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Derivative Instruments | 9 Months Ended
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Sep. 30, 2011
Derivative Instruments [Abstract] |
Derivative Instruments | 7. Derivative Instruments Types of Derivative Instruments and Volumetric Information Commodity Instruments — We are exposed to changes in prices for the purchase and sale of power, natural gas and other energy commodities. We use derivatives, which include physical commodity contracts and financial commodity instruments, such as OTC and exchange traded swaps, futures, options, forward agreements and instruments that settle on the power price to natural gas price relationships (Heat Rate swaps and options) or instruments that settle on power price relationships between delivery points for the purchase and sale of power and natural gas to attempt to maximize the risk-adjusted returns by economically hedging a portion of the commodity price risk associated with our assets. By entering into these transactions, we are able to economically hedge a portion of our Spark Spread at estimated generation and prevailing price levels. Interest Rate Swaps — A portion of our debt is indexed to base rates, primarily LIBOR. We have historically used interest rate swaps to adjust the mix between fixed and floating rate debt to hedge our interest rate risk for potential adverse changes in interest rates. At September 30, 2011, the maximum length of time that our PPAs extended was approximately 23 years into the future and the maximum length of time over which we were hedging using commodity and interest rate derivative instruments was 1 and 15 years, respectively. At September 30, 2011 and December 31, 2010, the net forward notional buy (sell) position of our outstanding commodity and interest rate swap contracts that did not qualify under the normal purchase normal sale exemption were as follows (in millions):
|  | Notional Amounts |
|  | September 30, 2011 |  |  | December 31, 2010 |
Derivative Instruments |  |  |  |  |  |  |  |
Power (MWh) |  |  | (38 | ) |  |  | (50 | )
Natural gas (MMBtu) |  |  | 124 |  |  |  | 31 |
Interest rate swaps(1) |  | $ | 5,448 |  |  | $ | 6,171 |
_________
(1) | Approximately $4.1 billion and $3.3 billion at September 30, 2011 and December 31, 2010, respectively, related to variable rate debt that was converted to fixed rate debt in 2011 and 2010.
Certain of our derivative instruments contain credit-contingent provisions that require us to maintain a minimum credit rating from each of the major credit rating agencies. If our credit rating were to be downgraded, it could require us to post additional collateral or could potentially allow our counterparty(ies) to request immediate, full settlement on certain derivative instruments in liability positions. Currently, we do not believe that it is probable that any additional collateral posted as a result of a one credit rating level downgrade would be material. The aggregate fair value of our derivative liabilities with credit-contingent provisions at September 30, 2011, was $34 million for which we have posted collateral of $8 million by posting margin deposits or granting additional first priority liens on the assets currently subject to first priority liens under our Corporate Revolving Facility. If our credit rating were downgraded, we estimate that additional collateral of approximately $10 million would be required and that no counterparty could request immediate, full settlement. Accounting for Derivative Instruments We recognize all derivative instruments that qualify for derivative accounting treatment as either assets or liabilities and measure those instruments at fair value unless they qualify for, and we elect, the normal purchase normal sale exemption. For transactions in which we elect the normal purchase normal sale exemption, gains and losses are not reflected on our Consolidated Condensed Statements of Operations until the period of delivery. Revenues and fuel costs derived from instruments that qualify for hedge accounting or represent an economic hedge are recorded in the same period and in the same financial statement line item as the item being hedged. Hedge accounting requires us to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. We present the cash flows from our derivatives in the same category as the item being hedged within operating activities or investing activities (in the case of settlements for our interest rate swaps formerly hedging our First Lien Credit Facility term loans or interest