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Accounting for Derivative Instruments and Hedging Activities (Notes)
 12 Months Ended
Dec. 31, 2016
Accounting for Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Accounting for Derivative Instruments and Hedging Activities
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 effective portion of the change in fair value of the derivatives to accumulated OCI, until the hedged transactions occur and are recognized in earnings. The ineffective portion of a cash flow hedge is immediately recognized in earnings.
For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair value of both the derivative and the hedged transaction are recorded in current 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, interest rate swaps, and equity contracts.
As the Company engages principally in the trading and marketing of its generation assets and retail businesses, some of NRG's commercial activities qualify for hedge accounting. In order for the generation assets to qualify, the physical generation and sale of electricity should be highly probable at inception of the trade and throughout the period it is held, as is the case with the Company's baseload plants. For this reason, many trades in support of NRG's baseload units normally qualify for NPNS or cash flow hedge accounting treatment, and trades in support of NRG's peaking units' asset optimization will generally not qualify for hedge accounting treatment, with any changes in fair value likely to be reflected on a mark-to-market basis in the statement of operations. 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 businesses, 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 and hurricane derivative products used to mitigate a portion of retail's lost revenue due to weather.
The objectives for entering into derivative contracts designated as hedges include:
•
Fixing the price for a portion of anticipated future electricity sales that provides an acceptable return on the Company's electric generation operations;
•
Fixing the price of a portion of anticipated fuel purchases for the operation of the Company's power plants; and
•
Fixing the price of a portion of anticipated power purchases for the Company's retail sales.
NRG's trading and hedging activities are subject to limits within the Company's Risk Management Policy. 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, 2016, 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 2031;
•
Forward and financial contracts for the purchase of fuel commodities relating to the forecasted usage of NRG's generation assets through 2018; and
•
Other energy derivatives instruments extending through 2024.
Also, as of December 31, 2016, 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 2026;
•
Power tolling contracts through 2039;
•
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 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 December 31, 2016, NRG had interest rate derivative instruments on recourse debt extending through 2021 and non-recourse debt extending through 2036, 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 December 31, 2016 and 2015. 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
December 31, 2016
 
December 31, 2015
 
 
(In millions)
Emissions
Short Ton
—

 
1

Coal
Short Ton
41

 
35

Natural Gas
MMBtu
85

 
293

Oil
Barrel
1

 
1

Power
MWh
(28
)
 
(74
)
Capacity
MW/Day
(1
)
 
(1
)
Interest
Dollars
$
3,429

 
$
2,326

Equity
Shares
1

 
1


The decrease in the natural gas position was primarily the result of the settlement of generation hedge positions and retail hedge positions. The increase in the interest rate position was primarily the result of entering into new interest rate swaps to hedge the Term Loan Facility, as described in Note 12, Debt and Capital Leases.
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, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
Derivatives Designated as Cash Flow or Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate contracts current
$
—

 
$
—

 
$
28

 
$
42

Interest rate contracts long-term
12

 
—

 
41

 
68

Total Derivatives Designated as Cash Flow or Fair Value Hedges
12

 
—

 
69

 
110

Derivatives Not Designated as Cash Flow or Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate contracts current
—

 
—

 
7

 
5

Interest rate contracts long-term
37

 
—

 
12

 
13

Commodity contracts current
1,062

 
1,915

 
1,049

 
1,674

Commodity contracts long-term
140

 
305

 
241

 
412

Total Derivatives Not Designated as Cash Flow or Fair Value Hedges
1,239

 
2,220

 
1,309

 
2,104

Total Derivatives
$
1,251

 
$
2,220

 
$
1,378

 
$
2,214


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
 
Gross Amounts of Recognized Assets/Liabilities
 
Derivative Instruments
 
Cash Collateral (Held)/Posted
 
Net Amount
As of December 31, 2016
(In millions)
Commodity contracts:
 
 
 
 
 
 
 
Derivative assets
$
1,202

 
$
(1,005
)
 
$
(1
)
 
$
196

Derivative liabilities
(1,290
)
 
1,005

 
14

 
(271
)
Total commodity contracts
(88
)

—

 
13

 
(75
)
Interest rate contracts:
 
 
 
 
 
 
 
Derivative assets
49

 
(4
)
 
—

 
45

Derivative liabilities
(88
)
 
4

 
—

 
(84
)
Total interest rate contracts
(39
)
 
—

 
—

 
(39
)
Total derivative instruments
$
(127
)
 
$
—

 
$
13

 
$
(114
)
 
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, 2015
(In millions)
Commodity contracts:
 
 
 
 
 
 
 
Derivative assets
$
2,220

 
$
(1,616
)
 
$
(113
)
 
$
491

Derivative liabilities
(2,086
)
 
1,616

 
271

 
(199
)
Total commodity contracts
134

 
—

 
158

 
292

Interest rate contracts:
 
 
 
 
 
 
 
Derivative liabilities
(128
)
 
—

 
—

 
(128
)
Total derivative instruments
$
6


$
—


$
158

 
$
164


Accumulated Other Comprehensive Income
The following tables summarize the effects on NRG's accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:
 
Year Ended December 31, 2016
 
Interest
Rate
 
Total
 
(In millions)
Accumulated OCI balance at December 31, 2015
$
(101
)
 
$
(101
)
Reclassified from accumulated OCI to income:
 
 
 
Due to realization of previously deferred amounts
21

 
21

Mark-to-market of cash flow hedge accounting contracts
14

 
14

Accumulated OCI balance at December 31, 2016, net of $16 tax
$
(66
)
 
$
(66
)
Losses expected to be realized from other comprehensive loss during the next 12 months, net of $4 tax
$
(16
)
 
$
(16
)
There were no gains or losses recognized in income from the ineffective portion of cash flow hedges for the year ended December 31, 2016.
 
