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 March 31, | |||||||||||||||||||||||
| (In millions, except for per share amounts) | 2022 | 2021 | |||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Revenue | $ | 7,896 | $ | 8,091 | |||||||||||||||||||
| Operating Costs and Expenses | |||||||||||||||||||||||
| Cost of operations (excluding depreciation and amortization shown below) | 4,930 | 6,857 | |||||||||||||||||||||
| Depreciation and amortization | 183 | 317 | |||||||||||||||||||||
| Selling, general and administrative costs | 322 | 337 | |||||||||||||||||||||
| Provision for credit losses | 25 | 611 | |||||||||||||||||||||
| Acquisition-related transaction and integration costs | 8 | 42 | |||||||||||||||||||||
| Total operating costs and expenses | 5,468 | 8,164 | |||||||||||||||||||||
| (Loss)/Gain on sale of assets | (3) | 17 | |||||||||||||||||||||
| Operating Income/(Loss) | 2,425 | (56) | |||||||||||||||||||||
| Other Income/(Expense) | |||||||||||||||||||||||
| Equity in (losses) of unconsolidated affiliates | (15) | (6) | |||||||||||||||||||||
| Other income, net | — | 22 | |||||||||||||||||||||
| Interest expense | (103) | (127) | |||||||||||||||||||||
| Total other expense | (118) | (111) | |||||||||||||||||||||
| Income/(Loss) Before Income Taxes | 2,307 | (167) | |||||||||||||||||||||
| Income tax expense/(benefit) | 571 | (85) | |||||||||||||||||||||
| Net Income/(Loss) | $ | 1,736 | $ | (82) | |||||||||||||||||||
| Income/(loss) per Share | |||||||||||||||||||||||
| Weighted average number of common shares outstanding — basic and diluted | 242 | 245 | |||||||||||||||||||||
| Income/(loss) per Weighted Average Common Share —Basic and Diluted | $ | 7.17 | $ | (0.33) |
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Net Income/(Loss) | $ | 1,736 | $ | (82) | |||||||||||||||||||
| Other Comprehensive Income | |||||||||||||||||||||||
| Foreign currency translation adjustments | 9 | 3 | |||||||||||||||||||||
| Defined benefit plans | (1) | — | |||||||||||||||||||||
| Other comprehensive income | 8 | 3 | |||||||||||||||||||||
| Comprehensive Income/(Loss) | $ | 1,744 | $ | (79) | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2022 | December 31, 2021 | ||||||||||
| (In millions, except share data) | (Unaudited) | (Audited) | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 387 | $ | 250 | |||||||
| Funds deposited by counterparties | 2,570 | 845 | |||||||||
| Restricted cash | 39 | 15 | |||||||||
| Accounts receivable, net | 3,291 | 3,245 | |||||||||
| Uplift securitization proceeds receivable from ERCOT | 689 | 689 | |||||||||
| Inventory | 354 | 498 | |||||||||
| Derivative instruments | 9,089 | 4,613 | |||||||||
| Cash collateral paid in support of energy risk management activities | 9 | 291 | |||||||||
| Prepayments and other current assets | 409 | 395 | |||||||||
| Total current assets | 16,837 | 10,841 | |||||||||
| Property, plant and equipment, net | 1,643 | 1,688 | |||||||||
| Other Assets | |||||||||||
| Equity investments in affiliates | 151 | 157 | |||||||||
| Operating lease right-of-use assets, net | 256 | 271 | |||||||||
| Goodwill | 1,796 | 1,795 | |||||||||
| Intangible assets, net | 2,391 | 2,511 | |||||||||
| Nuclear decommissioning trust fund | 949 | 1,008 | |||||||||
| Derivative instruments | 3,561 | 2,527 | |||||||||
| Deferred income taxes | 1,638 | 2,155 | |||||||||
| Other non-current assets | 255 | 229 | |||||||||
| Total other assets | 10,997 | 10,653 | |||||||||
| Total Assets | $ | 29,477 | $ | 23,182 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt and finance leases | $ | 4 | $ | 4 | |||||||
| Current portion of operating lease liabilities | 82 | 81 | |||||||||
| Accounts payable | 2,216 | 2,274 | |||||||||
| Derivative instruments | 6,076 | 3,387 | |||||||||
| Cash collateral received in support of energy risk management activities | 2,570 | 845 | |||||||||
| Accrued expenses and other current liabilities | 1,285 | 1,324 | |||||||||
| Total current liabilities | 12,233 | 7,915 | |||||||||
| Other Liabilities | |||||||||||
| Long-term debt and finance leases | 8,026 | 7,966 | |||||||||
| Non-current operating lease liabilities | 220 | 236 | |||||||||
| Nuclear decommissioning reserve | 325 | 321 | |||||||||
| Nuclear decommissioning trust liability | 602 | 666 | |||||||||
| Derivative instruments | 1,977 | 1,412 | |||||||||
| Deferred income taxes | 68 | 73 | |||||||||
| Other non-current liabilities | 996 | 993 | |||||||||
| Total other liabilities | 12,214 | 11,667 | |||||||||
| Total Liabilities | 24,447 | 19,582 | |||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders' Equity | |||||||||||
| Common stock; $0.01 par value; 500,000,000 shares authorized; 423,839,804 and 423,547,174 shares issued and 239,216,140 and 243,753,899 shares outstanding at March 31, 2022 and December 31, 2021, respectively | 4 | 4 | |||||||||
| Additional paid-in-capital | 8,433 | 8,531 | |||||||||
| Retained earnings | 2,171 | 464 | |||||||||
| Treasury stock, at cost 184,623,664 and 179,793,275 shares at March 31, 2022 and December 31, 2021, respectively | (5,460) | (5,273) | |||||||||
| Accumulated other comprehensive loss | (118) | (126) | |||||||||
| Total Stockholders' Equity | 5,030 | 3,600 | |||||||||
| Total Liabilities and Stockholders' Equity | $ | 29,477 | $ | 23,182 |
See accompanying notes to condensed consolidated financial statements.
