NRG 2013 03.31 10Q
                                    

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
 
 
For the Quarterly Period Ended: March 31, 2013
 
 
 
o
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-15891
NRG Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
 
41-1724239
(I.R.S. Employer
Identification No.)
 
 
 
211 Carnegie Center, Princeton, New Jersey
(Address of principal executive offices)
 
08540
(Zip Code)
(609) 524-4500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x       No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No x
As of April 30, 2013, there were 322,487,532 shares of common stock outstanding, par value $0.01 per share.
 


                                    

TABLE OF CONTENTS
Index
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
GLOSSARY OF TERMS
PART I — FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 — CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
ITEM 1A — RISK FACTORS
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES
ITEM 4 — MINE SAFETY DISCLOSURES
ITEM 5 — OTHER INFORMATION
ITEM 6 — EXHIBITS
SIGNATURES



2


                                    

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q of NRG Energy, Inc., or NRG or the Company, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. The words "believes," "projects," "anticipates," "plans," "expects," "intends," "estimates" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause NRG's actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors, risks and uncertainties include the factors described under Item 1A — Risk Factors Related to NRG Energy, Inc., in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2012, including, but not limited to, the following:

General economic conditions, changes in the wholesale power markets and fluctuations in the cost of fuel;
Volatile power supply costs and demand for power;
Hazards customary to the power production industry and power generation operations such as fuel and electricity price volatility, unusual weather conditions, catastrophic weather-related or other damage to facilities, unscheduled generation outages, maintenance or repairs, unanticipated changes to fuel supply costs or availability due to higher demand, shortages, transportation problems or other developments, environmental incidents, or electric transmission or gas pipeline system constraints and the possibility that NRG may not have adequate insurance to cover losses as a result of such hazards;
The effectiveness of NRG's risk management policies and procedures, and the ability of NRG's counterparties to satisfy their financial commitments;
Counterparties' collateral demands and other factors affecting NRG's liquidity position and financial condition;
NRG's ability to operate its businesses efficiently, manage capital expenditures and costs tightly, and generate earnings and cash flows from its asset-based businesses in relation to its debt and other obligations;
NRG's ability to enter into contracts to sell power and procure fuel on acceptable terms and prices;
The liquidity and competitiveness of wholesale markets for energy commodities;
Government regulation, including compliance with regulatory requirements and changes in market rules, rates, tariffs and environmental laws and increased regulation of carbon dioxide and other greenhouse gas emissions;
Price mitigation strategies and other market structures employed by ISOs or RTOs that result in a failure to adequately compensate NRG's generation units for all of their costs;
NRG's ability to borrow additional funds and access capital markets, as well as NRG's substantial indebtedness and the possibility that NRG may incur additional indebtedness going forward;
NRG's ability to receive federal loan guarantees or cash grants to support development projects;
Operating and financial restrictions placed on NRG and its subsidiaries that are contained in the indentures governing NRG's outstanding notes, in NRG's Senior Credit Facility, and in debt and other agreements of certain of NRG subsidiaries and project affiliates generally;
NRG's ability to implement its strategy of developing and building new power generation facilities, including new solar projects;
NRG's ability to implement its econrg strategy of finding ways to address environmental challenges while taking advantage of business opportunities;
NRG's ability to implement its FORNRG strategy to increase cash from operations through operational and commercial initiatives, corporate efficiencies, asset strategy, and a range of other programs throughout the company to reduce costs or generate revenues;
NRG's ability to achieve its strategy of regularly returning capital to stockholders;
NRG's ability to maintain retail market share;
NRG's ability to successfully evaluate investments in new business and growth initiatives;
NRG's ability to successfully integrate and manage any acquired businesses;
NRG's ability to develop and maintain successful partnering relationships; and
NRG's ability to integrate the businesses and realize cost savings related to the merger with GenOn Energy, Inc.

Forward-looking statements speak only as of the date they were made, and NRG undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG's actual results to differ materially from those contemplated in any forward-looking statements included in this Quarterly Report on Form 10-Q should not be construed as exhaustive.

3

                                    

GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
2012 Form 10-K
 
NRG’s Annual Report on Form 10-K for the year ended December 31, 2012
ASC
 
The FASB Accounting Standards Codification, which the FASB established as the source of
authoritative U.S. GAAP
ASU
 
Accounting Standards Updates - updates to the ASC
BACT
 
Best Available Control Technology
Baseload
 
Units expected to satisfy minimum baseload requirements for the system and produce electricity at an essentially constant rate and run continuously
BRA
 
Base Residual Auction
BTU
 
British Thermal Unit
CAIR
 
Clean Air Interstate Rule
CAISO
 
California Independent System Operator
Capital Allocation Program
 
NRG's plan of allocating capital between debt reduction, reinvestment in the business, share repurchases and shareholder dividends
CCUS
 
Carbon capture, utilization and storage project
CFTC
 
U.S. Commodity Futures Trading Commission
CO2
 
Carbon dioxide
CPUC
 
California Public Utilities Commission
CSAPR
 
Cross-State Air Pollution Rule
CWA
 
Clean Water Act
Distributed Solar
 
Solar power projects, typically less than 20 MW in size, that primarily sell power produced to customers for usage on site, or are interconnected to sell power into the local distribution grid
DNREC
 
Delaware Department of Natural Resources and Environmental Control
Energy Plus
 
Energy Plus Holdings LLC
EPA
 
United States Environmental Protection Agency
ERCOT
 
Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas
ESPP
 
Employee Stock Purchase Plan
Exchange Act
 
The Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
FCM
 
Forward Capacity Market
FERC
 
Federal Energy Regulatory Commission
GenOn
 
GenOn Energy, Inc.
GenOn Americas Generation
 
GenOn Americas Generation, LLC
GenOn Americas Generation Senior Notes
 
GenOn Americas Generation's $850 million outstanding unsecured senior notes consisting of $450 million of 8.55% senior notes due 2021 and $400 million of 9.125% senior notes due 2031
GenOn Mid-Atlantic
 
GenOn Mid- Atlantic, LLC and, except where the context indicates otherwise, its subsidiaries, which include the coal generation units at two generating facilities under operating leases
GenOn Senior Notes
 
GenOn's $2.5 billion outstanding unsecured senior notes consisting of $575 million of 7.625% senior notes due 2014, $725 million of 7.875% senior notes due 2017, $675 million of 9.5% senior notes due 2018, and $550 million of 9.875% senior notes due 2020
GHG
 
Greenhouse gases
Green Mountain Energy
 
Green Mountain Energy Company
GWh
 
Gigawatt hour
HAPs
 
Hazardous air pollutants

4

                                    

Heat Rate
 
A measure of thermal efficiency computed by dividing the total BTU content of the fuel burned by the resulting kWhs generated. Heat rates can be expressed as either gross or net heat rates, depending whether the electricity output measured is gross or net generation and is generally expressed as BTU per net kWh
High Desert
 
TA - High Desert LLC
High Desert Facility
 
High Desert's $82 million non-recourse project level financing facility under the Note Purchase and Private Shelf Agreement
Intermediate
 
Units expected to satisfy system requirements that are greater than baseload and less than peaking
ISO
 
Independent System Operator, also referred to as Regional Transmission Organization, or RTO
ITC
 
Investment Tax Credit
kWh
 
Kilowatt-hours
LIBOR
 
London Inter-Bank Offered Rate
LTIPs
 
Collectively, the NRG Long-Term Incentive Plan and the NRG GenOn Long-Term Incentive Plan
Marsh Landing
 
GenOn Marsh Landing, LLC
Mass
 
Residential and small business
MATS
 
Mercury and Air Toxics Standards promulgated by the EPA
MDE
 
Maryland Department of the Environment
Merger
 
The merger completed on December 14, 2012 by NRG and GenOn pursuant to the Merger Agreement
Merger Agreement
 
