filings.toolsItem 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions, except for per share amounts) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Total operating revenues | $ | 6,609 | $ | 2,809 | $ | 19,943 | $ | 7,066 | |||||||||||||||
| Operating Costs and Expenses | |||||||||||||||||||||||
| Cost of operations (excluding depreciation and amortization shown below) | 3,692 | 2,034 | 13,496 | 4,925 | |||||||||||||||||||
| Depreciation and amortization | 199 | 99 | 569 | 318 | |||||||||||||||||||
| Impairment losses | — | 29 | 306 | 29 | |||||||||||||||||||
| Selling, general and administrative costs | 318 | 216 | 973 | 592 | |||||||||||||||||||
| Provision for credit losses | 64 | 26 | 715 | 74 | |||||||||||||||||||
| Acquisition-related transaction and integration costs | 17 | 12 | 81 | 13 | |||||||||||||||||||
| Total operating costs and expenses | 4,290 | 2,416 | 16,140 | 5,951 | |||||||||||||||||||
| Gain on sale of assets | — | — | 17 | 6 | |||||||||||||||||||
| Operating Income | 2,319 | 393 | 3,820 | 1,121 | |||||||||||||||||||
| Other Income/(Expense) | |||||||||||||||||||||||
| Equity in earnings of unconsolidated affiliates | 15 | 36 | 23 | 37 | |||||||||||||||||||
| Impairment losses on investments | — | — | — | (18) | |||||||||||||||||||
| Other income, net | 8 | 11 | 42 | 52 | |||||||||||||||||||
| Loss on debt extinguishment, net | (57) | — | (57) | (1) | |||||||||||||||||||
| Interest expense | (122) | (99) | (374) | (292) | |||||||||||||||||||
| Total other expense | (156) | (52) | (366) | (222) | |||||||||||||||||||
| Income Before Income Taxes | 2,163 | 341 | 3,454 | 899 | |||||||||||||||||||
| Income tax expense | 545 | 92 | 840 | 216 | |||||||||||||||||||
| Net Income | 1,618 | 249 | 2,614 | 683 | |||||||||||||||||||
| Income per Share | |||||||||||||||||||||||
| Weighted average number of common shares outstanding — basic | 245 | 244 | 245 | 246 | |||||||||||||||||||
| Income per Weighted Average Common Share — Basic | $ | 6.60 | $ | 1.02 | $ | 10.67 | $ | 2.78 | |||||||||||||||
| Weighted average number of common shares outstanding — diluted | 245 | 245 | 245 | 247 | |||||||||||||||||||
| Income per Weighted Average Common Share — Diluted | $ | 6.60 | $ | 1.02 | $ | 10.67 | $ | 2.77 |
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net Income | $ | 1,618 | $ | 249 | $ | 2,614 | $ | 683 | |||||||||||||||
| Other Comprehensive (Loss)/Income | |||||||||||||||||||||||
| Foreign currency translation adjustments | (11) | 4 | (6) | 2 | |||||||||||||||||||
| Defined benefit plans | 1 | — | 20 | — | |||||||||||||||||||
| Other comprehensive (loss)/income | (10) | 4 | 14 | 2 | |||||||||||||||||||
| Comprehensive Income | $ | 1,608 | $ | 253 | $ | 2,628 | $ | 685 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | ||||||||||
| (In millions, except share data) | (Unaudited) | (Audited) | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 259 | $ | 3,905 | |||||||
| Funds deposited by counterparties | 1,748 | 19 | |||||||||
| Restricted cash | 14 | 6 | |||||||||
| Accounts receivable, net | 3,096 | 904 | |||||||||
| Inventory | 445 | 327 | |||||||||
| Derivative instruments | 8,528 | 560 | |||||||||
| Cash collateral paid in support of energy risk management activities | 21 | 50 | |||||||||
| Prepayments and other current assets | 461 | 257 | |||||||||
| Total current assets | 14,572 | 6,028 | |||||||||
| Property, plant and equipment, net | 1,976 | 2,547 | |||||||||
| Other Assets | |||||||||||
| Equity investments in affiliates | 167 | 346 | |||||||||
| Operating lease right-of-use assets, net | 293 | 301 | |||||||||
| Goodwill | 1,801 | 579 | |||||||||
| Intangible assets, net | 2,915 | 668 | |||||||||
| Nuclear decommissioning trust fund | 957 | 890 | |||||||||
| Derivative instruments | 2,671 | 261 | |||||||||
| Deferred income taxes | 1,994 | 3,066 | |||||||||
| Other non-current assets | 619 | 216 | |||||||||
| Total other assets | 11,417 | 6,327 | |||||||||
| Total Assets | $ | 27,965 | $ | 14,902 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt and finance leases | 504 | 1 | |||||||||
| Current portion of operating lease liabilities | 79 | 69 | |||||||||
| Accounts payable | 1,967 | 649 | |||||||||
| Derivative instruments | 6,032 | 499 | |||||||||
| Cash collateral received in support of energy risk management activities | 1,748 | 19 | |||||||||
| Accrued expenses and other current liabilities | 1,679 | 678 | |||||||||
| Total current liabilities | 12,009 | 1,915 | |||||||||
| Other Liabilities | |||||||||||
| Long-term debt and finance leases | 7,957 | 8,691 | |||||||||
| Non-current operating lease liabilities | 257 | 278 | |||||||||
| Nuclear decommissioning reserve | 316 | 303 | |||||||||
| Nuclear decommissioning trust liability | 619 | 565 | |||||||||
| Derivative instruments | 1,489 | 385 | |||||||||
| Deferred income taxes | 74 | 19 | |||||||||
| Other non-current liabilities | 1,166 | 1,066 | |||||||||
| Total other liabilities | 11,878 | 11,307 | |||||||||
| Total Liabilities | 23,887 | 13,222 | |||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders' Equity | |||||||||||
| Common stock; $0.01 par value; 500,000,000 shares authorized; 423,545,261 and 423,057,848 shares issued and 244,779,313 and 244,231,933 shares outstanding at September 30, 2021 and December 31, 2020, respectively | 4 | 4 | |||||||||
| Additional paid-in-capital | 8,525 | 8,517 | |||||||||
| Retained earnings/(accumulated deficit) | 971 | (1,403) | |||||||||
| Treasury stock, at cost 178,765,948 and 178,825,915 shares at September 30, 2021 and December 31, 2020, respectively | (5,230) | (5,232) | |||||||||
| Accumulated other comprehensive loss | (192) | (206) | |||||||||
| Total Stockholders' Equity | 4,078 | 1,680 | |||||||||
| Total Liabilities and Stockholders' Equity | $ | 27,965 | $ | 14,902 |
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended September 30, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net Income | $ | 2,614 | $ | 683 | |||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Distributions from and equity in earnings of unconsolidated affiliates | 8 | 6 | |||||||||
| Depreciation and amortization | 569 | 318 | |||||||||
| Accretion of asset retirement obligations | 21 | 46 | |||||||||
| Provision for credit losses | 715 | 74 | |||||||||
| Amortization of nuclear fuel | 39 | 40 | |||||||||
| Amortization of financing costs and debt discounts | 30 | 23 | |||||||||
| Loss on debt extinguishment, net | 57 | 1 | |||||||||
| Amortization of in-the-money contracts, emissions allowances and retirements of RECs | 111 | 60 | |||||||||
| Amortization of unearned equity compensation | 16 | 17 | |||||||||
| Net gain on sale and disposal of assets | (29) | (22) | |||||||||
| Impairment losses | 306 | 47 | |||||||||
| Changes in derivative instruments | (4,419) | (7) | |||||||||
| Changes in deferred income taxes and liability for uncertain tax benefits | 782 | 202 | |||||||||
| Changes in collateral deposits in support of energy risk management activities | 1,970 | 96 | |||||||||
| Changes in nuclear decommissioning trust liability | 38 | 39 | |||||||||
| Oil lower of cost or market adjustment | — | 29 | |||||||||
| Changes in other working capital | (973) | (266) | |||||||||
| Cash provided by operating activities | 1,855 | 1,386 | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Payments for acquisitions of businesses, net of cash acquired | (3,534) | (277) | |||||||||
| Capital expenditures | (219) | (167) | |||||||||
| Net sales/(purchases) of emission allowances | 6 | (15) | |||||||||
| Investments in nuclear decommissioning trust fund securities | (460) | (360) | |||||||||
| Proceeds from the sale of nuclear decommissioning trust fund securities | 424 | 318 | |||||||||
| Proceeds from sale of assets, net of cash disposed | 198 | 15 | |||||||||
| Changes in investments in unconsolidated affiliates | — | 2 | |||||||||
| Cash used by investing activities | (3,585) | (484) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Payments of dividends to common stockholders | (239) | (221) | |||||||||
| Payments for share repurchase activity | (9) | (229) | |||||||||
| Net receipts/(payments) from settlement of acquired derivatives that include financing elements | 396 | (6) | |||||||||
| Repayments of long-term debt and finance leases | (1,360) | (62) | |||||||||
| Proceeds from issuance of long-term debt | 1,100 | 59 | |||||||||
| Payments for debt extinguishment costs | (48) | — | |||||||||
| Payments of debt issuance costs | (18) | (24) | |||||||||
| Proceeds from issuance of common stock | 1 | 1 | |||||||||
| Net repayments of Revolving Credit Facility and Receivables Securitization Facilities | — | (83) | |||||||||
| Purchase of and distributions to noncontrolling interests from subsidiaries | — | (2) | |||||||||
| Cash used by financing activities | (177) | (567) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2) | (2) | |||||||||
| Net (Decrease)/Increase in Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash | (1,909) | 333 | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at Beginning of Period | 3,930 | 385 | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at End of Period | $ | 2,021 | $ | 718 |
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| (In millions) | Common Stock | Additional Paid-In Capital | Retained Earnings/ (Accumulated Deficit) | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stock-holders' Equity | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 4 | $ | 8,517 | $ | (1,403) | $ | (5,232) | $ | (206) | $ | 1,680 | |||||||||||||||||||||||||||||||||||
| Net loss | (82) | (82) | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 3 | 3 | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net(a) | (5) | (5) | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 4 | $ | 8,513 | $ | (1,565) | $ | (5,232) | $ | (203) | $ | 1,517 | |||||||||||||||||||||||||||||||||||
| Net income | 1,078 | 1,078 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 21 | 21 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares reissuance for ESPP | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 4 | $ | 8,519 | $ | (567) | $ | (5,230) | $ | (182) | $ | 2,544 | |||||||||||||||||||||||||||||||||||
| Net income | 1,618 | 1,618 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (10) | (10) | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | 4 | $ | 8,525 | $ | 971 | $ | (5,230) | $ | (192) | $ | 4,078 | |||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stock-holders' Equity | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 4 | $ | 8,501 | $ | (1,616) | $ | (5,039) | $ | (192) | $ | 1,658 | |||||||||||||||||||||||||||||||||||
| Net income | 121 | 121 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (15) | (15) | |||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of partners' equity interest in VIE | 18 | 18 | |||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | (150) | (150) | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net(a) | (21) | (21) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (75) | (75) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 4 | $ | 8,498 | $ | (1,570) | $ | (5,189) | $ | (207) | $ | 1,536 | |||||||||||||||||||||||||||||||||||
| Net income | 313 | 313 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 13 | 13 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares reissuance for ESPP | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | (47) | (47) | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (74) | (74) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | 4 | $ | 8,505 | $ | (1,331) | $ | (5,234) | $ | (194) | $ | 1,750 | |||||||||||||||||||||||||||||||||||
| Net income | 249 | 249 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (75) | (75) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | 4 | $ | 8,511 | $ | (1,157) | $ | (5,234) | $ | (190) | $ | 1,934 | |||||||||||||||||||||||||||||||||||
(a) Includes $(9) million and $(27) million of equivalent shares purchased in lieu of tax withholding on equity compensation issuances for the quarters ended March 31, 2021 and 2020, respectively
(b) Dividends per common share were $0.325 for the quarters ended September 30, June 30 and March 31, 2021 and $0.30 for the quarters ended September 30, June 30 and March 31, 2020
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Nature of Business and Basis of Presentation
General
NRG Energy, Inc., or NRG or the Company, is a consumer services company built on dynamic retail brands with diverse generation assets. NRG brings the power of energy to customers by producing and selling energy and related products and services, nation-wide in the U.S. and Canada in a manner that delivers value to all of NRG's stakeholders. The Company sells energy, services, and innovative, sustainable solutions and advisory services to approximately 6 million Home customers under the names NRG, Reliant, Direct Energy, Green Mountain Energy, Stream, and XOOM Energy, as well as other brand names owned by NRG, supported by approximately 23,000 MW of generation, including approximately 4,850 MW of fossil generation assets held for sale as of September 30, 2021 and approximately 1,600 MW of its PJM coal fleet with a retirement date of June 2022.
