NRG 2014 09.30 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: September 30, 2014
 
 
 
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 October 31, 2014, there were 338,108,633 shares of common stock outstanding, par value $0.01 per share.
 

1

                                                                                                                                    

TABLE OF CONTENTS
Index



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, 2013, 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;
The collateral demands of counterparties 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 its 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 renewable 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, realize cost savings and manage any acquired businesses; and
NRG's ability to develop and maintain successful partnering relationships.
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:
2013 Form 10-K
 
NRG’s Annual Report on Form 10-K for the year ended December 31, 2013
ASC
 
The FASB Accounting Standards Codification, which the FASB established as the source of authoritative U.S. GAAP
ASU
 
Accounting Standards Updates which reflect updates to the ASC
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, investment in acquisition opportunities, share repurchases and shareholder dividends
CCF
 
Carbon Capture Facility
CCPI
 
Clean Coal Power Initiative
CenterPoint
 
CenterPoint Energy, Inc. and its subsidiaries, on and after August 31, 2002, and Reliant Energy, Incorporated and its subsidiaries prior to August 31, 2002
Cirro Energy
 
Cirro Energy, Inc.
CO2
 
Carbon dioxide
CPUC
 
California Public Utilities Commission
CSAPR
 
Cross-State Air Pollution Rule
CWA
 
Clean Water Act
Distributed Solar
 
Solar power projects that primarily sell power produced to customers for usage on site, or are interconnected to sell power into the local distribution grid
Dodd-Frank Act
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act
EME
 
Edison Mission Energy
Energy Plus Holdings
 
Energy Plus Holdings LLC
EPA
 
U.S. 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
 
NRG Energy, Inc. Amended and Restated Employee Stock Purchase Plan
Exchange Act
 
The Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
GenConn
 
GenConn Energy LLC
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 8.50% 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 $2.0 billion outstanding unsecured senior notes consisting of $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
Goal Zero
 
Goal Zero LLC
Green Mountain Energy
 
Green Mountain Energy Company
GWh
 
Gigawatt hour

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
ISO
 
Independent System Operator
ITC
 
Investment Tax Credit
Kansas South
 
NRG Solar Kansas South LLC
kWh
 
Kilowatt-hours
LaGen
 
Louisiana Generating LLC
LIBOR
 
London Inter-Bank Offered Rate
LDEQ
 
Louisiana Department of Environmental Quality
LTIPs
 
Collectively, the NRG Long-Term Incentive Plan and the NRG GenOn Long-Term Incentive Plan
Marsh Landing
 
NRG Marsh Landing, LLC (formerly known as 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
Midwest Generation
 
Midwest Generation, LLC
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
Million British Thermal Units
MVA
 
Megavolt ampere
MW
 
Megawatt
MWh
 
Saleable megawatt hours, net of internal/parasitic load megawatt-hours
MWt
 
Megawatts Thermal Equivalent
NAAQS
 
National Ambient Air Quality Standards
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
NOL
 
Net Operating Loss
NOV
 
Notice of Violation
NOx
 
Nitrogen oxide
NPNS
 
Normal Purchase Normal Sale
NRC
 
U.S. Nuclear Regulatory Commission
NRG Yield
 
Reporting segment including the following projects: Alpine, Alta Wind, Avenal, Avra Valley, AZ DG Solar, Blythe, Borrego, CVSR, El Segundo, GenConn, High Desert, Kansas South, Marsh Landing, PFMG DG Solar, Roadrunner, South Trent and the Thermal Business
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
PADEP
 
Pennsylvania Department of Environmental Protection
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

5

                                                                                                                                    

PPA
 
Power Purchase Agreement
PUCT
 
Public Utility Commission of Texas
Pure Energies
 
Pure Energies Group Inc.
Reliant Energy
 
Reliant Energy Retail Services, LLC
REMA
 
NRG REMA LLC (formerly known as GenOn REMA, LLC)
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
 
NRG's retail energy business, including the following retail energy brands: Cirro Energy, Reliant Energy, Green Mountain Energy, Energy Plus, Goal Zero and NRG Residential Solutions
Revolving Credit Facility
 
The Company's $2.5 billion revolving credit facility due 2018, a component of the Senior Credit Facility
RGGI
 
Regional Greenhouse Gas Initiative
RTO
 
Regional Transmission Organization
Senior Credit Facility
 
NRG's senior secured facility, comprised of the Term Loan Facility and the Revolving Credit Facility
Senior Notes
 
The Company’s $6.4 billion outstanding unsecured senior notes, consisting of $1.1 billion of 7.625% senior notes due 2018, $1.1 billion of 8.25% senior notes due 2020, $1.1 billion of 7.875% senior notes due 2021, $1.1 billion of 6.25% senior notes due 2022, $990 million of 6.625% senior notes due 2023, and $1.0 billion of 6.25% senior notes due 2024
SO2
 
Sulfur dioxide
STP
 
South Texas Project — nuclear generating facility located near Bay City, Texas in which NRG owns a 44% interest
Term Loan Facility
 
The Company's $2.0 billion term loan facility due 2018, a component of the Senior Credit Facility
Thermal Business
 
NRG Yield’s thermal business, which consists of thermal infrastructure assets that provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units
U.S.
 
