Company Quick10K Filing
Quick10K
Calpine
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-08-29 Officers, Exhibits
8-K 2018-07-02 Officers, Exhibits
8-K 2018-05-18 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-09 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-03-16 Officers
8-K 2018-03-08 Enter Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-02-23 Other Events
FVRG Forevergreen Worldwide
FRFS GIFA
COTE Coates
NGLD Nevada Canyon Gold
BHAC Barington/Hilco Acquisition
EQUR E-Qure
WEB web.com
CLE Claires Stores
NPHC Nutra Pharma
SCTF Securetech Innovations
CPN 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit101-arlpaofcpnmanag.htm
EX-31.1 cpn_exhibit311x09302018.htm
EX-31.2 cpn_exhibit312x09302018.htm
EX-32.1 cpn_exhibit321x09302018.htm

Calpine Earnings 2018-09-30

CPN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cpn_10qx09302018.htm CALPINE 10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018 Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________
Form 10-Q
(Mark One)
[X]
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2018
 
 
 
 
Or
 
 
 
[    ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-12079
______________________
calpinelogoa02.jpg
Calpine Corporation
(A Delaware Corporation)
I.R.S. Employer Identification No. 77-0212977
717 Texas Avenue, Suite 1000, Houston, Texas 77002
Telephone: (713) 830-2000
Not Applicable
(Former Address)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [    ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes [X]        No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer            
[    ]
Non-accelerated filer
[   ]
 
Smaller reporting company 
[    ]
Emerging growth company
[   ]
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [    ]    No [X]
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 105.2 shares of common stock, par value $0.001, were outstanding as of November 8, 2018, none of which were publicly traded.
 





CALPINE CORPORATION AND SUBSIDIARIES
REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2018
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i



DEFINITIONS
As used in this report for the quarter ended September 30, 2018 (this “Report”), the following abbreviations and terms have the meanings as listed below. Additionally, the terms “Calpine,” “we,” “us” and “our” refer to Calpine Corporation and its consolidated subsidiaries, unless the context clearly indicates otherwise. The term “Calpine Corporation” refers only to Calpine Corporation and not to any of its subsidiaries. Unless and as otherwise stated, any references in this Report to any agreement means such agreement and all schedules, exhibits and attachments in each case as amended, restated, supplemented or otherwise modified to the date of filing this Report.
ABBREVIATION
 
DEFINITION
2008 Director Plan
 
The Amended and Restated Calpine Corporation 2008 Director Incentive Plan
 
 
 
2008 Equity Plan
 
The Amended and Restated Calpine Corporation 2008 Equity Incentive Plan
 
 
 
2017 Form 10-K
 
Calpine Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 16, 2018
 
 
 
2017 Director Plan
 
The Calpine Corporation 2017 Equity Compensation Plan for Non-Employee Directors
 
 
 
2017 Equity Plan
 
The Calpine Corporation 2017 Equity Incentive Plan
 
 
 
2017 First Lien Term Loan
 
The $550 million first lien senior secured term loan, dated December 1, 2016, among Calpine Corporation, as borrower, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and MUFG Union Bank, N.A., as collateral agent, repaid in a series of transactions on March 16, 2017, August 31, 2017, September 29, 2017, October 31, 2017 and November 30, 2017
 
 
 
2019 First Lien Term Loan
 
The $400 million first lien senior secured term loan, dated February 3, 2017, among Calpine Corporation, as borrower, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and MUFG Union Bank, N.A., as collateral agent
 
 
 
2022 First Lien Notes
 
The $750 million aggregate principal amount of 6.0% senior secured notes due 2022, issued October 31, 2013
 
 
 
2023 First Lien Notes
 
The $1.2 billion aggregate principal amount of 7.875% senior secured notes due 2023, issued January 14, 2011, repaid in a series of transactions on November 7, 2012, December 2, 2013, December 4, 2014, February 3, 2015, December 7, 2015, December 19, 2016 and March 6, 2017
 
 
 
2023 First Lien Term Loans
 
The $550 million first lien senior secured term loan, dated December 15, 2015, among Calpine Corporation, as borrower, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and Goldman Sachs Credit Partners L.P., as collateral agent and the $562 million first lien senior secured term loan, dated May 31, 2016, among Calpine Corporation, as borrower, the lenders party thereto, Citibank, N.A., as administrative agent and MUFG Union Bank, N.A., as collateral agent
 
 
 
2023 Senior Unsecured Notes
 
The $1.25 billion aggregate principal amount of 5.375% senior unsecured notes due 2023, issued July 22, 2014
 
 
 
2024 First Lien Notes
 
The $490 million aggregate principal amount of 5.875% senior secured notes due 2024, issued October 31, 2013
 
 
 
2024 First Lien Term Loan
 
The $1.6 billion first lien senior secured term loan, dated May 28, 2015 (as amended December 21, 2016), among Calpine Corporation, as borrower, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and Goldman Sachs Credit Partners L.P., as collateral agent
 
 
 
2024 Senior Unsecured Notes
 
The $650 million aggregate principal amount of 5.5% senior unsecured notes due 2024, issued February 3, 2015
 
 
 
2025 Senior Unsecured Notes
 
The $1.55 billion aggregate principal amount of 5.75% senior unsecured notes due 2025, issued July 22, 2014
 
 
 

ii



ABBREVIATION
 
DEFINITION
2026 First Lien Notes
 
Collectively, the $625 million aggregate principal amount of 5.25% senior secured notes due 2026, issued May 31, 2016, and the $560 million aggregate principal amount of 5.25% senior secured notes due 2026, issued on December 15, 2017
 
 
 
Accounts Receivable Sales Program
 
Receivables purchase agreement between Calpine Solutions and Calpine Receivables and the purchase and sale agreement between Calpine Receivables and an unaffiliated financial institution, both which allows for the revolving sale of up to $250 million in certain trade accounts receivables to third parties
 
 
 
AOCI
 
Accumulated Other Comprehensive Income
 
 
 
Average availability
 
Represents the total hours during the period that our plants were in-service or available for service as a percentage of the total hours in the period
 
 
 
Average capacity factor, excluding peakers
 
A measure of total actual power generation as a percent of total potential power generation. It is calculated by dividing (a) total MWh generated by our power plants, excluding peakers, by (b) the product of multiplying (i) the average total MW in operation, excluding peakers, during the period by (ii) the total hours in the period
 
 
 
Btu
 
British thermal unit(s), a measure of heat content
 
 
 
Calpine Equity Incentive Plans
 
Collectively, the Director Plans and the Equity Plans, which provided for grants of equity awards to Calpine non-union employees and non-employee members of Calpine’s Board of Directors
 
 
 
Calpine Receivables
 
Calpine Receivables, LLC, an indirect, wholly-owned subsidiary of Calpine, which was established as bankruptcy remote, special purpose subsidiary and is responsible for administering the Accounts Receivable Sales Program
 
 
 
Calpine Solutions
 
Calpine Energy Solutions, LLC, an indirect, wholly-owned subsidiary of Calpine, which is the third largest supplier of power to commercial and industrial retail customers in the United States with customers in 20 states, including presence in California, Texas, the Mid-Atlantic and the Northeast
 
 
 
CCFC
 
Calpine Construction Finance Company, L.P., an indirect, wholly-owned subsidiary of Calpine
 
 
 
CCFC Term Loan
 
The $1.0 billion first lien senior secured term loan entered into on December 15, 2017 among CCFC as borrower, the lenders party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent
 
 
 
CCFC Term Loans
 
Collectively, the $900 million first lien senior secured term loan and the $300 million first lien senior secured term loan entered into on May 3, 2013, and the $425 million first lien senior secured term loan entered into on February 26, 2014, between CCFC, as borrower, and Goldman Sachs Lending Partners, LLC, as administrative agent and as collateral agent, and the lenders party thereto, repaid on December 15, 2017
 
 
 
CDHI
 
Calpine Development Holdings, Inc., an indirect, wholly-owned subsidiary of Calpine
 
 
 
CFTC
 
Commodities Futures Trading Commission
 
 
 
Champion Energy
 
Champion Energy Marketing, LLC, which owns a retail electric provider that serves residential, governmental, commercial and industrial customers in deregulated electricity markets in 14 states and the District of Columbia, including presence in California, Texas, the Mid-Atlantic and Northeast
 
 
 
Cogeneration
 
Using a portion or all of the steam generated in the power generating process to supply a customer with steam for use in the customer’s operations
 
 
 
Commodity expense
 
The sum of our expenses from fuel and purchased energy expense, commodity transmission and transportation expense, environmental compliance expenses, ancillary retail expense and realized settlements from our marketing, hedging and optimization activities including natural gas and fuel oil transactions hedging future power sales
 
