NRG 2011.6.30 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: June 30, 2011
 
 
 
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. (Check one):
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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes x       No o
As of August 1, 2011, there were 241,251,871 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 — (REMOVED AND RESERVED)
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 the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the 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 Energy, Inc.'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 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, 2010, including 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 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 RepoweringNRG strategy of developing and building new power generation facilities, including new wind and solar projects;
NRG's ability to implement its econrg strategy of finding ways to meet the challenges of climate change, clean air and protecting natural resources while taking advantage of business opportunities;
NRG's ability to achieve its strategy of regularly returning capital to shareholders;
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; 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 Energy, Inc. 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:
2010 Form 10-K
 
NRG’s Annual Report on Form 10-K for the year ended December 31, 2010
 
 
 
2011 Senior Credit Facility
 
As of July 1, 2011, NRG's new senior secured facility, comprised of a $1.6 billion term loan facility and a $2.3 billion revolving credit facility, which replaces the Senior Credit Facility
 
 
 
316(b) Rule
 
A section of the Clean Water Act regulating cooling water intake structures
 
 
 
ASR Agreement
 
Accelerated Share Repurchase Agreement
 
 
 
Baseload capacity
 
Electric power generation capacity normally expected to serve loads on an around-the-clock basis throughout the calendar year
 
 
 
CAA
 
Clean Air Act
 
 
 
CAIR
 
Clean Air Interstate Rule
 
 
 
CAISO
 
California Independent System Operator
 
 
 
CATR
 
Clean Air Transport Rule
 
 
 
Capital Allocation Plan
 
Share repurchase program
 
 
 
Capital Allocation Program
 
NRG's plan of allocating capital between debt reduction, reinvestment in the business, and share repurchases through the Capital Allocation Plan

 
 
 
C&I
 
Commercial, industrial and governmental/institutional
 
 
 
CFTC
 
U.S. Commodity Futures Trading Commission
 
 
 
CPS
 
CPS Energy
 
 
 
CSAPR
 
Cross-State Air Pollution Rule
 
 
 
DNREC
 
Delaware Department of Natural Resources and Environmental Control
 
 
 
ERCOT
 
Electric Reliability Council of Texas, the Independent System Operator and the regional reliability coordinator of the various electricity systems within Texas
 
 
 
Exchange Act
 
The Securities Exchange Act of 1934, as amended
 
 
 
FERC
 
Federal Energy Regulatory Commission
 
 
 
FFB
 
Federal Financing Bank
 
 
 
Funded Letter of Credit Facility
 
NRG's $1.3 billion term loan-backed fully funded senior secured letter of credit facility, of which $500 million matures on February 1, 2013, and $800 million matures on August 31, 2015, and is a component of NRG's Senior Credit Facility


 
 
 
GHG
 
Greenhouse Gases
 
 
 
Green Mountain Energy
 
Green Mountain Energy Company
 
 
 
GWh
 
Gigawatt hour
 
 
 
ISO
 
Independent System Operator, also referred to as Regional Transmission Organizations, or RTO
 
 
 
ISO-NE
 
ISO New England Inc.
 
 
 

4



LFRM
 
Locational Forward Reserve Market
 
 
 
LIBOR
 
London Inter-Bank Offer Rate
 
 
 
LTIP
 
Long-Term Incentive Plan
 
 
 
MACT
 
Maximum Achievable Control Technology
 
 
 
Mass
 
Residential and small business
 
 
 
MMBtu
 
Million British Thermal Units
 
 
 
MW
 
Megawatts
 
 
 
MWh
 
Saleable megawatt hours net of internal/parasitic load megawatt-hours
 
 
 
NAAQS
 
National Ambient Air Quality Standards
 
 
 
NINA
 
Nuclear Innovation North America LLC
 
 
 
NOx
 
Nitrogen oxide
 
 
 
NPNS
 
Normal Purchase Normal Sale
 
 
 
NRC
 
U.S. Nuclear Regulatory Commission
 
 
 
NYISO
 
New York Independent System Operator
 
 
 
OCI
 
Other comprehensive income
 
 
 
PJM
 
PJM Interconnection, LLC
 
 
 
PJM market
 
The wholesale and retail electric market operated by PJM primarily in all or parts of Delaware, the District of Columbia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia
 
