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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments For cash and cash equivalents, funds deposited by counterparties, restricted cash, accounts and other receivables, accounts payable, and cash collateral paid and received in support of energy risk management activities, the carrying amounts approximate fair values because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy. The estimated carrying value and fair value of the Company's financial instruments not carried at fair market value are as follows:
| June 30, 2022 |  | December 31, 2021
(In millions) | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Convertible Senior Notes | $ | 575 |  |  | $ | 623 |  |  | $ | 518 |  |  | $ | 677 |
Other long-term debt, including current portion | 7,523 |  |  | 6,573 |  |  | 7,522 |  |  | 7,650 |
Total long-term debt, including current portion(a) | $ | 8,098 |  |  | $ | 7,196 |  |  | $ | 8,040 |  |  | $ | 8,327 |
(a)Excludes deferred financing costs, which are recorded as a reduction to long-term debt in 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. 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:
| June 30, 2022
(In millions) | Total |  | Level 1 |  | Level 2 |  | Level 3
Investments in securities (classified within other current and non-current assets) | $ | 17 |  |  | $ | — |  |  | $ | 17 |  |  | $ | — |
Nuclear trust fund investments: |  |  |  |  |  |  |
Cash and cash equivalents | 17 |  |  | 17 |  |  | — |  |  | — |
U.S. government and federal agency obligations | 96 |  |  | 94 |  |  | 2 |  |  | — |
Federal agency mortgage-backed securities | 103 |  |  | — |  |  | 103 |  |  | — |
Commercial mortgage-backed securities | 36 |  |  | — |  |  | 36 |  |  | — |
Corporate debt securities | 112 |  |  | — |  |  | 112 |  |  | — |
Equity securities | 392 |  |  | 392 |  |  | — |  |  | — |
Foreign government fixed income securities | 2 |  |  | — |  |  | 2 |  |  | — |
Other trust fund investments (classified within other non-current assets): |  |  |  |  |  |  |
U.S. government and federal agency obligations | 1 |  |  | 1 |  |  | — |  |  | — |
Derivative assets: |  |  |  |  |  |  |
Foreign exchange contracts | 6 |  |  | — |  |  | 6 |  |  | — |
Commodity contracts | 15,865 |  |  | 2,531 |  |  | 11,056 |  |  | 2,278 |
Measured using net asset value practical expedient: |  |  |  |  |  |  |
Equity securities — nuclear trust fund investments | 78 |  |  |  |  |  |  |
Equity securities (classified within other non-current assets) | 6 |  |  |  |  |  |  |
Total assets | $ | 16,731 |  |  | $ | 3,035 |  |  | $ | 11,334 |  |  | $ | 2,278 |
Derivative liabilities: |  |  |  |  |  |  |
Commodity contracts | 10,565 |  |  | 1,329 |  |  | 8,361 |  |  | 875 |
Total liabilities | $ | 10,565 |  |  | $ | 1,329 |  |  | $ | 8,361 |  |  | $ | 875 |
| December 31, 2021
(In millions) | Total |  | Level 1 |  | Level 2 |  | Level 3
Investments in securities (classified within other current and non-current assets) | $ | 32 |  |  | $ | 15 |  |  | $ | 17 |  |  | $ | — |
Nuclear trust fund investments: |  |  |  |  |  |  |
Cash and cash equivalents | 33 |  |  | 33 |  |  | — |  |  | — |
U.S. government and federal agency obligations | 112 |  |  | 111 |  |  | 1 |  |  | — |
Federal agency mortgage-backed securities | 100 |  |  | — |  |  | 100 |  |  | — |
Commercial mortgage-backed securities | 44 |  |  | — |  |  | 44 |  |  | — |
Corporate debt securities | 122 |  |  | — |  |  | 122 |  |  | — |
Equity securities | 494 |  |  | 494 |  |  | — |  |  | — |
Foreign government fixed income securities | 4 |  |  | — |  |  | 4 |  |  | — |
Other trust fund investments (classified within other non-current assets): |  |  |  |  |  |  |
U.S. government and federal agency obligations | 1 |  |  | 1 |  |  | — |  |  | — |
Derivative assets: |  |  |  |  |  |  |
Foreign exchange contracts | 1 |  |  | — |  |  | 1 |  |  | — |
Commodity contracts | 7,139 |  |  | 981 |  |  | 5,701 |  |  | 457 |
Measured using net asset value practical expedient: |  |  |  |  |  |  |
Equity securities — nuclear trust fund investments | 99 |  |  |  |  |  |  |
