INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES.

INCOME TAXES

9.     Income Taxes

        Income tax expense components for the years ended December 31 are as follows (in thousands):

	2011			2010			2009
Current income taxes:
Federal	$	(8,604	)	$	7,713		$	3,987
State		(2,120	)		1,057			572
TOTAL		(10,724	)		8,770			4,559
Deferred income taxes:
Federal		39,096			17,942			13,854
State		6,297			4,349			1,973
TOTAL		45,393			22,291			15,827
Investment tax credit amortization		(371	)		(528	)		(504	)
TOTAL INCOME TAX EXPENSE	$	34,298		$	30,533		$	19,882

Deferred Income Taxes

        Deferred tax assets and liabilities are reflected on our consolidated balance sheet as follows (in thousands):

	December 31,
Deferred Income Taxes	2011		2010
Current deferred tax assets, net(1)	$	6,688	$	—
Non-current deferred tax liabilities, net		263,933		212,003
NET DEFERRED TAX LIABILITIES	$	257,245	$	212,003

(1)

Current deferred tax assets are included in prepaid expenses and other on the face of the balance sheet.

        Temporary differences related to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):

	December 31,
Temporary Differences	2011		2010
Deferred tax assets:
Net operating loss	$	6,688	$	—
Disallowed plant costs		1,097		1,127
Alternative minimum tax		261		—
Gains on hedging transactions		1,454		1,518
Plant related basis differences		21,044		21,105
Regulated liabilities related to income taxes		13,318		13,702
Pensions and other post-retirement benefits		—		1,588
Carry forward of income tax credit		16,304		12,596
Income received — deferred		598		10,044
Other		32		2,262
Total deferred tax assets	$	60,796	$	63,942
Deferred tax liabilities:
Depreciation, amortization and other plant related differences	$	253,743	$	216,685
Regulated assets related to income		40,555		41,107
Loss on reacquired debt		4,288		3,996
Pensions and other post-retirement benefits		673		—
Deferred ice storm expenses		1,413		2,957
Deferred fuel costs		2,662		1,965
Amortization of intangibles		5,929		4,850
Other		8,778		4,385
Total deferred tax liabilities		318,041		275,945
NET DEFERRED TAX LIABILITIES	$	257,245	$	212,003

        The Company generated approximately $25.1 million of tax net operating losses during 2011, mainly due to bonus depreciation. These losses may be carried back two years and are also available to offset future taxable income until 2031.

Effective Income Tax Rates

        The difference between income taxes and amounts calculated by applying the federal legal rate to income tax expense for continuing operations were as follows:

Effective Income Tax Rates	2011			2010			2009
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Increase in income tax rate resulting from:
State income tax (net of federal benefit)		3.1			3.1			3.1
Investment tax credit amortization		(0.4	)		(0.7	)		(0.8	)
Effect of ratemaking on property related differences		0.2			(0.8	)		(3.6	)
Effect of Medicare part D changes		—			2.7
Other		0.5			(0.1	)		(1.2	)
Effective income tax rate		38.4	%		39.2	%		32.5	%

Unrecognized Tax Benefits	2011			2010			2009
Unrecognized tax benefits — January 1,	$	359,000		$	906,000		$	2,176,000
The gross amounts of increases in unrecognized tax benefits taken during prior periods		—			—			—
The gross amounts of decreases in unrecognized tax benefits taken during the period relating to positions accepted by taxing authorities		—			—			—
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations		(359,000	)		(547,000	)		(1,270,000	)
Unrecognized tax benefits — December 31,	$	—		$	359,000		$	906,000

        The Company does not have any unrecognized tax benefits as of December 31, 2011. The Company recognized interest or penalties of $0.0 million, $0.1 million and $(0.0) million during 2011, 2010 and 2009, respectively, related to unrecognized tax benefits in other expenses and on the balance sheet. The Company does not expect any significant changes to our unrecognized tax benefits over the next twelve months.

        A December 2009 award from an arbitration panel ordered KCP&L to renegotiate with the IRS a previous $125 million advanced coal investment tax credit granted to our Iatan 2 plant. The IRS executed a revised memorandum of understanding (MOU) on September 7, 2010, which granted us our share, $17.7 million, of advanced coal investment tax credits in accordance with the arbitration panel's order. We utilized less than $0.2 million of these credits when preparing our 2010 tax return as utilization of the credits was limited by alternative minimum tax rules. We expect to use the remaining credits over the 2012 and 2013 tax years. The tax credit will have no significant income statement impact as the credits will flow to our customers as we amortize the tax credits over the life of the plant.

        We received a $26.6 million payment received from the SWPA during 2010 which was deferred and treated as a noncurrent liability for book purposes. We increased our current tax liability by $10.0 million during 2010 in recognition that the $26.6 million payment may be considered taxable income in 2010. An agreement was reached with the IRS in 2011 that allowed us to defer recognition for tax purposes of approximately $26.1 million utilizing "like-kind exchange" rules within the Code. Accordingly, we reduced our current tax liability based on the agreement and will recognize the $26.1 million for tax purposes over more than 50 years.

        On March 23, 2010, the Patient Protection and Affordable Care Act was enacted. This legislation included a provision that reduced the deductibility, for income tax purposes, of retiree healthcare costs to the extent an employer receives federal subsidies. Companies receive the subsidy when they provide retiree prescription benefits at least equivalent to Medicare Part D coverage in their postretirement healthcare plan. Although the elimination of this tax benefit does not take effect until 2013, this change required us to recognize the full accounting impact in our financial statements in the period in which the legislation was enacted. As a result, in the first quarter of 2010, we recorded a one-time non-cash charge of approximately $2.1 million to provision for income taxes to reflect the impact of this change. Our 2010 effective tax rate increased as noted in the statutory rate reconciliation above based on the change.