Entity information:
21. TAXES
Components of income tax expense are detailed in the following tables.
Great Plains Energy
2017
 
2016
 
2015
Current income taxes
(millions)
Federal
$
(1.7
)
 
$
0.3

 
$
(0.2
)
State
1.0

 
0.7

 
(1.1
)
Total
(0.7
)
 
1.0

 
(1.3
)
Deferred income taxes
 

 
 

 
 

Federal
223.5

 
140.6

 
96.9

State
11.9

 
29.5

 
28.0

Total
235.4

 
170.1

 
124.9

Investment tax credit
 
 
 
 
 
Deferral
—

 
2.5

 
0.5

Amortization
(1.4
)
 
(1.4
)
 
(1.4
)
Total
(1.4
)
 
1.1

 
(0.9
)
Income tax expense
$
233.3

 
$
172.2

 
$
122.7

Great Plains Energy's 2017 federal deferred income tax expense includes $130.3 million of additional income tax expense due to the impacts of U.S. federal income tax reform, discussed further below.
KCP&L
2017
 
2016
 
2015
Current income taxes
(millions)
Federal
$
37.4

 
$
24.8

 
$
(18.7
)
State
8.3

 
4.7

 
(3.4
)
Total
45.7

 
29.5

 
(22.1
)
Deferred income taxes
 

 
 

 
 

Federal
74.7

 
76.4

 
81.9

State
8.8

 
17.0

 
17.5

Total
83.5

 
93.4

 
99.4

Investment tax credit
 
 
 
 
 
Deferral
—

 
—

 
0.5

Amortization
(1.0
)
 
(1.0
)
 
(1.0
)
Total
(1.0
)
 
(1.0
)
 
(0.5
)
Income tax expense
$
128.2

 
$
121.9

 
$
76.8


Effective Income Tax Rates
Effective income tax rates reflected in the financial statements and the reasons for their differences from the statutory federal rates are detailed in the following tables.
Great Plains Energy
2017
 
2016
 
2015
Federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Differences between book and tax depreciation not normalized
0.1

 
(0.1
)
 
—

Amortization of investment tax credits
(1.1
)
 
(0.3
)
 
(0.4
)
Federal income tax credits
(5.8
)
 
(2.6
)
 
(4.1
)
State income taxes
8.3

 
4.2

 
4.0

Transaction-related costs
42.5

 
0.9

 
—

Valuation allowance
8.9

 
—

 
1.5

Federal tax rate change
95.3

 
—

 
—

Other
0.3

 
0.2

 
0.5

Effective income tax rate
183.5
 %
 
37.3
 %
 
36.5
 %
The increase in Great Plains Energy's effective income tax rate for 2017 is driven by significant transaction-related costs incurred in connection with the anticipated merger with Westar that are not deductible for tax purposes and the impacts of U.S. federal income tax reform, discussed further below.
KCP&L
2017
 
2016
 
2015
Federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Differences between book and tax depreciation not normalized
(0.1
)
 
(0.3
)
 
—

Amortization of investment tax credits
(0.3
)
 
(0.3
)
 
(0.5
)
Federal income tax credits
(2.4
)
 
(3.1
)
 
(5.6
)
State income taxes
3.8

 
4.1

 
4.0

Valuation allowance
0.4

 
—

 
0.3

Federal tax rate change
5.3

 
—

 
—

Other
(0.1
)
 
(0.2
)
 
0.3

Effective income tax rate
41.6
 %
 
35.2
 %
 
33.5
 %

Deferred Income Taxes
The tax effects of major temporary differences resulting in deferred income tax assets (liabilities) in the consolidated balance sheets are in the following tables.
 