 
 
PM 2.5
 
Particulate matter particles with a diameter of 2.5 micrometers or less
 
 
 
PPA
 
Power Purchase Agreement
 
 
 
PUCT
 
Public Utility Commission of Texas
 
 
 
Repowering
 
Technologies utilized to replace, rebuild, or redevelop major portions of an existing electrical generating facility, not only to achieve a substantial emissions reduction, but also to increase facility capacity, and improve system efficiency
 
 
 
RepoweringNRG
 
NRG’s program designed to develop, finance, construct and operate new, highly efficient, environmentally responsible capacity
 
 
 
Revolving Credit Facility
 
NRG’s $925 million senior secured revolving credit facility, which matures on
August 31, 2015, and is a component of NRG’s Senior Credit Facility
 
 
 
SEC
 
United States Securities and Exchange Commission
 
 
 
Securities Act
 
The Securities Act of 1933, as amended
 
 
 
Senior Credit Facility
 
NRG’s senior secured facility, which is comprised of a Term Loan Facility, a $925 million Revolving Credit Facility and a $1.3 billion Funded Letter of Credit Facility
 
 
 
Senior Notes
 
The Company’s $6.1 billion outstanding unsecured senior notes consisting of $1.1 billion of 7.375% senior notes due 2017, $1.2 billion of 7.625% senior notes due 2018, $700 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 and $1.2 billion of 7.875% senior notes due 2021
 
 
 

5



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
 
 
 
TANE
 
Toshiba America Nuclear Energy Corporation
 
 
 
TANE Facility
 
NINA’s $500 million credit facility with TANE which matures on February 24, 2012
 
 
 
TEPCO
 
The Tokyo Electric Power Company of Japan, Inc.
 
 
 
Term Loan Facility
 
A senior first priority secured term loan, of which approximately $608 million matures on February 1, 2013, and $990 million matures on August 31, 2015, and is a component of NRG’s Senior Credit Facility
 
 
 
U.S.
 
United States of America
 
 
 
U.S. DOE
 
United States Department of Energy
 
 
 
U.S. EPA
 
United States Environmental Protection Agency
 
 
 
U.S. GAAP
 
Accounting principles generally accepted in the United States
 
 
 
VaR
 
Value at Risk


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 June 30,
 
Six months ended June 30,
(In millions, except for per share amounts)
2011
 
2010
 
2011
 
2010
Operating Revenues
 
 
 
 
 
 
 
Total operating revenues
$
2,278

 
$
2,133

 
$
4,273

 
$
4,348

Operating Costs and Expenses
 
 
 
 
 
 
 
Cost of operations
1,608

 
1,329

 
2,932

 
2,968

Depreciation and amortization
222

 
208

 
427

 
410

Selling, general and administrative
167

 
139

 
310

 
269

Development costs
12

 
13

 
21

 
22

Total operating costs and expenses
2,009

 
1,689

 
3,690

 
3,669

Gain on sale of assets

 

 

 
23

Operating Income
269

 
444

 
583

 
702

Other Income/(Expense)
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
12

 
11

 
10

 
25

Impairment charge on investment
(11
)
 

 
(492
)
 

Other income, net
3

 
19

 
8

 
23

Loss on debt extinguishment
(115
)
 

 
(143
)
 

Interest expense
(167
)
 
(147
)
 
(340
)
 
(300
)
Total other expense
(278
)
 
(117
)
 
(957
)
 
(252
)
(Loss)/Income Before Income Taxes
(9
)
 
327

 
(374
)
 
450

Income tax (benefit)/expense
(630
)
 
117

 
(735
)
 
182

Net Income
621

 
210

 
361

 
268

Less: Net loss attributable to noncontrolling interest

 
(1
)
 

 
(1
)
Net Income Attributable to NRG Energy, Inc.
621

 
211

 
361

 
269

Dividends for preferred shares
3

 
3

 
5

 
5

Income Available for Common Stockholders
$
618

 
$
208

 
$
356

 
$
264

Earnings Per Share Attributable to NRG Energy, Inc. Common Stockholders
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — basic
243

 
255

 
245

 
254

Net income per weighted average common share — basic
$
2.54

 
$
0.82

 
$
1.45

 
$
1.04

Weighted average number of common shares outstanding — diluted
244

 
256

 
247

 
256

Net income per weighted average common share — diluted
$
2.53

 
$
0.81

 
$
1.44

 
$
1.03


See notes to condensed consolidated financial statements.



