v3.8.0.1
Derivative Instruments
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [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, fuel oil, environmental products 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.
We also engage in limited trading activities related to our commodity derivative portfolio as authorized by our Board of Directors and monitored by our Chief Risk Officer and Risk Management Committee of senior management. These transactions are executed primarily for the purpose of providing improved price and price volatility discovery, greater market access, and profiting from our market knowledge, all of which benefit our asset hedging activities. Our trading results were not material for each of the three and nine months ended September 30, 2017 and 2016.
Interest Rate Hedging Instruments — A portion of our debt is indexed to base rates, primarily LIBOR. We have historically used interest rate hedging instruments to adjust the mix between fixed and variable rate debt to hedge our interest rate risk for potential adverse changes in interest rates. As of September 30, 2017, the maximum length of time over which we were hedging using interest rate hedging instruments designated as cash flow hedges was 8 years.
As of September 30, 2017 and December 31, 2016, the net forward notional buy (sell) position of our outstanding commodity derivative instruments that did not qualify or were not designated under the normal purchase normal sale exemption and our interest rate hedging instruments were as follows (in millions):
Derivative Instruments
 
Notional Amounts
 
September 30, 2017
 
December 31, 2016
Power (MWh)
 
(98
)
 
(86
)
Natural gas (MMBtu)
 
398

 
613

Environmental credits (Tonnes)
 
19

 
16

Interest rate hedging instruments
 
$
4,600

(1) 
$
3,721


___________
(1)
We entered into interest rate hedging instruments during the first quarter of 2017 to hedge approximately $1.0 billion of variable rate debt for 2018 through 2020 and approximately $500 million of variable rate debt for 2021 through 2022. We also extended the tenor of certain interest rate hedging instruments, which effectively places a ceiling on LIBOR on $2.5 billion of variable rate corporate debt through 2020 and $1.25 billion of variable rate corporate debt in 2021.
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. The aggregate fair value of our derivative liabilities with credit risk-related contingent provisions as of September 30, 2017, was $17 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 additional collateral of $1 million related to our derivative liabilities 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 expenses 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. 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 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 only apply hedge accounting to our interest rate hedging instruments. We report the effective portion of the mark-to-market gain or loss on our interest rate hedging instruments 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 interest rate hedging instruments are recognized currently in earnings as a component of interest expense. 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 affects 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, interest rate, environmental product and fuel oil 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 mark-to-market gain/loss as a component of operating revenues (for physical and financial power and Heat Rate and commodity option activity) and fuel and purchased energy expense (for physical and financial natural gas, power, environmental product and fuel oil activity). Changes in fair value of interest rate derivatives not designated as hedging instruments are recognized currently in earnings as interest expense.
Derivatives Included on Our Consolidated Condensed Balance Sheets
During the third quarter of 2017, we elected to begin offsetting fair value amounts associated with our derivative instruments and related cash collateral and margin deposits on our Consolidated Condensed Balance Sheets that are executed with the same counterparty under master netting arrangements. 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. See Note 1 for a further description of the change in accounting principle associated with our election to offset fair value amounts associated with our derivative instruments.
The following tables present the fair values of our derivative instruments and our net exposure after offsetting amounts subject to a master netting arrangement with the same counterparty to our derivative instruments recorded on our Consolidated Condensed Balance Sheets by location and hedge type at September 30, 2017 and December 31, 2016 (in millions):
 
 
September 30, 2017
 
 
Gross Amounts of Assets and (Liabilities)
 
Gross Amounts Offset on the Consolidated Condensed Balance Sheets
 
Net Amount Presented on the Consolidated Condensed Balance Sheet(1)
Derivative assets:
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
 
$
472

 
$
(472
)
 
$
—

Commodity forward contracts
 
338

 
(133
)
 
205

Interest rate hedging instruments
 
2

 
(1
)
 
1

Total current derivative assets(2)
 
$
812

 
$
(606
)
 
$
206

Commodity exchange traded futures and swaps contracts
 
133

 
(133
)
 
—

Commodity forward contracts
 
356

 
(82
)
 
274

Interest rate hedging instruments
 
18

 
(8
)
 
10

Total long-term derivative assets(2)
 
