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) | 2023 | 2022 | |||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Revenue | $ | 7,722 | $ | 7,896 | |||||||||||||||||||
| Operating Costs and Expenses | |||||||||||||||||||||||
| Cost of operations (excluding depreciation and amortization shown below) | 8,778 | 4,930 | |||||||||||||||||||||
| Depreciation and amortization | 190 | 183 | |||||||||||||||||||||
| Selling, general and administrative costs | 426 | 347 | |||||||||||||||||||||
| Acquisition-related transaction and integration costs | 71 | 8 | |||||||||||||||||||||
| Total operating costs and expenses | 9,465 | 5,468 | |||||||||||||||||||||
| Gain/(loss) on sale of assets | 199 | (3) | |||||||||||||||||||||
| Operating (Loss)/Income | (1,544) | 2,425 | |||||||||||||||||||||
| Other Income/(Expense) | |||||||||||||||||||||||
| Equity in earnings/(losses) of unconsolidated affiliates | 5 | (15) | |||||||||||||||||||||
| Other income, net | 16 | — | |||||||||||||||||||||
| Interest expense | (148) | (103) | |||||||||||||||||||||
| Total other expense | (127) | (118) | |||||||||||||||||||||
| (Loss)/Income Before Income Taxes | (1,671) | 2,307 | |||||||||||||||||||||
| Income tax (benefit)/expense | (336) | 571 | |||||||||||||||||||||
| Net (Loss)/Income | $ | (1,335) | $ | 1,736 | |||||||||||||||||||
| Less: Cumulative dividends attributable to Series A Preferred Stock | 4 | — | |||||||||||||||||||||
| Net (Loss)/Income Available for Common Stockholders | $ | (1,339) | $ | 1,736 | |||||||||||||||||||
| (Loss)/Income per Share | |||||||||||||||||||||||
| Weighted average number of common shares outstanding — basic and diluted | 230 | 242 | |||||||||||||||||||||
| (Loss)/Income per Weighted Average Common Share —Basic and Diluted | $ | (5.82) | $ | 7.17 |
See accompanying notes to condensed consolidated financial statements.
Draft 4 04/21/2023
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(Unaudited)
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||
| Net (Loss)/Income | $ | (1,335) | $ | 1,736 | |||||||||||||||||||
| Other Comprehensive Income | |||||||||||||||||||||||
| Foreign currency translation adjustments | 1 | 9 | |||||||||||||||||||||
| Defined benefit plans | — | (1) | |||||||||||||||||||||
| Other comprehensive income | 1 | 8 | |||||||||||||||||||||
| Comprehensive (Loss)/Income | $ | (1,334) | $ | 1,744 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
Draft 4 04/21/2023
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions, except share data and liquidation preference on preferred stock) | (Unaudited) | (Audited) | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 407 | $ | 430 | |||||||
| Funds deposited by counterparties | 330 | 1,708 | |||||||||
| Restricted cash | 32 | 40 | |||||||||
| Accounts receivable, net | 3,519 | 4,773 | |||||||||
| Inventory | 722 | 751 | |||||||||
| Derivative instruments | 4,400 | 7,886 | |||||||||
| Cash collateral paid in support of energy risk management activities | 293 | 260 | |||||||||
| Prepayments and other current assets | 505 | 383 | |||||||||
| Total current assets | 10,208 | 16,231 | |||||||||
| Property, plant and equipment, net | 1,835 | 1,692 | |||||||||
| Other Assets | |||||||||||
| Equity investments in affiliates | 136 | 133 | |||||||||
| Operating lease right-of-use assets, net | 247 | 225 | |||||||||
| Goodwill | 5,343 | 1,650 | |||||||||
| Intangible assets, net | 4,419 | 2,132 | |||||||||
| Nuclear decommissioning trust fund | 879 | 838 | |||||||||
| Derivative instruments | 3,350 | 4,108 | |||||||||
| Deferred income taxes | 2,925 | 1,881 | |||||||||
| Other non-current assets | 354 | 256 | |||||||||
| Total other assets | 17,653 | 11,223 | |||||||||
| Total Assets | $ | 29,696 | $ | 29,146 | |||||||
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| March 31, 2023 | December 31, 2022 | ||||||||||
| (In millions, except share data and liquidation preference on preferred stock) | (Unaudited) | (Audited) | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Current portion of long-term debt and finance leases | $ | 971 | $ | 63 | |||||||
| Current portion of operating lease liabilities | 94 | 83 | |||||||||
| Accounts payable | 2,330 | 3,643 | |||||||||
| Derivative instruments | 4,350 | 6,195 | |||||||||
| Cash collateral received in support of energy risk management activities | 330 | 1,708 | |||||||||
| Deferred revenue current | 688 | 176 | |||||||||
| Accrued expenses and other current liabilities | 1,563 | 1,114 | |||||||||
| Total current liabilities | 10,326 | 12,982 | |||||||||
| Other Liabilities | |||||||||||
| Long-term debt and finance leases | 11,332 | 7,976 | |||||||||
| Non-current operating lease liabilities | 196 | 180 | |||||||||
| Nuclear decommissioning reserve | 344 | 340 | |||||||||
| Nuclear decommissioning trust liability | 514 | 477 | |||||||||
| Derivative instruments | 1,893 | 2,246 | |||||||||
| Deferred income taxes | 133 | 134 | |||||||||
| Deferred revenue non-current | 848 | 10 | |||||||||
| Other non-current liabilities | 1,030 | 973 | |||||||||
| Total other liabilities | 16,290 | 12,336 | |||||||||
| Total Liabilities | 26,616 | 25,318 | |||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders' Equity | |||||||||||
| Preferred stock; 10,000,000 shares authorized; 650,000 Series A shares issued and outstanding at March 31, 2023 (liquidation preference $1,000); 0 shares issued and outstanding at December 31, 2022 | 650 | — | |||||||||
| Common stock; $0.01 par value; 500,000,000 shares authorized; 424,292,409 and 423,897,001 shares issued and 229,956,438 and 229,561,030 shares outstanding at March 31, 2023 and December 31, 2022, respectively | 4 | 4 | |||||||||
| Additional paid-in-capital | 8,481 | 8,457 | |||||||||
| (Accumulated deficit)/Retained earnings | (15) | 1,408 | |||||||||
| Treasury stock, at cost 194,335,971 shares at March 31, 2023 and December 31, 2022 | (5,864) | (5,864) | |||||||||
| Accumulated other comprehensive loss | (176) | (177) | |||||||||
| Total Stockholders' Equity | 3,080 | 3,828 | |||||||||
| Total Liabilities and Stockholders' Equity | $ | 29,696 | $ | 29,146 |
See accompanying notes to condensed consolidated financial statements.
Draft 4 04/21/2023
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended March 31, | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net (Loss)/Income | $ | (1,335) | $ | 1,736 | |||||||
| Adjustments to reconcile net (loss)/income to cash (used)/provided by operating activities: | |||||||||||
| Distributions from and equity in (earnings)/losses of unconsolidated affiliates | (5) | 18 | |||||||||
| Depreciation and amortization | 190 | 183 | |||||||||
| Accretion of asset retirement obligations | 6 | 7 | |||||||||
| Provision for credit losses | 35 | 25 | |||||||||
| Amortization of nuclear fuel | 13 | 14 | |||||||||
| Amortization of financing costs and debt discounts | 20 | 6 | |||||||||
| Amortization of in-the-money contracts and emissions allowances | 119 | 147 | |||||||||
| Amortization of unearned equity compensation | 30 | 6 | |||||||||
| Net gain on sale of assets and disposal of assets | (187) | (6) | |||||||||
| Changes in derivative instruments | 1,599 | (2,816) | |||||||||
| Changes in current and deferred income taxes and liability for uncertain tax benefits | (338) | 575 | |||||||||
| Changes in collateral deposits in support of risk management activities | (1,412) | 2,007 | |||||||||
| Changes in nuclear decommissioning trust liability | (16) | (7) | |||||||||
| Changes in other working capital | (317) | (219) | |||||||||
| Cash (used)/provided by operating activities | (1,598) | 1,676 | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Payments for acquisitions of businesses and assets, net of cash acquired | (2,492) | (26) | |||||||||
| Capital expenditures | (142) | (60) | |||||||||
| Net purchases of emission allowances | (18) | (18) | |||||||||
| Investments in nuclear decommissioning trust fund securities | (87) | (151) | |||||||||
| Proceeds from the sale of nuclear decommissioning trust fund securities | 99 | 161 | |||||||||
| Proceeds from sales of assets, net of cash disposed | 219 | 14 | |||||||||
| Proceeds from insurance recoveries for property, plant and equipment, net | 71 | — | |||||||||
| Cash used by investing activities | (2,350) | (80) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Proceeds from issuance of preferred stock, net of fees | 636 | — | |||||||||
| Payments of dividends to common stockholders | (87) | (85) | |||||||||
| Payments for share repurchase activity | (8) | (188) | |||||||||
| Net receipts from settlement of acquired derivatives that include financing elements | 336 | 561 | |||||||||
| Net proceeds of Revolving Credit Facility and Receivables Securitization Facilities | 950 | — | |||||||||
| Proceeds from issuance of long-term debt | 731 | — | |||||||||
| Payments of debt issuance costs | (18) | — | |||||||||
| Repayments of long-term debt and finance leases | (4) | (1) | |||||||||
| Cash provided by financing activities | 2,536 | 287 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3 | 3 | |||||||||
| Net (Decrease)/Increase in Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash | (1,409) | 1,886 | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at Beginning of Period | 2,178 | 1,110 | |||||||||
| Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at End of Period | $ | 769 | $ | 2,996 |
See accompanying notes to condensed consolidated financial statements.