7



NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2011
 
December 31, 2010
(In millions, except shares)
(unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,939

 
$
2,951

Funds deposited by counterparties
260

 
408

Restricted cash
145

 
8

Accounts receivable — trade, less allowance for doubtful accounts of $18 and $25
1,008

 
734

Inventory
386

 
453

Derivative instruments valuation
1,749

 
1,964

Cash collateral paid in support of energy risk management activities
254

 
323

Prepayments and other current assets
298

 
296

Total current assets
6,039

 
7,137

Property, plant and equipment, net of accumulated depreciation of $4,170 and $3,796
12,283

 
12,517

Other Assets
 
 
 
Equity investments in affiliates
549

 
536

Note receivable — affiliate and capital leases, less current portion
419

 
384

Goodwill
1,863

 
1,868

Intangible assets, net of accumulated amortization of $1,255 and $1,064
1,589

 
1,776

Nuclear decommissioning trust fund
433

 
412

Derivative instruments valuation
586

 
758

Restricted cash supporting Funded Letter of Credit Facility
1,301

 
1,300

Other non-current assets
274

 
208

Total other assets
7,014

 
7,242

Total Assets
$
25,336

 
$
26,896

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt and capital leases
$
90

 
$
463

Accounts payable
842

 
783

Derivative instruments valuation
1,319

 
1,685

Deferred income taxes
101

 
108

Cash collateral received in support of energy risk management activities
260

 
408

Accrued expenses and other current liabilities
493

 
773

Total current liabilities
3,105

 
4,220

Other Liabilities
 
 
 
Long-term debt and capital leases
8,910

 
8,748

Funded letter of credit
1,300

 
1,300

Nuclear decommissioning reserve
326

 
317

Nuclear decommissioning trust liability
278

 
272

Deferred income taxes
1,709

 
1,989

Derivative instruments valuation
333

 
365

Out-of-market contracts
201

 
223

Other non-current liabilities
598

 
1,142

Total non-current liabilities
13,655

 
14,356

Total Liabilities
16,760

 
18,576

3.625% convertible perpetual preferred stock (at liquidation value, net of issuance costs)
248

 
248

Commitments and Contingencies


 


Stockholders’ Equity
 
 
 
Common stock
3

 
3

Additional paid-in capital
5,339

 
5,323

Retained earnings
4,156

 
3,800

Less treasury stock, at cost — 62,972,529 and 56,808,672 shares, respectively
(1,633
)
 
(1,503
)
Accumulated other comprehensive income
305

 
432

Noncontrolling interest
158

 
17

Total Stockholders’ Equity
8,328

 
8,072

Total Liabilities and Stockholders’ Equity
$
25,336

 
$
26,896


See notes to condensed consolidated financial statements.


8




NRG ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
Six months ended June 30,
2011
 
2010
Cash Flows from Operating Activities
 
 
 
Net income
$
361

 
$
268

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Distributions and equity in earnings of unconsolidated affiliates

 
(9
)
Depreciation and amortization
427

 
410

Provision for bad debts
20

 
22

Amortization of nuclear fuel
20

 
19

Amortization of financing costs and debt discount/premiums
16

 
15

Loss on debt extinguishment
26

 

Amortization of intangibles and out-of-market contracts
92

 
1

Changes in deferred income taxes and liability for uncertain tax benefits
(748
)
 
179

Changes in nuclear decommissioning trust liability
13

 
9

Changes in derivatives
(166
)
 
(55
)
Changes in collateral deposits supporting energy risk management activities
69

 
(30
)
Impairment charge on investment
481

 

Cash used by changes in other working capital
(302
)
 
(224
)
Net Cash Provided by Operating Activities
309

 
605

Cash Flows from Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
(68
)
 
(141
)
Capital expenditures
(839
)
 
(330
)
Increase in restricted cash, net
(42
)
 
(11
)
Increase in restricted cash to support equity requirements for U.S. DOE funded projects
(70
)
 

