Accounting for Derivative Instruments and Hedging Activities

This footnote should be read in conjunction with the complete description under Note 5, Accounting for Derivative Instruments and Hedging Activities, to the Company's 2017 Form 10-K.

Energy-Related Commodities

As of June 30, 2018, NRG had energy-related derivative instruments extending through 2031. The Company marks these derivatives to market through the statement of operations.

Interest Rate Swaps

NRG is exposed to changes in interest rates through the Company's issuance of variable rate debt. In order to manage the Company's interest rate risk, NRG enters into interest rate swap agreements. As of June 30, 2018, NRG had interest rate derivative instruments on recourse debt extending through 2021, which are not designated as cash flow hedges. The Company had interest rate swaps on non-recourse debt extending through 2041, a portion of which are designated as cash flow hedges.

Volumetric Underlying Derivative Transactions

The following table summarizes the net notional volume buy/(sell) of NRG's open derivative transactions broken out by category, excluding those derivatives that qualified for the NPNS exception, as of June 30, 2018 and December 31, 2017. Option contracts are reflected using delta volume. Delta volume equals the notional volume of an option adjusted for the probability that the option will be in-the-money at its expiration date.



		Total Volume
		June 30, 2018			December 31, 2017
Category	Units	(In millions)
Emissions	Short Ton	2			1
Coal	Short Ton	12			21
Natural Gas	MMBtu	(551		)	(17		)
Power	MWh	16			14
Capacity	MW/Day	(1		)	(1		)
Interest	Dollars	$	4,016		$	3,876
Equity	Shares	—			1

The increase in the natural gas position was primarily the result of additional generation hedge positions.

Fair Value of Derivative Instruments

The following table summarizes the fair value within the derivative instrument valuation on the balance sheets:



	Fair Value
	Derivative Assets				Derivative Liabilities
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
	(In millions)
Derivatives Designated as Cash Flow or Fair Value Hedges:
Interest rate contracts current	$	3	$	1	$	2	$	5
Interest rate contracts long-term	23		11		5		11
Total Derivatives Designated as Cash Flow or Fair Value Hedges	26		12		7		16
Derivatives Not Designated as Cash Flow or Fair Value Hedges:
Interest rate contracts current	16		9		5		15
Interest rate contracts long-term	66		32		11		28
Commodity contracts current	832		616		702		535
Commodity contracts long-term	337		129		269		158
Total Derivatives Not Designated as Cash Flow or Fair Value Hedges	1,251		786		987		736
Total Derivatives	$	1,277	$	798	$	994	$	752

The Company has elected to present derivative assets and liabilities on the balance sheet on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. In addition, collateral received or paid on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. The following table summarizes the offsetting of derivatives by counterparty master agreement level and collateral received or paid:



	Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets / Liabilities			Derivative Instruments			Cash Collateral (Held) / Posted			Net Amount
As of June 30, 2018	(In millions)
Commodity contracts:
Derivative assets	$	1,169		$	(817	)	$	(50	)	$	302
Derivative liabilities	(971		)	817			98			(56		)
Total commodity contracts	198			—			48			246
Interest rate contracts:
Derivative assets	108			(3		)	—			105
Derivative liabilities	(23		)	3			—			(20		)
Total interest rate contracts	85			—			—			85
Total derivative instruments	$	283		$	—		$	48		$	331



	Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets / Liabilities			Derivative Instruments			Cash Collateral (Held) / Posted			Net Amount
As of December 31, 2017	(In millions)
Commodity contracts:
Derivative assets	$	745		$	(578	)	$	(11	)	$	156
Derivative liabilities	(693		)	578			73			(42		)
Total commodity contracts	52			—			62			114
Interest rate contracts:
Derivative assets	53			(3		)	—			50
Derivative liabilities	(59		)	3			—			(56		)
Total interest rate contracts	(6		)	—			—			(6		)
Total derivative instruments	$	46		$	—		$	62		$	108

Accumulated Other Comprehensive Loss

The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:



