19. 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. Great Plains Energy's and KCP&L's interest rate risk management activities have included using derivative instruments to hedge against future interest rate fluctuations on anticipated debt issuances. Commodity risk management activities, including the use of certain derivative instruments, are subject to the management, direction and control of an internal commodity risk committee. Management maintains commodity price risk management strategies that use derivative instruments to reduce the effects of fluctuations in fuel and purchased power expense caused by commodity price volatility.

Counterparties to commodity derivatives 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 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 hedges for GMO's utility operations 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 December 31, 2013, Great Plains Energy and KCP&L have posted collateral in excess of the aggregate fair value of their 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 their counterparties. For derivative contracts with counterparties under master netting arrangements, Great Plains Energy and KCP&L can net all receivables and payables with each respective counterparty.

Commodity Risk Management

KCP&L's risk management policy is to use derivative instruments, as needed, in order 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. KCP&L designates these 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. At December 31, 2013, KCP&L had no hedges for its projected natural gas usage for retail load and firm MWh sales. KCP&L has not recorded any ineffectiveness on natural gas hedges in 2013, 2012 or 2011.

Additionally, KCP&L's risk management policy uses derivative instruments to mitigate exposure to market price fluctuations for wholesale power prices. KCP&L has designated these financial contracts as economic hedges (non-hedging derivatives). The fair values of these instruments are recorded as derivative assets or liabilities with an offsetting entry to the consolidated statements of income.

KCP&L and GMO have Transmission Congestion Rights (TCR) that were acquired in the initial auction for the SPP Integrated Marketplace during the fourth quarter of 2013. KCP&L and GMO will utilize the TCRs to hedge against congestion costs and protect load prices when the SPP Integrated Marketplace begins operations in March 2014. These financial contracts have been designated as economic hedges (non-hedging derivatives). The fair value of these instruments are recorded as derivative assets or liabilities with an offsetting entry to the consolidated statements of income. At December 31, 2013, there was no change in the fair value since the initial SPP Integrated Marketplace auction.

GMO's risk management policy is to use derivative instruments to mitigate price exposure to natural gas price volatility in the market. At December 31, 2013, GMO had financial contracts in place to hedge approximately 40% and 6% of the expected on-peak natural gas generation and natural gas equivalent purchased power price exposure for 2014 and 2015, respectively. The fair value of the portfolio will settle against actual purchases of natural gas and purchased power. 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 or liability is recorded to reflect the change in the timing of recognition authorized by the MPSC. Recovery of actual costs 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.



	December 31
	2013					2012
	Notional Contract Amount		Fair Value			Notional Contract Amount		Fair Value
Great Plains Energy	(millions)
Futures contracts
Cash flow hedges	$	—	$	—		$	1.0	$	(0.2	)
Non-hedging derivatives	19.3		(0.6		)	17.9		(2.8		)
Forward contracts
Non-hedging derivatives	47.7		5.2			65.5		6.5
Transmission congestion rights
Non-hedging derivatives	22.9		1.7			—		—
Option contracts
Non-hedging derivatives	4.8		1.2			—		—
KCP&L
Futures contracts
Cash flow hedges	$	—	$	—		$	1.0	$	(0.2	)
Non-hedging derivatives	7.7		(0.2		)	—		—
Transmission congestion rights
Non-hedging derivatives	18.0		1.1			—		—

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

December 31, 2013

Classification

Fair Value

Derivatives Not Designated as Hedging Instruments

(millions)

Commodity contracts

Other

8.5

1.0

December 31, 2012

Derivatives Designated as Hedging Instruments

Commodity contracts

Other

—

0.2

Derivatives Not Designated as Hedging Instruments

Commodity contracts

Other

6.5

2.8

Total Derivatives

6.5

3.0

KCP&L

Balance Sheet

Asset Derivatives

Liability Derivatives

December 31, 2013

Classification

Fair Value

Derivatives Not Designated as Hedging Instruments

(millions)

Commodity contracts

Other

1.2

0.3

December 31, 2012

Derivatives Designated as Hedging Instruments

Commodity contracts

Other

—

0.2

The following tables provide information regarding Great Plains Energy's and KCP&L's offsetting of derivative assets and liabilities.



