRS’s Compliance Assurance Process which allows taxpayers to work collaboratively with an IRS team to identify and resolve potential tax issues before the return is filed each year.

Cleco classifies income tax penalties as a component of other expenses. During 2014, 2013, and 2012, the amount of penalties recognized was immaterial.