The discussion and analysis below has been organized as follows:•Executive Summary, including the business environment in which the Company,operates, a discussion of regulation, weather, competition and other factorsthat affect the business, Transformation Plan update, and other significantevents that are important to understanding the results of operations andfinancial condition;•Results of operations for years endingDecember 31, 2019 andDecember 31, 2018 ,including an explanation of significant differences between the periods in thespecific line items of NRG's Consolidated Statements of Operations;•Financial condition addressing credit ratings, liquidity position, sources anduses of cash, capital resources and requirements, commitments, and off-balancesheet arrangements; and•Critical accounting policies that are most important to both the portrayal ofthe Company's financial condition and results of operations, and requiremanagement's most difficult, subjective or complex judgments.As you read this discussion and analysis, refer to NRG's Consolidated Statementsof Operations to this Form 10-K, which presents the results of the Company'soperations for the years endedDecember 31, 2019 and 2018, and also refer toItem 1 to this Form 10-K for more detailed discussion about the Company'sbusiness. A discussion and analysis of fiscal year 2017 may be found in Part II,Item 7 - Management's Discussion and Analysis of Financial Condition and Resultsof Operations of the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 .As further described in Item 15 - Note 4, Acquisitions, Discontinued Operationsand Dispositions, to the Consolidated Financial Statements, the Companydetermined in prior years that the following businesses were discontinuedoperations and recast to present their results in the corporate segment:•South Central Portfolio•NRG Yield, Inc. and its Renewables Platform•Carlsbad•GenOnExecutive SummaryNRG is an integrated power company built on dynamic retail brands with diversegeneration assets. NRG brings the power of energy to customers by producing andselling electricity and related products and services in major competitive powermarkets in theU.S. andCanada in a manner that delivers value to all of NRG'sstakeholders. The Company sells energy, services, and innovative, sustainableproducts and services directly to retail customers under the brand names NRG,Reliant,Green Mountain Energy , Stream andXOOM Energy , as well as other brandnames owned by NRG, supported by approximately 23,000 MW of generation as ofDecember 31, 2019 .Business EnvironmentThe industry dynamics and external influences affecting the Company and itsbusinesses, and the power generation and retail energy industry in 2019 and forthe future medium term include:Commodities Markets - The price of natural gas plays an important role insetting the price of electricity in many of the regions where NRGoperates. Natural gas prices are driven by variables including demand from theindustrial, residential, and electric sectors, productivity across natural gassupply basins, costs of natural gas production, changes in pipelineinfrastructure, and the financial and hedging profile of natural gas customersand producers. In 2019, the average natural gas prices at Henry Hub was 15.0%lower than in 2018.If long-term gas prices increase, the Company is likely to encounter higherrealized energy prices, leading to higher energy revenues as lower priced hedgecontracts mature and are replaced by contracts with higher gas and power prices.This impact is partially offset by the retail business, as NRG's retail grossmargins have historically decreased as natural gas prices increase.NRG's retail gross margins have historically improved as natural gas pricesdecline. This would be partially offset by lower realized energy prices, leadingto lower energy revenues as higher priced hedge contracts mature and arereplaced by contracts with lower gas and power prices. To further mitigate thisimpact, NRG may increase its percentage of coal and nuclear capacity soldforward using a variety of hedging instruments, as described under the heading"Energy-Related Commodities " in Item 15 - Note 6, Accounting for DerivativeInstruments and Hedging Activities, to the Consolidated Financial Statements. 45--------------------------------------------------------------------------------
Natural gas prices are a primary driver of coal demand. The low-priced commodityenvironment has stressed coal equities, leading coal suppliers to file forbankruptcy protection, launch debt exchanges, rationalize assets, and cutproduction. If multiple parties withdraw from the market, liquidity could bechallenged in the short term. Inventory overhang will be utilized to offsetproduction losses. Coal prices are typically affected by the price of naturalgas.Electricity Prices - The price of electricity is a key determinant of theprofitability of the Company. Many variables such as the price of differentfuels, weather, load growth and unit availability all coalesce to impact thefinal price for electricity and the Company's profitability. An increase insupply cost volatility in the competitive retail markets may result in smallercompanies choosing to exit the market, which may result in further consolidationin the competitive retail space. The following table summarizes average on-peakpower prices for each of the major markets in which NRG operates for the yearsendedDecember 31, 2019 andDecember 31, 2018 .ERCOT power prices were higherprimarily due to the continued effect of lower reserve margins as a result ofasset retirements in the region. Power prices in East region decreased for theyear endedDecember 31, 2019 as compared to the same period in 2018. Average On-Peak Power Price ($/MWh) Year Ended December 31 2019 vs 2018Region 2019 2018 Change %Texas (a)ERCOT - Houston(a) $ 51.44$ 37.29 38 %ERCOT - North(a) 50.80 36.26 40 %East/WestMISO - Louisiana Hub(b) 30.58 43.70 (30) %NY J/NYC(b) 33.73 47.19 (29) %NEPOOL(b) 34.89 49.96 (30) %COMED (PJM)(b) 28.28 34.60 (18) %PJM West Hub(b) 30.85 41.66 (26) %CAISO - SP15(b) 38.15 47.33 (19) %
(a) Average on-peak power prices based on real time settlement prices aspublished by the respective ISOs(b) Average on-peak power prices based on day-ahead settlement prices aspublished by the respective ISOs
The following table summarizes average realized power prices for each region inwhich NRG operates, including the impact of settled hedges, for the years endedDecember 31, 2019 andDecember 31, 2018 : Average Realized Power Price ($/MWh) Year Ended December 31 2019 vs 2018Region 2019 2018 Change %Texas $ 46.58$ 37.12 25 %East/West 35.03 37.00 (5) %The average realized power prices forDecember 31, 2019 , as compared to the sameperiod in 2018, increased inTexas as a result of higher power prices, anddecreased in East/West as a result of the roll off of hedges.Clean Infrastructure Development - Policy mechanisms at the state and federallevel, including production and investment tax credits, cash grants, loanguarantees, accelerated depreciation tax benefits, RPS, and carbon tradingplans, have supported and continue to support the development of renewablegeneration, demand-side and smart grid, and other clean infrastructuretechnologies. In addition, the costs associated with the development of cleaninfrastructure, such as wind and solar generating facilities, continue todecline. These factors continue to drive increases in the development of cleaninfrastructure in the markets where the Company participates, which may impactthe ability of the Company's generating facilities to participate in thosemarkets. According toERCOT, Inc. , more than 30% of 2019 energy consumption intheERCOT market was generated from carbon-free resources with wind powercontributing 20%. In addition, subsidies and incentives have contributed to theincrease in renewable power sources, and customer awareness and preferences haveshifted toward sustainable solutions. Increased demand for sustainable energyproducts from both residential and commercial customers creates opportunitiesfor diversified product offerings in competitive retail markets. 46--------------------------------------------------------------------------------
Digitization and Customization - The electric industry is experiencing majortechnology changes in the way power is distributed and used by end-usecustomers. The electric grid is shifting from a centralized analog system, wherepower is generated from limited sources and flows in one direction, to adecentralized multidirectional system, where power can be generated from anumber of distributed resources and stored or dispatched on an as-needed basis.In addition, customers are seeking new ways to engage with their powerproviders. Technologies like smart thermostats, appliances and electric vehiclesare giving individuals more choice and control over their electricity usage.Weather - Weather conditions in the regions of theU.S. in which NRG doesbusiness influence the Company's financial results. Weather conditions canaffect the supply and demand for electricity and fuels and may also impact theavailability of the Company's generating assets. Changes in energy supply anddemand may impact the price of these energy commodities in both the spot andforward markets, which may affect the Company's results in any given period.Typically, demand for and the price of electricity is higher in the summer andthe winter seasons, when temperatures are more extreme. The demand for and priceof natural gas is also generally higher in the winter. However, all regions oftheU.S. typically do not experience extreme weather conditions at the sametime, thus NRG's operations are typically not exposed to the effects of extremeweather in all parts of its business at once. A significant portion of theCompany's business is located withinTexas , and extreme weather conditionsoccurring inTexas may have a material impact on the Company's financialposition.Other Factors - A number of other factors significantly influence the level andvolatility of prices for energy commodities and related derivative products forNRG's business. These factors include:•seasonal, daily and hourly changes in demand;•extreme peak demands;•available supply resources;•transportation and transmission availability and reliability within and betweenregions;•location of NRG's generating facilities relative to the location of itsload-serving opportunities;•procedures used to maintain the integrity of the physical electricity systemduring extreme conditions; and•changes in the nature and extent of federal and state regulations.These factors can affect energy commodity and derivative prices in differentways and to different degrees. These effects may vary throughout the country asa result of regional differences in:•weather conditions;•market liquidity;•capability and reliability of the physical electricity and gas systems;•local transportation systems; and•the nature and extent of electricity deregulation.Environmental Matters, Regulatory Matters and Legal Proceedings - Details ofenvironmental matters are presented in Item 15 - Note 25, Environmental Matters,to the Consolidated Financial Statements and Item 1- Business, EnvironmentalMatters. Details of regulatory matters are presented in Item 15 - Note 24,Regulatory Matters, to the Consolidated Financial Statements and Item 1-Business, Regulatory Matters. Details of legal proceedings are presented inItem 15 - Note 23, Commitments and Contingencies, to the Consolidated FinancialStatements. Some of this information relates to costs that may be material tothe Company's financial results. 47--------------------------------------------------------------------------------
Transformation PlanNRG has substantially completed its three-year Transformation Plan and expectsto fully complete the remaining margin enhancement activities by the end of2020. The Transformation Plan's targets and the Company's achievements towardssuch targets are as follows:Operations and Cost ExcellenceThe Company targeted recurring cost savings and margin enhancement of$1,065million , which consists of$590 million of cumulative cost savings, a$215million net margin enhancement program,$50 million annual reduction inmaintenance capital expenditures, and$210 million in permanent selling, generaland administrative expense reduction associated with asset sales. The Companyrealized annual cost savings of$532 million and$32 million of marginenhancements during 2018 and$590 million of cost savings and$135 million ofmargin enhancements during 2019.Under the Transformation Plan, byDecember 31, 2019 , the Company fully realized$370 million of non-recurring working capital improvements and$278 million ofone-time costs to achieve.Portfolio OptimizationThe Company targeted and completed$3.0 billion of asset sale cash proceedsreceived throughDecember 31, 2019 as described below:•In 2017 and 2018, NRG executed asset sales for aggregate cash of$1.6 billion ,which includes the sale of its interest inNRG Yield, Inc and its RenewablesPlatform, BETM, Buckthorn Solar, and various other assets.•OnFebruary 4, 2019 , NRG sold the South Central portfolio, a 3,555 MW portfolioof generation assets, for cash consideration of$1.0 billion , excluding workingcapital and other adjustments•OnFebruary 20, 2019 , NRG completed the sale ofGuam for cash consideration ofapproximately$8 million •OnFebruary 27, 2019 , NRG sold theCarlsbad project, a 528 MW natural gas-firedpower plant, for cash consideration of$385 million , excluding working capitaland other adjustmentsCapital Structure and AllocationAs ofDecember 31, 2018 , the Company achieved the planned credit ratio of 3.0xnet debt / adjusted EBITDA(a). During the first quarter of 2019, the Companyrevised its credit metrics target in order to further strengthen its balancesheet and improve credit ratings by reducing leverage.
