Fair Value of Financial Instruments (GenOn, GenOn Americas Generation and GenOn Mid-Atlantic)

This footnote should be read in conjunction with the complete description under Note 4, Fair Value of Financial Instruments, to the Registrants' 2016 Form 10-K.

For cash and cash equivalents, restricted cash, funds deposited by counterparties, accounts receivable, accounts payable, accrued liabilities, and cash collateral posted and received in support of energy risk management activities, the carrying amounts approximate fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.

As a result of the GenOn Entities filing for relief under Chapter 11 as further discussed in Note 3, Chapter 11 Cases, GenOn and GenOn Americas Generation's long-term debt, including current portion, are classified as liabilities subject to compromise as of September 30, 2017.

The estimated carrying amount and fair value of GenOn's long-term debt, including current portion, was $2,752 million and $1,946 million as of December 31, 2016, respectively, of which $1,850 million and $96 million was classified as Level 2 and Level 3, respectively, within the fair value hierarchy. The carrying amount and fair value of long-term debt — affiliate is $125 million as of September 30, 2017 and is classified as Level 3 within the fair value hierarchy.

The estimated carrying amount and fair value of GenOn Americas Generation's long-term debt was $745 million and $570 million as of December 31, 2016, respectively, and is classified as Level 2 within the fair value hierarchy.

The fair value of long-term debt was estimated using reported market prices for instruments that are publicly traded and are classified as Level 2 within the fair value hierarchy. The fair value of non-publicly traded debt and long-term debt — affiliate is based on the income approach valuation technique using current interest rates for similar instruments with equivalent credit quality and is classified as Level 3 within the fair value hierarchy.

Recurring Fair Value Measurements

Derivative assets and liabilities are carried at fair market value. Realized and unrealized gains and losses included in earnings that are related to energy derivatives are recorded in operating revenues and cost of operations.

GenOn

The following tables present assets and liabilities (including affiliate amounts) measured and recorded at fair value on GenOn’s consolidated balance sheet on a recurring basis and their level within the fair value hierarchy:



	As of September 30, 2017
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	56	$	—	$	56
Derivative liabilities:
Commodity contracts	$	—	$	36	$	5	$	41
Other assets ^(b)	$	8	$	—	$	—	$	8

(a) There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2017.

(b) Relates to mutual funds held in a rabbi trust for non-qualified deferred compensation plans for certain key and highly compensated employees.



	As of December 31, 2016
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	122	$	2	$	124
Derivative liabilities:
Commodity contracts	$	—	$	119	$	3	$	122
Other assets ^(b)	$	10	$	—	$	—	$	10

(a) There were no transfers between Levels 1 and 2 during the year ended December 31, 2016.

(b) Relates to mutual funds held in a rabbi trust for non-qualified deferred compensation plans for certain key and highly compensated employees.

The following table reconciles, for the three and nine months ended September 30, 2017 and 2016, the beginning and ending balances for derivatives that are recognized at fair value in GenOn's consolidated financial statements at least annually using significant unobservable inputs:



	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
	Derivatives ^(a)						Derivatives^(a)
	(In millions)
Beginning balance	$	(2	)	$	(11	)	$	(1	)	$	(12	)
Total (losses)/gains included in earnings — realized/unrealized	(1		)	7			(2		)	6
Purchases	(2		)	(1		)	(2		)	1
Transfers out of Level 3 ^(b)	—			1			—			1
Ending balance	$	(5	)	$	(4	)	$	(5	)	$	(4	)
(Losses)/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 September 30	$	(1	)	$	5		$	(3	)	$	(3	)

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

(b) Transfers out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period.

GenOn Americas Generation

The following tables present assets and liabilities (including affiliate amounts) measured and recorded at fair value on GenOn Americas Generation's consolidated balance sheet on a recurring basis and their level within the fair value hierarchy:



	As of September 30, 2017
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	89	$	5	$	94
Derivative liabilities:
Commodity contracts	$	—	$	88	$	6	$	94

(a) There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2017.



	As of December 31, 2016
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	209	$	5	$	214
Derivative liabilities:
Commodity contracts	$	—	$	212	$	5	$	217

(a) There were no transfers between Levels 1 and 2 during the year ended December 31, 2016.

