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Derivative Instruments | 6 Months Ended
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Jun. 30, 2020
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 or natural gas 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 six months ended June 30, 2020 and 2019. 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 June 30, 2020, the maximum length of time over which we were hedging using interest rate hedging instruments designated as cash flow hedges was 7 years. As of June 30, 2020 and December 31, 2019, 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:
Derivative Instruments |  | Notional Amounts |  |
| June 30, 2020 |  | December 31, 2019 |  | Unit of Measure
Power |  | (242 | ) |  | (184 | ) |  | Million MWh
Natural gas |  | 1,165 |  |  | 1,063 |  |  | Million MMBtu
Environmental credits |  | 36 |  |  | 26 |  |  | Million Tonnes
Interest rate hedging instruments(1) |  | $ | 7.0 |  |  | $ | 4.8 |  |  | Billion U.S. dollars
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(1) | During the first half of 2020, we entered into interest rate hedging instruments to hedge approximately $2.4 billion of variable rate debt.
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 June 30, 2020, was $120 million for which we have posted collateral of $37 million by posting margin deposits, letters of credit 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 $6 million of 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. 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 currently apply hedge accounting to a portion of our interest rate hedging instruments with the change in fair value of all other hedging instruments recorded through earnings. We report 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. 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 will be 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 We offset 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 and/or receive cash collateral in support of our derivative instruments which may also be subject to a master netting arrangement with the same counterparty. 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 June 30, 2020 and December 31, 2019 (in millions):
|  | June 30, 2020
|  | Gross Amounts of Assets and (Liabilities) |  | Gross Amounts Offset on the Consolidated Condensed Balance Sheets |  | Net Amount Presented on the Consolidated Condensed Balance Sheets(1)
Derivative assets: |  |  |  |  |  |
Commodity exchange traded derivatives contracts |  | $ | 758 |  |  | $ | (758 | ) |  | $ | — |
Commodity forward contracts |  | 440 |  |  | (241 | ) |  | 199 |
Interest rate hedging instruments |  | — |  |  | — |  |  | — |
Total current derivative assets(2) |  | $ | 1,198 |  |  | $ | (999 | ) |  | $ | 199 |
Commodity exchange traded derivatives contracts |  | 233 |  |  | (233 | ) |  | — |
Commodity forward contracts |  | 348 |  |  | (98 | ) |  | 250 |
Interest rate hedging instruments |  | — |  |  | — |  |  | — |
Total long-term derivative assets(2) |  | $ | 581 |  |  | $ | (331 | ) |  | $ | 250 |
Total derivative assets |  | $ | 1,779 |  |  | $ | (1,330 | ) |  | $ | 449 |
Derivative (liabilities): |  |  |  |  |  |
Commodity exchange traded derivatives contracts |  | $ | (733 | ) |  | $ | 733 |  |  | $ | — |
Commodity forward contracts |  | (357 | ) |  | 238 |  |  | (119 | )
Interest rate hedging instruments |  | (49 | ) |  | — |  |  | (49 | )
Total current derivative (liabilities)(2) |  | $ | (1,139 | ) |  | $ | 971 |  |  | $ | (168 | )
Commodity exchange traded derivatives contracts |  | (268 | ) |  | 268 |  |  | — |
Commodity forward contracts |  | (182 | ) |  | 98 |  |  | (84 | )
Interest rate hedging instruments |  | (112 | ) |  | — |  |  | (112 | )
Total long-term derivative (liabilities)(2) |  | $ | (562 | ) |  | $ | 366 |  |  | $ | (196 | )
Total derivative liabilities |  | $ | (1,701 | ) |  | $ | 1,337 |  |  | $ | (364 | )
Net derivative assets (liabilities) |  | $ | 78 |  |  | $ | 7 |  |  | $ | 85 |
|  | December 31, 2019
|  | Gross Amounts of Assets and (Liabilities) |  | Gross Amounts Offset on the Consolidated Condensed Balance Sheets |  | Net Amount Presented on the Consolidated Condensed Balance Sheets(1)
Derivative assets: |  |  |  |  |  |
