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Derivative Instruments | 3 Months Ended
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Mar. 31, 2013
Derivative Instruments [Abstract] |
Derivative Instruments | 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. As of March 31, 2013, the maximum length of time over which we were hedging using interest rate derivative instruments designated as cash flow hedges was 11 years. As of March 31, 2013 and December 31, 2012, 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):
Derivative Instruments |  | Notional Amounts
| March 31, 2013 |  | December 31, 2012
Power (MWh) |  | (16 | ) |  | (16 | )
Natural gas (MMBtu) |  | 162 |  |  | 66 |
Interest rate swaps |  | $ | 1,599 |  |  | $ | 1,602 |
Certain of our derivative instruments contain credit risk-related contingent provisions that require us to maintain collateral balances consistent with our credit ratings. If our credit rating were to be downgraded, it could require us to post additional collateral or could potentially allow our counterparty 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 notch downgrade from its current level would be material. The aggregate fair value of our derivative liabilities with credit risk-related contingent provisions as of March 31, 2013, was $6 million for which we have posted collateral of $1 million by posting margin deposits or granting additional first priority liens on the assets currently subject to first priority liens under our First Lien Notes, First Lien Term Loans and Corporate Revolving Facility. However, if our credit rating were downgraded by one notch from its current level, we estimate that no additional collateral 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. In order to simplify our reporting, we elected to discontinue the application of hedge accounting treatment during the first quarter of 2012 for all commodity derivatives, including the remaining commodity derivatives previously accounted for as cash flow hedges. Accordingly, prospective changes in fair value from the date of this election are reflected in unrealized mark-to-market gain/loss on our Consolidated Condensed Statements of Operations and could create more volatility in our earnings. Revenues and fuel costs derived from instruments that qualified for hedge accounting or represent an economic hedge are recorded in the same financial statement line item as the item being hedged. Although we have discontinued the application of hedge accounting treatment for our commodity derivative instruments, prior to this change and for our interest rate swaps, 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 (or economically 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) 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 recognized currently in earnings and are separately stated on our Consolidated Condensed Statements of Operations in unrealized mark-to-market gain/loss as a component of operating revenues (for power contracts and swaps) and fuel and purchased energy expense (for natural gas contracts and swaps). Gains and losses due to ineffectiveness on interest rate hedging instruments are recognized currently in earnings as a component of 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. Derivatives Not Designated as Hedging Instruments — We enter into power, natural gas and interest rate transactions that primarily act as economic hedges to our asset and interest rate 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 commodity derivatives not designated as hedging instruments are recognized currently in earnings and are separately stated on our Consolidated Condensed Statements of Operations in unrealized mark-to-market gain/loss as a component of operating revenues (for power contracts and Heat Rate swaps and options) and fuel and purchased energy expense (for natural gas contracts, swaps and options). Changes in fair value of interest rate derivatives not designated as hedging instruments are recognized currently in earnings as interest expense (for interest rate swaps except as discussed below). Interest Rate Swaps Formerly Hedging our First Lien Credit Facility — On March 26, 2012, we terminated the legacy interest rate swaps formerly hedging our First Lien Credit Facility and recorded the fair value of the swaps totaling approximately $156 million. Approximately $14 million of the settlement amount was recorded as a component of loss on interest rate derivatives on our Consolidated Condensed Statement of Operations for the three months ended March 31, 2012, and approximately $142 million reflected the realization of losses recorded in prior periods. Derivatives Included on Our Consolidated Condensed Balance Sheets During the first quarter of 2012, we de-designated our remaining commodity derivative cash flow hedges; therefore, as of March 31, 2013 and December 31, 2012, we do not have any designated commodity derivative cash flow hedges. 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 March 31, 2013 and December 31, 2012 (in millions):
| March 31, 2013
| Commodity Instruments |  | Interest Rate Swaps |  | Total Derivative Instruments
Balance Sheet Presentation |  |  |  |  |
Current derivative assets | $ | 514 |  |  | $ | — |  |  | $ | 514 |
Long-term derivative assets | 144 |  |  | 5 |  |  | 149 |
Total derivative assets | $ | 658 |  |  | $ | 5 |  |  | $ | 663 |