United States of America
U.S. DOE
 
U.S. Department of Energy
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 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
Yield Operating
 
NRG Yield Operating LLC

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 September 30,
 
 Nine months ended September 30,
(In millions, except for per share amounts)
2014
 
2013
 
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
Total operating revenues
$
4,569

 
$
3,490

 
$
11,676

 
$
8,500

Operating Costs and Expenses
 
 
 
 
 
 
 
Cost of operations
3,278

 
2,373

 
8,828

 
6,177

Depreciation and amortization
375

 
327

 
1,096

 
947

Impairment losses
70

 

 
70

 

Selling, general and administrative
258

 
213

 
752

 
670

Acquisition-related transaction and integration costs
17

 
26

 
69

 
95

Development activity expenses
22

 
24

 
62

 
63

Total operating costs and expenses
4,020

 
2,963

 
10,877

 
7,952

Gain on sale of assets

 

 
19

 

Operating Income
549

 
527

 
818

 
548

Other Income/(Expense)
 
 
 
 
 
 
 
Equity in earnings/(loss) of unconsolidated affiliates
18

 
(5
)
 
39


6

Other (expense)/income, net
(3
)

5

 
13


9

Loss on debt extinguishment
(13
)

(1
)
 
(94
)

(50
)
Interest expense
(280
)

(228
)
 
(809
)

(630
)
Total other expense
(278
)
 
(229
)
 
(851
)
 
(665
)
Income/(Loss) Before Income Taxes
271

 
298

 
(33
)
 
(117
)
Income tax expense/(benefit)
89


160


(68
)

(55
)
Net Income/(Loss)
182

 
138

 
35

 
(62
)
Less: Net income attributable to noncontrolling interest
14

 
19

 
20

 
27

Net Income/(Loss) Attributable to NRG Energy, Inc.
168

 
119

 
15

 
(89
)
Dividends for preferred shares
2

 
2

 
7

 
7

Income/(Loss) Available for Common Stockholders
$
166

 
$
117

 
$
8

 
$
(96
)
Earnings/(Loss) Per Share Attributable to NRG Energy, Inc. Common Stockholders
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — basic
338

 
323

 
333

 
323

Earnings/(Loss) per Weighted Average Common Share — Basic
$
0.49

 
$
0.36

 
$
0.02

 
$
(0.30
)
Weighted average number of common shares outstanding — diluted
343

 
327

 
338

 
323

Earnings/(Loss) per Weighted Average Common Share — Diluted
$
0.48

 
$
0.36

 
$
0.02

 
$
(0.30
)
Dividends Per Common Share
$
0.14

 
$
0.12

 
$
0.40

 
$
0.33

See accompanying notes to condensed consolidated financial statements.

7

                                                                                                                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Three months ended September 30,
 
 Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Net Income/(Loss)
$
182

 
$
138

 
$
35

 
$
(62
)
Other Comprehensive (Loss)/Income, net of tax
 
 
 
 
 
 
 
Unrealized gain/(loss) on derivatives, net of income tax expense/(benefit) of $4, $(5), $(11), and $(2)
4

 
(16
)
 
(24
)
 
8

Foreign currency translation adjustments, net of income tax benefit of $(6), $(1), $(2), and $(13)
(6
)
 
5

 
(3
)
 
(14
)
Available-for-sale securities, net of income tax (benefit)/expense of $(1), $0, $0, and $1
(2
)
 

 
2

 
2

Defined benefit plans, net of tax expense/(benefit) of $0, $0, $(7), and $4
(3
)
 

 
9

 
25

Other comprehensive (loss)/income
(7
)
 
(11
)
 
(16
)
 
21

Comprehensive Income/(Loss)
175

 
127

 
19

 
(41
)
Less: Comprehensive income attributable to noncontrolling interest
17

 
18

 
14

 
26

Comprehensive Income/(Loss) Attributable to NRG Energy, Inc.
158

 
109

 
5

 
(67
)
Dividends for preferred shares
2

 
2

 
7

 
7

Comprehensive Income/(Loss) Available for Common Stockholders
$
156

 
$
107

 
$
(2
)
 
$
(74
)
See accompanying notes to condensed consolidated financial statements.

8

                                                                                                                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2014
 
December 31, 2013
(In millions, except shares)
(unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,953

 
$
2,254

Funds deposited by counterparties
3

 
63

Restricted cash
339

 
268

Accounts receivable — trade, less allowance for doubtful accounts of $27 and $40
1,554

 
1,214

Inventory
1,051

 
898

Derivative instruments
1,397

 
1,328

Cash collateral paid in support of energy risk management activities
375

 
276

Deferred income taxes
79

 
258

Renewable energy grant receivable, net
614

 
539

Current assets held-for-sale
32

 
19

Prepayments and other current assets
475

 
479

Total current assets
7,872

 
7,596

Property, plant and equipment, net of accumulated depreciation of $7,584 and $6,573
22,181

 
19,851

Other Assets
 
 
 
Equity investments in affiliates
797

 
453

Notes receivable, less current portion
80

 
73

Goodwill
2,452

 
1,985

 Intangible assets, net of accumulated amortization of $1,333 and $1,977
2,880

 
1,140

Nuclear decommissioning trust fund
569

 
551

Derivative instruments
427

 
311

Deferred income taxes
1,476

 
1,202

Non-current assets held-for-sale
54

 

Other non-current assets
1,281

 
740

Total other assets
10,016

 
6,455

Total Assets
$
40,069

 
$
33,902

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt and capital leases
$
854

 
$
1,050

Accounts payable
1,098

 
1,038

Derivative instruments
1,365

 
1,055

Cash collateral received in support of energy risk management activities
3

 
63

Current liabilities held-for-sale
23

 

Accrued expenses and other current liabilities
1,200

 
998

Total current liabilities
4,543

 
4,204

Other Liabilities
 
 
 
Long-term debt and capital leases
19,919

 
15,767

Nuclear decommissioning reserve
306

 
294

Nuclear decommissioning trust liability
323

 
324

Deferred income taxes
24

 
22

Derivative instruments
326

 
195

Out-of-market contracts
1,245

 
1,177

Non-current liabilities held-for-sale
31

 

Other non-current liabilities
1,385

 
1,201

Total non-current liabilities
23,559


18,980

Total Liabilities
28,102

 
23,184

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

 
249

Redeemable noncontrolling interest in subsidiaries
28

 
2

Commitments and Contingencies


 


Stockholders’ Equity
 
 
 
Common stock
4

 
4

Additional paid-in capital
8,314

 
7,840

Retained earnings
3,564

 
3,695

Less treasury stock, at cost — 77,219,145 and 77,347,528 shares, respectively
(1,939
)
 
(1,942
)
Accumulated other comprehensive (loss)/income
(5
)
 
5

Noncontrolling interest
1,752

 
865

Total Stockholders’ Equity
11,690

 
10,467

Total Liabilities and Stockholders’ Equity
$
40,069

 
$
33,902

See accompanying notes to condensed consolidated financial statements.

