Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company employs a variety of derivative instruments to manage its exposure to fluctuations in electricity prices, interest rates and foreign currency exchange rates. Energy prices are subject to wide swings as supply and demand are impacted by, among many other unpredictable items, weather, market liquidity, generating facility availability, customer usage, storage, and transmission and transportation constraints. Interest rate risk exists primarily on variable-rate debt for which the cash flows vary based upon movement in interest rates. Additionally, the Company is exposed to foreign currency exchange rate risk primarily from its business operations in Canada and Japan. The Company’s objectives for holding these derivative instruments include reducing, eliminating and efficiently managing the economic impact of these exposures as effectively as possible. The Company does not hedge all of its electricity price risk, interest rate risks, and foreign currency exchange rate risks, thereby exposing the unhedged portions to changes in market prices.

As of September 30, 2019, the Company also had other energy-related contracts that did not meet the definition of a derivative instrument or qualified for the NPNS exception and were therefore exempt from fair value accounting treatment.

The following tables present the fair values of the Company's derivative instruments on a gross basis as reflected on the Company’s consolidated balance sheets (in millions):



	September 30, 2019
	Derivative Assets				Derivative Liabilities
	Current		Long-Term		Current		Long-Term
Fair Value of Designated Derivatives
Interest rate swaps	$	—	$	—	$	6	$	81

Fair Value of Undesignated Derivatives
Foreign currency forward contracts	3		7		—		—
Congestion revenue rights ⁽¹⁾	—		—		—		—
Total Fair Value	$	3	$	7	$	6	$	81

	December 31, 2018
	Derivative Assets				Derivative Liabilities
	Current		Long-Term		Current		Long-Term
Fair Value of Designated Derivatives
Interest rate swaps	$	—	$	3	$	2	$	25

Fair Value of Undesignated Derivatives
Interest rate swaps	$	—	$	—	$	—	$	4
Energy derivative	7		—		—		—
Foreign currency forward contracts	6		6		—		2
Congestion revenue rights	1		—		—		—
Total Fair Value	$	14	$	9	$	2	$	31


⁽¹⁾	As of September 30, 2019, the fair value was less than $1 million.

The following table summarizes the notional amounts of the Company's outstanding derivative instruments (in millions, except for MWh):



	Unit of Measure	September 30,		December 31,
	Unit of Measure	2019		2018
Designated Derivative Instruments
Interest rate swaps	USD	$	346	$	319
Interest rate swaps	CAD	$	707	$	721
Interest rate swaps	JPY	¥	54,987	¥	55,675

Undesignated Derivative Instruments
Interest rate swaps	USD	$	—	$	138
Energy derivative	MWh	—		193,252
Foreign currency forward contracts	CAD	$	77	$	106
Foreign currency forward contracts	JPY	¥	10,691	¥	11,589
Congestion revenue rights	MWh	248		505

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest swaps that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the hedge is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which cash settlement occurs. The designated interest rate swaps have remaining maturities ranging from approximately 4.2 years to 23.5 years as of September 30, 2019.

The following table presents the pre-tax effect of the hedging instruments designated as cash flow recognized in accumulated other comprehensive loss, amounts reclassified to earnings for the following periods, as well as, amounts recognized in interest expense (in millions):



		Three months ended September 30,						Nine months ended September 30,
	Description	2019			2018			2019			2018
Gains (losses) recognized in accumulated OCI	Change in fair value ⁽¹⁾	$	(13	)	$	14		$	(66	)	$	22
Gains (losses) reclassified from accumulated OCI into:
Interest expense	Derivative settlements	$	(1	)	$	(1	)	$	(2	)	$	(4	)
Gain on derivatives	De-designation of derivatives	—			—			$	—		$	2
Gain recognized in interest expense	Ineffective portion ⁽²⁾	$	—		$	—		$	—		$	1


⁽¹⁾	For 2018, the amount represents effective portion only as the Company adopted ASU 2017-12 on January 1, 2019.


⁽²⁾	Applies to 2018 only as a result of the adoption of ASU 2017-12 on January 1, 2019.

The Company estimates that $6 million in accumulated other loss will be reclassified into earnings over the next twelve months.

Derivatives Not Designated as Hedging Instruments

The following table presents gains and losses on derivatives not designated as hedges (in millions):



	Financial Statement Line Item	Three months ended September 30,				Nine months ended September 30,
Derivative Type	Financial Statement Line Item	2019		2018		2019			2018
Interest rate derivatives	Gain on derivatives	$	—	$	—	$	(1	)	$	4
Energy derivative	Electricity sales	$	—	$	2	$	—		$	(2	)
Foreign currency forward contracts	Gain on derivatives	$	3	$	1	$	4		$	12

Interest Rate Derivatives

The Company has interest rate swap agreements to hedge variable rate project-level debt. Under these interest rate swaps, the projects make fixed-rate interest payments and the counterparties to the agreements make variable-rate interest payments. For interest rate swaps that are not designated and do not qualify as cash flow hedges, the changes in fair value are recorded in gain on derivatives in the consolidated statements of operations as these hedges are not accounted for under hedge accounting. As of September 30, 2019, the Company terminated all of its undesignated interest rate swaps.

Energy Derivative

In 2010, Gulf Wind acquired an energy derivative instrument to manage its exposure to variable electricity prices over the life of the arrangement. The energy price swap fixed the price for a predetermined volume of production (the notional volume) over the life of the swap contract by locking in a fixed price per MWh. The notional volume agreed to by the parties was approximately 504,220 MWh per year. The energy derivative instrument did not meet the criteria required to adopt hedge accounting. As a result, changes in fair value were recorded in electricity sales in the consolidated statements of operations. The energy derivative expired in April 2019. As a result of the counterparty's credit rating downgrade, the Company received collateral related to the energy derivative agreement. As of September 30, 2019, the Company returned the counterparty's collateral.

In May 2019, the Company secured a short-term derivative instrument to continue to manage its exposure to variable electricity prices at Gulf Wind that expired on September 30, 2019. The short-term derivative instrument qualified for the NPNS scope exception and was accounted for under ASC 606.

Foreign Currency Forward Contracts

The Company has established a currency risk management program. The objective of the program is to mitigate the foreign exchange rate risk arising from transactions or cash flows that have a direct or underlying exposure in non-U.S. dollar denominated currencies in order to reduce volatility in the Company’s cash flow, which may have an adverse impact to the Company's short-term liquidity or financial condition. A majority of the Company’s power sale agreements and operating expenditures are transacted in U.S. dollars, with a growing portion transacted in currencies other than the U.S. dollar, primarily the Canadian dollar and Japanese yen. The Company enters into foreign currency forward and option contracts at various times to mitigate the currency exchange rate risk on Canadian dollar and, beginning in 2018, Japanese yen denominated cash flows. These instruments have remaining maturities ranging from three months to 10.5 years. The foreign currency forward and option contracts are considered non-designated derivative instruments and are not used for trading or speculative purposes. As a result, changes in fair value and settlements are recorded in gain on derivatives in the consolidated statements of operations.

Congestion Revenue Rights

Congestion revenue rights are financial instruments which were acquired via auction in the ERCOT power market that enable the Company to manage variability in electric energy congestion charges due to transmission grid limitations. The Company’s congestion revenue rights are considered non-designated derivative instruments and are not used for trading or speculative purposes. As a result, changes in fair value and settlements are recorded in gain on derivatives in the consolidated statements of operations.