Draft 4 04/21/2023
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| (In millions) | Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings/(Accumulated deficit) | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stock-holders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | — | $ | 4 | $ | 8,457 | $ | 1,408 | $ | (5,864) | $ | (177) | $ | 3,828 | |||||||||||||||||||||||||||||||||||||||
| Net loss | (1,335) | (1,335) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A Preferred Stock | 650 | (14) | 636 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based awards activity, net(a) | 38 | 38 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends and dividend equivalents declared(b) | (88) | (88) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 650 | $ | 4 | $ | 8,481 | $ | (15) | $ | (5,864) | $ | (176) | $ | 3,080 | |||||||||||||||||||||||||||||||||||||||
| (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 | |||||||||||||||||||||||||||||||||||
(a)Includes $(8) million and $(6) million of equivalent shares purchased in lieu of tax withholding on equity compensation issuances for the quarters ended March 31, 2023 and 2022, respectively.
(b)Dividends per common share were $0.3775 and $0.35 for the quarters ended March 31, 2023 and 2022.
See accompanying notes to condensed consolidated financial statements.
Draft 4 04/21/2023
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 leading energy, smart home and services company fueled by market-leading brands, proprietary technologies, and complementary sales channels. NRG brings the power of energy to customers by producing and selling energy and related products and services. Across the United States and Canada, NRG develops innovative, sustainable solutions, predominately under brand names such as NRG, Reliant, Direct Energy, Green Mountain Energy and Vivint. The Company has a customer base that includes approximately 7.5 million residential consumers in addition to commercial, industrial, and wholesale customers, supported by approximately 16 GW of generation.
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 customer, 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;
-
Vivint smart home; 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 2022 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, 2023, and the results of operations, comprehensive income, cash flows and statements of stockholders' equity for the three months ended March 31, 2023 and 2022.
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
Vivint Flex Pay
Under the Vivint Flex Pay plan (“Vivint Flex Pay”), customers pay separately for smart home products and smart home and security services. The customer has the ability to pay for Vivint products in the following three ways: (i) qualified customers may finance the purchase through third-party financing providers ("Consumer Financing Program" or “CFP”), (ii) Vivint generally offers a limited number of customers not eligible for the CFP, but who qualify under Vivint’s underwriting criteria, the option to enter into a retail installment contract directly with Vivint or (iii) customers may conduct purchases by check, automatic clearing house payments, credit or debit card or by obtaining short term financing (generally no more than six-month installment terms) through Vivint.
Draft 4 04/21/2023
Although customers pay separately for products and services under Vivint Flex Pay, the Company has determined that the sale of products and services are one single performance obligation resulting in deferred revenue for the gross amount of products sold. For products financed through the CFP, gross deferred revenues are reduced by (i) any fees the third-party financing provider (“Financing Provider”) is contractually entitled to receive at the time of loan origination, and (ii) the present value of expected future payments due to the Financing Providers. Loans are issued on either an installment or revolving basis with repayment terms ranging from 6 to 60 months.
For certain Financing Provider loans:
-
Vivint pays a monthly fee based on either the average daily outstanding balance of the installment loans, or the number of outstanding loans.
-
Vivint incurs fees at the time of the loan origination and receives proceeds that are net of these fees.
-
Vivint also shares liability for credit losses, with Vivint being responsible for between 2.6% and 100% of lost principal balances.
Due to the nature of these provisions, the Company records a derivative liability at its fair value when the Financing Provider originates loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative liability is reduced as payments are made by Vivint to the Financing Provider. Subsequent changes to the fair value of the derivative liability are realized through other income, net in the consolidated statements of operations. For further discussion, see Note 7, Accounting for Derivative Instruments and Hedging Activities.
Capitalized Contract Costs
Capitalized contract costs represent the costs directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts. These costs include installed products, commissions, other compensation and cost of installation of new or upgraded customer contracts. The Company calculates amortization by accumulating all deferred contract costs into separate portfolios based on the initial month of service and amortizes those deferred contract costs on a straight-line basis over the expected period of benefit, consistent with the pattern in which the Company provides services to its customers. The expected period of benefit for customers is approximately five years. The Company updates its estimate of the period of benefit periodically and whenever events or circumstances indicate that the period of benefit could change significantly. Such changes, if any, are accounted for prospectively as a change in estimate. Amortization of capitalized contract costs are included in cost of operations and selling, general and administrative costs on the consolidated statements of operations. Contract costs not directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts are expensed as incurred.
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, 2023 | December 31, 2022 | |||||||||
| Property, plant and equipment accumulated depreciation | $ | 1,518 | $ | 1,478 | |||||||
| Intangible assets accumulated amortization | 2,290 | 2,112 |
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.
Draft 4 04/21/2023
The following table represents the activity in the allowance for credit losses for the three months ended March 31, 2023 and 2022:
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||
| Beginning balance | $ | 133 | $ | 683 | |||||||||||||||||||
| Acquired balance from Vivint | 16 | — | |||||||||||||||||||||
| Provision for credit losses | 35 | 25 | |||||||||||||||||||||
| Write-offs | (78) | (50) | |||||||||||||||||||||
| Recoveries collected | 9 | 8 | |||||||||||||||||||||
| Ending balance | $ | 115 | $ | 666 |
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, 2023 | December 31, 2022 | |||||||||
| Cash and cash equivalents | $ | 407 | $ | 430 | |||||||
| Funds deposited by counterparties | 330 | 1,708 | |||||||||
| Restricted cash | 32 | 40 | |||||||||
| Cash and cash equivalents, funds deposited by counterparties and restricted cash shown in the statement of cash flows | $ | 769 | $ | 2,178 |
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 decrease in funds deposited by counterparties is driven by the significant decrease in forward positions as a result of decreases in natural gas and power prices compared to December 31, 2022. 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 financing agreements and funds held within the Company's projects that are restricted in their uses.
Goodwill
The following table represents the changes in goodwill during the three months ended March 31, 2023:
| (In millions) | Texas | East | West/Services/Other | Vivint | Total | ||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 710 | $ | 723 | $ | 217 | $ | — | $ | 1,650 | |||||||||||||||||||
| Goodwill resulting from the acquisition of Vivint | — | — | — | 3,692 | 3,692 | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | 710 | $ | 723 | $ | 218 | $ | 3,692 | $ | 5,343 |
Recent Accounting Developments - Guidance Adopted in 2023
ASU 2021-08 — In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, or ASU 2021-08, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination as if it had originated the contracts in accordance with ASC 606, Revenue from Contracts with Customers. As a result, an acquirer should recognize and measure the acquired contract assets and contract liabilities consistently with how they were recognized and measured in the acquiree’s financial statements. The amendments per ASU 2021-08 apply only to contract assets and contract liabilities from contracts with customers, as defined in Topic 606, such as refund liabilities and upfront payments to customers. Assets and liabilities under related Topics, such as deferred costs under Subtopic 340-40, Other Assets and Deferred Costs — Contracts
Draft 4 04/21/2023
with Customers, are not within the scope of amendments per ASU 2021-08. The Company adopted ASU 2021-08 prospectively effective January 1, 2023 and applied the amended requirements to the acquisition of Vivint.
Note 3 — Revenue Recognition
Vivint Retail Revenue
Vivint offers its customers combinations of smart home products and services, which together create an integrated smart home system that allows the Company's customers to monitor, control and protect their home. As the products and services included in the customer's contract are integrated and highly interdependent, and because the products (including installation) and services must work together to deliver the monitoring, controlling and protection of their home, the Company has concluded that the products and services contracted for by the customer are generally not distinct within the context of the contract and, therefore, constitute a single, combined performance obligation. Revenues for this single, combined performance obligation are recognized on a straight-line basis over the customer's contract term, which is the period in which the parties to the contract have enforceable rights and obligations. The Company has determined that certain contracts that do not require a long-term commitment for monitoring services by the customer contain a material right to renew the contract, because the customer does not have to purchase the products upon renewal. Proceeds allocated to the material right are recognized over the period of the benefit. The majority of Vivint's subscription contracts are five years and are generally non-cancelable. These contracts generally convert into month-to-month agreements at the end of the initial term, while some customers are month-to-month from inception. Payment for Vivint services is generally due in advance on a monthly basis. Product sales and other one-time fees are invoiced to customers at time of sale. Revenues for any products or services that are considered separate performance obligations are recognized upon delivery. Payments received or billed in advance are reported as deferred revenues.
Performance Obligations
As of March 31, 2023, estimated future fixed fee performance obligations are $1.0 billion for the remaining nine months of fiscal year 2023, and $1.1 billion, $828 million, $510 million, $227 million and $4 million for the fiscal years 2024, 2025, 2026, 2027 and 2028, respectively. These performance obligations include Vivint products and services as well as cleared auction MWs in the PJM, ISO-NE, NYISO and MISO capacity auctions and are subject to penalties for non-performance.