(a) adjusted EBITDA as defined per the Senior Credit Facility
48--------------------------------------------------------------------------------
Other Significant EventsThe following additional significant events occurred during 2019:Stream Energy Acquisition•OnAugust 1, 2019 , the Company completed the acquisition of Stream Energy'sretail electricity and natural gas business operating in 9 states andWashington, D.C. for$329 million , including working capital and otheradjustments of approximately$29 million . The acquisition increased NRG's retailportfolio by approximately 600,000 RCEs or 450,000 customers.Financing Activities•OnMay 14, 2019 , NRG issued$733 million of aggregate principal amount at parof 5.25% senior unsecured notes due 2029. The proceeds from the issuance of the2029 Senior Notes were utilized to redeem the remaining Company's$733 million of 6.25% Senior Notes due 2024.•OnMay 28, 2019 , NRG amended its existing credit agreement to, among otherthings, provide for a$184 million increase in revolving commitments, resultingin aggregate revolving commitments under the amended credit agreement equal to$2.6 billion . See Note 13, Debt and Finance Leases, for further discussion.•OnMay 28, 2019 , NRG issued$1.1 billion of aggregate principal amount ofsenior secured first lien notes, consisting of$600 million 3.75% senior securedfirst lien notes due 2024 and$500 million 4.45% senior secured first lien notesdue 2029, or the Senior Secured Notes, at a discount. The proceeds from theissuance of the Senior Secured Notes, as well as cash on hand, were used torepay the Company's$1.7 billion 2023 Term Loan facility, resulting in adecrease of$594 million to long-term debt outstanding.Share Repurchases•In 2018, the Company's board of directors authorized the Company to repurchase$1.5 billion of its common stock.$1.25 billion was executed in 2018 with theremaining$0.25 billion completed in the first quarter of 2019.•In 2019, the Company's board of directors authorized the Company to repurchasean additional$1.25 billion of its common stock, which was completed as ofFebruary 27, 2020 .Renewable Power Purchase Agreements•During 2019, NRG began execution of its strategy to procure mid to long-termgeneration through power purchase agreements. As ofDecember 31, 2019 , NRG hasentered into PPAs totaling approximately 1,600 MWs with third-party projectdevelopers and other counterparties. The tenor of these agreements is an averageof ten years. The Company expects to continue evaluating and executing similaragreements that support the needs of the business.Dividend Increase•Beginning in the first quarter of 2020, NRG increased the annual dividend to$1.20 per share from$0.12 per share and expects to target an annual dividendgrowth rate of 7-9% per share in subsequent years.Valuation Allowance for Net Deferred Tax Assets•During the year endedDecember 31, 2019 , NRG released the majority of itsvaluation allowance against itsU.S. federal and state deferred tax assets,resulting in a non-cash benefit to income tax expense of approximately$3.5billion . Refer to Item 15 - Note 20, Income Taxes, to the Consolidated FinancialStatements for further discussion of the release in valuation allowance. 49--------------------------------------------------------------------------------
Consolidated Results of Operations for the years endedDecember 31, 2019 and2018The following table provides selected financial information for the Company: Year Ended December 31,(In millions, except otherwise noted) 2019 2018 ChangeOperating RevenuesEnergy revenue (a)$ 1,222 $ 1,548 $ (326) Capacity revenue (a) 607 670 (63)Retail revenue 7,676 7,105 571Mark-to-market for economic hedging activities 33 (130) 163Other revenues (b) 283 285 (2)Total operating revenues 9,821 9,478 343Operating Costs and ExpensesCost of sales (b) 5,878 5,878 -Mark-to-market for economic hedging activities 53 (144) (197)Contract and emissions credit amortization (c) 19 27 8Operations and maintenance 1,082 1,083 1Other cost of operations 271 264 (7)Total cost of operations 7,303 7,108 (195)Depreciation and amortization 373 421 48Impairment losses 5 99 94Selling, general and administrative 827 799 (28)Reorganization costs 23 90 67Development costs 7 11 4Total operating costs and expenses 8,538 8,528 (10)Gain on sale of assets 7 32 (25)Operating Income 1,290 982 308Other Income/(Expense)Equity in earnings of unconsolidated affiliates 2 9 (7)Impairment losses on investments (108) (15) (93)Other income, net 66 18 48Net loss on debt extinguishment (51) (44) (7)Interest expense (413) (483) 70Total other expenses (504) (515) 11Income from Continuing Operations Before Income Taxes 786 467 319Income tax (benefit)/expense (3,334) 7 (3,341)Income from Continuing Operations 4,120 460 3,660Income/(loss) from discontinued operations, net of income tax 321 (192) 513Net Income 4,441 268 4,173
Less: Net income attributable to noncontrolling interests andredeemable noncontrolling interests
3 - 3Net Income Attributable to NRG Energy, Inc.$ 4,438 $ 268 $ 4,170 Business MetricsAverage natural gas price - Henry Hub ($/MMBtu)$ 2.63 $ 3.09 (15) %(a)Includes realized gains and losses from financially settled transactions(b)Includes unrealized trading gains and losses(c)Includes amortization of SO2 and NOx credits and excludes amortization ofRGGI credits 50--------------------------------------------------------------------------------
Economic Gross MarginIn addition to gross margin, the Company evaluates its operating performanceusing the measure of economic gross margin, which is not a GAAP measure and maynot be comparable to other companies' presentations or deemed more useful thanthe GAAP information provided elsewhere in this report. Economic gross marginshould be viewed as a supplement to and not a substitute for the Company'spresentation of gross margin, which is the most directly comparable GAAPmeasure. Economic gross margin is not intended to represent gross margin. TheCompany believes that economic gross margin is useful to investors as it is akey operational measure reviewed by the Company's chief operating decisionmaker. Economic gross margin is defined as the sum of energy revenue, capacityrevenue and other revenue, less cost of fuels and other cost of sales. Economicgross margin does not include mark-to-market gains or losses on economic hedgingactivities, contract amortization, emission credit amortization, or otheroperating costs.The tables below present the composition and reconciliation of gross margin andeconomic gross margin for the years endedDecember 31, 2019 and 2018 based onthe Company's reporting segments as ofDecember 31, 2019 :
Year Ended
Generation
(In millions, except otherwise noted) Retail Texas East/West/Other(a) Subtotal Corporate/Eliminations TotalEnergy revenue $ -$ 1,987 $ 733$ 2,720 $ (1,498)$ 1,222 Capacity revenue - - 606 606 1 607Retail revenue 7,680 - - - (4) 7,676Mark-to-market for economic hedgingactivities - 198 36 234 (201) 33Other revenue - 90 197 287 (4) 283Operating revenue 7,680 2,275 1,572 3,847 (1,706) 9,821Cost of fuel - (723) (384) (1,107) (54) (1,161)Other costs of sales(b) (5,821) (168) (283) (451) 1,555
(4,717)
Mark-to-market for economic hedgingactivities (267) 10 3 13 201
(53)
Contract and emission creditamortization - (19) - (19) - (19)Gross margin$ 1,592 $ 1,375 $ 908$ 2,283 $ (4)$ 3,871 Less: Mark-to-market for economichedging activities, net (267) 208 39 247 -
(20)
Less: Contract and emission creditamortization - (19) - (19) - (19)Economic gross margin$ 1,859 $ 1,186 $ 869$ 2,055 $ (4)$ 3,910 Business MetricsMWh sold (thousands) 42,662 20,924MWh generated (thousands) 37,994
16,375
(a) Includes Renewables and eliminations within Generation(b) Includes purchased energy, capacity and emissions credits
51
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Year Ended December 31, 2018 Generation(In millions, except otherwise noted) Retail Texas East/West/Other(a)(b) Subtotal Corporate/Eliminations TotalEnergy revenue $ -$ 1,585 $ 1,092$ 2,677 $ (1,129)$ 1,548 Capacity revenue - 1 669 670 - 670Retail revenue 7,110 - - - (5) 7,105Mark-to-market for economic hedgingactivities (7) (174) (28) (202) 79 (130)Other revenue - 84 214 298 (13) 285Operating revenue 7,103 1,496 1,947 3,443 (1,068) 9,478Cost of fuel - (734) (557) (1,291) (44) (1,335)Other costs of sales(c) (5,308) (133) (275) (408) 1,173 (4,543)Mark-to-market for economic hedgingactivities 260 2 (39) (37) (79)
144
Contract and emission creditamortization - (26) (1) (27) - (27)Gross margin$ 2,055 $ 605 $ 1,075$ 1,680 $ (18)$ 3,717 Less: Mark-to-market for economichedging activities, net 253 (172) (67) (239) -
14
Less: Contract and emission creditamortization - (26) (1) (27) - (27)Economic gross margin$ 1,802 $ 803 $ 1,143$ 1,946 $ (18)$ 3,730 Business MetricsMWh sold (thousands) 42,701 24,988MWh generated (thousands) 38,214 21,089
(a) Includes Renewables and eliminations within Generation(b) Includes Agua, BETM and Ivanpah which were sold or deconsolidated as of August, July and
The table below represents the weather metrics for 2019 and 2018:
Years endedDecember 31 , Quarters endedDecember 31 , Quarters endedSeptember 30 , Quarters endedJune 30 , Quarters endedMarch 31 ,Weather MetricsTexas East/West/OtherTexas East/West/OtherTexas East/West/OtherTexas
East/West/Other Texas East/West/Other2019CDDs(a) 3,115 1,715 266 123 1,840 1,102 934 458 75 32HDDs(a) 1,868 3,004 757 1,091 - 16 70 283 1,041 1,6142018CDDs 3,130 1,793 228 120 1,657 1,099 1,101 521 144 53HDDs 1,875 2,973 815 1,112 1 18 91 325 968 1,51810 year averageCDDs 3,053 1,675 266 125 1,672 1,021 1,009 487 106 42HDDs 1,742 2,946 705 1,068 6 28 60 310 971 1,540(a) National Oceanic and Atmospheric Administration-Climate Prediction Center -A Cooling Degree Day, or CDD, represents the number of degrees that the meantemperature for a particular day is above 65 degrees Fahrenheit in each region.A Heating Degree Day, or HDD, represents the number of degrees that the meantemperature for a particular day is below 65 degrees Fahrenheit in each region.The CDDs/HDDs for a period of time are calculated by adding the CDDs/HDDs foreach day during the period. 52--------------------------------------------------------------------------------
Retail gross margin and economic gross marginThe following is a discussion of gross margin and economic gross margin forRetail.
