Accounting for Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2021

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 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, foreign exchange 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 and gas 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 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 and gas 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, 2021, 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 2036;

•Forward and financial contracts for the purchase of fuel commodities relating to the forecasted usage of NRG's generation assets through 2024;

•Other energy derivatives instruments extending through 2029.

Also, as    of December 31, 2021, 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 2036;

•Load-following forward natural gas sale contracts extending through 2032;

•Power tolling contracts through 2038;

•Coal purchase contracts through 2023;

•Power transmission contracts through 2025;

•Natural gas transportation contracts through 2034;

•Natural gas storage agreements through 2025; and

•Coal transportation contracts through 2029.

Interest Rate Swaps

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.

Foreign Exchange Contracts

In order to mitigate foreign exchange risk primarily associated with the purchase of USD denominated natural gas for the Company's Canadian business, NRG enters into foreign exchange contract agreements through 2025.

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, 2021 and 2020. 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, 2021	December 31, 2020
Emissions	Short Ton	1	1
Renewables Energy Certificates	Certificates	13	5
Coal	Short Ton	19	2
Natural Gas	MMBtu	813	(286)
Oil	Barrels	1	—
Power	MWh	185	57
Capacity	MW/Day	—	(1)
Foreign Exchange	Dollars	279	—

The increase in positions is primarily the result of Direct Energy acquisition.

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, 2021		December 31, 2020		December 31, 2021		December 31, 2020
Derivatives Not Designated as Cash Flow or Fair Value Hedges:
Foreign exchange contracts - current	$	—	$	—	$	1	$	—
Foreign exchange contracts - long-term	1		—		—		—
Commodity contracts- current	4,613		560		3,386		499
Commodity contracts- long-term	2,526		261		1,412		385
Total Derivatives Not Designated as Cash Flow or Fair Value Hedges	$	7,140	$	821	$	4,799	$	884

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, 2021
Foreign exchange contracts:
Derivative assets	$	1	$	(1)	$	—	$	—
Derivative liabilities	(1)		1		—		—
Total foreign exchange contracts	$	—	$	—	$	—	$	—
Commodity contracts:
Derivative assets	$	7,139	$	(4,440)	$	(831)	$	1,868
Derivative liabilities	(4,798)		4,440		17		(341)
Total commodity contracts	$	2,341	$	—	$	(814)	$	1,527
Total derivative instruments	$	2,341	$	—	$	(814)	$	1,527

	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)

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 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 foreign exchange and 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)	2021		2020		2019
Unrealized mark-to-market results
Reversal of previously recognized unrealized (gains) on settled positions related to economic hedges	$	(41)	$	(55)	$	(68)
Reversal of acquired loss positions related to economic hedges	256		4		6
Net unrealized gains/(losses) on open positions related to economic hedges	2,501		(68)		42
Total unrealized mark-to-market gains/(losses) for economic hedging activities	2,716		(119)		(20)
Reversal of previously recognized unrealized (gains) on settled positions related to trading activity	(18)		(20)		(11)
Reversal of acquired (gain) positions related to trading activity	(1)		—		—
Net unrealized (losses)/gains on open positions related to trading activity	(13)		15		31
Total unrealized mark-to-market (losses)/gains for trading activity	(32)		(5)		20
Total unrealized gains/(losses)	$	2,684	$	(124)	$	—

	Year Ended December 31,
(In millions)	2021		2020		2019
Unrealized (losses)/gains included in operating - commodities	$	(196)	$	90	$	53
Unrealized gains/(losses) included in cost of operations- commodities	2,880		(214)		(53)
Total impact to statement of operations- commodities	$	2,684	$	(124)	$	—
Total impact to statement of operations — interest rate contracts	$	—	$	—	$	(38)

        

The reversals of acquired loss/(gain) 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 revenue or cost of operations during the same period.

The gain from open economic hedge positions of $2.5 billion for the year ended December 31, 2021 was primarily the result of an increase in value of forward positions as a result of increases in natural gas and power prices.

The loss from open economic hedge positions of $68 million for the year ended December 31, 2020 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 gain from open economic hedge positions of $42 million for the year ended December 31, 2019 was 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 and trading agreements contain provisions that entitle the counterparty to demand that the Company post additional collateral if the counterparty determines that there has been deterioration in the Company's 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. In addition, as a result of the acquisition of Direct Energy from Centrica, certain of the Company’s agreements as of December 31, 2021, were still supported by credit support posted by Centrica, and as a result could require the Company to post collateral upon a deterioration or downgrade of Centrica. The collateral potentially required for contracts with adequate assurance clauses that are in net liability positions as of December 31, 2021 was $1.0 billion. 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 $70 million as of December 31, 2021. In the event of a downgrade in the Company's credit rating and 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, 2021.

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