Accounting for Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2012

Accounting for Derivative Instruments and Hedging Activities Disclosure [Abstract]

Accounting for Derivative Instruments and Hedging Activities

Accounting for Derivative Instruments and Hedging Activities

This footnote should be read in conjunction with the complete description under Note 6, Accounting for Derivative Instruments and Hedging Activities, to the Company's 2011 Form 10-K.

Energy-Related Commodities

As of September 30, 2012, NRG had energy-related derivative financial instruments extending through 2015, which are designated as cash flow hedges.

Interest Rate Swaps

NRG is exposed to changes in interest rates through the Company's issuance of variable and fixed rate debt. In order to manage the Company's interest rate risk, NRG enters into interest rate swap agreements. As of September 30, 2012, NRG had interest rate derivative instruments on recourse debt extending through 2013 and on non-recourse debt extending through 2030, the majority 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 commodity, excluding those derivatives that qualified for the NPNS exception as of September 30, 2012, and December 31, 2011. 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
Commodity	Units	September 30, 2012			December 31, 2011
		(In millions)
Emissions	Short Ton	(1		)	(2		)
Coal	Short Ton	34			37
Natural Gas	MMBtu	(244		)	13
Oil	Barrel	—			1
Power	MWh	12			4
Interest	Dollars	$	2,251		$	2,121

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
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
	(In millions)
Derivatives Designated as Cash Flow Hedges:
Interest rate contracts current	$	—	$	—	$	11	$	39
Interest rate contracts long-term	—		—		96		68
Commodity contracts current	1		318		2		—
Commodity contracts long-term	—		—		1		1
Total Derivatives Designated as Cash Flow Hedges	1		318		110		108
Derivatives Not Designated as Cash Flow Hedges:
Interest rate contracts current	—		—		13		—
Interest rate contracts long-term	—		—		14		1
Commodity contracts current	2,676		3,898		2,436		3,712
Commodity contracts long-term	309		450		450		394
Total Derivatives Not Designated as Cash Flow Hedges	2,985		4,348		2,913		4,107
Total Derivatives	$	2,986	$	4,666	$	3,023	$	4,215

Accumulated Other Comprehensive Income

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

	Three months ended September 30, 2012									Nine months ended September 30, 2012
	Energy Commodities			Interest Rate			Total			Energy Commodities			Interest Rate			Total
	(In millions)
Accumulated OCI beginning balance	$	111		$	(68	)	$	43		$	188		$	(56	)	$	132
Reclassified from accumulated OCI to income:
Due to realization of previously deferred amounts	(30		)	3			(27		)	(106		)	11			(95		)
Mark-to-market of cash flow hedge accounting contracts	(1		)	(15		)	(16		)	(2		)	(35		)	(37		)
Accumulated OCI ending balance, net of $12 tax	$	80		$	(80	)	$	—		$	80		$	(80	)	$	—
Gains/(losses) expected to be realized from OCI during the next 12 months, net of $38 tax	$	77		$	(11	)	$	66		$	77		$	(11	)	$	66
Losses recognized in income from the ineffective portion of cash flow hedges	$	—		$	—		$	—		$	(51	)	$	—		$	(51	)

	Three months ended September 30, 2011									Nine months ended September 30, 2011
	Energy Commodities			Interest Rate			Total			Energy Commodities			Interest Rate			Total
	(In millions)
Accumulated OCI beginning balance	$	332		$	(40	)	$	292		$	488		$	(47	)	$	441
Reclassified from accumulated OCI to income:
Due to realization of previously deferred amounts	(91		)	—			(91		)	(281		)	11			(270		)
Mark-to-market of cash flow hedge accounting contracts	19			(4		)	15			53			(8		)	45
Accumulated OCI ending balance, net of $136 tax	$	260		$	(44	)	$	216		$	260		$	(44	)	$	216
Gains/(losses) expected to be realized from OCI during the next 12 months, net of $107 tax	$	186		$	(2	)	$	184		$	186		$	(2	)	$	184
Gains recognized in income from the ineffective portion of cash flow hedges	$	9		$	—		$	9		$	8		$	3		$	11

Amounts reclassified from accumulated OCI into income and amounts recognized in income from the ineffective portion of cash flow hedges are recorded to operating revenue for commodity contracts and interest expense for interest rate contracts.

Accounting guidelines require a high degree of correlation between the derivative and the hedged item throughout the period in order to qualify as a cash flow hedge. As of April 30, 2012, the Company's regression analysis for natural gas prices to ERCOT power prices, while positively correlated, did not meet the required threshold for cash flow hedge accounting for calendar year 2012. As a result, the Company de-designated its 2012 ERCOT cash flow hedges as of April 30, 2012, and prospectively marked these derivatives to market through the income statement.

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 and ineffectiveness of hedge derivatives 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, ineffectiveness on cash flow 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.

	Three months ended September 30,						Nine months ended September 30,
(In millions)	2012			2011			2012			2011
Unrealized mark-to-market results
Reversal of previously recognized unrealized (gains)/losses on settled positions related to economic hedges	$	(85	)	$	50		$	(160	)	$	72
Reversal of (gain)/loss positions acquired as part of the Reliant Energy and Green Mountain Energy acquisitions	(15		)	(11		)	5			60
Net unrealized (losses)/gains on open positions related to economic hedges	(159		)	(7		)	(78		)	77
Gains/(losses) on ineffectiveness associated with open positions treated as     cash flow hedges	—			9			(51		)	8
Total unrealized mark-to-market (losses)/gains for economic hedging activities	(259		)	41			(284		)	217
Reversal of previously recognized unrealized (gains)/losses on settled positions related to trading activity	(15		)	8			(45		)	22
Net unrealized (losses)/gains on open positions related to trading activity	(3		)	—			33			22
Total unrealized mark-to-market(losses)/gains for trading activity	(18		)	8			(12		)	44
Total unrealized (losses)/gains	$	(277	)	$	49		$	(296	)	$	261

	Three months ended September 30,						Nine months ended September 30,
(In millions)	2012			2011			2012			2011
Revenue from operations — energy commodities	$	(395	)	$	89		$	(470	)	$	193
Cost of operations	118			(40		)	174			68
Total impact to statement of operations — energy commodities	$	(277	)	$	49		$	(296	)	$	261
Total impact to statement of operations — interest rate contracts	$	—		$	(1	)	$	(12	)	$	2

The reversal of gain or loss positions acquired as part of the Reliant Energy and Green Mountain Energy 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 the cost of operations during the same period.

For the nine months ended September 30, 2012, the unrealized loss from open economic hedge positions was primarily the result of a decrease in forward coal prices.

As of June 30, 2012 NRG had interest rate swaps designated as cash flow hedges on the Alpine solar project. The notional amount on the swaps exceeded the actual debt draws on the project. As such, NRG discontinued cash flow hedge accounting for these contracts and $4 million of loss previously deferred in OCI was recognized in earnings for the nine months ended September 30, 2012.

For the nine months ended September 30, 2011, the unrealized gain from open economic hedge positions was the result of an increase in value of forward purchases and sales of natural gas, electricity and fuel due to a decrease in forward power and gas 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 requires 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, 2012, was $91 million. The collateral required for contracts with credit rating contingent features was $51 million. The Company is also a party to certain marginable agreements where NRG has a net liability position, but the counterparty has not called for the collateral due, which was approximately $56 million as of September 30, 2012.

See Note 5, Fair Value of Financial Instruments, to this Form 10-Q for discussion regarding concentration of credit risk.