Draft 4 04/21/2023
Disaggregated Revenues
The following tables represent the Company’s disaggregation of revenue from contracts with customers for the three months ended March 31, 2023 and 2022:
| Three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Vivint**(a)** | Corporate/Eliminations | Total | |||||||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||||||||
| Home*(b)* | $ | 1,236 | $ | 651 | $ | 625 | $ | 148 | $ | — | $ | 2,660 | |||||||||||||||||||||||
| Business | 722 | 3,365 | 616 | — | — | 4,703 | |||||||||||||||||||||||||||||
| Total retail revenue*(c)* | 1,958 | 4,016 | 1,241 | 148 | — | 7,363 | |||||||||||||||||||||||||||||
| Energy revenue(c) | 4 | 74 | 48 | — | 2 | 128 | |||||||||||||||||||||||||||||
| Capacity revenue(c) | — | 41 | 1 | — | — | 42 | |||||||||||||||||||||||||||||
| Mark-to-market for economic hedging activities(d) | — | 35 | 67 | — | (11) | 91 | |||||||||||||||||||||||||||||
| Contract amortization | — | (11) | — | — | — | (11) | |||||||||||||||||||||||||||||
| Other revenue(c) | 72 | 21 | 17 | — | (1) | 109 | |||||||||||||||||||||||||||||
| Total revenue | 2,034 | 4,176 | 1,374 | 148 | (10) | 7,722 | |||||||||||||||||||||||||||||
| Less: Revenues accounted for under topics other than ASC 606 and ASC 815 | — | (1) | 9 | — | — | 8 | |||||||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | (2) | 113 | 97 | — | (9) | 199 | |||||||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 2,036 | $ | 4,064 | $ | 1,268 | $ | 148 | $ | (1) | $ | 7,515 | |||||||||||||||||||||||
| (a) Vivint includes results of operations following the acquisition date of March 10, 2023 | |||||||||||||||||||||||||||||||||||
| (b) Home includes Services and Vivint | |||||||||||||||||||||||||||||||||||
| (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 | Vivint | Corporate/Eliminations | Total | |||||||||||||||||||||||||||||
| Retail revenue | $ | — | $ | 27 | $ | — | $ | — | $ | — | $ | 27 | |||||||||||||||||||||||
| Energy revenue | — | 47 | 17 | — | 2 | 66 | |||||||||||||||||||||||||||||
| Capacity revenue | — | 6 | — | — | — | 6 | |||||||||||||||||||||||||||||
| Other revenue | (2) | (2) | 13 | — | — | 9 | |||||||||||||||||||||||||||||
| (d) Revenue relates entirely to unrealized gains and losses on derivative instruments accounted for under ASC 815 |
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| Three months ended March 31, 2022 | |||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate/Eliminations | Total | ||||||||||||||||||||||||
| Retail revenue: | |||||||||||||||||||||||||||||
| Home*(a)* | $ | 1,283 | $ | 579 | $ | 703 | $ | — | $ | 2,565 | |||||||||||||||||||
| Business | 663 | 3,942 | 400 | — | 5,005 | ||||||||||||||||||||||||
| Total retail revenue | 1,946 | 4,521 | 1,103 | — | 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) | 61 | 14 | 4 | (5) | 74 | ||||||||||||||||||||||||
| Total revenue | 2,020 | 4,715 | 1,144 | 17 | 7,896 | ||||||||||||||||||||||||
| Less: Revenues accounted for under topics other than ASC 606 and ASC 815 | — | (9) | 11 | — | 2 | ||||||||||||||||||||||||
| Less: Realized and unrealized ASC 815 revenue | (7) | (66) | (42) | 20 | (95) | ||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 2,027 | $ | 4,790 | $ | 1,175 | $ | (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 |
Contract Balances
The following table reflects the contract assets and liabilities included in the Company’s balance sheet as of March 31, 2023 and December 31, 2022:
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Deferred customer acquisition costs | $ | 188 | $ | 126 | |||||||
| Accounts receivable, net - Contracts with customers | 3,416 | 4,704 | |||||||||
| Accounts receivable, net - Accounted for under topics other than ASC 606 | 87 | 64 | |||||||||
| Accounts receivable, net - Affiliate | 16 | 5 | |||||||||
| Total accounts receivable, net | $ | 3,519 | $ | 4,773 | |||||||
| Unbilled revenues (included within Accounts receivable, net - Contracts with customers) | $ | 1,290 | $ | 1,952 | |||||||
| Deferred revenues(a) | 1,536 | 186 |
(a) Deferred revenues from contracts with customers for the three months ended March 31, 2023 and the year ended December 31, 2022 were approximately $1.5 billion and $175 million, respectively. The increase in deferred revenues is primarily due to acquisition of Vivint
The revenue recognized from contracts with customers during the three months ended March 31, 2023 and 2022 relating to the deferred revenue balance at the beginning of each period was $168 million and $117 million, respectively. The change in deferred revenue balances recognized during the three months ended March 31, 2023 and 2022 was primarily due to the timing difference of when consideration was received and when the performance obligation was transferred.
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Note 4 — Acquisitions and Dispositions
Acquisitions
Vivint Smart Home Acquisition
On March 10, 2023 (the "Acquisition Closing Date"), the Company completed the acquisition of Vivint Smart Home Inc., pursuant to the Agreement and Plan of Merger, dated as of December 6, 2022, by and among the Company, Vivint and Jetson Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”) pursuant to which Merger Sub merged with and into Vivint, with Vivint surviving the merger as a wholly-owned subsidiary of the Company. Dedicated to redefining the home experience with intelligent products and services, Vivint brings nearly two million customers to NRG. Vivint's single, expandable platform incorporates artificial intelligence and machine learning into its operating system and its vertically integrated business model includes hardware, software, sales, installation, support and professional monitoring, enabling superior customer experiences and a complete end-to-end smart home experience. The acquisition accelerates the realization of NRG's consumer-focused growth strategy and creates a leading essential home services platform fueled by market-leading brands, unparalleled insights, proprietary technologies and complementary sales channels.
NRG paid $12 per share, or $2.609 billion in cash. The Company funded the acquisition using:
-
proceeds of $724 million from newly issued $740 million 7.000% Senior Secured First Lien Notes due 2033, net of issuance costs and discount;
-
proceeds of $636 million from newly issued $650 million 10.25% Series A Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Stock, net of issuance costs;
-
proceeds of approximately $900 million drawn from its Revolving Credit Facility and Receivables Securitization Facilities; and
-
cash on hand.
In February 2023, the Company increased its Revolving Credit Facility by $600 million to meet the additional liquidity requirements related to the acquisition. For further discussion see Note 8, Long-term Debt and Finance Leases.
Acquisition costs of $36 million for the three months ended March 31, 2023 are included in acquisition-related transaction and integration costs in the Company's consolidated statement of operations.
The acquisition has been recorded as a business combination under ASC 805, with identifiable assets and liabilities acquired provisionally recorded at their estimated fair values on the Acquisition Closing Date. The initial accounting for the business combination is not complete because the evaluation necessary to assess the fair value of certain net assets acquired and the amount of goodwill to be recognized is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the Acquisition Closing Date.
The total consideration of $2.623 billion includes:
| (In millions) | ||||||||
| Vivint common shares outstanding as of March 10, 2023 of 216,901,639 at $12.00 per share | $ | 2,603 | ||||||
| Other Vivint equity instruments (Cash out RSUs and PSUs, Stock Appreciation Rights, Private Placement Warrants) | 6 | |||||||
| Total Cash Consideration | $ | 2,609 | ||||||
| Fair value of acquired Vivint equity awards attributable to pre-combination service | 14 | |||||||
| Total Consideration | $ | 2,623 |
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The purchase price is provisionally allocated as follows:
| (In millions) | |||||
| Current Assets | |||||
| Cash and cash equivalents | $ | 120 | |||
| Accounts receivable, net | 60 | ||||
| Inventory | 113 | ||||
| Prepayments and other current assets | 37 | ||||
| Total current assets | 330 | ||||
| Property, plant and equipment, net | 49 | ||||
| Other Assets | |||||
| Operating lease right-of-use assets, net | 35 | ||||
| Goodwill(a) | 3,692 | ||||
| Intangibles assets, net | 2,500 | ||||
| Deferred income taxes | 451 | ||||
| Other non-current assets | 14 | ||||
| Total other assets | 6,692 | ||||
| Total Assets | $ | 7,071 | |||
| Current Liabilities | |||||
| Current portion of long-term debt and finance leases | $ | 14 | |||
| Current portion of operating lease liabilities | 13 | ||||
| Accounts payable | 109 | ||||
| Derivatives instruments | 80 | ||||
| Deferred revenue current | 517 | ||||
| Accrued expenses and other current liabilities | 207 | ||||
| Total current liabilities | 940 | ||||
| Other Liabilities | |||||
| Long-term debt and finance leases | 2,572 | ||||
| Non-current operating lease liabilities | 28 | ||||
| Derivatives instruments | 32 | ||||
| Deferred income taxes | 18 | ||||
| Deferred revenue non-current | 835 | ||||
| Other non-current liabilities | 23 | ||||
| Total other liabilities | 3,508 | ||||
| Total Liabilities | $ | 4,448 | |||
| Vivint Purchase Price | $ | 2,623 |
(a) Goodwill arising from the acquisition is attributed to the value of the platform acquired, cross-selling opportunities, customer growth and the synergies expected from combining the operations of Vivint with NRG's existing businesses. None of the goodwill recorded is expected to be deductible for tax purposes.
Fair Value Measurement of Intangible Assets
The fair values of intangible assets as of the Acquisition Closing Date were measured primarily based on significant inputs that are observable and unobservable in the market and thus represent Level 2 and Level 3 measurements, respectively. Significant inputs were as follows:
Customer relationships — Customer relationships, reflective of Vivint’s customer base, were valued using an excess earning method of the income approach, and is classified as level 3. Under this approach, the Company estimated the present
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value of expected future cash flows resulting from existing customer relationships, considering attrition and charges for contributory assets (such as net working capital, fixed assets, workforce, trade name and technology) utilized in the business, discounted using a weighted average cost of capital of comparable companies. The customer relationships are amortized to depreciation and amortization, ratably based on discounted future cash flows.
Technology – Developed technology was valued using a "relief from royalty" method of the income approach, and is classified as Level 3. Under this approach, the fair value was estimated to be the present value of royalties saved which assumed the value of the asset based on discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the asset and instead licensed the asset from another company. The estimated cash flows from the developed technology considered the obsolescence factor and was discounted using a weighted average cost of capital of comparable companies. The developed technology is amortized to depreciation and amortization, ratably based on discounted future cash flows.
Trade name — Trade name was valued using a "relief from royalty" method of the income approach, and is classified as level 3. Under this approach, the fair value is estimated to be the present value of royalties saved which assumed the value of the asset based on discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the asset and instead licensed the asset from another company. The estimated cash flows from the trade name considered the expected probable use of the asset and was discounted using a weighted average cost of capital of comparable companies. The trade name is amortized to depreciation and amortization, on a straight line basis, over the expected life of the asset.