Agreement and Plan of Merger by and among NRG Energy, Inc., Plus Merger Corporation and GenOn Energy, Inc. dated as of July 20, 2012
MISO
 
Midwest Independent Transmission System Operator, Inc.
MMBtu
 
Million British Thermal Units
MOPR
 
Minimum Offer Price Rule
MW
 
Megawatt
MWh
 
Saleable megawatt hours, net of internal/parasitic load megawatt-hours
MWt
 
Megawatts Thermal Equivalent
NAAQS
 
National Ambient Air Quality Standards
NERC
 
North American Electric Reliability Corporation
Net Exposure
 
Counterparty credit exposure to NRG, net of collateral
Net Generation
 
The net amount of electricity produced, expressed in kWh or MWhs, that is the total amount of electricity generated (gross) minus the amount of electricity used during generation
NJDEP
 
New Jersey Department of Environmental Protection
NOx
 
Nitrogen oxide
NPNS
 
Normal Purchase Normal Sale
NRC
 
U.S. Nuclear Regulatory Commission
NSPS
 
New Source Performance Standards
NSR
 
New Source Review
Nuclear Decommissioning Trust Fund
 
NRG's nuclear decommissioning trust fund assets, which are for the Company's portion of the decommissioning of the STP, units 1 & 2
NYISO
 
New York Independent System Operator
NYSPSC
 
New York State Public Service Commission
OCI
 
Other comprehensive income
Peaking
 
Units expected to satisfy demand requirements during the periods of greatest or peak load on the system
PG&E
 
Pacific Gas & Electric Company
PJM
 
PJM Interconnection, LLC
PPA
 
Power Purchase Agreement

5

                                    

PUCT
 
Public Utility Commission of Texas
QSE
 
Qualified Scheduling Entities
Reliant Energy
 
NRG's retail business in Texas, Illinois and the Northeast
REP
 
Retail Electric Provider
Repowering
 
Technologies utilized to replace, rebuild, or redevelop major portions of an existing electrical generating facility, generally to achieve a substantial emissions reduction, increase facility capacity, and improve system efficiency
Retail Business
 
Retail energy companies, collectively, Reliant Energy, Green Mountain Energy and Energy Plus, which are wholly owned subsidiaries of NRG
Revolving Credit Facility
 
The Company's $2.3 billion revolving credit facility due 2016, a component of the Senior Credit Facility
RGGI
 
Regional Greenhouse Gas Initiative
RMR
 
Reliability Must Run
RPM
 
Reliability Pricing Model
Schkopau
 
Kraftwerk Schkopau Betriebsgesellschaft mbH
Senior Credit Facility
 
NRG's senior secured facility, comprised of the $1.6 billion Term Loan Facility and the $2.3 billion Revolving Credit Facility
Senior Notes
 
The Company’s $5.7 billion outstanding unsecured senior notes, consisting of $1.1 billion of 7.625% senior notes due 2018, $601 million of 8.5% senior notes due 2019, $800 million of 7.625% senior notes due 2019, $1.1 billion of 8.25% senior notes due 2020, $1.1 billion of 7.875% senior notes due 2021, and $990 million of 6.625% senior notes due 2023
SO2
 
Sulfur dioxide
STP
 
South Texas Project — nuclear generating facility located near Bay City, Texas in which NRG owns a 44% interest
STPNOC
 
South Texas Project Nuclear Operating Company
Term Loan Facility
 
The Company's $1.6 billion term loan facility due 2018, a component of the Senior Credit Facility
Texas Genco
 
Texas Genco LLC, now referred to as the Company's Texas Region
U.S.
 
United States of America
U.S. DOE
 
U.S. Department of Energy
U.S. DOJ
 
U.S. Department of Justice
U.S. GAAP
 
Accounting principles generally accepted in the United States
Utility Scale Solar
 
Solar power projects, typically 20 MW or greater in size (on an alternating current, or AC, basis), that are interconnected into the transmission or distribution grid to sell power at a wholesale level
VaR
 
Value at Risk
VIE
 
Variable Interest Entity
WECC
 
Western Electricity Coordinating Council


6

                                    

PART I — FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended March 31,
(In millions, except for per share amounts)
2013
 
2012
Operating Revenues
 
 
 
Total operating revenues
$
2,081

 
$
1,862

Operating Costs and Expenses
 
 
 
Cost of operations
1,765

 
1,583

Depreciation and amortization
298

 
230

Selling, general and administrative
229

 
206

Acquisition-related transaction and integration costs
32

 

Development activity expenses
16

 
13

Total operating costs and expenses
2,340

 
2,032

Operating Loss
(259
)
 
(170
)
Other Income/(Expense)
 
 
 
Equity in earnings of unconsolidated affiliates
3

 
8

Other income, net
4

 
1

Loss on debt extinguishment
(28
)
 

Interest expense
(196
)
 
(165
)
Total other expense
(217
)
 
(156
)
Loss Before Income Taxes
(476
)
 
(326
)
Income tax benefit
(149
)
 
(120
)
Net Loss
(327
)
 
(206
)
Less: Net income attributable to noncontrolling interest
1

 
1

Net Loss Attributable to NRG Energy, Inc.
(328
)
 
(207
)
Dividends for preferred shares
2

 
2

Loss Available for Common Stockholders
$
(330
)
 
$
(209
)
Loss Per Share Attributable to NRG Energy, Inc. Common Stockholders
 
 
 
Weighted average number of common shares outstanding — basic and diluted
323

 
228

Net loss per weighted average common share — basic and diluted
$
(1.02
)
 
$
(0.92
)
Dividends Per Common Share
$
0.09

 
$

See accompanying notes to condensed consolidated financial statements.

7

                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Three months ended March 31,
 
2013
 
2012
 
(In millions)
Net Loss
$
(327
)
 
$
(206
)
Other comprehensive income/(loss), net of tax
 
 
 
Unrealized gain/(loss) on derivatives, net of income tax benefit of $9 and $5
7

 
(9
)
Foreign currency translation adjustments, net of income tax expense of $0 and $3

 
6

Available-for-sale securities, net of income tax expense of $1 and $0
2

 

Defined benefit plans, net of tax benefit of $5 and $0
5

 

Other comprehensive income/(loss)
14

 
(3
)
Comprehensive loss
(313
)
 
(209
)
Less: Comprehensive income attributable to noncontrolling interest
1

 
1

Comprehensive loss attributable to NRG Energy, Inc.
(314
)
 
(210
)
Dividends for preferred shares
2

 
2

Comprehensive loss available for common stockholders
$
(316
)
 
$
(212
)
See accompanying notes to condensed consolidated financial statements.

8

                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31, 2013
 
December 31, 2012
(In millions, except shares)
(unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,707

 
$
2,087

Funds deposited by counterparties
105

 
271

Restricted cash
221

 
217

Accounts receivable — trade, less allowance for doubtful accounts of $30 and $32
982

 
1,061

Inventory
904

 
931

Derivative instruments
2,805

 
2,644

Cash collateral paid in support of energy risk management activities
455

 
229

Deferred income taxes
128

 
56

Prepayments and other current assets
724

 
460

Total current assets
8,031

 
7,956

Property, plant and equipment, net of accumulated depreciation of $5,680 and $5,417
20,404

 
20,268

Other Assets
 
 
 
Equity investments in affiliates
677

 
676

Notes receivable, less current portion
86

 
79

Goodwill
1,954

 
1,956

 Intangible assets, net of accumulated amortization of $1,767 and $1,706
1,176

 
1,200

Nuclear decommissioning trust fund
501

 
473

Derivative instruments
562

 
662

Deferred income taxes
1,435

 
1,267

Other non-current assets
545

 
597

Total other assets
6,936

 
6,910

Total Assets
$
35,371

 
$
35,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt and capital leases
$
556