rate swap breakage costs associated with interest rate swaps formerly hedging project debt) on our Consolidated Condensed Statements of Cash Flows unless they contain an other-than-insignificant financing element in which case their cash flows are classified within financing activities. Cash Flow Hedges — We report the effective portion of the unrealized gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument as a component of OCI and reclassify such gains and losses into earnings in the same period during which the hedged forecasted transaction affects earnings. Gains and losses due to ineffectiveness on commodity hedging instruments are included in unrealized mark-to-market gains and losses and are recognized currently in earnings as a component of operating revenues (for power contracts and swaps), fuel and purchased energy expense (for natural gas contracts and swaps) and interest expense (for interest rate swaps except as discussed below). If it is determined that the forecasted transaction is no longer probable of occurring, then hedge accounting will be discontinued prospectively and future changes in fair value are recorded in earnings. If the hedging instrument is terminated or de-designated prior to the occurrence of the hedged forecasted transaction, the net accumulated gain or loss associated with the changes in fair value of the hedge instrument remains deferred in AOCI until such time as the forecasted transaction impacts earnings or until it is determined that the forecasted transaction is probable of not occurring. Upon repayment of our NDH Project Debt and other project debt, we terminated and settled the interest rate swaps related to these debt instruments and recorded $17 million to (gain) loss on interest rate derivatives, net during the second quarter of 2011. See Note 5 for further information about the repayment of the NDH Project Debt as well as the repayment of other project debt with proceeds from our New Term Loan. Derivatives Not Designated as Hedging Instruments — Along with our portfolio of transactions, which are accounted for as hedges under U.S. GAAP, we enter into power, natural gas and interest rate transactions that primarily act as economic hedges to our asset portfolio, but either do not qualify as hedges under the hedge accounting guidelines or qualify under the hedge accounting guidelines and the hedge accounting designation has not been elected. Changes in fair value of derivatives not designated as hedging instruments are recognized currently in earnings as a component of operating revenues (for power contracts and Heat Rate swaps and options), fuel and purchased energy expense (for natural gas contracts, swaps and options) and interest expense (for interest rate swaps except as discussed below). Interest Rate Swaps Formerly Hedging our First Lien Credit Facility and Other Project Debt — During 2010, we repaid approximately $3.5 billion of our First Lien Credit Facility term loans, which had approximately $3.3 billion notional amount of interest rate swaps hedging the scheduled variable interest payments, and in January 2011, we repaid the remaining approximately $1.2 billion of First Lien Credit Facility term loans which had approximately $1.0 billion notional amount of interest rate swaps hedging the scheduled variable interest payments. With the repayment of the remaining First Lien Credit Facility term loans, the remaining unrealized losses of approximately $91 million in AOCI related to the interest swaps formerly hedging the First Lien Credit Facility, were reclassified out of AOCI and into income as an additional (gain) loss on interest rate derivatives, net during the first quarter of 2011. In addition, we reclassified approximately $17 million in unrealized losses in AOCI to (gain) loss on interest rate derivatives, net during the second quarter of 2011 resulting from the repayment of project debt in June 2011. We have presented the reclassification of unrealized losses from AOCI into income and the changes in fair value and settlements subsequent to the reclassification date of the interest rate swaps formerly hedging our First Lien Credit Facility described above separate from interest expense as (gain) loss on interest rate derivatives, net on our Consolidated Condensed Statements of Operations. We also have determined that, based upon current market conditions and consistent with our risk management policy, liquidation of these interest rate swaps is not economically beneficial and additional future losses are limited. Accordingly, we have elected to retain and hold these interest rate swap positions at this time. Derivatives Included on Our Consolidated Condensed Balance Sheets The following tables present the fair values of our net derivative instruments recorded on our Consolidated Condensed Balance Sheets by location and hedge type at September 30, 2011 and December 31, 2010 (in millions):
