Leases

Accounting for Leases – Lessee

We evaluate contracts for lease accounting at contract inception and assess lease classification at the lease commencement date. For our leases, we recognize a right-of-use asset and corresponding lease obligation liability at the lease commencement date where the lease obligation liability is measured at the present value of the minimum lease payments. For our operating leases, the amortization of the right-of-use asset and the accretion of our lease obligation liability result in a single straight-line expense recognized over the lease term.

We determine the discount rate associated with our operating and finance leases using our incremental borrowing rate at lease commencement. For our operating leases, we use an interest rate commensurate with the interest rate to borrow on a collateralized basis over a similar term with an amount equal to the lease payments. Factors management considers in the calculation of the discount rate include the amount of the borrowing, the lease term including options that are reasonably certain of exercise, the current interest rate environment and the credit rating of the entity. For our finance leases, we use the interest rate commensurate with the interest rate for a project finance borrowing arrangement with a similar collateral package, repayment terms, restrictive covenants and guarantees.

Our operating leases are primarily related to office space for our corporate and regional offices as well as land and operating related leases for our power plants. Additionally, one of our power plants is accounted for as a long-term operating lease. Payments made by Calpine on this lease are recognized on a straight-line basis with capital improvements associated with our leased power plant deemed leasehold improvements that are amortized over the shorter of the term of the lease or the economic life of the capital improvement. Several of our leases contain renewal options held by us to extend the lease term. The inclusion of these renewal periods in the lease term and in the minimum lease payments included in our lease liabilities is dependent on specific facts and circumstances for each lease and whether it is determined to be reasonably certain that we will exercise our option to extend the term. Our office, land and other operating leases do not contain any material restrictive covenants or residual value guarantees.

We have entered into finance leases for certain power plants and related equipment with terms that range up to 37 years (including lease renewal options). The finance leases generally provide for the lessee to pay taxes, maintenance, insurance, and certain other operating costs of the leased property.

In connection with our adoption of Topic 842 on January 1, 2019, we elected certain practical expedients that were available under the new lease standards including:


•	we elected not to separate lease and nonlease components for our current classes of underlying leased assets as the lessee;


•	we did not evaluate existing and expired land easements that were not previously accounted for as leases prior to January 1, 2019; and


•	we did not reassess the classification of leases, the accounting for initial direct costs or whether contractual arrangements contained a lease for all contracts that expired or commenced prior to January 1, 2019.

Further, upon the adoption of Topic 842, we made an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. We do not have any material subleases associated with our operating and finance leases.

The components of our operating and finance lease expense are as follows for the period presented (in millions):



	Three Months Ended March 31,
	2019
Operating Leases
Operating lease expense	$	11

Finance Leases
Amortization of the right-of-use assets	$	3
Interest expense	2
Finance lease expense	$	5

Variable lease expense	$	1

Total lease expense	$	17

The following is a schedule by year of future minimum lease payments associated with our operating and finance leases together with the present value of the net minimum lease payments as of March 31, 2019 (in millions):



	Operating Leases⁽¹⁾		Finance Leases⁽²⁾
2019	$	44	$	12
2020	19		18
2021	19		18
2022	18		18
2023	17		21
Thereafter	191		72
Total minimum lease payments	308		159
Less: Amount representing interest	105		58
Total lease obligation	203		101
Less: current lease obligation	40		11
Long-term lease obligation	$	163	$	90

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(1)	The lease liabilities associated with our operating leases as of March 31, 2019 are included in other current liabilities and other long-term liabilities on our Consolidated Condensed Balance Sheet.


(2)	The lease liabilities associated with our finance leases as of March 31, 2019 are included in debt, current portion, current liabilities held for sale and debt, net of current portion on our Consolidated Condensed Balance Sheet.

Supplemental balance sheet information related to our operating and finance leases is as follows as of March 31, 2019 (in millions, except lease term and discount rate):



	March 31, 2019
Operating leases⁽¹⁾
Right-of-use assets associated with operating leases	$	182

Finance leases⁽²⁾
Property, plant and equipment, gross	$	390
Accumulated amortization	(177		)
Property, plant and equipment, net	$	213

Weighted average remaining lease term (in years)
Operating leases	15.7
Finance leases	12.1

Weighted average discount rate
Operating leases	5.3		%
Finance leases	7.5		%

____________


(1)	The right-of-use assets associated with our operating leases as of March 31, 2019 are included in other assets on our Consolidated Condensed Balance Sheet.