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended March 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net Income/(Loss) | $ | 1,736 | $ | (82) | |||||||
| Adjustments to reconcile net income/(loss) to cash provided by operating activities: | |||||||||||
| Distributions from and equity in losses of unconsolidated affiliates | 18 | 17 | |||||||||
| Depreciation and amortization | 183 | 317 | |||||||||
| Accretion of asset retirement obligations | 7 | 3 | |||||||||
| Provision for credit losses | 25 | 611 | |||||||||
| Amortization of nuclear fuel | 14 | 13 | |||||||||
| Amortization of financing costs and debt discounts | 6 | 11 | |||||||||
| Amortization of in-the-money contracts and emissions allowances | 147 | 7 | |||||||||
| Amortization of unearned equity compensation | 6 | 4 | |||||||||
| Net gain on sale and disposal of assets | (6) | (18) | |||||||||
| Changes in derivative instruments | (2,816) | (902) | |||||||||
| Changes in deferred income taxes and liability for uncertain tax benefits | 527 | (71) | |||||||||
| Changes in collateral deposits in support of energy risk management activities | 2,007 | 1 | |||||||||
| Changes in nuclear decommissioning trust liability | (7) | 15 | |||||||||
| Changes in other working capital | (171) | (843) | |||||||||
| Cash provided/(used) by operating activities | 1,676 | (917) | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Payments for acquisitions of businesses and assets, net of cash acquired | (26) | (3,482) | |||||||||
| Capital expenditures | (60) | (63) | |||||||||
| Net purchases of emission allowances | (18) | (5) | |||||||||
| Investments in nuclear decommissioning trust fund securities | (151) | (129) | |||||||||
| Proceeds from the sale of nuclear decommissioning trust fund securities | 161 | 118 | |||||||||
| Proceeds from sale of assets, net of cash disposed | 14 | 197 | |||||||||
| Cash used by investing activities | (80) | (3,364) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Payments of dividends to common stockholders | (85) | (80) | |||||||||
| Payments for share repurchase activity | (188) | (9) | |||||||||
| Net receipts from settlement of acquired derivatives that include financing elements | 561 | 190 | |||||||||
| Net proceeds of Revolving Credit Facility and Receivables Securitization Facilities | — | 825 | |||||||||
| Repayments of long-term debt and finance leases | (1) | (1) | |||||||||
| Payments of debt issuance costs | — | (2) | |||||||||
| Proceeds from issuance of common stock | — | 1 | |||||||||
| Cash provided by financing activities | 287 | 924 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3 | 1 | |||||||||
| Net Increase/(Decrease) in Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash | 1,886 | (3,356) | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at Beginning of Period | 1,110 | 3,930 | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at End of Period | $ | 2,996 | $ | 574 |
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 | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stock-holders' Equity | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 4 | $ | 8,531 | $ | 464 | $ | (5,273) | $ | (126) | $ | 3,600 | |||||||||||||||||||||||||||||||||||
| Net income | 1,736 | 1,736 | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 8 | 8 | |||||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | (187) | (187) | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net(a) | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (86) | (86) | |||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2020-06 | (100) | 57 | (43) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 4 | $ | 8,433 | $ | 2,171 | $ | (5,460) | $ | (118) | $ | 5,030 | |||||||||||||||||||||||||||||||||||
| (In millions) | Common Stock | Additional Paid-In Capital | 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 | |||||||||||||||||||||||||||||||||||
(a)Includes $(6) million and $(9) million of equivalent shares purchased in lieu of tax withholding on equity compensation issuances for the quarters ended March 31, 2022 and 2021, respectively
(b)Dividends per common share were $0.35 and $0.325 for the quarters ended March 31, 2022 and 2021, respectively
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. 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. NRG sells power, natural gas, home and power services, and develops innovative, sustainable solutions, predominately under the brand names NRG, Reliant, Direct Energy, Green Mountain Energy, Stream, and XOOM Energy. The Company has a customer base that includes approximately 6 million Home customers as well as commercial, industrial, and wholesale customers, supported by approximately 18,000 MW of generation.
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 approximately 1,600 MW of its PJM coal generating assets in June 2022. On July 30, 2021, PJM identified reliability impacts resulting from the proposed deactivation of one of those assets, Indian River Unit 4. On August 27, 2021 the Company notified PJM that it would continue operations at Indian River Unit 4 until the reliability upgrades identified by PJM were completed, provided that the unit receives a satisfactory and compensatory reliability must run arrangement. Accordingly, NRG filed a cost based RMR rate schedule at FERC on April 1, 2022, seeking a June 1, 2022 effective date. The Company is continuing to evaluate the viability of the remaining PJM generating assets.
The Company manages its operations based on the combined results of the retail and wholesale generation businesses with a geographical focus.
The Company's business is segmented as follows:
-
Texas, which includes all activity related to customer, plant and market operations in Texas, other than Cottonwood;
-
East, which includes all activity related to customer, plant and market operations in the East;
-
West/Services/Other, which includes the following assets and activities: (i) all activity related to plant and market operations in the West and Canada, (ii) the Services businesses (iii) activity related to the Cottonwood facility, (iv) the remaining renewables activity, including the Company’s equity method investment in Ivanpah Master Holdings, LLC, and (v) activity related to the Company’s equity method investment for the Gladstone power plant in Australia; and
-
Corporate activities.
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 2021 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 March 31, 2022, and the results of operations, comprehensive income, cash flows and statements of stockholders' equity for the three months ended March 31, 2022 and 2021.
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) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Property, plant and equipment accumulated depreciation | $ | 1,419 | $ | 1,308 | ||||||||||
| Intangible assets accumulated amortization | 1,867 | 1,636 |
Credit Losses
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 months ended March 31, 2022 and 2021:
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Beginning balance | $ | 683 | $ | 67 | |||||||||||||||||||
| Acquired balance from Direct Energy | — | 112 | |||||||||||||||||||||
| Provision for credit losses | 25 | 611 | |||||||||||||||||||||
| Write-offs | (50) | (48) | |||||||||||||||||||||
| Recoveries collected | 8 | 7 | |||||||||||||||||||||
| Ending balance | $ | 666 | $ | 749 |
The decrease in the provision for credit losses during the three months ended March 31, 2022, compared to the same period in 2021 was primarily due to the impacts of Winter Storm Uri during the prior year on bilateral finance hedging risk of $393 million, counterparty credit risk of $109 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) | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Cash and cash equivalents | $ | 387 | $ | 250 | |||||||||||||||||||
| Funds deposited by counterparties | 2,570 | 845 | |||||||||||||||||||||
| Restricted cash | 39 | 15 | |||||||||||||||||||||
| Cash and cash equivalents, funds deposited by counterparties and restricted cash shown in the statement of cash flows | $ | 2,996 | $ | 1,110 |
Funds deposited by counterparties consist of cash held by the Company as a result of collateral posting obligations from its counterparties related to NRG's hedging program. The increase in funds deposited by counterparties is driven by the significant increase in forward positions as a result of increases in natural gas and power prices. 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 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 to satisfy the requirements of certain debt agreements and funds held within the Company's projects that are restricted in their uses.