On January 5, 2021, the Company acquired Direct Energy, which is a leading retail provider of electricity, natural gas, and home and business energy related products and services, as well as a participant in the wholesale gas and power markets, in the U.S. and Canada. Refer to Note 4, Acquisitions and Dispositions, for further discussion of the acquisition of Direct Energy. The acquired operations of Direct Energy are integrated into the existing NRG segment structure. Domestic customer and market operations are combined into the corresponding geographical segments of Texas, East and West/Services/Other. The West/Services/Other segment includes activity related to the Canadian operations as well as the services businesses.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the SEC's regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the consolidated financial statements in the Company's 2020 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's consolidated financial position as of September 30, 2021, and the results of operations, comprehensive income, cash flows and statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes. The reclassifications did not affect consolidated results from operations, net assets or consolidated cash flows.
Note 2 — Summary of Significant Accounting Policies
Other Balance Sheet Information
The following table presents the accumulated depreciation included in property, plant and equipment, net and accumulated amortization included in intangible assets, net:
| (In millions) | September 30, 2021 | December 31, 2020 | ||||||||||||
| Property, plant and equipment accumulated depreciation | $ | 1,543 | $ | 1,936 | ||||||||||
| Intangible assets accumulated amortization | 1,542 | 1,357 |
Credit Losses
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU No. 2016-13, using the modified retrospective approach. Following the adoption of the new standard, the Company’s process of estimating expected credit losses remains materially consistent with its historical practice.
Retail trade receivables are reported on the balance sheet net of the allowance for credit losses. The Company accrues a provision for current expected credit losses based on (i) estimates of uncollectible revenues by analyzing accounts receivable aging and current and reasonable forecasts of expected economic factors including, but not limited to, unemployment rates and weather-related events, (ii) historical collections and delinquencies, and (iii) counterparty credit ratings for commercial and industrial customers.
The following table represents the activity in the allowance for credit losses for the three and nine months ended September 30, 2021 and 2020:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Beginning balance | $ | 761 | $ | 47 | $ | 67 | $ | 43 | |||||||||||||||
| Acquired balance from Direct Energy | — | — | 112 | — | |||||||||||||||||||
| Provision for credit losses | 64 | 26 | 715 | 74 | |||||||||||||||||||
| Write-offs | (41) | (19) | (124) | (71) | |||||||||||||||||||
| Recoveries collected | 8 | 3 | 22 | 11 | |||||||||||||||||||
| Ending balance | $ | 792 | $ | 57 | $ | 792 | $ | 57 |
The increase in the provision for credit losses during the three months ended September 30, 2021, compared to the same period in 2020 was primarily due to the impact of Winter Storm Uri on counterparty credit risk. The increase in the provision for credit losses during the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due to the impacts of Winter Storm Uri on bilateral finance hedging risk of $403 million, counterparty credit risk of $152 million and ERCOT default shortfall payments of $83 million.
Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, restricted cash and funds deposited by counterparties reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows:
| (In millions) | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||
| Cash and cash equivalents | $ | 259 | $ | 3,905 | |||||||||||||||||||
| Funds deposited by counterparties | 1,748 | 19 | |||||||||||||||||||||
| Restricted cash | 14 | 6 | |||||||||||||||||||||
| Cash and cash equivalents, funds deposited by counterparties and restricted cash shown in the statement of cash flows | $ | 2,021 | $ | 3,930 |
Funds deposited by counterparties consist of cash held by the Company as a result of collateral posting obligations from its counterparties. Though some amounts are segregated into separate accounts, not all funds are contractually restricted. Based on the Company's intention, these funds are not available for the payment of general corporate obligations; however, they are available for liquidity management. Depending on market fluctuations and the settlement of the underlying contracts, the Company will refund this collateral to the hedge counterparties pursuant to the terms and conditions of the underlying trades. Since collateral requirements fluctuate daily and the Company cannot predict if any collateral will be held for more than twelve
months, the funds deposited by counterparties are classified as a current asset on the Company's balance sheet, with an offsetting liability for this cash collateral received within current liabilities.
Restricted cash consists primarily of funds held within the Company's projects that are restricted for specific uses.
Recent Accounting Developments - Guidance Adopted in 2021
ASU 2019-12 — In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12, to simplify various aspects related to accounting for income taxes. The guidance in ASU 2019-12 amends the general principles in Topic 740 to eliminate certain exceptions for recognizing deferred taxes for investment, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted the amendments effective January 1, 2021 using the prospective approach. The adoption did not have a material impact on the Company's results of operations, cash flows, or statement of financial position.
Recent Accounting Developments - Guidance Not Yet Adopted
ASU 2020-06 — In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), or ASU 2020-06. The guidance in ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. In addition, ASU 2020-06 improves and amends the related earnings per share guidance. This standard is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. The Company is currently in the process of assessing the impact of this guidance on the consolidated financial statements and disclosures.
ASU 2021-08 — In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, or ASU 2021-08. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606, at fair value on the acquisition date. ASU 2021-08 requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts, which should generally result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. This update also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. Adoption during an interim period requires retrospective application to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. The Company does not expect the adoption of ASU 2021-08 to have a material impact on the consolidated financial statements and disclosures.
Note 3 — Revenue Recognition
Performance Obligations
As of September 30, 2021, estimated future fixed fee performance obligations are $158 million for the remaining three months of fiscal year 2021, and $345 million, $89 million, $37 million and $20 million for the fiscal years 2022, 2023, 2024 and 2025, respectively. Certain performance obligations relate to the fossil generating assets that are planned for sale to Generation Bridge, as further described in Note 4, Acquisitions and Dispositions. These performance obligations are for cleared auction MWs in the PJM, ISO-NE, NYISO and MISO capacity auctions and are subject to penalties for non-performance.
Disaggregated Revenues
The following tables represent the Company’s disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2021 and 2020:
| Three months ended September 30, 2021 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 1,776 | $ | 470 | $ | 400 | $ | — | $ | 2,646 | |||||||||||||||||||
| Business | 727 | 2,228 | 350 | — | 3,305 | ||||||||||||||||||||||||
| Total retail revenue | 2,503 | 2,698 | 750 | — | 5,951 | ||||||||||||||||||||||||
| Energy revenue(b) | 18 | 201 | 113 | 4 | 336 | ||||||||||||||||||||||||
| Capacity revenue(b) | — | 172 | 17 | — | 189 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(c) | (1) | (3) | (6) | 13 | 3 | ||||||||||||||||||||||||
| Contract amortization | — | (7) | 4 | — | (3) | ||||||||||||||||||||||||
| Other revenue(b) | 115 | 16 | 6 | (4) | 133 | ||||||||||||||||||||||||
| Total operating revenue | 2,635 | 3,077 | 884 | 13 | 6,609 | ||||||||||||||||||||||||
| Less: Lease revenue | — | — | 2 | — | 2 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | 38 | 76 | (8) | 14 | 120 | ||||||||||||||||||||||||
| Less: Contract amortization | — | (7) | 4 | — | (3) | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 2,597 | $ | 3,008 | $ | 886 | $ | (1) | $ | 6,490 | |||||||||||||||||||
| (a) Home includes Services | |||||||||||||||||||||||||||||
| (b) The following table represents the realized revenues related to derivative instruments that are accounted for under ASC 815 and included in the amounts above: | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Energy revenue | $ | — | $ | 38 | $ | 2 | $ | 1 | $ | 41 | |||||||||||||||||||
| Capacity revenue | — | 42 | — | — | 42 | ||||||||||||||||||||||||
| Other revenue | 39 | (1) | (4) | — | 34 | ||||||||||||||||||||||||
| (c) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 |
| Three months ended September 30, 2020 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 1,633 | $ | 327 | $ | 27 | $ | — | $ | 1,987 | |||||||||||||||||||
| Business | 288 | 27 | — | — | 315 | ||||||||||||||||||||||||
| Total retail revenue | 1,921 | 354 | 27 | — | 2,302 | ||||||||||||||||||||||||
| Energy revenue(b) | 11 | 93 | 117 | 1 | 222 | ||||||||||||||||||||||||
| Capacity revenue(b) | — | 158 | 16 | — | 174 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(c) | 1 | 43 | (10) | 5 | 39 | ||||||||||||||||||||||||
| Other revenue(b) | 59 | 18 | (1) | (4) | 72 | ||||||||||||||||||||||||
| Total operating revenue | 1,992 | 666 | 149 | 2 | 2,809 | ||||||||||||||||||||||||
| Less: Lease revenue | — | — | 5 | — | 5 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | 10 | 115 | (10) | 5 | 120 | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 1,982 | $ | 551 | $ | 154 | $ | (3) | $ | 2,684 | |||||||||||||||||||
| (a) Home includes Services | |||||||||||||||||||||||||||||
| (b) The following table represents the realized revenues related to derivative instruments that are accounted for under ASC 815 and included in the amounts above: | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Energy revenue | $ | — | $ | 23 | $ | 13 | $ | (1) | $ | 35 | |||||||||||||||||||
| Capacity revenue | — | 49 | — | — | 49 | ||||||||||||||||||||||||
| Other revenue | 9 | — | (13) | 1 | (3) | ||||||||||||||||||||||||
| (c) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 |
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 4,484 | $ | 1,469 | $ | 1,439 | $ | (1) | $ | 7,391 | |||||||||||||||||||
| Business | 2,091 | 6,560 | 887 | — | 9,538 | ||||||||||||||||||||||||
| Total retail revenue | 6,575 | 8,029 | 2,326 | (1) | 16,929 | ||||||||||||||||||||||||
| Energy revenue(c) | 317 | 428 | 238 | 6 | 989 | ||||||||||||||||||||||||
| Capacity revenue(c) | — | 568 | 47 | — | 615 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(d) | (5) | (53) | (60) | 19 | (99) | ||||||||||||||||||||||||
| Contract amortization | — | (15) | (4) | — | (19) | ||||||||||||||||||||||||
| Other revenue(b)(c) | 1,475 | 45 | 17 | (9) | 1,528 | ||||||||||||||||||||||||
| Total operating revenue | 8,362 | 9,002 | 2,564 | 15 | 19,943 | ||||||||||||||||||||||||
| Less: Lease revenue | — | 1 | 5 | — | 6 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | 129 | 193 | (73) | 20 | 269 | ||||||||||||||||||||||||
| Less: Contract amortization | — | (15) | (4) | — | (19) | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 8,233 | $ | 8,823 | $ | 2,636 | $ | (5) | $ | 19,687 | |||||||||||||||||||