 
 

iii



ABBREVIATION
 
DEFINITION
Commodity Margin
 
Measure of profit reviewed by our chief operating decision maker that includes revenue recognized on our wholesale and retail power sales activity, electric capacity sales, REC sales, steam sales, realized settlements associated with our marketing, hedging, optimization and trading activities, fuel and purchased energy expenses, commodity transmission and transportation expenses, environmental compliance expenses and ancillary retail expense. Commodity Margin is a measure of segment profit or loss under FASB Accounting Standards Codification 280 used by our chief operating decision maker to make decisions about allocating resources to the relevant segments and assessing their performance
 
 
 
Commodity revenue
 
The sum of our revenues recognized on our wholesale and retail power sales activity, electric capacity sales, REC sales, steam sales and realized settlements from our marketing, hedging, optimization and trading activities
 
 
 
Company
 
Calpine Corporation, a Delaware corporation, and its subsidiaries
 
 
 
Corporate Revolving Facility
 
The approximately $1.69 billion aggregate amount revolving credit facility credit agreement, dated as of December 10, 2010, as amended on June 27, 2013, July 30, 2014, February 8, 2016, December 1, 2016, September 15, 2017, October 20, 2017, March 8, 2018 and May 18, 2018 among Calpine Corporation, the Bank of Tokyo-Mitsubishi UFJ, Ltd., as successor administrative agent, MUFG Union Bank, N.A., as successor collateral agent, the lenders party thereto and the other parties thereto
 
 
 
Director Plans
 
Collectively, the 2008 Director Plan and the 2017 Director Plan
 
 
 
Equity Plans
 
Collectively, the 2008 Equity Plan and the 2017 Equity Plan
 
 
 
Exchange Act
 
U.S. Securities Exchange Act of 1934, as amended
 
 
 
FASB
 
Financial Accounting Standards Board
 
 
 
FDIC
 
U.S. Federal Deposit Insurance Corporation
 
 
 
FERC
 
U.S. Federal Energy Regulatory Commission
 
 
 
First Lien Notes
 
Collectively, the 2022 First Lien Notes, the 2024 First Lien Notes and the 2026 First Lien Notes
 
 
 
First Lien Term Loans
 
Collectively, the 2019 First Lien Term Loan, the 2023 First Lien Term Loans and the 2024 First Lien Term Loan
 
 
 
Geysers Assets
 
Our geothermal power plant assets, including our steam extraction and gathering assets, located in northern California consisting of 13 operating power plants
 
 
 
Greenfield LP
 
Greenfield Energy Centre LP, a 50% partnership interest between certain of our subsidiaries and a third party which operates the Greenfield Energy Centre, a 1,038 MW natural gas-fired, combined-cycle power plant in Ontario, Canada
 
 
 
Heat Rate(s)
 
A measure of the amount of fuel required to produce a unit of power
 
 
 
IRS
 
U.S. Internal Revenue Service
 
 
 
ISO(s)
 
Independent System Operator which is an entity that coordinates, controls and monitors the operation of an electric power system
 
 
 
ISO-NE
 
ISO New England Inc., an independent, nonprofit RTO serving states in the New England area, including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont
 
 
 
KWh
 
Kilowatt hour(s), a measure of power produced, purchased or sold
 
 
 
LIBOR
 
London Inter-Bank Offered Rate
 
 
 
Lyondell
 
LyondellBasell Industries N.V.
 
 
 

iv



ABBREVIATION
 
DEFINITION
Market Heat Rate(s)
 
The regional power price divided by the corresponding regional natural gas price
 
 
 
Merger
 
Merger of Volt Merger Sub, Inc. with and into Calpine pursuant to the terms of the Merger Agreement, which was consummated on March 8, 2018
 
 
 
Merger Agreement
 
Agreement and Plan of Merger, dated, August 17, 2017, by and among Calpine Corporation, Volt Parent, LP and Volt Merger Sub, Inc.
 
 
 
MMBtu
 
Million Btu
 
 
 
MW
 
Megawatt(s), a measure of plant capacity
 
 
 
MWh
 
Megawatt hour(s), a measure of power produced, purchased or sold
 
 
 
NOL(s)
 
Net operating loss(es)
 
 
 
North American Power
 
North American Power & Gas, LLC, an indirect, wholly-owned subsidiary of Calpine, which was acquired on January 17, 2017 and is a retail energy supplier for homes and small businesses primarily concentrated in the Northeast U.S.
 
 
 
OCI
 
Other Comprehensive Income
 
 
 
OMEC
 
Otay Mesa Energy Center, LLC, an indirect, wholly owned subsidiary that owns the Otay Mesa Energy Center, a 608 MW power plant located in San Diego County, California
 
 
 
OTC
 
Over-the-Counter
 
 
 
PJM
 
PJM Interconnection is a RTO that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia
 
 
 
PPA(s)
 
Any term power purchase agreement or other contract for a physically settled sale (as distinguished from a financially settled future, option or other derivative or hedge transaction) of any power product, including power, capacity and/or ancillary services, in the form of a bilateral agreement or a written or oral confirmation of a transaction between two parties to a master agreement, including sales related to a tolling transaction in which the purchaser provides the fuel required by us to generate such power and we receive a variable payment to convert the fuel into power and steam
 
 
 
REC(s)
 
Renewable energy credit(s)
 
 
 
Risk Management Policy
 
Calpine’s policy applicable to all employees, contractors, representatives and agents, which defines the risk management framework and corporate governance structure for commodity risk, interest rate risk, currency risk and other risks
 
 
 
RTO(s)
 
Regional Transmission Organization which is an entity that coordinates, controls and monitors the operation of an electric power system and administers the transmission grid on a regional basis
 
 
 
SDG&E
 
San Diego Gas & Electric Company
 
 
 
SEC
 
U.S. Securities and Exchange Commission
 
 
 
Securities Act
 
U.S. Securities Act of 1933, as amended
 
 
 
Senior Unsecured Notes
 
Collectively, the 2023 Senior Unsecured Notes, the 2024 Senior Unsecured Notes and the 2025 Senior Unsecured Notes
 
 
 
Short Term Credit Facility
 
The $300 million aggregate amount credit agreement, dated as of April 11, 2018, among Calpine Corporation, Morgan Stanley Senior Funding, Inc., as administrative agent, and the lenders party thereto, which was terminated on August 17, 2018
 
 
 

v



ABBREVIATION
 
DEFINITION
Spark Spread(s)
 
The difference between the sales price of power per MWh and the cost of natural gas to produce it
 
 
 
Steam Adjusted Heat Rate
 
The adjusted Heat Rate for our natural gas-fired power plants, excluding peakers, calculated by dividing (a) the fuel consumed in Btu reduced by the net equivalent Btu in steam exported to a third party by (b) the KWh generated. Steam Adjusted Heat Rate is a measure of fuel efficiency, so the lower our Steam Adjusted Heat Rate, the lower our cost of generation
 
 
 
U.S. GAAP
 
Generally accepted accounting principles in the U.S.
 
 
 
VAR
 
Value-at-risk
 
 
 
VIE(s)
 
Variable interest entity(ies)
 
 
 
Whitby
 
Whitby Cogeneration Limited Partnership, a 50% partnership interest between certain of our subsidiaries and a third party, which operates Whitby, a 50 MW natural gas-fired, simple-cycle cogeneration power plant located in Ontario, Canada

