Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value of Financial Instruments Disclosure [Abstract]

Fair Value of Financial Instruments

Note 6 — Fair Value of Financial Instruments

The estimated carrying values and fair values of NRG's recorded financial instruments are as follows:

	Carrying Amount				Fair Value
	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
	(In millions)
Assets:
Cash and cash equivalents	$	1,127	$	2,951	$	1,127	$	2,951
Funds deposited by counterparties	259		408		259		408
Restricted cash	441		8		441		8
Cash collateral paid in support of energy     risk management activities	316		323		316		323
Investment in available-for-sale securities (classified within other non-current assets):
Debt securities	8		8		8		8
Marketable equity securities	1		3		1		3
Trust fund investments	401		414		401		414
Notes receivable	131		177		136		190
Derivative assets	3,121		2,722		3,121		2,722
Restricted cash supporting funded letter of credit facility	—		1,300		—		1,300
Liabilities:
Long-term debt, including current portion	9,185		9,104		8,830		9,236
Funded letter of credit	—		1,300		—		1,295
Cash collateral received in support of energy    risk management activities	259		408		259		408
Derivative liabilities	$	2,497	$	2,050	$	2,497	$	2,050

Recurring Fair Value Measurements

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

(In millions)	Fair Value
As of September 30, 2011	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	1,127	$	—	$	—	$	1,127
Funds deposited by counterparties	259		—		—		259
Restricted cash	441		—		—		441
Cash collateral paid in support of energy risk management activities	316		—		—		316
Investment in available-for-sale securities (classified within other     non-current assets):
Debt securities	—		—		8		8
Marketable equity securities	1		—		—		1
Trust fund investments:
Cash and cash equivalents	1		—		—		1
U.S. government and federal agency obligations	45		—		—		45
Federal agency mortgage-backed securities	—		66		—		66
Commercial mortgage-backed securities	—		7		—		7
Corporate debt securities	—		52		—		52
Marketable equity securities	193		—		33		226
Foreign government fixed income securities	—		4		—		4
Derivative assets:
Commodity contracts	1,513		1,569		39		3,121
Total assets	$	3,896	$	1,698	$	80	$	5,674
Cash collateral received in support of energy risk management activities	$	259	$	—	$	—	$	259
Derivative liabilities:
Commodity contracts	1,564		805		46		2,415
Interest rate contracts	—		82		—		82
Total liabilities	$	1,823	$	887	$	46	$	2,756

(In millions)	Fair Value
As of December 31, 2010	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2,951	$	—	$	—	$	2,951
Funds deposited by counterparties	408		—		—		408
Restricted cash	8		—		—		8
Cash collateral paid in support of energy risk management activities	323		—		—		323
Investment in available-for-sale securities (classified within other non-current assets):
Debt securities	—		—		8		8
Marketable equity securities	3		—		—		3
Trust fund investments:
Cash and cash equivalents	9		—		—		9
U.S. government and federal agency obligations	27		—		—		27
Federal agency mortgage-backed securities	—		57		—		57
Commercial mortgage-backed securities	—		11		—		11
Corporate debt securities	—		56		—		56
Marketable equity securities	213		—		39		252
Foreign government fixed income securities	—		2		—		2
Derivative assets:
Commodity contracts	652		2,046		24		2,722
Restricted cash supporting funded letter of credit facility	1,300		—		—		1,300
Total assets	$	5,894	$	2,172	$	71	$	8,137
Cash collateral received in support of energy risk management activities	$	408	$	—	$	—	$	408
Derivative liabilities:
Commodity contracts	660		1,251		51		1,962
Interest rate contracts	—		88		—		88
Total liabilities	$	1,068	$	1,339	$	51	$	2,458

There were no transfers during the three months and nine months ended September 30, 2011, and 2010, between Levels 1 and 2. The following tables reconcile, for the three months and nine months ended September 30, 2011, and 2010, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements at least annually using significant unobservable inputs:

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Three months ended September 30, 2011												Nine months ended September 30, 2011
	Debt Securities			Trust Fund Investments									Debt Securities		Trust Fund Investments
(In millions)							Derivatives(a)			Total								Derivatives(a)			Total
Beginning Balance	$	9		$	41		$	(26	)	$	24		$	8	$	39		$	(27	)	$	20
Total gains/(losses) - realized/unrealized:
Included in earnings	—			—			—			—			—		—			19			19
Included in OCI	(1		)	—			—			(1		)	—		—			—			—
Included in nuclear decommissioning obligations	—			(8		)	—			(8		)	—		(7		)	—			(7		)
Purchases	—			—			(2		)	(2		)	—		1			6			7
Transfers into Level 3 (b)	—			—			13			13			—		—			(17		)	(17		)
Transfers out of Level 3 (b)	—			—			8			8			—		—			12			12
Ending balance as of September 30, 2011	$	8		$	33		$	(7	)	$	34		$	8	$	33		$	(7	)	$	34
The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of September 30, 2011	$	—		$	—		$	(1	)	$	(1	)	$	—	$	—		$	6		$	6

