

Note 11 — Income Taxes

Cleco

For the year ended December 31, 2018 and for the predecessor period January 1, 2016, through April 12, 2016, income tax expense was higher than the amount computed by applying the statutory federal rate. For the year ended December 31, 2017, and for the successor period April 13, 2016, through December 31, 2016, income tax expense was lower than the amount computed by applying the statutory federal rate. The differences are as follows:



	SUCCESSOR									PREDECESSOR
(THOUSANDS, EXCEPT PERCENTAGES)	FOR THE YEAR ENDED DEC. 31, 2018			FOR THE YEAR ENDED DEC. 31, 2017			APR. 13, 2016 - DEC. 31, 2016			JAN. 1, 2016 - APR. 12, 2016
Income (loss) before tax	$	123,819		$	145,159		$	(46,935	)	$	(492	)
Statutory rate	21.0		%	35.0		%	35.0		%	35.0		%
Tax expense (benefit) at federal statutory rate	$	26,002		$	50,806		$	(16,427	)	$	(172	)
Increase (decrease)
Plant differences, including AFUDC flowthrough	(401		)	743			(881		)	823
Amortization of investment tax credits	(236		)	(662		)	(371		)	(124		)
State income taxes, net of federal benefit	6,288			5,047			1,844			(3,078		)
Nondeductible merger costs	—			2			(844		)	4,282
Return to accrual adjustment	(193		)	(608		)	(2,943		)	—
TCJA	(19		)	(46,291		)	—			—
NMTC	(1,578		)	313			(181		)	(158		)
Other	(481		)	(2,271		)	(3,019		)	1,895
Total tax expense (benefit)	$	29,382		$	7,079		$	(22,822	)	$	3,468
Effective rate	23.7		%	4.9		%	48.6		%	(704.9		)%

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



	SUCCESSOR									PREDECESSOR
(THOUSANDS)	FOR THE YEAR ENBDED DEC. 31, 2018			FOR THE YEAR ENDED DEC. 31, 2017			APR. 13, 2016 - DEC. 31, 2016			JAN. 1, 2016 - APR. 12, 2016
Current federal income tax expense (benefit)	$	15,304		$	46,520		$	(1,062	)	$	1,373
Deferred federal income tax expense (benefit)	5,863			(47,329		)	(16,715		)	5,297
Amortization of accumulated deferred investment tax credits	(236		)	(662		)	(371		)	(124		)
Total federal income tax expense (benefit)	$	20,931		$	(1,471	)	$	(18,148	)	$	6,546
Current state income tax expense (benefit)	7,771			3,187			(337		)	—
Deferred state income tax expense (benefit)	680			5,363			(4,337		)	(3,078		)
Total state income tax expense (benefit)	$	8,451		$	8,550		$	(4,674	)	$	(3,078	)
Total federal and state income tax expense (benefit)	$	29,382		$	7,079		$	(22,822	)	$	3,468
Items charged or credited directly to member’s/shareholders’ equity
Federal deferred	1,408			(2,380		)	808			348
State deferred	460			(384		)	130			56
Total tax expense (benefit) from items charged directly to member’s/shareholders’ equity	$	1,868		$	(2,764	)	$	938		$	404
Total federal and state income tax expense (benefit)	$	31,250		$	4,315		$	(21,884	)	$	3,872

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2018, and 2017 was comprised of the following:



	AT DEC. 31,
(THOUSANDS)	2018			2017
Depreciation and property basis differences	$	(664,996	)	$	(596,824	)
Net operating loss carryforward	—			12,873
NMTC	86,673			96,917
Fuel costs	(8,339		)	(3,283		)
Other comprehensive income	640			(490		)
Regulated operations regulatory liability, net	39,808			(54,471		)
Postretirement benefits	19,580			23,642
Merger fair value adjustments	(56,725		)	(58,251		)
Other	(24,671		)	(34,925		)
Accumulated deferred federal and state income taxes, net	$	(608,030	)	$	(614,812	)

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, 2018, and 2017, Cleco had a deferred tax asset resulting from NMTC carryforwards of $86.9 million and $97.5 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 December 31, 2018, Cleco had no federal net operating loss carryforward and no state net operating loss carryforward.

Cleco Power

For the year ended December 31, 2018, income tax expense was higher than the amount computed by applying the statutory rate. For the years ended December 31, 2017 and 2016, 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 PERCENTAGES)	2018			2017			2016
Income before tax	$	218,181		$	218,069		$	57,497
Statutory rate	21.0		%	35.0		%	35.0		%
Tax expense at federal statutory rate	$	45,818		$	76,324		$	20,124
Increase (decrease)
Plant differences, including AFUDC flowthrough	(401		)	743			(58		)
Amortization of investment tax credits	(236		)	(662		)	(494		)
State income taxes, net of federal benefit	11,080			7,583			1,999
Return to accrual adjustment	483			(284		)	(2,646		)
TCJA	(19		)	(14,292		)	—
Other	(801		)	(2,081		)	(556		)
Total taxes	$	55,924		$	67,331		$	18,369
Effective rate	25.6		%	30.9		%	31.9		%