The following table reconciles, for the three and nine months ended September 30, 2017 and 2016, the beginning and ending balances for GenOn Americas Generation's derivatives 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,						Nine months ended September 30,
	2017			2016			2017			2016
	Derivatives ^(a)						Derivatives ^(a)
	(In millions)
Beginning balance	$	—		$	1		$	—		$	1
Total losses included in earnings — realized/unrealized	(1		)	—			(1		)	(1		)
Purchases	—			(1		)	—			—
Transfers out of Level 3 ^(b)	—			1			—			1
Ending balance	$	(1	)	$	1		$	(1	)	$	1
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 September 30	$	(1	)	$	—		$	(1	)	$	—

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

(b) Transfers out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period.

GenOn Mid-Atlantic

The following tables present assets and liabilities (including affiliate amounts) measured and recorded at fair value on GenOn Mid-Atlantic's consolidated balance sheet on a recurring basis and their level within the fair value hierarchy:



	As of September 30, 2017
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	12	$	—	$	12
Derivative liabilities:
Commodity contracts	$	—	$	13	$	1	$	14

(a) There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2017.



	As of December 31, 2016
	Fair Value
	Level 1 ^(a)		Level 2 ^(a)		Level 3		Total
	(In millions)
Derivative assets:
Commodity contracts	$	—	$	47	$	1	$	48
Derivative liabilities:
Commodity contracts	$	—	$	45	$	1	$	46

(a) There were no transfers between Levels 1 and 2 during the year ended December 31, 2016.

The following table reconciles, for the three and nine months ended September 30, 2017 and 2016, the beginning and ending balances for GenOn Mid-Atlantic's derivatives 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,					Nine months ended September 30,
	2017			2016		2017			2016
	Derivatives^(a)					Derivatives ^(a)
	(In millions)
Beginning balance	$	—		$	1	$	—		$	2
Total losses included in earnings — realized/unrealized	(1		)	—		(1		)	(1		)
Ending balance	$	(1	)	$	1	$	(1	)	$	1
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 September 30	$	(1	)	$	—	$	(1	)	$	—

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

Derivative Fair Value Measurements

A portion of the Registrants' contracts are exchange-traded contracts with readily available quoted market prices. A majority of the Registrants' 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. 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 September 30, 2017, contracts valued with prices provided by models and other valuation techniques make up 0% of GenOn's derivative assets and 12% of GenOn's derivative liabilities, 5% of GenOn Americas Generation’s derivative assets and 6% of GenOn Americas Generation's derivative liabilities and 0% of GenOn Mid-Atlantic’s derivative assets and 7% of GenOn Mid-Atlantic's derivative liabilities.

The Registrants' significant positions classified as Level 3 include financial power and physical coal executed in illiquid markets as well as financial transmission rights, or FTRs. The significant unobservable inputs used in developing fair value include illiquid power and coal 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, the Registrants use 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 Registrants' Level 3 positions as of September 30, 2017 and December 31, 2016:

GenOn



	Significant Unobservable Inputs
	September 30, 2017
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
FTRs	$	—	$	5	Discounted Cash Flow	Auction Prices (per MWh)	$	(3	)	$	1	$	—
	$	—	$	5



	Significant Unobservable Inputs
	December 31, 2016
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	1	$	—	Discounted Cash Flow	Forward Market Price (per MWh)	$	29		$	59	$	43
Coal Contracts	—		1		Discounted Cash Flow	Forward Market Price (per ton)	42			51		45
FTRs	1		2		Discounted Cash Flow	Auction Prices (per MWh)	(2		)	3		—
	$	2	$	3

GenOn Americas Generation



	Significant Unobservable Inputs
	September 30, 2017
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
FTRs	$	5	$	6	Discounted Cash Flow	Auction Prices (per MWh)	$	(3	)	$	1	$	—
	$	5	$	6



	Significant Unobservable Inputs
	December 31, 2016
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low			High		Weighted Average
	(In millions)
Power Contracts	$	1	$	—	Discounted Cash Flow	Forward Market Price (per MWh)	$	29		$	59	$	43
Coal Contracts	1		1		Discounted Cash Flow	Forward Market Price (per ton)	42			51		45
FTRs	3		4		Discounted Cash Flow	Auction Prices (per MWh)	(2		)	3		—
	$	5	$	5

GenOn Mid-Atlantic



	Significant Unobservable Inputs
	September 30, 2017
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average
	(In millions)
FTRs	$	—	$	1	Discounted Cash Flow	Auction Prices (per MWh)	$	—	$	1	$	—
	$	—	$	1