Equity securities (classified within other non-current assets) | 7 |  |  |  |  |  |  |
Total assets | $ | 8,188 |  |  | $ | 1,635 |  |  | $ | 5,990 |  |  | $ | 457 |
Derivative liabilities: |  |  |  |  |  |  |
Foreign exchange contracts | $ | 1 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |
Commodity contracts | 4,798 |  |  | 626 |  |  | 4,008 |  |  | 164 |
Total liabilities | $ | 4,799 |  |  | $ | 626 |  |  | $ | 4,009 |  |  | $ | 164 |
The following table reconciles, for the three and six months ended June 30, 2022 and 2021, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed consolidated financial statements, using significant unobservable inputs:
| Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
| Derivatives(a)
(In millions) | Three months ended June 30, 2022 |  | Three months ended June 30, 2021 |  | Six months ended June 30, 2022 |  | Six months ended June 30, 2021
Beginning balance | $ | 528 |  |  | $ | 159 |  |  | $ | 293 |  |  | $ | (16) |
Contracts added from Direct Energy acquisition | — |  |  | — |  |  | — |  |  | (15) |
Total gains realized/unrealized — included in earnings | 293 |  |  | 182 |  |  | 459 |  |  | 362 |
Purchases | 6 |  |  | 58 |  |  | 29 |  |  | 78 |
Transfers into Level 3(b) | 568 |  |  | 168 |  |  | 621 |  |  | 172 |
Transfers out of Level 3(b) | 8 |  |  | 7 |  |  | 1 |  |  | (7) |
Ending balance | $ | 1,403 |  |  | $ | 574 |  |  | $ | 1,403 |  |  | $ | 574 |
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 period end | $ | 297 |  |  | $ | 275 |  |  | $ | 534 |  |  | $ | 421 |
(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 Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in revenues and cost of operations. 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. These contracts are valued based on various valuation techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of the observable market data with similar characteristics. As of June 30, 2022, contracts valued with prices provided by models and other valuation techniques make up 14% of derivative assets and 8% of derivative liabilities. NRG's significant positions classified as Level 3 include physical and financial natural gas and power contracts executed in illiquid markets, as well as FTRs. The significant unobservable inputs used in developing fair value include illiquid natural gas and 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, 2022 and December 31, 2021:
| June 30, 2022
| Fair Value |  |  |  | Input/Range
(In millions) | Assets |  | Liabilities |  | Valuation Technique |  | Significant Unobservable Input |  | Low |  | High |  | Weighted Average
Natural Gas Contracts | $ | 55 |  |  | $ | 56 |  |  | Discounted Cash Flow |  | Forward Market Price (per MMBtu) |  | $ | 3 |  |  | $ | 17 |  |  | $ | 5 |
Power Contracts | 2,144 |  |  | 762 |  |  | Discounted Cash Flow |  | Forward Market Price (per MWh) |  | 7 |  |  | 263 |  |  | 56 |
FTRs | 79 |  |  | 57 |  |  | Discounted Cash Flow |  | Auction Prices (per MWh) |  | (307) |  |  | 75 |  |  | 1 |
| $ | 2,278 |  |  | $ | 875 |  |  |  |  |  |  |  |  |  |  |
| December 31, 2021
| Fair Value |  |  |  | Input/Range
(In millions) | Assets |  | Liabilities |  | Valuation Technique |  | Significant Unobservable Input |  | Low |  | High |  | Weighted Average
Natural Gas Contracts | $ | 16 |  |  | $ | 1 |  |  | Discounted Cash Flow |  | Forward Market Price (per MMBtu) |  | $ | 3 |  |  | $ | 40 |  |  | $ | 15 |
Power Contracts | 392 |  |  | 121 |  |  | Discounted Cash Flow |  | Forward Market Price (per MWh) |  | 3 |  |  | 212 |  |  | 35 |
FTRs | 49 |  |  | 42 |  |  | Discounted Cash Flow |  | Auction Prices (per MWh) |  | (122) |  |  | 43 |  |  | 0
| $ | 457 |  |  | $ | 164 |  |  |  |  |  |  |  |  |  |  |
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of June 30, 2022 and December 31, 2021:
Significant Unobservable Input |  | Position |  | Change In Input |  | Impact on Fair Value Measurement
Forward Market Price Natural Gas/Power |  | Buy |  | Increase/(Decrease) |  | Higher/(Lower)