 
Great Plains Energy
 
KCP&L
December 31
 
2017
 
2016
 
2017
 
2016
Noncurrent deferred income taxes
 
(millions)
Plant related
 
$
(1,549.0
)
 
$
(2,107.6
)
 
$
(1,114.9
)
 
$
(1,492.2
)
Income taxes on future regulatory refunds (recoveries)
 
236.0

 
(148.7
)
 
179.1

 
(123.9
)
Derivative instruments
 
(19.2
)
 
(17.0
)
 
1.6

 
8.5

Pension and post-retirement benefits
 
9.4

 
10.5

 
28.6

 
38.6

SO2 emission allowance sales
 
14.9

 
24.1

 
15.0

 
24.1

Fuel recovery mechanisms
 
(17.9
)
 
(22.3
)
 
(15.9
)
 
(27.2
)
Tax credit carryforwards
 
279.8

 
271.1

 
185.8

 
177.4

Customer demand programs
 
(17.4
)
 
(34.3
)
 
(11.7
)
 
(21.8
)
Solar rebates
 
(15.2
)
 
(27.3
)
 
(5.8
)
 
(11.4
)
Net operating loss carryforward
 
473.0

 
718.0

 
131.2

 
198.3

Other
 
6.9

 
20.2

 
(9.1
)
 
1.3

Net noncurrent deferred income tax liability before valuation allowance
 
(598.7
)
 
(1,313.3
)
 
(616.1
)
 
(1,228.3
)
Valuation allowance
 
(23.0
)
 
(16.4
)
 
—

 
—

Net noncurrent deferred income tax liability
 
$
(621.7
)
 
$
(1,329.7
)
 
$
(616.1
)
 
$
(1,228.3
)

 
 
Great Plains Energy
 
KCP&L
December 31
 
2017
 
2016
 
2017
 
2016
 
 
(millions)
Gross deferred income tax assets
 
$
2,017.4

 
$
1,360.9

 
$
1,261.5

 
$
747.7

Gross deferred income tax liabilities
 
(2,639.1
)
 
(2,690.6
)
 
(1,877.6
)
 
(1,976.0
)
Net deferred income tax liability
 
$
(621.7
)
 
$
(1,329.7
)
 
$
(616.1
)
 
$
(1,228.3
)

Tax Credit Carryforwards
At December 31, 2017 and 2016, Great Plains Energy had $191.0 million and $183.5 million, respectively, of federal general business income tax credit carryforwards.  At December 31, 2017 and 2016, KCP&L had $184.6 million and $177.4 million, respectively, of federal general business income tax credit carryforwards.  The carryforwards for both Great Plains Energy and KCP&L relate primarily to Advanced Coal Investment Tax Credits and Wind Production tax credits and expire in the years 2028 to 2037.  Approximately $0.5 million of Great Plains Energy's credits are related to Low Income Housing credits that were acquired in the GMO acquisition.  Due to federal limitations on the utilization of income tax attributes acquired in the GMO acquisition, management expects a portion of these credits to expire unutilized and has provided a valuation allowance against $0.4 million of the federal income tax benefit. 
At December 31, 2017 and 2016, Great Plains Energy had $87.6 million of federal alternative minimum tax credit carryforwards, all of which were acquired in the GMO acquisition.  These credits do not expire and can be used to reduce taxes paid in the future or become refundable starting in 2018. Due to potential federal budget sequestration reductions for refundable income tax credits, management expects a portion of these credits will not be refunded and has provided a valuation allowance against $5.8 million of the federal income tax benefit.
At December 31, 2017, Great Plains Energy and KCP&L had $1.2 million of state income tax credit carryforwards. The state income tax credits relate primarily to the Company's Kansas research and development tax credits, which do not expire.
Net Operating Loss Carryforwards
At December 31, 2017 and 2016, Great Plains Energy had $382.0 million and $643.8 million, respectively, of tax benefits related to federal net operating loss (NOL) carryforwards.  Approximately $179.3 million and $306.2 million at December 31, 2017 and 2016, respectively, are tax benefits related to NOLs that were acquired in the GMO acquisition. The federal NOL carryforwards expire in years 2023 to 2036.  The year of origin of Great Plains Energy's related tax benefit amounts for federal NOL carryforwards as of December 31, 2017 are detailed in the following table.
 