Commodity exchange traded derivatives contracts |  | $ | 727 |  |  | $ | (727 | ) |  | $ | — |
Commodity forward contracts |  | 262 |  |  | (108 | ) |  | 154 |
Interest rate hedging instruments |  | 2 |  |  | — |  |  | 2 |
Total current derivative assets(3) |  | $ | 991 |  |  | $ | (835 | ) |  | $ | 156 |
Commodity exchange traded derivatives contracts |  | 145 |  |  | (145 | ) |  | — |
Commodity forward contracts |  | 277 |  |  | (41 | ) |  | 236 |
Interest rate hedging instruments |  | 10 |  |  | — |  |  | 10 |
Total long-term derivative assets(3) |  | $ | 432 |  |  | $ | (186 | ) |  | $ | 246 |
Total derivative assets |  | $ | 1,423 |  |  | $ | (1,021 | ) |  | $ | 402 |
Derivative (liabilities): |  |  |  |  |  |
Commodity exchange traded derivatives contracts |  | $ | (830 | ) |  | $ | 830 |  |  | $ | — |
Commodity forward contracts |  | (321 | ) |  | 109 |  |  | (212 | )
Interest rate hedging instruments |  | (13 | ) |  | — |  |  | (13 | )
Total current derivative (liabilities)(3) |  | $ | (1,164 | ) |  | $ | 939 |  |  | $ | (225 | )
Commodity exchange traded derivatives contracts |  | (154 | ) |  | 154 |  |  | — |
Commodity forward contracts |  | (87 | ) |  | 42 |  |  | (45 | )
Interest rate hedging instruments |  | (18 | ) |  | — |  |  | (18 | )
Total long-term derivative (liabilities)(3) |  | $ | (259 | ) |  | $ | 196 |  |  | $ | (63 | )
Total derivative liabilities |  | $ | (1,423 | ) |  | $ | 1,135 |  |  | $ | (288 | )
Net derivative assets (liabilities) |  | $ | — |  |  | $ | 114 |  |  | $ | 114 |
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(1) | At June 30, 2020 and December 31, 2019, we had $260 million and $191 million, respectively, of collateral under master netting arrangements that were not offset against our derivative instruments on the Consolidated Condensed Balance Sheets primarily related to initial margin requirements.
(2) | At June 30, 2020, current and long-term derivative assets are shown net of collateral of $(28) million and $(9) million, respectively, and current and long-term derivative liabilities are shown net of collateral of $1 million and $43 million, respectively.
(3) | At December 31, 2019, current and long-term derivative assets are shown net of collateral of $(4) million and $(4) million, respectively, and current and long-term derivative liabilities are shown net of collateral of $108 million and $14 million, respectively.
| June 30, 2020 |  | December 31, 2019
| 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 | $ | — |  |  | $ | 119 |  |  | $ | 12 |  |  | $ | 29 |
Total derivatives designated as cash flow hedging instruments | $ | — |  |  | $ | 119 |  |  | $ | 12 |  |  | $ | 29 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Commodity instruments | $ | 449 |  |  | $ | 203 |  |  | $ | 390 |  |  | $ | 257 |
Interest rate hedging instruments | — |  |  | 42 |  |  | — |  |  | 2 |
Total derivatives not designated as hedging instruments | $ | 449 |  |  | $ | 245 |  |  | $ | 390 |  |  | $ | 259 |
Total derivatives | $ | 449 |  |  | $ | 364 |  |  | $ | 402 |  |  | $ | 288 |
Derivatives Included on Our Consolidated Condensed Statements of Operations Changes in the fair values of our derivative instruments are reflected in cash for option premiums paid or collected, in OCI, net of tax, for 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 June 30, |  | Six Months Ended June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Realized gain (loss)(1)(2) |  |  |  |  |  |  |
Commodity derivative instruments | $ | 36 |  |  | $ | 58 |  |  | $ | 33 |  |  | $ | 169 |
Interest rate hedging instruments(3) | $ | (18 | ) |  | $ | — |  |  | $ | (18 | ) |  | $ | — |
Total realized gain (loss) | $ | 18 |  |  | $ | 58 |  |  | $ | 15 |  |  | $ | 169 |
Mark-to-market gain (loss)(4) |  |  |  |  |  |  |
Commodity derivative instruments | $ | 35 |  |  | $ | 187 |  |  | $ | 236 |  |  | $ | 233 |
Interest rate hedging instruments | (14 | ) |  | (1 | ) |  | (38 | ) |  | (2 | )
Total mark-to-market gain (loss) | $ | 21 |  |  | $ | 186 |  |  | $ | 198 |  |  | $ | 231 |
Total activity, net | $ | 39 |  |  | $ | 244 |  |  | $ | 213 |  |  | $ | 400 |
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(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 and Calpine Solutions.