Decrease in notes receivable
20

 
15

Purchases of emission allowances
(17
)
 
(45
)
Proceeds from sale of emission allowances
4

 
11

Investments in nuclear decommissioning trust fund securities
(165
)
 
(76
)
Proceeds from sales of nuclear decommissioning trust fund securities
152

 
67

Proceeds from renewable energy grants

 
102

Proceeds from sale of assets
13

 
30

Investments in unconsolidated affiliates
(15
)
 

Other
(32
)
 
(7
)
Net Cash Used by Investing Activities
(1,059
)
 
(385
)
Cash Flows from Financing Activities
 
 
 
Payment of dividends to preferred stockholders
(5
)
 
(5
)
Payment for treasury stock
(130
)
 
(50
)
Net (payments for)/receipts from settlement of acquired derivatives that include financing elements
(46
)
 
27

Installment proceeds from sale of noncontrolling interest in subsidiary

 
50

Proceeds from issuance of long-term debt
3,798

 
141

Proceeds from issuance of term loan for Funded Letter of Credit Facility

 
1,300

Increase in restricted cash supporting funded letter of credit
(1
)
 
(1,300
)
Proceeds from issuance of common stock
1

 
2

Payment of debt issuance costs
(52
)
 
(53
)
Payments for short and long-term debt
(3,833
)
 
(459
)
Net Cash Used by Financing Activities
(268
)
 
(347
)
Effect of exchange rate changes on cash and cash equivalents
6

 
(9
)
Net Decrease in Cash and Cash Equivalents
(1,012
)
 
(136
)
Cash and Cash Equivalents at Beginning of Period
2,951

 
2,304

Cash and Cash Equivalents at End of Period
$
1,939

 
$
2,168


See notes to condensed consolidated financial statements.


9



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 an integrated wholesale power generation and retail electricity company with a significant presence in major competitive power markets in the United States. NRG is engaged in: the ownership, development, construction and operation of power generation facilities; the transacting in and trading of fuel and transportation services; the trading of energy, capacity and related products in the United States and select international markets; and the supply of electricity, energy services, and cleaner energy products to retail electricity customers in deregulated markets through its retail subsidiaries Reliant Energy and Green Mountain Energy Company, or Green Mountain Energy.

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 financial statements in its Annual Report on Form 10-K for the year ended December 31, 2010, or 2010 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 June 30, 2011, the results of operations for the three and six months ended June 30, 2011, and 2010, and cash flows for the six months ended June 30, 2011, and 2010.

Use of Estimates

The preparation of consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during the reporting period. Actual results could be different from these estimates.


Note 2Other Cash Flow Information

NRG’s investing activities exclude capital expenditures of $204 million which were accrued and unpaid at June 30, 2011.

10




Note 3Comprehensive Income
The following table summarizes the components of the Company's comprehensive income, net of tax:
 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
2011
 
2010
 
2011
 
2010
Net Income attributable to NRG Energy, Inc.
$
621

 
$
211

 
$
361

 
$
269

Changes in derivative activity
(67
)
 
(154
)
 
(149
)
 
103

Foreign currency translation adjustment
10

 
(36
)
 
22

 
(42
)
Unrealized loss on available-for-sale securities
(1
)
 
(1
)
 

 
(1
)
Other comprehensive (loss)/income
(58
)
 
(191
)
 
(127
)
 
60

Comprehensive income attributable to NRG Energy, Inc.
$
563

 
$
20

 
$
234

 
$
329

The following table summarizes the changes in the Company’s accumulated other comprehensive income, or OCI, net of tax:
(In millions)
 
Accumulated other comprehensive income as of December 31, 2010
$
432

Changes in derivative activity
(149
)
Foreign currency translation adjustment
22

Accumulated other comprehensive income as of June 30, 2011
$
305



Note 4Business Acquisitions and Disposition

2011 Acquisitions

Ivanpah On April 5, 2011, NRG acquired a 50.1% stake in the 392 MW Ivanpah Solar Electric Generation System, or Ivanpah, from BrightSource Energy, Inc., or BSE, for cash consideration of $68 million. In addition, NRG committed to contribute up to an additional $232 million into Ivanpah, against which it paid $7 million for debt issuance costs and posted $192 million of collateral, which included $70 million in cash and $122 million in a letter of credit. The Company may increase its letter of credit to replace the cash collateral at its discretion. The Company has recorded the $70 million of cash collateral as restricted cash on the consolidated balance sheet as of June 30, 2011. In addition to the cash collateral of $70 million, Ivanpah had approximately $52 million of restricted cash as of June 30, 2011, which primarily represented cash collateral for its various agreements.