vi



Forward-Looking Statements

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act. Forward-looking statements may appear throughout this Report, including without limitation, the “Management’s Discussion and Analysis” section. We use words such as “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,” “potential,” “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. We believe that the forward-looking statements are based upon reasonable assumptions and expectations. However, you are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to:
The effect of the Merger on our customer relationships, operating results and business;
Financial results that may be volatile and may not reflect historical trends due to, among other things, seasonality of demand, fluctuations in prices for commodities such as natural gas and power, changes in U.S. macroeconomic conditions, fluctuations in liquidity and volatility in the energy commodities markets and our ability and extent to which we hedge risks;
Laws, regulations and market rules in the wholesale and retail markets in which we participate and our ability to effectively respond to changes in laws, regulations or market rules or the interpretation thereof including those related to the environment, derivative transactions and market design in the regions in which we operate;
Our ability to manage our liquidity needs, access the capital markets when necessary and comply with covenants under our Senior Unsecured Notes, First Lien Notes, First Lien Term Loans, Corporate Revolving Facility, CCFC Term Loan and other existing financing obligations;
Risks associated with the operation, construction and development of power plants, including unscheduled outages or delays and plant efficiencies;
Risks related to our geothermal resources, including the adequacy of our steam reserves, unusual or unexpected steam field well and pipeline maintenance requirements, variables associated with the injection of water to the steam reservoir and potential regulations or other requirements related to seismicity concerns that may delay or increase the cost of developing or operating geothermal resources;
Extensive competition in our wholesale and retail businesses, including from renewable sources of power, interference by states in competitive power markets through subsidies or similar support for new or existing power plants, lower prices and other incentives offered by retail competitors, and other risks associated with marketing and selling power in the evolving energy markets;
Structural changes in the supply and demand of power, resulting from the development of new fuels or technologies and demand-side management tools (such as distributed generation, power storage and other technologies);
The expiration or early termination of our PPAs and the related results on revenues;
Future capacity revenue may not occur at expected levels;
Natural disasters, such as hurricanes, earthquakes, droughts, wildfires and floods, acts of terrorism or cyber attacks that may affect our power plants or the markets our power plants or retail operations serve and our corporate offices;
Disruptions in or limitations on the transportation of natural gas or fuel oil and the transmission of power;
Our ability to manage our counterparty and customer exposure and credit risk, including our commodity positions;
Our ability to attract, motivate and retain key employees;
Present and possible future claims, litigation and enforcement actions that may arise from noncompliance with market rules promulgated by the SEC, CFTC, FERC and other regulatory bodies; and
Other risks identified in this Report, in our 2017 Form 10-K and in other reports filed by us with the SEC.

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of

vii



the date of this Report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.
Where You Can Find Other Information
Our website is www.calpine.com. Information contained on our website is not part of this Report. Information that we furnish or file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to, or exhibits included in, these reports are available for download, free of charge, through our website. Our SEC filings, including exhibits filed therewith, are also available directly on the SEC’s website at www.sec.gov.

viii



PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements

CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Operating revenues:
 
 
 
 
 
 
 
Commodity revenue
$
2,845

 
$
2,506

 
$
7,362

 
$
6,714

Mark-to-market gain (loss)
40

 
76

 
(220
)
 
224

Other revenue
5

 
4

 
16

 
13

Operating revenues
2,890

 
2,586


7,158

 
6,951

Operating expenses:
 
 
 
 
 
 
 
Fuel and purchased energy expense:
 
 
 
 
 
 
 
Commodity expense
1,912

 
1,711

 
5,128

 
4,757

Mark-to-market (gain) loss
(66
)
 
10

 
(143
)
 
185

Fuel and purchased energy expense
1,846

 
1,721


4,985

 
4,942

Operating and maintenance expense
248

 
228

 
765

 
812

Depreciation and amortization expense
179

 
179

 
566

 
542

General and other administrative expense
31

 
37

 
122

 
117

Other operating expenses
23

 
23

 
79

 
63

Total operating expenses
2,327

 
2,188


6,517

 
6,476

Impairment losses

 
12

 

 
41

(Gain) on sale of assets, net

 

 

 
(27
)
(Income) from unconsolidated subsidiaries
(5
)
 
(7
)
 
(16
)
 
(17
)
Income from operations
568

 
393


657

 
478

Interest expense
158

 
156

 
466

 
469

Debt extinguishment costs
1

 
1

 
1

 
26

Other (income) expense, net
3

 
7

 
72

 
16

Income (loss) before income taxes
406

 
229


118

 
(33
)
Income tax expense (benefit)
128

 
(2
)
 
78

 

Net income (loss)
278

 
231


40

 
(33
)
Net income attributable to the noncontrolling interest
(6
)
 
(6
)
 
(14
)
 
(14
)
Net income (loss) attributable to Calpine
$
272

 
$
225


$
26

 
$
(47
)

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

1



CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Net income (loss)
$
278

 
$
231

 
$
40

 
$
(33
)
Cash flow hedging activities:
 
 
 
 
 
 
 
Gain (loss) on cash flow hedges before reclassification adjustment for cash flow hedges realized in net income (loss)
13

 
(3
)
 
76

 
(44
)
Reclassification adjustment for loss on cash flow hedges realized in net income (loss)

 
11

 
7

 
37

Foreign currency translation gain (loss)
1

 
7

 
(7
)
 
13

Income tax benefit (expense)
1

 
(1
)
 
(3
)
 
(3
)
Other comprehensive income
15

 
14

 
73

 
3

Comprehensive income (loss)
293

 
245

 
113

 
(30
)
Comprehensive (income) attributable to the noncontrolling interest
(7
)
 
(7
)
 
(17
)
 
(15
)
Comprehensive income (loss) attributable to Calpine
$
286

 
$
238

 
$
96


$
(45
)

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


2



CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
(in millions, except share and per share amounts)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents ($65 and $39 attributable to VIEs)
 
$
534

 
$
284

Accounts receivable, net of allowance of $11 and $9
 
936

 
970

Inventories
 
546

 
498

Margin deposits and other prepaid expense
 
244

 
203

Restricted cash, current ($128 and $74 attributable to VIEs)
 
213

 
134

Derivative assets, current
 
159

 
174

Other current assets
 
36

 
43

Total current assets
 
2,668

 
2,306

Property, plant and equipment, net ($3,943 and $4,048 attributable to VIEs)
 
12,494

 
12,724

Restricted cash, net of current portion ($15 and $24 attributable to VIEs)
 
16

 
25

Investments in unconsolidated subsidiaries
 
119

 
106

Long-term derivative assets
 
207

 
218

Goodwill
 
242

 
242

Intangible assets, net
 
440

 
512

Other assets ($27 and $22 attributable to VIEs)
 
274

 
320

Total assets
 
$
16,460

 
$
16,453

LIABILITIES & STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
743

 
$
777

Accrued interest payable
 
138

 
104

Debt, current portion ($462 and $175 attributable to VIEs)
 
512

 
225

Derivative liabilities, current
 
222

 
197

Other current liabilities
 
557

 
571

Total current liabilities
 
2,172

 
1,874

Debt, net of current portion ($1,861 and $2,238 attributable to VIEs)
 
10,795

 
11,180

Long-term derivative liabilities
 
126

 
119

Other long-term liabilities
 
255

 
213

Total liabilities
 
13,348

 
13,386

 
 
 
 
 
Commitments and contingencies (see Note 11)
 

 

Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; authorized 5,000 and 1,400,000,000 shares, respectively, 105.2 and 361,677,891 shares issued, respectively, and 105.2 and 360,516,091 shares outstanding, respectively
 

 

Treasury stock, at cost, nil and 1,161,800 shares, respectively
 

 
(15
)
Additional paid-in capital
 
9,582

 
9,661

Accumulated deficit
 
(6,526
)
 
(6,552
)
Accumulated other comprehensive loss
 
(36
)
 
(106
)
Total Calpine stockholders’ equity
 
3,020

 
2,988

Noncontrolling interest
 
92

 
79

Total stockholders’ equity
 
3,112

 
3,067

Total liabilities and stockholders’ equity
 
$
16,460

 
$
16,453


The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

3



CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(in millions)
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance, December 31, 2017
$

 
$
(15
)
 
$
9,661

 
$
(6,552
)
 
$
(106
)
 
$
79

 
$
3,067

Treasury stock transactions

 
(7
)
 

 

 

 

 
(7
)
Stock-based compensation expense

 

 
41

 

 

 

 
41

Effects of the Merger

 
22

 
(120
)
 

 

 

 
(98
)
Contribution from the noncontrolling interest

 

 

 

 

 
2

 
2

Distribution to the noncontrolling interest

 

 

 

 

 
(6
)
 
(6
)
Net income

 

 

 
26

 

 
14

 
40

Other comprehensive income

 

 

 

 
70

 
3

 
73

Balance, September 30, 2018
$

 
$

 
$
9,582

 
$
(6,526
)
 
$
(36
)
 
$
92

 
$
3,112


The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


4



CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
40

 
$
(33
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 

Depreciation and amortization(1)
 
642

 
691

Debt extinguishment costs
 
1

 
26

Deferred income taxes
 
69

 
12

Impairment losses
 

 
41

Gain on sale of assets, net
 

 
(27
)
Mark-to-market activity, net
 
73

 
(40
)
(Income) from unconsolidated subsidiaries
 
(16
)
 
(17
)
Return on investments from unconsolidated subsidiaries
 
5

 
22

Stock-based compensation expense
 
57

 
31

Other
 
16

 
(4
)
Change in operating assets and liabilities, net of effects of acquisitions:
 

 

Accounts receivable
 
35

 
(86
)
Derivative instruments, net
 
61

 
(10
)
Other assets
 
(260
)
 
60

Accounts payable and accrued expenses
 
81

 
95

Other liabilities
 
69

 
64

Net cash provided by operating activities
 
873

 
825

Cash flows from investing activities:
 
 
 