|  | September 30, 2011 |
|  | Interest Rate Swaps |  |  | Commodity Instruments |  |  | Total Derivative Instruments |
Balance Sheet Presentation |  |  |  |  |  |  |  |  |  |  |  |
Current derivative assets |  | $ | — |  |  | $ | 690 |  |  | $ | 690 |
Long-term derivative assets |  |  | 9 |  |  |  | 125 |  |  |  | 134 |
Total derivative assets |  | $ | 9 |  |  | $ | 815 |  |  | $ | 824 |
Current derivative liabilities |  | $ | 190 |  |  | $ | 589 |  |  | $ | 779 |
Long-term derivative liabilities |  |  | 171 |  |  |  | 132 |  |  |  | 303 |
Total derivative liabilities |  | $ | 361 |  |  | $ | 721 |  |  | $ | 1,082 |
Net derivative assets (liabilities) |  | $ | (352 | ) |  | $ | 94 |  |  | $ | (258 | )
|  | December 31, 2010 |
|  | Interest Rate Swaps |  |  | Commodity Instruments |  |  | Total Derivative Instruments |
Balance Sheet Presentation |  |  |  |  |  |  |  |  |  |  |  |
Current derivative assets |  | $ | — |  |  | $ | 725 |  |  | $ | 725 |
Long-term derivative assets |  |  | 4 |  |  |  | 166 |  |  |  | 170 |
Total derivative assets |  | $ | 4 |  |  | $ | 891 |  |  | $ | 895 |
Current derivative liabilities |  | $ | 197 |  |  | $ | 521 |  |  | $ | 718 |
Long-term derivative liabilities |  |  | 174 |  |  |  | 196 |  |  |  | 370 |
Total derivative liabilities |  | $ | 371 |  |  | $ | 717 |  |  | $ | 1,088 |
Net derivative assets (liabilities) |  | $ | (367 | ) |  | $ | 174 |  |  | $ | (193 | )
|  | September 30, 2011 |  |  | December 31, 2010 |
|  | Fair Value of Derivative Assets |  |  | Fair Value of Derivative Liabilities |  |  | Fair Value of Derivative Assets |  |  | Fair Value of Derivative Liabilities |
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 9 |  |  | $ | 140 |  |  | $ | 2 |  |  | $ | 143 |
Commodity instruments |  |  | 98 |  |  |  | 18 |  |  |  | 161 |  |  |  | 52 |
Total derivatives designated as cash flow hedging instruments |  | $ | 107 |  |  | $ | 158 |  |  | $ | 163 |  |  | $ | 195 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | 221 |  |  | $ | 2 |  |  | $ | 228 |
Commodity instruments |  |  | 717 |  |  |  | 703 |  |  |  | 730 |  |  |  | 665 |
Total derivatives not designated as hedging instruments |  | $ | 717 |  |  | $ | 924 |  |  | $ | 732 |  |  | $ | 893 |
Total derivatives |  | $ | 824 |  |  | $ | 1,082 |  |  | $ | 895 |  |  | $ | 1,088 |
Derivatives Included on Our Consolidated Condensed Statements of Operations Changes in the fair values of our derivative instruments (both assets and liabilities) are reflected either in cash for option premiums paid or collected, in OCI, net of tax, for the effective portion of derivative instruments which qualify for and we have elected cash flow hedge accounting treatment, or on our Consolidated Condensed Statements of Operations as a component of mark-to-market activity within our net income. The following tables detail the components of our total mark-to-market activity for both the net realized gain (loss) and the net unrealized gain (loss) recognized from our derivative instruments not designated as hedging instruments and where these components were recorded on our Consolidated Condensed Statements of Operations for the periods indicated (in millions):
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Realized gain (loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (44 | ) |  | $ | (14 | ) |  | $ | (150 | ) |  | $ | (26 | )
Commodity derivative instruments |  |  | 65 |  |  |  | 41 |  |  |  | 117 |  |  |  | 93 |
Total realized gain (loss) |  | $ | 21 |  |  | $ | 27 |  |  | $ | (33 | ) |  | $ | 67 |
Unrealized gain (loss)(1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 43 |  |  | $ | (96 | ) |  | $ | 5 |  |  | $ | (115 | )
Commodity derivative instruments |  |  | (8 | ) |  |  | 131 |  |  |  | (47 | ) |  |  | 212 |
Total unrealized gain (loss) |  | $ | 35 |  |  | $ | 35 |  |  | $ | (42 | ) |  | $ | 97 |
Total mark-to-market activity |  | $ | 56 |  |  | $ | 62 |  |  | $ | (75 | ) |  | $ | 164 |
_________
(1) | Changes in unrealized gain (loss) include de-designation of interest rate swap cash flow hedges and related reclassification from AOCI into income, hedge ineffectiveness and adjustments to reflect changes in credit default risk exposure.