Forward Market Price Natural Gas/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, 2022, the credit reserve resulted in a $5 million decrease primarily within cost of operations. As of December 31, 2021, the credit reserve resulted in a $11 million decrease primarily within 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 2021 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, as well as retail customer credit risk through its retail load activities. Counterparty Credit Risk The Company's counterparty credit risk policies are disclosed in its 2021 Form 10-K. As of June 30, 2022, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $3.9 billion and NRG held collateral (cash and letters of credit) against those positions of $2.5 billion, resulting in a net exposure of $1.5 billion. NRG periodically receives collateral from counterparties in excess of their exposure. Collateral amounts shown include such excess while net exposure shown excludes excess collateral received. Approximately 80% of the Company's exposure before collateral is expected to roll off by the end of 2023. 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 | 78 | %
Financial institutions | 22 |
Total as of June 30, 2022 | 100 | %
| Net Exposure (a)(b)
Category by Counterparty Credit Quality | (% of Total)
Investment grade | 52 | %
Non-investment grade/non-rated | 48 |
Total as of June 30, 2022 | 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 The Company currently has exposure to one wholesale counterparty in excess of 10% of total net exposure discussed above as of June 30, 2022. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration. During the first quarter of 2021, during Winter Storm Uri, the Company experienced a nonperformance by a counterparty in one of its bilateral financial hedging transactions, resulting in exposure of $403 million. The Company is pursuing all means available to enforce its obligations under this transaction but, given the size of the exposure and the counterparty filing for Chapter 11 bankruptcy protection, cannot determine with certainty what the amount of its ultimate recovery will be. The full exposure was provided for in the allowance for credit losses since March 31, 2021. RTOs and ISOs The Company participates in the organized markets of CAISO, ERCOT, AESO, IESO, ISO-NE, MISO, NYISO and PJM, known as RTOs or ISOs. Trading in the majority of these markets is approved by FERC, whereas in the case of ERCOT, it is approved by the PUCT, and whereas in the case of AESO and IESO, both exist provincially with AESO primarily subject to Alberta Utilities Commission and the IESO to the Ontario Energy Board. These ISOs may include 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 the overall market and are excluded from the above exposures. Exchange Traded Transactions The Company enters into commodity transactions on registered exchanges, notably ICE, NYMEX and Nodal. 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 contracts, primarily solar PPAs. As external sources or observable market quotes are not always available to estimate such exposure, the Company values 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, 2022, aggregate credit risk exposure managed by NRG to these counterparties was approximately $1.1 billion for the next five years. Retail Customer Credit Risk The Company is exposed to retail credit risk through the Company's retail electricity and gas providers, which serve Home and Business customers. Retail credit risk results in losses when a customer fails to pay for services rendered. The losses may result from both non-payment 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, 2022, the Company's retail customer credit exposure to Home and Business customers was diversified across many customers and various industries, as well as government entities. Current economic conditions may affect the Company’s customers’ ability to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in credit losses.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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