Ivanpah is composed of three separate facilities - Ivanpah 1 (126 MW), Ivanpah 2 (133 MW) and Ivanpah 3 (133 MW), all of which are expected to be fully operational by the end of 2013. Ivanpah has received project financing of $1.6 billion from the Federal Financing Bank, or FFB, under a credit agreement, or the Ivanpah Credit Agreement, which is guaranteed by the United States Department of Energy, or U.S. DOE. As of June 30, 2011, approximately $474 million of borrowings were outstanding under the Ivanpah Credit Agreement. The terms of the borrowings are described further in Note 9, Long-Term Debt. Power generated from Ivanpah will be sold to Southern California Edison and Pacific Gas and Electric, under multiple 20 to 25 year Power Purchase Agreements, or PPAs.

The acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification, or ASC, 805, Business Combinations, 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 $492 million, restricted cash of $25 million, other current assets of $29 million, other non-current assets of $7 million, accrued expenses of $327 million, $4 million of debt and accrued interest and a non-controlling interest of $154 million. The non-controlling interest represents the fair value of the capital contributions from the minority investors in Ivanpah. The provisional amounts recognized are subject to revision until evaluations are completed and to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. The provisional fair value of the property, plant and equipment at the acquisition date was 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, Fair Value Measurement. The fair value of the property, plant and equipment was valued using a cost approach, which estimates value by determining the current cost of replacing the asset with another equivalent economic utility.
  


11



2010 Acquisitions

The Company made several acquisitions in 2010, which were recorded as business combinations under ASC 805. Those acquisitions for which purchase accounting was not finalized as of December 31, 2010 are briefly summarized below. See Note 3, Business Acquisitions and Note 12, Debt and Capital Leases, in the Company's 2010 Form 10-K for additional information related to these acquisitions.

Green Mountain Energy On November 5, 2010, NRG acquired Green Mountain Energy for $357 million in cash, net of $75 million cash acquired, funded from cash on hand. The identifiable assets acquired and liabilities assumed were provisionally recorded at their estimated fair values on the acquisition date, and are subject to revision until the evaluations are completed and 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 acquisition-date fair value of goodwill.

Cottonwood On November 15, 2010, NRG acquired the Cottonwood Generating Station, or Cottonwood, a 1,265 MW combined cycle natural gas plant in the Entergy zone of east Texas for $507 million in cash, funded from cash on hand. The purchase price was primarily allocated to fixed assets acquired, which were recorded at provisional fair value on the acquisition date. The accounting for Cottonwood was considered complete as of March 31, 2011, at which point the provisional fair values became final.

2010 Disposition

Padoma On January 11, 2010, NRG sold its terrestrial wind development company, Padoma Wind Power LLC, or Padoma, to Enel North America, Inc. NRG recognized a gain on the sale of Padoma of $23 million, which was recorded as a component of operating income in the statement of operations during the six months ended June 30, 2010.

12





Note 5Nuclear Innovation North America LLC Developments, Including Impairment Charge

Nuclear Innovation North America LLC, or NINA, which is majority-owned by NRG, was established in May 2008 to focus on marketing, siting, developing, financing and investing in new advanced design nuclear projects in select markets across North America, including the planned South Texas Project Units 3 and 4, or STP 3 & 4, Project. Toshiba America Nuclear Energy Corporation, or TANE, a wholly-owned subsidiary of Toshiba Corporation, is the minority owner of NINA. NINA is a bankruptcy remote entity under NRG's corporate structure and designated as an Excluded Project Subsidiary under NRG's Senior Credit Facility and senior unsecured notes, which require that NRG not be obligated to contribute any capital to service NINA's debt or fund the repayment of any NINA debt in the event of a default. Furthermore, NRG is not required to continue the funding of NINA and any capital provided to NINA by any other equity partner could result in the dilution of NRG's equity interest.