Winter Storm Uri Uplift Securitization Proceeds
The Texas Legislature passed House Bill ("HB") 4492 in May of 2021 for ERCOT to mitigate exceptionally high price adders and ancillary service costs incurred by LSEs during Winter Storm Uri. HB 4492 authorized ERCOT to obtain $2.1 billion of financing to distribute to LSEs that were charged and paid to ERCOT those highly priced ancillary service and ORDPA during Winter Storm Uri.
In December 2021, ERCOT filed with the PUCT a calculation of each LSE’s share of proceeds based on the settlement methodology. The Company accounted for the proceeds it will receive by analogy to the contribution model within ASC 958-605, Not-for-Profit Entities- Revenue Recognition and the grant model within IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, as a reduction to cost of operations within its consolidated statements of operations in the 2021 annual period for which the proceeds were intended to compensate. The Company expects to receive proceeds of $689 million from ERCOT in the second quarter of 2022 which is reflected as a receivable on its consolidated balance sheets.
Recent Accounting Developments - Guidance Adopted in 2022
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. The Company adopted this standard on January 1, 2022 using the modified retrospective approach. As a result of the provisions of the amended guidance, the Company recorded a $100 million decrease to additional paid-in capital, a $57 million decrease to debt discount, a $57 million increase to retained earnings and a $14 million decrease to long-term deferred tax liabilities. The adoption of ASU 2020-06 did not have a material impact on the Company's statement of operations, statement of cash flow or earnings per share amounts.
Note 3 — Revenue Recognition
Performance Obligations
As of March 31, 2022, estimated future fixed fee performance obligations are $151 million for the remaining nine months of fiscal year 2022, and $52 million and $1 million for the fiscal years 2023 and 2024, respectively. 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 months ended March 31, 2022 and 2021:
| Three months ended March 31, 2022 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 1,289 | $ | 675 | $ | 697 | $ | — | $ | 2,661 | |||||||||||||||||||
| Business | 663 | 3,846 | 400 | — | 4,909 | ||||||||||||||||||||||||
| Total retail revenue | 1,952 | 4,521 | 1,097 | — | 7,570 | ||||||||||||||||||||||||
| Energy revenue(b) | 15 | 204 | 54 | 5 | 278 | ||||||||||||||||||||||||
| Capacity revenue(b) | — | 115 | 1 | — | 116 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(c) | (2) | (130) | (18) | 17 | (133) | ||||||||||||||||||||||||
| Contract amortization | — | (9) | — | — | (9) | ||||||||||||||||||||||||
| Other revenue(b) | 58 | 17 | 4 | (5) | 74 | ||||||||||||||||||||||||
| Total revenue | 2,023 | 4,718 | 1,138 | 17 | 7,896 | ||||||||||||||||||||||||
| Less: Revenues accounted for under topics other than 606 and 815 | — | (9) | 11 | — | 2 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | (7) | (66) | (42) | 20 | (95) | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 2,030 | $ | 4,793 | $ | 1,169 | $ | (3) | $ | 7,989 | |||||||||||||||||||
| (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 | $ | — | $ | 45 | $ | (20) | $ | 4 | $ | 29 | |||||||||||||||||||
| Capacity revenue | — | 13 | — | — | 13 | ||||||||||||||||||||||||
| Other revenue | (5) | 6 | (4) | (1) | (4) | ||||||||||||||||||||||||
| (c) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 |
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 1,333 | $ | 584 | $ | 554 | $ | — | $ | 2,471 | |||||||||||||||||||
| Business | 781 | 2,629 | 281 | — | 3,691 | ||||||||||||||||||||||||
| Total retail revenue | 2,114 | 3,213 | 835 | — | 6,162 | ||||||||||||||||||||||||
| Energy revenue(c) | 285 | 126 | 70 | 1 | 482 | ||||||||||||||||||||||||
| Capacity revenue(c) | — | 141 | 14 | — | 155 | ||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(d) | (1) | (4) | (28) | 1 | (32) | ||||||||||||||||||||||||
| Other revenue(b)(c) | 1,304 | 19 | 4 | (3) | 1,324 | ||||||||||||||||||||||||
| Total revenue | 3,702 | 3,495 | 895 | (1) | 8,091 | ||||||||||||||||||||||||
| Less: Revenues accounted for under topics other than 606 and 815 | — | — | 2 | — | 2 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | 93 | 99 | (34) | 2 | 160 | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 3,609 | $ | 3,396 | $ | 927 | $ | (3) | $ | 7,929 | |||||||||||||||||||
| (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 | $ | — | $ | 60 | $ | (4) | $ | 2 | $ | 58 | |||||||||||||||||||
| Capacity revenue | — | 37 | — | — | 37 | ||||||||||||||||||||||||
| Other revenue | 94 | 6 | (2) | (1) | 97 | ||||||||||||||||||||||||
| (d) 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 March 31, 2022 and December 31, 2021:
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Deferred customer acquisition costs | $ | 111 | $ | 133 | |||||||
| Accounts receivable, net - Contracts with customers | 3,091 | 3,057 | |||||||||
| Accounts receivable, net - Derivative instruments | 197 | 182 | |||||||||
| Accounts receivable, net - Affiliate | 3 | 6 | |||||||||
| Total accounts receivable, net | $ | 3,291 | $ | 3,245 | |||||||
| Unbilled revenues (included within Accounts receivable, net - Contracts with customers) | $ | 1,237 | $ | 1,574 | |||||||
| Deferred revenues(a) | 177 | 227 |
(a) Deferred revenues from contracts with customers for the three months ended March 31, 2022 and the year ended December 31, 2021 were approximately $169 million and $224 million, respectively
The revenue recognized from contracts with customers during the three months ended March 31, 2022 and 2021 relating to the deferred revenue balance at the beginning of each period was $117 million and $23 million, respectively. The change in deferred revenue balances during the three months ended March 31, 2022 and 2021 was primarily due to the usage of customer bill credits by certain C&I customers, which were as a result of power pricing during Winter Storm Uri and a significant increase in customer count as a result of the Direct Energy acquisition.