 
Amount of
 
Year of Origin
 
Benefit
 
 
 
(millions)
 
2003
 
$
9.5

 
2004
 
91.4

 
2005
 
44.4

 
2006
 
32.0

 
2007
 
0.8

 
2008
 
1.4

 
2009
 
21.9

 
2010
 
2.5

 
2011
 
65.3

 
2012
 
0.2

 
2013
 
0.8

 
2014
 
52.0

 
2015
 
59.2

 
2016
 
0.6

 
 
 
$
382.0

 

In addition, Great Plains Energy also had deferred tax benefits of $91.0 million and $74.2 million related to state NOLs as of December 31, 2017 and 2016, respectively.  Of these amounts, approximately $42.1 million and $36.1 million at December 31, 2017 and 2016, respectively, were acquired in the GMO acquisition.  Management does not expect to utilize $16.8 million of NOLs before the expiration date of the carryforwards of NOLs in certain states. Therefore, a valuation allowance has been provided against $16.8 million of state tax benefits.
Valuation Allowances
Great Plains Energy is required to assess the ultimate realization of deferred tax assets using a “more likely than not” assessment threshold.  This assessment takes into consideration tax planning strategies within Great Plains Energy's control.  As a result of this assessment, Great Plains Energy has established a partial valuation allowance for state tax NOL carryforwards and tax credit carryforwards. During 2017, $6.6 million of tax expense was recorded in continuing operations primarily related to a reduction in the refundable portion of federal Alternative Minimum Tax (AMT) credits.
Tax Reform
In December 2017, the U.S. Congress passed and President Donald Trump signed Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act represents the first major reform in U.S. income tax law since 1986. Most notably, the Tax Act reduces the current top corporate income tax rate from 35% to 21% beginning in 2018, repeals the corporate AMT, makes existing AMT tax credit carryforwards refundable, and changes the deductibility and taxability of certain items, among other things.
In December 2017, the SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. Great Plains Energy’s and KCP&L’s accounting for the Tax Act under ASC 740 as of December 31, 2017 is complete and is detailed further below.
As a result of the change in the corporate income tax rate, Great Plains Energy and KCP&L revalued and restated their deferred income tax assets and liabilities in December 2017. Great Plains Energy decreased its net deferred income tax liabilities by $814.5 million, primarily consisting of a $645.5 million adjustment for the revaluation and restatement of deferred income tax assets and liabilities included in rate base and a $222.8 million tax gross-up adjustment for ratemaking purposes. KCP&L decreased its net deferred income tax liabilities by $682.8 million, primarily consisting of a $471.8 million adjustment for the revaluation and restatement of deferred income tax assets and liabilities included in rate base and a $163.6 million tax gross-up adjustment for ratemaking purposes. The decreases to Great Plains Energy's and KCP&L's net deferred income tax liabilities included in rate base were offset by a corresponding increase in regulatory liabilities. The net regulatory liabilities will be refunded to customers in future rates by amortizing the amounts related to plant assets over the remaining useful life of the assets, and amortizing the amounts related to other items over a period to be determined in a future rate case.
Great Plains Energy recognized $130.3 million of income tax expense consisting of $110.1 million primarily related to the revaluation of GMO’s non-regulated deferred income tax assets, $9.1 million related to the reassessment of the valuation allowance needed for the realization of refundable AMT credits and state NOLs and $11.1 million related to KCP&L and GMO deferred income taxes not included in rate base. KCP&L recognized $16.5 million of income tax expense related to deferred income taxes not included in rate base.
KCP&L and GMO currently recover the cost of income taxes in rates from their customers based on the 35% federal corporate income tax rate. Both KCP&L and GMO have announced their intentions to pass the income tax savings generated by the tax rate change, currently estimated at approximately $100 million annually, through to customers as part of upcoming general rate cases, including applications filed by KCP&L and GMO in Missouri in January 2018. However, both the MPSC and KCC have also initiated investigatory dockets regarding the impact of the Tax Act on customer rates and the actual rate treatment of tax reform will not be known until orders specifying that treatment are received from the MPSC and KCC. In January 2018, KCC issued an order requiring certain regulated public utilities, including KCP&L, to begin recording a regulatory liability for the difference between the new corporate tax rate and amounts currently collected in rates. The treatment of the regulatory liability will be addressed by KCC in future orders.