Great Plains Energy
											Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts Recognized			Gross Amounts Offset in the Statement of Financial Position				Net Amounts Presented in the Statement of Financial Position			Financial Instruments			Cash Collateral Received			Net Amount
December 31, 2013	(millions)
Derivative assets		$	8.5		$	(0.7	)		$	7.8		$	—		$	—		$	7.8
Derivative liabilities		1.0			(0.9		)		0.1			—			—			0.1
December 31, 2012
Derivative assets		$	6.5		$	—			$	6.5		$	—		$	—		$	6.5
Derivative liabilities		3.0			(3.0		)		—			—			—			—



KCP&L
											Gross Amounts Not Offset in the Statement of Financial Position
Description	Gross Amounts Recognized			Gross Amounts Offset in the Statement of Financial Position				Net Amounts Presented in the Statement of Financial Position			Financial Instruments			Cash Collateral Received			Net Amount
December 31, 2013	(millions)
Derivative assets		$	1.2		$	(0.1	)		$	1.1		$	—		$	—		$	1.1
Derivative liabilities		0.3			(0.3		)		—			—			—			—
December 31, 2012
Derivative liabilities		$	0.2		$	(0.2	)		$	—		$	—		$	—		$	—

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 (Effective Portion)				Income Statement Classification	Amount
2013	(millions)					(millions)
Interest rate contracts		$	—		Interest charges	$	(18.6	)
Commodity contracts		—			Fuel	(0.3		)
Income tax benefit		—			Income tax benefit	7.3
Total		$	—		Total	$	(11.6	)
2012
Interest rate contracts		$	—		Interest charges	$	(20.2	)
Commodity contracts		(0.1		)	Fuel	(0.5		)
Income tax benefit		—			Income tax benefit	8.1
Total		$	(0.1	)	Total	$	(12.6	)



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 (Effective Portion)				Income Statement Classification	Amount
2013	(millions)					(millions)
Interest rate contracts		$	—		Interest charges	$	(8.8	)
Commodity contracts		—			Fuel	(0.3		)
Income tax benefit		—			Income tax benefit	3.5
Total		$	—		Total	$	(5.6	)
2012
Interest rate contracts		$	—		Interest charges	$	(8.7	)
Commodity contracts		(0.1		)	Fuel	(0.5		)
Income tax benefit		—			Income tax benefit	3.5
Total		$	(0.1	)	Total	$	(5.7	)

The following table summarizes the amount of loss recognized in a regulatory asset 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 in Regulatory Asset on Derivatives				Income Statement Classification	Amount
2013	(millions)					(millions)
Commodity contracts		$	2.0		Fuel	$	(1.9	)
Total		$	2.0		Total	$	(1.9	)
2012
Commodity contracts		$	(2.7	)	Fuel	$	(6.6	)
Total		$	(2.7	)	Total	$	(6.6	)

Great Plains Energy's income statement reflects the gain (loss) for the change in fair value of commodity contract derivatives not designated as hedging instruments of $(0.5) million for 2013 and $1.3 million for 2012. KCP&L's income statement reflects the gain for the change in fair value of commodity contract derivatives not designated as hedging instruments of $0.8 million for 2013.

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



	Great Plains Energy								KCP&L
	December 31								December 31
	2013				2012				2013				2012
		(millions)
Current assets		$	9.9			$	10.6			$	9.9			$	10.6
Current liabilities		(48.9		)		(68.4		)		(43.1		)		(52.8		)
Noncurrent liabilities		—				(0.1		)		—				(0.1		)
Deferred income taxes		15.2				22.5				13.0				16.5
Total		$	(23.8	)		$	(35.4	)		$	(20.2	)		$	(25.8	)

Great Plains Energy's accumulated OCI in the table above at December 31, 2013, includes $17.1 million that is expected to be reclassified to expenses over the next twelve months. KCP&L's accumulated OCI in the table above at December 31, 2013, includes $8.7 million that is expected to be reclassified to expenses over the next twelve months.