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 September 30, 2018, NRG had energy-related derivative instruments extending through 2030. 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 September 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 an interest rate swap on non-recourse debt extending through 2032, which is not designated as a cash flow hedge.

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 September 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
		September 30, 2018			December 31, 2017
Category	Units	(In millions)
Emissions	Short Ton	3			1
Renewable Energy Certificates	Certificates	1			—
Coal	Short Ton	8			21
Natural Gas	MMBtu	(439		)	(20		)
Power	MWh	8			23
Capacity	MW/Day	(1		)	(1		)
Interest	Dollars	$	1,058		$	1,060
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
	September 30, 2018	December 31, 2017	September 30, 2018	December 31, 2017
	(In millions)
Derivatives Not Designated as Cash Flow or Fair Value Hedges:
Interest rate contracts current	17	8	—	1
Interest rate contracts long-term	36	31	2	5
Commodity contracts current	666	616	550	536
Commodity contracts long-term	356	128	355	138
Total Derivatives Not Designated as Cash Flow or Fair Value Hedges	1,075	783	907	680

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 September 30, 2018	(In millions)
Commodity contracts:
Derivative assets	$	1,022		$	(765	)	$	(18	)	$	239
Derivative liabilities	(905		)	765			30			(110		)
Total commodity contracts	117			—			12			129
Interest rate contracts:
Derivative assets	53			—			—			53
Derivative liabilities	(2		)	—			—			(2		)
Total interest rate contracts	51			—			—			51
Total derivative instruments	$	168		$	—		$	12		$	180



	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	$	744		$	(578	)	$	(11	)	$	155
Derivative liabilities	(674		)	578			72			(24		)
Total commodity contracts	70			—			61			131
Interest rate contracts:
Derivative assets	39			—			—			39
Derivative liabilities	(6		)	—			—			(6		)
Total interest rate contracts	33			—			—			33
Total derivative instruments	$	103		$	—		$	61		$	164

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 September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In millions)
Accumulated OCI beginning balance	$	(23	)	$	(67	)	$	(54	)	$	(66	)
Reclassified from accumulated OCI to income:
Due to realization of previously deferred amounts	1			4			8			10
Mark-to-market of cash flow hedge accounting contracts	(3		)	4			21			(3		)
Sale of NRG Yield and the Renewables Platform	25			—			25			—
Accumulated OCI ending balance, net of $0, and $15 tax	$	—		$	(59	)	$	—		$	(59	)

Amounts reclassified from accumulated OCI into income are recorded in discontinued operations.

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 prospectively marked these derivatives to market through the income statement until the assets were sold.

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 September 30,						Nine months ended September 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	$	(84	)	$	(7	)	$	(85	)	$	18
Reversal of acquired gain positions related to economic hedges	(10		)	(2		)	(11		)	(1		)
Net unrealized gains/(losses) on open positions related to economic hedges	25			(19		)	158			(8		)
Total unrealized mark-to-market (losses)/gains for economic hedging activities	(69		)	(28		)	62			9
Reversal of previously recognized unrealized gains on settled positions related to trading activity	(4		)	(5		)	(10		)	(24		)
Net unrealized gains on open positions related to trading activity	8			—			27			17
Total unrealized mark-to-market gains/(losses) for trading activity	4			(5		)	17			(7		)
Total unrealized (losses)/gains	$	(65	)	$	(33	)	$	79		$	2



	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In millions)
Unrealized gains/(losses) included in operating revenues	$	59		$	17		$	(14	)	$	170
Unrealized (losses)/gains included in cost of operations	(124		)	(50		)	93			(168		)
Total impact to statement of operations — energy commodities	$	(65	)	$	(33	)	$	79		$	2
Total impact to statement of operations — interest rate contracts	$	2		$	3		$	17		$	(4	)

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 nine months ended September 30, 2018, the $158 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 nine months ended September 30, 2017, the $8 million unrealized loss from open economic hedge positions was primarily the result of a decrease in value of forward purchases of coal, natural gas, and ERCOT power due to decreases in coal, natural gas, and ERCOT electricity prices, which was largely offset by an increase in value of forward sales of PJM power and New York capacity due to decreases in PJM electricity and New York capacity 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 September 30, 2018, was $25 million. The collateral required for contracts with credit rating contingent features that are in a net liability position as of September 30, 2018, was $17 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 $6 million as of September 30, 2018.

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