 
$
147

Accounts payable
1,054

 
1,170

Derivative instruments
2,493

 
1,981

Cash collateral received in support of energy risk management activities
105

 
271

Accrued expenses and other current liabilities
954

 
1,108

Total current liabilities
5,162

 
4,677

Other Liabilities
 
 
 
Long-term debt and capital leases
15,914

 
15,733

Nuclear decommissioning reserve
359

 
354

Nuclear decommissioning trust liability
293

 
273

Deferred income taxes
53

 
55

Derivative instruments
477

 
500

Out-of-market contracts
1,194

 
1,216

Other non-current liabilities
1,474

 
1,555

Total non-current liabilities
19,764


19,686

Total Liabilities
24,926

 
24,363

3.625% convertible perpetual preferred stock (at liquidation value, net of issuance costs)
249

 
249

Commitments and Contingencies


 


Stockholders’ Equity
 
 
 
Common stock
4

 
4

Additional paid-in capital
7,602

 
7,587

Retained earnings
4,124

 
4,483

Less treasury stock, at cost — 77,416,791 and 76,505,718 shares, respectively
(1,944
)
 
(1,920
)
Accumulated other comprehensive loss
(136
)
 
(150
)
Noncontrolling interest
546

 
518

Total Stockholders’ Equity
10,196

 
10,522

Total Liabilities and Stockholders’ Equity
$
35,371

 
$
35,134

See accompanying notes to condensed consolidated financial statements.

9

                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
 
2013
 
2012
 
(In millions)
Cash Flows from Operating Activities
 
 
 
Net loss
$
(327
)
 
$
(206
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Depreciation and amortization
298

 
230

Provision for bad debts
9

 
7

Amortization of nuclear fuel
6

 
6

Amortization of financing costs and debt discount/premiums
(13
)
 
8

Loss on debt extinguishment
2

 

Amortization of intangibles and out-of-market contracts
31

 
42

Amortization of unearned equity compensation
18

 

Changes in deferred income taxes and liability for uncertain tax benefits
(212
)
 
(129
)
Changes in nuclear decommissioning trust liability
10

 
8

Changes in derivative instruments
317

 
187

Changes in collateral deposits supporting energy risk management activities
(226
)
 
(187
)
Cash used by changes in other working capital
(37
)
 
(42
)
Net Cash Used by Operating Activities
(124
)
 
(76
)
Cash Flows from Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
(18
)
 

Capital expenditures
(813
)
 
(639
)
Increase in restricted cash, net
(13
)
 
(20
)
Decrease in restricted cash to support equity requirements for U.S. DOE funded projects
12

 
95

Increase in notes receivable
(9
)
 
(7
)
Investments in nuclear decommissioning trust fund securities
(95
)
 
(126
)
Proceeds from sales of nuclear decommissioning trust fund securities
85

 
119

Proceeds from renewable energy grants
16

 
28

Other
(1
)
 
7

Net Cash Used by Investing Activities
(836
)
 
(543
)
Cash Flows from Financing Activities
 
 
 
Payment of dividends to common and preferred stockholders
(31
)
 
(2
)
Payment for treasury stock
(20
)
 

Net receipts/(payments for) settlement of acquired derivatives that include financing elements
98

 
(20
)
Sale proceeds and other contributions from noncontrolling interests in subsidiaries
20

 
178

Proceeds from issuance of long-term debt
736

 
415

Proceeds from issuance of common stock
1

 

Payment of debt issuance and hedging costs
(5
)
 
(10
)
Payments for short and long-term debt
(219
)
 
(34
)
Net Cash Provided by Financing Activities
580

 
527

Effect of exchange rate changes on cash and cash equivalents

 
1

Net Decrease in Cash and Cash Equivalents
(380
)
 
(91
)
Cash and Cash Equivalents at Beginning of Period
2,087

 
1,105

Cash and Cash Equivalents at End of Period
$
1,707

 
$
1,014

See accompanying notes to condensed consolidated financial statements.

10

                                    

NRG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1Basis of Presentation
NRG Energy, Inc., or NRG or the Company, is a competitive power and energy company that aspires to be a leader in the way the industry and consumers think about, use, produce and deliver energy and energy services in major competitive power markets in the United States. At its core, NRG is a wholesale power generator engaged in the ownership and operation of power generation facilities; the trading of energy, capacity and related products; and the transacting in and trading of fuel and transportation services. Second, while leveraging its core wholesale power business, NRG is a retail energy company engaged in the supply of energy, services, and innovative, sustainable products to retail customers in competitive markets through multiple channels and brands like Reliant Energy, Green Mountain Energy and Energy Plus (collectively, the Retail Business). Finally, NRG is a clean energy leader and is focused on the deployment and commercialization of potentially disruptive technologies, like electric vehicles, Distributed Solar and smart meter technology, which have the potential to change the nature of the power supply industry. On December 14, 2012, the Company acquired GenOn as further described in Note 3, Business Acquisitions and Dispositions, and has reported results of operations from the acquisition date forward.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the SEC's regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the Company's 2012 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's consolidated financial position as of March 31, 2013, and the results of operations, comprehensive loss and cash flows for the three months ended March 31, 2013, and 2012.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior-year amounts have been reclassified for comparative purposes. The reclassifications did not affect results from operations or cash flows. The Company reclassified certain plant-related expenses from selling, general and administrative to cost of operations and certain general and administrative expenses to development activity expenses.
Note 2Summary of Significant Accounting Policies
Development Activity Expenses
Development activity expenses include project development costs, which are expensed in the preliminary stages of a project and capitalized when the project is deemed to be commercially viable. Commercial viability is determined by one or a series of actions including, among others, Board of Director approval pursuant to a formal project plan that subjects the Company to significant future obligations that can only be discharged by the use of a Company asset. When a project is available for operations, capitalized project development costs are reclassified to property, plant and equipment and amortized on a straight-line basis over the estimated useful life of the project's related assets. Capitalized costs are charged to expense if a project is abandoned or management otherwise determines the costs to be unrecoverable.
Development activity expenses also include selling, general, and administrative expenses associated with the current operations of certain developing businesses including residential solar, electric vehicles, waste-to-energy, carbon capture and other emerging technologies. The revenue associated with these businesses was immaterial for the three months ended March 31, 2013 and 2012. When it is determined that a business will remain an ongoing part of the Company's operations or when operating revenues become material relative to the operating costs of the underlying business, the Company no longer classifies a business as a development activity.

11

                                    

Other Cash Flow Information
NRG’s investing activities exclude capital expenditures of $51 million which were accrued and unpaid at March 31, 2013, primarily for solar projects under construction.
Noncontrolling Interests
The following table reflects the changes in NRG's noncontrolling interest balance:
 
(In millions)
Balance as of December 31, 2012
$
518

Contributions from noncontrolling interest
27

Comprehensive income attributable to noncontrolling interest
1

Balance as of March 31, 2013
$
546

Recent Accounting Developments
ASU 2011-11 - Effective January 1, 2013, the Company adopted the provisions of ASU No. 2011-11, Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities, or ASU No. 2011-11, and began providing enhanced disclosures regarding the effect or potential effect of netting arrangements on an entity's financial position by improving information about financial instruments and derivative instruments that either (1) offset in accordance with either ASC 210-20-45 or ASC 810-20-45 or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Reporting entities are required to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The disclosures required by ASU No. 2011-11 are required to be adopted retroactively. As this guidance provides only disclosure requirements, the adoption of this standard did not impact the Company's results of operations, cash flows or financial position.
ASU 2013-02 - Effective January 1, 2013, the Company adopted the provisions of ASU No. 2013-02, Other Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, or ASU No. 2013-02, and began reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income within the notes to the financial statements if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts not required by U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures which provide additional information about the amounts.  The provisions of ASU No. 2013-02 are required to be adopted prospectively.  As this guidance provides only presentation requirements, the adoption of this standard did not impact the Company's results of operations, cash flows or financial position.