Fair Value Measurement of Acquired Vivint’s Debt
The Company acquired $2.7 billion in aggregate principal of Vivint’s 2027 Senior Secured Notes, 2029 Senior notes and 2028 Senior Secured Term Loan (together, the Acquired Vivint’s Debt) which were recorded at fair value as of the Acquisition Closing Date. The difference between the fair value at the Acquisition Closing Date and the principal outstanding of the Acquired Vivint’s Debt, of $152 million, is being amortized through interest expense over the remaining term of the debt. The Acquired Vivint’s Debt are classified as level 2 and were measured at fair value using observable market inputs based on interest rates at the Acquisition Closing Date. For additional discussion see Note 8, Long-term Debt and Finance Leases.
Fair Value Measurement of Derivatives Liabilities
The derivative liabilities are recorded in connection with the contractual future payment obligations with the financing providers under Vivint’s Consumer Financing Program. The fair values of the derivatives liabilities as of the Acquisition Closing Date were valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced using a credit valuation adjustment methodology, and are classified as level 3. Changes to the fair value are recorded through other income, net in the Consolidated Statement of Operations. For additional discussion see Note 7, Accounting for Derivative Instruments and Hedging Activities.
Supplemental Pro Forma Financial Information for the three months ended March 31, 2023 and 2022
The following table provides pro forma combined financial information of NRG and Vivint, after giving effect to the Vivint acquisition and related financing transactions as if they had occurred on January 1, 2022. The pro forma financial information has been prepared for illustrative and informational purposes only, and is not intended to project future operating results or be indicative of what the Company's financial performance would have been had the transactions occurred on the date acquired. No effect has been given to operating synergies.
| (In millions) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||||
| Total operating revenues | $ | 8,008 | $ | 8,288 | |||||||
| Net (loss)/ income | (1,329) | 1,558 |
Amounts above reflect certain pro forma adjustments that were directly attributable to the Vivint acquisition. These adjustments include the following:
(i)Income statement effects of fair value adjustments based on the preliminary purchase price allocation including amortization of intangible assets, reversal of historical Vivint amortization of capitalized contract costs and reversal of historical Vivint other income recorded for the change in fair value of warrant derivative liabilities, as the warrants are assumed to be cashed out upon the close of the Acquisition.
(ii)Adjustments to record additional stock-based compensation expense related to acquired Vivint equity awards in the 2022 period. Additionally, one-time stock-based compensation expense related primarily to the acceleration of Vivint equity awards is removed from the three months ended March 31, 2023 and reflected in the 2022 period.
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(iii)Adjustments to reflect all acquisition and related transactions costs occurring during the three months ended March 31, 2022.
(iv)Interest expense assumes the financing transactions directly attributable to the Vivint acquisition occurred on January 1, 2022.
(v)Adjustments related to recording Vivint's historical debt at Acquisition Closing Date fair value.
(vi)Adjustments to reflect the write-off of short-term deferred financing costs related to the bridge facility put in place for the acquisition prior to securing permanent financing during the 2022 period instead of the 2023 period.
(vii)Tax effects of pro forma adjustments on both periods and the shifting of the recognition of one-time tax benefits resulting from the acquisition from the three months ended March 31, 2023 to the 2022 period.
Dispositions
Sale of Astoria
On January 6, 2023, the Company closed on the sale of land and related generation assets from the Astoria site, within the East region of operations, for initial proceeds of $212 million, subject to transaction fees of $3 million and certain indemnifications, resulting in a $199 million gain. As part of the transaction, NRG entered into an agreement to lease the land back for the purpose of operating the Astoria gas turbines. The lease agreement is expected to terminate by the end of the year.
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 long-term debt, including current portion, is as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Convertible Senior Notes | $ | 575 | $ | 595 | $ | 575 | $ | 576 | |||||||||||||||
| Other long-term debt, including current portion | 11,784 | 11,012 | 7,523 | 6,432 | |||||||||||||||||||
| Total long-term debt, including current portion(a) | $ | 12,359 | $ | 11,607 | $ | 8,098 | $ | 7,008 |
(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 and the Vivint Senior Secured Term Loan are based on quoted market prices and are classified as Level 2 within the fair value hierarchy. The estimated fair value of the borrowing under the Revolving Credit Facility and Receivable Securitization Facilities approximates the carrying value because the interest rates vary with market interest rates, and is classified as Level 3 within the fair value hierarchy. The following table presents the level within the fair value hierarchy for long-term debt, including current portion, as of March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 | |||||||||||||||||||
| Convertible Senior Notes | $ | 595 | $ | — | $ | 576 | $ | — | |||||||||||||||
| Other long-term debt, including current portion | 10,062 | 950 | 6,432 | — | |||||||||||||||||||
| Total long-term debt, including current portion | $ | 10,657 | $ | 950 | $ | 7,008 | $ | — |
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.
Draft 4 04/21/2023
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, 2023 | |||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 19 | $ | — | $ | 19 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 13 | 13 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 98 | 96 | 2 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 101 | — | 101 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 34 | — | 34 | — | |||||||||||||||||||
| Corporate debt securities | 113 | — | 113 | — | |||||||||||||||||||
| Equity securities | 430 | 430 | — | — | |||||||||||||||||||
| Foreign government fixed income securities | 1 | 1 | — | — | |||||||||||||||||||
| Other trust fund investments (classified within other non-current assets): | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1 | 1 | — | — | |||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||
| Foreign exchange contracts | 15 | — | 15 | — | |||||||||||||||||||
| Commodity contracts | 7,725 | 1,331 | 5,360 | 1,034 | |||||||||||||||||||
| Interest rate contracts | 10 | — | 10 | — | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 89 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 6 | ||||||||||||||||||||||
| Total assets | $ | 8,655 | $ | 1,872 | $ | 5,654 | $ | 1,034 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 1 | $ | — | $ | 1 | $ | — | |||||||||||||||
| Commodity contracts | 6,116 | 1,422 | 4,131 | 563 | |||||||||||||||||||
| Interest rate contracts | 15 | — | 15 | — | |||||||||||||||||||
| Consumer Financing Program | 111 | — | — | 111 | |||||||||||||||||||
| Total liabilities | $ | 6,243 | $ | 1,422 | $ | 4,147 | $ | 674 |
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| December 31, 2022 | |||||||||||||||||||||||
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Investments in securities (classified within other current and non-current assets) | $ | 19 | $ | — | $ | 19 | $ | — | |||||||||||||||
| Nuclear trust fund investments: | |||||||||||||||||||||||
| Cash and cash equivalents | 15 | 15 | — | — | |||||||||||||||||||
| U.S. government and federal agency obligations | 86 | 84 | 2 | — | |||||||||||||||||||
| Federal agency mortgage-backed securities | 101 | — | 101 | — | |||||||||||||||||||
| Commercial mortgage-backed securities | 35 | — | 35 | — | |||||||||||||||||||
| Corporate debt securities | 114 | — | 114 | — | |||||||||||||||||||
| Equity securities | 403 | 403 | — | — | |||||||||||||||||||
| Foreign government fixed income securities | 1 | — | 1 | — | |||||||||||||||||||
| Other trust fund investments (classified within other non-current assets): | |||||||||||||||||||||||
| U.S. government and federal agency obligations | 1 | 1 | — | — | |||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||
| Foreign exchange contracts | 18 | — | 18 | — | |||||||||||||||||||
| Commodity contracts | 11,976 | 1,929 | 8,796 | 1,251 | |||||||||||||||||||
| Measured using net asset value practical expedient: | |||||||||||||||||||||||
| Equity securities — nuclear trust fund investments | 83 | ||||||||||||||||||||||
| Equity securities (classified within other non-current assets) | 6 | ||||||||||||||||||||||
| Total assets | $ | 12,858 | $ | 2,432 | $ | 9,086 | $ | 1,251 | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 2 | $ | — | $ | 2 | $ | — | |||||||||||||||
| Commodity contracts | 8,439 | 1,244 | 6,449 | 746 | |||||||||||||||||||
| Total liabilities | $ | 8,441 | $ | 1,244 | $ | 6,451 | $ | 746 |
The following table reconciles, for the three months ended March 31, 2023 and 2022, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed consolidated financial statements, using significant unobservable inputs, for commodity derivatives:
| Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
| Commodity Derivatives**(a)** | |||||||||||||||||||||||
| (In millions) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||||||||||||||||
| Beginning balance | $ | 505 | $ | 293 | |||||||||||||||||||
| Total (losses)/gains realized/unrealized included in earnings | (91) | 166 | |||||||||||||||||||||
| Purchases | 41 | 23 | |||||||||||||||||||||
| Transfers into Level 3(b) | 24 | 53 | |||||||||||||||||||||
| Transfers out of Level 3(b) | (8) | (7) | |||||||||||||||||||||
| Ending balance | $ | 471 | $ | 528 | |||||||||||||||||||
| (Losses)/Gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of period end | $ | (55) | $ | 237 |
(a)Consists of derivative assets and liabilities, net, excluding derivatives liabilities from Consumer Financing Program, which are presented in a separate table below.
(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 commodity derivatives are recorded in revenues and cost of operations.
Draft 4 04/21/2023
The following table reconciles, for the three months ended March 31, 2023 the beginning and ending balances of the contractual obligations from the Consumer Financing Program 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) | |||||||||||||||||||||||
| Consumer Financing Program | |||||||||||||||||||||||
| (In millions) | Three months ended March 31, 2023 | ||||||||||||||||||||||
| Beginning balance | $ | — | |||||||||||||||||||||
| Contractual obligations added from the acquisition of Vivint | 112 | ||||||||||||||||||||||
| New contractual obligations | 2 | ||||||||||||||||||||||
| Settlements | (3) | ||||||||||||||||||||||
| Ending balance | $ | 111 | |||||||||||||||||||||
Gains and losses, when they occur, are recorded in other income, net.
