15. FAIR VALUE MEASUREMENTS

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad categories, giving the highest priority to quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. A definition of the various levels, as well as discussion of the various measurements within the levels, is as follows:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets that Great Plains Energy and KCP&L have access to at the measurement date.

Level 2 – Market-based inputs for assets or liabilities that are observable (either directly or indirectly) or inputs that are not observable but are corroborated by market data.

Level 3 – Unobservable inputs, reflecting Great Plains Energy's and KCP&L's own assumptions about the assumptions market participants would use in pricing the asset or liability.

Great Plains Energy and KCP&L record cash and cash equivalents and short-term borrowings on the balance sheet at cost, which approximates fair value due to the short-term nature of these instruments.

Interest Rate Derivatives

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 acquisition of Westar under the Original Merger Agreement. Settlement of the interest rate swaps was contingent on the consummation of the acquisition of Westar. In July 2017, the interest rate swap agreements were amended to make them contingent on the consummation of the anticipated merger with Westar under the Amended Merger Agreement by May 31, 2018, which can be extended to no later than November 30, 2018. The interest rate swaps have been designated as economic hedges (non-hedging derivatives).

In March 2017, in connection with Great Plains Energy's $4.3 billion senior note issuance, the settlement value of the interest rate swaps to Great Plains Energy of $140.6 million was fixed. Cash settlement of the $140.6 million is contingent on the consummation of the anticipated merger with Westar no later than November 30, 2018. The fair value of the interest rate swaps recorded on Great Plains Energy's balance sheets reflects a contingency factor that management believes is representative of what a market participant would use in valuing these instruments in order to account for the contingent nature of the cash settlement of the interest rate swaps. The contingency factor was 0.65 and 0.35 at June 30, 2017, and December 31, 2016, respectively. At June 30, 2017, and December 31, 2016, the fair value of the interest rate swaps was $49.2 million and $79.3 million, respectively, and was recorded on the consolidated balance sheets in interest rate derivative instruments. For the three months ended and year to date June 30, 2017, Great Plains Energy recognized a $42.2 million and $30.1 million loss, respectively, in interest charges for the change in fair value. For the three months ended and year to date June 30, 2016, Great Plains Energy recognized a $77.0 million loss in interest charges for the change in fair value.

Fair Value of Long-Term Debt

Great Plains Energy and KCP&L record long-term debt on the balance sheet at amortized cost. The fair value of long-term debt is measured as a Level 2 liability and is based on quoted market prices, with the incremental borrowing rate for similar debt used to determine fair value if quoted market prices are not available. At June 30, 2017, the book value and fair value of Great Plains Energy's long-term debt, including current maturities, were $8.1 billion and $8.4 billion, respectively. At December 31, 2016, the book value and fair value of Great Plains Energy's long-term debt, including current maturities, were $3.8 billion and $4.0 billion, respectively. At June 30, 2017, the book value and fair value of KCP&L's long-term debt, including current maturities, were $2.6 billion and $2.8 billion, respectively. At December 31, 2016, the book value and fair value of KCP&L's long-term debt, including current maturities, were $2.6 billion and $2.7 billion, respectively.

Supplemental Executive Retirement Plan

At June 30, 2017, and December 31, 2016, GMO's Supplemental Executive Retirement Plan (SERP) rabbi trusts included $15.2 million and $16.0 million, respectively, of fixed income funds valued at net asset value per share (or its equivalent) that are not categorized in the fair value hierarchy. The fixed income fund invests primarily in intermediate and long-term debt securities, can be redeemed immediately and is not subject to any restrictions on redemptions.

The following tables include Great Plains Energy's and KCP&L's balances of financial assets and liabilities measured at fair value on a recurring basis.



Description	June 30 2017			Level 1		Level 2			Level 3
KCP&L		(millions)
Assets
Nuclear decommissioning trust ^(a)
Equity securities		$	165.8	$	165.8		$	—		$	—
Debt securities
U.S. Treasury		32.7		32.7			—			—
U.S. Agency		1.1		—			1.1			—
State and local obligations		4.1		—			4.1			—
Corporate bonds		31.5		—			31.5			—
Foreign governments		0.1		—			0.1			—
Cash equivalents		3.1		3.1			—			—
Total nuclear decommissioning trust		238.4		201.6			36.8			—
Self-insured health plan trust ^(b)
Equity securities		0.7		0.7			—			—
Debt securities		2.5		—			2.5			—
Cash and cash equivalents		8.2		8.2			—			—
Total self-insured health plan trust		11.4		8.9			2.5			—
Total		$	249.8	$	210.5		$	39.3		$	—
Other Great Plains Energy
Assets
Interest rate derivative instruments ^(c)		$	49.2	$	—		$	—		$	49.2
Total		$	49.2	$	—		$	—		$	49.2
Liabilities
Series B Preferred Stock dividend make-whole provisions ^(d)		$	57.1	$	—		$	—		$	57.1
Total		$	57.1	$	—		$	—		$	57.1
Great Plains Energy
Assets
Nuclear decommissioning trust ^(a)		$	238.4	$	201.6		$	36.8		$	—
Self-insured health plan trust ^(b)		11.4		8.9			2.5			—
Interest rate derivative instruments ^(c)		49.2		—			—			49.2
Total		$	299.0	$	210.5		$	39.3		$	49.2
Liabilities
Series B Preferred Stock dividend make-whole provisions ^(d)		$	57.1	$	—		$	—		$	57.1
Total		$	57.1	$	—		$	—		$	57.1