Current derivative liabilities | $ | 551 |  |  | $ | 44 |  |  | $ | 595 |
Long-term derivative liabilities | 145 |  |  | 144 |  |  | 289 |
Total derivative liabilities | $ | 696 |  |  | $ | 188 |  |  | $ | 884 |
Net derivative liabilities | $ | (38 | ) |  | $ | (183 | ) |  | $ | (221 | )
| December 31, 2012
| Commodity Instruments |  | Interest Rate Swaps |  | Total Derivative Instruments
Balance Sheet Presentation |  |  |  |  |
Current derivative assets | $ | 339 |  |  | $ | — |  |  | $ | 339 |
Long-term derivative assets | 94 |  |  | 4 |  |  | 98 |
Total derivative assets | $ | 433 |  |  | $ | 4 |  |  | $ | 437 |
Current derivative liabilities | $ | 317 |  |  | $ | 40 |  |  | $ | 357 |
Long-term derivative liabilities | 133 |  |  | 160 |  |  | 293 |
Total derivative liabilities | $ | 450 |  |  | $ | 200 |  |  | $ | 650 |
Net derivative liabilities | $ | (17 | ) |  | $ | (196 | ) |  | $ | (213 | )
| March 31, 2013 |  | December 31, 2012
| 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 | $ | 5 |  |  | $ | 174 |  |  | $ | 4 |  |  | $ | 184 |
Total derivatives designated as cash flow hedging instruments | $ | 5 |  |  | $ | 174 |  |  | $ | 4 |  |  | $ | 184 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Commodity instruments | $ | 658 |  |  | $ | 696 |  |  | $ | 433 |  |  | $ | 450 |
Interest rate swaps | — |  |  | 14 |  |  | — |  |  | 16 |
Total derivatives not designated as hedging instruments | $ | 658 |  |  | $ | 710 |  |  | $ | 433 |  |  | $ | 466 |
Total derivatives | $ | 663 |  |  | $ | 884 |  |  | $ | 437 |  |  | $ | 650 |
We elected not to offset fair value amounts recognized as derivative instruments on our Consolidated Condensed Balance Sheets that are executed with the same counterparty under master netting arrangements or other contractual netting provisions negotiated with the counterparty. Our netting arrangements include a right to set off or net together purchases and sales of similar products in the margining or settlement process. In some instances, we have also negotiated cross commodity netting rights which allow for the net presentation of activity with a given counterparty regardless of product purchased or sold. We also post cash collateral in support of our derivative instruments which may also be subject to a master netting arrangement with the same counterparty. The tables below set forth our net exposure to derivative instruments after offsetting amounts subject to a master netting arrangement with the same counterparty at March 31, 2013 and December 31, 2012 (in millions):
|  | March 31, 2013
|  |  |  | Gross Amounts Not Offset on the Consolidated Condensed Balance Sheets |  |
|  | Gross Amounts Presented on our Consolidated Condensed Balance Sheets |  | Derivative Asset (Liability) not Offset on the Consolidated Condensed Balance Sheets |  | Margin/Cash (Received) Posted (1) |  | Net Amount
Derivative assets: |  |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts |  | $ | 594 |  |  | $ | (593 | ) |  | $ | (1 | ) |  | $ | — |
Commodity forward contracts |  | 64 |  |  | (29 | ) |  | — |  |  | 35 |
Interest rate swaps |  | 5 |  |  | — |  |  | — |  |  | 5 |
Total derivative assets |  | $ | 663 |  |  | $ | (622 | ) |  | $ | (1 | ) |  | $ | 40 |
Derivative (liabilities): |  |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts |  | $ | (655 | ) |  | $ | 593 |  |  | $ | 62 |  |  | $ | — |
Commodity forward contracts |  | (41 | ) |  | 29 |  |  | 1 |  |  | (11 | )
Interest rate swaps |  | (188 | ) |  | — |  |  | — |  |  | (188 | )
Total derivative (liabilities) |  | $ | (884 | ) |  | $ | 622 |  |  | $ | 63 |  |  | $ | (199 | )
Net derivative assets (liabilities) |  | $ | (221 | ) |  | $ | — |  |  | $ | 62 |  |  | $ | (159 | )
|  | December 31, 2012
|  |  |  | Gross Amounts Not Offset on the Consolidated Condensed Balance Sheets |  |
|  | Gross Amounts Presented on our Consolidated Condensed Balance Sheets |  | Derivative Asset (Liability) not Offset on the Consolidated Condensed Balance Sheets |  | Margin/Cash (Received) Posted (1) |  | Net Amount
Derivative assets: |  |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts |  | $ | 385 |  |  | $ | (379 | ) |  | $ | (6 | ) |  | $ | — |
Commodity forward contracts |  | 48 |  |  | (17 | ) |  | (1 | ) |  | 30 |
Interest rate swaps |  | 4 |  |  | — |  |  | — |  |  | 4 |
Total derivative assets |  | $ | 437 |  |  | $ | (396 | ) |  | $ | (7 | ) |  | $ | 34 |
Derivative (liabilities): |  |  |  |  |  |  |  |
Commodity exchange traded futures and swaps contracts |  | $ | (424 | ) |  | $ | 379 |  |  | $ | 45 |  |  | $ | — |
Commodity forward contracts |  | (26 | ) |  | 17 |  |  | 1 |  |  | (8 | )
Interest rate swaps |  | (200 | ) |  | — |  |  | — |  |  | (200 | )
Total derivative (liabilities) |  | $ | (650 | ) |  | $ | 396 |  |  | $ | 46 |  |  | $ | (208 | )
Net derivative assets (liabilities) |  | $ | (213 | ) |  | $ | — |  |  | $ | 39 |  |  | $ | (174 | )
____________
(1) | Negative balances represent margin deposits posted with us by our counterparties related to our derivative activities that are subject to a master netting arrangement. Positive balances reflect margin deposits and natural gas and power prepayments posted by us with our counterparties related to our derivative activities that are subject to a master netting arrangement. See Note 6 for a further discussion of our collateral.