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, 2023, contracts valued with prices provided by models and other valuation techniques make up 13% of derivative assets and 11% 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 Consumer Financing Program derivatives are valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology.
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, 2023 and December 31, 2022:
| March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Natural Gas Contracts | $ | 152 | $ | 196 | Discounted Cash Flow | Forward Market Price (per MMBtu) | $ | 1 | $ | 17 | $ | 4 | |||||||||||||||||||||||||||||
| Power Contracts | 827 | 292 | Discounted Cash Flow | Forward Market Price (per MWh) | 2 | 326 | 45 | ||||||||||||||||||||||||||||||||||
| FTRs | 55 | 75 | Discounted Cash Flow | Auction Prices (per MWh) | (30) | 145 | 0 | ||||||||||||||||||||||||||||||||||
| Consumer Financing Program | — | 111 | Discounted Cash Flow | Collateral Default Rate | 1.80 | % | 52.50 | % | 6.16 | % | |||||||||||||||||||||||||||||||
| Discounted Cash Flow | Collateral Prepayment Rate | 2.00 | % | 3.00 | % | 2.87 | % | ||||||||||||||||||||||||||||||||||
| Discounted Cash Flow | Loss Severity Rates | 6.00 | % | 36.00 | % | 10.88 | % | ||||||||||||||||||||||||||||||||||
| $ | 1,034 | $ | 674 |
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| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Fair Value | Input/Range | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Assets | Liabilities | Valuation Technique | Significant Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||||
| Natural Gas Contracts | $ | 340 | $ | 448 | Discounted Cash Flow | Forward Market Price (per MMBtu) | $ | 2 | $ | 48 | $ | 6 | |||||||||||||||||||||||||||||
| Power Contracts | 843 | 216 | Discounted Cash Flow | Forward Market Price (per MWh) | 3 | 431 | 48 | ||||||||||||||||||||||||||||||||||
| FTRs | 68 | 82 | Discounted Cash Flow | Auction Prices (per MWh) | (32) | 610 | 0 | ||||||||||||||||||||||||||||||||||
| $ | 1,251 | $ | 746 | ||||||||||||||||||||||||||||||||||||||
The following table provides sensitivity of fair value measurements to increases/(decreases) in significant, unobservable inputs as of March 31, 2023 and December 31, 2022:
| 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) | |||||||||||||||||
| Collateral Default Rates | n/a | Increase/(Decrease) | Higher/(Lower) | |||||||||||||||||
| Collateral Prepayment Rates | n/a | Increase/(Decrease) | Lower/(Higher) | |||||||||||||||||
| Loss Severity Rates | n/a | Increase/(Decrease) | Higher/(Lower) |
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, 2023, the credit reserve resulted in a $10 million decrease primarily within cost of operations. As of December 31, 2022, the credit reserve resulted in a $9 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 2022 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.
Draft 4 04/21/2023
Counterparty Credit Risk
The Company's counterparty credit risk policies are disclosed in its 2022 Form 10-K. As of March 31, 2023, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $1.7 billion and NRG held collateral (cash and letters of credit) against those positions of $554 million, resulting in a net exposure of $1.1 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 52% of the Company's exposure before collateral is expected to roll off by the end of 2024. 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 | 71 | % | |||
| Financial institutions | 29 | ||||
| Total as of March 31, 2023 | 100 | % |
| Net Exposure (a)(b) | |||||
| Category by Counterparty Credit Quality | (% of Total) | ||||
| Investment grade | 55 | % | |||
| Non-investment grade/non-rated | 45 | ||||
| Total as of March 31, 2023 | 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 exposure to two wholesale counterparties in excess of 10% of total net exposure as of March 31, 2023. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration.
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 Renewable 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, 2023, aggregate credit risk exposure managed by NRG to these counterparties was approximately $1.1 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 as well as through Vivint, which serve both 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
Draft 4 04/21/2023
forward value. The Company manages retail credit risk through the use of established credit policies, which include monitoring of the portfolio and the use of credit mitigation measures such as deposits or prepayment arrangements.
As of March 31, 2023, 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, 2023 | As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| (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 | $ | 13 | $ | — | $ | — | — | $ | 15 | $ | — | $ | — | — | |||||||||||||||||||||||||||||||||
| U.S. government and federal agency obligations | 98 | 1 | 4 | 11 | 86 | — | 5 | 11 | |||||||||||||||||||||||||||||||||||||||
| Federal agency mortgage-backed securities | 101 | — | 8 | 26 | 101 | — | 11 | 26 | |||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 34 | — | 3 | 29 | 35 | — | 4 | 30 | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 113 | 1 | 9 | 11 | 114 | — | 13 | 12 | |||||||||||||||||||||||||||||||||||||||
| Equity securities | 519 | 374 | — | — | 486 | 346 | 3 | — | |||||||||||||||||||||||||||||||||||||||
| Foreign government fixed income securities | 1 | — | — | 20 | 1 | — | — | 17 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 879 | $ | 376 | $ | 24 | $ | 838 | $ | 346 | $ | 36 |
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) | 2023 | 2022 | |||||||||
| Realized gains | $ | 2 | $ | 1 | |||||||
| Realized losses | (5) | (4) | |||||||||
| Proceeds from sale of securities | 99 | 161 |
Note 7 — Accounting for Derivative Instruments and Hedging Activities
Energy-Related Commodities
As of March 31, 2023, 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.
Interest Rate Swaps
NRG is exposed to changes in interest rate through the Company's issuance of variable rate debt. In order to manage the Company's interest rate risk, NRG enters into interest rate swap agreements. In the first quarter of 2023, the Company entered into $1.0 billion of interest rate swaps through 2027 to hedge the floating rate on the Term Loan acquired with the Vivint
Draft 4 04/21/2023
acquisition. Additionally, in the first quarter of 2023, the Company entered into a $720 million interest rate swap to hedge the floating rate on the Revolving Credit Facility extending through 2024.
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, 2023, NRG had foreign exchange contracts extending through 2026. The Company marks these derivatives to market through the statement of operations.
Consumer Financing Program
Under the Consumer Financing Program, Vivint pays a monthly fee to Financing Providers based on either the average daily outstanding balance of the Loans or the number of outstanding Loans. For certain loans, Vivint incurs fees at the time of the loan origination and receives proceeds that are net of these fees. Vivint also shares the liability for credit losses, depending on the credit quality of the customer. Due to the nature of certain provisions under the Consumer Financing Program, the Company records a derivative liability that is not designated as a hedging instrument and is adjusted to fair value, measured using the present value of the estimated future payments. Changes to the fair value are recorded through other income, net in the Consolidated Statement of Operations. The following represent the contractual future payment obligations with the Financing Providers under the Consumer Financing Program that are components of the derivative:
-
Vivint pays either a monthly fee based on the average daily outstanding balance of the Loans, or the number of outstanding Loans, depending on the Financing Provider;
-
Vivint shares the liability for credit losses depending on the credit quality of the customer; and
-
Vivint pays transactional fees associated with customer payment processing.
The derivative is classified as a Level 3 instrument. The derivative positions are valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology. In summary, the fair value represents an estimate of the present value of the cash flows Vivint will be obligated to pay to the Financing Provider for each component of the derivative.
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, 2023 and December 31, 2022. 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, 2023 | December 31, 2022 | |||||||||||
| Emissions | Short Ton | — | 1 | |||||||||||
| Renewable Energy Certificates | Certificates | 13 | 15 | |||||||||||
| Coal | Short Ton | 14 | 11 | |||||||||||
| Natural Gas | MMBtu | 667 | 422 | |||||||||||
| Oil | Barrels | — | 1 | |||||||||||
| Power | MWh | 198 | 192 | |||||||||||
| Consumer Financing Program | Dollars | 863 | — | |||||||||||
| Foreign Exchange | Dollars | 594 | 569 | |||||||||||
| Interest | Dollars | 1,720 | — |
Draft 4 04/21/2023
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, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | |||||||||||||||||||
| Derivatives Not Designated as Cash Flow or Fair Value Hedges: | |||||||||||||||||||||||
| Interest rate contracts - current | $ | 10 | $ | — | $ | — | $ | — | |||||||||||||||
| Interest rate contracts - long-term | — | — | 15 | — | |||||||||||||||||||
| Foreign exchange contracts - current | 9 | 11 | — | 1 | |||||||||||||||||||
| Foreign exchange contracts - long-term | 6 | 7 | 1 | 1 | |||||||||||||||||||
| Consumer Financing Program - short-term | — | — | 80 | — | |||||||||||||||||||
| Consumer Financing Program - long-term | — | — | 31 | — | |||||||||||||||||||
| Commodity contracts - current | 4,381 | 7,875 | 4,270 | 6,194 | |||||||||||||||||||
| Commodity contracts - long-term | 3,344 | 4,101 | 1,846 | 2,245 | |||||||||||||||||||
| Total Derivatives Not Designated as Cash Flow or Fair Value Hedges | $ | 7,750 | $ | 11,994 | $ | 6,243 | $ | 8,441 | |||||||||||||||
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, 2023 | ||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 15 | $ | (1) | $ | — | $ | 14 | ||||||||||||||||||
| Derivative liabilities | (1) | 1 | — | — | ||||||||||||||||||||||
| Total foreign exchange contracts | $ | 14 | $ | — | $ | — | $ | 14 | ||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 7,725 | $ | (5,750) | $ | (307) | $ | 1,668 | ||||||||||||||||||
| Derivative liabilities | (6,116) | 5,750 | 8 | (358) | ||||||||||||||||||||||
| Total commodity contracts | $ | 1,609 | $ | — | $ | (299) | $ | 1,310 | ||||||||||||||||||
| Consumer Financing Program: | ||||||||||||||||||||||||||
| Derivative liabilities | $ | (111) | $ | — | $ | — | $ | (111) | ||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||
| Derivative assets | $ | 10 | $ | (8) | $ | — | $ | 2 | ||||||||||||||||||
| Derivative liabilities | (15) | 8 | — | (7) | ||||||||||||||||||||||
| Total interest rate contracts | (5) | — | — | (5) | ||||||||||||||||||||||
| Total derivative instruments | $ | 1,507 | $ | — | $ | (299) | $ | 1,208 |
Draft 4 04/21/2023
| 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, 2022 | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||||||||
| Derivative assets | $ | 18 | $ | (2) | $ | — | $ | 16 | ||||||||||||||||||||||||
| Derivative liabilities | (2) | 2 | — | — | ||||||||||||||||||||||||||||
| Total foreign exchange contracts | $ | 16 | $ | — | $ | — | $ | 16 | ||||||||||||||||||||||||
| Commodity contracts: | ||||||||||||||||||||||||||||||||
| Derivative assets | $ | 11,976 | $ | (7,897) | $ | (1,659) | $ | 2,420 | ||||||||||||||||||||||||
| Derivative liabilities | (8,439) | 7,897 | 20 | (522) | ||||||||||||||||||||||||||||
| Total commodity contracts | $ | 3,537 | $ | — | $ | (1,639) | $ | 1,898 | ||||||||||||||||||||||||
| Total derivative instruments | $ | 3,553 | $ | — | $ | (1,639) | $ | 1,914 |
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.