| (a) Home includes Services | |||||||||||||||||||||||||||||
| (b) Other Revenue in Texas includes ancillary revenues of $1.2 billion driven by high pricing during Winter Storm Uri | |||||||||||||||||||||||||||||
| (c) The following table represents the realized revenues related to derivative instruments that are accounted for under ASC 815 and included in the amounts above: | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Energy revenue | $ | — | $ | 122 | $ | (4) | $ | 2 | $ | 120 | |||||||||||||||||||
| Capacity revenue | — | 119 | — | — | 119 | ||||||||||||||||||||||||
| Other revenue | 134 | 5 | (9) | (1) | 129 | ||||||||||||||||||||||||
| (d) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 | |||||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 3,938 | $ | 926 | $ | 66 | $ | (1) | $ | 4,929 | |||||||||||||||||||
| Business | 796 | 70 | — | — | 866 | ||||||||||||||||||||||||
| Total retail revenue | 4,734 | 996 | 66 | (1) | 5,795 | ||||||||||||||||||||||||
| Energy revenue(b) | 21 | 157 | 252 | (1) | 429 | ||||||||||||||||||||||||
| Capacity revenue(b) | — | 471 | 47 | — | 518 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(c) | 1 | 63 | 6 | 8 | 78 | ||||||||||||||||||||||||
| Other revenue(b) | 172 | 45 | 36 | (7) | 246 | ||||||||||||||||||||||||
| Total operating revenue | 4,928 | 1,732 | 407 | (1) | 7,066 | ||||||||||||||||||||||||
| Less: Lease revenue | — | 1 | 14 | — | 15 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | 24 | 239 | 50 | 5 | 318 | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 4,904 | $ | 1,492 | $ | 343 | $ | (6) | $ | 6,733 | |||||||||||||||||||
| (a) Home includes Services | |||||||||||||||||||||||||||||
| (b) The following table represents the realized revenues related to derivative instruments that are accounted for under ASC 815 and included in the amounts above: | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Energy revenue | $ | — | $ | 60 | $ | 42 | $ | (3) | $ | 99 | |||||||||||||||||||
| Capacity revenue | — | 114 | — | — | 114 | ||||||||||||||||||||||||
| Other revenue | 23 | 2 | 2 | — | 27 | ||||||||||||||||||||||||
| (c) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 |
Contract Balances
The following table reflects the contract assets and liabilities included in the Company’s balance sheet as of September 30, 2021 and December 31, 2020:
| (In millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Deferred customer acquisition costs | $ | 124 | $ | 113 | |||||||
| Accounts receivable, net - Contracts with customers | 2,955 | 866 | |||||||||
| Accounts receivable, net - Derivative instruments | 136 | 33 | |||||||||
| Accounts receivable, net - Affiliate | 5 | 5 | |||||||||
| Total accounts receivable, net | $ | 3,096 | $ | 904 | |||||||
| Unbilled revenues (included within Accounts receivable, net - Contracts with customers) | $ | 1,268 | $ | 393 | |||||||
| Deferred revenues(a) | 312 | 60 |
(a) Deferred revenues from contracts with customers for the nine months ended September 30, 2021 and the year ended December 31, 2020 were approximately $303 million and $31 million, respectively
The revenue recognized from contracts with customers during the nine months ended September 30, 2021 and 2020 relating to the deferred revenue balance at the beginning of each period was $23 million and $13 million, respectively. The revenue recognized from contracts with customers during the three months ended September 30, 2021 and 2020 relating to the deferred revenue balance at the beginning of each period was $162 million and $31 million, respectively. The change in deferred revenue balances during the three and nine months ended September 30, 2021 and 2020 was primarily due to bill credits owed to certain C&I customers, a portion of which is long-term, as a result of power pricing during Winter Storm Uri and the timing difference of when consideration was received and when the performance obligation was transferred.
Note 4 — Acquisitions and Dispositions
Acquisitions
Direct Energy Acquisition
On January 5, 2021 (the "Acquisition Closing Date"), the Company acquired all of the issued and outstanding common shares of Direct Energy, a North American subsidiary of Centrica. Direct Energy is a leading retail provider of electricity, natural gas, and home and business energy related products and services in North America, with operations in all 50 U.S. states and 8 Canadian provinces. The acquisition increased NRG's retail portfolio by over 3 million customers and strengthens its integrated model. It also broadens the Company's presence in the Northeast and into states and locales where it did not previously operate, supporting NRG's objective to diversify its business.
The Company paid an aggregate purchase price of $3.625 billion in cash and an initial purchase price adjustment of $77 million. The Company funded the purchase price using a combination of $715 million of cash on hand, $166 million from a draw on its Revolving Credit Facility (of which $107 million was used to fund acquisition costs and financing fees that are not included in the aggregate purchase price above), as well as approximately $2.9 billion in secured and unsecured corporate debt issued in December 2020. The purchase price adjustment resulted in a reduction of $3 million, which is in negotiation with Centrica. The Company expects to receive this payment from Centrica in 2021. The Company also increased its collective liquidity and collateral facilities by $3.4 billion as of the Acquisition Closing Date to meet the additional liquidity requirements related to the acquisition, as detailed in the following table:
| (In millions) | |||||
| Available on Acquisition Closing Date | |||||
| Revolving Credit Facility commitment increase | $ | 802 | |||
| Revolving Credit Facility new tranche | 273 | ||||
| Facility agreement in connection with the sale of pre-capitalized trust securities | 874 | ||||
| Available as of December 31, 2020 | |||||
| Credit default swap facility | 150 | ||||
| Revolving accounts receivable financing facility | 750 | ||||
| Repurchase facility | 75 | ||||
| Bilateral letter of credit facilities | 475 | ||||
| Total Increases to Liquidity and Collateral Facilities | $ | 3,399 |
For further discussion see Note 9, Long-term Debt and Finance Leases, and also Note 13, Receivables Securitization and Repurchase Facility, to the Company's 2020 Form 10-K.
Acquisition costs were $1 million and $24 million for the three and nine months ended September 30, 2021, respectively, and are included in acquisition-related transaction and integration costs in the Company's consolidated statement of operations.
The acquisition has been recorded as a business combination under ASC 805 with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The initial accounting for the business combination is not complete because the evaluation necessary to assess the fair value of certain net assets acquired and the amount of goodwill to be recognized is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the Acquisition Closing Date.
The purchase price is provisionally allocated as follows:
| (In millions) | |||||
| Current Assets | |||||
| Cash and cash equivalents | $ | 152 | |||
| Funds deposited by counterparties | 21 | ||||
| Restricted cash | 9 | ||||
| Accounts receivable, net | 1,802 | ||||
| Inventory | 106 | ||||
| Derivative instruments | 1,014 | ||||
| Cash collateral paid in support of energy risk management activities | 233 | ||||
| Prepayments and other current assets | 183 | ||||
| Total current assets | 3,520 | ||||
| Property, plant and equipment, net | 151 | ||||
| Other Assets | |||||
| Goodwill(a) | 1,257 | ||||
| Intangible assets, net: | |||||
| Customer relationships(b) | 1,277 | ||||
| Customer and supply contracts(b) | 610 | ||||
| Trade names(b) | 310 | ||||
| Renewable energy credits | 124 | ||||
| Total intangible assets, net | 2,321 | ||||
| Derivative instruments | 531 | ||||
| Other non-current assets | 31 | ||||
| Total other assets | 4,140 | ||||
| Total Assets | $ | 7,811 | |||
| Current Liabilities | |||||
| Accounts payable | $ | 1,120 | |||
| Derivative instruments | 1,266 | ||||
| Cash collateral received in support of energy risk management activities | 21 | ||||
| Accrued expenses and other current liabilities | 690 | ||||
| Total current liabilities | 3,097 | ||||
| Other Liabilities | |||||
| Derivative instruments | 562 | ||||
| Deferred income taxes | 338 | ||||
| Other non-current liabilities | 115 | ||||
| Total other liabilities | 1,015 | ||||
| Total Liabilities | $ | 4,112 | |||
| Direct Energy Purchase Price | $ | 3,699 |
(a) Goodwill arising from the acquisition is attributed to the value of the platform acquired and the synergies expected from combining the operations of Direct Energy with NRG's existing businesses. Goodwill was provisionally allocated to the Texas, East, and West/Services/Other segments of $424 million, $663 million and $170 million, respectively. Goodwill expected to be deductible for tax purposes is $337 million
(b) The weighted average amortization period for total amortizable intangible assets is 12 years
Measurement Period Adjustments
The following measurement period adjustments were recognized during the quarter ended September 30, 2021:
| (In millions) | Increase/(Decrease) | ||||
| Assets | |||||
| Goodwill | $ | 11 | |||
| Intangible assets, net | (32) | ||||
| Total decrease in assets | $ | (21) | |||
| Liabilities | |||||
| Accounts payable | $ | (270) | |||
| Accrued expenses and other current liabilities | 248 | ||||
| Deferred income taxes | (1) | ||||
| Other non-current liabilities | 2 | ||||
| Total decrease in liabilities | $ | (21) | |||
The measurement period adjustments to the provisional amounts are attributable primarily to refinement of the underlying assumptions used to estimate the fair value of assets acquired and liabilities assumed as more information is obtained about facts and circumstances that existed as of the Acquisition Closing Date.
Fair Value Measurement of Intangible Assets
The provisional fair values of intangible assets as of the Acquisition Closing Date were measured primarily based on significant inputs that are observable and unobservable in the market and thus represent Level 2 and Level 3 measurements, respectively. Significant inputs were as follows:
Customer relationships — Customer relationships, reflective of Direct Energy’s customer base, were valued using an excess earning method of the income approach. Under this approach, the Company estimated the present value of expected future cash flows resulting from existing customer relationships, considering attrition and charges for contributory assets (such as net working capital, fixed assets, workforce and trade names) utilized in the business, discounted at an independent power producer peer group’s weighted average cost of capital. The customer relationships are amortized to depreciation and amortization, ratably based on discounted future cash flows. The weighted average amortization period is 12 years.
Customer and supply contracts — The fair value of in-market and out-of-market customer and supply contracts were estimated based on contractual terms compared to market prices as of the Acquisition Closing Date. The majority of the contracts were valued using prices provided by external sources, primarily price quotations available through broker or over-the-counter and online exchanges. For contracts for which external sources or observable market quotes were not available, these values were based on valuation techniques including, but not limited to, internal models based on fundamental analysis of the market and extrapolation of the observable market data with similar characteristics. In addition, the Company applied a credit reserve to reflect credit risk, which is calculated based on published default probabilities. The customer and supply contracts are amortized to revenue and cost of operations, respectively, based upon the fair market value, as of the acquisition date, for each delivery month. The weighted average amortization period is 14 years.