9

                                                                                                                                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 Nine months ended September 30,
 
2014
 
2013
 
(In millions)
Cash Flows from Operating Activities
 
 
 
Net Income/(loss)
$
35

 
$
(62
)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
 
Distributions and equity in earnings of unconsolidated affiliates
32

 
23

Depreciation and amortization
1,096

 
947

Provision for bad debts
49

 
49

Amortization of nuclear fuel
33

 
27

Amortization of financing costs and debt discount/premiums
(9
)
 
(22
)
Adjustment for debt extinguishment
24

 
(15
)
Amortization of intangibles and out-of-market contracts
52

 
75

Amortization of unearned equity compensation
32

 
32

Changes in deferred income taxes and liability for uncertain tax benefits
(75
)
 
39

Changes in nuclear decommissioning trust liability
12

 
25

Changes in derivative instruments
248

 
189

Changes in collateral deposits supporting energy risk management activities
(100
)
 
(59
)
Loss/(gain) on sale of emission allowances
2

 
(8
)
Gain on sale of assets
(26
)
 

Impairment losses
70

 

Cash used by changes in other working capital
(361
)
 
(417
)
Net Cash Provided by Operating Activities
1,114

 
823

Cash Flows from Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
(2,832
)
 
(374
)
Capital expenditures
(675
)
 
(1,581
)
Increase in restricted cash, net
(52
)
 
(67
)
Decrease/(increase) in restricted cash to support equity requirements for U.S. DOE funded projects
21

 
(20
)
Decrease/(increase) in notes receivable
21

 
(22
)
Investments in nuclear decommissioning trust fund securities
(475
)
 
(369
)
Proceeds from sales of nuclear decommissioning trust fund securities
463

 
344

Proceeds from renewable energy grants
431

 
52

Proceeds from sale of assets, net of cash disposed of
153

 
13

Cash proceeds to fund cash grant bridge loan payment
57

 

Other
(70
)
 
(7
)
Net Cash Used by Investing Activities
(2,958
)
 
(2,031
)
Cash Flows from Financing Activities
 
 
 
Payment of dividends to common and preferred stockholders
(140
)
 
(113
)
Payment for treasury stock

 
(25
)
Net (payments for)/receipts from settlement of acquired derivatives that include financing elements
(64
)
 
177

Proceeds from issuance of long-term debt
4,456

 
1,605

Contributions and sale proceeds from noncontrolling interest in subsidiaries
639

 
504

Proceeds from issuance of common stock
15

 
14

Payment of debt issuance costs
(57
)
 
(43
)
Payments for short and long-term debt
(3,308
)
 
(868
)
Net Cash Provided by Financing Activities
1,541

 
1,251

Effect of exchange rate changes on cash and cash equivalents
2

 
(1
)
Net (Decrease)/Increase in Cash and Cash Equivalents
(301
)
 
42

Cash and Cash Equivalents at Beginning of Period
2,254

 
2,087

Cash and Cash Equivalents at End of Period
$
1,953

 
$
2,129

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 company that produces, sells and delivers energy and energy services in major competitive power markets in the U.S. while positioning itself as a leader in the way residential, industrial and commercial consumers think about and use energy products and services. As one of the largest power generators in the U.S., the Company owns and operates approximately 53,000 MWs of generation; engages in the trading of wholesale energy, capacity and related products around those generation assets; transacts in and trades fuel and transportation services; and directly sells energy, services, and innovative, sustainable products and services to retail customers under the name “NRG” and various other retail brand names owned by NRG.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the SEC's regulations for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The following notes should be read in conjunction with the accounting policies and other disclosures as set forth in the notes to the consolidated financial statements in the Company's 2013 Form 10-K. Interim results are not necessarily indicative of results for a full year.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal and recurring accruals necessary to present fairly the Company's consolidated financial position as of September 30, 2014, and the results of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2014, and 2013.
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. Certain prior year depreciation amounts have been recast to revise provisional purchase accounting estimates for the GenOn acquisition.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes. The reclassifications did not affect results from operations or cash flows.

11

                                                                                                                                    

Note 2Summary of Significant Accounting Policies
Other Cash Flow Information
NRG’s investing activities exclude capital expenditures of $148 million which were accrued and unpaid at September 30, 2014.
Noncontrolling Interest
The following table reflects the changes in NRG's noncontrolling interest balance:
 
(In millions)
Balance as of December 31, 2013
$
865

Acquisition of EME
353

Sale of assets to NRG Yield, Inc.
(41
)
Non-cash adjustments for equity component of NRG Yield, Inc. convertible notes
23

Non-cash adjustments to noncontrolling interest
(75
)
Contributions from NRG Yield, Inc. public offering
630

Contributions from noncontrolling interest
20

Distributions to noncontrolling interest
(37
)
Comprehensive income attributable to noncontrolling interest
14