 
Purchases of property, plant and equipment
 
(314
)
 
(248
)
Proceeds from sale of Auburndale Peaking Energy Center and Osprey Energy Center
 
10

 
162

Purchase of North American Power, net of cash acquired
 

 
(111
)
Other
 
(9
)
 
35

Net cash used in investing activities
 
(313
)
 
(162
)
Cash flows from financing activities:
 
 
 
 
Borrowings under First Lien Term Loans
 

 
396

Repayment of CCFC Term Loan, CCFC Term Loans and First Lien Term Loans
 
(31
)
 
(435
)
Repurchase of First Lien Notes
 

 
(453
)
Borrowings under Corporate Revolving Facility
 
325

 
25

Repayments of Corporate Revolving Facility
 
(325
)
 
(25
)
Repayments of project financing, notes payable and other
 
(89
)
 
(90
)
Distribution to noncontrolling interest holder
 
(6
)
 
(8
)
Financing costs
 
(12
)
 
(26
)
Stock repurchases
 
(79
)
 

Shares repurchased for tax withholding on stock-based awards
 
(7
)
 
(6
)
Other
 
(16
)
 
1

Net cash used in financing activities
 
(240
)
 
(621
)
Net increase in cash, cash equivalents and restricted cash
 
320

 
42

Cash, cash equivalents and restricted cash, beginning of period
 
443

 
606

Cash, cash equivalents and restricted cash, end of period(2)
 
$
763

 
$
648


The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

5



CALPINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS — (CONTINUED)
(Unaudited)

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(in millions)
Cash paid during the period for:
 
 
 
 
Interest, net of amounts capitalized
 
$
401

 
$
412

Income taxes
 
$
10

 
$
10

____________
(1)
Includes amortization recorded in Commodity revenue and Commodity expense associated with intangible assets and amortization recorded in interest expense associated with debt issuance costs and discounts.
(2)
Our cash and cash equivalents, restricted cash, current and restricted cash, net of current portion are stated as separate line items on our Consolidated Condensed Balance Sheets.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


6



CALPINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
1.
Basis of Presentation and Summary of Significant Accounting Policies
We are a power generation company engaged in the ownership and operation of primarily natural gas-fired and geothermal power plants in North America. We have a significant presence in major competitive wholesale and retail power markets in California, Texas and the Northeast and Mid-Atlantic regions of the U.S. We sell power, steam, capacity, renewable energy credits and ancillary services to our customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities and other governmental entities, power marketers as well as retail commercial, industrial, governmental and residential customers. We continue to focus on providing products and services that are beneficial to our wholesale and retail customers. We purchase primarily natural gas and some fuel oil as fuel for our power plants and engage in related natural gas transportation and storage transactions. We also purchase power for sale to our customers and purchase electric transmission rights to deliver power to our customers. Additionally, consistent with our Risk Management Policy, we enter into natural gas, power, environmental product, fuel oil and other physical and financial commodity contracts to hedge certain business risks and optimize our portfolio of power plants.
Basis of Interim Presentation — The accompanying unaudited, interim Consolidated Condensed Financial Statements of Calpine Corporation, a Delaware corporation, and consolidated subsidiaries have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the Consolidated Condensed Financial Statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. Certain information and note disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, these financial statements should be read in conjunction with our audited Consolidated Financial Statements for the year ended December 31, 2017, included in our 2017 Form 10-K. The results for interim periods are not indicative of the results for the entire year primarily due to acquisitions and disposals of assets, seasonal fluctuations in our revenues and expenses, timing of major maintenance expense, variations resulting from the application of the method to calculate the provision for income tax for interim periods, volatility of commodity prices and mark-to-market gains and losses from commodity and interest rate derivative contracts.
Use of Estimates in Preparation of Financial Statements — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures included in our Consolidated Condensed Financial Statements. Actual results could differ from those estimates.
Reclassifications We have reclassified certain prior period amounts for comparative purposes. These reclassifications did not have a material effect on our financial condition, results of operations or cash flows.
Cash and Cash Equivalents — We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We have cash and cash equivalents held in non-corporate accounts relating to certain project finance facilities and lease agreements that require us to establish and maintain segregated cash accounts. These accounts have been pledged as security in favor of the lenders under such project finance facilities, and the use of certain cash balances on deposit in such accounts is limited, at least temporarily, to the operations of the respective projects.
Restricted Cash — Certain of our debt agreements, lease agreements or other operating agreements require us to establish and maintain segregated cash accounts, the use of which is restricted, making these cash funds unavailable for general use. These amounts are held by depository banks in order to comply with the contractual provisions requiring reserves for payments such as for debt service, rent and major maintenance or with applicable regulatory requirements. Funds that can be used to satisfy obligations due during the next 12 months are classified as current restricted cash, with the remainder classified as non-current restricted cash. Restricted cash is generally invested in accounts earning market rates; therefore, the carrying value approximates fair value. Such cash is excluded from cash and cash equivalents on our Consolidated Condensed Balance Sheets.

7



The table below represents the components of our restricted cash as of September 30, 2018 and December 31, 2017 (in millions):
 
September 30, 2018
 
December 31, 2017
 
Current
 
Non-Current
 
Total
 
Current
 
Non-Current
 
Total
Debt service
$
24

 
$
7

 
$
31

 
$
11

 
$
8

 
$
19

Construction/major maintenance
32

 
6

 
38

 
28

 
16

 
44

Security/project/insurance
153

 

 
153

 
92

 

 
92

Other
4

 
3

 
7

 
3

 
1

 
4

Total
$
213

 
$
16

 
$
229

 
$
134

 
$
25

 
$
159

Business Interruption Proceeds — We record business interruption insurance proceeds in operating revenues when they are realizable and recorded approximately nil and $6 million of business interruption proceeds during the three months ended September 30, 2018 and 2017, respectively, and $14 million and $7 million during the nine months ended September 30, 2018 and 2017, respectively.
Property, Plant and Equipment, Net — At September 30, 2018 and December 31, 2017, the components of property, plant and equipment are stated at cost less accumulated depreciation as follows (in millions):
 
September 30, 2018
 
December 31, 2017
 
Depreciable Lives
Buildings, machinery and equipment
$
16,405

 
$
16,506

 
1.5
46
 Years
Geothermal properties
1,500

 
1,494

 
13
58
 Years
Other
268

 
236

 
3
46
 Years
 
18,173

 
18,236

 
 
 
 
 
Less: Accumulated depreciation
6,698

 
6,383

 
 
 
 
 
 
11,475

 
11,853

 
 
 
 
 
Land
121

 
117

 
 
 
 
 
Construction in progress
898

 
754

 
 
 
 
 
Property, plant and equipment, net
$
12,494

 
$
12,724

 
 
 
 
 
Depreciable Lives — During the first quarter of 2018, we reviewed our accounting policies related to depreciation associated with our estimates of useful lives related to our componentized balance of plant parts. As a result, the useful lives of our rotable parts are now generally estimated to range from 1.5 to 12 years. Our change in the method of depreciation for rotable parts is considered a change in accounting estimate and will result in changes to our depreciation expense prospectively. The change in estimate resulted in an increase (decrease) to our net income attributable to Calpine of $2 million and $(41) million for the three and nine months ended September 30, 2018, respectively.
Capitalized Interest — The total amount of interest capitalized was $7 million and $7 million during the three months ended September 30, 2018 and 2017, respectively, and $21 million and $20 million during the nine months ended September 30, 2018 and 2017, respectively.
Goodwill — We have not recorded any impairment losses associated with our goodwill. During the first quarter of 2018, we altered the composition of our segments to report the results associated with our retail business as a separate segment. This change reflects the manner in which our segment information is presented internally to our chief operating decision maker associated with the strategic utilization of our retail business subsequent to the consummation of the Merger. Thus, beginning in the first quarter of 2018, our geographic reportable segments for our wholesale business are West (including geothermal), Texas and East (including Canada) and we have a separate reportable segment for our retail business. As our goodwill resulted from the acquisition of our retail business over the last several years, our goodwill balance of $242 million was allocated to our Retail segment in connection with the change in segment presentation.
New Accounting Standards and Disclosure Requirements
Revenue Recognition — On January 1, 2018, we adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). The comprehensive new revenue recognition standard supersedes all pre-existing revenue recognition guidance. The core principle of Topic 606 is that a company will recognize revenue to depict the transfer of promised