(2)	The right-of-use assets associated with our finance leases as of March 31, 2019 are included in current assets held for sale and property, plant and equipment, net on our Consolidated Condensed Balance Sheet.

We did not obtain any right-of-use assets in exchange for lease liabilities associated with operating or finance leases during the three months ended March 31, 2019. Supplemental cash flow information related to our operating and finance leases is as follows for the period presented (in millions):



	Three Months Ended March 31,
	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8
Operating cash flows from finance leases	$	2
Financing cash flows from finance leases	$	5

As of March 31, 2019, we have executed agreements that contain a lease with a future lease commencement date and future lease commitments of $1 million primarily related to an office lease which commences in September 2019.

Accounting for Leases – Lessor

We apply lease accounting to PPAs that meet the definition of a lease and determine lease classification treatment at commencement of the agreement. We currently do not have any contracts which are accounted for as sales-type leases or direct financing leases and all of our leases as the lessor are classified as operating leases. As part of the implementation of Topic 842, we elected the practical expedient to not reassess leases that have commenced prior to January 1, 2019.

Revenue from contracts accounted for as operating leases, such as certain tolling agreements, with minimum lease rentals (capacity payments) which vary over time must be levelized. Generally, we levelize these contract revenues on a straight-line basis over the term of the contract. Our operating leases that have commenced contain terms extending through December 2034. These contracts also generally contain variable payment components based on generation volumes or operating efficiency over a period of time. Revenues associated with the variable payments are recognized over time as the goods or services are provided to the lessee. Our operating leases generally do not contain renewal or purchase options or residual value guarantees. We have elected to not separate our lease and non-lease components as the lease components reflect the predominant characteristics of these agreements.

Revenue recognized related to fixed lease payments on our operating leases for the period presented is as follows (in millions):



	Three Months Ended March 31,
	2019
Operating Leases⁽¹⁾
Fixed lease payments	$	69

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(1)	Revenues associated with our operating leases are included in Commodity revenue and other revenue on our Consolidated Condensed Statement of Operations.

The total contractual future minimum lease rentals for our contracts that have commenced and are accounted for as operating leases at March 31, 2019, are as follows (in millions):



2019	$	276
2020	265
2021	261
2022	226
2023	144
Thereafter	277
Total	$	1,449

We do not recognize lease receivables associated with our operating leases as the long-lived assets related to the power plants subject to the tolling contracts are recorded on our Consolidated Condensed Balance Sheets and are being depreciated over their estimated useful lives. Amounts recorded on our Consolidated Condensed Balance Sheet associated with the long-lived assets subject to our operating leases as of March 31, 2019 are as follows (in millions):



	March 31, 2019
Power plants subject to tolling contracts accounted for as operating leases
Property, plant and equipment, gross	$	3,055
Accumulated depreciation	(880		)
Property, plant and equipment, net	$	2,175

We also record lease levelization assets and liabilities for any difference between the timing of the contractual payments made related to our tolling contracts and revenue recognized on a straight-line basis. These balances are included in current and long-term assets and liabilities on our Consolidated Condensed Balance Sheet.

Disclosures for periods prior to the adoption of Topic 842

Lessee

The following is a schedule by year of future minimum lease payments under operating and capital leases as of December 31, 2018 (in millions):



	Operating Leases		Capital Leases⁽¹⁾
2019	$	50	$	40
2020	19		40
2021	20		38
2022	18		33
2023	17		27
Thereafter	192		92
Total minimum lease payments	$	316	270
Less: Amount representing interest			89
Present value of net minimum lease payments			$	181

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(1)	Includes a failed sale-leaseback transaction related to our Pasadena Power Plant.

At December 31, 2018, the asset balance for our assets under capital leases totaled approximately $715 million with accumulated amortization of $353 million.

Lessor

The total contractual future minimum lease rentals for our contracts accounted for as operating leases at December 31, 2018, are as follows (in millions):



2019	$	342
2020	261
2021	257
2022	224
2023	141
Thereafter	239
Total	$	1,464