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



	FOR THE YEAR ENDED DEC. 31,
(THOUSANDS)	2018			2017			2016
Current federal income tax expense (benefit)	$	44,411		$	87,433		$	(1,211	)
Deferred federal income tax (benefit) expense	(9,033		)	(29,190		)	22,647
Amortization of accumulated deferred investment tax credits	(236		)	(662		)	(494		)
Total federal income tax expense	$	35,142		$	57,581		$	20,942
Current state income tax expense (benefit)	23,293			14,751			(418		)
Deferred state income tax benefit	(2,511		)	(5,001		)	(2,155		)
Total state income tax expense (benefit)	$	20,782		$	9,750		$	(2,573	)
Total federal and state income taxes	$	55,924		$	67,331		$	18,369
Items charged or credited directly to members’ equity
Federal deferred	797			(141		)	1,976
State deferred	261			(23		)	319
Total tax expense (benefit) from items charged directly to member’s equity	$	1,058		$	(164	)	$	2,295
Total federal and state income tax expense	$	56,982		$	67,167		$	20,664

The balance of accumulated deferred federal and state income tax assets and liabilities at December 31, 2018, and 2017 was comprised of the following:



	AT DEC. 31,
(THOUSANDS)	2018			2017
Depreciation and property basis differences	$	(666,224	)	$	(597,838	)
Net operating loss carryforward	—			470
Fuel costs	(8,339		)	(3,282		)
Other comprehensive income	4,192			5,250
Regulated operations regulatory liability, net	39,808			(54,471		)
Postretirement benefits	11,081			6,266
Other	(11,283		)	(12,757		)
Accumulated deferred federal and state income taxes, net	$	(630,765	)	$	(656,362	)

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.

Uncertain Tax Positions

Cleco classifies all interest related to uncertain tax positions as a component of interest payable and interest expense. At December 31, 2018, and 2017, Cleco and Cleco Power had no interest payable related to uncertain tax positions. For the years ended December 31, 2018, 2017, and 2016, Cleco and Cleco Power had no interest expense related to uncertain tax positions.

At December 31, 2018, and 2017, Cleco and Cleco Power had no liability for unrecognized tax positions. Cleco and Cleco Power estimate that it is reasonably possible that there will be no liability for unrecognized tax positions in the next 12 months. The settlement of open tax years could involve the payment of additional taxes, and/or the recognition of tax benefits, which may have an effect on Cleco’s effective income tax rate.

The federal income tax years that remain subject to examination by the IRS are 2015, 2016, and 2017.

Beginning with the 2013 tax year, 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 federal tax return is filed each year. Cleco must apply for admission to the program each year. Cleco has been approved for the Compliance Assurance Process through the 2019 tax year.

The state income tax years that remain subject to examination by the Louisiana Department of Revenue are 2015, 2016, and 2017.

Cleco classifies income tax penalties as a component of other expenses. For the years ended December 31, 2018, 2017, and 2016, no penalties were recognized.

TCJA

On December 22, 2017, the President signed into law the TCJA. The TCJA includes significant changes to the IRC, as amended, including amendments which significantly change the taxation of business entities and includes specific provisions related to rate regulated activities, including Cleco Power. The most significant change that impacts Cleco is the reduction of the corporate federal income tax rate from 35% to 21%.

The SEC Staff recognized the complexity of reflecting the impacts of the TCJA and issued guidance which clarified accounting for income taxes and allowed for up to one year to complete the required analysis and accounting (the measurement period). During the fourth quarter of 2018, Cleco finalized the remeasurement of and accounting for the effects of the TCJA.

For the year ended December 31, 2017, the Registrants recorded provisional estimates for the effects of the TCJA that decreased deferred income tax expense for Cleco and Cleco Power by $46.3 million and $14.3 million, respectively. At December 31, 2017, the provisional impacts of the TCJA decreased the ADIT liability for Cleco and Cleco Power by $394.9 million and $362.9 million, respectively.

During the fourth quarter of 2018, Cleco and Cleco Power increased the ADIT liability by $26.4 million for the final remeasurement. For more information on the regulatory treatment, see Note 13 — “Regulation and Rates — TCJA.”

Additionally, as a result of the TCJA, effective for tax years beginning after December 31, 2017, corporations are no longer subject to the alternative minimum tax (AMT). For companies with unused AMT credits, the credits may be carried forward and used as refundable credits for tax years beginning after 2017, but before 2022. Cleco expects its unused AMT credits will be fully utilized by December 31, 2021. During 2018, Cleco’s $7.6 million of unused tax credits were reclassed from Accumulated deferred federal and state income taxes, net to Taxes payable, net and Other deferred charges on Cleco’s Consolidated Balance Sheet. Of this amount, the $3.8 million of AMT credits expected to be utilized in 2019 were reported in Taxes payable, net on Cleco’s Consolidated Balance Sheet, and the remaining $3.8 million are classified as Other deferred charges on Cleco’s Consolidated Balance Sheet.