Commitments and Contingencies

Long-Term Service Agreements

As of December 31, 2016, the total estimated commitments for LTSAs associated with turbines were approximately $247 million. These commitments are payable over the terms of the respective agreements, which range from 1 to 15 years. LTSA future commitment estimates are based on the stated payment terms in the contracts at the time of execution and are subject to an annual inflationary adjustment. Certain of these agreements have terms that allow us to cancel the contracts for a fee. If we cancel such contracts, the estimated commitments remaining for LTSAs would be reduced.

Power Plant, Land and Other Operating Leases

We have entered into a long-term operating lease for one of our power plants, extending through 2020, which includes renewal options or purchase options at fair value and contain customary restrictions on dividends up to Calpine Corporation, additional debt and further encumbrances similar to those typically found in project finance agreements. Payments on our operating lease, which may contain escalation clauses or step rent provisions, are recognized on a straight-line basis. Certain capital improvements associated with our leased power plant may be deemed to be leasehold improvements and are amortized over the shorter of the term of the lease or the economic life of the capital improvement. We have also entered into various land and other operating leases for ground facilities and operations, which extend through 2073. Future minimum rent payments under these lease agreements, including renewal options and rent escalation clauses, are as follows (in millions):



	Initial Year	2017		2018		2019		2020		2021		Thereafter		Total
Land and other operating leases	various	$	13	$	13	$	13	$	12	$	12	$	176	$	239
Power plant operating lease	2000	22		22		30		—		—		—		74
Total leases		$	35	$	35	$	43	$	12	$	12	$	176	$	313

During the years ended December 31, 2016, 2015 and 2014, rent expense for power plant, land and other operating leases amounted to $38 million, $43 million and $46 million, respectively.

Production Royalties and Leases

We are obligated under numerous geothermal leases and right-of-way, easement and surface agreements. The geothermal leases generally provide for royalties based on production revenue with reductions for property taxes paid. The right-of-way, easement and surface agreements are based on flat rates or adjusted based on consumer price index changes and are not material. Under the terms of most geothermal leases, the royalties accrue as a percentage of power revenues. Certain properties also have net profits and overriding royalty interests that are in addition to the land base lease royalties. Some lease agreements contain clauses providing for minimum lease payments to lessors if production temporarily ceases or if production falls below a specified level. Production royalties for geothermal power plants for the years ended December 31, 2016, 2015 and 2014, were $22 million, $23 million and $28 million, respectively.

Office Leases

We lease our corporate and regional offices under noncancellable operating leases extending through 2022. Future minimum lease payments under these leases are as follows (in millions):



2017	$	13
2018	13
2019	12
2020	12
2021	1
Thereafter	—
Total	$	51

Lease payments are subject to adjustments for our pro rata portion of annual increases or decreases in building operating costs. During the years ended December 31, 2016, 2015 and 2014, rent expense for noncancelable operating leases was $9 million, $11 million and $11 million, respectively.

Commodity Purchases

We enter into commodity purchase contracts of various terms with third parties to supply fuel to our natural gas-fired power plants and power to our retail customers. The majority of our purchases are made in the spot market or under index-priced contracts. These contracts are accounted for as executory contracts and therefore not recognized as liabilities on our Consolidated Balance Sheet. At December 31, 2016, we had future commitments for the purchase, transportation, or storage of commodities as detailed below (in millions):



2017	$	285
2018	201
2019	118
2020	89
2021	70
Thereafter	539
Total	$	1,302

Guarantees and Indemnifications

As part of our normal business operations, we enter into various agreements providing, or otherwise arranging, financial or performance assurance to third parties on behalf of our subsidiaries in the ordinary course of such subsidiaries’ respective business. Such arrangements include guarantees, standby letters of credit and surety bonds for power and natural gas purchase and sale arrangements, retail contracts, contracts associated with the development, construction, operation and maintenance of our fleet of power plants and our Accounts Receivable Sales Program. These arrangements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries’ intended commercial purposes.

At December 31, 2016, guarantees of subsidiary debt, standby letters of credit and surety bonds to third parties and the guarantee under our Account Receivable Sales Program and their respective expiration dates were as follows (in millions):



Guarantee Commitments	2017		2018		2019		2020		2021		Thereafter		Total
Guarantee of subsidiary debt⁽¹⁾	$	26	$	31	$	30	$	30	$	29	$	90	$	236
Standby letters of credit^(2)(3)(4)	855		98		—		—		—		38		991
Surety bonds^(4)(5)(6)	15		—		—		—		—		11		26
Guarantee under Accounts Receivable Sales Program⁽⁷⁾	211		—		—		—		—		—		211
Total	$	1,107	$	129	$	30	$	30	$	29	$	139	$	1,464

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(1)	Represents Calpine Corporation guarantees of certain power plant capital leases and related interest. All guaranteed capital leases are recorded on our Consolidated Balance Sheets.