Year Ended December 31, 2015
 
Energy
Commodities
 
Interest
Rate
 
Total
 
(In millions)
Accumulated OCI balance at December 31, 2014
$
(1
)
 
$
(67
)
 
$
(68
)
Reclassified from accumulated OCI to income:
 
 
 
 
 
Due to realization of previously deferred amounts
1

 
14

 
15

Mark-to-market of cash flow hedge accounting contracts
—

 
(48
)
 
(48
)
Accumulated OCI balance at December 31, 2015, net of $16 tax
$
—

 
$
(101
)
 
$
(101
)
There were no gains or losses recognized in income from the ineffective portion of cash flow hedges for the year ended December 31, 2015.
 
Year Ended December 31, 2014
 
Energy
Commodities
 
Interest
Rate
 
Total
 
(In millions)
Accumulated OCI balance at December 31, 2013
$
(1
)
 
$
(22
)
 
$
(23
)
Reclassified from accumulated OCI to income:
 
 
 
 
 
Due to realization of previously deferred amounts
—

 
13

 
13

Mark-to-market of cash flow hedge accounting contracts
—

 
(58
)
 
(58
)
Accumulated OCI balance at December 31, 2014, net of $35 tax
$
(1
)
 
$
(67
)
 
$
(68
)

There were no gains or losses recognized in income from the ineffective portion of cash flow hedges for the year ended December 31, 2014.

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 December 31, 2016, the Company's regression analysis for Viento Funding II interest rate swaps, while positively correlated, did not meet the required threshold for cash flow hedge accounting. As a result, the Company de-designated the Viento Funding II cash flow hedges as of December 31, 2016, and will prospectively mark 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.
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Unrealized mark-to-market results
 
 
 
 
 
Reversal of previously recognized unrealized gains on settled positions related to economic hedges
$
(245
)
 
$
(275
)
 
$
(15
)
Reversal of acquired gain positions related to economic hedges
(60
)
 
(106
)
 
(333
)
Net unrealized gains on open positions related to economic hedges
20

 
9

 
361

Total unrealized mark-to-market (losses)/gains for economic hedging activities
(285
)
 
(372
)
 
13

Reversal of previously recognized unrealized losses/(gains) on settled positions related to trading activity
10

 
(46
)
 
1

Reversal of acquired gain positions related to trading activity
—

 
(14
)
 
(32
)
Net unrealized gains/(losses) on open positions related to trading activity
18

 
(16
)
 
45

Total unrealized mark-to-market gains/(losses) for trading activity
28

 
(76
)
 
14

Total unrealized (losses)/gains
$
(257
)
 
$
(448
)
 
$
27

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Unrealized (losses)/gains included in operating revenues
$
(837
)
 
$
(320
)
 
$
515

Unrealized gains/(losses) included in cost of operations
580

 
(128
)
 
(488
)
Total impact to statement of operations — energy commodities
$
(257
)
 
$
(448
)
 
$
27

Total impact to statement of operations — interest rate contracts
$
36

 
$
17

 
$
(31
)

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, 2016, the $20 million gain from economic hedge positions was primarily the result of an increase in the value of forward purchases of natural gas due to an increase in natural gas prices.
During 2016, the Company closed out and financially settled certain open positions with counterparties. The closure and financial settlements with these counterparties were necessary to manage the increase in collateral posting requirements following rating agency downgrades for GenOn and to reduce expected collateral costs associated with exchange cleared hedge transactions. GenOn realized approximately $38 million due to the closure and financial settlement of all open positions with one of GenOn's counterparties during the second quarter of 2016, for which $18 million, $19 million and $1 million would have been realized during the remainder of 2016, 2017 and 2018, respectively. During the third quarter of 2016, GenOn realized $98 million due to the closure and financial settlement of certain positions with an additional counterparty for which $82 million, $13 million and $3 million would have otherwise been realized in 2017, 2018, and 2019, respectively. GenOn has entered into additional transactions with NRG Power Marketing LLC and an external counterparty in order to re-hedge the positions settled with certain counterparties.
For the year ended December 31, 2015, the $9 million gain from economic hedge positions was primarily the result of an increase in the value of forward sales of electricity due to a decrease in power prices.
For the year ended December 31, 2014, the $361 million gain from economic hedge positions was primarily the result of an increase in the value of forward sales of natural gas due to a decrease in natural gas prices.
During 2014, NRG had interest rate swaps designated as cash flow hedges on the Dandan solar project. The notional amount on the swaps exceeded the actual debt draws on the project. As such, the Company discontinued cash flow hedge accounting for these contracts and $6 million of losses previously deferred in OCI was recognized in the statement of operations for the year ended December 31, 2014.
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 that have adequate assurance clauses that are in net liability positions as of December 31, 2016 was $36 million. The collateral required for contracts with credit rating contingent features that are in a net liability position as of December 31, 2016 was $56 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 $14 million as of December 31, 2016.
See Note 4, Fair Value of Financial Instruments, for discussion regarding concentration of credit risk.