Basis of Presentation and Summary of Significant Accounting Policies

We are a wholesale 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 power markets in California, Texas and the Mid-Atlantic region of the U.S. We sell wholesale 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, power marketers and others. 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 purchase electric transmission rights to deliver power to our customers. Additionally, consistent with our Risk Management Policy, we enter into natural gas and power physical and financial 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, 2013, included in our 2013 Form 10-K. The results for interim periods are not necessarily indicative of the results for the entire year primarily due to acquisitions and disposals of assets, seasonal fluctuations in our revenues, 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 unrealized 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 year amounts for comparative purposes. These reclassifications did not have a material impact 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 certain project finance facilities and lease agreements that require us to establish and maintain segregated cash accounts, which 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. At March 31, 2014 and December 31, 2013, we had cash and cash equivalents of $98 million and $292 million, respectively, that were subject to such project finance facilities and lease agreements.

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. 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, major maintenance and debt repurchases 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 and Statements of Cash Flows.

The table below represents the components of our restricted cash as of March 31, 2014 and December 31, 2013 (in millions):



	March 31, 2014						December 31, 2013
	Current		Non-Current		Total		Current		Non-Current		Total
Debt service⁽¹⁾	$	11	$	41	$	52	$	11	$	41	$	52
Rent reserve	4		—		4		3		—		3
Construction/major maintenance	34		22		56		35		20		55
Security/project/insurance	146		6		152		151		6		157
Other	—		2		2		3		2		5
Total	$	195	$	71	$	266	$	203	$	69	$	272

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(1)	At both March 31, 2014 and December 31, 2013, amounts restricted for debt service included approximately $24 million of repurchase agreements with a financial institution containing maturity dates greater than one year.

Inventory — At March 31, 2014 and December 31, 2013, we had inventory of $361 million and $364 million, respectively. Inventory primarily consists of spare parts, stored natural gas and fuel oil, environmental products and natural gas exchange imbalances. Inventory, other than spare parts, is stated primarily at the lower of cost or market value under the weighted average cost method. Spare parts inventory is valued at weighted average cost and is expensed to plant operating expense or capitalized to property, plant and equipment as the parts are utilized and consumed.

Property, Plant and Equipment, Net — At March 31, 2014 and December 31, 2013, the components of property, plant and equipment are stated at cost less accumulated depreciation as follows (in millions):



	March 31, 2014		December 31, 2013		Depreciable Lives
Buildings, machinery and equipment⁽¹⁾	$	16,516	$	15,838	3 – 47 Years
Geothermal properties	1,267		1,265		13 – 59 Years
Other	167		164		3 – 47 Years
	17,950		17,267
Less: Accumulated depreciation	5,046		4,897
	12,904		12,370
Land	109		103
Construction in progress	585		522
Property, plant and equipment, net	$	13,598	$	12,995

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(1)	The change from December 31, 2013 to March 31, 2014 can primarily be attributed to our acquisition of Guadalupe Energy Center on February 26, 2014.

Capitalized Interest — The total amount of interest capitalized was $6 million and $12 million for the three months ended March 31, 2014 and 2013, respectively.

Treasury Stock — During the three months ended March 31, 2014, we repurchased common stock with a value of $140 million and withheld shares with a value of $8 million to satisfy tax withholding obligations associated with the vesting of restricted stock awarded to employees and net share employee stock options exercises under the Equity Plan.

New Accounting Standards and Disclosure Requirements

Income Taxes — In July 2013, the FASB issued Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. We adopted Accounting Standards Updated 2013-11 in the first quarter of 2014 which did not have a material impact on our financial condition, results of operations or cash flows.

Financial Reporting of Discontinued Operations — In April 2014, the FASB issued Accounting Standards Update 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”. The update limits discontinued operations reporting to disposals that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The standard also requires new disclosures related to components reported as discontinued operations, as well as components of an entity that were sold and do not meet the criteria for discontinued operations reporting. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. We are currently assessing the future impact of this update, but we do not anticipate a material impact on our financial condition, results of operations or cash flows.