12

                                    

Note 3Business Acquisitions and Dispositions
GenOn Acquisition
On December 14, 2012, NRG completed the acquisition of GenOn Energy, Inc., or GenOn.  GenOn, a generator of wholesale electricity, has baseload, intermediate and peaking power generation facilities using coal, natural gas and oil, totaling approximately 21,440 MW.  Consideration for the acquisition was valued at $2.2 billion and was comprised of 0.1216 shares of NRG common stock for each outstanding share of GenOn, including restricted stock units outstanding, on the acquisition date, except for fractional shares which were paid in cash.  The Company issued 93.9 million shares of NRG common stock, or 29% of total common shares outstanding following the closing of the transaction. The acquisition was recorded as a business combination, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair value of certain net assets acquired is still in process. See Note 3, Business Acquisitions and Dispositions in the Company's 2012 Form 10-K for additional information related to the GenOn acquisition.
The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date as well as adjustments made in the first quarter of 2013 to the amounts initially recorded in 2012. The measurement period adjustments did not have a significant impact on the Company's consolidated statements of operations, cash flows or financial position in any period. The allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and liabilities assumed.
(in millions)
Amounts Recognized
as of Acquisition Date
(as previously reported)
 
Measurement Period Adjustments
 
Amounts Recognized
as of Acquisition Date
(as adjusted)
Assets
 
 
 
 
 
Cash
$
983

 
$

 
$
983

Current and non-current assets
1,385

 

 
1,385

Property, plant and equipment
3,936

 

 
3,936

Derivative assets
1,157

 

 
1,157

Deferred income taxes
2,265

 
6

 
2,271

Total assets acquired
$
9,726

 
$
6

 
$
9,732

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Current and non-current liabilities
$
1,312

 
$
17

 
$
1,329

Out-of-market contracts and leases
1,064

 

 
1,064

Derivative liabilities
399

 

 
399

Long-term debt and capital leases
4,203

 

 
4,203

Total liabilities assumed
6,978

 
17

 
6,995

Net assets acquired
2,748

 
(11
)
 
2,737

Consideration paid
2,188

 
 
 
2,188

Gain on bargain purchase
$
560

 
$
(11
)
 
$
549

2012 Dispositions
Agua Caliente
On January 18, 2012, the Company completed the sale of a 49% interest in NRG Solar AC Holdings LLC, the indirect owner of the Agua Caliente project, to MidAmerican Energy Holdings Company, or MidAmerican. A majority of the $122 million of cash consideration received at closing represented 49% of construction costs funded by NRG's equity contributions. The excess of the consideration over the carrying value of the divested interest was recorded to additional paid-in capital. MidAmerican will fund its proportionate share of future equity contributions and other credit support for the project. NRG continues to hold a majority interest in and consolidate the project.
Saale Energie GmbH
On July 17, 2012, the Company completed the sale of its 100% interest in Saale Energie GmbH, which holds a 41.9% interest in Kraftwerke Schkopau GbR and a 44.4% interest in Kraftwerke Schkopau Betriebsgesllschaft mbH, collectively, Schkopau.  Schkopau holds a fixed 400 MW participation in the 900 MW Schkopau Power Station located in Germany.  In connection with the sale of Schkopau, NRG entered into a foreign currency swap contract to hedge the impact of exchange rate fluctuations on the sale proceeds of €141 million. The Company received cash consideration, net of selling expenses, of $174 million, which included $4 million related to the settlement of the swap contract that was recorded as a gain within Other income, net in the quarter ended September 30, 2012.  The cash consideration approximated the book value of the net assets, including cash of $38 million, on the date of the sale.

13

                                    

Note 4Fair Value of Financial Instruments
This footnote should be read in conjunction with the complete description under Note 4, Fair Value of Financial Instruments, to the Company's 2012 Form 10-K.
For cash and cash equivalents, funds deposited by counterparties, accounts receivable, accounts payable, accrued expenses and other current liabilities, restricted cash, and cash collateral paid and received in support of energy risk management activities, the carrying amount approximates fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.
The estimated carrying amounts and fair values of NRG's recorded financial instruments not carried at fair market value are as follows:
 
As of March 31, 2013
 
As of December 31, 2012
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(In millions)
Assets:
 
 
 
 
 
 
 
Notes receivable (a)
$
97

 
$
97

 
$
88

 
$
88

Liabilities:
 
 
 
 
 
 
 
Long-term debt, including current portion
16,457

 
17,133

 
15,866

 
16,492

(a) Includes the current portion of notes receivable which is recorded in prepayments and other current assets on the Company's consolidated balance sheets.
The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 1 within the fair value hierarchy. The fair value of debt securities, non publicly-traded long-term debt, and certain notes receivable of the Company are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments with equivalent credit quality and are classified as Level 3 within the fair value hierarchy.
Recurring Fair Value Measurements
Debt securities, equity securities, and trust fund investments, which are comprised of various U.S. debt and equity securities, and derivative assets and liabilities, are carried at fair market value.
The following tables present assets and liabilities measured and recorded at fair value on the Company's condensed consolidated balance sheet on a recurring basis and their level within the fair value hierarchy:
 
As of March 31, 2013
 
Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Investment in available-for-sale securities (classified within other
    non-current assets):
 
 
 
 
 
 
 
Debt securities
$

 
$

 
$
13

 
$
13

Other (a)
45

 

 

 
45

Trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
1

 

 

 
1

U.S. government and federal agency obligations
34

 
6

 

 
40

Federal agency mortgage-backed securities

 
57

 

 
57

Commercial mortgage-backed securities

 
16

 

 
16

Corporate debt securities
1

 
78

 

 
79

Equity securities
258

 

 
50

 
308

Foreign government fixed income securities

 
1

 

 
1

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
1,719

 
1,547

 
99

 
3,365

Interest rate contracts

 
2

 

 
2

Total assets
$
2,058

 
$
1,707

 
$
162

 
$
3,927

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
1,606

 
$
1,143

 
$
94

 
$
2,843

Interest rate contracts

 
127

 

 
127

Total liabilities
$
1,606

 
$
1,270

 
$
94

 
$
2,970

(a) Primarily consists of mutual funds held in rabbi trusts for non-qualified deferred compensation plans for certain former employees.

14

                                    

 
As of December 31, 2012
 
Fair Value
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Investment in available-for-sale securities (classified within other
non-current assets):
 
 
 
 
 
 
 
Debt securities
$

 
$

 
$
12

 
$
12

Other (a)
44

 

 

 
44

Trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
10

 

 

 
10

U.S. government and federal agency obligations
34

 

 

 
34

Federal agency mortgage-backed securities

 
59

 

 
59

Commercial mortgage-backed securities

 
9

 

 
9

Corporate debt securities

 
80

 

 
80

Equity securities
233

 

 
47

 
280

Foreign government fixed income securities

 
2

 

 
2

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
1,457

 
1,711

 
135

 
3,303

Interest rate contracts

 
3

 

 
3

Total assets
$
1,778

 
$
1,864

 
$
194

 
$
3,836

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
1,144

 
$
1,047

 
$
147

 
$
2,338

Interest rate contracts

 
143

 

 
143

Total liabilities
$
1,144

 
$
1,190

 
$
147

 
$
2,481

(a) Primarily consists of mutual funds held in rabbi trusts for non-qualified deferred compensation plans for certain former employees.
There were no transfers during the three months ended March 31, 2013, and 2012, between Levels 1 and 2. The following tables reconcile, for the three months ended March 31, 2013 and 2012, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements at least annually using significant unobservable inputs:
 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Three months ended March 31, 2013
(In millions)
Debt Securities
 
Trust Fund Investments
 
Derivatives(a)
 
Total
Beginning balance as of January 1, 2013
$
12

 
$
47

 
$
(12
)
 
$
47

Total gains/(losses) - realized/unrealized:
 
 
 
 
 
 
 
Included in earnings

 

 
(27
)
 
(27
)
Included in OCI
1

 

 

 
1

Included in nuclear decommissioning obligations

 
3

 

 
3

Purchases

 

 
(1
)
 
(1
)
Transfers into Level 3 (b)

 

 
15

 
15

Transfers out of Level 3 (b)

 

 
30

 
30

Ending balance as of March 31, 2013
$
13

 
$
50

 
$
5

 
$
68

The amount of the total losses for the period included in earnings attributable to the change in unrealized derivatives relating to assets still held as of March 31, 2013
$

 
$

 
$
(21
)
 
$
(21
)
(a)
Consists of derivatives assets and liabilities, net.
(b)
Transfers in/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period. All transfers in/out are with Level 2.