	Interest Rate Contracts
	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
	(In millions)
Accumulated OCI beginning balance	$	(31	)	$	(61	)	$	(54	)	$	(66	)
Reclassified from accumulated OCI to income:
Due to realization of previously deferred amounts	3			3			7			6
Mark-to-market of cash flow hedge accounting contracts	5			(9		)	24			(7		)
Accumulated OCI ending balance, net of $5, and $16 tax	$	(23	)	$	(67	)	$	(23	)	$	(67	)
Losses expected to be realized from OCI during the next 12 months, net of $1 tax	$	8					$	8

Amounts reclassified from accumulated OCI into income are recorded to interest expense for interest rate contracts.

The Company's regression analysis for Marsh Landing, Walnut Creek, and Avra Valley interest rate swaps, while positively correlated, no longer contain match terms for cash flow hedge accounting. As a result, the Company voluntarily de-designated the Marsh Landing, Walnut Creek, and Avra Valley cash flow hedges as of April 28, 2017, and will prospectively mark these derivatives to market through the income statement.

Impact of Derivative Instruments on the Statements of Operations

Unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow hedges are reflected in current period consolidated results of operations.

The following table summarizes the pre-tax effects of economic hedges that have not been designated as cash flow hedges and trading activity on the Company's statement of operations. The effect of energy commodity contracts is included within operating revenues and cost of operations and the effect of interest rate contracts is included in interest expense.



	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Unrealized mark-to-market results	(In millions)
Reversal of previously recognized unrealized (gains)/losses on settled positions related to economic hedges	$	(3	)	$	22		$	(1	)	$	25
Reversal of acquired (gain)/loss positions related to economic hedges	(1		)	1			(1		)	1
Net unrealized (losses)/gains on open positions related to economic hedges	(67		)	36			127			15
Total unrealized mark-to-market (losses)/gains for economic hedging activities	(71		)	59			125			41
Reversal of previously recognized unrealized gains on settled positions related to trading activity	(3		)	(4		)	(6		)	(19		)
Net unrealized gains on open positions related to trading activity	8			16			19			17
Total unrealized mark-to-market gains/(losses) for trading activity	5			12			13			(2		)
Total unrealized (losses)/gains	$	(66	)	$	71		$	138		$	39



	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
	(In millions)
Unrealized gains/(losses) included in operating revenues	$	20		$	53		$	(78	)	$	157
Unrealized (losses)/gains included in cost of operations	(86		)	18			216			(118		)
Total impact to statement of operations — energy commodities	$	(66	)	$	71		$	138		$	39
Total impact to statement of operations — interest rate contracts	$	13		$	(24	)	$	61		$	(19	)

The reversals of acquired gain or loss positions were valued based upon the forward prices on the acquisition date. The roll-off amounts were offset by realized gains or losses at the settled prices and are reflected in operating revenue or cost of operations during the same period.

For the six months ended June 30, 2018, the $127 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward purchases of ERCOT heat rate and ERCOT electricity contracts due to ERCOT heat rate expansion and increases in ERCOT power prices.

For the six months ended June 30, 2017, the $15 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward sales of PJM electricity and New York capacity due to decreases in PJM electricity and New York capacity prices, which was offset by a decrease in value of forward purchases of natural gas and coal due to decreases in natural gas and coal prices.

Credit Risk Related Contingent Features

Certain of the Company's hedging agreements contain provisions that require the Company to post additional collateral if the counterparty determines that there has been deterioration in credit quality, generally termed “adequate assurance” under the agreements, or require the Company to post additional collateral if there were a one notch downgrade in the Company's credit rating. The collateral required for contracts with adequate assurance clauses that are in a net liability position as of June 30, 2018, was $31 million. The collateral required for contracts with credit rating contingent features that are in a net liability position as of June 30, 2018, was $3 million. The Company is also a party to certain marginable agreements under which it has a net liability position, but the counterparty has not called for the collateral due, which was approximately $4 million as of June 30, 2018.

See Note 4, Fair Value of Financial Instruments, to this Form 10-Q for discussion regarding concentration of credit risk.