Fair Value of Financial Instruments

This footnote should be read in conjunction with the complete description under Note 4, Fair Value of Financial Instruments, to the Company's 2017 Form 10-K.

For cash and cash equivalents, funds deposited by counterparties, accounts and other receivables, accounts payable, restricted cash, and cash collateral paid and received in support of energy risk management activities, the carrying amount approximates fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.

The estimated carrying amounts and fair values of NRG's recorded financial instruments not carried at fair market value are as follows:



	As of June 30, 2018				As of December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)
Assets:
Notes receivable^(a)	$	21	$	18	$	16	$	15
Liabilities:
Long-term debt, including current portion^(b)	15,969		16,163		16,603		16,894

(a) Includes the current portion of notes receivable which is recorded in prepayments and other current assets on the Company's consolidated balance sheets.

(b) Excludes deferred financing costs, which are recorded as a reduction to long-term debt on the Company's consolidated balance sheets.

The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 2 within the fair value hierarchy. The fair value of debt securities, non-publicly traded long-term debt and certain notes receivable of the Company are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments with equivalent credit quality and are classified as Level 3 within the fair value hierarchy. The following table presents the level within the fair value hierarchy for long-term debt, including current portion as of June 30, 2018 and December 31, 2017:



	As of June 30, 2018				As of December 31, 2017
	Level 2		Level 3		Level 2		Level 3
	(In millions)
Long-term debt, including current portion	$	9,586	$	6,577	$	8,934	$	7,960

Recurring Fair Value Measurements

Debt securities, equity securities, and trust fund investments, which are comprised of various U.S. debt and equity securities, and derivative assets and liabilities, are carried at fair market value.

The following tables present assets and liabilities measured and recorded at fair value on the Company's condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:



	As of June 30, 2018
	Fair Value
(In millions)	Total		Level 1		Level 2		Level 3
Investments in securities (classified within other non-current assets)	$	22	$	3	$	—	$	19
Nuclear trust fund investments:
Cash and cash equivalents	25		25		—		—
U.S. government and federal agency obligations	42		42		—		—
Federal agency mortgage-backed securities	97		—		97		—
Commercial mortgage-backed securities	16		—		16		—
Corporate debt securities	101		—		101		—
Equity securities	342		342		—		—
Foreign government fixed income securities	6		—		6		—
Other trust fund investments:
U.S. government and federal agency obligations	1		1		—		—
Derivative assets:
Commodity contracts	1,169		188		481		500
Interest rate contracts	108		—		108		—
Measured using net asset value practical expedient:
Equity securities — nuclear trust fund investments	65
Total assets	$	1,994	$	601	$	809	$	519
Derivative liabilities:
Commodity contracts	971		236		388		347
Interest rate contracts	23		—		23		—
Total liabilities	$	994	$	236	$	411	$	347



	As of December 31, 2017
	Fair Value
(In millions)	Total		Level 1		Level 2		Level 3
Investments in securities (classified within other non-current assets)	$	22	$	3	$	—	$	19
Nuclear trust fund investments:
Cash and cash equivalents	47		45		2		—
U.S. government and federal agency obligations	43		42		1		—
Federal agency mortgage-backed securities	82		—		82		—
Commercial mortgage-backed securities	14		—		14		—
Corporate debt securities	99		—		99		—
Equity securities	334		334		—		—
Foreign government fixed income securities	5		—		5		—
Other trust fund investments:
U.S. government and federal agency obligations	1		1		—		—
Derivative assets:
Commodity contracts	745		191		509		45
Interest rate contracts	53		—		53		—
Measured using net asset value practical expedient:
Equity securities — nuclear trust fund investments	68
Total assets	$	1,513	$	616	$	765	$	64
Derivative liabilities:
Commodity contracts	693		257		359		77
Interest rate contracts	59		—		59		—
Total liabilities	$	752	$	257	$	418	$	77

There were no transfers during the three and six months ended June 30, 2018 and 2017 between Levels 1 and 2. The following tables reconcile, for the three and six months ended June 30, 2018 and 2017, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed consolidated financial statements, at least annually, using significant unobservable inputs:



	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Three months ended June 30, 2018								Six months ended June 30, 2018
(In millions)	Debt Securities		Derivatives^(a)			Total			Debt Securities		Derivatives^(a)			Total
Beginning balance	$	19	$	(22	)	$	(3	)	$	19	$	(32	)	$	(13	)
Contracts acquired in Xoom acquisition	—		12			12			—		12			12
Total losses — realized/unrealized:
Included in earnings	—		(21		)	(21		)	—		(19		)	(19		)
Purchases	—		(4		)	(4		)	—		(3		)	(3		)
Transfers into Level 3 ^(b)	—		193			193			—		197			197
Transfers out of Level 3 ^(b)	—		(5		)	(5		)	—		(2		)	(2		)
Ending balance as of June 30, 2018	$	19	$	153		$	172		$	19	$	153		$	172
Losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2018	—		20			20			—		17			17


(a)	Consists of derivative assets and liabilities, net.


(b)	Transfers into/out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period. All transfers in/out are with Level 2.



	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Three months ended June 30, 2017								Six months ended June 30, 2017
(In millions)	Debt Securities		Derivatives^(a)			Total			Debt Securities		Derivatives^(a)			Total
Beginning balance	$	18	$	(56	)	$	(38	)	$	17	$	(68	)	$	(51	)
Total gains — realized/unrealized:
Included in earnings	—		40			40			1		46			47
Included in nuclear decommissioning obligation	—		—			—			—		—			—
Purchases	—		5			5			—		9			9
Transfers into Level 3 ^(b)	—		3			3			—		(5		)	(5		)
Transfers out of Level 3 ^(b)	—		(3		)	(3		)	—		7			7
Ending balance as of June 30, 2017	$	18	$	(11	)	$	7		$	18	$	(11	)	$	7
Gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of June 30, 2017	—		22			22			—		7			7


(a)	Consists of derivative assets and liabilities, net.


(b)	Transfers into/out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period. All transfers in/out are with Level 2.

Derivative Fair Value Measurements

A portion of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A majority of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available for the whole term or for certain delivery months or the contracts are retail and load following power contracts. These contracts are valued using various valuation techniques including but not limited to internal models that apply fundamental analysis of the market and corroboration with similar markets. As of June 30, 2018, contracts valued with prices provided by models and other valuation techniques make up 39% of the total derivative assets and 35% of the total derivative liabilities.

NRG's significant positions classified as Level 3 include physical and financial power executed in illiquid markets as well as financial transmission rights, or FTRs. The significant unobservable inputs used in developing fair value include illiquid power location pricing which is derived as a basis to liquid locations. The basis spread is based on observable market data when available or derived from historic prices and forward market prices from similar observable markets when not available. For FTRs, NRG uses the most recent auction prices to derive the fair value.

The following tables quantify the significant unobservable inputs used in developing the fair value of the Company's Level 3 positions as of June 30, 2018 and December 31, 2017:



	Significant Unobservable Inputs
	June 30, 2018
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	481	$	330	Discounted Cash Flow	Forward Market Price (per MWh)	$	6		$	198	$	35
FTRs	19		17		Discounted Cash Flow	Auction Prices (per MWh)	(48		)	47		—
	$	500	$	347



	Significant Unobservable Inputs
	December 31, 2017
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	34	$	65	Discounted Cash Flow	Forward Market Price (per MWh)	$	10		$	142	$	33
FTRs	11		12		Discounted Cash Flow	Auction Prices (per MWh)	(28		)	46		—
	$	45	$	77

The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of June 30, 2018 and December 31, 2017:



Significant Unobservable Input	Position	Change In Input	Impact on Fair Value Measurement
Forward Market Price Power	Buy	Increase/(Decrease)	Higher/(Lower)
Forward Market Price Power	Sell	Increase/(Decrease)	Lower/(Higher)
FTR Prices	Buy	Increase/(Decrease)	Higher/(Lower)
FTR Prices	Sell	Increase/(Decrease)	Lower/(Higher)

The fair value of each contract is discounted using a risk-free interest rate. In addition, the Company applies a credit reserve to reflect credit risk, which is calculated based on published default probabilities. As of June 30, 2018, the credit reserve resulted in a $4 million decrease in fair value which is composed of a $1 million loss in OCI and a $3 million loss in interest expense. As of December 31, 2017, the credit reserve resulted in no change in fair value in operating revenue and cost of operations.