| (In millions) | Three months ended March 31, | ||||||||||||||||||||||
| Unrealized mark-to-market results | 2023 | 2022 | |||||||||||||||||||||
| Reversal of previously recognized unrealized (gains) on settled positions related to economic hedges | $ | (846) | $ | (408) | |||||||||||||||||||
| Reversal of acquired (gain) positions related to economic hedges | (25) | (60) | |||||||||||||||||||||
| Net unrealized (losses)/gains on open positions related to economic hedges | (1,073) | 2,745 | |||||||||||||||||||||
| Total unrealized mark-to-market (losses)/gains for economic hedging activities | (1,944) | 2,277 | |||||||||||||||||||||
| Reversal of previously recognized unrealized losses on settled positions related to trading activity | 1 | 1 | |||||||||||||||||||||
| Net unrealized gains/(losses) on open positions related to trading activity | 11 | (15) | |||||||||||||||||||||
| Total unrealized mark-to-market gains/(losses) for trading activity | 12 | (14) | |||||||||||||||||||||
| Total unrealized (losses)/gains - commodities and foreign exchange | $ | (1,932) | $ | 2,263 |
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||
| Unrealized gains/(losses) included in revenues - commodities | $ | 103 | $ | (147) | |||||||||||||||||||
| Unrealized (losses)/gains included in cost of operations - commodities | (2,037) | 2,414 | |||||||||||||||||||||
| Unrealized gains/(losses) included in cost of operations - foreign exchange | 2 | (4) | |||||||||||||||||||||
| Total impact to statement of operations - commodities and foreign exchange | $ | (1,932) | $ | 2,263 | |||||||||||||||||||
| Total impact to statement of operations - interest rate contracts | $ | (5) | $ | — | |||||||||||||||||||
The effect of foreign exchange and commodity hedges are included within revenues and cost of operations. The effect of the interest rate contracts are included within interest expense.
The reversals of acquired gain 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, 2023, the $1.1 billion unrealized losses from open economic hedge positions was primarily the result of a decrease in value of forward positions as a result of decreases in natural gas and power prices.
Draft 4 04/21/2023
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.
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, 2023 was $612 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 $124 million as of March 31, 2023. In the event of a downgrade in the Company's credit rating and if called for by the counterparty, $33 million of additional collateral would be required for all contracts with credit rating contingent features as of March 31, 2023.
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, 2023 | December 31, 2022 | 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 | ||||||||||||||
| Senior Secured First Lien Notes, due 2033 | 740 | — | 7.000 | ||||||||||||||
| Revolving Credit Facility | 725 | — | SOFR + 1.720 | ||||||||||||||
| Receivables Facility | 150 | — | various | ||||||||||||||
| Repurchase Facility | 75 | — | SOFR + 1.300 | ||||||||||||||
| Tax-exempt bonds | 466 | 466 | 1.250 - 4.750 | ||||||||||||||
| Subtotal recourse debt | 9,790 | 8,100 | |||||||||||||||
| Non-recourse debt: | |||||||||||||||||
| Vivint Senior Secured Notes, due 2027 | 600 | — | 6.750 | ||||||||||||||
| Vivint Senior Notes, due 2029 | 800 | — | 5.750 | ||||||||||||||
| Vivint Senior Secured Term Loan, due 2028 | 1,330 | — | various | ||||||||||||||
| Subtotal all Vivint non-recourse debt | 2,730 | — | |||||||||||||||
| Subtotal long-term debt (including current maturities) | 12,520 | 8,100 | |||||||||||||||
| Finance leases | 19 | 11 | various | ||||||||||||||
| Subtotal long-term debt and finance leases (including current maturities) | 12,539 | 8,111 | |||||||||||||||
| Less current maturities | (971) | (63) | |||||||||||||||
| Less debt issuance costs | (75) | (70) | |||||||||||||||
| Discounts | (161) | (2) | |||||||||||||||
| Total long-term debt and finance leases | $ | 11,332 | $ | 7,976 |
(a)As of the ex-dividend date of April 28, 2023, the Convertible Senior Notes were convertible at a price of $42.57, which is equivalent to a conversion rate of approximately 23.4925 shares of common stock per $1,000 principal amount
Draft 4 04/21/2023
Recourse Debt
Issuance of 2033 Senior Secured First Lien Notes
On March 9, 2023, the Company issued $740 million of aggregate principal amount of 7.000% senior secured first lien notes due 2033 (the "2033 Senior Secured First Lien Notes"). The 2033 Senior Secured First Lien Notes are senior secured obligations of NRG and are guaranteed by certain of its subsidiaries. The 2033 Senior Secured First Lien Notes are secured by a first priority security interest in the same collateral that is pledged for the benefit of the lenders under the Revolving Credit Facility and existing senior secured notes, which collateral consists of a substantial portion of the property and assets owned by the Company and the guarantors. The collateral securing the 2033 Senior Secured First Lien Notes will be released at the Company’s request if the senior unsecured long-term debt securities of the Company are rated investment grade by any two of the three rating agencies, subject to reversion if such rating agencies withdraw such investment grade rating or downgrade such rating below investment grade. Interest is paid semi-annually beginning on September 15, 2023 until the maturity date of March 15, 2033. The proceeds of the 2033 Senior Secured First Lien Notes, along with cash on hand and other proceeds, were used to fund the acquisition of Vivint.
2048 Convertible Senior Notes
As of March 31, 2023, 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 $43.01 per common share, which is equivalent to a conversion rate of approximately 23.2527 shares of common stock per $1,000 principal amount of Convertible Senior Notes. The net carrying amounts of the Convertible Senior Notes as of March 31, 2023 and December 31, 2022 were $571 million and $570 million, respectively. The Convertible Senior Notes mature on June 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms. The Convertible Senior notes are convertible at the option of the holders under certain circumstances. Prior to the close of business on the business day immediately preceding December 1, 2024, the Convertible Senior Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter during specified periods as follows:
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from December 1, 2024 until the close of business on the second scheduled trading day immediately before June 1, 2025; and
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from December 1, 2047 until the close of business on the second scheduled trading day immediately before the maturity date
The following table details the interest expense recorded in connection with the Convertible Senior Notes, due 2048:
| Three months ended March 31, | |||||||||||||||||||||||
| ($ In millions) | 2023 | 2022 | |||||||||||||||||||||
| Contractual interest expense | $ | 4 | $ | 4 | |||||||||||||||||||
| Amortization of discount and deferred finance costs | 1 | — | |||||||||||||||||||||
| Total | $ | 5 | $ | 4 | |||||||||||||||||||
| Effective Interest Rate | 0.77 | % | 0.76 | % |
Revolving Credit Facility
On February 14, 2023, the Company amended its Revolving Credit Facility to: (i) increase the existing revolving commitments thereunder by $600 million, (ii) extend the maturity date of a portion of the revolving commitments thereunder to February 14, 2028, (iii) transition the benchmark rate applicable to revolving loans from LIBOR to SOFR and (iv) make certain other amendments to the terms of the Revolving Credit Facility for purposes of, among other things, providing additional flexibility. For further discussion, see Note 13, Long-term Debt and Finance Leases, of the Company’s 2022 Form 10-K.
On March 13, 2023, the Company amended its Revolving Credit Facility to, among other things, increase the existing revolving commitments by $45 million. As of March 31, 2023, there were outstanding borrowings of $725 million and there were $1.1 billion in letters of credit issued under the Revolving Credit Facility. As of April 30, 2023, there were outstanding borrowings of $650 million and $994 million in letters of credit issued under the Revolving Credit Facility.
Dunkirk Bonds
On April 3, 2023, NRG remarketed $59 million in aggregate principal amount of 4.25% tax-exempt refinancing bonds of the Chautauqua County Capital Resource Corporation (the "Dunkirk Bonds"). The Dunkirk Bonds are guaranteed on a first-priority basis by each of NRG's current and future subsidiaries that guarantee indebtedness under the Revolving Credit Facility. The Dunkirk Bonds are secured by a first priority security interest in the same collateral that is pledged for the benefit of the lenders under the Revolving Credit Facility, which consists of a substantial portion of the property and assets owned by NRG
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and the guarantors. The collateral securing the Dunkirk Bonds will, at the request of NRG, be released if NRG satisfies certain conditions, including receipt of an investment grade rating on its senior, unsecured debt securities from two out of the three rating agencies, subject to reversion if those rating agencies withdraw their investment grade rating of the Dunkirk Bonds or any of NRG's senior, unsecured debt securities or downgrade such ratings below investment grade. The Dunkirk Bonds are subject to mandatory tender and purchase on April 3, 2028 and have a final maturity date of April 1, 2042.
