Derivative Instruments

6 Months Ended

Jun. 30, 2012

Derivative Instruments [Abstract]

Derivative Instruments

13.   DERIVATIVE INSTRUMENTS

Great Plains Energy and KCP&L are exposed to a variety of market risks including interest rates and commodity prices.  Management has established risk management policies and strategies to reduce the potentially adverse effects that the volatility of the markets may have on Great Plains Energy’s and KCP&L’s operating results.  Commodity risk management activities, including the use of certain derivative instruments, are subject to the management, direction and control of an internal risk management committee.  Management’s interest rate risk management strategy uses derivative instruments to adjust Great Plains Energy’s and KCP&L’s liability portfolio to optimize the mix of fixed and floating rate debt within an established range.  In addition, Great Plains Energy and KCP&L use derivative instruments to hedge against future interest rate fluctuations on anticipated debt issuances.  Management maintains commodity price risk management strategies that use derivative instruments to reduce the effects of fluctuations in fuel expense caused by commodity price volatility.  Counterparties to commodity derivatives and interest rate swap agreements expose Great Plains Energy and KCP&L to credit loss in the event of nonperformance.  This credit loss is limited to the cost of replacing these contracts at current market rates.  Derivative instruments, excluding those instruments that qualify for the normal purchases and normal sales (NPNS) election, which are accounted for by accrual accounting, are recorded on the balance sheet at fair value as an asset or liability.  Changes in the fair value of derivative instruments are recognized currently in net income unless specific hedge accounting criteria are met, except GMO utility operations hedges that are recorded to a regulatory asset or liability consistent with MPSC regulatory orders, as discussed below.

Great Plains Energy and KCP&L have posted collateral, in the ordinary course of business, for the aggregate fair value of all derivative instruments with credit risk-related contingent features that are in a liability position.  At June 30, 2012, Great Plains Energy and KCP&L have posted collateral in excess of the aggregate fair value of its derivative instruments; therefore, if the credit risk-related contingent features underlying these agreements were triggered, Great Plains Energy and KCP&L would not be required to post additional collateral to its counterparties.

Commodity Risk Management

KCP&L’s risk management policy is to use derivative instruments to mitigate its exposure to market price fluctuations on a portion of its projected natural gas purchases to meet generation requirements for retail and firm wholesale sales.  At June 30, 2012, KCP&L had fully hedged 2012 and had hedged 38% and 6%, respectively, of the 2013 and 2014 projected natural gas usage for retail load and firm MWh sales by utilizing futures contracts.  KCP&L has designated the natural gas hedges as cash flow hedges.  The fair values of these instruments are recorded as derivative assets or liabilities with an offsetting entry to OCI for the effective portion of the hedge.  To the extent the hedges are not effective, any ineffective portion of the change in fair market value would be recorded currently in fuel expense.  KCP&L has not recorded any ineffectiveness on natural gas hedges for the three months ended and year to date June 30, 2012 and 2011.

GMO’s risk management policy is to use derivative instruments to mitigate price exposure to natural gas price volatility in the market.  The fair value of the portfolio relates to financial contracts that will settle against actual purchases of natural gas and purchased power.  At June 30, 2012, GMO had financial contracts in place to hedge approximately 99%, 59% and 8%, respectively, of the expected on-peak natural gas generation and natural gas equivalent purchased power price exposure for 2012, 2013 and 2014.  GMO has designated its natural gas hedges as economic hedges (non-hedging derivatives).  In connection with GMO’s 2005 Missouri electric rate case, it was agreed that the settlement costs of these contracts would be recognized in fuel expense.  The settlement cost is included in GMO’s FAC.  A regulatory asset has been recordedto reflect the change in the timing of recognition authorized by the MPSC.  To the extent recovery of actual costs incurred is allowed, amounts will not impact earnings, but will impact cash flows due to the timing of the recovery mechanism.