15

                                    

 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Three months ended March 31, 2012
(In millions)
Debt Securities
 
Trust Fund Investments
 
Derivatives(a)
 
Total
Beginning balance as of January 1, 2012
$
7

 
$
42

 
$
8

 
$
57

Total gains - realized/unrealized:
 
 
 
 
 
 
 
Included in earnings

 

 
17

 
17

Included in OCI
1

 

 

 
1

Included in nuclear decommissioning obligations

 
4

 

 
4

Purchases

 

 
(4
)
 
(4
)
Transfers into Level 3 (b)

 

 
10

 
10

Transfers out of Level 3 (b)

 

 
12

 
12

Ending balance as of March 31, 2012
$
8

 
$
46

 
$
43

 
$
97

The amount of the total gains for the period included in earnings attributable to the change in unrealized derivatives relating to assets still held as of March 31, 2012
$

 
$

 
$
18

 
$
18

(a)
Consists of derivatives assets and liabilities, net.
(b)
Transfers in/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period. All transfers in/out are with Level 2.
Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in operating revenues and cost of operations.
Derivative Fair Value Measurements
A majority of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A portion of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. For the majority of NRG markets, the Company receives quotes from multiple sources. To the extent that NRG receives multiple quotes, the Company's prices reflect the average of the bid-ask mid-point prices obtained from all sources that NRG believes provide the most liquid market for the commodity. If the Company receives one quote, then the mid-point of the bid-ask spread for that quote is used. The terms for which such price information is available vary by commodity, region and product. A significant portion of the fair value of the Company's derivative portfolio is based on price quotes from brokers in active markets who regularly facilitate those transactions and the Company believes such price quotes are executable. The Company does not use third party sources that derive price based on proprietary models or market surveys. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available for the whole term or for certain delivery months or the contracts are retail and load following power contracts. These contracts are valued using various valuation techniques including but not limited to internal models that apply fundamental analysis of the market and corroboration with similar markets. Contracts valued with prices provided by models and other valuation techniques make up 3% of the total derivative assets and 3% of the total derivative liabilities.
The fair value of each contract is discounted using a risk free interest rate. In addition, the Company applies a credit reserve to reflect credit risk which is calculated based on published default probabilities. To the extent that NRG's net exposure under a specific master agreement is an asset, the Company uses the counterparty's default swap rate. If the net exposure under a specific master agreement is a liability, the Company uses NRG's default swap rate. The credit reserve is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume NRG's liabilities or that a market participant would be willing to pay for NRG's assets. As of March 31, 2013, the credit reserve resulted in a $5 million increase in fair value which is composed of a $3 million gain in OCI, and a $2 million gain in operating revenue and cost of operations. As of March 31, 2012, the credit reserve resulted in an $8 million increase in fair value which is composed of a $1 million gain in OCI and a $7 million gain in operating revenue and cost of operations.
Concentration of Credit Risk
In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, to the Company's 2012 Form 10-K, the following is a discussion of the concentration of credit risk for the Company's contractual obligations. Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply arrangements, and retail customer credit risk through its retail load activities.

16

                                    

Counterparty Credit Risk
The Company monitors and manages counterparty credit risk through credit policies that include: (i) an established credit approval process; (ii) daily monitoring of counterparties' credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting arrangements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty. Risk surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty credit risk with a diversified portfolio of counterparties. The Company also has credit protection within various agreements to call on additional collateral support if and when necessary. Cash margin is collected and held at NRG to cover the credit risk of the counterparty until positions settle.
As of March 31, 2013, counterparty credit exposure to a portion of the Company's counterparties was $1.3 billion and NRG held collateral (cash and letters of credit) against those positions of $105 million, resulting in a net exposure of $1.2 billion. Approximately 83% of the Company's exposure before collateral is expected to roll off by the end of 2014. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and Normal Purchase Normal Sale, or NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.
 
Net Exposure (a)
Category
(% of Total)
Financial institutions
51
%
Utilities, energy merchants, marketers and other
37

Independent System Operators, or ISOs
11

Coal and emissions
1

Total as of March 31, 2013
100
%
 
Net Exposure (a)
Category
(% of Total)
Investment grade
93
%
Non-rated (b)
6

Non-Investment grade
1

Total as of March 31, 2013
100
%
(a)
Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices.
(b)
For non-rated counterparties, the majority are related to ISO and municipal public power entities, which are considered investment grade equivalent ratings based on NRG's internal credit ratings.
NRG has counterparty credit risk exposure to certain counterparties representing more than 10% of total net exposure discussed above and the aggregate of such counterparties' exposure was $412 million. Changes in hedge positions and market prices will affect credit exposure and counterparty concentration. Given the credit quality, diversification and term of the exposure in the portfolio, NRG does not anticipate a material impact on the Company's financial position or results of operations from nonperformance by any of NRG's counterparties.
Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, South Central load obligations, and solar Power Purchase Agreements, or PPAs. As external sources or observable market quotes are not available to estimate such exposure, the Company valued these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. Based on these valuation techniques, as of March 31, 2013, credit risk exposure to these counterparties attributable to NRG's ownership interests was approximately $1.3 billion for the next five years. This amount excludes potential credit exposures for projects with long term PPAs that have not reached commercial operations. Many of these power contracts are with utilities or public power entities that have strong credit quality and specific public utility commission or other regulatory support. These factors significantly reduce the risk of loss.

17

                                    

Retail Customer Credit Risk
NRG is exposed to retail credit risk through the Company's retail electricity providers, which serve commercial, industrial and governmental/institutional, or C&I, customers and the residential and small business, or mass, market. Retail credit risk results when a customer fails to pay for products or services rendered. The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value. NRG manages retail credit risk through the use of established credit policies that include monitoring of the portfolio, and the use of credit mitigation measures such as deposits or prepayment arrangements.
As of March 31, 2013, the Company's retail customer credit exposure was diversified across many customers and various industries, with a significant portion of the exposure with government entities.
Note 5Nuclear Decommissioning Trust Fund
NRG's Nuclear Decommissioning Trust Fund assets are comprised of securities classified as available-for-sale and recorded at fair value based on actively quoted market prices. NRG accounts for the Nuclear Decommissioning Trust Fund in accordance with ASC 980, Regulated Operations, or ASC 980, because the Company's nuclear decommissioning activities are subject to approval by the PUCT with regulated rates that are designed to recover all decommissioning costs and that can be charged to and collected from the ratepayers per PUCT mandate. Since the Company is in compliance with PUCT rules and regulations regarding decommissioning trusts and the cost of decommissioning is the responsibility of the Texas ratepayers, not NRG, all realized and unrealized gains or losses (including other-than-temporary impairments) related to the Nuclear Decommissioning Trust Fund are recorded to nuclear decommissioning trust liability and are not included in net income or accumulated other comprehensive income, consistent with regulatory treatment.
The following table summarizes the aggregate fair values and unrealized gains and losses (including other-than-temporary impairments) for the securities held in the trust funds, as well as information about the contractual maturities of those securities.
 
