Accounting for Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivative Instruments and Hedging Activities

Energy-Related Commodities

As of September 30, 2020, NRG had energy-related derivative instruments extending through 2034. The Company marks these derivatives to market through the statement of operations. NRG has executed power purchase agreements extending through 2037 that qualified for the NPNS exception and were therefore exempt from fair value accounting treatment.

Interest Rate Swaps

NRG was 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 entered into interest rate swap agreements. As of September 30, 2020, NRG had no interest rate derivative instruments as a result of the early termination of such contracts in connection with the repayment of the 2023 Term Loan Facility during the second quarter of 2019. As of November 5, 2020, the Company entered into $1.6 billion of interest rate hedges associated with anticipated financing needs.

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, 2020 and December 31, 2019. 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 (In millions)
Category	Units	September 30, 2020	December 31, 2019
Emissions	Short Ton	1	3
Renewable Energy Certificates	Certificates	3	1
Coal	Short Ton	4	10
Natural Gas	MMBtu	(264)	(181)

Power	MWh	51	38
Capacity	MW/Day	(1)	(1)

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
(In millions)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019




Derivatives Not Designated as Cash Flow or Fair Value Hedges:


Commodity contracts current	$	578	$	860	$	495	$	781
Commodity contracts long-term	315		310		318		322
Total Derivatives Not Designated as Cash Flow or Fair Value Hedges	$	893	$	1,170	$	813	$	1,103

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
(In millions)	Gross Amounts of Recognized Assets / Liabilities		Derivative Instruments		Cash Collateral (Held) / Posted		Net Amount
As of September 30, 2020
Commodity contracts:
Derivative assets	$	893	$	(738)	$	(1)	$	154
Derivative liabilities	(813)		738		—		(75)
Total commodity contracts	$	80	$	—	$	(1)	$	79


	Gross Amounts Not Offset in the Statement of Financial Position
(In millions)	Gross Amounts of Recognized Assets / Liabilities		Derivative Instruments		Cash Collateral (Held) / Posted		Net Amount
As of December 31, 2019
Commodity contracts:
Derivative assets	$	1,170	$	(909)	$	(7)	$	254
Derivative liabilities	(1,103)		909		73		(121)
Total commodity contracts	$	67	$	—	$	66	$	133

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 and fair value hedges are reflected in current period results of operations.

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


(In millions)	Three months ended September 30,				Nine months ended September 30,
Unrealized mark-to-market results	2020		2019		2020		2019
Reversal of previously recognized unrealized (gains) on settled positions related to economic hedges	$	(101)	$	(118)	$	(62)	$	(88)
Reversal of acquired (gain)/loss positions related to economic hedges	(2)		(3)		2		(4)
Net unrealized (losses)/gains on open positions related to economic hedges	(15)		57		73		69
Total unrealized mark-to-market (losses)/gains for economic hedging activities	(118)		(64)		13		(23)
Reversal of previously recognized unrealized (gains) on settled positions related to trading activity	(7)		(1)		(14)		(8)
Net unrealized gains/(losses) on open positions related to trading activity	2		(3)		19		23
Total unrealized mark-to-market (losses)/gains for trading activity	(5)		(4)		5		15
Total unrealized (losses)/gains	$	(123)	$	(68)	$	18	$	(8)


	Three months ended September 30,				Nine months ended September 30,
(In millions)	2020		2019		2020		2019
Unrealized gains/(losses) included in operating revenues	$	34	$	(214)	$	83	$	66
Unrealized (losses)/gains included in cost of operations	(157)		146		(65)		(74)
Total impact to statement of operations — energy commodities	$	(123)	$	(68)	$	18	$	(8)
Total impact to statement of operations — interest rate contracts	$	—	$	—	$	—	$	(38)

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, 2020, the $73 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward positions as a result of decreases in New York capacity and power prices, as well as increases in ERCOT power prices.

For the nine months ended September 30, 2019, the $69 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward purchases of ERCOT heat rate due to ERCOT heat rate expansion.

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 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, 2020 was

$35 million. The Company is also party to certain marginable agreements under which it has net liability position, but the counterparty has not called for the collateral due, which was $8 million as of September 30, 2020. If called for by the counterparty, $3 million of additional collateral would be required for all contracts with credit rating contingent features as of September 30, 2020.

See Note 5, Fair Value of Financial Instruments, for discussion regarding concentration of credit risk.