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Realized and unrealized gain (loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Power contracts included in operating revenues |  | $ | 18 |  |  | $ | 22 |  |  | $ | 9 |  |  | $ | 34 |
Natural gas contracts included in fuel and purchased energy expense |  |  | 39 |  |  |  | 150 |  |  |  | 61 |  |  |  | 271 |
Interest rate swaps included in interest expense |  |  | 2 |  |  |  | (26 | ) |  |  | 4 |  |  |  | (54 | )
Gain (loss) on interest rate derivatives, net |  |  | (3 | ) |  |  | (84 | ) |  |  | (149 | ) |  |  | (87 | )
Total mark-to-market activity |  | $ | 56 |  |  | $ | 62 |  |  | $ | (75 | ) |  | $ | 164 |
Derivatives Included in Our OCI and AOCI The following tables detail the effect of our net derivative instruments that qualify for hedge accounting treatment and are included in OCI and AOCI for the periods indicated (in millions):
|  | Three Months Ended September 30, |
|  | Gain (Loss) Recognized in OCI (Effective Portion) |  |  | Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)(2) |  |  | Gain (Loss) Reclassified from AOCI Into Income (Ineffective Portion) |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Interest rate swaps |  | $ | (103 | ) |  | $ | 45 |  |  | $ | (7 | ) |  | $ | (50 | ) |  | $ | (1 | ) |  | $ | — |
Commodity derivative instruments |  |  | 9 |  |  |  | 8 |  |  |  | 27 |  |  |  | 62 |  |  |  | (1 | ) |  |  | (1 | )
Total |  | $ | (94 | ) |  | $ | 53 |  |  | $ | 20 |  |  | $ | 12 |  |  | $ | (2 | ) |  | $ | (1 | )
|  | Nine Months Ended September 30, |
|  | Gain (Loss) Recognized in OCI (Effective Portion) |  |  | Gain (Loss) Reclassified from AOCI Into Income (Effective Portion)(2) |  |  | Gain (Loss) Reclassified from AOCI Into Income (Ineffective Portion) |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Interest rate swaps |  | $ | (9 | ) |  | $ | 18 |  |  | $ | (130 | )(4) |  | $ | (172 | ) |  | $ | (2 | ) |  | $ | — |
Commodity derivative instruments |  |  | (27 | ) |  |  | 87 |  |  |  | 106 | (1) |  |  | 162 |  |  |  | — |  |  |  | — |
Total |  | $ | (36 | ) |  | $ | 105 |  |  | $ | (24 | ) |  | $ | (10 | ) |  | $ | (2 | ) |  | $ | — |
_________
(1) | Included in operating revenues and fuel and purchased energy expense on our Consolidated Condensed Statements of Operations.
(2) | Cumulative cash flow hedge losses remaining in AOCI were $140 million and $122 million at September 30, 2011 and December 31, 2010, respectively.
(3) | Reclassification of losses from OCI to earnings for the three months ended September 30, 2011, consisted of $7 million in losses from the reclassification of interest rate contracts due to settlement.
(4) | Reclassification of losses from OCI to earnings for the nine months ended September 30, 2011 consisted of $24 million in losses from the reclassification of interest rate contracts due to settlement, $15 million in losses from terminated interest rate contracts due to the repayment of project debt in June 2011, and $91 million in losses from existing interest rate contracts reclassified from OCI into earnings due to the refinance of variable rate First Lien Credit Facility term loans.
Assuming constant September 30, 2011, power and natural gas prices and interest rates, we estimate that pre-tax net gains of $52 million would be reclassified from AOCI into our net income during the next 12 months as the hedged transactions settle; however, the actual amounts that will be reclassified will likely vary based on changes in natural gas and power prices as well as interest rates. Therefore, we are unable to predict what the actual reclassification from AOCI to our net income (positive or negative) will be for the next 12 months.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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