8



goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires expanded disclosures surrounding the recognition of revenue from contracts with customers. We adopted the new revenue recognition standards under Topic 606 using the modified retrospective method and applied Topic 606 to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts continue to be reported in accordance with historical accounting standards. The adoption of Topic 606 resulted in no adjustment to our opening retained earnings as of January 1, 2018. There was no material effect to our revenues, results of operations or cash flows for the nine months ended September 30, 2018 from the adoption of Topic 606 and we do not expect the new revenue standard to have a material effect on our results of operations in future periods. See Note 3 for additional disclosures required by Topic 606.
Leases — In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases.” The comprehensive new lease standard will supersede all existing lease guidance. The standard requires that a lessee should recognize a right-to-use asset and a lease liability for substantially all operating leases based on the present value of the minimum rental payments. Entities may make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For lessors, the accounting for leases remains substantially unchanged. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, including interim periods within that reporting period and requires modified retrospective adoption with early adoption permitted. In January 2018, the FASB issued Accounting Standards Update 2018-01, “Land Easement Practical Expedient for Transition to Topic 842” that allows an entity to not evaluate existing and expired land easements that were not previously accounted for as leases upon adoption of Accounting Standards Update 2016-02. Any land easements entered into prospectively or modified after adoption should be evaluated to assess whether they meet the definition of a lease. In July 2018, the FASB issued Accounting Standards Update 2018-10 “Codification Improvements to Topic 842, Leases” which clarifies, corrects or consolidates authoritative guidance issued in Accounting Standards Update 2016-02 and is effective upon adoption of Accounting Standards Update 2016-02. Also in July 2018, the FASB issued Accounting Standards Update 2018-11 “Leases (Topic 842): Targeted Improvements” which provides a new transitional method to adopt the new leases standard and a practical expedient for lessors in applying the provisions of the new leases standard, which is effective upon adoption of Accounting Standards Update 2016-02. We plan to adopt the standards in the first quarter of 2019 and will elect a number of the practical expedients in our implementation of the standards. We have completed our initial evaluation of the standards and believe that the key changes that will affect us relate to our accounting for operating leases for which we are the lessee that are currently off-balance sheet and the evaluation of new tolling contracts as a result of the effects of the removal of the real estate guidance. Additionally, we are currently evaluating the effect of the additional recognition and disclosure requirements under the standards on our current processes and controls.
Statement of Cash Flows — In August 2016, the FASB issued Accounting Standards Update 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard addresses several matters of diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows including the presentation of debt extinguishment costs and distributions received from equity method investments. The standard is effective for fiscal years beginning after December 15, 2017, and requires retrospective adoption. We adopted Accounting Standards Update 2016-15 in the first quarter of 2018 which resulted in the reclassification of cash payments for debt extinguishment costs from a cash outflow for operating activities to a cash outflow for financing activities. The adoption of this standard did not have a material effect on our financial condition, results of operations or cash flows.
Income Taxes — In October 2016, the FASB issued Accounting Standards Update 2016-16, “Intra-Entity Transfers of Assets Other than Inventory.” The standard requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs which differs from the current requirement that prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period and requires modified retrospective adoption. We adopted Accounting Standards Update 2016-16 in the first quarter of 2018 which did not have a material effect on our financial condition, results of operations or cash flows as a result of adopting this standard.
Restricted Cash — In November 2016, the FASB issued Accounting Standards Update 2016-18, “Restricted Cash.” The standard requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts in the statement of cash flows and also requires disclosures regarding the nature of restrictions on cash, cash equivalents and restricted cash. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods and requires retrospective adoption with early adoption permitted. We adopted Accounting Standards Update 2016-18 in the first quarter of 2018 which did not have a material effect on our financial condition, results of operations or cash flows as a result of adopting this standard.

9



Derivatives and Hedging — In August 2017, the FASB issued Accounting Standards Update 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” The standard better aligns an entity’s hedging activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The standard will prospectively make hedge accounting easier to apply to hedging activities and also enhances disclosure requirements for how hedge transactions are reflected in the financial statements when hedge accounting is elected. The standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessing the future effect this standard may have on our financial condition, results of operations or cash flows.
Fair Value Measurements — In August 2018, the FASB issued Accounting Standards Update 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The standard removes, modifies and adds disclosures about fair value measurements and is effective for fiscal years beginning after December 15, 2019. The changes required by this standard to remove or modify disclosures may be early adopted with adoption of the additional disclosures required by this standard delayed until their effective date. We do not anticipate a material effect on our financial condition, results of operations or cash flows as a result of adopting this standard.
2.
Merger
Merger — On August 17, 2017, we entered into the Merger Agreement with Volt Parent, LP (“Volt Parent”) and Volt Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Volt Parent, pursuant to which Merger Sub merged with and into Calpine, with Calpine surviving the Merger as a subsidiary of Volt Parent. On March 8, 2018, we completed the Merger contemplated in the Merger Agreement.
At the effective time of the Merger, each share of Calpine common stock outstanding as of immediately prior to the effective time of the Merger (excluding certain shares as described in the Merger Agreement) ceased to be outstanding and was converted into the right to receive $15.25 per share in cash or approximately $5.6 billion in total. See Note 10 for a discussion of the treatment of the outstanding share-based awards to employees at the effective time of the Merger.
We recorded approximately $1 million and $11 million for the three months ended September 30, 2018 and 2017, respectively, and $33 million and $11 million for the nine months ended September 30, 2018 and 2017, respectively, in Merger-related costs which was recorded in other operating expenses on our Consolidated Condensed Statements of Operations and primarily related to legal, investment banking and other professional fees associated with the Merger. We elected not to apply pushdown accounting in connection with the consummation of the Merger.
3.
Revenue from Contracts with Customers
Disaggregation of Revenues with Customers

The following tables represent a disaggregation of our revenue for the three and nine months ended September 30, 2018 by reportable segment (in millions). See Note 13 for a description of our segments.
 
Three Months Ended September 30, 2018
 
Wholesale
 
 
 
 
 
 
 
West
 
Texas
 
East
 
Retail
 
Elimination
 
Total
Third Party:
 
 
 
 
 
 
 
 
 
 
 
Energy & other products
$
369

 
$
470

 
$
221

 
$
543

 
$

 
$
1,603

Capacity
51

 
23

 
190

 

 

 
264

Revenues relating to physical or executory contracts – third party
$
420

 
$
493

 
$
411

 
$
543

 
$

 
$
1,867

 
 
 
 
 
 
 
 
 
 
 
 
Affiliate(1):
$
9

 
$
11

 
$
20

 
$

 
$
(40
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Revenues relating to leases and derivative instruments(2)
 
 
 
 
 
 
 
 
 
 
$
1,023

Total operating revenues
 
 
 
 
 
 
 
 
 
 
$
2,890



10



 
Nine Months Ended September 30, 2018
 
Wholesale
 
 
 
 
 
 
 
West
 
Texas
 
East
 
Retail
 
Elimination
 
Total
Third Party:
 
 
 
 
 
 
 
 
 
 
 
Energy & other products
$
744

 
$
1,100

 
$
473

 
$
1,437

 
$

 
$
3,754

Capacity
105

 
72

 
479

 

 

 
656

Revenues relating to physical or executory contracts – third party
$
849

 
$
1,172

 
$
952

 
$
1,437

 
$

 
$
4,410

 
 
 
 
 
 
 
 
 
 
 
 
Affiliate(1):
$
22

 
$
24

 
$
62

 
$
2

 
$
(110
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Revenues relating to leases and derivative instruments(2)
 
 
 
 
 
 
 
 
 
 
$
2,748

Total operating revenues
 
 
 
 
 
 
 
 
 
 
$
7,158

___________
(1)
Affiliate energy, other and capacity revenues reflect revenues on transactions between wholesale and retail affiliates excluding affiliate activity related to leases and derivative instruments. All such activity supports retail supply needs from the wholesale business and/or allows for collateral margin netting efficiencies at Calpine.
(2)
Revenues relating to contracts accounted for as leases and derivatives include energy and capacity revenues relating to PPAs that we are required to account for as operating leases and physical and financial commodity derivative contracts, primarily relating to power, natural gas and environmental products. Revenue related to derivative instruments includes revenue recorded in Commodity revenue and mark-to-market gain (loss) within our operating revenues on our Consolidated Condensed Statements of Operations.
For contracts that do not meet the requirements of a lease and either do not meet the definition of a derivative instrument or are exempt from derivative accounting, we have applied the new revenue recognition guidance beginning in the first quarter of 2018. Under the new guidance, the majority of our operating revenue continues to be recognized as the underlying commodity or service is delivered to our customers.
Energy and Other Products
Variable payments for power and steam that are based on generation, including retail sales of power, are recognized over time as the underlying commodity is generated and control is transferred to our customer upon transmission and delivery. Ancillary service revenues are also included within energy-related revenues and are recognized over time as the service is provided.
For our power, steam and ancillary service contracts, we have elected the practical expedient that allows us to recognize revenue in the amount to which we have the right to invoice to the extent we determine that we have a right to consideration in an amount that corresponds directly with the value provided to date. To the extent this practical expedient cannot be utilized, we will recognize revenue over time based on the quantity of the commodity delivered to the customer for power and steam sales and over time as the service is provided for our ancillary service sales.
Energy and other revenues also includes revenues generated from the sale of natural gas and environmental products, including RECs and are recognized at either a point in time or over time when control of the commodity has transferred. Revenues from the sale of RECs are primarily related to credits that are generated upon generation of renewable power from our Geysers Assets and are recognized over a period of time similar to the timing of the related energy sale. Revenues from sales of RECs or other environmental products that are not generated from our assets are recognized once all certifications have been completed and the credits are delivered to the customer at a point in time. Revenues from our natural gas sales are recognized at a point in time when delivery of the natural gas is provided. Revenues from natural gas and emission product sales are generally at the contracted transaction price, which may be fixed or index-based.