Description	December 31 2016			Level 1			Level 2			Level 3
KCP&L		(millions)
Assets
Nuclear decommissioning trust ^(a)
Equity securities		$	153.9		$	153.9		$	—		$	—
Debt securities
U.S. Treasury		27.8			27.8			—			—
U.S. Agency		1.7			—			1.7			—
State and local obligations		3.2			—			3.2			—
Corporate bonds		32.4			—			32.4			—
Foreign governments		0.1			—			0.1			—
Cash equivalents		3.8			3.8			—			—
Total nuclear decommissioning trust		222.9			185.5			37.4			—
Self-insured health plan trust ^(b)
Equity securities		0.9			0.9			—			—
Debt securities		4.8			0.1			4.7			—
Cash and cash equivalents		5.6			5.6			—			—
Total self-insured health plan trust		11.3			6.6			4.7			—
Total		$	234.2		$	192.1		$	42.1		$	—
Other Great Plains Energy
Assets
Interest rate derivative instruments ^(c)		$	79.3		$	—		$	—		$	79.3
Total		$	79.3		$	—		$	—		$	79.3
Great Plains Energy
Assets
Nuclear decommissioning trust ^(a)		$	222.9		$	185.5		$	37.4		$	—
Self-insured health plan trust ^(b)		11.3			6.6			4.7			—
Interest rate derivative instruments ^(c)		79.3			—			—			79.3
Total		$	313.5		$	192.1		$	42.1		$	79.3


^(a)	Fair value is based on quoted market prices of the investments held by the fund and/or valuation models.


^(b)	Fair value is based on quoted market prices of the investments held by the trust. Debt securities classified as Level 1 are comprised of U.S. Treasury securities. Debt securities classified as Level 2 are comprised of corporate bonds, U.S. Agency, state and local obligations, and other asset-backed securities.

^(c)

At June 30, 2017, the fair value of interest rate derivative instruments is based on the settlement value of $140.6 million discounted by a contingency factor of 0.65 that management believes is representative of what a market participant would use in valuing these instruments in order to account for the contingent nature of the cash settlement of these instruments. At December 31, 2016, the fair value of interest rate derivative instruments is determined by calculating the net present value of expected payments and receipts under the interest rate swaps using observable market inputs including interest rates and London Interbank Offered Rate (LIBOR) swap rates discounted by a contingency factor of 0.35. A decrease in the contingency factor would result in a higher fair value measurement. The contingency factor will increase in response to facts and circumstances that in the view of a market participant, would increase the likelihood that the acquisition of Westar is not consummated. Because of the unobservable nature of the contingency factor, the interest rate derivatives have been classified as Level 3.

^(d)

At June 30, 2017, the fair value of the Series B Preferred Stock dividend make-whole provisions is determined by calculating the present value of all dividend payments on all outstanding shares of Series B Preferred Stock for all the remaining dividend periods, excluding accumulated and unpaid dividends, discounted by a contingency factor of 0.53 that management believes is representative of the probability that conditions would be met that would result in a dividend make-whole payment being made under either the acquisition termination redemption or the fundamental change conversion options of the Series B Preferred Stock. These conditions include the probability that a qualifying acquisition termination event occurs, the probability Great Plains Energy would elect to redeem the Series B Preferred Stock upon the occurrence of a qualifying event and the probability that Great Plains Energy's average stock price exceeds a certain threshold amount. A decrease in the contingency factor would result in a higher fair value measurement. Because of the unobservable nature of the contingency factor, the dividend make-whole provision has been classified as Level 3.

The following tables reconcile the beginning and ending balances for all Level 3 assets and liabilities measured at fair value on a recurring basis.



Great Plains Energy
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Derivative Instruments
	2017			2016
	(millions)
Net asset at April 1	$	91.4		$	—
Total unrealized losses:
included in interest charges	(42.2		)	(77.0		)
included in loss on Series B Preferred Stock dividend make-whole provisions	(57.1		)	—
Net liability at June 30	$	(7.9	)	$	(77.0	)
Total unrealized losses relating to assets and liabilities still on the consolidated balance sheet at June 30:
included in interest charges	$	(42.2	)	$	(77.0	)
included in loss on Series B Preferred Stock dividend make-whole provisions	(57.1		)	—

Great Plains Energy
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Derivative Instruments
	2017			2016
	(millions)
Net asset at January 1	$	79.3		$	—
Total unrealized losses:
included in interest charges	(30.1		)	(77.0		)
included in loss on Series B Preferred Stock dividend make-whole provisions	(57.1		)	—
Net liability at June 30	$	(7.9	)	$	(77.0	)
Total unrealized losses relating to assets and liabilities still on the consolidated balance sheet at June 30:
included in interest charges	$	(30.1	)	$	(77.0	)
included in loss on Series B Preferred Stock dividend make-whole provisions	(57.1		)	—