MPS Merchant, which has certain long-term natural gas contracts remaining from its former non-regulated trading operations, manages the daily delivery of its remaining contractual commitments with economic hedges (non-hedging derivatives) to reduce its exposure to changes in market prices.  Within the trading portfolio, MPS Merchant takes certain positions to hedge physical sale or purchase contracts.  MPS Merchant records the fair value of physical trading energy contracts as derivative assets or liabilities with an offsetting entry to the consolidated statements of income.

The notional and recorded fair values of open positions for derivative instruments are summarized in the following table.  The fair values of these derivatives are recorded on the consolidated balance sheets.  The fair values below are gross values before netting agreements and netting of cash collateral.

	June 30					December 31
	2012					2011
	Notional					Notional
	Contract		Fair			Contract		Fair
	Amount		Value			Amount		Value
Great Plains Energy	(millions)
Futures contracts
Cash flow hedges	$	1.6	$	(0.5	)	$	2.0	$	(0.5	)
Non-hedging derivatives		16.2		(3.0	)		23.6		(5.0	)
Forward contracts
Non-hedging derivatives		69.5		6.7			97.3		7.8
Option contracts
Non-hedging derivatives		-		-			0.4		-
KCP&L
Futures contracts
Cash flow hedges	$	1.6	$	(0.5	)	$	2.0	$	(0.5	)

The fair values of Great Plains Energy’s and KCP&L’s open derivative positions are summarized in the following tables.  The tables contain both derivative instruments designated as hedging instruments as well as non-hedging derivatives under GAAP.  The fair values below are gross values before netting agreements and netting of cash collateral.

Great Plains Energy
	Balance Sheet	Asset Derivatives		Liability Derivatives
June 30, 2012	Classification	Fair Value		Fair Value
Derivatives Designated as Hedging Instruments		(millions)
Commodity contracts	Derivative instruments	$	-	$	0.5
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Derivative instruments		6.7		3.0
Total Derivatives		$	6.7	$	3.5
December 31, 2011
Derivatives Designated as Hedging Instruments
Commodity contracts	Derivative instruments	$	-	$	0.5
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Derivative instruments		7.8		5.0
Total Derivatives		$	7.8	$	5.5

KCP&L
	Balance Sheet	Asset Derivatives		Liability Derivatives
June 30, 2012	Classification	Fair Value		Fair Value
Derivatives Designated as Hedging Instruments		(millions)
Commodity contracts	Derivative instruments	$	-	$	0.5
December 31, 2011
Derivatives Designated as Hedging Instruments
Commodity contracts	Derivative instruments	$	-	$	0.5

The following tables summarize the amount of gain (loss) recognized in OCI or earnings for interest rate and commodity hedges.

Great Plains Energy
Derivatives in Cash Flow Hedging Relationship
					Gain (Loss) Reclassified from
					Accumulated OCI into Income
					(Effective Portion)
	Amount of Gain
	(Loss) Recognized
	in OCI on Derivatives				Income Statement
	(Effective Portion)				Classification	Amount
Three Months Ended June 30, 2012	(millions)					(millions)
Interest rate contracts		$	-		Interest charges	$	(5.0	)
Commodity contracts			0.1		Fuel		-
Income tax benefit			-		Income tax benefit		1.9
Total		$	0.1		Total	$	(3.1	)
Year to Date June 30, 2012
Interest rate contracts		$	-		Interest charges	$	(10.1	)
Commodity contracts			(0.2	)	Fuel		-
Income tax benefit			0.1		Income tax benefit		3.9
Total		$	(0.1	)	Total	$	(6.2	)
Three Months Ended June 30, 2011
Interest rate contracts		$	(5.8	)	Interest charges	$	(3.9	)
Commodity contracts			(0.1	)	Fuel		-
Income tax benefit			2.2		Income tax benefit		1.4
Total		$	(3.7	)	Total	$	(2.5	)
Year to Date June 30, 2011
Interest rate contracts		$	(5.3	)	Interest charges	$	(6.8	)
Commodity contracts			(0.1	)	Fuel		-
Income tax benefit			2.1		Income tax benefit		2.6
Total		$	(3.3	)	Total	$	(4.2	)