(3) | Includes costs associated with the termination of de-designated interest rate hedging instruments recorded to interest expense related to our Steamboat project debt that was repaid in June 2020.
(4) | 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.
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Realized and mark-to-market gain (loss)(1) |  |  |  |  |  |  |
Derivatives contracts included in operating revenues(2)(3) | $ | 34 |  |  | $ | 541 |  |  | $ | 541 |  |  | $ | 578 |
Derivatives contracts included in fuel and purchased energy expense(2)(3) | 37 |  |  | (296 | ) |  | (272 | ) |  | (176 | )
Interest rate hedging instruments included in interest expense(4) | (32 | ) |  | (1 | ) |  | (56 | ) |  | (2 | )
Total activity, net | $ | 39 |  |  | $ | 244 |  |  | $ | 213 |  |  | $ | 400 |
___________
(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 and Calpine Solutions.
(4) | Includes costs associated with the termination of de-designated interest rate hedging instruments recorded to interest expense related to our Steamboat project debt that was repaid in June 2020.
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 June 30, |  | Three Months Ended June 30,
| Gain (Loss) Recognized in OCI |  | Gain (Loss) Reclassified from AOCI into Income(2)(3)
| 2020 |  | 2019 |  | 2020 |  | 2019 |  | Affected Line Item on the Consolidated Condensed Statements of Operations
Interest rate hedging instruments(1) | $ | 3 |  |  | $ | (32 | ) |  | $ | (25 | ) |  | $ | 3 |  |  | Interest expense
| Six Months Ended June 30, |  | Six Months Ended June 30,
| Gain (Loss) Recognized in OCI |  | Gain (Loss) Reclassified from AOCI into Income(2)(3)
| 2020 |  | 2019 |  | 2020 |  | 2019 |  | Affected Line Item on the Consolidated Condensed Statements of Operations
Interest rate hedging instruments(1) | $ | (101 | ) |  | $ | (57 | ) |  | $ | (31 | ) |  | $ | 5 |  |  | Interest expense
____________
(1) | We recorded an income tax expense of $1 million and an income tax (benefit) of $(1) million for the three months ended June 30, 2020 and 2019, respectively, and income tax (benefit) of $(2) million and $(1) million for the six months ended June 30, 2020 and 2019, respectively, in AOCI related to our cash flow hedging activities.
(2) | Cumulative cash flow hedge losses attributable to Calpine, net of tax, remaining in AOCI were $174 million and $72 million at June 30, 2020 and December 31, 2019, respectively. Cumulative cash flow hedge losses attributable to the noncontrolling interest, net of tax, remaining in AOCI were nil and $3 million at June 30, 2020 and December 31, 2019, respectively.
(3) | Includes losses of $16 million and nil that were reclassified from AOCI to interest expense for the three months ended June 30, 2020 and 2019, respectively, and losses of $16 million and $1 million that were reclassified from AOCI to interest expense for the six months ended June 30, 2020 and 2019, respectively,where the hedged transactions became probable of not occurring.
We estimate that pre-tax net losses of $57 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 derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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