$
507

 
$
(223
)
 
$
284

Total derivative assets
 
$
1,319

 
$
(829
)
 
$
490

 
 
 
 
 
 
 
Derivative (liabilities):
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
 
$
(496
)
 
$
496

 
$
—

Commodity forward contracts
 
(236
)
 
148

 
(88
)
Interest rate hedging instruments
 
(26
)
 
1

 
(25
)
Total current derivative (liabilities)(2)
 
$
(758
)
 
$
645

 
$
(113
)
Commodity exchange traded futures and swaps contracts
 
(160
)
 
160

 
—

Commodity forward contracts
 
(183
)
 
98

 
(85
)
Interest rate hedging instruments
 
(26
)
 
8

 
(18
)
Total long-term derivative (liabilities)(2)
 
$
(369
)
 
$
266

 
$
(103
)
Total derivative liabilities
 
$
(1,127
)
 
$
911

 
$
(216
)
Net derivative assets (liabilities)
 
$
192

 
$
82

 
$
274

 
 
December 31, 2016
 
 
Gross Amounts of Assets and (Liabilities)
 
Gross Amounts Offset on the Consolidated Condensed Balance Sheets
 
Net Amount Presented on the Consolidated Condensed Balance Sheet(1)
Derivative assets:
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
 
$
1,344

 
$
(1,344
)
 
$
—

Commodity forward contracts
 
380

 
(160
)
 
220

Interest rate hedging instruments
 
1

 
—

 
1

Total current derivative assets(3)
 
$
1,725

 
$
(1,504
)
 
$
221

Commodity exchange traded futures and swaps contracts
 
198

 
(198
)
 
—

Commodity forward contracts
 
317

 
(45
)
 
272

Interest rate hedging instruments
 
28

 
—

 
28

Total long-term derivative assets(3)
 
$
543

 
$
(243
)
 
$
300

Total derivative assets
 
$
2,268

 
$
(1,747
)
 
$
521

 
 
 
 
 
 
 
Derivative (liabilities):
 
 
 
 
 
 
Commodity exchange traded futures and swaps contracts
 
$
(1,327
)
 
$
1,327

 
$
—

Commodity forward contracts
 
(275
)
 
165

 
(110
)
Interest rate hedging instruments
 
(28
)
 
—

 
(28
)
Total current derivative (liabilities)(3)
 
$
(1,630
)
 
$
1,492

 
$
(138
)
Commodity exchange traded futures and swaps contracts
 
(243
)
 
243

 
—

Commodity forward contracts
 
(203
)
 
84

 
(119
)
Interest rate hedging instruments
 
(30
)
 
—

 
(30
)
Total long-term derivative (liabilities)(3)
 
$
(476
)
 
$
327

 
$
(149
)
Total derivative liabilities
 
$
(2,106
)
 
$
1,819

 
$
(287
)
Net derivative assets (liabilities)
 
$
162

 
$
72

 
$
234

____________
(1)
At September 30, 2017 and December 31, 2016, we had $115 million and $262 million of collateral under master netting arrangements that were not offset against our derivative instruments on the Consolidated Condensed Balance Sheets.
(2)
At September 30, 2017, current and long-term derivative assets are shown net of collateral of $(4) million and $(8) million, respectively, and current and long-term derivative liabilities are shown net of collateral of $43 million and $51 million, respectively.
(3)
At December 31, 2016, current and long-term derivative assets are shown net of collateral of $(29) million and $(3) million, respectively, and current and long-term derivative liabilities are shown net of collateral of $19 million and $85 million, respectively.
 
September 30, 2017
 
December 31, 2016
 
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 hedging instruments
$
11

 
$
43

 
$
29

 
$
58

Total derivatives designated as cash flow hedging instruments
$
11

 
$
43

 
$
29

 
$
58

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity instruments
$
479

 
$
173

 
$
492

 
$
229

Total derivatives not designated as hedging instruments
$
479

 
$
173

 
$
492

 
$
229

Total derivatives
$
490

 
$
216

 
$
521

 
$
287


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 activity for both the net realized gain (loss) and the net mark-to-market 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Realized gain (loss)(1)(2)
 
 
 
 
 
 
 
Commodity derivative instruments
$
(53
)
 