Non-recourse Debt
The following are descriptions of certain indebtedness of NRG's subsidiaries. All of NRG's non-recourse debt is secured by the assets in the subsidiaries as further described below.
Vivint Acquired Debt
On March 10, 2023, in connection with the Vivint acquisition, Vivint's wholly owned indirect subsidiary, APX Group, Inc. ("APX"), retained its 6.750% senior secured notes due 2027, 5.750% senior notes due 2029, senior secured term loan credit agreement and senior secured revolving credit facility.
Vivint 2027 Senior Secured Notes
As of March 31, 2023, Vivint had outstanding $600 million aggregate principal amount of 6.750% senior secured notes due 2027 (the "Vivint 2027 Senior Secured Notes"). The Vivint 2027 Senior Secured Notes are senior secured obligations of APX and are guaranteed by APX Group Holdings, Inc., each of APX's existing and future wholly owned U.S. restricted subsidiaries (subject to customary exclusions and qualifications) and Vivint. Interest on the Vivint 2027 Senior Secured Notes is paid semi-annually in arrears on February 15 and August 15 until the maturity date of February 15, 2027.
Vivint 2029 Senior Notes
As of March 31, 2023, Vivint had outstanding $800 million aggregate principal amount of 5.750% senior notes due 2029 (the "Vivint 2029 Senior Notes"). The Vivint 2029 Senior Notes are senior unsecured obligations of APX and are guaranteed by APX Group Holdings, Inc., each of APX's existing and future wholly owned U.S. restricted subsidiaries (subject to customary exclusions and qualifications) and Vivint. Interest on the Vivint 2029 Senior Notes is paid semi-annually in arrears on January 15 and July 15 until the maturity date of July 15, 2029.
Vivint Senior Secured Credit Facilities
The Vivint senior secured credit agreement (the “Vivint Credit Agreement”) provides for (i) a term loan facility in an aggregate principal amount of $1.4 billion (the “Vivint Term Loan Facility”, and the loans thereunder, the “Vivint Term Loans”) and (ii) a revolving credit facility in an aggregate principal amount of $370 million (the “Vivint Revolving Credit Facility,” and the loans thereunder, the “Vivint Revolving Loans”).
All of APX’s obligations under the Vivint Credit Agreement are guaranteed by APX Group Holdings, Inc. and each of APX’s existing and future wholly-owned U.S. restricted subsidiaries (subject to customary exclusions and qualifications). The obligations under the Vivint Credit Agreement are secured by a first priority perfected security interest in (1) substantially all of the present and future tangible and intangible assets of APX, and the guarantors, including without limitation equipment, subscriber contracts and communication paths, intellectual property, general intangibles, investment property, material intercompany notes and proceeds of the foregoing, subject to permitted liens and other customary exceptions, (2) substantially all personal property of APX and the guarantors consisting of accounts receivable arising from the sale of inventory and other goods and services (including related contracts and contract rights, inventory, cash, deposit accounts, other bank accounts and securities accounts), inventory and intangible assets to the extent attached to the foregoing books and records of APX and the guarantors, and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held by APX and the guarantors and (3) a pledge of all of the capital stock of APX, each of its subsidiary guarantors and each restricted subsidiary of APX and its subsidiary guarantors, in each case other than excluded assets and subject to the limitations and exclusions provided in the applicable collateral documents.
The Vivint Credit Agreement contains customary covenants, which, among other things, require APX to maintain a maximum first lien net leverage ratio when amounts outstanding under the Vivint Revolving Facility exceed a certain threshold and restrict, subject to certain exceptions, APX and its restricted subsidiaries’ ability to:
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incur or guarantee additional debt or issue disqualified stock or preferred stock;
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pay dividends and make other distributions on, or redeem or repurchase, capital stock;
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make certain investments;
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incur certain liens;
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enter into transactions with affiliates;
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merge or consolidate;
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materially change the nature of their business;
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enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to APX or grant liens on their assets;
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designate restricted subsidiaries as unrestricted subsidiaries;
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amend, prepay, redeem or purchase certain material contractually subordinated debt; and
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transfer or sell certain assets.
As of March 31, 2023, the aggregate outstanding principal amount of the Vivint Term Loans was $1.3 billion. As of March 31, 2023, Vivint had $11 million in letters of credit issued under the Vivint Revolving Credit Facility and there were no Vivint Revolving Loans outstanding. As of May 4, 2023, there were $10 million in letters of credit issued under the Vivint Revolving Credit Facility.
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 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 2022 Form 10-K.
The summarized financial information for the Company's consolidated VIE consisted of the following:
| (In millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Accounts receivable and Other current assets | $ | 730 | $ | 2,108 | |||||||
| Current liabilities | 303 | 152 | |||||||||
| Net assets | $ | 427 | $ | 1,956 |
Note 10 — Changes in Capital Structure
As of March 31, 2023 and December 31, 2022, the Company had 10,000,000 shares of preferred stock authorized and 500,000,000 shares of common stock authorized. The following table reflects the changes in NRG's preferred and common stock issued and outstanding:
| Preferred | Common | ||||||||||||||||||||||
| Issued and Outstanding | Issued | Treasury | Outstanding | ||||||||||||||||||||
| Balance as of December 31, 2022 | — | 423,897,001 | (194,335,971) | 229,561,030 | |||||||||||||||||||
| Shares issued under LTIPs | — | 395,408 | — | 395,408 | |||||||||||||||||||
| Issuance of Series A Preferred Stock | 650,000 | — | — | — | |||||||||||||||||||
| Balance as of March 31, 2023 | 650,000 | 424,292,409 | (194,335,971) | 229,956,438 | |||||||||||||||||||
Common Stock
Share Repurchases
In December 2021, the Company announced that the Board of Directors authorized $1 billion for share repurchases as part of NRG’s Capital Allocation policy. The program began with $44 million of share repurchases in December 2021, and an incremental $601 million was repurchased in 2022. During the first quarter of 2023, the Company purchased $8 million in equivalent shares in lieu of tax withholdings on equity compensation issuances. The balance of $347 million under the current program is expected to be repurchased in 2023, subject to the availability of excess cash and full visibility of the achievement of the Company's 2023 targeted credit metrics.
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Employee Stock Purchase Plan
The Company offers 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. On April 27, 2023, NRG stockholders approved the adoption of the Amended and Restated Employee Stock Purchase Plan, effective April 1, 2023, which includes a reduction in the price at which eligible employees may purchase shares of NRG common stock from 95% to 90% of the fair market value of the shares on the applicable date. NRG stockholders also approved an increase of 4,400,000 shares available for issuance under the ESPP. 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 2023, NRG increased the annual dividend to $1.51 from $1.40 per share and expects to target an annual dividend growth rate of 7%-9% per share in subsequent years. A quarterly dividend of $0.3775 per share was paid on the Company's common stock during the three months ended March 31, 2023. On April 19, 2023, NRG declared a quarterly dividend on the Company's common stock of $0.3775 per share, payable on May 15, 2023 to stockholders of record as of May 1, 2023.
The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws, regulations and other contractual obligations.
Preferred Stock
Series A Preferred Stock
On March 9, 2023, the Company issued 650,000 shares of 10.25% Series A Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Stock ("Series A Preferred Stock"). The net proceeds of $636 million, net of issuance costs, were used to fund the Vivint acquisition.
The Series A Preferred Stock is not convertible into or exchangeable for any other securities or property and has limited voting rights. The Series A Preferred Stock may be redeemed, in whole or in part, on one or more occasions, at the option of the Company at any time after March 15, 2028 ("Series A First Reset Date") and in certain other circumstances prior to the Series A First Reset Date.
The annual dividend rate on each share of Series A Preferred Stock is 10.25% from the Series A Issuance Date to, but excluding the Series A First Reset Date. On and after the Series A First Reset Date, the dividend rate on each share of Series A Preferred Stock shall equal the five-year U.S. Treasury rate as of the most recent reset dividend determination date (subject to a floor of 1.00%), plus a spread of 5.92% per annum. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus accumulated but unpaid dividends. Cumulative cash dividends on the Series A Preferred Stock are payable semiannually, in arrears, on each March 15 and September 15, commencing on September 15, 2023, when, as and if declared by the board of directors.
Note 11 — (Loss)/Income Per Share
Basic (loss)/income per common share is computed by dividing net (loss)/income less cumulative dividends attributable to preferred stock by the weighted average number of common shares outstanding. Shares issued and treasury shares repurchased during the period are weighted for the portion of the period that they were outstanding. Diluted (loss)/income per share is computed in a manner consistent with that of basic (loss)/income per share while giving effect to all potentially dilutive common shares that were outstanding during the period when there is net income. The relative performance stock units, non-vested restricted stock units, and non-qualified stock options are not considered outstanding for purposes of computing basic (loss)/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 there is net income. The Convertible Senior Notes are convertible, under certain circumstances, into cash or combination of cash and Company’s common stock. 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 there is 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, 2023, there was no dilutive effect for the Convertible Senior Notes since there was a net loss. For the period ending March 31, 2022, there was no dilutive effect for the Convertible Senior Notes since there were no potential share settlements for the period.
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NRG's basic and diluted (loss)/income per share is shown in the following table:
| Three months ended March 31, | |||||||||||||||||||||||
| (In millions, except per share data) | 2023 | 2022 | |||||||||||||||||||||
| Basic and diluted (loss)/income per share: | |||||||||||||||||||||||
| Net (loss)/income | $ | (1,335) | $ | 1,736 | |||||||||||||||||||
| Less: Cumulative dividends attributable to Series A Preferred Stock | 4 | — | |||||||||||||||||||||
| Net (loss)/income available for common stockholders | (1,339) | 1,736 | |||||||||||||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 230 | 242 | |||||||||||||||||||||
| (Loss)/Income per weighted average common share — basic and diluted | $ | (5.82) | $ | 7.17 | |||||||||||||||||||
As of March 31, 2023, the Company had 7 million outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company's diluted loss per share. 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.