Years ended December 31,(In millions, except otherwise noted) 2019 2018Retail revenue$ 7,369 $ 6,775 Supply management revenue 215 174Capacity revenues 96 161Customer mark-to-market - (7)Operating revenue (a) 7,680 7,103Cost of sales (b) (5,821) (5,308)Mark-to-market for economic hedging activities (267) 260Gross margin$ 1,592 $ 2,055 Less: Mark-to-market for economic hedging activities, net (267) 253Economic gross margin$ 1,859 $ 1,802 Business MetricsMass electricity sales volume (GWh) - Texas 38,958 37,846Mass electricity sales volume (GWh) - All other regions 9,918 7,968C&I electricity sales volume (GWh) All regions (b) 20,190 21,176Natural gas sales volumes (MDth) 23,359 11,253Average Retail Mass customer count (in thousands) 3,470 3,063Ending Retail Mass customer count (in thousands) 3,678 3,320(a)Includes intercompany sales of$4 million and$5 million in 2019 and 2018,respectively, representing sales from Retail to theTexas region of Generation(b)Includes intercompany purchases of$1,554 million and$1,163 million in 2019and 2018, respectivelyRetail gross margin decreased$463 million and retail economic gross marginincreased$57 million for the year endedDecember 31, 2019 , compared to the sameperiod in 2018, due to: (In millions)Lower gross margin due to weather driven by a decrease in load of 144,000 MWh,unfavorable impact of purchasing incremental supply during extreme weatherconditions in Summer 2019 at escalated prices above$1,000 /MWh and the impact ofselling back excess supply in 2019 as compared to 2018 $ (34)Lower gross margin from demand response activities due to lower auction clearingprices and fewer MW sold in PJM in 2019 compared to 2018 (29)Higher gross margin from Mass due to higher revenues primarily driven by marginenhancement initiatives of approximately$4.50 per MWh or$278 million ,partially offset by higher supply costs driven by an increase in power prices ofapproximately$4.40 per MWh or$272 million 6
Higher gross margin driven by higher volume from XOOM and Stream acquisitions
114Increase in economic gross margin $ 57
Decrease in mark-to-market for economic hedging primarily due to net unrealizedgains/losses on open positions related to economic hedges
(520)Decrease in gross margin $ (463) 53
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Generation gross margin and economic gross marginGeneration gross margin increased$603 million and generation economic grossmargin increased$109 million , both of which include intercompany sales, duringthe year endedDecember 31, 2019 , compared to the same period in 2018.The tables below describe the change in Generation gross margin and generationeconomic gross margin:Texas Region (In millions)Higher gross margin due to a 25% increase in average realized prices due to heatrate expansion $ 285Higher gross margin due to a 6% increase in generation volumes driven by aplanned outage at STP and a forced outage at T.H.Wharton in 2018, partiallyoffset by current year forced outages at coal facilities 44
Higher gross margin due to
38Higher gross margin from commercial optimization activities 28
Higher gross margin due to margin enhancement initiatives from reduced fuelsupply cost
13Lower gross margin due to lower sales of NOx emission credits (23)Other (2)Increase in economic gross margin $ 383Increase in mark-to-market for economic hedging primarily due to net unrealizedgains/losses on open positions related to economic hedges 380Increase in contract and emission credit amortization 7Increase in gross margin $ 770East/West Region (In millions)Lower gross margin due to the sale of BETM, Keystone and Conemaugh in the thirdquarter of 2018, the sale ofGuam in the first quarter of 2019 and the retirementof Encina in December 2018 $ (122)Lower gross margin due to Ivanpah and Agua deconsolidations inApril 2018 andAugust 2018, respectively (118)
Lower gross margin due to a 17% decrease in economic generation volumes due todark spread and spark spread contractions and outages in 2019
(56)
Lower gross margin driven by a decrease in
(29)Lower gross margin from commercial optimization activities (16)
Lower gross margin due to insurance proceeds from outages in 2018, partiallyoffset by business interruption proceeds
(6)
Higher gross margin mainly due to 7% increase in weighted average realizedprices, primarily at Midwest Generation
See Also
11830 Jelicoe Dr, Houston, TX 77047 - MLS 12342971 - Coldwell Banker2016 SEASON SUPER BOWL LI HOUSTON TX SB LI 51 2-5-2017 LOGO Iron-On PatchFAMOUS PHOTOGRAPHER 4 1944 MARSHALL MERCHANT MARINES NEGATIVE LOT SCARCE for SaleTelevision Archive News Search Service38
Higher gross margin due to lower supply costs coupled with an increase in loadcontract volumes
21Higher gross margin due to a 10% increase in PJM capacity prices and a 42%increase in West capacity prices, partially offset by an 8% decrease in NewEngland capacity prices 15Other (1)Decrease in economic gross margin $ (274)Increase in mark-to-market for economic hedging primarily due to net unrealizedgains/losses on open positions related to economic hedges 106Increase in contract and emission credit amortization 1Decrease in gross margin $ (167) 54
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Mark-to-market for Economic Hedging ActivitiesMark-to-market for economic hedging activities includes asset-backed hedges thathave not been designated as cash flow hedges. Total net mark-to-market resultsdecreased by$34 million during the year endedDecember 31, 2019 , compared tothe same period in 2018.The breakdown of gains and losses included in operating revenues and operatingcosts and expenses by region was as follows:
Year Ended
Generation
(In millions) Retail Texas East/West/Other Elimination (a) TotalMark-to-market results in operating revenuesReversal of previously recognized unrealizedlosses on settled positions related to economichedges$ 1 $ 187 $ 30 $ (171)$ 47 Net unrealized (losses)/gains on open positionsrelated to economic hedges (1) 11 6 (30) (14)
Total mark-to-market gains in operating revenues $ -
$ 36 $ (201)$ 33 Mark-to-market results in operating costs andexpensesReversal of previously recognized unrealized(gains)/losses on settled positions related toeconomic hedges$ (293) $ 5 $ 2 $ 171$ (115) Reversal of acquired loss positions related toeconomic hedges. 6 - - - 6Net unrealized gains on open positions relatedto economic hedges 20 5 1 30 56Total mark-to-market (losses)/gains in operatingcosts and expenses$ (267) $ 10 $ 3 $ 201$ (53) (a) Represents the elimination of the intercompany activity between Retail andGenerationThe breakdown of gains and losses included in operating revenues and operatingcosts and expenses by region was as follows:
Year Ended
Generation
(In millions) Retail Texas East/West/Other Elimination (a) TotalMark-to-market results in operating revenuesReversal of previously recognized unrealized(gains)/losses on settled positions related toeconomic hedges$ (2) $ 32 $ (3) $ (104)$ (77) Net unrealized (losses) on open positionsrelated to economic hedges (5) (206) (25) 183 (53)Total mark-to-market (losses) in operatingrevenues$ (7) $ (174) $ (28) $ 79$ (130) Mark-to-market results in operating costs andexpensesReversal of previously recognized unrealized(gains)/losses on settled positions related toeconomic hedges$ (81) $ (6) $ (13) $ 104$ 4 Reversal of acquired gain positions related toeconomic hedges. (10) - - - (10)Net unrealized gains/(losses) on open positionsrelated to economic hedges 351 8 (26) (183) 150Total mark-to-market gains/(losses) in operatingcosts and expenses$ 260 $ 2 $ (39) $ (79)$ 144 (a) Represents the elimination of the intercompany activity between Retail andGenerationMark-to-market results consist of unrealized gains and losses on contracts thatare yet to be settled. The settlement of these transactions is reflected in thesame revenue or cost caption as the items being hedged.The reversals of acquired gain or loss positions were valued based upon theforward prices on the acquisition date. 55--------------------------------------------------------------------------------
For the year endedDecember 31, 2019 the$33 million gain in operating revenuesfrom economic hedge positions was driven primarily by the reversal of previouslyrecognized unrealized losses on contracts that settled during the period. The$53 million loss in operating costs and expenses from economic hedge positionswas driven primarily by the reversal of previously recognized unrealized gains,partially offset by an increase in the value of open positions as a result ofgains onERCOT heat rate positions due to heat rate expansion.For the year endedDecember 31, 2018 the$130 million loss in operating revenuesfrom economic hedge positions was driven primarily by the reversal of previouslyrecognized unrealized gains on contracts that settled during the period, as wellas a decrease in value of open positions as a result of losses onERCOT heatrate positions due to heat rate expansion. The$144 million gain in operatingcosts and expenses from economic hedge positions was driven primarily by anincrease in the value of open positions as a result of increases inERCOT heatrate, partially offset by the reversal of acquired gain positions.In accordance with ASC 815, the following table represents the results of theCompany's financial and physical trading of energy commodities for the yearsendedDecember 31, 2019 and 2018. The realized and unrealized financial andphysical trading results are included in operating revenue. The Company'strading activities are subject to limits within the Company's Risk ManagementPolicy. Year ended December 31,(In millions) 2019 2018Trading gainsRealized$ 57 $ 77 Unrealized 20 17Total trading gains$ 77 $ 94 Operations and Maintenance ExpensesOperations and maintenance expenses are comprised of the following: Generation(In millions) Retail Texas East/West/Other (a) Corporate Eliminations TotalYear Ended December 31, 2019$ 242 $ 441 $ 393$ 9 $ (3) $ 1,082 Year Ended December 31, 2018$ 209 $ 437 $ 440$ 3 $ (6) $ 1,083