11



Capacity
Capacity revenues include fixed and variable capacity payments, which are based on generation volumes and include capacity payments received from RTO and ISO capacity auctions. For these contracts, we have elected the practical expedient that allows us to recognize revenue in the amount to which we have the right to invoice to the extent we determine that we have a right to consideration in an amount that corresponds directly with the value provided to date. To the extent this practical expedient cannot be utilized, we will recognize revenue over time as the service is being provided to the customer.
Performance Obligations and Contract Balances
Certain of our contracts have multiple performance obligations. The revenues associated with each individual performance obligation is based on the relative stand-alone sales price of each good or service or, when not available, is based on a cost incurred plus margin approach. For a significant portion of our contracts with multiple performance obligations, management has applied the practical expedient that results in recognition of revenue commensurate with the invoiced amount and no allocation is required as all performance obligations are transferred over the same period of time.
Certain of our contracts include volumetric optionality based on the customer’s needs. The transaction price within these contracts are based on a stand-alone sale price of the good or service being provided and revenue is recognized based on the customer’s usage. On a monthly basis, revenue is recognized based on estimated or actual usage by the customer at the transaction price. To the extent estimated usage is used in the recognition of revenue, revenues are adjusted for actual usage once known; however, this adjustment is not material to the revenues recognized. Generally, we have applied the practical expedient that allows us to recognize revenue based on the invoiced amount for these contracts.
Changes in estimates for our contracts are not material and revisions to estimates are recognized when the amounts can be reasonably estimated. Unbilled retail sales are based upon estimates of customer usage since the date of the last meter reading provided by the ISOs or electric distribution companies by applying the estimated revenue per KWh by customer class to the estimated number of KWhs delivered but not yet billed. Estimated amounts are adjusted when actual usage is known and billed. During the three and nine months ended September 30, 2018, there were no significant changes to revenue amounts recognized in prior periods as a result of a change in estimates. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from our operating revenues.
Billing requirements for our wholesale customers generally result in billing customers on a monthly basis in the month following the delivery of the good or service. Once billed, payment is generally required within 20 days resulting in payment for the delivery of the good or service in the month following delivery of the good or service. Billing requirements for our retail customers are generally once every 30 days and may result in billed amounts relating to our retail customers extending up to 60 days. Based on the terms of our agreements, payment is generally received at or shortly after delivery of the good or service.
Changes in accounts receivable relating to our customers is primarily due to the timing difference between payment and when the good or service is provided. During the three and nine months ended September 30, 2018, there were no significant changes in accounts receivable other than normal billing and collection transactions and there were no material credit or impairment losses recognized relating to accounts receivable balances associated with contracts with customers.
When we receive consideration from a customer prior to transferring goods or services to the customer under the terms of a contract, we record deferred revenue, which represents a contract liability. Such deferred revenue typically results from consideration received prior to the transfer of goods and services relating to our capacity contracts and the sale of RECs that are not generated from our power plants. Based on the nature of these contracts and the timing between when consideration is received and delivery of the good or service is provided, these contracts do not contain any material financing elements.
At September 30, 2018 and December 31, 2017, deferred revenue balances relating to contracts with our customers were included in other current liabilities on our Consolidated Condensed Balance Sheets and primarily relate to sales of environmental products and capacity. We classify deferred revenue as current or long-term based on the timing of when we expect to recognize revenue. The balance outstanding at September 30, 2018 was $14 million. The revenue recognized during the three and nine months ended September 30, 2018, relating to the deferred revenue balance at the beginning of each period was $18 million and $17 million, respectively, and resulted from our performance under the customer contracts. The change in the deferred revenue balance during the three and nine months ended September 30, 2018 was primarily due to the timing difference of when consideration was received and when the related good or service was transferred.
Contract Costs
For certain retail contracts, we incur third party incremental broker costs that are capitalized on our Consolidated Condensed Balance Sheets. Capitalized contract costs are amortized on a straight line basis over the term of the underlying sales

12



contract to the extent the term extends beyond one year. Contract costs associated with sales contracts that are less than one year are expensed as incurred under a practical expedient.
At both September 30, 2018 and December 31, 2017, the capitalized contract cost balance was not material. There were no impairment losses or changes in amortization during the three and nine months ended September 30, 2018 and amortization of contract costs during the three and nine months ended September 30, 2018 was immaterial.
Performance Obligations not yet Satisfied
As of September 30, 2018, we have entered into certain contracts with customers under which we have not yet completed our performance obligations which primarily includes agreements for which we are providing capacity from our generating facilities. We have revenues related to the sale of capacity through participation in various ISO capacity auctions estimated based upon cleared volumes and the sale of capacity to our customers of $185 million, $606 million, $507 million, $468 million and $201 million that will be recognized during the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively, and $46 million thereafter. Revenues under these contracts will be recognized as we transfer control of the commodities to our customers.
4.
Variable Interest Entities and Unconsolidated Investments
We consolidate all of our VIEs where we have determined that we are the primary beneficiary. There were no changes to our determination of whether we are the primary beneficiary of our VIEs for the nine months ended September 30, 2018. See Note 6 in our 2017 Form 10-K for further information regarding our VIEs.
VIE Disclosures
Our consolidated VIEs include natural gas-fired power plants with an aggregate capacity of 7,880 MW and 7,880 MW at September 30, 2018 and December 31, 2017, respectively. For these VIEs, we may provide other operational and administrative support through various affiliate contractual arrangements among the VIEs, Calpine Corporation and its other wholly-owned subsidiaries whereby we support the VIE through the reimbursement of costs and/or the purchase and sale of energy. Other than amounts contractually required, we provided support to these VIEs in the form of cash and other contributions of nil during each of the three and nine months ended September 30, 2018 and 2017.
OMEC — OMEC has a ten-year tolling agreement with SDG&E which commenced on October 3, 2009. Under a ground lease agreement, OMEC holds a put option to sell the Otay Mesa Energy Center for $280 million to SDG&E, pursuant to the terms and conditions of the agreement, which is exercisable until April 1, 2019 and SDG&E held a call option to purchase the Otay Mesa Energy Center for $377 million, which was exercisable through October 3, 2018. The call option held by SDG&E expired unexercised.
OMEC has executed a new 59-month Resource Adequacy (“RA”) contract with SDG&E, which will commence on October 3, 2019. The RA contract is subject to lender and regulatory approval. In the event that lender and regulatory approval is received, we will continue to own and operate the OMEC facility and will relinquish the put option rights held under the current ground lease agreement. In the event that regulatory or lender approval is not obtained for the new RA contract, OMEC will retain the right to exercise the put option for the sale of the Otay Mesa Energy Center for $280 million to SDG&E, pursuant to the terms and conditions of the agreement, with the sale occurring upon the conclusion of the tolling agreement on October 3, 2019.
We have concluded that we are the primary beneficiary of OMEC as we believe the activity that has the most effect on the financial performance of OMEC is operations and maintenance which is controlled by us. As a result, we consolidate OMEC.
Unconsolidated VIEs and Investments in Unconsolidated Subsidiaries
We have a 50% partnership interest in Greenfield LP and in Whitby. Greenfield LP and Whitby are VIEs; however, we do not have the power to direct the most significant activities of these entities and therefore do not consolidate them. Greenfield LP is a limited partnership between certain subsidiaries of ours and of Mitsui & Co., Ltd., which operates the Greenfield Energy Centre, a 1,038 MW natural gas-fired, combined-cycle power plant located in Ontario, Canada. We and Mitsui & Co., Ltd. each hold a 50% interest in Greenfield LP. Whitby is a limited partnership between certain of our subsidiaries and Atlantic Packaging Ltd., which operates the Whitby facility, a 50 MW natural gas-fired, simple-cycle cogeneration power plant located in Ontario, Canada. We and Atlantic Packaging Ltd. each hold a 50% partnership interest in Whitby.
In December 2016, we acquired Calpine Receivables, a bankruptcy remote entity created for the special purpose of purchasing trade accounts receivable from Calpine Solutions under the Accounts Receivable Sales Program. Calpine Receivables is a VIE. We have determined that we do not have the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance nor the obligation to absorb losses or receive benefits from the VIE. Accordingly, we have determined that we are not the primary beneficiary of Calpine Receivables because we do not have the power to affect its financial performance