Trade names — Trade names were valued using a "relief from royalty" method of the income approach. Under this approach, the fair value is estimated to be the present value of royalties saved because NRG owns the intangible asset and therefore does not have to pay a royalty for its use. The trade names are amortized to depreciation and amortization, on a straight line basis, over a weighted average amortization period of 15 years.
Renewable energy credits — Renewable energy credits were valued based on the market prices as of the Acquisition Closing Date. Renewable energy credits are retired, as required, for the applicable compliance period. They are expensed to cost of operations based on customer usage.
Fair Value Measurement of Derivative Assets and Liabilities
The fair values of derivatives assets and liabilities as of the Acquisition Closing Date were as follows:
| Fair Value | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Derivatives assets | $ | 1,545 | $ | 155 | $ | 1,272 | $ | 118 | |||||||||||||||
| Derivatives liabilities | $ | 1,828 | $ | 207 | $ | 1,489 | $ | 132 |
Refer to Note 5, Fair Value of Financial Instruments to this Form 10-Q and Note 5, Fair Value of Financial Instruments to the Company's 2020 Form 10-K for discussion on derivative fair value measurements.
Supplemental Information
For the three and nine months ended September 30, 2021 Direct Energy contributed revenue and income before income taxes as follows:
| (In millions) | Three months ended September 30, 2021 | Nine months ended September 30, 2021 | |||||||||
| Revenue | $ | 3,599 | $ | 10,718 | |||||||
| Income before income taxes | 2,010 | 3,457 |
Supplemental Pro Forma Financial Information for the nine months ended September 30, 2021 and 2020*(a)*
The following table provides pro forma combined financial information of NRG and Direct Energy, after giving effect to the Direct Energy acquisition and related financing transactions as if they had occurred on January 1, 2020. The pro forma financial information has been prepared for illustrative and informational purposes only, and is not intended to project future operating results or indicative of what our financial performance would have been had the transactions occurred on the date assumed. No effect has been given to operating synergies.
| (In millions) | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||
| Total operating revenues | $ | 19,932 | $ | 16,039 | |||||||
| Net Income | 2,585 | 832 |
(a) Pro forma comparative financial information for the three months ended September 30, 2021 and 2020 has not been included as computation of such information is impracticable as Direct Energy's pre-acquisition financial statements for the three months ended September 30, 2020 were not prepared in accordance with GAAP
Amounts above reflect certain pro forma adjustments that were directly attributable to the Direct Energy acquisition. These adjustments include the following:
(i) Income statement effects of fair value adjustments based on the preliminary purchase price allocation including amortization of intangible assets, depreciation of property, plant and equipment and lease expense.
(ii) Interest expense assumes the financing transactions directly attributable to the Direct Energy acquisition occurred on January 1, 2020.
(iii) Removal of Direct Energy historical interest expense associated with related party notes receivable/payable between Direct Energy and Centrica and its subsidiaries, as those notes are assumed to be repaid as of January 1, 2020.
(iv) Elimination of transactions between NRG and Direct Energy.
(v) Adjustments to reflect all acquisition costs occurring during the nine months ended September 30, 2020.
(vi) Tax effects of pro forma adjustments on both periods and shifting the recognition of one time tax benefits resulting from the acquisition from the nine months ended September 30, 2021 to the period ended September 30, 2020.
Midwest Generation Lease Purchase
On September 29, 2020, Midwest Generation acquired all of the ownership interests in the Powerton facility and Units 7 and 8 of the Joliet facility, which were being leased through 2034 and 2030, respectively, for approximately $260 million. The purchase was funded with cash-on-hand. Upon closing the operating lease liability of $148 million was eliminated.
Dispositions
On February 28, 2021, the Company entered into a definitive purchase agreement with Generation Bridge, an affiliate of ArcLight Capital Partners, to sell approximately 4,850 MW of fossil generating assets from its East and West regions of operations for total proceeds of $760 million, subject to standard purchase price adjustments and certain other indemnifications. The purchase price adjustments will include a working capital deduction for cash flows generated of approximately $11 million per month from the beginning of the year until the closing of the transaction, in lieu of cash flows generated during the year. As part of the transaction, NRG is entering into a tolling agreement for its 866 MW Arthur Kill plant in New York City through April 2025. The transaction is expected to close by the end of 2021 and is subject to various closing conditions, approvals and consents, including approval from the NYPSC. The transaction has received FERC approval and approval under the Hart-Scott-Rodino Act.
As of September 30, 2021, the following is classified as held for sale in the Consolidated Balance Sheet:
| (In millions)****(a) | |||||
| Current assets(b) | $ | 51 | |||
| Property, plant and equipment, net | 391 | ||||
| Other non-current assets | 3 | ||||
| Total non-current assets(c) | 394 | ||||
| Total assets held for sale | $ | 445 | |||
| Current liabilities(d) | 14 | ||||
| Non-current liabilities(e) | 61 | ||||
| Total liabilities held for sale | $ | 75 |
(a) Property, plant and equipment, net for the East and West/Services/Other segments was $242 million and $149 million, respectively. The remaining assets and liabilities were primarily in the East segment
(b) Included in prepayments and other current assets in the Consolidated Balance Sheet
(c) Included in other non-current assets in the Consolidated Balance Sheet
(d) Included in accrued expenses and other current liabilities in the Consolidated Balance Sheet
(e) Included in other non-current liabilities in the Consolidated Balance Sheet
On February 3, 2021, the Company closed on the sale of its 35% ownership in the Agua Caliente solar project to Clearway Energy, Inc. for $202 million. NRG recognized a gain on the sale of $17 million, including cash disposed of $7 million.
The Company completed other asset sales for cash proceeds of $3 million and $15 million during the nine months ended September 30, 2021 and 2020, respectively.
Note 5 — 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 amounts and fair values of NRG's recorded financial instruments not carried at fair market value are as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Notes receivable | $ | 2 | $ | 2 | $ | 2 | $ | 2 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Long-term debt, including current portion (a) | 8,537 | 8,897 | 8,781 | 9,446 |
(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. The fair value of certain notes receivable of the Company is based on expected future cash flows discounted at market interest rate and is classified as Level 3 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:
| September 30, 2021 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 23 | $ | 7 | $ | 16 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 29 | 29 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 76 | 75 | 1 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 93 | — | 93 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 43 | — | 43 | — | |||||||||||||||||||
| Corporate debt securities | 116 | — | 116 | — | |||||||||||||||||||
| Equity securities | 503 | 503 | — | — | |||||||||||||||||||
| 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 | 11,198 | 2,161 | 8,474 | 563 | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 93 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 8 | ||||||||||||||||||||||
| Total assets | $ | 12,188 | $ | 2,776 | $ | 8,748 | $ | 563 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Commodity contracts | $ | 7,521 | $ | 1,376 | $ | 5,893 | $ | 252 | |||||||||||||||
| Total liabilities | $ | 7,521 | $ | 1,376 | $ | 5,893 | $ | 252 |
| December 31, 2020 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 25 | $ | 10 | $ | 15 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 23 | 23 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 70 | 69 | 1 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 89 | — | 89 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 36 | — | 36 | — | |||||||||||||||||||
| Corporate debt securities | 144 | — | 144 | — | |||||||||||||||||||
| Equity securities | 434 | 434 | — | — | |||||||||||||||||||
| Foreign government fixed income securities | 7 | 1 | 6 | — | |||||||||||||||||||
| Other trust fund investments (classified within other non-current assets): | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1 | 1 | — | — | |||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||
| Commodity contracts | 821 | 59 | 623 | 139 | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 87 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 8 | ||||||||||||||||||||||
| Total assets | $ | 1,745 | $ | 597 | $ | 914 | $ | 139 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Commodity contracts | $ | 884 | $ | 86 | $ | 643 | $ | 155 | |||||||||||||||
| Total liabilities | $ | 884 | $ | 86 | $ | 643 | $ | 155 |
The following table reconciles, for the three and nine months ended September 30, 2021 and 2020, 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) | |||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Derivatives**(a)** | Derivatives**(a)** | |||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 574 | $ | (16) | |||||||||||||||||||||||||||||||||||||
| Contracts added from Direct Energy acquisition | — | (15) | |||||||||||||||||||||||||||||||||||||||
| Total (losses)/gains realized/unrealized— included in earnings | (175) | 187 | |||||||||||||||||||||||||||||||||||||||
| Purchases | — | 78 | |||||||||||||||||||||||||||||||||||||||
| Transfers into Level 3(b) | (108) | 64 | |||||||||||||||||||||||||||||||||||||||
| Transfers out of Level 3(b) | 20 | 13 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 311 | $ | 311 | |||||||||||||||||||||||||||||||||||||
| (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 period end | $ | (237) | $ | 184 |
(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 September 30, 2020 | Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Derivatives**(a)** | Derivatives**(a)** | |||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 152 | $ | 38 | |||||||||||||||||||||||||||||||||||||
| Total (losses) realized/unrealized — included in earnings | (92) | (18) | |||||||||||||||||||||||||||||||||||||||
| Purchases | (10) | 6 | |||||||||||||||||||||||||||||||||||||||
| Transfers into Level 3(b) | (11) | 22 | |||||||||||||||||||||||||||||||||||||||
| Transfers out of Level 3(b) | 13 | 4 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 52 | $ | 52 | |||||||||||||||||||||||||||||||||||||
| 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 | $ | 23 | $ | 50 |
(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 September 30, 2021, contracts valued with prices provided by models and other valuation techniques make up 5% of derivative assets and 3% 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 September 30, 2021 and December 31, 2020:
| September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Natural Gas Contracts | $ | 19 | $ | 3 | Discounted Cash Flow | Forward Market Price (per MMBtu) | $ | 3 | $ | 49 | $ | 19 | |||||||||||||||||||||||||||||
| Power Contracts | 512 | 218 | Discounted Cash Flow | Forward Market Price (per MWh) | 3 | 263 | 40 | ||||||||||||||||||||||||||||||||||
| FTRs | 32 | 31 | Discounted Cash Flow | Auction Prices (per MWh) | (131) | 755 | — | ||||||||||||||||||||||||||||||||||
| $ | 563 | $ | 252 | ||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Power Contracts | $ | 111 | $ | 143 | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 10 | $ | 105 | $ | 21 | |||||||||||||||||||||||||||||
| FTRs | 28 | 12 | Discounted Cash Flow | Auction Prices (per MWh) | (28) | 43 | 0 | ||||||||||||||||||||||||||||||||||
| $ | 139 | $ | 155 | ||||||||||||||||||||||||||||||||||||||
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of September 30, 2021 and December 31, 2020:
| 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 September 30, 2021, the credit reserve resulted in a $7 million decrease primarily within cost of operations. As of December 31, 2020, the credit reserve resulted in a $2 million increase 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 2020 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 2020 Form 10-K. As of September 30, 2021, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $2.9 billion and NRG held collateral (cash and letters of credit) against those positions of $1.1 billion, resulting in a net exposure of $1.9 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 59% of the Company's exposure before collateral is expected to roll off by the end of 2022. 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 | 49 | % | |||
| Financial institutions | 51 | ||||
| Total as of September 30, 2021 | 100 | % |
| Net Exposure (a)(b) | |||||
| Category by Counterparty Credit Quality | (% of Total) | ||||
| Investment grade | 78 | % | |||
| Non-investment grade/non-rated | 22 | ||||
| Total as of September 30, 2021 | 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 no exposure to wholesale counterparties in excess of 10% of total net exposure discussed above as of September 30, 2021. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration.