(a) Includes Renewables and eliminations within GenerationOperations and maintenance expenses decreased by
(In millions)Increase primarily related to the lease of the Cottonwood facility from February4, 2019 $ 37
Increase in investments in
21
Increase due to XOOM and Stream Energy acquisitions in
21
Increase in operations and maintenance expenses due to margin enhancementinitiatives
8
Increase in outages primarily due to both planned and forced outages in 2019,partially offset by planned STP outages in 2018
3
Decrease due to the final settlement of the asbestos liability and resultingreduction of the accrual for Midwest Generation
(27)
Decrease due to the deconsolidations of Ivanpah and
(20)
Decrease in variable chemical costs due to reduction in East generation volumes
(18)
Decrease due to retirement of Encina and the sale of Keystone and Conemaugh in2018
(14)
Decrease due to payments in settlement of certain legal matters in 2018
(13)Other 1Increase in operations and maintenance expense $ (1) 56
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Other Cost of OperationsOther Cost of operations are comprised of the following: Generation(In millions) Retail Texas East/West/Other TotalYear Ended December 31, 2019$ 120 $ 76 $ 75$ 271 Year Ended December 31, 2018$ 109 $ 76 $ 79$ 264
Other cost of operations increased by
(In millions)Increase in ARO accretion expense due to Encina decommissioning andJewett Mine accretion in 2019, partially offset by a decrease due to prior year write-offof S.R. Bertron $ 15
Increase in gross receipts tax due to the Stream Energy acquisition and higherrevenue from increased rates and customer counts
10
Decrease due to deconsolidation of Ivanpah and
(8)Decrease due to resolution of favorable property tax disputes (7)Decrease in other cost of operations due to cost efficiencies as a result ofthe Transformation Plan (5)Other 2Increase in other cost of operations $ 7Depreciation and AmortizationDepreciation and amortization expenses are comprised of the following:(In millions) Retail Generation Corporate Total
Year Ended
Depreciation and amortization expense decreased by$48 million for the yearendedDecember 31, 2019 , compared to the same period in 2018, due to thedeconsolidations of Ivanpah andAgua Caliente in April andAugust 2018 ,respectively, and the sale of the Cottonwood facility inFebruary 2019 ,partially offset by the acquisitions of Stream Energy and XOOM.Impairment LossesFor the year endedDecember 31, 2019 the Company recorded an impairment loss of$5 million compared to impairment losses of$99 million for the same period in2018, as further described in Item 15 - Note 11, Asset Impairments, to theConsolidated Financial Statements.Selling, General and Administrative ExpensesSelling, general and administrative expenses are comprised of the following:(In millions) Retail Generation Corporate TotalYear Ended December 31, 2019$ 576 $ 227 $ 24 $ 827 Year Ended December 31, 2018$ 538 $ 215 $ 46 $ 799 Selling, general and administrative expenses increased by$28 million for theyear endedDecember 31, 2019 , compared to the same period in 2018, due to thefollowing: (In millions)Increase in selling and marketing expenses for margin enhancement initiatives $ 56Increase in selling expense due to the acquisitions of XOOM and Stream Energyin June 2018 and August 2019, respectively 31
Increase in bad debt expense primarily due to higher customer attrition andincreased revenue due to acquisitions
10
Decrease in general and administrative expense from cost efficiencies as aresult of the Transformation Plan
(51)Decrease due to the sale of BETM in 2018 (19)Other 1Increase in selling, general and administrative expenses
$ 28
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Reorganization CostsReorganization costs, primarily related to severance and contract modifications,decreased by$67 million for the year endedDecember 31, 2019 , compared to thesame period in 2018. The Company has substantially completed its three-yearTransformation Plan and expects this expense to decrease further as we completethe implementation by the end of 2020.Gain on Sale of AssetsGain on sale of assets for the year endedDecember 31, 2019 represents a gain onthe sale of an investment, while the gain for the year endedDecember 31, 2018 represents gains on the sales of BETM and Canal 3.Impairment Losses on InvestmentsFor the year endedDecember 31, 2019 , the Company recorded other-than-temporaryimpairment losses of$108 million , compared to$15 million recorded in the sameperiod in 2018, as further described in Item 15 - Note 11, Asset Impairments, tothe Consolidated Financial Statements.Other Income, NetOther income increased by$48 million for the year endedDecember 31, 2019 ,compared to the same period in 2018, primarily due to the loss ondeconsolidation of Ivanpah in 2018.Loss on Debt ExtinguishmentA loss on debt extinguishment of$51 million was recorded for the year endedDecember 31, 2019 , driven by the redemption of the Senior Notes, due 2024, andthe repayment of the 2023 Term Loan Facility.A loss on debt extinguishment of$44 million was recorded for the year endedDecember 31, 2018 , primarily driven by the redemption of Senior Notes, due 2022,at a price above par value.Interest ExpenseInterest expense decreased by$70 million for the year endedDecember 31, 2019 ,compared to the same period in 2018, due to the following:
(In millions)Decrease related to the debt reduction of
(27)
Increase in derivative interest expense due to the termination of interest rateswaps in 2019 of
14
Increase due to
7
Increase due to the amortization of the premium on the Convertible Senior Notesdue 2048 that were issued in the second quarter of 2018
5Other (3)Decrease in interest expense$ (70) 58
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Income Tax (Benefit)/ExpenseFor the year endedDecember 31, 2019 , NRG recorded an income tax benefit of$3.3billion on pre-tax income of$786 million . For the same period in 2018, NRGrecorded income tax expense of$7 million on pre-tax income of$467 million . Theeffective tax rate was (424.2)% and 1.5% for the years endedDecember 31, 2019 and 2018, respectively. The large benefit for the year endedDecember 31, 2019 is due to a$3.5 billion release of the Company's valuation allowance. Refer tothe section entitled Critical Accounting Policies and Estimates - Income Taxesand Valuation Allowance for Deferred Tax Assets and Item 15 - Note 20, IncomeTaxes, to the Consolidated Financial Statements for further discussion of therelease in valuation allowance.For the year endedDecember 31, 2019 , NRG's overall effective tax rate wasdifferent than the federal statutory tax rate of 21% primarily due to a taxbenefit from the release of the valuation allowance. Year Ended December 31,(In millions, except effective income tax rate) 2019 2018Income from continuing operations before income taxes $ 786$ 467 Tax at federal statutory tax rate 165 98State taxes 13 18Deferred impact of state tax rate changes 12 -Valuation allowance - current period activities (3,492) (106)Permanent differences (9) 7Production tax credits - (7)Recognition of uncertain tax benefits (10) 1Alternative minimum tax ("AMT") refundable credit - (4)Other (13) -Income tax (benefit)/expense$ (3,334) $ 7 Effective income tax rate (424.2) % 1.5 %The effective income tax rate may vary from period to period depending on, amongother factors, the geographic and business mix of earnings and losses andchanges in valuation allowances in accordance with ASC 740, Income Taxes, orASC 740. These factors and others, including the Company's history of pre-taxearnings and losses, are taken into account in assessing the ability to realizedeferred tax assets.Income/(Loss) from Discontinued Operations, Net of Income Tax Year Ended December 31,(In millions) 2019 2018 ChangeSouth Central$ 28 $ 66 $ (38) Yield Renewables Platform & Carlsbad 296 (292) 588Genon (3) 34 (37)
Income/(Loss) from discontinued operations, net oftax
$ 321
Refer to Item 15 - Note 4, Acquisitions, Discontinued Operations andDispositions, to the Consolidated Financial Statements for further discussion.