As of March 31, 2013
 
As of December 31, 2012
(In millions, except otherwise noted)
Fair Value
 
Unrealized Gains (a)
 
Weighted- average maturities (in years)
 
Fair Value
 
Unrealized Gains (a)
 
Weighted- average maturities (in years)
Cash and cash equivalents
$
1

 
$

 

 
$
10

 
$

 

U.S. government and federal agency obligations
39

 
2

 
9

 
33

 
2

 
10

Federal agency mortgage-backed securities
57

 
2

 
25

 
59

 
2

 
23

Commercial mortgage-backed securities
16

 

 
29

 
9

 

 
30

Corporate debt securities
79

 
3

 
10

 
80

 
4

 
11

Equity securities
308

 
169

 

 
280

 
143

 

Foreign government fixed income securities
1

 

 
11

 
2

 

 
6

Total
$
501

 
$
176

 
 
 
$
473

 
$
151

 
 
(a) There were no unrealized losses as of March 31, 2013 or December 31, 2012.
The following table summarizes proceeds from sales of available-for-sale securities and the related realized gains and losses from these sales. The cost of securities sold is determined on the specific identification method.
 
Three months ended March 31,
 
2013
 
2012
 
(In millions)
Realized gains
$
1

 
$
3

Realized losses
1

 
2

Proceeds from sale of securities
85

 
119



18

                                    

Note 6Accounting for Derivative Instruments and Hedging Activities
This footnote should be read in conjunction with the complete description under Note 5, Accounting for Derivative Instruments and Hedging Activities, to the Company's 2012 Form 10-K.
Energy-Related Commodities
As of March 31, 2013, NRG had energy-related derivative financial instruments extending through 2015, which are designated as cash flow hedges.
Interest Rate Swaps
NRG is exposed to changes in interest rates through the Company's issuance of variable and fixed rate debt. In order to manage the Company's interest rate risk, NRG enters into interest rate swap agreements. As of March 31, 2013, the Company had interest rate derivative instruments on non-recourse debt extending through 2030, the majority of which are designated as cash flow hedges.
Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of NRG's open derivative transactions broken out by commodity, excluding those derivatives that qualified for the NPNS exception as of March 31, 2013 and December 31, 2012. Option contracts are reflected using delta volume. Delta volume equals the notional volume of an option adjusted for the probability that the option will be in-the-money at its expiration date.
 
 
Total Volume
Commodity
Units
March 31, 2013
 
December 31, 2012
 
 
(In millions)
Emissions
Short Ton
(1
)
 
(1
)
Coal
Short Ton
45

 
37

Natural Gas
MMBtu
(330
)
 
(413
)
Oil
Barrel
1

 
1

Power
MWh
(18
)
 
(14
)
Interest
Dollars
$
1,650

 
$
2,612

The decrease in the natural gas position was the result of additional purchases entered into during the year to hedge our retail portfolio as well as the settlement of positions during the period.  These amounts were slightly offset by natural gas sales entered into during the year to hedge our conventional power generation.  The decrease in the interest rate position was primarily the result of the settlement of interest rate swaps.

19

                                    


Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheet:
 
Fair Value
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31,
2012
 
(In millions)
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Interest rate contracts current
$

 
$

 
$
29

 
$
29

Interest rate contracts long-term
2

 
3

 
85

 
96

Commodity contracts current

 

 
5

 
3

Commodity contracts long-term

 

 
1

 
1

Total Derivatives Designated as Cash Flow Hedges
2

 
3

 
120

 
129

Derivatives Not Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
Interest rate contracts current

 

 
4

 
7

Interest rate contracts long-term

 

 
9

 
11

Commodity contracts current
2,805

 
2,644

 
2,455

 
1,942

Commodity contracts long-term
560

 
659

 
382

 
392

Total Derivatives Not Designated as Cash Flow Hedges
3,365

 
3,303

 
2,850

 
2,352

Total Derivatives
$
3,367

 
$
3,306

 
$
2,970

 
$
2,481

The Company has elected to present derivative assets and liabilities on the balance sheet on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. In addition, collateral received or paid on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. The following table summarizes the offsetting of derivatives by counterparty master agreement level and collateral received or paid:
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
Gross Amounts of Recognized Assets / Liabilities
 
Derivative Instruments
 
Cash Collateral (Held) / Posted
 
Net Amount

As of March 31, 2013
 
(in millions)
Commodity contracts:
 
 
 
 
 
 
 
 
Derivative assets
 
$
3,365

 
$
(2,545
)
 
$
(225
)
 
$
595

Derivative liabilities
 
(2,843
)
 
2,545

 
19

 
(279
)
Total commodity contracts
 
522

 

 
(206
)
 
316

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivative assets
 
2

 

 

 
2

Derivative liabilities
 
(127
)
 

 

 
(127
)
Total interest rate contracts
 
(125
)
 

 

 
(125
)
Total derivative instruments
 
$
397

 
$

 
$
(206
)
 
$
191


20

                                    

 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
Gross Amounts of Recognized Assets / Liabilities
 
Derivative Instruments
 
Cash Collateral (Held) / Posted
 
Net Amount

As of December 31, 2012
 
(in millions)
Commodity contracts:
 
 
 
 
 
 
 

Derivative assets
 
$
3,303

 
$
(2,024
)
 
$
(374
)
 
$
905

Derivative liabilities
 
(2,338
)
 
2,024

 
28

 
(286
)
Total commodity contracts
 
965

 

 
(346
)
 
619

Interest rate contracts:
 
 
 
 
 
 
 

Derivative assets
 
3

 

 

 
3

Derivative liabilities
 
(143
)
 

 

 
(143
)
Total interest rate contracts
 
(140
)
 

 

 
(140
)
Total derivative instruments
 
$
825

 
$

 
$
(346
)

$
479

Accumulated Other Comprehensive Income
The following table summarizes the effects of ASC 815, Derivatives and Hedging, or ASC 815, on the Company's accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:
 
Three months ended March 31, 2013
 
Three months ended March 31, 2012
 
Energy Commodities
 
Interest Rate
 
Total
 
Energy Commodities
 
Interest Rate
 
Total
 
(In millions)
Accumulated OCI beginning balance
$
41

 
$
(72
)
 
$
(31
)
 
$
188

 
$
(56
)
 
$
132

Reclassified from accumulated OCI to income:
 
 
 
 
 
 
 
 
 
 
 
Due to realization of previously deferred amounts
(8
)
 
3

 
(5
)
 
(31
)
 
3

 
(28
)
Mark-to-market of cash flow hedge accounting contracts
9

 
3

 
12

 
13

 
6

 
19

Accumulated OCI ending balance, net of $15 and $82 tax, respectively
$
42

 
$
(66
)
 
$
(24
)
 
$
170

 
$
(47
)
 
$
123

Gains/(losses) expected to be realized from OCI during the next 12 months, net of $19 and $66 tax, respectively
$
42

 
$
(10
)
 
$
32

 
$
137

 
$
(23
)
 
$
114

(Losses)/gains recognized in income from the ineffective portion of cash flow hedges
$
(1
)
 
$
1

 
$

 
$
(1
)
 
$
(2
)
 
$
(3
)
Amounts reclassified from accumulated OCI into income and amounts recognized in income from the ineffective portion of cash flow hedges are recorded to operating revenue for commodity contracts and interest expense for interest rate contracts.
Impact of Derivative Instruments on the Statements of Operations
Unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow hedges and ineffectiveness of hedge derivatives are reflected in current period earnings.

21

                                    

The following table summarizes the pre-tax effects of economic hedges that have not been designated as cash flow hedges, ineffectiveness on cash flow hedges, and trading activity on the Company's statement of operations. The effect of commodity hedges is included within operating revenues and cost of operations and the effect of interest rate hedges is included in interest expense.
 