Balance as of September 30, 2014
$
1,752

As described in Note 3, Business Acquisitions and Dispositions, in order to fund the purchase price of the Alta Wind Assets acquisition, NRG Yield, Inc. issued 12,075,000 shares of its Class A common stock on July 29, 2014 for net proceeds of $630 million. NRG Yield, Inc. utilized the proceeds of the offering to acquire additional units of NRG Yield LLC. Following the offering, the Company owned 55.3% of NRG Yield LLC and as a result continues to consolidate NRG Yield, Inc. through its controlling interest. The contributions are reflected as an increase to the Company's noncontrolling interest balance.
Cash Proceeds from Wind Tax Equity Arrangement 
On November 3, 2014, the Company sold an economic interest in a portfolio of wind assets for gross proceeds of approximately $195 million, in order to monetize cash and tax benefits associated with the projects.  The Company will continue to manage the portfolio of wind assets, which were primarily acquired in connection with the acquisition of EME, and will continue to consolidate the assets, with the contributions presented as noncontrolling interests in the Company’s consolidated balance sheet. 
Impairment Losses
During the three months ended September 30, 2014, the Company determined that it will pursue mothballing the 463 MW natural gas-fired Osceola facility, in Saint Cloud, Florida. The Company considered this to be an indicator of impairment and performed an impairment test for these assets under ASC 360, Property, Plant and Equipment. The carrying amount of the assets was lower than the future net cash flows expected to be generated by the assets and as a result, the assets are considered to be impaired. The Company measured the impairment loss as the difference between the carrying amount and the fair value of the assets. Due to the location of the facility, it was determined that the best indicator of fair value is the market value of the combustion turbines. The Company recorded an impairment loss of approximately $60 million, which represents the excess of the carrying value over the fair market value. In addition, during the three months ended September 30, 2014, the Company recorded an impairment loss of $10 million to reduce the carrying value of certain solar panels to their approximate fair value.
Assets and Liabilities Held for Sale
During the three months ended September 30, 2014, the Company entered into separate agreements to sell its 50% interest in Sabine Cogen, L.P. and its 50% interest in the American Bituminous Power Partners, L.P. waste coal facility. These transactions are expected to close in the fourth quarter of 2014. As a result, the Company has classified the related assets and liabilities as "held-for-sale" in the consolidated balance sheet as of September 30, 2014.
Redeemable Noncontrolling Interest in Subsidiaries
Redeemable noncontrolling interest in subsidiaries represent third-party interests in the net assets under certain arrangements that the Company has entered into to finance the cost of solar energy systems under operating leases.  To the extent that the third-party has the right to redeem their interests for cash or other assets, the Company has included the noncontrolling interest attributable to the third party as a component of temporary equity in the mezzanine section of the consolidated balance sheet. 

12

                                                                                                                                    



Recent Accounting Developments
ASU 2014-09 - In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU No. 2014-09. The amendments of ASU No. 2014-09 complete the joint effort between the FASB and the International Accounting Standards Board, or IASB, to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards, or IFRS, and to improve financial reporting. The guidance in ASU No. 2014-09 provides that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services provided and establishes the following steps to be applied by an entity: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies the performance obligation. The guidance of ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early adoption is not permitted. The Company is currently evaluating the impact of the standard on the Company's results of operations, cash flows and financial position.
ASU 2013-11 - In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU No. 2013-11.  The amendments of ASU No. 2013-11, which were adopted on January 1, 2014, require an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction of a deferred tax asset for a net operating loss, or NOL, a similar tax loss or tax credit carryforward rather than a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and the entity intends to use the deferred tax asset for that purpose.  The adoption of this standard did not impact the Company's results of operations or cash flows as the unrecognized tax benefits relate to state issues and the Company either has no NOLs or the NOLs are limited for that particular jurisdiction.

13

                                                                                                                                    

Note 3Business Acquisitions and Dispositions
The Company has completed the following business acquisitions and dispositions that are material to the Company's financial statements:
Acquisition of Alta Wind
On August 12, 2014, NRG Yield, Inc., through its subsidiary Yield Operating, completed the acquisition of 100% of the membership interests of Alta Wind Asset Management Holdings, LLC, Alta Wind Company, LLC, Alta Wind X Holding Company, LLC, and Alta Wind XI Holding Company, LLC, which collectively own seven wind facilities that total 947 MWs located in Tehachapi, California and a portfolio of land leases, or the Alta Wind Assets. Power generated by the Alta Wind facility is sold to Southern California Edison under long-term power purchase agreements with 21 years of remaining contract life for Alta I-V and 22 years, beginning in 2016, for Alta X and XI.
The purchase price of the Alta Wind Assets was $923 million, which was comprised of purchase price of $870 million and $53 million paid for working capital balances. In order to fund the purchase price of the acquisition, NRG Yield, Inc. issued 12,075,000 shares of its Class A common stock on July 29, 2014 for net proceeds of $630 million. In addition, on August 5, 2014, Yield Operating issued $500 million in aggregate principal amount at par of 5.375% senior notes due August 2024. Interest on the notes is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2015. The notes are senior unsecured obligations of Yield Operating and are guaranteed by NRG Yield LLC, Yield Operating’s parent company, and by certain of Yield Operating’s wholly owned subsidiaries.
The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The initial accounting for the business combination is not complete because the evaluation necessary to assess the fair values of certain net assets acquired is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. 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. The purchase price of $923 million was provisionally allocated as follows:
 
 
(In millions)
Assets
 
 
Cash
 
$
22

Current and non-current assets
 
49

Property, plant and equipment
 
1,057

Intangible assets
 
1,420

Total assets acquired
 
2,548

 
 
 
Liabilities
 
 
Debt
 
1,591

Current and non-current liabilities
 
34

Total liabilities assumed
 
1,625

Net assets acquired
 
$
923


14

                                                                                                                                    