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Liquidity and Capital Resources
Liquidity PositionAs ofDecember 31, 2019 and 2018, NRG's liquidity, excluding collateral fundsdeposited by counterparties, was approximately$2.1 billion and$2.0 billion ,respectively, comprised of the following: As of December 31,(In millions) 2019 2018Cash and cash equivalents:$ 345 $ 563 Restricted cash - operating 4 6Restricted cash - reserves (a) 4 11Total 353 580Total credit facility availability 1,794 1,397
Total liquidity, excluding collateral funds deposited by counterparties $
2,147
(a)Includes reserves primarily for debt service, performance obligations, andcapital expendituresFor the year endedDecember 31, 2019 , total liquidity, excluding collateralfunds deposited by counterparties, increased by$170 million . Changes in cashand cash equivalent balances are further discussed hereinafter under the headingCash Flow Discussion. Cash and cash equivalents atDecember 31, 2019 werepredominantly held in money market funds invested in treasury securities,treasury repurchase agreements or government agency debt.Management believes that the Company's liquidity position and cash flows fromoperations will be adequate to finance operating and maintenance capitalexpenditures, to fund dividends to NRG's common stockholders, and to fund otherliquidity commitments. Management continues to regularly monitor the Company'sability to finance the needs of its operating, financing and investing activitywithin the dictates of prudent balance sheet management.Credit RatingsOnDecember 13, 2019 , Moody's upgraded the NRG corporate family rating to Ba1and senior unsecured rating to Ba2. The agency affirmed the company's seniorsecured rating at Baa3.The following table summarizes the Company's current credit ratings: S&P Moody'sNRG Energy, Inc. BB Positive Ba1 Positive3.75% Senior Secured Notes, due 2024 BBB- Baa37.25% Senior Notes, due 2026 BB Ba26.625% Senior Notes, due 2027 BB Ba25.75% Senior Notes, due 2028 BB Ba24.45% Senior Secured Notes, due 2029 BBB- Baa35.25% Senior Notes, due 2029 BB Ba2Revolving Credit Facility, due 2024 BBB- Baa3
Liquidity
The principal sources of liquidity for NRG's operating and capital expendituresare expected to be derived from cash on hand, cash flows from operations andfinancing arrangements. As described in Item 15 - Note 13, Debt and FinanceLeases, to the Consolidated Financial Statements, the Company's financingarrangements consist mainly of the Senior Credit Facility, the Senior Notes andthe Senior Secured Notes.The Company's requirements for liquidity and capital resources, other than foroperating its facilities, can generally be categorized by the following:(i) commercial operations activities; (ii) debt service obligations, asdescribed more fully in Item 15 - Note 13, Debt and Finance Leases, to theConsolidated Financial Statements; (iii) capital expenditures, includingenvironmental; and (iv) allocations in connection with return of capital anddividend payments to shareholders as described in Item 15 - Note 16, CapitalStructure, to the Consolidated Financial Statements, acquisition opportunities,and debt repayments.Issuance of 2029 Senior NotesOnMay 14, 2019 , NRG issued$733 million of aggregate principal amount at par of5.25% senior unsecured notes due 2029. The proceeds from the issuance of the2029 Senior Notes were utilized to redeem the Company's remaining$733 million of 6.25% Senior Notes due 2024. 60--------------------------------------------------------------------------------
Issuance of 2024 and 2029 Senior Secured Notes
OnMay 28, 2019 , NRG issued$1.1 billion of aggregate principal amount of seniorsecured first lien notes, consisting of$600 million 3.75% senior secured firstlien notes due 2024 and$500 million 4.45% senior secured first lien notes due2029, at a discount. The proceeds from the issuance of the Senior Secured Notes,together with cash on hand, were used to repay the Company's 2023 Term LoanFacility.2023 Term Loan FacilityOnMay 28, 2019 , the Company repaid its$1.7 billion 2023 Term Loan Facilityusing the proceeds from the issuance of the Senior Secured Notes, as well ascash on hand, resulting in a decrease of$594 million to long-term debtoutstanding. The Company recorded a loss on debt extinguishment of$17 million ,which included the write-off of previously deferred debt issuance costs of$13million . As a result of the repayment of the outstanding 2023 Term LoanFacility, the Company terminated the related interest rate swap agreements,which were in-the-money, and received$25 million that was recorded as areduction to interest expense.Revolving Credit Facility ModificationOnMay 28, 2019 , the Company amended its existing credit agreement to, amongother things, (i) provide for a$184 million increase in revolving commitments,resulting in aggregate revolving commitments under the amended credit agreementequal to$2.6 billion , (ii) extend the maturity date of the revolving loans andcommitments under the amended credit agreement toMay 28, 2024 , (iii) providefor a release of the collateral securing the amended credit agreement if NRGobtains an investment grade rating from two out of the three rating agencies,subject to an obligation to reinstate the collateral if such rating agencieswithdraw NRG's investment grade rating or downgrade NRG's rating belowinvestment grade, (iv) reduce the applicable margins for borrowings under (a)ABR Revolving Loans from 1.25% to 0.75% and (b) Eurodollar Revolving Loans from2.25% to 1.75%, (v) add a sustainability-linked pricing metric that permits aninterest rate adjustment tied to NRG meeting targets related to environmentalsustainability and (vi) make certain other changes to the existing covenants. AsofDecember 31, 2019 ,$83 million of borrowings were outstanding under theRevolving Credit Facility.Agua Caliente Borrower I - Non-Recourse DebtOnOctober 21, 2019 , the Company repaid the outstanding amount on the AguaCaliente Borrower I notes at 102% plus accrued interest through the paymentdate.Balance Sheet Target RatioNRG revised its credit metrics target to 2.5x -2.75x net debt / adjustedEBITDA(a) in the first quarter of 2019 in order to further strengthen itsbalance sheet and improve credit ratings by reducing leverage. As discussedabove, during the second quarter of 2019, the Company reduced total outstandingdebt by$594 million with the repayment of the 2023 Term Loan facility.Petra Nova Debt RepaymentDuring the third quarter of 2019, NRG contributed approximately$95 million incash toPetra Nova and posted a$12 million letter of credit to cover certainproject debt reserve requirements. The cash portion of the contribution was usedbyPetra Nova to prepay a significant portion of the project debt. As a result,the financial guarantees previously provided by NRG were canceled and theremaining project debt became non-recourse to NRG.
(a) adjusted EBITDA as defined per the Senior Credit Facility
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Debt Service ObligationsPrincipal payments on debt as ofDecember 31, 2019 are due in the followingperiods:(In millions)Description 2020 2021 2022 2023 2024 Thereafter Total Recourse Debt:Senior notes, due 2026 $ - $ - $ - $ - $ -$ 1,000 $ 1,000 Senior notes, due 2027 - - - - - 1,230 1,230Senior notes, due 2028 - - - - - 821 821Senior notes, due 2029 - - - - - 733 733Convertible Senior Notes, due 2048 - - - - - 575 575Senior Secured First Lien Notes, due2024 - - - - 600 - 600Senior Secured First Lien Notes, due2029 - - - - - 500 500Revolving Credit Facility 83 - - - - - 83Tax-exempt bonds - - - - - 466 466Subtotal Recourse Debt 83 - - - 600 5,325 6,008 Non-Recourse Debt:Other 5 6 5 4 4 10 34Subtotal Non-Recourse Debt 5 6 5 4 4 10 34Total Debt$ 88 $ 6 $ 5 $ 4 $ 604 $ 5,335 $ 6,042 In addition to the debt shown in the above table, NRG had issued$723 million ofletters of credit under the Company's$2.6 billion Revolving Credit Facility asofDecember 31, 2019 .Commercial OperationsThe Company's commercial operations activities require a significant amount ofliquidity and capital resources. These liquidity requirements are primarilydriven by: (i) margin and collateral posted with counterparties; (ii) margin andcollateral required to participate in physical markets and commodity exchanges;(iii) timing of disbursem*nts and receipts (e.g. buying fuel before receivingenergy revenues); (iv) initial collateral for large structured transactions; and(v) collateral for project development. As ofDecember 31, 2019 , commercialoperations had total cash collateral outstanding of$190 million and$694million outstanding in letters of credit to third parties primarily to supportit* commercial activities for both wholesale and retail transactions. As ofDecember 31, 2019 , total funds deposited by counterparties was$32 million incash and$102 million of letters of credit.Future liquidity requirements may change based on the Company's hedgingactivities and structures, power purchases and sales, fuel purchases, and futuremarket conditions, including forward prices for energy and fuel and marketvolatility. In addition, liquidity requirements are dependent on the Company'scredit ratings and general perception of its creditworthiness.First Lien StructureNRG has granted first liens to certain counterparties on a substantial portionof property and assets owned by NRG and the guarantors of its senior debt. NRGuses the first lien structure to reduce the amount of cash collateral andletters of credit that it would otherwise be required to post from time to timeto support its obligations under out-of-the-money hedge agreements for forwardsales of power or gas used as a proxy for power. To the extent that theunderlying hedge positions for a counterparty are out-of-the-money to NRG, thecounterparty would have a claim under the first lien program. The first lienprogram limits the volume that can be hedged, not the value of underlyingout-of-the-money positions. The first lien program does not require NRG to postcollateral above any threshold amount of exposure. Within the first lienstructure, the Company can hedge up to 80% of its coal and nuclear capacity and10% of its other assets with these counterparties for the first 60 months andthen declining thereafter. Net exposure to a counterparty on all trades must bepositively correlated to the price of the relevant commodity for the first liento be available to that counterparty. The first lien structure is not subject tounwind or termination upon a ratings downgrade of a counterparty and has nostated maturity date.The Company's first lien counterparties may have a claim on its assets to theextent market prices exceed the hedged prices. As ofDecember 31, 2019 , allhedges under the first liens were in-the-money on a counterparty aggregatebasis. 62--------------------------------------------------------------------------------
The following table summarizes the amount of MW hedged against the Company'scoal and nuclear assets and as a percentage relative to the Company's coal andnuclear capacity under the first lien structure as ofDecember 31, 2019 :Equivalent Net Sales Secured by First Lien Structure (a) 2020 2021 2022 2023In MW 642 644 699 753As a percentage of total net coal and nuclear capacity (b) 14% 14%
15% 16%
(a)EquivalentNet Sales include natural gas swaps converted using a weightedaverage heat rate by region(b)Net coal and nuclear capacity represents 80% of the Company's total coal andnuclear assets eligible under the first lien, which excludes coal assetsacquired in the Midwest Generation acquisitionStream Energy AcquisitionOnAugust 1, 2019 , the Company completed the acquisition of Stream Energy'sretail electricity and natural gas business operating in 9 states andWashington, D.C. for$329 million , including working capital and otheradjustments of approximately$29 million . The acquisition increased NRG's retailportfolio by approximately 600,000 RCEs or 450,000 customers.Small Book AcquisitionsDuring 2019, the Company acquired several books of customers totalingapproximately 72,000 customers for$17 million , of which$13 million was paid in2019. During 2018, the Company acquired several books of customers totalingapproximately 115,000 customers, along with brand names, for$44 million , ofwhich$40 million was paid in 2018,$2 million was paid in 2019 and$2 million was prepaid in 2017. The majority of the purchase price for the 2019 and 2018book acquisitions were allocated to acquired intangibles.Asset Sale ProceedsThe following table summarizes the approximate cash proceeds received from saletransactions and related financings, net of working capital and otheradjustments, completed by the Company during the years endedDecember 31, 2019 and 2018:(In millions) 2019 2018South Central Portfolio$ 962 $ -Carlsbad 396 -Guam 8 -NRG Yield, Inc and Renewables Platform - 1,348Canal 3 (a) - 167UPMC Thermal Project (b) - 84BETM - 70Buckthorn Solar (b) - 42Other 14 12