Note 4 — Acquisitions and Dispositions
Acquisitions
2021 Acquisition of Direct Energy
On January 5, 2021, the Company acquired all of the issued and outstanding common shares of Direct Energy, which had been 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 total purchase price adjustment of $99 million, resulting in an adjusted purchase price of $3.724 billion. For additional information refer to Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Company's 2021 Form 10-K.
Dispositions
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.
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 value and fair value of the Company's financial instruments not carried at fair market value are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Convertible Senior Notes | $ | 575 | $ | 633 | $ | 518 | $ | 677 | |||||||||||||||
| Other long-term debt, including current portion | 7,523 | 7,128 | 7,522 | 7,650 | |||||||||||||||||||
| Total long-term debt, including current portion(a) | $ | 8,098 | $ | 7,761 | $ | 8,040 | $ | 8,327 |
(a) Excludes deferred financing costs, which are recorded as a reduction to long-term debt in the Company's consolidated balance sheets
The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 2 within the fair value hierarchy.
Recurring Fair Value Measurements
Debt securities, equity securities, and trust fund investments, which are comprised of various U.S. debt and equity securities, and derivative assets and liabilities, are carried at fair market value.
The following tables present assets and liabilities measured and recorded at fair value on the Company's condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:
| March 31, 2022 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 17 | $ | — | $ | 17 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 17 | 17 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 106 | 105 | 1 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 104 | — | 104 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 41 | — | 41 | — | |||||||||||||||||||
| Corporate debt securities | 116 | — | 116 | — | |||||||||||||||||||
| Equity securities | 471 | 471 | — | — | |||||||||||||||||||
| Foreign government fixed income securities | 2 | — | 2 | — | |||||||||||||||||||
| Other trust fund investments (classified within other non-current assets): | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1 | 1 | — | — | |||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||
| Commodity contracts | 12,650 | 2,528 | 9,403 | 719 | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 92 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 7 | ||||||||||||||||||||||
| Total assets | $ | 13,624 | $ | 3,122 | $ | 9,684 | $ | 719 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 4 | $ | — | $ | 4 | $ | — | |||||||||||||||
| Commodity contracts | 8,049 | 1,173 | 6,685 | 191 | |||||||||||||||||||
| Total liabilities | $ | 8,053 | $ | 1,173 | $ | 6,689 | $ | 191 |
| December 31, 2021 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 32 | $ | 15 | $ | 17 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 33 | 33 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 112 | 111 | 1 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 100 | — | 100 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 44 | — | 44 | — | |||||||||||||||||||
| Corporate debt securities | 122 | — | 122 | — | |||||||||||||||||||
| Equity securities | 494 | 494 | — | — | |||||||||||||||||||
| Foreign government fixed income securities | 4 | — | 4 | — | |||||||||||||||||||
| Other trust fund investments (classified within other non-current assets): | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1 | 1 | — | — | |||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||
| Foreign exchange contracts | 1 | — | 1 | — | |||||||||||||||||||
| Commodity contracts | 7,139 | 981 | 5,701 | 457 | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 99 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 7 | ||||||||||||||||||||||
| Total assets | $ | 8,188 | $ | 1,635 | $ | 5,990 | $ | 457 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 1 | $ | — | $ | 1 | $ | — | |||||||||||||||
| Commodity contracts | 4,798 | 626 | 4,008 | 164 | |||||||||||||||||||
| Total liabilities | $ | 4,799 | $ | 626 | $ | 4,009 | $ | 164 |
The following table reconciles, for the three months ended March 31, 2022 and 2021, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed consolidated financial statements, using significant unobservable inputs:
| Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | |||||||||||
| Derivatives**(a)** | |||||||||||
| (In millions) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | |||||||||
| Beginning balance | $ | 293 | $ | (16) | |||||||
| Contracts added from Direct Energy acquisition | — | (15) | |||||||||
| Total gains realized/unrealized — included in earnings | 166 | 180 | |||||||||
| Purchases | 23 | 20 | |||||||||
| Transfers into Level 3(b) | 53 | 4 | |||||||||
| Transfers out of Level 3(b) | (7) | (14) | |||||||||
| Ending balance | $ | 528 | $ | 159 | |||||||
| 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 | $ | 146 |
(a)Consists of derivative assets and liabilities, net
(b)Transfers into/out of Level 3 are related to the availability of external broker quotes and are valued as of the end of the reporting period. All transfers in/out are with Level 2
Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in revenues and cost of operations.
Derivative Fair Value Measurements
A portion of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A majority of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available. These contracts are valued based on various valuation techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of the observable market data with similar characteristics. As of March 31, 2022, contracts valued with prices provided by models and other valuation techniques make up 6% of derivative assets and 2% 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 March 31, 2022 and December 31, 2021:
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Power Contracts | $ | 676 | $ | 153 | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 6 | $ | 278 | $ | 47 | |||||||||||||||||||||||||||||
| FTRs | 43 | 38 | Discounted Cash Flow | Auction Prices (per MWh) | (105) | 43 | 0 | ||||||||||||||||||||||||||||||||||
| $ | 719 | $ | 191 | ||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Natural Gas Contracts | $ | 16 | $ | 1 | Discounted Cash Flow | Forward Market Price (per MWh) | $ | 3 | $ | 40 | $ | 15 | |||||||||||||||||||||||||||||
| Power Contracts | 392 | 121 | Discounted Cash Flow | Forward Market Price (per ton) | 3 | 212 | 35 | ||||||||||||||||||||||||||||||||||
| FTRs | 49 | 42 | Discounted Cash Flow | Auction Prices (per MWh) | (122) | 43 | 0 | ||||||||||||||||||||||||||||||||||
| $ | 457 | $ | 164 | ||||||||||||||||||||||||||||||||||||||
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant unobservable inputs as of March 31, 2022 and December 31, 2021:
| Significant Unobservable Input | Position | Change In Input | Impact on Fair Value Measurement | |||||||||||||||||
| Forward Market Price Natural Gas/Power | Buy | Increase/(Decrease) | Higher/(Lower) | |||||||||||||||||
| Forward Market Price Natural Gas/Power | Sell | Increase/(Decrease) | Lower/(Higher) | |||||||||||||||||
| FTR Prices | Buy | Increase/(Decrease) | Higher/(Lower) | |||||||||||||||||
| FTR Prices | Sell | Increase/(Decrease) | Lower/(Higher) |
The fair value of each contract is discounted using a risk-free interest rate. In addition, the Company applies a credit reserve to reflect credit risk, which is calculated based on published default probabilities. As of March 31, 2022, the credit reserve resulted in a $5 million decrease primarily within cost of operations. As of December 31, 2021, the credit reserve resulted in a $11 million decrease primarily within cost of operations.