Fair value measurements
The provisional fair values of the property, plant and equipment and intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. Significant inputs were as follows:
Property, plant and equipment The estimated fair values were determined primarily based on an income method using discounted cash flows and validated using a cost approach based on the replacement cost of the assets less economic obsolescence. The income approach was applied by determining the enterprise value for each acquired entity and subtracting the fair value of the intangible assets and working capital to determine the implied value of the tangible fixed assets. This methodology was primarily relied upon as the forecasted cash flows incorporate the specific attributes of each asset including age, useful life, equipment condition and technology. The income approach also allows for an accurate reflection of current and expected market dynamics such as supply and demand and regulatory environment as of the acquisition date.
Intangible assets The fair values of the PPAs acquired were determined utilizing a variation of the income approach where the incremental future cash flows resulting from the acquired PPAs compared to the cash flows based on current market prices were discounted to present value at the weighted average cost of debt of the utility off-taker, as the PPA was determined to be a debt-like instrument for the off-taker. The values were corroborated with available market data. The PPA values will be amortized over an average period of 22 years.
Disposition of 50% Interest in Petra Nova Parish Holdings LLC
On July 3, 2014, the Company, through its wholly owned subsidiary Petra Nova Holdings LLC, sold 50% of its interest in Petra Nova Parish Holdings LLC to JX Nippon Oil Exploration (EOR) Limited, JX Nippon, a wholly owned subsidiary of JX Nippon Oil & Gas Exploration Corporation.  As a result of the sale, the Company no longer has a controlling interest in and has deconsolidated Petra Nova Parish Holdings LLC as of the date of the sale. On July 7, 2014, the Company made its initial capital contribution into the partnership of $35 million, which was funded with the sale proceeds of $76 million. On March 3, 2014, Petra Nova CCS I LLC, a wholly owned subsidiary of Petra Nova Parish Holdings LLC, entered into a fixed-price agreement to build and operate a CCF at the W.A. Parish facility with a consortium of Mitsubishi Heavy Industries America, Inc. and TIC - The Industrial Company.  Notice to proceed for the construction on the CCF was issued on July 15, 2014, and commercial operation is expected in late 2016. 
Petra Nova Parish Holdings LLC also owns a 75 MW peaking unit at W.A. Parish, which achieved commercial operations on June 26, 2013. The peaking unit will be converted into a cogeneration facility to provide power and steam to the CCF.  The CCF is being financed by: (i) up to $167 million from a U.S. DOE CCPI grant of which $7 million has already been received from the grant in the initial design and engineering phase and $26 million has already been received from the grant under the construction phase, (ii) $250 million in loans provided by the Japan Bank for International Cooperation and Mizuho Bank, Ltd., and (iii) approximately $300 million in equity contributions from each of the Company and JX Nippon. The Company’s contribution will include investments already made during the development of the project. 
On July 14, 2014, Petra Nova Parish Holdings LLC entered into two credit facilities, or the Petra Nova Parish Credit Agreements, to fund the cost of construction of the CCF at the W.A. Parish facility. The Petra Nova Parish Credit Agreements are comprised of a $75 million Nippon Export and Investment Insurance, or NEXI, covered loan and a $175 million Japan Bank for International Cooperation, or JBIC, facility. The NEXI covered loan has an interest rate of LIBOR plus an applicable margin of 1.75% and the JBIC facility has an interest rate of LIBOR plus an applicable margin of 0.50% during the construction phase which escalates to an applicable margin of 1.50% upon completion of the CCF. Both credit facilities mature in April 2026. NRG has guaranteed its 50% share of the obligations under the Petra Nova Parish Credit Agreements through mechanical completion as defined by the credit agreements.
Sales of Assets to NRG Yield, Inc.
On June 30, 2014, the Company sold the following facilities to NRG Yield, Inc.: High Desert, Kansas South, and El Segundo Energy Center. NRG Yield, Inc. paid total cash consideration of $357 million, which represents a base purchase price of $349 million and $8 million of working capital adjustments, plus assumed project level debt of approximately $612 million. The sale was recorded as a transfer of entities under common control and the related assets were transferred at carrying value.

15

                                                                                                                                    

Acquisition of Dominion's Competitive Electric Retail Business
On March 31, 2014, the Company acquired the competitive retail electricity business of Dominion Resources, Inc., or Dominion. The acquisition of Dominion's competitive retail electricity business is expected to increase NRG’s retail portfolio by approximately 540,000 customers in the aggregate by the end of 2014. The acquisition supports NRG's ongoing efforts to expand the Company's retail footprint in the Northeast and to grow its retail position in Texas. The Company paid approximately $192 million as cash consideration for the acquisition, including $165 million of purchase price and $27 million paid for working capital balances, which was funded by cash on hand. The purchase price was provisionally allocated to the following: $40 million to accounts receivable-trade, $62 million to customer relationships, $9 million to trade names, $14 million to current assets, $21 million to derivative assets, $45 million to current and non-current liabilities, and goodwill of $91 million of which $8 million is deductible for U.S. income tax purposes in future periods. The factors that resulted in goodwill arising from the acquisition include the revenues associated with new customers in new regions and through the synergies associated with combining a new retail business with the Company's generation assets. The acquired assets and liabilities are included within the Retail segment. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. Any changes to the fair value assessments will affect the value of goodwill. 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.
EME Acquisition
On April 1, 2014, the Company acquired substantially all of the assets of EME.  EME, through its subsidiaries and affiliates, owned or leased and operated a portfolio of approximately 8,000 MW consisting of wind energy facilities and coal- and gas-fired generating facilities. The Company paid an aggregate purchase price of $3.5 billion, which was comprised of the following:
 
Original Purchase Price
Purchase Price on Acquisition Date
Cash and equivalents (a)
$
2,285

$
3,016

Common shares (b)
350

401

Liabilities acquired

57

Total purchase price
2,635

3,474

Less: cash acquired
 
1,422

Net purchase price
 
$
2,052

(a) The increase in cash paid relates to an increase in acquired cash on hand as well as changes in cash collateral, restricted cash and cash related to unconsolidated subsidiaries. It also reflects lease and debt payments in 2014.
(b) The increase in the value of the common shares reflects an increase in trading price of NRG common shares between October 18, 2013 and April 1, 2014. The shares of NRG common stock were given a value of $350 million in determining the cash purchase price, which was based upon the volume-weighted average trading price over the 20 trading days prior to October 18, 2013.
The purchase price was funded through the issuance of 12,671,977 shares of NRG common stock on April 1, 2014, the issuance of $700 million in newly-issued corporate debt, as described in Note 7, Debt and Capital Leases, and cash on hand. The Company also assumed non-recourse debt of approximately $1.2 billion
In connection with the transaction, NRG agreed to certain conditions with the parties to the Powerton and Joliet, or POJO, sale-leaseback transaction subject to which an NRG subsidiary assumed the POJO leveraged leases and NRG guaranteed the remaining payments under each lease, which total $485 million through 2034. In connection with this agreement, NRG has committed to fund up to $350 million in capital expenditures for plant modifications at Powerton and Joliet to comply with environmental regulations, as discussed further in Note 15, Environmental Matters. In addition, NRG assumed certain long-term contractual arrangements for fuel and transportation. Commitments under these arrangements totaled approximately $490 million.
On April 30, 2014, subsequent to the acquisition, the Company acquired the remaining 50% ownership of Mission Del Sol LLC, which owns the Sunrise facility, a 586 MW natural gas facility in Fellows, California, from Chevron Power Holdings Inc. increasing the Company's ownership interest to 100% in exchange for the Company's 50% interest in six cogeneration facilities, previously co-owned with Chevron Power Holdings Inc.