Three months ended March 31,
(In millions)
2013
 
2012
Unrealized mark-to-market results
 
 
 
Reversal of previously recognized unrealized gains on settled positions related to economic hedges
$
(25
)
 
$
(41
)
Reversal of (gain)/loss positions acquired as part of the Reliant Energy, Green Mountain Energy and GenOn acquisitions
(88
)
 
14

Net unrealized losses on open positions related to economic hedges
(149
)
 
(137
)
Losses on ineffectiveness associated with open positions treated as
    cash flow hedges
(1
)
 
(1
)
Total unrealized mark-to-market losses for economic hedging activities
(263
)
 
(165
)
Reversal of previously recognized unrealized gains on settled positions related to trading activity
(28
)
 
(30
)
Reversal of gain positions acquired as part of the GenOn acquisitions
(2
)
 

Net unrealized (losses)/gains on open positions related to trading activity
(13
)
 
28

Total unrealized mark-to-market losses for trading activity
(43
)
 
(2
)
Total unrealized losses
$
(306
)
 
$
(167
)
 
Three months ended March 31,
(In millions)
2013
 
2012
Revenue from operations — energy commodities
$
(521
)
 
$
38

Cost of operations
215

 
(205
)
Total impact to statement of operations — energy commodities
$
(306
)
 
$
(167
)
Total impact to statement of operations — interest rate contracts
$
2

 
$
(1
)
The reversal of gain or loss positions acquired as part of the Reliant Energy, Green Mountain Energy and GenOn acquisitions were valued based upon the forward prices on the acquisition dates.
For the three months ended March 31, 2013, the unrealized loss from open economic hedge positions was primarily the result of a decrease in value of forward purchases and sales of natural gas and electricity due to an increase in forward natural gas and electricity prices.
For the three months ended March 31, 2012, the unrealized loss from open economic hedge positions was the result of a decrease in value of forward purchases of coal, due to decreases in forward coal prices along with a decrease in value of forward purchases and sales of natural gas and electricity, due to a decrease in forward power and gas prices and increases in ERCOT heat rates.
Credit Risk Related Contingent Features
Certain of the Company's hedging agreements contain provisions that require the Company to post additional collateral if the counterparty determines that there has been deterioration in credit quality, generally termed “adequate assurance” under the agreements, or requires the Company to post additional collateral if there were a one notch downgrade in the Company's credit rating. The collateral required for contracts with adequate assurance clauses that are in a net liability position as of March 31, 2013 was $75 million. The collateral required for contracts with credit rating contingent features was $56 million. The Company is also a party to certain marginable agreements where NRG has a net liability position, but the counterparty has not called for the collateral due, which was approximately $38 million as of March 31, 2013.
See Note 4, Fair Value of Financial Instruments, to this Form 10-Q for discussion regarding concentration of credit risk.

22

                                    

Note 7Debt and Capital Leases
This footnote should be read in conjunction with the complete description under Note 11, Debt and Capital Leases, to the Company's 2012 Form 10-K.
Long-term debt and capital leases consisted of the following:
 
 
March 31, 2013
 
December 31, 2012
 
Interest rate % (a)
 
 
(In millions, except rates)
NRG Recourse Debt:
 
 
 
 
 
 
Senior notes, due 2018
 
$
1,130

 
$
1,200

 
7.625
Senior notes, due 2019
 
800

 
800

 
7.625
Senior notes, due 2019
 
601

 
693

 
8.500
Senior notes, due 2020
 
1,063

 
1,100

 
8.250
Senior notes, due 2021
 
1,128

 
1,128

 
7.875
Senior notes, due 2023
 
990

 
990

 
6.625
Term loan facility, due 2018
 
1,569

 
1,573

 
L+2.50 - 3.00
Indian River Power LLC, tax-exempt bonds, due 2040 and 2045
 
247

 
247

 
5.375 - 6.000
Dunkirk Power LLC, tax-exempt bonds, due 2042
 
59

 
59

 
5.875
Fort Bend County, tax-exempt bonds, due 2038 and 2042
 
35

 
28

 
4.750
Subtotal NRG Recourse Debt
 
7,622

 
7,818

 
 
NRG Non-Recourse Debt:
 
 
 
 
 
 
GenOn senior notes, due 2014
 
610

 
617

 
7.625
GenOn senior notes, due 2017
 
795

 
800

 
7.875
GenOn senior notes, due 2018
 
796

 
801

 
9.500
GenOn senior notes, due 2020
 
629

 
631

 
9.875
GenOn Americas Generation senior notes, due 2021
 
508

 
509

 
8.500
GenOn Americas Generation senior notes, due 2031
 
436

 
437

 
9.125
GenOn Marsh Landing term loans, due 2017 and 2023
 
435

 
390

 
L+2.50 - 2.75
CVSR - High Plains Ranch II LLC, due 2037
 
995

 
786

 
0.611 - 2.935
NRG West Holdings LLC, term loan, due 2023
 
407

 
350

 
L+2.25 - 2.75
Agua Caliente Solar, LLC, due 2037
 
683

 
640

 
2.395 - 3.256
Ivanpah Financing, due 2014 and 2038
 
1,510

 
1,437

 
1.116 - 4.256
South Trent Wind LLC, financing agreement, due 2020
 
72

 
72

 
L+2.625
NRG Peaker Finance Co. LLC, bonds, due 2019
 
174

 
173

 
L+1.07
NRG Energy Center Minneapolis LLC, senior secured notes, due 2013, 2017 and 2025
 
134

 
137

 
5.95 - 7.31
NRG Solar Alpine LLC, due 2013 and 2022
 
228

 
2

 
L+2.25 - 2.50
NRG Solar Borrego LLC, due 2024 and 2038
 
81

 

 
L+2.50/5.65
NRG Solar Avra Valley LLC
 
69

 
66

 
L+2.25
TA - High Desert LLC, due 2013, 2023 and 2033
 
82

 

 
L+2.50/5.15
Other
 
191

 
200

 
various
Subtotal NRG Non-Recourse Debt
 
8,835

 
8,048

 
 
Subtotal long-term debt (including current maturities)
 
16,457

 
15,866

 
 
Capital leases:
 
 
 
 
 
 
Chalk Point capital lease, due 2015
 
13

 
14

 
8.190
Subtotal
 
16,470

 
15,880

 
 
Less current maturities
 
556

 
147

 
 
Total long-term debt and capital leases
 
$
15,914

 
$
15,733

 
 
(a) L+ equals 3 month LIBOR plus x%, with the exception of (i) GenOn Marsh Landing term loans, (ii) NRG Solar Alpine LLC cash grant loans and (iii) NRG Solar Avra Valley LLC cash grant loans which are 1 month LIBOR plus x%.

23

                                    