Concentration of Credit Risk
In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Company's 2021 Form 10-K, the following is a discussion of the concentration of credit risk for the Company's contractual obligations. Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply arrangements, as well as retail customer credit risk through its retail load activities.
Counterparty Credit Risk
The Company's counterparty credit risk policies are disclosed in its 2021 Form 10-K. As of March 31, 2022, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $3.2 billion and NRG held collateral (cash and letters of credit) against those positions of $1.5 billion, resulting in a net exposure of $1.8 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 82% of the Company's exposure before collateral is expected to roll off by the end of 2023. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and NPNS, and non-derivative transactions. The exposure is shown net of collateral held and includes amounts net of receivables or payables.
| Net Exposure**(a)(b)** | |||||
| Category by Industry Sector | (% of Total) | ||||
| Utilities, energy merchants, marketers and other | 59 | % | |||
| Financial institutions | 41 | ||||
| Total as of March 31, 2022 | 100 | % |
| Net Exposure (a)(b) | |||||
| Category by Counterparty Credit Quality | (% of Total) | ||||
| Investment grade | 59 | % | |||
| Non-investment grade/non-rated | 41 | ||||
| Total as of March 31, 2022 | 100 | % |
(a)Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices
(b)The figures in the tables above exclude potential counterparty credit exposure related to RTOs, ISOs, registered commodity exchanges and certain long-term contracts
The Company currently has no exposure to wholesale counterparties in excess of 10% of total net exposure discussed above as of March 31, 2022. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration.
During the first quarter of 2021, during Winter Storm Uri, the Company experienced a nonperformance by a counterparty in one of its bilateral financial hedging transactions, resulting in exposure of $393 million. The Company is pursuing all means available to enforce its obligations under this transaction but, given the size of the exposure and the counterparty filing for Chapter 11 bankruptcy protection, cannot determine with certainty what the amount of its ultimate recovery will be. The full exposure was recorded as a provision for credit losses as of March 31, 2021.
RTOs and ISOs
The Company participates in the organized markets of CAISO, ERCOT, AESO, IESO, ISO-NE, MISO, NYISO and PJM, known as RTOs or ISOs. Trading in the majority of these markets is approved by FERC, whereas in the case of ERCOT, it is approved by the PUCT, and whereas in the case of AESO and IESO, both exist provincially with AESO primarily subject to Alberta Utilities Commission and the IESO to the Ontario Energy Board. These ISOs may include credit policies that, under certain circumstances, require that losses arising from the default of one member on spot market transactions be shared by the remaining participants. As a result, the counterparty credit risk to these markets is limited to NRG’s share of the overall market and are excluded from the above exposures.
Exchange Traded Transactions
The Company enters into commodity transactions on registered exchanges, notably ICE, NYMEX and Nodal. These clearinghouses act as the counterparty and transactions are subject to extensive collateral and margining requirements. As a result, these commodity transactions have limited counterparty credit risk.
Long-Term Contracts
Counterparty credit exposure described above excludes credit risk exposure under certain long-term contracts, primarily solar PPAs. As external sources or observable market quotes are not always available to estimate such exposure, the Company values these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. Based on these valuation techniques, as of March 31, 2022, aggregate credit risk exposure managed by NRG to these counterparties was approximately $1.2 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 March 31, 2022, the Company's retail customer credit exposure to Home and Business customers was diversified across many customers and various industries, as well as government entities. Current economic conditions may affect the Company’s customers’ ability to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in credit losses.
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 March 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (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 | $ | 17 | $ | — | $ | — | — | $ | 33 | $ | — | $ | — | — | |||||||||||||||||||||||||||||||||
| U.S. government and federal agency obligations | 106 | 2 | 4 | 10 | 112 | 5 | 1 | 10 | |||||||||||||||||||||||||||||||||||||||
| Federal agency mortgage-backed securities | 104 | 1 | 3 | 25 | 100 | 2 | — | 25 | |||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 41 | — | 2 | 27 | 44 | 1 | — | 27 | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 116 | 2 | 5 | 14 | 122 | 7 | 1 | 14 | |||||||||||||||||||||||||||||||||||||||
| Equity securities | 563 | 424 | — | — | 593 | 456 | — | — | |||||||||||||||||||||||||||||||||||||||
| Foreign government fixed income securities | 2 | — | — | 19 | 4 | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 949 | $ | 429 | $ | 14 | $ | 1,008 | $ | 471 | $ | 2 |
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.