Concentration of Credit Risk

In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Company's 2017 Form 10-K, the following is a discussion of the concentration of credit risk for the Company's contractual obligations. Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply arrangements, and retail customer credit risk through its retail load activities.

Counterparty Credit Risk

The Company's counterparty credit risk policies are disclosed in its 2017 Form 10-K. As of June 30, 2018, the Company's counterparty credit exposure, excluding credit risk exposure under certain long term agreements, was $289 million with net exposure of $112 million. NRG held collateral (cash and letters of credit) against those positions of $246 million. Approximately 77% of the Company's exposure before collateral is expected to roll off by the end of 2019. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.



	Net Exposure ^{(a) (b)}
Category by Industry Sector	(% of Total)
Utilities, energy merchants, marketers and other	76	%
Financial institutions	24
Total as of June 30, 2018	100	%



	Net Exposure ^{(a) (b)}
Category by Counterparty Credit Quality	(% of Total)
Investment grade	76	%
Non-Investment grade/Non-Rated	24
Total as of June 30, 2018	100	%


(a)	Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices.


(b)	The figures in the tables above exclude potential counterparty credit exposure related to RTOs, ISOs, registered commodity exchanges and certain long term contracts.

NRG has counterparty credit risk exposure to certain counterparties, each of which represent more than 10% of total net exposure discussed above. The aggregate of such counterparties' exposure was $49 million as of June 30, 2018. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration. Given the credit quality, diversification and term of the exposure in the portfolio, NRG does not anticipate a material impact on the Company's financial position or results of operations from nonperformance by any of NRG's counterparties.

RTOs and ISOs

The Company participates in the organized markets of CAISO, ERCOT, ISO-NE, MISO, NYISO and PJM, known as RTOs or ISOs. Trading in these markets is approved by FERC, or in the case of ERCOT, approved by the PUCT and includes credit policies that, under certain circumstances, require that losses arising from the default of one member on spot market transactions be shared by the remaining participants. As a result, the counterparty credit risk to these markets is limited to NRG’s share of overall market and are excluded from the above exposures.

Exchange Traded Transactions

The Company enters into commodity transactions on registered exchanges, notably ICE and NYMEX. These clearinghouses act as the counterparty and transactions are subject to extensive collateral and margining requirements. As a result, these commodity transactions have limited counterparty credit risk.

Long Term Contracts

Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, Gulf Coast load obligations, and wind and solar PPAs. As external sources or observable market quotes are not available to estimate such exposure, the Company estimates its credit exposure for these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. Based on these valuation techniques, as of June 30, 2018, aggregate credit risk exposure managed by NRG to these counterparties was approximately $4.1 billion, including $2.5 billion related to assets of NRG Yield, Inc., for the next five years. This amount excludes potential credit exposures for projects with long-term PPAs that have not reached commercial operations. The majority of these power contracts are with utilities or public power entities with strong credit quality and public utility commission or other regulatory support. However, such regulated utility counterparties can be impacted by changes in government regulations or treatment by regulatory agencies which NRG is unable to predict.

Retail Customer Credit Risk

The Company is exposed to retail credit risk through the Company's retail electricity providers, which serve C&I customers and the Mass market. Retail credit risk results in losses when a customer fails to pay for services rendered. The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value. The Company manages retail credit risk through the use of established credit policies that include monitoring of the portfolio and the use of credit mitigation measures such as deposits or prepayment arrangements.

As of June 30, 2018, the Company's retail customer credit exposure to C&I and Mass customers was diversified across many customers and various industries, as well as government entities.