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Accounting for Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivative Instruments and Hedging Activities

ASC 815 requires the Company to recognize all derivative instruments on the balance sheet as either assets or liabilities and to measure them at fair value each reporting period unless they qualify for a NPNS exception. The Company may elect to designate certain derivatives as cash flow hedges, if certain conditions are met, and defer the change in fair value of the derivatives to accumulated OCI, until the hedged transactions occur and are recognized in earnings.

For derivatives that are not designated as cash flow hedges or do not qualify for hedge accounting treatment, the changes in the fair value will be immediately recognized in earnings. Certain derivative instruments may qualify for the NPNS exception and are therefore exempt from fair value accounting treatment. ASC 815 applies to NRG's energy related commodity contracts, and interest rate swaps.

As the Company engages principally in the trading and marketing of its generation assets and retail operations, some of NRG's commercial activities qualify for NPNS accounting. Most of the retail load contracts either qualify for the NPNS exception or fail to meet the criteria for a derivative and the majority of the retail supply and fuels supply contracts are recorded under mark-to-market accounting. All of NRG's hedging and trading activities are subject to limits within the Company's Risk Management Policy.

Energy-Related Commodities

To manage the commodity price risk associated with the Company's competitive supply activities and the price risk associated with wholesale power sales from the Company's electric generation facilities and retail power sales from NRG's retail operations, NRG enters into a variety of derivative and non-derivative hedging instruments, utilizing the following:

•Forward contracts, which commit NRG to purchase or sell energy commodities or purchase fuels in the future;

•Futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument;

•Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined contractual, or notional, quantity;

•Option contracts, which convey to the option holder the right but not the obligation to purchase or sell a commodity;

•Extendable swaps, which include a combination of swaps and options executed simultaneously for different periods. This combination of instruments allows NRG to sell out-year volatility through call options in exchange for natural gas swaps with fixed prices in excess of the market price for natural gas at that time. The above-market swap combined with its later-year call option are priced in aggregate at market at the trade's inception; and

•Weather derivative products used to mitigate a portion of lost revenue due to weather.

The objectives for entering into derivative contracts designated as hedges include:

•Fixing the price of a portion of anticipated power purchases for the Company's retail sales;

•Fixing the price for a portion of anticipated future electricity sales that provides an acceptable return on the Company's electric generation operations; and

•Fixing the price of a portion of anticipated fuel purchases for the operation of the Company's power plants.

These contracts are recognized on the balance sheet at fair value and changes in the fair value of these derivative financial instruments are recognized in earnings.

As of December 31, 2020, NRG's derivative assets and liabilities consisted primarily of the following:

•Forward and financial contracts for the purchase/sale of electricity and related products economically hedging NRG's generation assets' forecasted output or NRG's retail load obligations through 2034;

•Forward and financial contracts for the purchase of fuel commodities relating to the forecasted usage of NRG's generation assets through 2021; and

•Other energy derivatives instruments extending through 2029.

Also, as of December 31, 2020, NRG 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 as follows:

•Load-following forward electric sale contracts extending through 2034;

•Power tolling contracts through 2037;

•Coal purchase contracts through 2021;

•Power transmission contracts through 2025;

•Natural gas transportation contracts and storage agreements through 2030; and

•Coal transportation contracts through 2029.

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 December 31, 2019, 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.

During the fourth quarter of 2020, NRG entered into $1.6 billion of interest rate hedges associated with anticipated certain financing needs. As of December 31, 2020, the interest rate hedges were settled in connection with the issuance of fixed rate debt, resulting in a gain of $11 million that was recorded as a reduction to interest expense.

Volumetric Underlying Derivative Transactions

The following table summarizes the net notional volume buy/(sell) of NRG's open derivative transactions broken out by commodity, excluding those derivatives that qualified for the NPNS exception as of December 31, 2020 and 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.


(In millions)		Total Volume
Commodity	Units	December 31, 2020	December 31, 2019
Emissions	Short Ton	1	3
Renewables Energy Certificates	Certificates	5	1
Coal	Short Ton	2	10
Natural Gas	MMBtu	(286)	(181)

Power	MWh	57	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 sheet:


	Fair Value
	Derivative Assets				Derivative Liabilities
(In millions)	December 31, 2020		December 31, 2019		December 31, 2020		December 31, 2019






Derivatives Not Designated as Cash Flow or Fair Value Hedges:


Commodity contracts current	$	560	$	860	$	499	$	781
Commodity contracts long-term	261		310		385		322

Total Derivatives Not Designated as Cash Flow or Fair Value Hedges	$	821	$	1,170	$	884	$	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 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 December 31, 2020
Commodity contracts:
Derivative assets	$	821	$	(658)	$	(5)	$	158
Derivative liabilities	(884)		658		—		(226)
Total commodity contracts	$	(63)	$	—	$	(5)	$	(68)


	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

Accumulated Other Comprehensive Income

The following table summarizes the effects on NRG's accumulated OCI balance attributable to cash flow hedge derivatives, net of tax, for the year 2018:


	Interest Rate Contracts
(In millions)	2018
Accumulated OCI beginning balance	$	(54)
Reclassified from accumulated OCI to income:
Due to realization of previously deferred amounts	8
Mark-to-market of cash flow hedge accounting contracts	21
Sale of NRG Yield and Renewables	25
Accumulated OCI ending balance	$	—

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

Impact of Derivative Instruments on the Statement 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 earnings.

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.


	Year Ended December 31,
(In millions)	2020		2019		2018
Unrealized mark-to-market results
Reversal of previously recognized unrealized (gains) on settled positions related to economic hedges	$	(55)	$	(68)	$	(73)
Reversal of acquired loss/(gain) positions related to economic hedges	4		6		(10)
Net unrealized (losses)/gains on open positions related to economic hedges	(68)		42		97
Total unrealized mark-to-market (losses)/gains for economic hedging activities	(119)		(20)		14
Reversal of previously recognized unrealized (gains) on settled positions related to trading activity	(20)		(11)		(12)

Net unrealized gains on open positions related to trading activity	15		31		29
Total unrealized mark-to-market (losses)/gains for trading activity	(5)		20		17
Total unrealized (losses)/gains	$	(124)	$	—	$	31


	Year Ended December 31,
(In millions)	2020		2019		2018
Unrealized gains/(losses) included in operating revenues	$	90	$	53	$	(113)
Unrealized (losses)/gains included in cost of operations	(214)		(53)		144
Total impact to statement of operations — energy commodities	$	(124)	$	—	$	31
Total impact to statement of operations — interest rate contracts	$	—	$	(38)	$	—

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

For the year ended December 31, 2020, the $68 million loss from open economic hedge positions was primarily the result of a decrease in the value of forward positions as a result of decreases in ERCOT power prices and heat rate contraction, partially offset by an increase in value of forward positions as a result of decreases in New York capacity prices.

The gains from open economic hedge positions of $42 million and $97 million for the years ended December 31, 2019 and 2018, respectively, were primarily the result of an increase in the value of forward purchases of ERCOT heat rate contracts 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 that have adequate assurance clauses that are in net liability positions as of December 31, 2020 was $26 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 $35 million as of December 31, 2020. If called for by the counterparty, $1 million of additional collateral would be required for all contracts with credit rating contingent features as of December 31, 2020.

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