| Three months ended March 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Realized gains | $ | 1 | $ | 3 | |||||||
| Realized losses | (4) | (2) | |||||||||
| Proceeds from sale of securities | 161 | 118 |
Note 7 — Accounting for Derivative Instruments and Hedging Activities
Energy-Related Commodities
As of March 31, 2022, NRG had energy-related derivative instruments extending through 2036. The Company marks these derivatives to market through the statement of operations. NRG has executed energy-related contracts 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 primarily 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 March 31, 2022, NRG had foreign exchange contracts extending through 2025. 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 March 31, 2022 and December 31, 2021. 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 | March 31, 2022 | December 31, 2021 | |||||||||||
| Emissions | Short Ton | — | 1 | |||||||||||
| Renewable Energy Certificates | Certificates | 13 | 13 | |||||||||||
| Coal | Short Ton | 14 | 19 | |||||||||||
| Natural Gas | MMBtu | 811 | 813 | |||||||||||
| Oil | Barrels | — | 1 | |||||||||||
| Power | MWh | 175 | 185 | |||||||||||
| Foreign Exchange | Dollars | $ | 264 | $ | 279 | |||||||||
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) | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||||||||
| Derivatives Not Designated as Cash Flow or Fair Value Hedges: | |||||||||||||||||||||||
| Foreign exchange contracts - current | $ | — | $ | — | $ | 2 | $ | 1 | |||||||||||||||
| Foreign exchange contracts - long-term | — | 1 | 2 | — | |||||||||||||||||||
| Commodity contracts - current | 9,089 | 4,613 | 6,074 | 3,386 | |||||||||||||||||||
| Commodity contracts - long-term | 3,561 | 2,526 | 1,975 | 1,412 | |||||||||||||||||||
| Total Derivatives Not Designated as Cash Flow or Fair Value Hedges | $ | 12,650 | $ | 7,140 | $ | 8,053 | $ | 4,799 | |||||||||||||||
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 March 31, 2022 | ||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||
| Derivative liabilities | $ | (4) | $ | — | $ | — | $ | (4) | ||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 12,650 | $ | (7,482) | $ | (2,631) | $ | 2,537 | ||||||||||||||||||
| Derivative liabilities | (8,049) | 7,482 | 41 | (526) | ||||||||||||||||||||||
| Total commodity contracts | $ | 4,601 | $ | — | $ | (2,590) | $ | 2,011 | ||||||||||||||||||
| Total derivative instruments | $ | 4,597 | $ | — | $ | (2,590) | $ | 2,007 |
| 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, 2021 | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||||||||
| Derivative assets | $ | 1 | $ | (1) | $ | — | $ | — | ||||||||||||||||||||||||
| Derivative liabilities | (1) | 1 | — | — | ||||||||||||||||||||||||||||
| Total foreign exchange contracts | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||
| Derivative assets | $ | 7,139 | $ | (4,440) | $ | (831) | $ | 1,868 | ||||||||||||||||||||||||
| Derivative liabilities | (4,798) | 4,440 | 17 | (341) | ||||||||||||||||||||||||||||
| Total commodity contracts | $ | 2,341 | $ | — | $ | (814) | $ | 1,527 | ||||||||||||||||||||||||
| Total derivative instruments | $ | 2,341 | $ | — | $ | (814) | $ | 1,527 |
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 revenues and cost of operations.
| (In millions) | Three months ended March 31, | ||||||||||||||||||||||
| Unrealized mark-to-market results | 2022 | 2021 | |||||||||||||||||||||
| Reversal of previously recognized unrealized (gains)/losses on settled positions related to economic hedges | $ | (408) | $ | 17 | |||||||||||||||||||
| Reversal of acquired (gain)/loss positions related to economic hedges | (60) | 145 | |||||||||||||||||||||
| Net unrealized gains on open positions related to economic hedges | 2,745 | 559 | |||||||||||||||||||||
| Total unrealized mark-to-market gains for economic hedging activities | 2,277 | 721 | |||||||||||||||||||||
| Reversal of previously recognized unrealized losses/(gains) on settled positions related to trading activity | 1 | (7) | |||||||||||||||||||||
| Net unrealized (losses)/gains on open positions related to trading activity | (15) | 11 | |||||||||||||||||||||
| Total unrealized mark-to-market (losses)/gains for trading activity | (14) | 4 | |||||||||||||||||||||
| Total unrealized gains | $ | 2,263 | $ | 725 |
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Unrealized (losses) included in revenues - commodities | $ | (147) | $ | (28) | |||||||||||||||||||
| Unrealized gains included in cost of operations - commodities | 2,414 | 755 | |||||||||||||||||||||
| Unrealized (losses) included in cost of operations - foreign exchange | (4) | (2) | |||||||||||||||||||||
| Total impact to statement of operations - commodities | $ | 2,263 | $ | 725 | |||||||||||||||||||
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 revenue or cost of operations during the same period.
For the three months ended March 31, 2022, the $2.7 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 three months ended March 31, 2021, the $559 million unrealized gain from open economic hedge positions was primarily the result of an increase in value of forward positions due to increases in ERCOT power prices and ERCOT heat rate expansion.
Credit Risk Related Contingent Features
Certain of the Company's 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. The collateral potentially required for all contracts with adequate assurance clauses that are in a net liability position as of March 31, 2022 was $790 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 approximately $56 million as of March 31, 2022. In the event of a downgrade in the Company's credit rating and if called for by the counterparty, $26 million of additional collateral would be required for all contracts with credit rating contingent features as of March 31, 2022.
See Note 5, Fair Value of Financial Instruments, for discussion regarding concentration of credit risk.
Note 8 — Long-term Debt and Finance Leases
Long-term debt and finance leases consisted of the following:
| (In millions, except rates) | March 31, 2022 | December 31, 2021 | Interest rate % | ||||||||||||||
| Recourse debt: | |||||||||||||||||
| Senior Notes, due 2027 | $ | 375 | $ | 375 | 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 | 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 | 8,100 | 8,100 | |||||||||||||||
| Finance leases | 13 | 13 | various | ||||||||||||||
| Subtotal long-term debt and finance leases (including current maturities) | 8,113 | 8,113 | |||||||||||||||
| Less current maturities | (4) | (4) | |||||||||||||||
| Less debt issuance costs | (81) | (83) | |||||||||||||||
| Discounts | (2) | (60) | |||||||||||||||
| Total long-term debt and finance leases | $ | 8,026 | $ | 7,966 |
(a)As of the ex-dividend date of April 29, 2022, the Convertible Senior Notes were convertible at a price of 44.15, which is equivalent to a conversion rate of approximately 22.6516 shares of common stock per $1,000 principal amount.
2048 Convertible Senior Notes
Accounting for Convertible Senior Notes — Upon issuance, the Convertible Senior Notes were separated into liability and equity components for accounting purposes. The carrying amounts of the liability component was initially calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. This difference represented the debt discount that was amortized to interest expense over seven years, which was determined to be the expected life of the Convertible Senior Notes, using the effective interest rate method. The equity component was recorded in additional paid-in capital and was not remeasured as it continued to meet the conditions for equity classification.
Following the adoption of ASU 2020-06 as of January 1, 2022, the Company no longer records the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. As a result of the provisions of the amended guidance, the Company recorded a $100 million decrease to additional paid-in capital, a $57 million decrease to debt discount, a $57 million increase to retained earnings and a $14 million decrease to long-term deferred tax liabilities. For more information on the adoption of ASU 2020-06, refer to Note 2, Summary of Significant Accounting Policies.
Modification to Convertible Senior Notes — On February 22, 2022, the Company irrevocably elected to eliminate the right to settle conversions only in shares of the Company's common stock, such that any conversion after such date, the Company will pay cash per $1,000 principal amount and will settle in cash or a combination of cash and the Company's common stock for the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount.
