Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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

	As of June 30, 2019				As of December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)
Assets:
Notes receivable	$	12	$	8	$	17	$	14
Liabilities:
Long-term debt, including current portion (a)	5,951		6,422		6,591		6,697

(a) 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, 2019 and December 31, 2018:

	As of June 30, 2019				As of December 31, 2018
	Level 2		Level 3		Level 2		Level 3
	(In millions)
Long-term debt, including current portion	$	6,305	$	117	$	6,528	$	169

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, 2019
(In millions)	Total		Level 1		Level 2		Level 3
Investments in securities (classified within other current and non-current assets)	$	38	$	—	$	19	$	19
Nuclear trust fund investments:
Cash and cash equivalents	25		25		—		—
U.S. government and federal agency obligations	57		57		—		—
Federal agency mortgage-backed securities	92		—		92		—
Commercial mortgage-backed securities	29		—		29		—
Corporate debt securities	102		—		102		—
Equity securities	366		366		—		—
Foreign government fixed income securities	4		—		4		—
Other trust fund investments:
U.S. government and federal agency obligations	1		1		—		—
Derivative assets:
Commodity contracts	1,276		131		770		375
Measured using net asset value practical expedient:
Equity securities — nuclear trust fund investments	73
Equity securities	9
Total assets	$	2,072	$	580	$	1,016	$	394
Derivative liabilities:
Commodity contracts	$	1,152	$	245	$	629	$	278
Total liabilities	$	1,152	$	245	$	629	$	278

	As of December 31, 2018
(In millions)	Total		Level 1		Level 2		Level 3
Investments in securities (classified within other current and non-current assets)	$	39	$	2	$	18	$	19
Nuclear trust fund investments:
Cash and cash equivalents	19		19		—		—
U.S. government and federal agency obligations	46		46		—		—
Federal agency mortgage-backed securities	100		—		100		—
Commercial mortgage-backed securities	22		—		22		—
Corporate debt securities	96		—		96		—
Equity securities	312		312		—		—
Foreign government fixed income securities	4		—		4		—
Other trust fund investments:
U.S. government and federal agency obligations	1		1		—		—
Derivative assets:
Commodity contracts	1,042		137		796		109
Interest rate contracts	39		—		39		—
Measured using net asset value practical expedient:
Equity securities — nuclear trust fund investments	64
Equity securities	8
Total assets	$	1,792	$	517	$	1,075	$	128
Derivative liabilities:
Commodity contracts	$	977	$	224	$	664	$	89
Total liabilities	$	977	$	224	$	664	$	89

There were no transfers during the three and six months ended June 30, 2019 and 2018 between Levels 1 and 2. The following tables reconcile, for the three and six months ended June 30, 2019 and 2018, 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, 2019								Six months ended June 30, 2019
(In millions)	Debt Securities		Derivatives(a)			Total			Debt Securities			Derivatives(a)			Total
Beginning balance	$	18	$	(2	)	$	16		$	19		$	20		$	39
Contracts added from acquisitions	—		(1		)	(1		)	—			(1		)	(1		)
Total gains/(losses) — realized/unrealized included in earnings	1		(17		)	(16		)	1			(27		)	(26		)
Cash received	—		—			—			(1		)	—			(1		)
Purchases	—		(10		)	(10		)	—			(12		)	(12		)
Transfers into Level 3(b)	—		113			113			—			130			130
Transfers out of Level 3(b)	—		14			14			—			(13		)	(13		)
Ending balance as of June 30, 2019	$	19	$	97		$	116		$	19		$	97		$	116
Gains/(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, 2019	$	1	$	(19	)	$	(18	)	$	1		$	(31	)	$	(30	)

(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, 2018								Six months ended June 30, 2018
(In millions)	Debt Securities		Derivatives(a)			Total			Debt Securities		Derivatives(a)			Total
Beginning balance	$	19	$	5		$	24		$	19	$	(15	)	$	4
Contracts added in XOOM acquisition	—		12			12			—		12			12
Total (losses) — realized/unrealized included in earnings	—		(27		)	(27		)	—		(16		)	(16		)
Purchases	—		(4		)	(4		)	—		(3		)	(3		)
Transfers into Level 3(b)	—		193			193			—		197			197
Transfers out of Level 3(b)	—		(5		)	(5		)	—		(1		)	(1		)
Ending balance as of June 30, 2018	$	19	$	174		$	193		$	19	$	174		$	193
(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	$	—	$	(27	)	$	(27	)	$	—	$	(15	)	$	(15	)

(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. 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, 2019, contracts valued with prices provided by models and other valuation techniques make up 29% of derivative assets and 24% of 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, 2019 and December 31, 2018:

	June 30, 2019
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	347	$	261	Discounted Cash Flow	Forward Market Price (per MWh)	$	4		$	142	$	25
FTRs	28		17		Discounted Cash Flow	Auction Prices (per MWh)	(134		)	52		0
	$	375	$	278

	December 31, 2018
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	89	$	75	Discounted Cash Flow	Forward Market Price (per MWh)	$	1		$	214	$	31
FTRs	20		14		Discounted Cash Flow	Auction Prices (per MWh)	(90		)	34		0
	$	109	$	89

The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of June 30, 2019 and December 31, 2018:

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, 2019 the credit reserve resulted in a $2 million decrease in cost of operations. As of December 31, 2018, the credit reserve did not result in a significant 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 2018 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 2018 Form 10-K. As of June 30, 2019, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $273 million and NRG held collateral (cash and letters of credit) against those positions of $93 million, resulting in a net exposure of $226 million. 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 60% of the Company's exposure before collateral is expected to roll off by the end of 2020. 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	84	%
Financial institutions	16
Total as of June 30, 2019	100	%

	Net Exposure (a) (b)
Category by Counterparty Credit Quality	(% of Total)
Investment grade	53	%
Non-investment grade/non-rated	47
Total as of June 30, 2019	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 $33 million in exposure to one wholesale counterparty in excess of 10% of total net exposure discussed above as of June 30, 2019. 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 its 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 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 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, 2019, aggregate credit risk exposure managed by NRG to these counterparties was approximately $524 million for the next five years, including exposure to PG&E as described below.

NRG, through its unconsolidated affiliates Ivanpah and Agua Caliente, has exposure to PG&E of approximately $337 million for the next five years. As a result of the bankruptcy filing by PG&E on January 29, 2019, it is uncertain whether and to what extent the bankruptcy may have an effect on these contracts. For further discussion see Note 11, Investments Accounted for Using the Equity Method and Variable Interest Entities, or VIEs.

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, 2019, 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.