13



as the unaffiliated financial institutions that purchase the receivables from Calpine Receivables control the selection criteria of the receivables sold and appoint the servicer of the receivables which controls management of default. Thus, we do not consolidate Calpine Receivables in our Consolidated Condensed Financial Statements and use the equity method of accounting to record our net interest in Calpine Receivables.
We account for these entities under the equity method of accounting and include our net equity interest in investments in unconsolidated subsidiaries on our Consolidated Condensed Balance Sheets. At September 30, 2018 and December 31, 2017, our equity method investments included on our Consolidated Condensed Balance Sheets were comprised of the following (in millions):
 
Ownership Interest as of
September 30, 2018
 
September 30, 2018
 
December 31, 2017
Greenfield LP
50%
 
$
101

 
$
92

Whitby
50%
 
12

 
6

Calpine Receivables
100%
 
6

 
8

Total investments in unconsolidated subsidiaries
 
 
$
119

 
$
106

Our risk of loss related to our investments in Greenfield LP and Whitby is limited to our investment balance. Our risk of loss related to our investment in Calpine Receivables is $53 million which consists of our notes receivable from Calpine Receivables at September 30, 2018 and our initial investment associated with Calpine Receivables. See Note 12 for further information associated with our related party activity with Calpine Receivables.
Holders of the debt of our unconsolidated investments do not have recourse to Calpine Corporation and its other subsidiaries; therefore, the debt of our unconsolidated investments is not reflected on our Consolidated Condensed Balance Sheets. At September 30, 2018 and December 31, 2017, Greenfield LP’s debt was approximately $233 million and $256 million, respectively, and based on our pro rata share of our investment in Greenfield LP, our share of such debt would be approximately $116 million and $128 million at September 30, 2018 and December 31, 2017, respectively. On October 5, 2018, Greenfield LP refinanced and upsized its debt. Following this transaction, Greenfield LP’s debt was approximately $313 million and our share of such debt would be approximately $156 million.
Our equity interest in the net income from our investments in unconsolidated subsidiaries for the three and nine months ended September 30, 2018 and 2017, is recorded in (income) from unconsolidated subsidiaries. The following table sets forth details of our (income) from unconsolidated subsidiaries for the periods indicated (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Greenfield LP
$
(2
)
 
$
(5
)
 
$
(6
)
 
$
(11
)
Whitby
(3
)
 
(2
)
 
(11
)
 
(6
)
Calpine Receivables

 

 
1

 

Total
$
(5
)
 
$
(7
)

$
(16
)

$
(17
)
Distributions from Greenfield LP were nil during each of the three and nine months ended September 30, 2018 and $4 million during each of the three and nine months ended September 30, 2017. Distributions from Whitby were nil and $5 million during the three and nine months ended September 30, 2018, respectively, and $2 million and $18 million during the three and nine months ended September 30, 2017, respectively. Following the debt refinancing transaction in the fourth quarter of 2018, we received a distribution of $48 million from Greenfield LP. We did not have material distributions from our investment in Calpine Receivables for the three and nine months ended September 30, 2018 and 2017.

14



5.
Debt
Our debt at September 30, 2018 and December 31, 2017, was as follows (in millions):
 
September 30, 2018

December 31, 2017
Senior Unsecured Notes
$
3,421

 
$
3,417

First Lien Term Loans
2,981

 
2,995

First Lien Notes
2,399

 
2,396

Project financing, notes payable and other
1,419

 
1,498

CCFC Term Loan
976

 
984

Capital lease obligations
111

 
115

Subtotal
11,307

 
11,405

Less: Current maturities
512

 
225

Total long-term debt
$
10,795

 
$
11,180

Our effective interest rate on our consolidated debt, excluding the effects of capitalized interest and mark-to-market gains (losses) on interest rate hedging instruments, increased to 5.7% for the nine months ended September 30, 2018, from 5.4% for the same period in 2017.
Senior Unsecured Notes
The amounts outstanding under our Senior Unsecured Notes are summarized in the table below (in millions):
 
September 30, 2018
 
December 31, 2017
2023 Senior Unsecured Notes
$
1,241

 
$
1,239

2024 Senior Unsecured Notes
644

 
644

2025 Senior Unsecured Notes
1,536

 
1,534

Total Senior Unsecured Notes
$
3,421

 
$
3,417

First Lien Term Loans
The amounts outstanding under our senior secured First Lien Term Loans are summarized in the table below (in millions):
 
September 30, 2018
 
December 31, 2017
2019 First Lien Term Loan
$
389

 
$
389

2023 First Lien Term Loans
1,060

 
1,064

2024 First Lien Term Loan
1,532

 
1,542

Total First Lien Term Loans
$
2,981

 
$
2,995

First Lien Notes
The amounts outstanding under our senior secured First Lien Notes are summarized in the table below (in millions):
 
September 30, 2018
 
December 31, 2017
2022 First Lien Notes
$
743

 
$
741

2024 First Lien Notes
486

 
485

2026 First Lien Notes
1,170

 
1,170

Total First Lien Notes
$
2,399

 
$
2,396


15



Corporate Revolving Facility and Other Letter of Credit Facilities
The table below represents amounts issued under our letter of credit facilities at September 30, 2018 and December 31, 2017 (in millions):
 
September 30, 2018
 
December 31, 2017
Corporate Revolving Facility(1)
$
524

 
$
629

CDHI
245

 
244

Various project financing facilities
232

 
196

Other corporate facilities(2)
143

 

Total
$
1,144

 
$
1,069

____________
(1)
The Corporate Revolving Facility represents our primary revolving facility.
(2)
During the second quarter of 2018, we executed two unsecured $50 million letter of credit facilities with third party financial institutions, each maturing on June 20, 2020. On July 26, 2018, we upsized one of the letter of credit facilities to $100 million.
On May 18, 2018, we amended our Corporate Revolving Facility to increase the capacity by approximately $220 million from $1.47 billion to approximately $1.69 billion. On March 8, 2018, we amended our Corporate Revolving Facility to increase the letter of credit facility from $1.15 billion to $1.3 billion and increased the Incremental Revolving Facilities (as defined in the credit agreement) amount to $500 million.
On September 15, 2017, we amended our Corporate Revolving Facility to, among other things, provide that the Merger does not constitute a “Change of Control” thereunder, effective upon consummation of the Merger. On October 20, 2017, we further amended our Corporate Revolving Facility to extend the maturity of most revolving commitments (totaling $1.3 billion in the aggregate) to March 8, 2023. Both amendments to the Corporate Revolving Facility became effective upon consummation of the Merger on March 8, 2018. See Note 2 for further information related to the Merger.
Short Term Credit Facility — On April 11, 2018, we entered into a credit agreement which allowed us access to $300 million in aggregate available borrowings until August 31, 2018. We did not make any cash draws on the Short Term Credit Facility which we terminated on August 17, 2018.
Fair Value of Debt
We record our debt instruments based on contractual terms, net of any applicable premium or discount and debt issuance costs. The following table details the fair values and carrying values of our debt instruments at September 30, 2018 and December 31, 2017 (in millions):
 
September 30, 2018
 
December 31, 2017
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Senior Unsecured Notes
$
3,126

 
$
3,421

 
$
3,294

 
$
3,417

First Lien Term Loans
3,019

 
2,981

 
3,043

 
2,995

First Lien Notes
2,347

 
2,399

 
2,437

 
2,396

Project financing, notes payable and other(1)
1,351

 
1,330

 
1,439

 
1,409

CCFC Term Loan
994

 
976

 
1,000

 
984

Total
$
10,837

 
$
11,107

 
$
11,213

 
$
11,201

____________
(1)
Excludes a lease that is accounted for as a failed sale-leaseback transaction under U.S. GAAP.
Our Senior Unsecured Notes, First Lien Term Loans, First Lien Notes, CCFC Term Loan and Corporate Revolving Facility are categorized as level 2 within the fair value hierarchy. Our project financing, notes payable and other debt instruments are categorized as level 3 within the fair value hierarchy. We do not have any debt instruments with fair value measurements categorized as level 1 within the fair value hierarchy.