During Winter Storm Uri, the Company experienced 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 rights under this transaction but, given the size of the exposure, cannot determine with certainty what the amount of its ultimate recovery will be. The full exposure was recorded as a provision for credit losses during the nine months ended September 30, 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 September 30, 2021, aggregate credit risk exposure managed by NRG to these counterparties was approximately $1.4 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 September 30, 2021, 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. As a result of Winter Storm Uri, the Company incurred additional credit losses from Business customers primarily due to a segment of customers whose contracts included a pass through of wholesale power prices which were significantly escalated during the storm and from customers who failed to meet their obligations in ERCOT load curtailment programs.
Note 6 — Nuclear Decommissioning Trust Fund
NRG's Nuclear Decommissioning Trust Fund assets, which are for the decommissioning of its 44% interest in STP, are comprised of securities classified as available-for-sale and recorded at fair value based on actively quoted market prices. NRG accounts for the Nuclear Decommissioning Trust Fund in accordance with ASC 980, Regulated Operations, because the Company's nuclear decommissioning activities are subject to approval by the PUCT with regulated rates that are designed to recover all decommissioning costs and that can be charged to and collected from the ratepayers per PUCT mandate. Since the Company is in compliance with PUCT rules and regulations regarding decommissioning trusts and the cost of decommissioning is the responsibility of the Texas ratepayers, not NRG, all realized and unrealized gains or losses (including other-than-temporary impairments) related to the Nuclear Decommissioning Trust Fund are recorded to the Nuclear Decommissioning Trust liability and are not included in net income or accumulated OCI, consistent with regulatory treatment.
The following table summarizes the aggregate fair values and unrealized gains and losses for the securities held in the trust funds, as well as information about the contractual maturities of those securities.
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions, except maturities) | Fair Value | Unrealized Gains | Unrealized Losses | Weighted-average Maturities (In years) | Fair Value | Unrealized Gains | Unrealized Losses | Weighted-average Maturities (In years) | |||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 29 | $ | — | $ | — | — | $ | 23 | $ | — | $ | — | — | |||||||||||||||||||||||||||||||||
| U.S. government and federal agency obligations | 76 | 4 | — | 12 | 70 | 6 | — | 10 | |||||||||||||||||||||||||||||||||||||||
| Federal agency mortgage-backed securities | 93 | 3 | — | 24 | 89 | 4 | — | 24 | |||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 43 | 1 | — | 27 | 36 | 2 | — | 27 | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 116 | 8 | 1 | 14 | 144 | 13 | — | 12 | |||||||||||||||||||||||||||||||||||||||
| Equity securities | 596 | 439 | — | — | 521 | 372 | — | — | |||||||||||||||||||||||||||||||||||||||
| Foreign government fixed income securities | 4 | — | — | 12 | 7 | 1 | — | 10 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 957 | $ | 455 | $ | 1 | $ | 890 | $ | 398 | $ | — |
The following table summarizes proceeds from sales of available-for-sale securities held in the trust funds and the related realized gains and losses from these sales. The cost of securities sold is determined on the specific identification method.
| Nine months ended September 30, | |||||||||||
| (In millions) | 2021 | 2020 | |||||||||
| Realized gains | $ | 10 | $ | 22 | |||||||
| Realized losses | (6) | (11) | |||||||||
| Proceeds from sale of securities | 424 | 318 |
Note 7 — Accounting for Derivative Instruments and Hedging Activities
Energy-Related Commodities
As of September 30, 2021, NRG had energy-related derivative instruments extending through 2036. The Company marks these derivatives to market through the statement of operations. NRG has executed power purchase agreements extending through 2038 that qualified for the NPNS exception and were therefore exempt from fair value accounting treatment.
Foreign Exchange Contracts
NRG is exposed to changes in foreign currency associated with the purchase of USD denominated natural gas for its Canadian business. In order to manage the Company's foreign exchange risk, NRG entered into foreign exchange contracts. As of September 30, 2021, NRG had foreign exchange contracts extending through 2024. The Company marks these derivatives to market through the statement of operations.
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of NRG's open derivative transactions broken out by category, excluding those derivatives that qualified for the NPNS exception, as of September 30, 2021 and December 31, 2020. Option contracts are reflected using delta volume. Delta volume equals the notional volume of an option adjusted for the probability that the option will be in-the-money at its expiration date.
| Total Volume (In millions) | ||||||||||||||
| Category | Units | September 30, 2021 | December 31, 2020 | |||||||||||
| Emissions | Short Ton | 1 | 1 | |||||||||||
| Renewable Energy Certificates | Certificates | 13 | 5 | |||||||||||
| Coal | Short Ton | 3 | 2 | |||||||||||
| Natural Gas | MMBtu | 663 | (286) | |||||||||||
| Oil | Barrels | 1 | — | |||||||||||
| Power | MWh | 185 | 57 | |||||||||||
| Capacity | MW/Day | — | (1) | |||||||||||
| Foreign Exchange | Dollars | $ | 218 | $ | — | |||||||||
The increase in positions was primarily the result of the Direct Energy acquisition.
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheets:
| Fair Value | |||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| (In millions) | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Derivatives Not Designated as Cash Flow or Fair Value Hedges: | |||||||||||||||||||||||
| Foreign exchange contracts - current | $ | 1 | $ | — | $ | — | $ | — | |||||||||||||||
| Commodity contracts - current | 8,527 | 560 | 6,032 | 499 | |||||||||||||||||||
| Commodity contracts - long-term | 2,671 | 261 | 1,489 | 385 | |||||||||||||||||||
| Total Derivatives Not Designated as Cash Flow or Fair Value Hedges | $ | 11,199 | $ | 821 | $ | 7,521 | $ | 884 | |||||||||||||||
The Company has elected to present derivative assets and liabilities on the balance sheet on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. In addition, collateral received or paid on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. The following table summarizes the offsetting of derivatives by counterparty master agreement level and collateral received or paid:
| Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||||
| (In millions) | Gross Amounts of Recognized Assets / Liabilities | Derivative Instruments | Cash Collateral (Held) / Posted | Net Amount | ||||||||||||||||||||||
| As of September 30, 2021 | ||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 1 | $ | — | $ | — | $ | 1 | ||||||||||||||||||
| Total foreign exchange contracts | $ | 1 | $ | — | $ | — | $ | 1 | ||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 11,198 | $ | (6,946) | $ | (1,712) | $ | 2,540 | ||||||||||||||||||
| Derivative liabilities | (7,521) | 6,946 | — | (575) | ||||||||||||||||||||||
| Total commodity contracts | $ | 3,677 | $ | — | $ | (1,712) | $ | 1,965 | ||||||||||||||||||
| Total derivative instruments | $ | 3,678 | $ | — | $ | (1,712) | $ | 1,966 |
| Gross Amounts Not Offset in the Statement of Financial Position | ||||||||||||||||||||||||||
| (In millions) | Gross Amounts of Recognized Assets / Liabilities | Derivative Instruments | Cash Collateral (Held) / Posted | Net Amount | ||||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 821 | $ | (658) | $ | (5) | $ | 158 | ||||||||||||||||||
| Derivative liabilities | (884) | 658 | — | (226) | ||||||||||||||||||||||
| Total commodity contracts | $ | (63) | $ | — | $ | (5) | $ | (68) | ||||||||||||||||||
Impact of Derivative Instruments on the Statements of Operations
Unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow and fair value hedges are reflected in current period results of operations.
The following table summarizes the pre-tax effects of economic hedges that have not been designated as cash flow hedges or fair value hedges and trading activity on the Company's statement of operations. The effect of foreign exchange and commodity hedges are included within operating revenues and cost of operations.
| (In millions) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| Unrealized mark-to-market results | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Reversal of previously recognized unrealized (gains) on settled positions related to economic hedges | $ | (97) | $ | (101) | $ | (58) | $ | (62) | |||||||||||||||
| Reversal of acquired (gain)/loss positions related to economic hedges | (42) | (2) | 206 | 2 | |||||||||||||||||||
| Net unrealized gains/(losses) on open positions related to economic hedges | 1,924 | (15) | 3,875 | 73 | |||||||||||||||||||
| Total unrealized mark-to-market gains/(losses) for economic hedging activities | 1,785 | (118) | 4,023 | 13 | |||||||||||||||||||
| Reversal of previously recognized unrealized (gains) on settled positions related to trading activity | (6) | (7) | (16) | (14) | |||||||||||||||||||
| Net unrealized gains on open positions related to trading activity | 14 | 2 | 18 | 19 | |||||||||||||||||||
| Total unrealized mark-to-market gains/(losses) for trading activity | 8 | (5) | 2 | 5 | |||||||||||||||||||
| Total unrealized gains/(losses) | $ | 1,793 | $ | (123) | $ | 4,025 | $ | 18 |
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Unrealized gains/(losses) included in operating revenues - commodities | $ | 11 | $ | 34 | $ | (97) | $ | 83 | |||||||||||||||
| Unrealized gains/(losses) included in cost of operations - commodities | 1,777 | (157) | 4,121 | (65) | |||||||||||||||||||
| Unrealized gains included in cost of operations - foreign exchange | 5 | — | 1 | — | |||||||||||||||||||
| Total impact to statement of operations | $ | 1,793 | $ | (123) | $ | 4,025 | $ | 18 | |||||||||||||||
The reversals of acquired loss positions were valued based upon the forward prices on the acquisition date. The roll-off amounts were offset by realized gains or losses at the settled prices and are reflected in operating revenue or cost of operations during the same period.
For the nine months ended September 30, 2021, the $3.9 billion unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward positions as a result of increases in natural gas and power prices.
For the nine months ended September 30, 2020, the $73 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward positions as a result of decreases in New York capacity and power prices, as well as increases in ERCOT power prices.
Credit Risk Related Contingent Features
Certain of the Company's hedging and trading agreements contain provisions that entitle the counterparty to demand that the Company post additional collateral if the counterparty determines that there has been deterioration in the Company's credit quality, generally termed “adequate assurance” under the agreements, or require the Company to post additional collateral if there were a downgrade in the Company's credit rating. In addition, as a result of the acquisition of Direct Energy from Centrica, certain of the Company’s agreements as of September 30, 2021, were still supported by credit support posted by Centrica, and as a result could require the Company to post collateral upon a deterioration or downgrade of Centrica. The collateral potentially required for all contracts with adequate assurance clauses that are in a net liability position as of September 30, 2021 was $865 million. The Company is also party to certain marginable agreements under which it has net liability position, but the counterparty has not called for the collateral due, which was $92 million as of September 30, 2021. In the event of a downgrade in the Company's credit rating and if called for by the counterparty, $35 million of additional collateral would be required for all contracts with credit rating contingent features as of September 30, 2021.
See Note 5, Fair Value of Financial Instruments, for discussion regarding concentration of credit risk.