16

                                                                                                                                    

The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The initial accounting for the business combination is not complete because the evaluation necessary to assess the fair values of certain net assets acquired is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. 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. The purchase price of $3.5 billion was provisionally allocated as follows:
 
Acquisition Date
 
Measurement period adjustments
 
Revised Acquisition Date
 
(In millions)
Assets
 
 
 
 
 
Cash
1,422

 

 
$
1,422

Current assets
676

 
(8
)
 
668

Property, plant and equipment
2,475

 
(144
)
 
2,331

Intangible assets
312

 
11

 
323

Goodwill

 
200

 
200

Non-current assets
813

 
18

 
831

Total assets acquired
5,698

 
77

 
5,775

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Current and non-current liabilities
533

 
25

 
558

Out-of-market contracts and leases
43

 
98

 
141

Long-term debt
1,249

 

 
1,249

Total liabilities assumed
1,825

 
123

 
1,948

Less: noncontrolling interest
380

 
(27
)
 
353

Net assets acquired
$
3,493

 
$
(19
)
 
$
3,474

The Company incurred and expensed acquisition-related transaction costs related to the acquisition of EME of $17 million for the nine months ended September 30, 2014. There were no acquisition-related transaction costs incurred during the three months ended September 30, 2014.
Fair value measurements
The provisional fair values of the property, plant and equipment, intangible assets and out-of-market contracts at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. Significant inputs were as follows:
Property, plant and equipment The estimated fair values were determined primarily based on an income method using discounted cash flows and validated using a market approach based on recent transactions of comparable assets. The income approach was primarily relied upon as the forecasted cash flows more appropriately incorporate differences in regional markets, plant types, age, useful life, equipment condition and environmental controls of each asset. The income approach also allows for a more accurate reflection of current and expected market dynamics such as supply and demand, commodity prices and regulatory environment as of the acquisition date.
Intangible assets The fair values of the PPAs acquired were determined utilizing a variation of the income approach where the expected future cash flows resulting from the acquired PPAs were reduced by operating costs and charges for contributory assets and then discounted to present value at the weighted average cost of capital of an integrated utility peer group adjusted for project-specific financing attributes. The values were corroborated with available market data. The PPAs will be amortized over an average term of 12 years.
Out-of-market lease contracts The estimated fair values of the acquired leases were determined utilizing a variation of the income approach under which the fair value of the lease was determined by discounting the future lease payments at an appropriate discount rate and comparing it to the fair value of the property, plant and equipment being leased.

17

                                                                                                                                    

Noncontrolling interest The estimated fair value of the noncontrolling interests represent the fair value of the partners' contributions as of the acquisition date.
The Company recorded goodwill of approximately $200 million, all of which is deductible for U.S. income tax purposes in future periods. The goodwill primarily represents the Company's ability to further monetize certain of the assets in the portfolio through the sale of assets to NRG Yield, Inc. or to other partners with the ability to further utilize the related tax benefits. The goodwill will be recorded in the Renewables segment.
Supplemental Pro Forma Information
Since the acquisition date, EME contributed $703 million in operating revenues and $58 million in net income attributable to NRG. The following supplemental pro forma information represents the results of operations as if NRG had acquired EME on January 1, 2013:
 
 
For the nine months ended
 
For the year ended
(in millions except per share amounts)
 
September 30, 2014
 
September 30, 2013
 
December 31, 2013
 
 
Operating revenues
 
$
12,234

 
$
9,486

 
$
12,598

Net income/(loss) attributable to NRG Energy, Inc.
 
47

 
(702
)
 
(1,004
)
Earnings/(loss) per share attributable to NRG common stockholders:
 

 
 
 
 
Basic
 
0.14

 
(2.09
)
 
(2.99
)
Diluted
 
0.14

 
(2.09
)
 
(2.99
)
The supplemental pro forma information has been adjusted to include the pro-forma impact of depreciation of property, plant and equipment, amortization of lease obligations and out-of-market contracts, based on the preliminary purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs incurred by NRG, as well as the related tax impact. There were no transactions during the periods between NRG and EME. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs. The Company expects to achieve certain cost savings from the acquisition; however, there can be no assurance that these cost savings will be achieved.
2013 Acquisitions
Energy Systems Acquisition
On December 31, 2013, NRG Energy Center Omaha Holdings, LLC, an indirect wholly owned subsidiary of NRG Yield LLC, acquired 100% of Energy Systems Company, or Energy Systems, for approximately $120 million. The acquisition was financed from cash on hand. Energy Systems is an operator of steam and chilled thermal facilities that provides heating and cooling services to nonresidential customers in Omaha, Nebraska. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was primarily allocated to property, plant and equipment of $60 million, customer relationships of $59 million, and working capital of $1 million. The accounting for Energy Systems was completed as of September 30, 2014, at which point the provisional fair values became final with no material changes.
Gregory Acquisition
On August 7, 2013, NRG Texas Gregory, LLC, a wholly owned subsidiary of NRG, acquired Gregory Power Partners, L.P. for approximately $245 million in cash, net of $32 million cash acquired. Gregory is a cogeneration plant located in Corpus Christi, Texas, which has generation capacity of 388 MW and steam capacity of 160 MWt. The Gregory cogeneration plant provides steam, processed water and a small percentage of its electrical generation to the Corpus Christi Sherwin Alumina plant. The majority of the plant's generation is available for sale in the ERCOT market. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was provisionally allocated primarily to property, plant, and equipment of $248 million, current assets of $13 million, and other liabilities of $16 million. The accounting for the Gregory acquisition was completed as of June 30, 2014, at which point the provisional fair values became final with no material changes.