$
32

 
$
20

 
$
213

Total realized gain (loss)
$
(53
)
 
$
32

 
$
20

 
$
213

 
 
 
 
 
 
 
 
Mark-to-market gain (loss)(3)
 
 
 
 
 
 
 
Commodity derivative instruments
$
66

 
$
109

 
$
39

 
$
(22
)
Interest rate hedging instruments
—

 
—

 
1

 
1

Total mark-to-market gain (loss)
$
66

 
$
109

 
$
40

 
$
(21
)
Total activity, net
$
13

 
$
141

 
$
60

 
$
192


___________
(1)
Does not include the realized value associated with derivative instruments that settle through physical delivery.
(2)
Includes amortization of acquisition date fair value of financial derivative activity related to the acquisition of Champion Energy, Calpine Solutions and North American Power.
(3)
In addition to changes in market value on derivatives not designated as hedges, changes in mark-to-market gain (loss) also includes hedge ineffectiveness and adjustments to reflect changes in credit default risk exposure.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Realized and mark-to-market gain (loss)(1)
 
 
 
 
 
 
 
Derivatives contracts included in operating revenues(2)(3)
$
60

 
$
308

 
$
252

 
$
240

Derivatives contracts included in fuel and purchased energy expense(2)(3)
(47
)
 
(167
)
 
(193
)
 
(49
)
Interest rate hedging instruments included in interest expense(4)
—

 
—

 
1

 
1

Total activity, net
$
13

 
$
141

 
$
60

 
$
192


___________
(1)
In addition to changes in market value on derivatives not designated as hedges, changes in mark-to-market gain (loss) also includes adjustments to reflect changes in credit default risk exposure.
(2)
Does not include the realized value associated with derivative instruments that settle through physical delivery.
(3)
Includes amortization of acquisition date fair value of financial derivative activity related to the acquisition of Champion Energy, Calpine Solutions and North American Power.
(4)
In addition to changes in market value on interest rate hedging instruments not designated as hedges, changes in mark-to-market gain (loss) also includes hedge ineffectiveness.
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 September 30,
 
Three Months Ended September 30,
 
Gain (Loss) Recognized in
OCI (Effective Portion)
 
Gain (Loss) Reclassified from
AOCI into Income (Effective Portion)(3)
 
2017
 
2016
 
2017
 
2016
 
Affected Line Item on the Consolidated Condensed Statements of Operations
Interest rate hedging instruments(1)(2)
$
7

 
$
18

 
$
(10
)
 
$
(11
)
 
Interest expense
Interest rate hedging instruments(1)(2)
1

 
—

 
(1
)
 
—

 
Depreciation expense
Total
$
8

 
$
18

 
$
(11
)
 
$
(11
)
 
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
Gain (Loss) Recognized in
OCI (Effective Portion)
 
Gain (Loss) Reclassified from
AOCI into Income (Effective Portion)(3)
 
2017
 
2016
 
2017
 
2016
 
Affected Line Item on the Consolidated Condensed Statements of Operations
Interest rate hedging instruments(1)(2)
$
(12
)
 
$
—

 
$
(32
)
 
$
(33
)
 
Interest expense
Interest rate hedging instruments(1)(2)
5

 
—

 
(5
)
 
—

 
Depreciation expense
Total
$
(7
)
 
$
—

 
$
(37
)
 
$
(33
)
 
 
____________
(1)
We did not record any material gain (loss) on hedge ineffectiveness related to our interest rate hedging instruments designated as cash flow hedges during the three and nine months ended September 30, 2017 and 2016.
(2)
We recorded an income tax expense of $1 million and $3 million for each of the three and nine months ended September 30, 2017 and nil for each of the three and nine months ended September 30, 2016, in AOCI related to our cash flow hedging activities.
(3)
Cumulative cash flow hedge losses attributable to Calpine, net of tax, remaining in AOCI were $101 million and $90 million at September 30, 2017 and December 31, 2016, respectively. Cumulative cash flow hedge losses attributable to the noncontrolling interest, net of tax, remaining in AOCI were $7 million and $8 million at September 30, 2017 and December 31, 2016, respectively.
We estimate that pre-tax net losses of $35 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.