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Three months ended September 30, 2010											Nine months ended September 30, 2010
	Debt Securities			Trust Fund Investments								Debt Securities			Trust Fund Investments
(In millions)						Derivatives(a)			Total								Derivatives(a)			Total
Beginning Balance	$	10		$	32	$	(76	)	$	(34	)	$	9		$	37	$	(13	)	$	33
Total gains/(losses) - realized/unrealized:
Included in earnings	3			—		18			21			3			—		(13		)	(10		)
Included in OCI	(1		)	—		—			(1		)	—			—		—			—
Included in nuclear decommissioning obligations	—			5		—			5			—			—		—			—
Purchases	—			—		(10		)	(10		)	—			—		(1		)	(1		)
Sales	(5		)	—		—			(5		)	(5		)	—		—			(5		)
Transfers into Level 3 (b)	—			—		31			31			—			—		(16		)	(16		)
Transfers out of Level 3 (b)	—			—		(8		)	(8		)	—			—		(2		)	(2		)
Ending balance as of September 30, 2010	$	7		$	37	$	(45	)	$	(1	)	$	7		$	37	$	(45	)	$	(1	)
The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of September 30, 2010	$	—		$	—	$	12		$	12		$	—		$	—	$	(24	)	$	(24	)

(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 into/out are with Level 2.

Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in operating revenues and cost of operations.

In determining the fair value of NRG's Level 2 and 3 derivative contracts, NRG applies a credit reserve to reflect credit risk which is calculated based on credit default swaps. As of September 30, 2011, the credit reserve resulted in a $15 million decrease in fair value which is composed of a $5 million loss in OCI and a $10 million loss in operating revenue and cost of operations. As of September 30, 2010, the credit reserve resulted in a $6 million decrease in fair value which is composed of a $3 million loss in OCI and a $3 million loss 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 2010 Form 10-K, the following item 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 monitors and manages counterparty credit risk through credit policies that include: (i) an established credit approval process; (ii) daily monitoring of counterparties' credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting arrangements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty. Risk surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty credit risk with a diversified portfolio of counterparties. The Company also has credit protection within various agreements to call on additional collateral support if and when necessary. Cash margin is collected and held at NRG to cover the credit risk of the counterparty until positions settle.

As of September 30, 2011, counterparty credit exposure to a significant portion of the Company's counterparties was $1.2 billion and NRG held collateral (cash and letters of credit) against those positions of $262 million, resulting in a net exposure of $938 million. Counterparty credit exposure is discounted at the risk free rate. The following tables highlight the counterparty credit quality and the net counterparty credit exposure by industry sector. 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 Normal Purchase Normal Sale, or NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.

	Net Exposure (a)
Category	(% of Total)
Financial institutions	55	%
Utilities, energy merchants, marketers and other	37
Coal and emissions	5
ISOs	3
Total as of September 30, 2011	100	%

	Net Exposure (a)
Category	(% of Total)
Investment grade	75	%
Non-Investment grade	1
Non-rated (b)	24
Total as of September 30, 2011	100	%

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

(b) For non-rated counterparties, the majority are related to ISO and municipal public power entities, which are considered investment grade equivalent ratings based on NRG's internal credit ratings.

NRG has counterparty credit risk exposure to certain counterparties representing more than 10% of total net exposure discussed above and the aggregate of such counterparties was $263 million. Approximately 73% of NRG's positions relating to this credit risk roll-off by the end of 2012. 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.

Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, South Central load obligations, solar PPA's, and a coal supply agreement. As external sources or observable market quotes are not available to estimate such exposure, the Company valued 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 September 30, 2011, credit risk exposure to these counterparties is approximately $686 million for the next five years. This amount excludes potential credit exposure for projects with long term PPAs that have not reached commercial operations. Many of these power contracts are with utilities or public power entities that have strong credit quality and specific public utility commission or other regulatory support. In the case of the coal supply agreement, NRG holds a lien against the underlying asset. These factors significantly reduce the risk of loss.

Retail Customer Credit Risk

NRG is exposed to credit risk through the Company's competitive electricity supply business, which serves retail customers. Retail credit risk results 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. NRG 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 September 30, 2011, the Company's retail customer credit exposure to C&I customers was diversified across many customers and various industries, with a significant portion of the exposure attributable to government entities.

NRG is also exposed to retail customer credit risk relating to its Mass customers, which may result in a write-off of bad debt. During 2011, the Company continued to experience improved customer payment behavior, but current economic conditions may affect the ability of the Company's customers to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in bad debt expense.

This footnote should be read in conjunction with the complete description under Note 5, Fair Value of Financial Instruments, to the Company's 2010 Form 10-K.