Cash proceeds from sales transactions
(a) In addition to cash proceeds from sale, amount includes$151 million relatedto a financing arrangement prior to the sale(b) Sale of assets toNRG Yield, Inc. , prior to discontinued operations 63--------------------------------------------------------------------------------
Capital ExpendituresThe following table summarizes the Company's capital expenditures formaintenance, environmental, and growth investments for the year endedDecember 31, 2019 :(In millions) Maintenance Environmental Growth Investments TotalRetail$ 13 $ - $ 47$ 60 GenerationTexas 91 1 - 92East/West/Other (a) 40 2 - 42Corporate 12 - 22 34Total cash capital expenditures for the year endedDecember 31, 2019 156 3 69 228 Stream acquisition - - 326 326 Other investments(b) - - 240 240
Total capital expenditures and investments, net offinancings
$ 156 $ 3 $ 635$ 794 (a) Includes Renewables and the Cottonwood facility(b) Other investments includes acquisitions, cost-to-achieve expenses,integration costs, and equity investments•Growth Investments capital expenditures - For the year endedDecember 31, 2019 ,the Company's growth investment capital expenditures included$51 million forcost-to-achieve projects associated with the Transformation Plan and$18 million for the Company's other growth projects.Environmental Capital Expenditures EstimateNRG estimates that environmental capital expenditures from 2020 through 2024required to comply with environmental laws will be approximately$40 million .These costs are primarily associated with the cost of adding NOx controls inConnecticut and water and landfill projects at W.A. Parish.The table below summarizes the status of NRG's coal fleet with respect to airquality controls. NRG uses an integrated approach to fuels, controls andemissions markets to meet environmental requirements. SO2 NOx Mercury Particulate Units State Control Equipment Install Date Control Equipment Install Date Control Equipment Install Date Control Equipment Install DateIndian River 4 DE CDS 2011 LNBOFA/SCR 1999/2011 ACI/CDS/FF 2008/2011 ESP/FF 1980/2011Limestone 1-2 TX FGD 1985-86 LNBOFA 2002/2003 ACI 2015 ESP 1985-1986Powerton 5 IL DSI 2016 OFA/SNCR 2003/2012 ACI 2009 ESP/upgrade 1973/2016Powerton 6 IL DSI 2014 OFA/SNCR 2002/2012 ACI 2009 ESP/upgrade 1976/2014W.A. Parish 5, 6, 7 TX FF co-benefit 1988 SCR 2004 ACI 2015 FF 1988W.A. Parish 8 TX FGD 1982 SCR 2004 ACI 2015 FF 1988Waukegan 7 IL DSI 2014 LNBOFA 2002 ACI 2008 ESP/upgrade 1958/2002, 2014Waukegan 8 IL DSI 2015 LNBOFA 1999 ACI 2008 ESP/upgrade 1962/1999, 2015 1999,2001/ 1963,72/Will County 4 IL DSI 2017 LNBOFA/SNCR 2012 ACI 2009 ESP/upgrade 2000ACI - Activated Carbon Injection FF- Fabric FilterCDS - Circulating Dry Scrubber LNBOFA - Low NOx Burner with Overfire AirDSI - Dry Sorbent Injection with Trona OFA - Overfire AirESP - Electrostatic Precipitator SCR - Selective Catalytic ReductionFGD - Flue Gas Desulfurization (wet) SNCR - Selective
Non-Catalytic Reduction
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The following table summarizes the estimated environmental capital expendituresby region:(In millions) Texas East/West Total2020$ 3 $ 4 $ 7 2021 14 12 262022 6 5 112023 - 1 12024 - - -Total$ 23 $ 22 $ 45 Share RepurchasesIn 2018, the Company's board of directors authorized the Company to repurchase$1.5 billion of its common stock. Repurchases of$1.25 billion were executed in2018 with the remaining$0.25 billion completed in the first quarter of 2019. In2019, the Company's board of directors authorized the Company to repurchaseadditional$1.25 billion of its common stock, which was completed as ofFebruary27, 2020 . See Item 15 - Note 16, Capital Structure, to the ConsolidatedFinancial Statements for additional discussion.Common Stock DividendsThe Company returned$32 million of capital to shareholders in the year ended2019 through a$0.12 dividend per common share.Beginning in the first quarter of 2020, NRG increased the annual dividend to$1.20 per share from$0.12 per share and expects to target an annual dividendgrowth rate of 7-9% per share in subsequent years.OnJanuary 21, 2020 , NRG declared a quarterly dividend on the Company's commonstock of$0.30 per share, or$1.20 per share on an annualized basis, payable onFebruary 18, 2020 , to stockholders of record as ofFebruary 3, 2020 . TheCompany's common stock dividends are subject to available capital, marketconditions, and compliance with associated laws and regulations.Cash Flow Discussion2019 compared to 2018The following table reflects the changes in cash flows for the comparativeyears: Year ended December 31,(In millions) 2019 2018 ChangeNet cash provided by operating activities$ 1,413 $ 1,377 $ 36 Net cash provided/(used) by investing activities 556 (205) 761Net cash used by financing activities (2,148) (1,526) (622)Net Cash Provided By Operating ActivitiesChanges to net cash provided by operating activities were driven by: (In millions)Change in cash provided by discontinued operations $ (366)Increase in operating income adjusted for other non-cash items 230
Changes in cash collateral in support of risk management activities due tochange in commodity prices
210GenOn settlement inJuly 2018 63Other changes in working capital (101) $ 36 65
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Net Cash Provided By Investing ActivitiesChanges to net cash provided by investing activities were driven by: (In millions)Decrease in cash used by discontinued operations
$ 724Cash removed in 2018 due to deconsolidation of
268
Decrease in capital expenditures primarily driven by construction projects in2018
160
Increase in proceeds received from sales of nuclear decommissioning trust fundsecurities, net of purchases
24Decrease in contributions to discontinued operations 16
Decrease in proceeds from sale of assets and discontinued operations
(271)
Increase in cash paid for acquisitions primarily due to Stream Energy acquisitionin 2019
(112)Change in investments in unconsolidated affiliates (52)Other 4 $ 761Net Cash Used By Financing ActivitiesChanges in net cash used by financing activities were driven by: (In millions)Increase in payments of short and long-term debt $ (837)Change in cash provided by discontinued operations (428)Increase in payments for treasury stock (190)
Increase in payments of debt extinguishment costs and deferred issuance costs
(10)Increase in proceeds from issuance of short and long-term debt 816
Decrease in distributions to noncontrolling interests from subsidiaries
14Other 13 $ (622)NOLs, Deferred Tax Assets and Uncertain Tax Position ImplicationsAs ofDecember 31, 2019 , the Company had domestic pre-tax book income of$771million and foreign pre-tax book income of$15 million . For the year endedDecember 31, 2019 , the Company utilized NOLs of$593 million due to current yeartaxable income. As ofDecember 31, 2019 , the Company has cumulativeU.S. federalNOL carryforwards of$10.1 billion , which will begin expiring in 2031 andcumulative state NOL carryforwards of$5.5 billion . NRG also has cumulativeforeign NOL carryforwards of$357 million , which do not have an expiration date.In addition to the above NOLs, NRG has a$361 million indefinite carryforwardfor interest deductions, as well as$384 million of tax credits to be utilizedin future years. As a result of the Company's tax position, including theutilization of federal and state NOLs, and based on current forecasts, theCompany anticipates income tax payments, primarily due to state and localjurisdictions, of up to$16 million in 2020. See Item 15 - Note 20, IncomeTaxes, for further discussion regarding the release of the valuation allowance.The Company has recorded as ofDecember 31, 2019 short-term and long-termreceivables of$35 million and$34 million , respectively, representingrefundable AMT credits from theIRS , which are anticipated to be received from2020 through 2022 pursuant to the 50% annual limitation as enacted by the TaxAct upon repeal of corporate AMT effectiveJanuary 1, 2018 . Of these amounts,short-term and long-term payables of$11 million each are due to GenOn for theirshare of the minimum tax credits.In addition to these amounts, the Company has$15 million of tax effecteduncertain state tax benefits for which the Company has recorded a non-currenttax liability of$17 million (including accrued interest) until such finalresolution with the related taxing authority.The Company is no longer subject toU.S. federal income tax examinations foryears prior to 2016. With few exceptions, state and local income taxexaminations are no longer open for years before 2011. 66--------------------------------------------------------------------------------
Off-Balance Sheet ArrangementsObligations under Certain Guarantee ContractsNRG and certain of its subsidiaries enter into guarantee arrangements in thenormal course of business to facilitate commercial transactions with thirdparties. These arrangements include financial and performance guarantees,stand-by letters of credit, debt guarantees, surety bonds and indemnifications.See also Item 15 - Note 27, Guarantees, to the Consolidated Financial Statementsfor additional discussion.Retained or Contingent InterestsNRG does not have any material retained or contingent interests in assetstransferred to an unconsolidated entity.Obligations Arising Out of a Variable Interest in an Unconsolidated EntityVariable interest in Equity investments - As ofDecember 31, 2019 , NRG hasseveral investments with an ownership interest percentage of 50% or less inenergy and energy-related entities that are accounted for under the equitymethod of accounting. Ivanpah is considered a variable interest entity for whichNRG is not the primary beneficiary.NRG's pro-rata share of non-recourse debt held by unconsolidated affiliates wasapproximately$866 million as ofDecember 31, 2019 . This indebtedness mayrestrict the ability of these subsidiaries to issue dividends or distributionsto NRG. See also Item 15 - Note 17, Investments Accounted for by the EquityMethod and Variable Interest Entities, to the Consolidated Financial Statementsfor additional discussion.Contractual Obligations and Commercial CommitmentsNRG has a variety of contractual obligations and other commercial commitmentsthat represent prospective cash requirements in addition to the Company'scapital expenditure programs. The following tables summarize NRG's contractualobligations and contingent obligations for guarantees. See also Item 15 - Note13, Debt and Finance Leases, Note 23, Commitments and Contingencies, and Note27, Guarantees, to the Consolidated Financial Statements for additionaldiscussion. By Remaining Maturity at December 31,(In millions) 2019 Under OverContractual Cash Obligations 1 Year 1-3
Years 3-5 Years 5 Years Total (a)Long-term debt (including estimated interest)
Operating leases 96 174 160 296 726Fuel purchase and transportation obligations 124 198 115 139 576Purchased power commitments(b) 35 117 112 349 613Pension minimum funding requirement (c) 54 54 42 53 203Other postretirement benefits minimum fundingrequirement (d) 7 11 11 17 46Other liabilities (e) 45 57 40 125 267Total$ 797 $ 1,316 $ 1,761 $ 7,891 $ 11,765 (a)Excludes$15 million non-current payable relating to NRG's uncertain taxbenefits under ASC 740 as the period of payment cannot be reasonably estimated.Also excludes$728 million of asset retirement obligations that are discussed inItem 15 - Note 14, Asset Retirement Obligations, to the Consolidated FinancialStatements(b)Includes purchase power commitments and renewable minimum purchase powercommitments under PPAs(c)These amounts represent the Company's estimated minimum pension contributionsrequired under the Pension Protection Act of 2006. These amounts representestimates based on assumptions that are subject to change(d)These amounts represent estimates based on assumptions that are subject tochange. The minimum required contribution for years after 2027 are currently notavailable(e)Includes water right agreements, service and maintenance agreements, stadiumnaming rights, stadium sponsorships, LTSA commitments and other contractualobligations By Remaining Maturity at December 31,(In millions) 2019 Under OverGuarantees 1 Year 1-3 Years 3-5 Years 5 Years TotalLetters of credit and surety bonds(a)$ 878 $
115
4 490 - 204 698Other guarantees 77 5 - 206 288Total guarantees$ 959 $ 610 $ 31 $ 410 $ 2,010
(a)Guarantees as of