Senior Notes Repurchases
On December 17, 2012, NRG entered into an agreement with a financial institution to repurchase up to $200 million of the Senior Notes in the open market by February 27, 2013.  In the first quarter of 2013, the Company paid $80 million, $104 million, and $42 million, at an average price of 114.179%, 111.700%, and 113.082% of face value, for repurchases of the Company's 2018 Senior Notes, 2019 Senior Notes and 2020 Senior Notes, respectively. A $28 million loss on the debt extinguishment of the 2018 Senior Notes, 2019 Senior Notes and 2020 Senior Notes was recorded during the three months ended March 31, 2013, primarily consisting of the premiums paid on the repurchases and the write-off of previously deferred financing costs.
Alpine Financing
On March 16, 2012 NRG Solar Alpine LLC, a wholly owned subsidiary of NRG, entered into a credit agreement with a group of lenders for a $166 million construction loan that will convert to a term loan upon completion of the project and a $68 million cash grant loan. On January 15, 2013, the credit agreement was amended reducing the cash grant loan to $63 million. On March 26, 2013, NRG Solar Alpine LLC met the conditions under the credit agreement to convert the construction loan for the facility to a term loan. Immediately prior to the conversion, the Company drew an additional $164 million under the construction loan and $62 million under the cash grant loan. The term loan amortizes on a predetermined schedule with final maturity in November 2022. As of March 31, 2013, $166 million was outstanding under the term loan, $62 million under the cash grant loan, and $36 million of letters of credit were issued under the credit agreement.
Borrego Financing
On March 28, 2013, NRG, through its wholly-owned subsidiary, NRG Solar Borrego LLC, or Borrego, entered into a credit agreement with a group of lenders, or the Borrego Financing Agreement, for $45 million of 5.65% fixed rate notes and a $36 million term loan. The term loan has an interest rate of 3 month LIBOR plus an applicable margin of 2.50%, which escalates 0.25% on the fourth and eighth anniversary of the closing date. The fixed rate notes mature in February 2038 and the term loan matures in December 2024. Both amortize based upon predetermined schedules. The Borrego Financing Agreement also includes a letter of credit facility on behalf of Borrego of up to $5 million. Borrego pays an availability fee of 100% of the applicable margin on issued letters of credit. As of March 31, 2013, $45 million was outstanding under the fixed rate notes, $36 million was outstanding under the term loans, and $5 million of letters of credit in support of the project were issued.
Under the terms of the Borrego Financing Agreement, on March 28, 2013, Borrego was required to enter into two fixed for floating interest rate swaps that would fix the interest rate for a minimum of 75% of the outstanding notional amount. Borrego will pay its counterparty the equivalent of a 1.125% fixed interest payment on a predetermined notional value, and Borrego will receive quarterly the equivalent of a floating interest payment based on a 3 month LIBOR calculated on the same notional value through June 30, 2020. All interest rate swap payments by Borrego and its counterparties are made quarterly and the LIBOR rate is determined in advance of each interest period. The original notional amount of the swaps, which became effective April 3, 2013, is $15 million and will amortize in proportion to the term loan.
High Desert Facility
In March 2013, the Company, through its wholly-owned subsidiary, NRG Solar PV LLC, acquired High Desert, a 20 MW utility-scale photovoltaic solar facility located in Lancaster, California shortly, before commercial operation.  As part of the acquisition of High Desert, NRG recorded $82 million of non-recourse project level debt issued under the High Desert Facility which is comprised of $53 million of fixed rate notes due 2033 at an interest rate of 5.15% and $7 million of floating rate notes due 2023, $22 million of bridge notes due the earlier of 10 days after receipt of the cash grant or August 2013, and a revolving facility of $12 million. The floating rate notes, bridge notes and revolving facility have an interest rate of 3 month LIBOR plus 2.5%. The revolving facility can be used in cash or for the issuance of up to $9 million in letters of credit. As of March 31, 2013, $9 million of letters of credit were issued under the revolving facility.  The notes amortize on predetermined schedules and are secured by all of the assets of High Desert. 


24

                                    

Note 8Variable Interest Entities, or VIEs
NRG has interests in entities that are considered VIEs under ASC 810, Consolidation, but NRG is not considered the primary beneficiary.  NRG accounts for its interests in these entities under the equity method of accounting.
GenConn Energy LLC Through its subsidiary, NRG Connecticut Peaking Development LLC, NRG owns a 50% interest in GenConn, a limited liability company which owns and operates two 200 MW peaking generation facilities in Connecticut at NRG's Devon and Middletown sites. NRG's maximum exposure to loss is limited to its equity investment, which was $129 million as of March 31, 2013.
Sherbino I Wind Farm LLC NRG owns a 50% interest in Sherbino, a joint venture with BP Wind Energy North America Inc. NRG's maximum exposure to loss is limited to its equity investment, which was $89 million as of March 31, 2013.
Texas Coastal Ventures, LLC NRG owns a 50% interest in Texas Coastal Ventures, a joint venture with Hilcorp Energy I, L.P., through its subsidiary Petra Nova LLC. NRG's maximum exposure to loss is limited to its equity investment, which was $59 million as of March 31, 2013.
Note 9Changes in Capital Structure
As of March 31, 2013, and December 31, 2012, the Company had 500,000,000 shares of common stock authorized. The following table reflects the changes in NRG's common shares issued and outstanding:
 
Issued
 
Treasury
 
Outstanding
Balance as of December 31, 2012
399,112,616

 
(76,505,718
)
 
322,606,898

Shares issued under LTIP
707,261

 

 
707,261

Shares issued under ESPP

 
61,219

 
61,219

Capital Allocation Program repurchases

 
(972,292
)
 
(972,292
)
Balance as of March 31, 2013
399,819,877

 
(77,416,791
)
 
322,403,086

2013 Capital Allocation Program
On February 27, 2013, the Company announced its intention to increase NRG's annual common stock dividend by 33%, to $0.48 per share, commencing with the next quarterly payment. On April 19, 2013, NRG declared a quarterly dividend on the Company's common stock of $0.12 per share, payable May 15, 2013, to shareholders of record as of May 1, 2013.
In addition, the Company is authorized to repurchase $200 million of its common stock under the 2013 Capital Allocation Program. During the first quarter, the Company purchased 972,292 shares of NRG common stock for approximately $25 million at a volume weighted average cost of $25.88 per share, of which 195,210 shares settled in April 2013 for which $5 million was accrued as of March 31, 2013. The Company intends to complete its remaining $175 million of share repurchases by the end of 2013. The Company's common stock dividend and share repurchases are subject to available capital, market conditions, and compliance with associated laws and regulations.


25

                                    

Note 10Loss Per Share
Basic loss per common share is computed by dividing net loss less accumulated preferred stock dividends by the weighted average number of common shares outstanding. Shares issued and treasury shares repurchased during the year are weighted for the portion of the year that they were outstanding.
The reconciliation of NRG's basic and diluted loss per share is shown in the following table:
 
Three months ended March 31,
(In millions, except per share data)
2013
 
2012
Basic and diluted loss per share attributable to NRG common stockholders
 
 
 
Numerator:
 
 
 
Net loss attributable to NRG Energy, Inc.
$
(328
)
 
$
(207
)
Preferred stock dividends
(2
)
 
(2
)
Net loss attributable to NRG Energy, Inc. available to common stockholders
$
(330
)
 
$
(209
)
Denominator:
 
 
 
Weighted average number of common shares outstanding
323

 
228

Basic and diluted loss per share:
 
 
 
Net loss attributable to NRG Energy, Inc.
$
(1.02
)
 
$
(0.92
)
The following table summarizes NRG’s outstanding equity instruments that are anti-dilutive and were not included in the computation of the Company’s diluted loss per share:
 
Three months ended March 31,
(In millions of shares)
2013
 
2012
Equity compensation plans
13

 
12

Embedded derivative of 3.625% redeemable perpetual preferred stock
16

 
16

Total
29

 
28


26

                                    

Note 11Segment Reporting
The Company's businesses are primarily segregated based on the Retail Business, conventional power generation, alternative energy businesses and corporate activities.  Within NRG's conventional power generation operations, there are distinct components with separate operating results and management structures for the following geographical regions: Texas, East, South Central, West and Other, which includes its international businesses, thermal and chilled water business and maintenance services.  The Company's alternative energy businesses include solar and wind assets, electric vehicle services and the carbon capture business.  Intersegment sales are accounted for at market.
(In millions)
 
 
Conventional Power Generation
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
Retail(a)
 
Texas(a)
 
East(a)
 
South
Central(a)
 
West
 
Other(a)
 
Alternative Energy(a)
 
Corporate(a)(b)
 
Elimination
 
Total
Operating revenues
$
1,231

 
$
84

 
$
595

 
$
196

 
$
91

 
$
73

 
$
50

 
$
8

 
$
(247
)
 
$
2,081

Depreciation and amortization
32

 
112

 
78

 
24

 
13

 
5

 
30

 
4

 

 
298

Equity in earnings/(loss) of unconsolidated affiliates

 

 
4

 

 
1