16



6.
Assets and Liabilities with Recurring Fair Value Measurements
Cash Equivalents — Highly liquid investments which meet the definition of cash equivalents, primarily investments in money market accounts and other interest-bearing accounts, are included in both our cash and cash equivalents and our restricted cash on our Consolidated Condensed Balance Sheets. Certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. We do not have any cash equivalents invested in institutional prime money market funds which require use of a floating net asset value and are subject to liquidity fees and redemption restrictions. Certain of our cash equivalents are classified within level 1 of the fair value hierarchy.
Derivatives — The primary factors affecting the fair value of our derivative instruments at any point in time are the volume of open derivative positions (MMBtu, MWh and $ notional amounts); changing commodity market prices, primarily for power and natural gas; our credit standing and that of our counterparties and customers for energy commodity derivatives; and prevailing interest rates for our interest rate hedging instruments. Prices for power and natural gas and interest rates are volatile, which can result in material changes in the fair value measurements reported in our financial statements in the future.
We utilize market data, such as pricing services and broker quotes, and assumptions that we believe market participants would use in pricing our assets or liabilities including assumptions about the risks inherent to the inputs in the valuation technique. These inputs can be either readily observable, market corroborated or generally unobservable. The market data obtained from broker pricing services is evaluated to determine the nature of the quotes obtained and, where accepted as a reliable quote, used to validate our assessment of fair value. We use other qualitative assessments to determine the level of activity in any given market. We primarily apply the market approach and income approach for recurring fair value measurements and utilize what we believe to be the best available information. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs. We classify fair value balances based on the observability of those inputs.
The fair value of our derivatives includes consideration of our credit standing, the credit standing of our counterparties and customers and the effect of credit enhancements, if any. We have also recorded credit reserves in the determination of fair value based on our expectation of how market participants would determine fair value. Such valuation adjustments are generally based on market evidence, if available, or our best estimate.
Our level 1 fair value derivative instruments primarily consist of power and natural gas swaps, futures and options traded on an exchange.
Our level 2 fair value derivative instruments primarily consist of interest rate hedging instruments and OTC power and natural gas forwards for which market-based pricing inputs in the principal or most advantageous market are representative of executable prices for market participants. These inputs are observable at commonly quoted intervals for substantially the full term of the instruments. In certain instances, our level 2 derivative instruments may utilize models to measure fair value. These models are industry-standard models, including the Black-Scholes option-pricing model, that incorporate various assumptions, including quoted interest rates, correlation, volatility, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Our level 3 fair value derivative instruments may consist of OTC power and natural gas forwards and options where pricing inputs are unobservable, as well as other complex and structured transactions primarily for the sale and purchase of power and natural gas to both wholesale counterparties and retail customers. Complex or structured transactions are tailored to our customers’ needs and can introduce the need for internally-developed model inputs which might not be observable in or corroborated by the market. When such inputs have a significant effect on the measurement of fair value, the instrument is categorized in level 3. Our valuation models may incorporate historical correlation information and extrapolate available broker and other information to future periods.

17



Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement at period end. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect our estimate of the fair value of our assets and liabilities and their placement within the fair value hierarchy levels. The following tables present our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, by level within the fair value hierarchy:
 
Assets and Liabilities with Recurring Fair Value Measures as of September 30, 2018
 
Level 1    
 
Level 2    
 
Level 3    
 
Total    
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents(1)
$
196

 
$

 
$

 
$
196

Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded derivatives contracts
595

 

 

 
595

Commodity forward contracts(2)

 
416

 
223

 
639

Interest rate hedging instruments

 
82

 

 
82

Effect of netting and allocation of collateral(3)(4)
(595
)
 
(330
)
 
(25
)
 
(950
)
Total assets
$
196

 
$
168

 
$
198

 
$
562

Liabilities:
 
 
 
 
 
 
 
Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded derivatives contracts
$
584

 
$

 
$

 
$
584

Commodity forward contracts(2)

 
588

 
135

 
723

Interest rate hedging instruments

 
12

 

 
12

Effect of netting and allocation of collateral(3)(4)
(584
)
 
(362
)
 
(25
)
 
(971
)
Total liabilities
$

 
$
238

 
$
110

 
$
348

 
Assets and Liabilities with Recurring Fair Value Measures as of December 31, 2017
 
Level 1    
 
Level 2    
 
Level 3    
 
Total    
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents(1)
$
131

 
$

 
$

 
$
131

Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded derivatives contracts
746

 

 

 
746

Commodity forward contracts(2)

 
327

 
265

 
592

Interest rate hedging instruments

 
29

 

 
29

Effect of netting and allocation of collateral(3)(4)
(746
)
 
(206
)
 
(23
)
 
(975
)
Total assets
$
131

 
$
150

 
$
242

 
$
523

Liabilities:
 
 
 
 
 
 
 
Commodity instruments:
 
 
 
 
 
 
 
Commodity exchange traded derivatives contracts
$
790

 
$

 
$

 
$
790

Commodity forward contracts(2)

 
461

 
68

 
529

Interest rate hedging instruments

 
34

 

 
34

Effect of netting and allocation of collateral(3)(4)
(790
)
 
(224
)
 
(23
)
 
(1,037
)
Total liabilities
$

 
$
271

 
$
45

 
$
316

___________
(1)
At September 30, 2018 and December 31, 2017, we had cash equivalents of $49 million and $21 million included in cash and cash equivalents and $147 million and $110 million included in restricted cash, respectively.

18



(2)
Includes OTC swaps and options and retail contracts.
(3)
We offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement for financial statement presentation; therefore, amounts recognized for the right to reclaim, or the obligation to return, cash collateral are presented net with the corresponding derivative instrument fair values. See Note 7 for further discussion of our derivative instruments subject to master netting arrangements.
(4)
Cash collateral posted with (received from) counterparties allocated to level 1, level 2 and level 3 derivative instruments totaled $(11) million, $32 million and nil, respectively, at September 30, 2018. Cash collateral posted with (received from) counterparties allocated to level 1, level 2 and level 3 derivative instruments totaled $44 million, $18 million and nil, respectively, at December 31, 2017.
At September 30, 2018 and December 31, 2017, the derivative instruments classified as level 3 primarily included commodity contracts, which are classified as level 3 because the contract terms relate to a delivery location or tenor for which observable market rate information is not available. The fair value of the net derivative position classified as level 3 is predominantly driven by market commodity prices. The following table presents quantitative information for the unobservable inputs used in our most significant level 3 fair value measurements at September 30, 2018 and December 31, 2017:
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
 
September 30, 2018
 
 
 
Fair Value, Net Asset
 
 
 
Significant Unobservable
 
 
 
 
 
 
 
(Liability)
 
Valuation Technique
 
Input
 
Range
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Power Contracts(1)
 
$
57

 
Discounted cash flow
 
Market price (per MWh)
 
$
4.23

$326.13
/MWh
Power Congestion Products
 
$
20

 
Discounted cash flow
 
Market price (per MWh)
 
$
(9.34
)
$18.16
/MWh
Natural Gas Contracts
 
$
1

 
Discounted cash flow
 
Market price (per MMBtu)
 
$
1.08

$12.35
/MMBtu
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
Fair Value, Net Asset
 
 
 
Significant Unobservable
 
 
 
 
 
 
 
(Liability)
 
Valuation Technique
 
Input
 
Range
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Power Contracts(1)
 
$
149

 
Discounted cash flow
 
Market price (per MWh)
 
$
4.13

$119.20
/MWh
Power Congestion Products
 
$
11

 
Discounted cash flow
 
Market price (per MWh)
 
$
(10.54
)
$9.13
/MWh
Natural Gas Contracts
 
$
34

 
Discounted cash flow
 
Market price (per MMBtu)
 
$
1.62

$13.67
/MMBtu
___________
(1)
Power contracts include power and heat rate instruments classified as level 3 in the fair value hierarchy.


19



The following table sets forth a reconciliation of changes in the fair value of our net derivative assets (liabilities) classified as level 3 in the fair value hierarchy for the periods indicated (in millions):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
131

 
$
303

 
$
197

 
$
416

Realized and mark-to-market gains (losses):
 
 
 
 
 
 
 
 
Included in net income (loss):
 
 
 
 
 
 
 
 
Included in operating revenues(1)
 
(99
)
 
26

 
(84
)
 
125

Included in fuel and purchased energy expense(2)
 
18

 
(12
)
 
27

 
(1
)
Change in collateral
 

 
4

 

 
(4
)
Purchases and settlements:
 
 
 
 
 
 
 
 
Purchases
 
4

 
1

 
12

 
2

Settlements
 
37

 
(40
)
 
(56
)
 
(129
)
Transfers in and/or out of level 3(3):