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Fair Value of Derivative InstrumentsNRG may enter into power purchase and sales contracts, fuel purchase contractsand other energy-related financial instruments to mitigate variability inearnings due to fluctuations in spot market prices and to hedge fuelrequirements at power plants or retail load obligations.NRG's trading activities are subject to limits in accordance with the Company'sRisk Management Policy. These contracts are recognized on the balance sheet atfair value and changes in the fair value of these derivative financialinstruments are recognized in earnings.The tables below disclose the activities that include both exchange andnon-exchange traded contracts accounted for at fair value in accordance with ASC820, Fair Value Measurements and Disclosures, or ASC 820. Specifically, thesetables disaggregate realized and unrealized changes in fair value; disaggregateestimated fair values atDecember 31, 2019 , based on their level within the fairvalue hierarchy defined in ASC 820; and indicate the maturities of contracts atDecember 31, 2019 . For a full discussion of the Company's valuation methodologyof its contracts, see Derivative Fair Value Measurements in Item 15 - Note 5,Fair Value of Financial Instruments, to the Consolidated Financial Statements.Derivative Activity Gains/(Losses) (In millions)Fair value of contracts as of December 31, 2018$ 104 Contracts realized or otherwise settled during the period (105)Contracts acquired during the period (12)Changes in fair value 80Fair value of contracts as of December 31, 2019 $ 67 Fair Value of Contracts as of December 31, 2019(In millions) Maturity Greater Than 1 Greater Than 3 Greater Than Total FairFair value hierarchy (Losses)/Gains 1 Year or Less Year to 3 Years Years to 5 Years 5 Years ValueLevel 1$ (31) $ (27) $ (2)$ 1 $ (59) Level 2 56 49 (7) (10) 88Level 3 54 (2) 1 (15) 38Total $ 79$ 20 $ (8)$ (24) $ 67 The Company has elected to disclose derivative assets and liabilities on atrade-by-trade basis and does not offset amounts at the counterparty masteragreement level. Also, collateral received or posted on the Company's derivativeassets or liabilities are recorded on a separate line item on the balance sheet.Consequently, the magnitude of the changes in individual current and non-currentderivative assets or liabilities is higher than the underlying credit and marketrisk of the Company's portfolio. As discussed in Item 7A - Quantitative andQualitative Disclosures About Market Risk, Commodity Price Risk, NRG measuresthe sensitivity of the Company's portfolio to potential changes in market pricesusing VaR, a statistical model which attempts to predict risk of loss based onmarket price and volatility. NRG's risk management policy places a limit onone-day holding period VaR, which limits the Company's net open position. As theCompany's trade-by-trade derivative accounting results in a gross-up of theCompany's derivative assets and liabilities, the net derivative assets andliability position is a better indicator of NRG's hedging activity. As ofDecember 31, 2019 , NRG's net derivative asset was$67 million , a decrease tototal fair value of$37 million as compared toDecember 31, 2018 . This decreasewas primarily driven by losses in trades settled and contracts acquired duringthe period, partially offset by increases in change in fair value during theperiod.Based on a sensitivity analysis using simplified assumptions, the impact of a$0.50 per MMBtu increase in natural gas prices across the term of the derivativecontracts would result in an increase of approximately$41 million in the netvalue of derivatives as ofDecember 31, 2019 .The impact of a$0.50 per MMBtu decrease in natural gas prices across the termof the derivative contracts would result in a decrease of approximately$36million in the net value of derivatives as ofDecember 31, 2019 . 68--------------------------------------------------------------------------------
Critical Accounting Policies and EstimatesNRG's discussion and analysis of the financial condition and results ofoperations are based upon the Consolidated Financial Statements, which have beenprepared in accordance with GAAP. The preparation of these financial statementsand related disclosures in compliance with GAAP requires the application ofappropriate technical accounting rules and guidance as well as the use ofestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosures of contingent assets andliabilities. The application of these policies involves judgments regardingfuture events, including the likelihood of success of particular projects, legaland regulatory challenges, and the fair value of certain assets and liabilities.These judgments, in and of themselves, could materially affect the financialstatements and disclosures based on varying assumptions, which may beappropriate to use. In addition, the financial and operating environment mayalso have a significant effect, not only on the operation of the business, buton the results reported through the application of accounting measures used inpreparing the financial statements and related disclosures, even if the natureof the accounting policies have not changed.On an ongoing basis, NRG evaluates these estimates, utilizing historicexperience, consultation with experts and other methods the Company considersreasonable. In any event, actual results may differ substantially from theCompany's estimates. Any effects on the Company's business, financial positionor results of operations resulting from revisions to these estimates arerecorded in the period in which the information that gives rise to the revisionbecomes known.NRG's significant accounting policies are summarized in Item 15 - Note 2,Summary of Significant Accounting Policies, to the Consolidated FinancialStatements. The Company identifies its most critical accounting policies asthose that are the most pervasive and important to the portrayal of theCompany's financial position and results of operations, and require the mostdifficult, subjective and/or complex judgments by management regarding estimatesabout matters that are inherently uncertain.Accounting Policy Judgments/Uncertainties Affecting ApplicationDerivative Instruments Assumptions used in valuation techniques Assumptions used in forecasting generation Assumptions used in forecasting borrowings Market maturity and economic conditions Contract interpretation Market conditions in
the energy industry, especially
the effects of price
volatility on contractual
commitmentsIncome Taxes and Valuation Allowance for Deferred Ability to be sustained upon audit examination ofTax Assets taxing authorities Interpret existing tax statute and regulations upon application to transactions Ability to utilize tax
benefits through carry backs to
prior periods and
carry forwards to future periodsImpairment of Long-Lived Assets and Investments Recoverability of investment through future operations
Regulatory and
political environments and requirements
Estimated useful lives
of assets
Environmental
obligations and operational limitations
Estimates of future cash flows Estimates of fair value Judgment about impairment triggering eventsGoodwill and Other Intangible Assets Estimated useful lives
for finite-lived intangible
assets Judgment about
impairment triggering events
Estimates of reporting
unit's fair value
Fair value estimate of
intangible assets acquired in
business combinationsContingencies Estimated financial
impact of event(s)
Judgment about
likelihood of event(s) occurring
Regulatory and
political environments and requirements
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Derivative InstrumentsThe Company follows the guidance of ASC 815 to account for derivativeinstruments. ASC 815 requires the Company to mark-to-market all derivativeinstruments on the balance sheet and recognize changes in the fair value ofnon-hedge derivative instruments immediately in earnings. In certain cases, NRGmay apply hedge accounting to the Company's derivative instruments. The criteriaused to determine if hedge accounting treatment is appropriate are: (i) thedesignation of the hedge to an underlying exposure; (ii) whether the overallrisk is being reduced; and (iii) if there is a correlation between the changesin fair value of the derivative instrument and the underlying hedged item.Changes in the fair value of derivatives instruments accounted for as hedges aredeferred and recorded as a component of OCI and subsequently recognized inearnings when the hedged transactions occur.For purposes of measuring the fair value of derivative instruments, NRG usesquoted exchange prices and broker quotes. When external prices are notavailable, NRG uses internal models to determine the fair value. These internalmodels include assumptions of the future prices of energy commodities based onthe specific market in which the energy commodity is being purchased or sold,using externally available forward market pricing curves for all periodspossible under the pricing model. These estimations are considered to becritical accounting estimates.Upon repayment of the Term Loan in 2019, all of the Company's interest rateswaps were terminated. In order to qualify the derivative instruments for hedgedtransactions prior to termination, NRG estimated the forecasted borrowings forinterest rate swaps occurring within a specified time period. Judgments relatedto the probability of forecasted borrowings were based on the estimated timingof project construction, which can vary based on various factors. Theprobability that forecasted borrowings will occur by the end of a specified timeperiod could change the results of operations by requiring amounts currentlyclassified in OCI to be reclassified into earnings, creating increasedvariability in the Company's earnings.Certain derivative instruments that meet the criteria for derivative accountingtreatment also qualify for a scope exception to derivative accounting, as theyare considered to be NPNS. The availability of this exception is based upon theassumption that NRG has the ability and it is probable to deliver or takedelivery of the underlying item. These assumptions are based on expected loadrequirements, available baseload capacity, internal forecasts of sales andgeneration and historical physical delivery on contracts. Derivatives that areconsidered to be NPNS are exempt from derivative accounting treatment and areaccounted for under accrual accounting. If it is determined that a transactiondesignated as NPNS no longer meets the scope exception due to changes inestimates, the related contract would be recorded on the balance sheet at fairvalue combined with the immediate recognition through earnings.Income Taxes and Valuation Allowance for Deferred Tax AssetsAs ofDecember 31, 2019 , NRG's deferred tax assets were primarily the result ofU.S. federal and state NOLs, the difference between book and tax basis inproperty, plant, and equipment, and tax credit carryforwards. The realization ofdeferred tax assets is dependent upon the Company's ability to generatesufficient future taxable income during the periods in which those temporarydifferences become deductible, prior to the expiration of the tax attributes.The evaluation of deferred tax assets requires judgment in assessing the likelyfuture tax consequences of events that have been recognized in the Company'sfinancial statements or tax returns and forecasting future profitability by taxjurisdiction.A valuation allowance of$242 million and$3.8 billion was recorded againstNRG's gross deferred tax asset balance as ofDecember 31, 2019 , andDecember 31,2018 , respectively. During the year endedDecember 31, 2019 , NRG released themajority of its valuation allowance against itsU.S. federal and state deferredtax assets, resulting in a non-cash benefit to income tax expense ofapproximately$3.5 billion .The Company evaluates its deferred tax assets quarterly on a jurisdictionalbasis to determine whether adjustments to the valuation allowance areappropriate considering changes in facts or circ*mstances. As of each reportingdate, management considers new evidence, both positive and negative, whendetermining the future realization of the Company's deferred tax assets. Inmaking the determination to release the majority of the valuation allowance asofDecember 31, 2019 , the Company evaluated a number of factors, including itsrecent history of pre-tax earnings, utilization of$593 million of NOLs in 2019,as well as its forecasted future pre-tax earnings. Based on this evaluation, theCompany determined that its futureU.S. federal tax benefits aremore-likely-than-not to be realized. Given the Company's current level ofpre-tax earnings and forecasted future pre-tax earnings, the Company expects togenerate income before taxes in theU.S. in future periods at a level that wouldfully utilize itsU.S. federal NOL carryforwards and the majority of its stateNOL carryforwards prior to their expiration.NRG continues to maintain a valuation allowance of approximately$242 million asofDecember 31, 2019 against net deferred tax assets consisting of state netoperating losses and foreign NOL carryforwards in jurisdictions where theCompany does not currently believe that the realization of its deferred taxassets is more likely than not.NRG continues to be under audit for multiple years by taxing authorities inother jurisdictions. Considerable judgment is required to determine the taxtreatment of a particular item that involves interpretations of complex taxlaws, including the 70--------------------------------------------------------------------------------