18

                                                                                                                                    

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 2013 Form 10-K.
For cash and cash equivalents, funds deposited by counterparties, accounts and other receivables, accounts payable, 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 September 30, 2014
 
As of December 31, 2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(In millions)
Assets:
 
 
 
 
 
 
 
Notes receivable (a)
$
95

 
$
95

 
$
99

 
$
99

Liabilities:
 
 
 
 
 
 
 
Long-term debt, including current portion
20,764

 
20,843

 
16,804

 
17,222

(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 2 within the fair value hierarchy. The fair value of 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 sheets on a recurring basis and their level within the fair value hierarchy:
 
As of September 30, 2014
 
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
$

 
$

 
$
18

 
$
18

Available-for-sale securities
42

 

 

 
42

Other (a)
21

 

 
11

 
32

Nuclear trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
2

 

 

 
2

U.S. government and federal agency obligations
39

 
3

 

 
42

Federal agency mortgage-backed securities

 
68

 

 
68

Commercial mortgage-backed securities

 
25

 

 
25

Corporate debt securities

 
85

 

 
85

Equity securities
291

 

 
54

 
345

Foreign government fixed income securities

 
2

 

 
2

Other trust fund investments:
 
 
 
 
 
 
 
U.S. government and federal agency obligations
1

 

 

 
1

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
357

 
1,170

 
285

 
1,812

Interest rate contracts

 
10

 

 
10

Equity contracts

 

 
2

 
2

Total assets
$
753

 
$
1,363

 
$
370

 
$
2,486

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
240

 
$
1,061

 
$
258

 
$
1,559

Interest rate contracts

 
132

 

 
132

Total liabilities
$
240

 
$
1,193

 
$
258

 
$
1,691

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

19

                                                                                                                                    

 
As of December 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
$

 
$

 
$
16

 
$
16

Available-for-sale securities
2

 

 

 
2

Other (a)
37

 

 
10

 
47

Nuclear trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
26

 

 

 
26

U.S. government and federal agency obligations
40

 
5

 

 
45

Federal agency mortgage-backed securities

 
62

 

 
62

Commercial mortgage-backed securities

 
14

 

 
14

Corporate debt securities

 
70

 

 
70

Equity securities
276

 

 
56

 
332

Foreign government fixed income securities

 
2

 

 
2

Other trust fund investments:
 
 
 
 
 
 
 
U.S. government and federal agency obligations
1

 

 

 
1

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
346

 
1,126

 
147

 
1,619

Interest rate contracts

 
20

 

 
20

Total assets
$
728

 
$
1,299

 
$
229

 
$
2,256

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
216

 
$
831

 
$
134

 
$
1,181

Interest rate contracts

 
69

 

 
69

Total liabilities
$
216

 
$
900

 
$
134

 
$
1,250

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

20

                                                                                                                                    

There were no transfers during the three and nine months ended September 30, 2014 and 2013 between Levels 1 and 2. The following tables reconcile, for the three and nine months ended September 30, 2014 and 2013, 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 September 30, 2014
 
Nine months ended September 30, 2014
(In millions)
Debt Securities
 
Other
 
Trust Fund Investments
 
Derivatives(a)
 
Total
 
Debt Securities
 
Other
 
Trust Fund Investments
 
Derivatives(a)
 
Total
Beginning balance
$
18

 
$
11

 
$
58

 
$
(12
)
 
$
75

 
$
16

 
$
10

 
$
56

 
$
13

 
$
95

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

 

 

 
(22
)
 
(22
)
 

 
1

 

 
(18
)
 
(17
)
Included in OCI

 

 

 

 

 
2

 

 

 

 
2

Included in nuclear
decom-
missioning
obligation

 

 
(4
)
 

 
(4
)
 

 

 
(3
)
 

 
(3
)
Purchases

 

 

 
63

 
63

 

 

 
1

 
(21
)
 
(20
)
Contracts acquired in Dominion and EME acquisition

 

 

 

 

 

 

 

 
39

 
39

Transfers into Level 3 (b)

 

 

 
(1
)
 
(1
)
 

 

 

 
17

 
17

Transfers out of Level 3 (b)

 

 

 
1

 
1

 

 

 

 
(1
)
 
(1
)
Ending balance as of September 30, 2014
$
18

 
$
11

 
$
54

 
$
29

 
$
112

 
$
18

 
$
11

 
$
54

 
$
29

 
$
112

Gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of September 30, 2014
$

 
$

 
$

 
$
5

 
$
5

 
$

 
$

 
$

 
$
26

 
$
26

(a)
Consists of derivative 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.

21

                                                                                                                                    

 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
(In millions)
Debt Securities
 
Trust Fund Investments
 
Derivatives(a)
 
Total
 
Debt Securities
 
Trust Fund Investments
 
Derivatives(a)
 
Total
Beginning balance
$
15

 
$
50

 
$
(12
)
 
$
53

 
$
12

 
$
47

 
$
(12
)
 
$
47

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

 

 
14

 
14

 

 

 
(4
)
 
(4
)
Included in OCI

 

 

 

 
3

 

 

 
3

Included in nuclear decom-
missioning obligations

 
5

 

 
5

 

 
7

 

 
7

Purchases

 

 
4

 
4

 

 
1

 
(3
)
 
(2
)
Transfers into Level 3 (b)

 

 
(36
)
 
(36
)
 

 

 
(9
)
 
(9
)
Transfers out of Level 3 (b)

 

 
23

 
23

 

 

 
21

 
21

Ending balance as of September 30, 2013
$
15

 
$
55

 
$
(7
)
 
$
63

 
$
15

 
$
55

 
$
(7
)
 
$
63

Losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of September 30, 2013

 

 
(7
)
 
(7
)
 

 

 
(4
)
 
(4
)
(a)
Consists of derivative 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 energy derivatives are recorded in operating revenues and cost of operations.
Derivative Fair Value Measurements
A portion of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A majority of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. The remainder of the assets and liabilities represent contracts for which external sources or observable market quotes are not available 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. As of September 30, 2014, contracts valued with prices provided by models and other valuation techniques make up 16% of the total derivative assets and 15% 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. As of September 30, 2014, the credit reserve resulted in a $1 million increase in fair value which is a gain in OCI. As of September 30, 2013, the credit reserve resulted in a $1 million decrease in fair value which is composed of a $1 million gain in OCI and a $2 million loss 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 2013 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.