	Significant Unobservable Inputs
	December 31, 2016
	Fair Value						Input/Range
	Assets		Liabilities		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average
	(In millions)
Power Contracts	$	1	$	—	Discounted Cash Flow	Forward Market Price (per MWh)	$	29	$	59	$	43
FTRs	—		1		Discounted Cash Flow	Auction Prices (per MWh)	—		1		—
	$	1	$	1

The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of September 30, 2017 and December 31, 2016:



Significant Unobservable Input	Position	Change In Input	Impact on Fair Value Measurement
Forward Market Price Power/Coal	Buy	Increase/(Decrease)	Higher/(Lower)
Forward Market Price Power/Coal	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 Registrants apply a non-performance/credit reserve to reflect credit risk which is calculated based on published default probabilities. To the extent that the Registrants' net exposure under a specific master agreement is an asset, the Registrants use the counterparty's default swap rate. The credit reserve is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume the Registrants' liabilities or that a market participant would be willing to pay for the Registrants' assets. The Registrants' credit reserves were as follows:



	As of September 30, 2017		As of December 31, 2016
	(In millions)
GenOn	$	—	$	1
GenOn Americas Generation	—		1

There were no non-performance/credit reserves for GenOn Mid-Atlantic as of September 30, 2017 and December 31, 2016.

Under the guidance of ASC 815, entities may choose to offset cash collateral posted or received against the fair value of derivative positions executed with the same counterparties under the same master netting agreements. The Registrants have chosen not to offset positions as defined in ASC 815. As of September 30, 2017, GenOn recorded $72 million of cash collateral posted on its balance sheet related to fair value of derivative positions, which includes $25 million of collateral posted to NRG. As of September 30, 2017, GenOn Americas Generation recorded $70 million of cash collateral posted on its balance sheet related to fair value of derivative positions, which includes $25 million of collateral posted to NRG. As of September 30, 2017, GenOn Mid-Atlantic had no outstanding cash collateral posted or received on its balance sheet.

Concentration of Credit Risk

In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Registrants' 2016 Form 10-K, the following is a discussion of the concentration of credit risk for the Registrants’ financial instruments. 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. The Registrants are exposed to counterparty credit risk through various activities including wholesale sales and fuel purchases.

Counterparty Credit Risk

The Registrants' counterparty credit risk policies are disclosed in their 2016 Form 10-K. As of September 30, 2017, GenOn's counterparty credit exposure was $47 million and GenOn held $0 collateral (cash and letters of credit) against those positions, resulting in a net exposure of $47 million. Approximately 94% of GenOn's exposure before collateral is expected to roll off by the end of 2018. As of September 30, 2017, GenOn Americas Generation’s counterparty credit exposure was $47 million, and GenOn Americas Generation held $0 collateral (cash and letters of credit) against those positions, resulting in a net exposure of $47 million. Approximately 94% of GenOn Americas Generation’s exposure before collateral is expected to roll off by the end of 2018. As of September 30, 2017, GenOn Mid-Atlantic had no counterparty credit exposure. 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 the Registrants with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market, 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)}(% of Total)
Category by Industry Sector	GenOn		GenOn Americas Generation		GenOn Mid-Atlantic
Utilities, energy merchants, marketers and other	100	%	100	%	—	%
Total as of September 30, 2017	100	%	100	%	—	%



	Net Exposure ^{(a) (b)}(% of Total)
Category by Counterparty Credit Quality	GenOn		GenOn Americas Generation		GenOn Mid-Atlantic
Investment grade	96	%	96	%	—	%
Non-Investment grade/Non-rated	4		4		—
Total as of September 30, 2017	100	%	100	%	—	%


(a)	Counterparty credit exposure excludes 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 Registrants have counterparty credit risk exposure to certain counterparties, each of which represent more than 10% of their respective total net exposure discussed above. The aggregate of such counterparties' exposure was $41 million, $41 million and zero for GenOn, GenOn Americas Generation and GenOn Mid-Atlantic, respectively. 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, the Registrants do not anticipate a material impact on their financial position or results of operations from nonperformance by any of their counterparties.

RTOs and ISOs

The Registrants participate in the organized markets of CAISO, ISO-NE, MISO, NYISO and PJM, known as RTO or ISOs. Trading in these markets is approved by FERC 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 the Registrants' applicable share of the overall market and is excluded from the above exposure.

Exchange Traded Transactions

The Registrants enter 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.