impact of the Tax Act effectiveDecember 22, 2017 . NRG is subject to examinationby taxing authorities for income tax returns filed in theU.S. federaljurisdiction and various state and foreign jurisdictions, including operationslocated inAustralia .The Company is no longer subject toU.S. federal income tax examinations foryears prior to 2016. With few exceptions, state and local income taxexaminations are no longer open for years before 2011.Evaluation of Assets for Impairment and Other-Than-Temporary Decline in ValueIn accordance with ASC 360, Property, Plant, and Equipment, or ASC 360, NRGevaluates property, plant and equipment and certain intangible assets forimpairment whenever indicators of impairment exist. Examples of such indicatorsor events are:•Significant decrease in the market price of a long-lived asset;•Significant adverse change in the manner an asset is being used or its physicalcondition;•Adverse business climate;•Accumulation of costs significantly in excess of the amount originally expectedfor the construction or acquisition of an asset;•Current period loss combined with a history of losses or the projection offuture losses; and•Change in the Company's intent about an asset from an intent to hold to agreater than 50% likelihood that an asset will be sold, or disposed of beforethe end of its previously estimated useful life.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of the assets to the future net cash flows expected to begenerated by the asset, through considering project specific assumptions forlong-term power prices, escalated future project operating costs and expectedplant operations. If such assets are considered to be impaired, the impairmentto be recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets by factoring in the differentcourses of action available to the Company. Generally, fair value will bedetermined using valuation techniques, such as the present value of expectedfuture cash flows. NRG uses its best estimates in making these evaluations andconsiders various factors, including forward price curves for energy, fuel andoperating costs. However, actual future market prices and project costs couldvary from the assumptions used in the Company's estimates and the impact of suchvariations could be material.For assets to be held and used, if the Company determines that the undiscountedcash flows from the asset are less than the carrying amount of the asset, NRGmust estimate fair value to determine the amount of any impairment loss. Assetsheld-for-sale are reported at the lower of the carrying amount or fair valueless the cost to sell. The estimation of fair value, whether in conjunction withan asset to be held and used or with an asset held-for-sale, and the evaluationof asset impairment are, by their nature, subjective. NRG considers quotedmarket prices in active markets to the extent they are available. In the absenceof such information, the Company may consider prices of similar assets, consultwith brokers, or employ other valuation techniques. NRG will also discount theestimated future cash flows associated with the asset using a single interestrate representative of the risk involved with such an investment or employ anexpected present value method that probability-weights a range of possibleoutcomes. The use of these methods involves the same inherent uncertainty offuture cash flows as previously discussed with respect to undiscounted cashflows. Actual future market prices and project costs could vary from those usedin the Company's estimates and the impact of such variations could be material.Annually, during the fourth quarter, the Company revises its views of power andfuel prices including the Company's fundamental view for long-term prices,forecasted generation and operating and capital expenditures, in connection withthe preparation of its annual budget. Changes to the Company's views oflong-term power and fuel prices impact the Company's projections ofprofitability, based on management's estimate of supply and demand within thesub-markets for its operations and the physical and economic characteristics ofeach of its businesses.As ofDecember 31, 2019 , the Company recorded impairment losses of approximately$5 million , excluding impairment losses on equity and cost method investmentsdiscussed below. These impairment losses were primarily to record the value ofcertain long-lived assets, including property, plant and equipment andintangible assets, at fair market value in connection with an impairmentindicator.Equity and Cost Method InvestmentsNRG is also required to evaluate its equity method and cost method investmentsto determine whether or not they are impaired in accordance with ASC 323,Investments -Equity Method and Joint Ventures , or ASC 323. The standard fordetermining whether an impairment must be recorded under ASC 323 is whether adecline in the value is considered an other-than-temporary decline in value. Theevaluation and measurement of impairments under ASC 323 involves the sameuncertainties as described for long-lived assets that the Company owns directlyand accounts for in accordance with ASC 360. 71--------------------------------------------------------------------------------
Similarly, the estimates that NRG makes with respect to its equity and costmethod investments are subjective, and the impact of variations in theseestimates could be material. Additionally, if the projects in which the Companyholds these investments recognize an impairment under the provisions of ASC 360,NRG would record its proportionate share of that impairment loss and wouldevaluate its investment for an other-than-temporary decline in value under ASC323. During the year endedDecember 31, 2019 , the Company recorded impairmentlosses on its equity and cost method investments, primarilyPetra Nova , of$108 million due to declines in value.Goodwill and Other Intangible AssetsAtDecember 31, 2019 , NRG reported goodwill of$579 million , consisting of$165million associated with the acquisition of Midwest Generation and$414 million for retail business acquisitions, includingTexas non-commodity, XOOM and StreamEnergy.The Company applies ASC 805, Business Combinations, or ASC 805, and ASC 350, toaccount for its goodwill and intangible assets. Under these standards, theCompany amortizes all finite-lived intangible assets over their respectiveestimated weighted-average useful lives, while goodwill has an indefinite lifeand is not amortized.Goodwill is tested for impairment at least annually, ormore frequently whenever an event or change in circ*mstances occurs that wouldmore likely than not reduce the fair value of a reporting unit below itscarrying amount. The Company tests goodwill for impairment at the reporting unitlevel, which is identified by assessing whether the components of the Company'soperating segments constitute businesses for which discrete financialinformation is available and whether segment management regularly reviews theoperating results of those components. The Company performs the annual goodwillimpairment assessment as ofDecember 31 or when events or changes incirc*mstances indicate that the carrying value may not be recoverable. TheCompany first assesses qualitative factors to determine whether it is morelikely than not that an impairment has occurred. In the absence of sufficientqualitative factors, the Company performs a quantitative assessment bydetermining the fair value of the reporting unit and comparing to its bookvalue. If it is determined that the fair value of a reporting unit is below itscarrying amount, where necessary, the Company's goodwill will be impaired atthat time.The Company performed its qualitative assessment of macroeconomic, industry andmarket events and circ*mstances, and the overall financial performance of theNRG Business Solutions and Retail Mass reporting units. The Company determinedit was more-likely-than-not that the fair value of the goodwill attributed tothese reporting units were more than their carrying amount and accordingly, noimpairment existed for the year endedDecember 31, 2019 .The Company performed a quantitative assessment for the reporting units in thefollowing table. The Company determined the fair value of these reporting unitsusing primarily an income approach. Under the income approach, the Companyestimated the fair value of the reporting units' invested capital exceeds itscarrying value and, as such, the Company concluded that goodwill associated withthe reporting units in the following table is not impaired as ofDecember 31,2019 :Reporting Unit % Fair Value Over Carrying
Value
Midwest Generation (Generation Segment) 112 %Texas Non-Commodity (Retail Segment)
140 %
The Company believes the methodology and assumptions used in its quantitativeassessment are consistent with the views of market participants. Significantinputs to the determination of fair value were as follows:•The Company applied a discounted cash flow methodology to the long-termforecasts for the Midwest Generation plants. The significant assumptions used toderive the long-term budgets used in the income approach are affected by thefollowing key inputs:•The Company's views of power and fuel prices consider market prices for thenext five years and the Company's fundamental view for the longer term, drivenby the Company's long-term view of the price of natural gas. The Company'sfundamental view for the longer term reflects the implied power price and heatrate that would support new build of a combined cycle gas plant. The price ofnatural gas plays an important role in setting the price of electricity in manyof the regions where NRG operates power plants. Hedging is included to theextent of contracts already in place;•The Company's estimate of generation, fuel costs, capital expenditurerequirements and the existing and anticipated impact of environmentalregulations;•The Company's fundamental view for the longer term, cash flows for the plantsin the region were included in the fair value calculation through the end ofeach plants' estimated useful life; and•Projected generation and resulting energy gross margin in the long-termforecasts is based on an hourly dispatch that simulates dispatch of each unitinto the power market. The dispatch simulation is based on power prices, fuelprices, and the physical and economic characteristics of each plant 72--------------------------------------------------------------------------------
•The Company applied a discounted cash flow methodology to the long-term budgetfor the Texas Non-Commodity reporting unit. The significant assumptions used toderive the long-term budgets used in the income approach are affected by thefollowing key inputs: a terminal value utilizing assumed growth rates anddiscount rates that reflect the inherent cash flow risk.Fair value determinations require considerable judgment and are sensitive tochanges in underlying assumptions and factors. As a result, there can be noassurance that the estimates and assumptions made for purposes of the annualgoodwill impairment test will prove to be accurate predictions of the future.ContingenciesNRG records reserves for estimated losses from contingencies when informationavailable indicates that a loss is probable and the amount of the loss, or rangeof loss, can be reasonably estimated. Gain contingencies are not recorded untilmanagement determines it is certain that the future event will become or doesbecome a reality. Such determinations are subject to interpretations of currentfacts and circ*mstances, forecasts of future events, and estimates of thefinancial impacts of such events. NRG describes in detail its contingencies inItem 15 - Note 23, Commitments and Contingencies, to the Consolidated FinancialStatements.Recent Accounting DevelopmentsSee Item 15 - Note 2, Summary of Significant Accounting Policies, to theConsolidated Financial Statements for a discussion of recent accountingdevelopments. 73
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