22

                                                                                                                                    

Counterparty Credit Risk
The Company's counterparty credit risk policies are disclosed in its 2013 Form 10-K. As of September 30, 2014, counterparty credit exposure, excluding credit risk exposure under certain long term agreements, was $677 million and NRG held collateral (cash and letters of credit) against those positions of $1 million, resulting in a net exposure of $676 million. Approximately 78% of the Company's exposure before collateral is expected to roll off by the end of 2015. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.
 
Net Exposure (a)
Category
(% of Total)
Financial institutions
38
%
Utilities, energy merchants, marketers and other
38

ISOs
24

Total as of September 30, 2014
100
%
 
Net Exposure (a)
Category
(% of Total)
Investment grade
89
%
Non-rated (b)
11

Total as of September 30, 2014
100
%
(a)
Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices.
(b)
For non-rated counterparties, a significant portion 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, each of which represent more than 10% of total net exposure discussed above. The aggregate of such counterparties' exposure was $181 million as of September 30, 2014. 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 PPAs. As external sources or observable market quotes are not available to estimate such exposure, the Company estimates its credit exposure for these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics. Based on these valuation techniques, as of September 30, 2014, aggregate credit risk exposure managed by NRG to these counterparties was approximately $4.4 billion, including $1.8 billion related to assets of NRG Yield, Inc., for the next five years. The majority of these power contracts are with utilities or public power entities with strong credit quality and public utility commission or other regulatory support. However, such regulated utility counterparties can be impacted by changes in government regulations, which NRG is unable to predict.
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 customers and the 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 September 30, 2014, the Company believes its retail customer credit exposure was diversified across many customers and various industries, as well as government entities.

23

                                                                                                                                    

Note 5Nuclear Decommissioning Trust Fund
This footnote should be read in conjunction with the complete description under Note 6, Nuclear Decommissioning Trust Fund, to the Company's 2013 Form 10-K.
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, 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 September 30, 2014
 
As of December 31, 2013
(In millions, except otherwise noted)
Fair Value
 
Unrealized Gains
 
Unrealized Losses
 
Weighted-average Maturities (In years)
 
Fair Value
 
Unrealized Gains
 
Unrealized Losses
 
Weighted-average Maturities (In years)
Cash and cash equivalents
$
2

 
$

 
$

 

 
$
26

 
$

 
$

 

U.S. government and federal agency obligations
42

 
2

 

 
9

 
45

 
1

 
1

 
9

Federal agency mortgage-backed securities
68

 
1

 

 
25

 
62

 
1

 
1

 
24

Commercial mortgage-backed securities
25

 

 
1

 
30

 
14

 

 

 
29

Corporate debt securities
85

 
2

 
1

 
10

 
70

 
1

 
1

 
9

Equity securities
345

 
210

 

 

 
332

 
204

 

 

Foreign government fixed income securities
2

 

 

 
16

 
2

 

 

 
9

Total
$
569

 
$
215

 
$
2

 
 
 
$
551

 
$
207

 
$
3

 
 
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.
 
 Nine months ended September 30,
 
2014
 
2013
 
(In millions)
Realized gains
$
15

 
$
10

Realized losses
5

 
7

Proceeds from sale of securities
463

 
344


24

                                                                                                                                    

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 2013 Form 10-K.
Energy-Related Commodities
As of September 30, 2014, NRG had energy-related derivative instruments extending through 2024. The Company voluntarily de-designated all remaining commodity cash flow hedges as of January 1, 2014, and prospectively marked these derivatives to market through the income statement.
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 September 30, 2014, the Company had interest rate derivative instruments on non-recourse debt extending through 2032, some 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 category, excluding those derivatives that qualified for the NPNS exception as of September 30, 2014 and December 31, 2013. 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
 
 
September 30, 2014
 
December 31, 2013
Category
Units
(In millions)
Emissions
Short Ton
1

 

Coal
Short Ton
60

 
51

Natural Gas
MMBtu
(150
)
 
(166
)
Oil
Barrel

 
1

Power
MWh
(52
)
 
(27
)
Interest
Dollars
$
3,459

 
$
1,444

Equity
Shares
2

 

The increase in the interest rate swap position was primarily the result of interest rate swaps acquired in connection with EME and Alta Wind.
Fair Value of Derivative Instruments
The following table summarizes the fair value within the derivative instrument valuation on the balance sheets:
 
Fair Value
 
Derivative Assets
 
Derivative Liabilities
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
 
(In millions)
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts current
$

 
$

 
$
53

 
$
35

Interest rate contracts long-term
8

 
14

 
66

 
29

Commodity contracts current

 

 

 
1

Commodity contracts long-term

 

 

 
1

Total derivatives designated as cash flow hedges
8

 
14

 
119

 
66

Derivatives not designated as cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts current

 

 
6

 
4

Interest rate contracts long-term
2

 
6

 
7

 
1

Commodity contracts current
1,397

 
1,328

 
1,306

 
1,015

Commodity contracts long-term
415

 
291

 
253

 
164

Equity contracts long-term
2

 

 

 

Total derivatives not designated as cash flow hedges
1,816

 
1,625

 
1,572

 
1,184

Total derivatives
$
1,824

 
$
1,639

 
$
1,691

 
$
1,250


25

                                                                                                                                    

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 September 30, 2014
 
(In millions)
Commodity contracts:
 
 
 
 
 
 
 
 
Derivative assets
 
$
1,812

 
$
(1,433
)
 
$
(3
)
 
$
376

Derivative liabilities
 
(1,559
)
 
1,433

 
15

 
(111
)
Total commodity contracts
 
253

 

 
12

 
265

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivative assets
 
10

 
(8
)
 

 
2

Derivative liabilities
 
(132
)
 
8

 

 
(124
)
Total interest rate contracts
 
(122
)