Convertible Senior Notes Features — As of March 31, 2022, the Convertible Senior Notes were convertible, under certain circumstances, into cash or a combination of cash and the Company’s common stock at a price of $44.53 per common share, which is equivalent to a conversion rate of approximately 22.4563 shares of common stock per $1,000 principal amount of Convertible Senior Notes. The Convertible Senior Notes mature on June 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms. The Convertible Senior notes are convertible at the option of the holders under certain circumstances. Prior to the close of business on the business day immediately preceding December 1, 2024, the Convertible
Senior Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter during specified periods as follows:
-
from December 1, 2024 until the close of business on the second scheduled trading day immediately before June 1, 2025; and
-
from December 1, 2047 until the close of business on the second scheduled trading day immediately before the maturity date
The following table details the interest expense recorded in connection with the Convertible Senior Notes, due 2048:
| ($ In millions) | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | |||||||||
| Contractual interest expense | $ | 4 | $ | 4 | |||||||
| Amortization of discount and deferred finance costs | — | 4 | |||||||||
| Total | $ | 4 | $ | 8 | |||||||
| Effective Interest Rate | 0.76 | % | 1.32 | % |
Repurchase Facility
On February 9, 2022, the Company entered into amendments to its existing Repurchase Facility to, among other things, (i) increase the size of the facility from $75 million to $150 million and (ii) replace LIBOR with term SOFR as the benchmark for the pricing rate. The Repurchase Facility has no commitment fee and borrowings will be drawn at SOFR + 1.30%. As of March 31, 2022, there were no outstanding borrowings.
Bilateral Letter of Credit Facilities
On April 29, 2022, the Company increased the size of the facilities by $100 million to provide additional liquidity, allowing for the issuance of up to $575 million of letters of credit.
Note 9 — 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.
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, Long-term Debt and Finance Leases, to the Company’s 2021 Form 10-K.
The summarized financial information for the Company's consolidated VIE consisted of the following:
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Accounts receivable and Other current assets | $ | 573 | $ | 939 | |||||||
| Current liabilities | 78 | 78 | |||||||||
| Net assets | $ | 495 | $ | 861 |
Note 10 — Changes in Capital Structure
As of March 31, 2022 and December 31, 2021, 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, 2021 | 423,547,174 | (179,793,275) | 243,753,899 | ||||||||||||||
| Shares issued under LTIPs | 292,630 | — | 292,630 | ||||||||||||||
| Shares repurchased | — | (4,830,389) | (4,830,389) | ||||||||||||||
| Balance as of March 31, 2022 | 423,839,804 | (184,623,664) | 239,216,140 | ||||||||||||||
| Shares issued under LTIPs | 13,213 | — | 13,213 | ||||||||||||||
| Shares issued under ESPP | — | 68,941 | 68,941 | ||||||||||||||
| Shares repurchased | — | (2,014,734) | (2,014,734) | ||||||||||||||
| Balance as of April 30, 2022 | 423,853,017 | (186,569,457) | 237,283,560 |
Share Repurchases
The Company adopted in the fourth quarter of 2019 a long-term capital allocation policy that targets allocating 50% of cash available for allocation generated each year to growth investments and 50% to be returned to shareholders. The return of capital to shareholders is expected to be completed through the increased dividend discussed below, supplemented by share repurchases. On December 6, 2021 the Company announced that the Board of Directors has authorized $1 billion for share repurchases, as part of NRG’s capital allocation program. During 2021, $44 million of share repurchases were completed under this authorization. During the first quarter of 2022, the Company completed $187 million of share repurchases under the plan at an average price of $38.66.
The following repurchases have been made during the three months ended March 31, 2022 and through April 30, 2022:
| Total number of shares and share equivalents purchased | Average price paid per share and share equivalent | Amounts paid for shares and share equivalents purchased (in millions) | |||||||||||||||||||||
| 2022 repurchases | |||||||||||||||||||||||
| Repurchases(a) | 4,830,389 | $ | 187 | ||||||||||||||||||||
| Equivalent shares purchased in lieu of tax withholdings on equity compensation issuances(b) | 131,899 | 6 | |||||||||||||||||||||
| Total Share Repurchases during the three months ended March 31, 2022 | 4,962,288 | $38.78 | 193 | ||||||||||||||||||||
| Repurchases made during April 2022 | 2,014,734 | $ | 76 | ||||||||||||||||||||
| Equivalent shares purchased in lieu of tax withholdings on equity compensation issuances(b) | 5,465 | — | |||||||||||||||||||||
| Total Share Repurchases January 1, 2022 through April 30, 2022 | 6,982,487 | $38.55 | $ | 269 | |||||||||||||||||||
(a)Includes $10 million accrued as of March 31, 2022
(b)NRG elected to pay cash for tax withholding on equity awards instead of issuing actual shares to management. The average price per equivalent shares withheld was $43.03 and $39.19 for the three months ended March 31, 2022 and for April 2022, respectively
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 2022, NRG increased the annual dividend to $1.40 from $1.30 per share and expects to target an annual dividend growth rate of 7%-9% per share in subsequent years. A quarterly dividend of $0.35 per share was paid on the Company's common stock during the three months ended March 31, 2022. On April 20, 2022, NRG declared a quarterly dividend on the Company's common stock of $0.35 per share, payable on May 16, 2022 to stockholders of record as of May 2, 2022.
The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations.
Note 11 — Income/(loss) Per Share
Basic income/(loss) per common share is computed by dividing net income/(loss) 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 for periods when we have net income. The Convertible Senior Notes are convertible, under certain circumstances, into cash or combination of cash and Company’s common stock. Prior to adoption of ASU 2020-06, there was no dilutive effect for the Convertible Senior Notes due to the Company’s expectation to settle the liability in cash. Upon adoption of ASU 2020-06, on January 1, 2022, the Company is including the potential share settlements, if any, in the denominator for purposes of computing diluted income per share under the if converted method for periods when we have net income. The potential shares settlements are calculated as the excess of the Company's conversion obligation over the aggregate principal amount (which will be settled in cash), divided by the average share price for the period. For the period ended March 31, 2022, there was no dilutive effect for the Convertible Senior Notes since there were no potential share settlements for that period.