KCP&L
Derivatives in Cash Flow Hedging Relationship
					Gain (Loss) Reclassified from
					Accumulated OCI into Income
					(Effective Portion)
	Amount of Gain
	(Loss) Recognized
	in OCI on Derivatives				Income Statement
	(Effective Portion)				Classification	Amount
Three Months Ended June 30, 2012	(millions)					(millions)
Interest rate contracts		$	-		Interest charges	$	(2.2	)
Commodity contracts			0.1		Fuel		-
Income tax benefit			-		Income tax benefit		0.9
Total		$	0.1		Total	$	(1.3	)
Year to Date June 30, 2012
Interest rate contracts		$	-		Interest charges	$	(4.4	)
Commodity contracts			(0.2	)	Fuel		-
Income tax benefit			0.1		Income tax benefit		1.7
Total		$	(0.1	)	Total	$	(2.7	)
Three Months Ended June 30, 2011
Interest rate contracts		$	-		Interest charges	$	(2.2	)
Commodity contracts			(0.1	)	Fuel		-
Income tax benefit			-		Income tax benefit		0.8
Total		$	(0.1	)	Total	$	(1.4	)
Year to Date June 30, 2011
Interest rate contracts		$	-		Interest charges	$	(4.4	)
Commodity contracts			(0.1	)	Fuel		-
Income tax benefit			-		Income tax benefit		1.7
Total		$	(0.1	)	Total	$	(2.7	)

The following table summarizes the amount of gain (loss) recognized in a regulatory balance sheet account or earnings for GMO utility commodity hedges.  GMO utility commodity derivatives fair value changes are recorded to either a regulatory asset or liability consistent with MPSC regulatory orders.

Great Plains Energy
Derivatives in Regulatory Account Relationship
					Gain (Loss) Reclassified from
					Regulatory Account
	Amount of Gain (Loss)
	Recognized on Regulatory				Income Statement
	Account on Derivatives				Classification	Amount
Three Months Ended June 30, 2012		(millions)				(millions)
Commodity contracts		$	0.3		Fuel	$	(2.0	)
Total		$	0.3		Total	$	(2.0	)
Year to Date June 30, 2012
Commodity contracts		$	(2.7	)	Fuel	$	(2.7	)
Total		$	(2.7	)	Total	$	(2.7	)
Three Months Ended June 30, 2011
Commodity contracts		$	(1.0	)	Fuel	$	(1.0	)
Total		$	(1.0	)	Total	$	(1.0	)
Year to Date June 30, 2011
Commodity contracts		$	(1.3	)	Fuel	$	(2.9	)
Total		$	(1.3	)	Total	$	(2.9	)

Great Plains Energy’s income statement reflects gains (losses) for the change in fair value of the MPS Merchant commodity contract derivatives not designated as hedging instruments of $(0.3) million and $(1.1) million, respectively, for the three months ended and year to date June 30, 2012, and $(0.9) million and $1.0 million, respectively, for the same periods in 2011.

The amounts recorded in accumulated OCI related to the cash flow hedges are summarized in the following table.

	Great Plains Energy						KCP&L
	June 30			December 31			June 30			December 31
	2012			2011			2012			2011
	(millions)
Current assets	$	10.9		$	11.3		$	10.9		$	11.3
Current liabilities		(79.1	)		(89.5	)		(57.8	)		(62.5	)
Noncurrent liabilities		(0.3	)		(0.2	)		(0.3	)		(0.2	)
Deferred income taxes		26.7			30.5			18.4			20.0
Total	$	(41.8	)	$	(47.9	)	$	(28.8	)	$	(31.4	)

Great Plains Energy’s accumulated OCI in the table above at June 30, 2012, includes $20.6 million that is expected to be reclassified to expenses over the next twelve months.  KCP&L’s accumulated OCI in the table above at June 30, 2012, includes $9.1 million that is expected to be reclassified to expense over the next twelve months.