Note 8 — Impairments
2021 Impairment Losses
PJM Asset Impairments — During the second quarter of 2021, the results of the PJM Base Residual Auction for the 2022/2023 delivery year were released leading the Company to announce the near-term retirement of a significant portion of its PJM coal generating assets in June 2022. The Company considered the decline in PJM capacity prices and the near-term retirement dates of certain assets to be a trigger for impairment and performed impairment tests on the PJM generating assets and the goodwill associated with Midwest Generation. The Company measured the impairment losses on the PJM generation assets and Midwest Generation goodwill as the difference between the carrying amount and the fair value of the PJM generating assets and Midwest Generation reporting unit, respectively. Fair values were determined using an income approach in which the Company applied a discounted cash flow methodology to the long-term budgets for the plants and reporting unit. Significant inputs impacting the income approach include the Company's long-term view of capacity and fuel prices, projected generation, the physical and economic characteristics of each plant, and the discount rate applied to the after-tax cash flow projections. Impairment losses of $271 million and $35 million were recorded in the East segment on the PJM generating assets and Midwest Generation goodwill, respectively.
2020 Impairment Losses
Home Solar — During the third quarter of 2020, the Company concluded its Home Solar business was held for sale as a result of advanced negotiations to sell the business. NRG recorded impairment losses of $29 million in the West/Other segment to adjust the carrying amount of the assets and liabilities to fair market value based on indicative sale prices.
Petra Nova Parish Holdings — During the first quarter of 2020, due to the decline in oil prices, NRG determined that the carrying amount of the Company’s equity method investment exceeded the fair value of the investment and that the decline was considered to be other-than-temporary. In determining the fair value, the Company utilized an income approach to estimate future project cash flows. The Company recorded an impairment loss of $18 million in the Texas segment, which included the anticipated drawdown of the $12 million letter of credit posted in September 2019 to cover certain project debt reserve requirements.
Note 9 — Long-term Debt and Finance Leases
Long-term debt and finance leases consisted of the following:
| (In millions, except rates) | September 30, 2021 | December 31, 2020 | Interest rate % | ||||||||||||||
| Recourse debt: | |||||||||||||||||
| Senior Notes, due 2026 | $ | — | $ | 1,000 | 7.250 | ||||||||||||
| Senior Notes, due 2027 | 875 | 1,230 | 6.625 | ||||||||||||||
| Senior Notes, due 2028 | 821 | 821 | 5.750 | ||||||||||||||
| Senior Notes, due 2029 | 733 | 733 | 5.250 | ||||||||||||||
| Senior Notes, due 2029 | 500 | 500 | 3.375 | ||||||||||||||
| Senior Notes, due 2031 | 1,030 | 1,030 | 3.625 | ||||||||||||||
| Senior Notes, due 2032 | 1,100 | — | 3.875 | ||||||||||||||
| Convertible Senior Notes, due 2048(a) | 575 | 575 | 2.750 | ||||||||||||||
| Senior Secured First Lien Notes, due 2024 | 600 | 600 | 3.750 | ||||||||||||||
| Senior Secured First Lien Notes, due 2025 | 500 | 500 | 2.000 | ||||||||||||||
| Senior Secured First Lien Notes, due 2027 | 900 | 900 | 2.450 | ||||||||||||||
| Senior Secured First Lien Notes, due 2029 | 500 | 500 | 4.450 | ||||||||||||||
| Tax-exempt bonds | 466 | 466 | 1.250 - 4.750 | ||||||||||||||
| Subtotal recourse debt | 8,600 | 8,855 | |||||||||||||||
| Finance leases | 13 | 4 | various | ||||||||||||||
| Subtotal long-term debt and finance leases (including current maturities) | 8,613 | 8,859 | |||||||||||||||
| Less current maturities | (504) | (1) | |||||||||||||||
| Less debt issuance costs | (89) | (93) | |||||||||||||||
| Discounts | (63) | (74) | |||||||||||||||
| Total long-term debt and finance leases | $ | 7,957 | $ | 8,691 |
(a)As of the ex-dividend date of October 29, 2021, the Convertible Senior Notes were convertible at a price of $44.89, which is equivalent to a conversion rate of approximately 22.2761 shares of common stock per $1,000 principal amount
Recourse Debt
Issuance of 2032 Senior Notes
On August 23, 2021, the Company issued $1.1 billion of aggregate principal amount at par of 3.875% senior notes due 2032 (the "2032 Senior Notes"). The 2032 Senior Notes are senior unsecured obligations of NRG and are guaranteed by certain of its subsidiaries. Interest is paid semi-annually beginning on February 15, 2022 until the maturity date of February 15, 2032. The 2032 Senior Notes were issued under NRG's Sustainability-Linked Bond Framework, which sets out certain sustainability targets, including reducing greenhouse gas emissions. Failure to meet such sustainability targets will result in a 25 basis point increase to the interest rate payable on the 2032 Senior Notes from and including August 15, 2026. The proceeds of the 2032 Senior Notes, along with cash on hand, were used to fund the redemption of $1.0 billion 7.250% Senior Notes due 2026 and $355 million of 6.625% Senior Notes due 2027.
2021 Senior Note Redemptions
On August 24, 2021, the Company redeemed $1.4 billion in aggregate principal of its Senior Notes for $1.4 billion using the proceeds of the 2032 Senior Notes and cash on hand. In connection with the redemptions, a $57 million loss on debt extinguishment was recorded, which included the write-off of previously deferred financing costs of $9 million, during the nine months ended September 30, 2021. The Company redeemed an additional $500 million of its 6.625% Senior Notes due 2027 in October 2021.
| (In millions, except percentages) | Principal Repurchased | Cash Paid**(a)** | Average Early Redemption Percentage | ||||||||||||||
| 7.250% Senior Notes, due 2026 | $ | 1,000 | $ | 1,056 | 103.625 | % | |||||||||||
| 6.625% Senior Notes, due 2027 | 355 | 369 | 103.313 | % | |||||||||||||
| Total Redemptions during the nine months ended September 30, 2021 | $ | 1,355 | $ | 1,425 | |||||||||||||
| 6.625% Senior Notes, due 2027 | $ | 500 | $ | 524 | 103.313 | % | |||||||||||
| Total Redemptions January 1, 2021 through November 4, 2021 | $ | 1,855 | $ | 1,949 |
(a)Includes accrued interest of $22 million and $29 million for redemptions through September 30, 2021 and November 4, 2021, respectively
Receivables Securitization Facilities
On July 26, 2021, NRG Receivables LLC, a wholly-owned indirect subsidiary of the Company, entered into the First Amendment to its accounts receivable securitized borrowing facility dated September 22, 2020 with a group of conduit lenders and banks and Royal Bank of Canada, as Administrative Agent (as amended, the “Receivables Facility”) to, among other things, (i) increase the existing revolving commitments by $50 million to an aggregate amount of $800 million, (ii) extend the maturity date until July 26, 2022, (iii) make certain adjustments to the pool of receivables through the Receivables Facility and certain related covenants and (iv) provide for revised language relating to interest determination based on SOFR in case of a LIBOR cessation or the occurrence of certain other trigger events. As of September 30, 2021, there were no outstanding borrowings and there were $400 million in letters of credit issued under the Receivables Facility.
On July 26, 2021, the Company renewed its existing Repurchase Facility to, among other things, (i) extend the maturity date to July 26, 2022 and (ii) provide for revised language relating to interest determination based on SOFR in case of a LIBOR cessation or the occurrence of certain other trigger events.
Revolving Credit Facility
During the third quarter of 2020, the Company amended its existing credit agreement to, among other things, (i) increase the existing revolving commitments in an aggregate amount of $802 million, and (ii) provide for a new tranche of revolving commitments in an aggregate amount of $273 million with a maturity date of July 5, 2023. The maturity date of the new revolving tranche of commitments may, upon request by the Company, and at the option of each applicable lender under the new tranche be extended to May 28, 2024, which is the maturity date of the existing and increased commitments. Other than with respect to the maturity date, the terms of all revolving commitments and loans made pursuant thereto are identical. The increase in the existing commitments, and the commitments with respect to the new tranche were effective on August 20, 2020 and became available on January 5, 2021 upon the closing of the Direct Energy Acquisition. As of September 30, 2021, total revolving commitments available, subject to usage, under the amended credit agreement was $3.7 billion.
Non-Recourse Debt
Put Option Agreement for Senior Debt Issuance
As further discussed in Part IV, Item 15, Note 14, Long-term Debt and Finance Leases of the Company's 2020 Form 10-K, the Company entered into a Put Option Agreement for Senior Debt Issuances (the “P-Caps”). In connection with the issuance of the P-Caps, on December 11, 2020, NRG entered into an amended and restated facility agreement for the issuance of letters of credit (the “LC Agreement”) with Deutsche Bank Trust Company Americas as collateral agent (the “Collateral Agent”) and administrative agent pursuant to which certain financial institutions (the “LC Issuers”) have agreed to provide letters of credit in an aggregate amount not to exceed $874 million to support the operations of NRG and its subsidiaries and minority investments, including to replace certain letters of credit and other credit support issued for the account of entities acquired pursuant to the Direct Energy Acquisition. In addition, on December 11, 2020, the Trust entered into an amended and restated pledge and control agreement (the “Pledge Agreement”), among NRG, the Trust and the Collateral Agent for the LC Issuers, under which the Trust agreed to grant a pledge over the Eligible Treasury Assets in favor of the Collateral Agent for the benefit of the LC Issuers. Pursuant to the LC Agreement and the Pledge Agreement, the Collateral Agent is entitled to withdraw Eligible Treasury Assets from the Trust’s pledged account, following notice to NRG, in the event NRG has failed to reimburse amounts drawn under any letter of credit issued pursuant to the LC Agreement, and the LC Issuers have the right to instruct the
Collateral Agent to enforce the pledge over the Eligible Treasury Assets upon the occurrence of any event of default under the LC Agreement. The LC Agreement and the Pledge Agreement were available on January 5, 2021. As of September 30, 2021, $864 million of letters of credit were issued under the LC Agreement.
Note 10 — Investments Accounted for Using the Equity Method and Variable Interest Entities, or VIEs
Entities that are not Consolidated
NRG accounts for the Company's significant investments using the equity method of accounting. NRG's carrying value of equity investments can be impacted by a number of elements including impairments, unrealized gains and losses on derivatives and movements in foreign currency exchange rates. On February 3, 2021, the Company sold its 35% ownership in Agua Caliente to Clearway Energy, Inc. for $202 million as further described in Note 4, Acquisitions and Dispositions.
Variable Interest Entities that are Consolidated
The Company has a controlling financial interest that has been identified as a VIE under ASC 810 in NRG Receivables LLC, which has entered into financing transactions related to the Receivables Facility as further described in Note 13, Receivables Securitization and Repurchase Facility, to the Company’s 2020 Form 10-K.