The reconciliation of NRG's basic and diluted income/(loss) per share is shown in the following table:
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions, except per share data) | 2022 | 2021 | |||||||||||||||||||||
| Basic income/(loss) per share: | |||||||||||||||||||||||
| Net income/(loss) | $ | 1,736 | $ | (82) | |||||||||||||||||||
| Weighted average number of common shares outstanding - basic | 242 | 245 | |||||||||||||||||||||
| Income/(loss) per weighted average common share — basic | $ | 7.17 | $ | (0.33) | |||||||||||||||||||
| Diluted income/(loss) per share: | |||||||||||||||||||||||
| Net income/(loss) | $ | 1,736 | $ | (82) | |||||||||||||||||||
| Weighted average number of common shares outstanding - basic | 242 | 245 | |||||||||||||||||||||
| Weighted average number of common shares outstanding - dilutive | 242 | 245 | |||||||||||||||||||||
| Income/(loss) per weighted average common share — diluted | $ | 7.17 | $ | (0.33) |
As of March 31, 2022, the Company had 1 million outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company’s diluted income per share. As of March 31, 2021, the Company had 1 million shares of outstanding equity instruments that were not included in the computation of the Company’s diluted loss per share since the Company was in a loss position for the period.
Note 12 — 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).
| Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Revenue | $ | 2,023 | $ | 4,718 | $ | 1,138 | $ | — | $ | 17 | $ | 7,896 | ||||||||||||||||||||||||||
| Depreciation and amortization | 76 | 78 | 21 | 8 | — | 183 | ||||||||||||||||||||||||||||||||
| Loss on sale of assets | — | — | (1) | (2) | — | (3) | ||||||||||||||||||||||||||||||||
| Equity in (losses) of unconsolidated affiliates | (1) | — | (14) | — | — | (15) | ||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 773 | 1,541 | 124 | (131) | — | 2,307 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 773 | $ | 1,541 | $ | 125 | $ | (703) | $ | — | $ | 1,736 | ||||||||||||||||||||||||||
| Three months ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Revenue | $ | 3,702 | $ | 3,495 | $ | 895 | $ | — | $ | (1) | $ | 8,091 | ||||||||||||||||||||||||||
| Depreciation and amortization | 77 | 206 | 27 | 7 | — | 317 | ||||||||||||||||||||||||||||||||
| Gain on sale of assets | — | — | 17 | — | — | 17 | ||||||||||||||||||||||||||||||||
| Equity in (losses) of unconsolidated affiliates | (1) | — | (5) | — | — | (6) | ||||||||||||||||||||||||||||||||
| (Loss)/income before income taxes | (433) | 356 | 79 | (169) | — | (167) | ||||||||||||||||||||||||||||||||
| Net (loss)/income | $ | (433) | $ | 356 | $ | 74 | $ | (79) | $ | — | $ | (82) |
Note 13 — Income Taxes
Effective Income Tax Rate
The income tax provision consisted of the following:
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions, except rates) | 2022 | 2021 | |||||||||||||||||||||
| Income before income taxes | $ | 2,307 | $ | (167) | |||||||||||||||||||
| Income tax expense/(benefit) | 571 | (85) | |||||||||||||||||||||
| Effective income tax rate | 24.8 | % | 50.9 | % |
For the three months ended March 31, 2022, the effective tax rate was higher than the statutory rate of 21% primarily due to state tax expense. For the same periods in 2021, the effective tax rate was higher than the statutory rate of 21% primarily due to state tax benefits and 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.
Uncertain Tax Benefits
As of March 31, 2022, NRG had a non-current tax liability of $19 million for uncertain tax benefits from positions taken on various federal and state income tax returns and accrued interest. For the three months ended March 31, 2022, NRG accrued an immaterial amount of interest relating to the uncertain tax benefits. As of March 31, 2022, NRG had cumulative interest and penalties related to these uncertain tax benefits of $1 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 2013.
Note 14 — Related Party Transactions
NRG provides services to some of its related parties, who are accounted for as 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 March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Revenues from Related Parties Included in Revenue | |||||||||||||||||||||||
| Gladstone | $ | 1 | $ | 1 | |||||||||||||||||||
| Ivanpah(a) | 13 | 12 | |||||||||||||||||||||
| Midway-Sunset | 2 | 2 | |||||||||||||||||||||
| Total | $ | 16 | $ | 15 |
(a)Also includes fees under project management agreements with each project company
Note 15 — Commitments and Contingencies
Commitments
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 would have a claim under the first lien program. As of March 31, 2022, 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 16, Regulatory Matters, and Note 17, 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 its 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 in an interim order 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 three 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. On November 16, 2021, the Court granted preliminary approval of the settlement. On April 5, 2022, the Court granted final approval of the settlement. However, it may take several months to determine the final payout amount; (2) Martin Forte v. Direct Energy (N.D.N.Y. Mar. 2017) - The Court recently granted Direct Energy's Motion for summary judgment effectively ending the matter at the district court level. It is likely that the plaintiff will appeal; however, it is unlikely the plaintiff will prevail; (3) Richard Schafer v. Direct Energy (W.D.N.Y. Dec.
2019; on appeal 2nd Cir. N.Y.) - The Court granted limited discovery that will end April 29, 2022. Summary judgment briefing is due on May 20, 2022.
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) Holly Newman v. Direct Energy, LP (D. Md Sept 2021) - Direct Energy filed its Motion to Dismiss asserting the ruling in the Brittany Burk v. Direct Energy (S.D. Tex. Feb 2019) preempts the Plaintiff's ability to file suit based on the same facts; and (2) Matthew Dickson v. Direct Energy (N.D. Ohio Jan. 2018) - Direct Energy 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. Direct Energy refiled its motions along with supplements. On March 25, 2022, the Court granted summary judgment in favor of Direct Energy and dismissed the case. The plaintiff is expected to appeal.
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 in its capacity as a generator and a retail electric provider. As a power generator, the Company is named in 161 cases with claims ranging from: wrongful death; personal injury only; property damage and personal injury; property damage only; and subrogation. As a retail electric provider, the Company is named in 27 lawsuits with similar claims: wrongful death; property damage only; personal injury only; and both personal injury and property damage. The power generators and retail electric providers are working together to file a handful of motions to dismiss that represent the breadth of the claims filed against them. These motions are due May 17, 2022. All of the lawsuits related to Winter Storm Uri are consolidated into a single multi-district litigation matter in Harris County District Court. 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 16 — Regulatory Matters
Environmental regulatory matters are discussed within Note 17, 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 proceeding 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.
Note 17 — 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 existing 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.
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