15. 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 wholesale sales, 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 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 in net income, except hedges for KCP&L's and GMO's utility operations that are recorded to a regulatory asset or liability consistent with KCC and MPSC regulatory orders.

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, 2016, 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 receivables and payables with each respective counterparty.

Interest Rate Risk Management

In June 2016, Great Plains Energy entered into four interest rate swaps, with a total notional amount of $4.4 billion, to hedge against interest rate fluctuations on future issuances of long-term debt expected to be issued to finance a portion of the cash consideration for the anticipated acquisition of Westar. Settlement of the interest rate swaps is contingent on the consummation of the anticipated acquisition of Westar. The interest rate swaps have been designated as economic hedges (non-hedging derivatives). The fair values of these instruments are recorded as derivative assets or liabilities with an offsetting entry recorded to interest charges.

Commodity Risk Management

KCP&L's risk management policy uses derivative instruments to mitigate exposure to commodity market price fluctuations. At June 30, 2016, KCP&L had financial contracts in place to hedge approximately 26% of its Missouri jurisdictional portion of the 2016 expected natural gas equivalent bulk power sales price exposure. At June 30, 2016, KCP&L had financial contracts in place to hedge approximately 30%, 20% and 7% of the expected summer month natural gas generation for Missouri jurisdictional retail sales for the remainder of 2016, 2017 and 2018, respectively. 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 recorded to a regulatory asset or liability. The settlement costs are included in a recovery mechanism. 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.

KCP&L and GMO have Transmission Congestion Rights (TCRs) that they utilize to hedge against congestion costs and protect load prices in the Southwest Power Pool, Inc. (SPP) Integrated Marketplace. These financial contracts have been designated as economic hedges (non-hedging derivatives). The fair values of these instruments are recorded as derivative assets or liabilities with an offsetting entry recorded to a regulatory asset or liability. The settlement costs are included in a recovery mechanism. A regulatory asset or liability is recorded to reflect the change in the timing of recognition authorized by KCC and MPSC. Recovery of actual costs will not impact earnings, but will impact cash flows due to the timing of the recovery mechanism.

GMO's risk management policy uses derivative instruments to mitigate price exposure to natural gas price volatility in the market. At June 30, 2016, GMO had financial contracts in place to hedge approximately 66%, 37% and 11% of the expected on-peak natural gas generation and natural gas equivalent purchased power price exposure for the remainder of 2016, 2017 and 2018, 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 a recovery mechanism. 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 comprehensive income.

The gross notional contract amount 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
	2016					2015
	Notional Contract Amount		Fair Value			Notional Contract Amount		Fair Value
Great Plains Energy	(millions)
Non-hedging derivatives
Futures contracts	$	25.1	$	0.5		$	26.6	$	(5.7	)
Forward contracts	13.5		2.9			15.6		3.1
Transmission congestion rights	6.7		0.5			5.6		(0.5		)
Interest rate swaps	4,415.0		(77.0		)	—		—
KCP&L
Non-hedging derivatives
Futures contracts	$	3.3	$	(0.4	)	$	0.9	$	(0.1	)
Transmission congestion rights	5.1		0.5			4.1		(0.4		)

The fair values of Great Plains Energy's and KCP&L's open derivative positions and balance sheet classification are summarized in the following tables. 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, 2016

Classification

Fair Value

Derivatives Not Designated as Hedging Instruments

(millions)

Commodity contracts

Other

5.8

1.9

Interest rate contracts

Derivative instruments

—

77.0

December 31, 2015

Derivatives Not Designated as Hedging Instruments

Commodity contracts

Other/Derivative instruments

3.3

6.4

KCP&L

Balance Sheet

Asset Derivatives

Liability Derivatives

June 30, 2016

Classification

Fair Value

Derivatives Not Designated as Hedging Instruments

(millions)

Commodity contracts

Other

0.6

0.5

December 31, 2015

Derivatives Not Designated as Hedging Instruments

Commodity contracts

Other

0.2

0.7

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			Net Amount
June 30, 2016	(millions)
Derivative assets		$	5.8		$	(1.5	)		$	4.3		$	—		$	—		$	4.3
Derivative liabilities		78.9			(1.9		)		77.0			—			—			77.0
December 31, 2015
Derivative assets		$	3.3		$	(0.2	)		$	3.1		$	—		$	—		$	3.1
Derivative liabilities		6.4			(5.9		)		0.5			—			—			0.5



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			Net Amount
June 30, 2016	(millions)
Derivative assets		$	0.6		$	(0.1	)		$	0.5		$	—		$	—		$	0.5
Derivative liabilities		0.5			(0.5		)		—			—			—			—
December 31, 2015
Derivative assets		$	0.2		$	(0.2	)		$	—		$	—		$	—		$	—
Derivative liabilities		0.7			(0.3		)		0.4			—			—			0.4

At June 30, 2016, and December 31, 2015, Great Plains Energy offset $0.4 million and $5.7 million, respectively, of cash collateral posted with counterparties against net derivative positions.

See Note 17 for information regarding amounts reclassified out of accumulated other comprehensive loss for Great Plains Energy and KCP&L.

Great Plains Energy's accumulated OCI at June 30, 2016, includes $9.2 million that is expected to be reclassified to expenses over the next twelve months. KCP&L's accumulated OCI at June 30, 2016, includes $8.8 million that is expected to be reclassified to expenses over the next twelve months.

The following tables summarize the amounts of gain (loss) recognized for the change in fair value of derivatives not designated as hedging instruments for Great Plains Energy and KCP&L.



Great Plains Energy
	Three Months Ended June 30						Year to Date June 30
Derivatives Not Designated as Hedging Instruments	2016			2015			2016			2015
Location of Gain (Loss)	(millions)
Electric revenues	$	0.1		$	(2.5	)	$	(0.3	)	$	(7.7	)
Fuel	(2.6		)	(0.6		)	(4.5		)	(1.1		)
Purchased power	(0.1		)	(1.1		)	(0.3		)	(1.2		)
Interest charges	(77.0		)	—			(77.0		)	—
Regulatory asset	6.1			3.1			(0.1		)	(3.2		)
Regulatory liability	1.2			—			1.2			—
Total	$	(72.3	)	$	(1.1	)	$	(81.0	)	$	(13.2	)



KCP&L
	Three Months Ended June 30						Year to Date June 30
Derivatives Not Designated as Hedging Instruments	2016			2015			2016			2015
Location of Gain (Loss)	(millions)
Electric revenues	$	0.1		$	(2.5	)	$	(0.3	)	$	(7.7	)
Fuel	(0.5		)	—			(0.1		)	0.2
Regulatory asset	0.1			1.4			(0.1		)	—
Regulatory liability	0.5			—			0.5			—
Total	$	0.2		$	(1.1	)	$	—		$	(7.5	)