The summarized financial information for the Company's consolidated VIE consisted of the following:
| (In millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Accounts receivable | $ | 730 | $ | 647 | |||||||
| Other current assets | — | 2 | |||||||||
| Total assets | 730 | 649 | |||||||||
| Current liabilities | 78 | 78 | |||||||||
| Net assets | $ | 652 | $ | 571 |
Note 11 — Changes in Capital Structure
As of September 30, 2021 and December 31, 2020, the Company had 500,000,000 shares of common stock authorized. The following table reflects the changes in NRG's common stock issued and outstanding:
| Issued | Treasury | Outstanding | |||||||||||||||
| Balance as of December 31, 2020 | 423,057,848 | (178,825,915) | 244,231,933 | ||||||||||||||
| Shares issued under LTIPs | 487,413 | — | 487,413 | ||||||||||||||
| Shares issued under ESPP | — | 59,967 | 59,967 | ||||||||||||||
| Balance as of September 30, 2021 | 423,545,261 | (178,765,948) | 244,779,313 | ||||||||||||||
| Shares issued under LTIPs | 1,913 | — | 1,913 | ||||||||||||||
| Shares issued under ESPP | — | 57,425 | 57,425 | ||||||||||||||
| Balance as of November 4, 2021 | 423,547,174 | (178,708,523) | 244,838,651 |
Employee Stock Purchase Plan
In March 2019, the Company reopened participation in the ESPP, which allows eligible employees to elect to withhold between 1% and 10% of their eligible compensation to purchase shares of NRG common stock at the lesser of 95% of its market value on the offering date or 95% of the fair market value on the exercise date. An offering date occurs each April 1 and October 1. An exercise date occurs each September 30 and March 31.
NRG Common Stock Dividends
During the first quarter of 2021, NRG increased the annual dividend to $1.30 from $1.20 per share and expects to target an annual dividend growth rate of 7-9% per share in subsequent years. A quarterly dividend of $0.325 per share was paid on the Company's common stock during the three months ended September 30, 2021. On October 15, 2021, NRG declared a quarterly dividend on the Company's common stock of $0.325 per share, payable on November 15, 2021 to stockholders of record as of November 1, 2021. Beginning in the first quarter of 2022, NRG will increase the annual dividend by 8% to $1.40 per share.
The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations.
Note 12 — Income Per Share
Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Shares issued and treasury shares repurchased during the year are weighted for the portion of the year that they were outstanding. Diluted income per share is computed in a manner consistent with that of basic income per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The outstanding relative performance stock units, non-vested restricted stock units, market stock units, and non-qualified stock options are not considered outstanding for purposes of computing basic income per share. However, these instruments are included in the denominator for purposes of computing diluted income per share under the treasury stock method. The Convertible Senior Notes are convertible, under certain circumstances, into the Company’s common stock, cash or combination thereof (at NRG's option). There is no dilutive effect for the Convertible Senior Notes due to the Company’s expectation to settle the liability in cash.
The reconciliation of NRG's basic and diluted income per share is shown in the following table:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Basic income per share: | |||||||||||||||||||||||
| Net income | $ | 1,618 | $ | 249 | $ | 2,614 | $ | 683 | |||||||||||||||
| Weighted average number of common shares outstanding - basic | 245 | 244 | 245 | 246 | |||||||||||||||||||
| Income per weighted average common share — basic | $ | 6.60 | $ | 1.02 | $ | 10.67 | $ | 2.78 | |||||||||||||||
| Diluted income per share: | |||||||||||||||||||||||
| Net income | $ | 1,618 | $ | 249 | $ | 2,614 | $ | 683 | |||||||||||||||
| Weighted average number of common shares outstanding - basic | 245 | 244 | 245 | 246 | |||||||||||||||||||
| Incremental shares attributable to the issuance of equity compensation (treasury stock method) | — | 1 | — | 1 | |||||||||||||||||||
| Weighted average number of common shares outstanding - dilutive | 245 | 245 | 245 | 247 | |||||||||||||||||||
| Income per weighted average common share — diluted | $ | 6.60 | $ | 1.02 | $ | 10.67 | $ | 2.77 |
As of September 30, 2021 and 2020 the Company had an insignificant number of outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company’s diluted income per share.
Note 13 — Segment Reporting
The Company’s segment structure reflects how management currently makes financial decisions and allocates resources. The Company manages its operations based on the combined results of the retail and wholesale generation businesses with a geographical focus.
NRG’s chief operating decision maker, its chief executive officer, evaluates the performance of its segments based on operational measures including adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA, free cash flow and allocation of capital, as well as net income/(loss).
The acquired operations of Direct Energy are integrated into the existing NRG segment structure. Domestic customer and market operations are combined into the corresponding geographical segments of Texas, East and West/Services/Other. The West/Services/Other segment includes activity related to the Canadian operations as well as the services businesses.
| Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Operating revenues | $ | 2,635 | $ | 3,077 | $ | 884 | $ | — | $ | 13 | $ | 6,609 | ||||||||||||||||||||||||||
| Depreciation and amortization | 84 | 88 | 20 | 7 | — | 199 | ||||||||||||||||||||||||||||||||
| Equity in earnings of unconsolidated affiliates | (2) | — | 17 | — | — | 15 | ||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 251 | 1,989 | 131 | (208) | — | 2,163 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 251 | $ | 1,976 | $ | 130 | $ | (739) | $ | — | $ | 1,618 | ||||||||||||||||||||||||||
| Total assets as of September 30, 2021 | $ | 9,929 | $ | 19,940 | $ | 4,655 | $ | 10,507 | $ | (17,066) | $ | 27,965 |
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Operating revenues | $ | 1,992 | $ | 666 | $ | 149 | $ | — | $ | 2 | $ | 2,809 | ||||||||||||||||||||||||||
| Depreciation and amortization | 49 | 33 | 10 | 7 | — | 99 | ||||||||||||||||||||||||||||||||
| Impairment losses | — | — | 29 | — | — | 29 | ||||||||||||||||||||||||||||||||
| Equity in losses of unconsolidated affiliates | — | — | 36 | — | — | 36 | ||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 287 | 146 | 23 | (115) | — | 341 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 287 | $ | 145 | $ | 23 | $ | (206) | $ | — | $ | 249 |
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Operating revenues | $ | 8,362 | $ | 9,002 | $ | 2,564 | $ | — | $ | 15 | $ | 19,943 | ||||||||||||||||||||||||||
| Depreciation and amortization | 245 | 238 | 65 | 21 | — | 569 | ||||||||||||||||||||||||||||||||
| Impairment losses | — | 306 | — | — | — | 306 | ||||||||||||||||||||||||||||||||
| Gain on sale of assets | — | — | 17 | — | — | 17 | ||||||||||||||||||||||||||||||||
| Equity in (losses)/earnings of unconsolidated affiliates | (3) | — | 26 | — | — | 23 | ||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 600 | 3,136 | 254 | (536) | — | 3,454 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 600 | $ | 3,107 | $ | 251 | $ | (1,344) | $ | — | $ | 2,614 |
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Operating revenues | $ | 4,928 | $ | 1,732 | $ | 407 | $ | — | $ | (1) | $ | 7,066 | ||||||||||||||||||||||||||
| Depreciation and amortization | 167 | 97 | 28 | 26 | — | 318 | ||||||||||||||||||||||||||||||||
| Impairment losses | — | — | 29 | — | — | 29 | ||||||||||||||||||||||||||||||||
| Gain on sale of assets | — | — | 1 | 5 | — | 6 | ||||||||||||||||||||||||||||||||
| Equity in (losses)/earnings of unconsolidated affiliates | (3) | — | 40 | — | — | 37 | ||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 799 | 308 | 98 | (306) | — | 899 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 799 | $ | 307 | $ | 97 | $ | (520) | $ | — | $ | 683 |
Note 14 — Income Taxes
Effective Income Tax Rate
The income tax provision consisted of the following:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions, except rates) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Income before income taxes | $ | 2,163 | $ | 341 | $ | 3,454 | $ | 899 | |||||||||||||||
| Income tax expense | 545 | 92 | 840 | 216 | |||||||||||||||||||
| Effective income tax rate | 25.2 | % | 27.0 | % | 24.3 | % | 24.0 | % |
For the three months ended September 30, 2021, the effective tax rate was higher than the statutory rate of 21% primarily due to state tax expense. For the nine months ended September 30, 2021, the effective tax rate was higher than the statutory rate of 21% primarily due to state tax expense partially offset by one-time tax benefits, as a result of the acquisition of Direct Energy, on the revaluation of state deferred tax assets, NOLs and valuation allowance. For the same periods in 2020, the effective tax rates were higher than the statutory rate of 21% due to state tax expense partially offset by an excess tax benefit related to share-based compensation.
Uncertain Tax Benefits
As of September 30, 2021, NRG had a non-current tax liability of $25 million for uncertain tax benefits from positions taken on various federal and state income tax returns and accrued interest. For the nine months ended September 30, 2021, NRG accrued an immaterial amount of interest relating to the uncertain tax benefits. As of September 30, 2021, NRG had cumulative interest and penalties related to these uncertain tax benefits of $3 million. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense.
NRG is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions including operations located in Australia and Canada. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2017. With few exceptions, state and local income tax examinations are no longer open for years prior to 2012.
Note 15 — Related Party Transactions
NRG provides services to some of its equity method investments under operations and maintenance agreements. Fees for the services under these agreements include recovery of NRG's costs of operating the plants. Certain agreements also include fees for administrative service, a base monthly fee, profit margin and/or annual incentive bonus.
The following table summarizes NRG's material related party transactions with third party affiliates:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues from Related Parties Included in Operating Revenues | |||||||||||||||||||||||
| Gladstone | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||||||||||
| Ivanpah(a) | 9 | 11 | 30 | 34 | |||||||||||||||||||
| Midway-Sunset | 1 | 1 | 4 | 4 | |||||||||||||||||||
| Total | $ | 11 | $ | 13 | $ | 36 | $ | 40 |
(a) Also includes fees under project management agreements with each project company
Note 16 — Commitments and Contingencies
Commitments
The Company disclosed its commitments in Note 24, Commitments and Contingencies, to the Company's 2020 Form 10-K. NRG completed the acquisition of Direct Energy on January 5, 2021 and assumed additional purchased energy commitments as detailed below.
Purchased Energy Commitments
NRG assumed additional long-term contractual commitments related to electricity and natural gas products, including power purchases, gas transportation and storage. The Company's minimum commitments under such outstanding agreements as of the Acquisition Closing Date are estimated as follows:
| Period | (In millions) | ||||
| 2021 | $ | 246 | |||
| 2022 | 396 | ||||
| 2023 | 272 | ||||
| 2024 | 180 | ||||
| 2025 | 134 | ||||
| Thereafter | 450 | ||||
| Total | $ | 1,678 |
First Lien Structure
NRG has granted first liens to certain counterparties on a substantial portion of property and assets owned by NRG and the guarantors of its senior debt. NRG uses the first lien structure to reduce the amount of cash collateral and letters of credit that it would otherwise be required to post from time to time to support its obligations under out-of-the-money hedges. To the extent that the underlying hedge positions for a counterparty are out-of-the-money to NRG, the counterparty may have a claim under the first lien program. As of September 30, 2021, all hedges under the first lien program were out-of-the-money for NRG on a counterparty aggregate basis.
Contingencies
The Company's material legal proceedings are described below. The Company believes that it has valid defenses to these legal proceedings and intends to defend them vigorously. NRG records accruals for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. As applicable, the Company has established an adequate accrual for the applicable legal matters, including regulatory and environmental matters as further discussed in Note 17, Regulatory Matters, and Note 18, Environmental Matters. In addition, legal costs are expensed as incurred. Management has assessed each of the following matters based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought, and the probability of success. Unless specified below, the Company is unable to predict the outcome of these legal proceedings or reasonably estimate the scope or amount of any associated costs and potential liabilities. As additional information becomes available, management adjusts its assessment and estimates of such contingencies accordingly. Because litigation is subject to inherent uncertainties and unfavorable rulings or developments, it is possible that the ultimate resolution of the Company's liabilities and contingencies could be at amounts that are different from their currently recorded accruals and that such differences could be material.