(2)	The standby letters of credit disclosed above represent those disclosed in Note 6.


(3)	Letters of credit are renewed annually and as such all amounts are reflected in the year of letter of credit expiration. The related commercial obligations extend for multiple years, therefore, renewal of the letter of credit will likely follow the term of the associated commercial obligation.


(4)	These are contingent off balance sheet obligations.


(5)	The majority of surety bonds do not have expiration or cancellation dates.


(6)	As of December 31, 2016, no cash collateral is outstanding related to these bonds.


(7)	Calpine has guaranteed the performance of Calpine Solutions under the Accounts Receivable Sales Program. The Accounts Receivable Sales Program expires on December 1, 2017.

We routinely arrange for the issuance of letters of credit and various forms of surety bonds to third parties in support of our subsidiaries’ contractual arrangements of the types described above and may guarantee the operating performance of some of our partially-owned subsidiaries up to our ownership percentage. The letters of credit issued under various credit facilities support risk management and other operational and construction activities. In the event a subsidiary were to fail to perform its obligations under a contract supported by such a letter of credit or surety bond, and the issuing bank or surety were to make payment to the third party, we would be responsible for reimbursing the issuing bank or surety within an agreed timeframe, typically a period of one to five days. To the extent liabilities are incurred as a result of activities covered by letters of credit or the surety bonds, such liabilities are included on our Consolidated Balance Sheets.

Commercial Agreements — In connection with the purchase and sale of power, natural gas, environmental products and fuel oil to and from third parties with respect to the operation of our power plants and our retail subsidiaries, we may be required to guarantee a portion of the obligations of certain of our subsidiaries. We may also be required to guarantee performance obligations associated with our marketing, hedging, optimization and trading activities to manage our exposure to changes in prices for energy commodities. These guarantees may include future payment obligations and effectively guarantee our future performance under certain agreements.

Asset Acquisition and Disposition Agreements — In connection with our purchase and sale agreements, we have frequently provided for indemnification to the counterparty for liabilities incurred as a result of a breach of a representation, warranty or covenant by the indemnifying party. These indemnification obligations generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or impossible to quantify at the time of the consummation of a particular transaction.

Other — Additionally, we and our subsidiaries from time to time assume other guarantee and indemnification obligations in conjunction with other transactions such as parts supply agreements, construction agreements, maintenance and service agreements and equipment lease agreements. These guarantee and indemnification obligations may include indemnification from personal injury or other claims by our employees as well as future payment obligations and effectively guarantee our future performance under certain agreements.

Our potential exposure under guarantee and indemnification obligations can range from a specified amount to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. Our total maximum exposure under our guarantee and indemnification obligations is not estimable due to uncertainty as to whether claims will be made or how any potential claim will be resolved. As of December 31, 2016, there are no material outstanding claims related to our guarantee and indemnification obligations and we do not anticipate that we will be required to make any material payments under our guarantee and indemnification obligations.

Litigation

We are party to various litigation matters, including regulatory and administrative proceedings arising out of the normal course of business. At the present time, we do not expect that the outcome of any of these proceedings, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.

On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote,” “reasonably possible” or “probable” as defined by U.S. GAAP. Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss. The ultimate outcome of these litigation matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome be reasonably estimated. As a result, we give no assurance that such litigation matters would, individually or in the aggregate, not have a material adverse effect on our financial condition, results of operations or cash flows.

Environmental Matters

We are subject to complex and stringent environmental laws and regulations related to the operation of our power plants. On occasion, we may incur environmental fees, penalties and fines associated with the operation of our power plants. At the present time, we do not have environmental violations or other matters that would have a material effect on our financial condition, results of operations or cash flows or that would significantly change our operations.

California Air Resources Board. On November 8, 2016, Russell City Energy Center, LLC received a notice of violation for an exceedance of CARB’s annual emission limits for Sulfur Hexafluoride (“SF₆”) due to a leak of SF₆ experienced for reporting year 2015 from one of the high voltage circuit breakers located in the Russell City Energy Center switchyard. SF₆ is a gas used as an electrical insulator in high voltage circuit breakers and is a GHG. A monetary penalty has not yet been imposed by CARB. The liability we may ultimately incur with respect to this matter has not been determined, but it is not expected to be material.