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).
The acquired operations from the Vivint acquisition are reported within the Vivint segment.
| Three months ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Vivint**(a)** | Corporate | Eliminations | Total | |||||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,034 | $ | 4,176 | $ | 1,374 | $ | 148 | $ | — | $ | (10) | $ | 7,722 | ||||||||||||||||||||||||||||||
| Depreciation and amortization | 75 | 30 | 24 | 52 | 9 | — | 190 | |||||||||||||||||||||||||||||||||||||
| Gain on sale of assets | — | 199 | — | — | — | — | 199 | |||||||||||||||||||||||||||||||||||||
| Equity in earnings of unconsolidated affiliates | — | — | 5 | — | — | — | 5 | |||||||||||||||||||||||||||||||||||||
| Income/(loss) before income taxes | 284 | (1,402) | (351) | (39) | (163) | — | (1,671) | |||||||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 284 | $ | (1,402) | $ | (304) | $ | (39) | $ | 126 | $ | — | $ | (1,335) | ||||||||||||||||||||||||||||||
(a)Vivint includes results of operations following the acquisition date of March 10, 2023
| Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Texas | East | West/Services/Other | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||||
| Revenue | $ | 2,020 | $ | 4,715 | $ | 1,144 | $ | — | $ | 17 | $ | 7,896 | ||||||||||||||||||||||||||
| Depreciation and amortization | 77 | 77 | 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 | 771 | 1,538 | 129 | (131) | — | 2,307 | ||||||||||||||||||||||||||||||||
| Net income/(loss) | $ | 771 | $ | 1,538 | $ | 130 | $ | (703) | $ | — | $ | 1,736 |
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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) | 2023 | 2022 | |||||||||||||||||||||
| (Loss)/Income before income taxes | $ | (1,671) | $ | 2,307 | |||||||||||||||||||
| Income tax (benefit)/expense | (336) | 571 | |||||||||||||||||||||
| Effective income tax rate | 20.1 | % | 24.8 | % |
For the three months ended March 31, 2023, the effective tax rate was lower than the statutory rate of 21% primarily due to current state tax expense and permanent differences which when applied to year-to-date financial statement losses have an inverted effect and reduced the overall effective tax rate. 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.
The Inflation Reduction Act ("IRA") enacted on August 16, 2022, introduced new provisions including a 15% corporate book minimum tax and a 1% excise tax on net share repurchases with both taxes effective beginning in fiscal year 2023 for NRG. The Company will continue to evaluate the impact of the corporate book minimum tax when the U.S. Treasury and the IRS release further guidance. Additionally, the IRA establishes a tax credit associated with existing nuclear facilities which begins in 2024 and terminates at the end of 2031. The production tax credit will fully apply when gross revenues are at or below $25 per MWh and phases out completely at $43.75 per MWh. The U.S. Treasury is in the process of defining the methods by which gross revenues may be calculated pursuant to the IRA.
Uncertain Tax Benefits
As of March 31, 2023, NRG had a non-current tax liability of $43 million for uncertain tax benefits from positions taken on various federal and state income tax returns inclusive of accrued interest. For the three months ended March 31, 2023, NRG accrued an immaterial amount of interest relating to the uncertain tax benefits. As of March 31, 2023, NRG had cumulative interest and penalties related to these uncertain tax benefits of $2 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 2019. With few exceptions, state and Canadian income tax examinations are no longer open for years prior to 2014.
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) | 2023 | 2022 | |||||||||||||||||||||
| Revenues from Related Parties Included in Revenue | |||||||||||||||||||||||
| Gladstone | $ | 1 | $ | 1 | |||||||||||||||||||
| Ivanpah(a) | 34 | 13 | |||||||||||||||||||||
| Midway-Sunset | 1 | 2 | |||||||||||||||||||||
| Total | $ | 36 | $ | 16 |
(a)Also includes fees under project management agreements with each project company
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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, 2023, 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 difference 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. During the second quarter of 2023, the IPCB will hold hearings regarding 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
Mirkin v. XOOM Energy (E.D.N.Y. Aug. 2019) is a defendant in a putative class action lawsuit pending in New York. This case is in the summary judgment phase.
Direct Energy
There are two putative class actions pending against Direct Energy: (1) Richard Schafer v. Direct Energy (W.D.N.Y. Dec. 2019; on appeal 2nd Cir. N.Y.) - The Second Circuit sent the matter back to the trial court in December 2021. After discovery, Direct Energy filed summary judgment. Direct Energy won summary judgment and Schafer appealed. The parties are now briefing the appeal. Given the result of Martin Forte v. Direct Energy (N.D.N.Y. Mar. 2017), the trial court's summary
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judgment will be upheld and Direct Energy is expected to prevail; and (2) Andrew Gant v. Direct Energy and NRG (D.N.J. Aug. 2022) - Direct Energy and NRG filed a Motion to Dismiss on October 18, 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. The Court denied Direct Energy's motion stating the Court does not have the benefit of all of the facts that were in front of the Burk court to issue a similar ruling. On October 19, 2022, Direct Energy filed a Motion to Transfer Venue asking the Court to transfer the case to the Southern District where the Burk case was filed. On April 12, 2023, the Court granted Direct Energy’s Motion to Transfer Venue, moving to the case to the Southern District of Texas; and (2) Matthew Dickson v. Direct Energy (N.D. Ohio Jan. 2018) - 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. Dickson appealed. The Court held oral arguments on January 17, 2023. The Company anticipates a ruling with the next six months.
Sales Practice Lawsuits
There are three ongoing litigation matters relating to claims made by Vivint competitors against Vivint alleging, among other things, that Vivint's sales representatives used deceptive sales practices: (1) CPI Security Systems, Inc. ("CPI") v. Vivint (W.D.N.C. Sept. 2020); (2) ADT LLC, et al. ("ADT") v. Vivint Smart Home, Inc. f/k/a Mosaic Acquisition Corporation, et al.(S.D.Fl. Aug. 2020); and (3) Alert 360 Opco, Inc, et al. ("Alert 360") v. Vivint Smart Home, Inc., et al (N.D.Ok. March 2023). The CPI and ADT matters were filed in 2020 and relate to, among other things, alleged deceptive sales practices by Vivint sales representatives. The CPI matter went to trial, and in February 2023, the jury issued a verdict against Vivint, in favor of CPI for $50 million of compensatory damages and an additional $140 million of punitive damages. Vivint filed its post-trial motion in March 2023 and continues to evaluate its post-trial and appeal options. While Vivint believes the CPI jury verdict is not legally or factually supported and intends to pursue post judgment remedies and file an appeal, there can be no assurance that such defense efforts will be successful. Trial in the ADT matter is scheduled to commence in August 2023. On March 1, 2023, Alert 360 filed a complaint against Vivint alleging, among other things, deceptive sales practices. These matters were known and accrued for, as necessary, at the time of the acquisition. Vivint intends to vigorously defend these matters. In management's opinion, the disposition of these matters will not materially adversely affect NRG's consolidated financial position, results of operations or cash flows.
Contract Disputes
In September 2022, Vivint sent Alarm.com a notice asserting that it was no longer obligated to pay certain license fees under the Patent Cross License Agreement between the parties on the basis that Vivint no longer practices any claim under any valid Alarm.com patent and, therefore, no license fees are due. Alarm.com filed an arbitration demand against Vivint alleging, among other things, breach of the agreement due to continued use of the patents in question. The arbitration panel recently determined that Vivint's challenge to the validity of certain Alarm.com patents will be considered as part of the arbitration proceeding.
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 REP. Most of the lawsuits related to Winter Storm Uri are consolidated into a single multi-district litigation matter in Harris County District Court. NRG's REPs have since been severed from the multi-district litigation and will be seeking dismissal in any remaining cases. As a power generator, the Company is named in various cases with claims ranging from: wrongful death; personal injury only; property damage and personal injury; property damage only; and subrogation. The case is currently stayed pending appeal by other parties on other issues. 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.
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Plaintiffs sought damages for the alleged improper charges and a declaration as to which charges were proper under the contract. In February 2020, the federal 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 with this litigation.
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
CPP/ACE Rules — 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 June 30, 2022, the U.S. Supreme Court held that the "generation shifting" approach in the CPP exceeded the powers granted to the EPA by Congress. The Court did not address the related issues of whether the EPA may adopt only measures applied at each source. The Company anticipates that there will be additional rulemaking by the EPA over the next several years.
Cross-State Air Pollution Rule ("CSAPR") — On March 15, 2023, the EPA signed and released a prepublication of a final rule that if and when published in the Federal Register would have significantly revised the CSAPR to address the good-neighbor obligations of the 2015 ozone NAAQS for 23 states after earlier having disapproved numerous state plans to address the issue. Several states, including Texas, challenged the EPA's disapproval of their state plans. On May 1, 2023, the United States Court of Appeals for the Fifth Circuit stayed the EPA's disapproval of Texas' and Louisiana's state plans, which disapprovals are a condition precedent to the EPA imposing its plan on Texas and Louisiana. Accordingly, the EPA may not publish this rule in the Federal Register or if it does publish the rule, it would be ineffective in Texas and Louisiana while the stay is pending. The rule would have decreased over time the ozone-season NOx allowances allocated to generators in the 23 states beginning this summer by assuming that participants in this cap-and-trade program had or would optimize existing NOx controls and later install additional NOx controls. The Company cannot predict the outcome of: (i) the legal challenges to the various state disapprovals; (ii) whether the EPA will proceeds with publication in the Federal Register; and (iii) legal challenges to the final rule if it is published in the Federal Register.
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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. On March 29, 2023, the EPA proposed revisions to the ELG and is accepting comments on the proposal until May 30, 2023. 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 that have coal-fired units 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. On July 30, 2018, the EPA promulgated a rule that amended the 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 surface impoundments. 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. NRG anticipates further rulemaking related to the Federal Permit Program and legacy surface impoundments.
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