In addition to the legal proceedings noted below, NRG and its subsidiaries are party to other litigation or legal proceedings arising in the ordinary course of business. In management's opinion, the disposition of these ordinary course matters will not materially adversely affect NRG's consolidated financial position, results of operations, or cash flows.
Environmental Lawsuits
Sierra club et al. v. Midwest Generation LLC — In 2012, several environmental groups filed a complaint against Midwest Generation with the Illinois Pollution Control Board ("IPCB") alleging violations of environmental law resulting in groundwater contamination. In June 2019, the IPCB found that Midwest Generation violated the law because it had improperly handled coal ash at four facilities in Illinois and caused or allowed coal ash constituents to impact groundwater. On September 9, 2019, Midwest Generation filed a Motion to Reconsider numerous issues, which the court granted in part and denied in part on February 6, 2020. The IPCB will hold hearings to determine the appropriate relief. Midwest Generation has been working with the Illinois EPA to address the groundwater issues since 2010.
Consumer Lawsuits
Similar to other energy service companies (“ESCOs”) operating in the industry, from time-to-time, the Company and/or its subsidiaries may be subject to consumer lawsuits in various jurisdictions where they sell natural gas and electricity.
Variable Price Cases — In the cases set forth below, referred to as the Variable Price Cases, such actions involve consumers alleging that one of the Company’s ESCOs promised that consumers would pay the same or less than they would have paid if they stayed with their default utility or previous energy supplier. The underlying claims of each case are similar and the Company continues to deny the allegations and is vigorously defending these matters. These matters were known and accrued for at the time of each acquisition.
XOOM Energy
XOOM Energy is a defendant in a putative class action lawsuit pending in New York. This case is in the discovery phase.
Direct Energy
There are four putative class actions pending against Direct Energy: (1) Linda Stanley v. Direct Energy (S.D.N.Y Apr. 2019) - The parties mediated in June and agreed on a settlement. Once the settlement is drafted and signed, it will be submitted to the Court for approval; (2) Martin Forte v. Direct Energy (N.D.N.Y. Mar. 2017) - Direct Energy’s Motion for Summary Judgment and Plaintiff’s Class Certification are fully briefed and awaiting a ruling; (3) Richard Schafer v. Direct Energy (W.D.N.Y. Dec. 2019; on appeal 2nd Cir. N.Y.) - The trial court dismissed this action. Plaintiff appealed to the Second Circuit Court of Appeals. Oral arguments took place in April 2021. Subsequently, the Second Circuit issued a summary opinion vacating the district court's dismissal of the case. The matter was remanded back to the district court for further action; and (4) Julie and Richard Lane v. Direct Energy (S.D.Ill. Jun. 2019) - Plaintiffs have amended their Complaint in response to the Court dismissing all claims except a claim under the Illinois Consumer Protection Act. Direct Energy’s Motion to Dismiss was granted by the Court on April 26, 2021. The time to appeal this determination has passed.
Telephone Consumer Protection Act ("TCPA") Cases — In the cases set forth below, referred to as the TCPA Cases, such actions involve consumers alleging violations of the Telephone Consumer Protection Act of 1991, as amended, by receiving calls, texts or voicemails without consent in violation of the federal Telemarketing Sales Rule, and/or state counterpart legislation. The underlying claims of each case are similar. The Company denies the allegations asserted by plaintiffs and intends to vigorously defend these matters. These matters were known and accrued for at the time of the acquisition.
There are two putative class actions pending against Direct Energy: (1) Brittany Burk v. Direct Energy (S.D. Tex. Feb. 2019) - The briefing on Direct Energy’s Motion to Dismiss and Plaintiff’s Class Certification is complete. The Court denied Plaintiff's Motion for Class Certification and Motion for Substitution of a New Plaintiff on September 20, 2021. The parties have reached a settlement of the plaintiff's individual claims and expect the Court to dismiss the matter in the next 30 to 60 days; and (2) Matthew Dickson v. Direct Energy (N.D.Ohio Jan. 2018) - Direct Energy has filed a Third-Party Petition against its vendor, Total Marketing Concepts, LLC, who placed voicemails without consent from Direct Energy and in violation of the parties’ agreement. The case was stayed pending the outcome of an appeal to the Sixth Circuit based on the unconstitutionality of the TCPA during the period from 2015-2020. The Sixth Circuit found the TCPA was in effect during that period and remanded the case back to the trial court. The stay has been lifted and the Company plans to refile its previous motions and start discovery.
Winter Storm Uri Lawsuits
The Company has been named in certain property damage and wrongful death claims that have been filed in connection with Winter Storm Uri. At this time, the Company is unable to determine the extent or impact of these various litigation matters due to their preliminary nature. The Company intends to vigorously defend these matters.
Indemnifications and Other Contractual Arrangements
Washington-St. Tammany and Claiborne Electric Cooperative v. LaGen — On June 28, 2017, plaintiffs Washington-St. Tammany Electric Cooperative, Inc. and Claiborne Electric Cooperative, Inc. filed a lawsuit against LaGen in the United States District Court for the Middle District of Louisiana. The plaintiffs claimed breach of contract against LaGen for allegedly improperly charging the plaintiffs for costs related to the installation and maintenance of certain pollution control technology. Plaintiffs sought damages for the alleged improper charges and a declaration as to which charges were proper under the contract. In February 2020, the court dismissed this lawsuit without prejudice for lack of subject matter jurisdiction. On March 17, 2020, plaintiffs filed a lawsuit in the Nineteenth Judicial District Court for the Parish of East Baton Rouge in Louisiana alleging substantially the same matters. On February 4, 2019, NRG sold the South Central Portfolio, including the entities subject to this litigation. However, NRG has agreed to indemnify the purchaser for certain losses suffered in connection therewith.
Note 17 — Regulatory Matters
Environmental regulatory matters are discussed within Note 18, Environmental Matters.
NRG operates in a highly regulated industry and is subject to regulation by various federal, state and provincial agencies. As such, NRG is affected by regulatory developments at the federal, state and provincial levels and in the regions in which NRG operates. In addition, NRG is subject to the market rules, procedures, and protocols of the various ISO and RTO markets in which NRG participates. These power markets are subject to ongoing legislative and regulatory changes that may impact NRG's wholesale and retail operations.
In addition to the regulatory proceedings noted below, NRG and its subsidiaries are parties to other regulatory proceedings arising in the ordinary course of business or have other regulatory exposure. In management's opinion, the disposition of these ordinary course matters will not materially adversely affect NRG's consolidated financial position, results of operations, or cash flows.
California Station Power — As the result of unfavorable final and non-appealable litigation, the Company accrued a liability associated with consumption of station power at the Company's Encina power plant facility in California after August 30, 2010. The Company has established an appropriate accrual pending potential regulatory action by San Diego Gas & Electric regarding the Company's Encina facility.
South Central — On August 4, 2016, NRG received a document hold notice from FERC regarding conduct in the MISO and PJM markets. FERC Office of Enforcement Staff investigated potential violations of MISO rules involving bidding for the Big Cajun 2 facility, as well as other aspects of NRG’s operations in MISO. On August 18, 2020, FERC Office of Enforcement presented NRG with its preliminary findings. NRG responded to the preliminary findings on January 15, 2021. On September 16, 2021, FERC Office of Enforcement Staff informed NRG that the investigation is closed with no further action.
Note 18 — Environmental Matters
NRG is subject to a wide range of environmental laws in the development, construction, ownership and operation of power plants. These laws generally require that governmental permits and approvals be obtained before construction and maintained during operation of power plants. The electric generation industry has been facing increasingly stringent requirements regarding air quality, GHG emissions, combustion byproducts, water discharge and use, and threatened and endangered species. In general, future laws are expected to require the addition of emissions controls or other environmental controls or to impose additional restrictions on the operations of the Company's facilities, which could have a material effect on the Company's consolidated financial position, results of operations, or cash flows. The Company has elected to use a $1 million disclosure threshold, as permitted, for environmental proceedings to which the government is a party.
Air
On July 8, 2019, the EPA promulgated the ACE rule, which rescinded the CPP, which had sought to broadly regulate CO2 emissions from the power sector. The ACE rule required states that have coal-fired EGUs to develop plans to seek heat rate improvements from coal-fired EGUs. On January 19, 2021, the D.C. Circuit vacated the ACE rule (but on February 22, 2021, at the EPA's request, stayed the issuance of the portion of the mandate that would vacate the repeal of the CPP). On October 29, 2021, the U.S. Supreme Court agreed to review the D.C. Circuit's decision, which should provide some clarity regarding the scope of the EPA's authority to regulate CO2 under the Clean Air Act. The Company expects the EPA to promulgate a new rule to regulate GHG emissions from power plants after a decision from the U.S. Supreme Court.
Water
Effluent Limitations Guidelines — In November 2015, the EPA revised the Effluent Limitations Guidelines ("ELG") for Steam Electric Generating Facilities, which imposed more stringent requirements (as individual permits were renewed) for wastewater streams from FGD, fly ash, bottom ash, and flue gas mercury control. On September 18, 2017, the EPA promulgated a final rule that, among other things, postponed the compliance dates to preserve the status quo for FGD wastewater and bottom ash transport water by two years to November 2020 until the EPA amended the rule. On October 13, 2020, the EPA amended the 2015 ELG rule by: (i) altering the stringency of certain limits for FGD wastewater; (ii) relaxing the zero-discharge requirement for bottom ash transport water; and (iii) changing several deadlines. On July 26, 2021, the EPA announced that it is initiating a new rulemaking to evaluate revising the ELG rule. While the EPA is developing the new rule, the existing rule (as amended in 2020) will stay in place, and the EPA expects permitting authorities to continue to implement the current regulation. The EPA anticipates releasing a proposed rule in fall 2022. In October 2021, NRG informed its regulators that the Company intends to comply with the ELG by ceasing combustion of coal by the end of 2028 at its domestic coal units outside of Texas, and installing appropriate controls by the end of 2025 at its two plants in Texas.
Byproducts, Wastes, Hazardous Materials and Contamination
In April 2015, the EPA finalized the rule regulating byproducts of coal combustion (e.g., ash and gypsum) as solid wastes under the RCRA. In September 2017, the EPA agreed to reconsider the rule. On July 30, 2018, the EPA promulgated a rule that amended the 2015 ash rule by extending some of the deadlines and providing more flexibility for compliance. On August 21, 2018, the D.C. Circuit found, among other things, that the EPA had not adequately regulated unlined ponds and legacy ponds. In 2019 and 2020, the EPA proposed several changes to this rule. On August 28, 2020, the EPA finalized "A Holistic Approach to Close Part A: Deadline to Initiate Closure," which amended the April 2015 Rule to address the August 2018 D.C. Circuit decision and extend some of the deadlines. On November 12, 2020, the EPA finalized "A Holistic Approach to Closure Part B," which further amended the April 2015 Rule to, among other things, provide procedures for requesting approval to operate existing impoundments with an alternative liner. The Company has updated its estimates of required environmental capital expenditures.
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