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 earnings. 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 in earnings and where these components were recorded on our Consolidated Condensed Statements of Operations for the periods indicated (in millions):
|  | Three Months Ended March 31,
|  | 2013 |  | 2012
Realized gain (loss)(1) |  |  |  |
Commodity derivative instruments |  | $ | 28 |  |  | $ | 118 |
Interest rate swaps |  | — |  |  | (157 | )
Total realized gain (loss) |  | $ | 28 |  |  | $ | (39 | )
Unrealized gain (loss)(2) |  |  |  |
Commodity derivative instruments |  | $ | (57 | ) |  | $ | 78 |
Interest rate swaps |  | 2 |  |  | 146 |
Total unrealized gain (loss) |  | $ | (55 | ) |  | $ | 224 |
Total mark-to-market activity, net |  | $ | (27 | ) |  | $ | 185 |
___________
(1) | Does not include the realized value associated with derivative instruments that settle through physical delivery.
(2) | In addition to changes in market value on derivatives not designated as hedges, changes in unrealized gain (loss) also includes hedge ineffectiveness and adjustments to reflect changes in credit default risk exposure.
|  | Three Months Ended March 31,
|  | 2013 |  | 2012
Realized and unrealized gain (loss) |  |  |  |
Derivatives contracts included in operating revenues |  | $ | (74 | ) |  | $ | 92 |
Derivatives contracts included in fuel and purchased energy expense |  | 45 |  |  | 104 |
Interest rate swaps included in interest expense |  | 2 |  |  | 3 |
Loss on interest rate derivatives |  | — |  |  | (14 | )
Total mark-to-market activity, net |  | $ | (27 | ) |  | $ | 185 |
Derivatives Included in OCI and AOCI The following table details the effect of our net derivative instruments that qualified for hedge accounting treatment and are included in OCI and AOCI for the periods indicated (in millions):
| Three Months Ended March 31, |  | Three Months Ended March 31,
| Gain (Loss) Recognized in OCI (Effective Portion) |  | Gain (Loss) Reclassified from AOCI into Income (Effective Portion)(3)
| 2013 |  | 2012 |  | 2013 |  | 2012 |  | Affected Line Item on the Consolidated Condensed Statements of Operations
Commodity derivative instruments(1): |  |  |  |  |  |  |  |  |
Power derivative instruments | $ | — |  |  | $ | (15 | ) |  | $ | — |  |  | $ | 38 |  |  | Commodity revenue
Natural gas derivative instruments | — |  |  | 14 |  |  | — |  |  | (21 | ) |  | Commodity expense
Interest rate swaps(2) | 13 |  |  | 1 |  |  | (9 | ) |  | (7 | ) |  | Interest expense
Total | $ | 13 |  |  | $ | — |  |  | $ | (9 | ) |  | $ | 10 |  |  |
____________
(1) | There were no commodity derivative instruments designated as cash flow hedges during the three months ended March 31, 2013. We recorded a gain on hedge ineffectiveness of $2 million related to our commodity derivative instruments designated as cash flow hedges during the three months ended March 31, 2012.
(2) | We did not record any gain (loss) on hedge ineffectiveness related to our interest rate swaps designated as cash flow hedges during the three months ended March 31, 2013 and 2012.
(3) | Cumulative cash flow hedge losses, net of tax, remaining in AOCI were $228 million and $242 million at March 31, 2013 and December 31, 2012, respectively.
We estimate that pre-tax net losses of $45 million would be reclassified from AOCI into interest expense 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 interest rates. Therefore, we are unable to predict what the actual reclassification from AOCI into earnings (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 Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: 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. 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