On March 11, 2011, Japan was hit by a devastating earthquake and tsunami which, in turn, triggered a nuclear incident at the Fukushima Daiichi Nuclear Power Station owned by The Tokyo Electric Power Company of Japan, Inc., or TEPCO. The nuclear incident in Japan introduced multiple and substantial uncertainties around new nuclear development in the United States and the availability of debt and equity financing to NINA. Consequently, NINA announced, on March 21, 2011, that it was reducing the scope of development at the STP 3 & 4 expansion to allow time for the U.S. Nuclear Regulatory Commission, or NRC, and other nuclear stakeholders to assess the impacts from the events in Japan. NINA suspended indefinitely all detailed engineering work and other pre-construction activities and, as a result, dramatically reduced the project workforce. The decision to reduce the scope of activities was made jointly by NINA, NRG and Toshiba. Further, on April 19, 2011, NRG announced that, while it will cooperate with and support its current partners and any prospective future partners in attempting to develop STP 3 & 4 successfully, NRG was withdrawing from further financial participation in NINA's development of STP 3 & 4. NINA, going forward, will be focused solely on securing a combined operating license from the NRC and on obtaining the loan guarantee from the U.S. DOE, two items that are essential to the success of any future project development. TANE agreed, for the time being, to assume responsibility for NINA's ongoing costs associated with continuation of the licensing process. In concurrence with the substantial reduction in NINA's project workforce, and to support NINA's reduced scope of work, NRG has contributed approximately $11 million to NINA in the second quarter of 2011, and expects to incur additional one-time costs, related to contributions to NINA, of up to $9 million, bringing these total expected costs to $20 million. These contributions are expensed as incurred to "Impairment charge on investment."

Due to the events described above, NRG evaluated its investment in NINA for impairment. As part of this process, NRG evaluated the contractual rights and economic interests held by the various stakeholders in NINA, and concluded that while it continues to hold majority legal ownership, NRG ceased to have a controlling financial interest in NINA at the end of the first quarter of 2011. Consequently, NRG deconsolidated NINA as of March 31, 2011, in accordance with ASC-810, Consolidation, or ASC 810. This resulted in the removal of the following amounts from NRG's consolidated balance sheet: $930 million of construction in progress; $154 million of accounts payable and accrued expenses; $297 million of long-term debt; $17 million of non-controlling interest; and $19 million of other assets and liabilities. Furthermore, NRG assessed the impact of the diminished prospects for the STP 3 & 4 project on the fair value of NINA's assets relative to NINA's existing liabilities as well as NINA's potential contingent liabilities. Based on this assessment, the Company concluded it was remote that NRG would recover any portion of the carrying amount of its equity investment in NINA and, consequently, recorded an impairment charge of $492 million for the six months ended Six months ended June 30, 2011, for the full amount of its investment, including $481 million as of March 31, 2011, and $11 million from the 2011 second quarter. This impairment charge included net assets contributed from all of NINA's equity investors, both NRG and TANE, which the Company previously consolidated.

As part of a March 1, 2010, settlement of litigation with CPS Energy, or CPS, NRG had agreed to pay $80 million to CPS, subject to the U.S. DOE's approval of a fully executed term sheet for a conditional U.S. DOE loan guarantee for STP 3 & 4. NRG also had agreed to donate an additional $10 million, unconditionally, over four years in annual payments of $2.5 million to the Residential Energy Assistance Partnership, or REAP, in San Antonio. Payments of $5 million were made to REAP through March 31, 2011. As a result of the events stemming from the nuclear incident in Japan, the Company no longer believes it probable that the conditional U.S. DOE loan guarantee will be received or accepted. Therefore, as of March 31, 2011, the Company reversed the $80 million contingent liability to CPS previously recorded within other current liabilities, along with the $80 million of associated amounts capitalized to construction in progress within property, plant and equipment. At June 30, 2011, $5 million in liabilities remains on the condensed consolidated balance sheet for the obligations to REAP.

13






Note 6Fair Value of Financial Instruments
The estimated carrying values and fair values of NRG's recorded financial instruments are as follows:
 
Carrying Amount
 
Fair Value
 
June 30, 2011
 
December 31, 2010
 
June 30, 2011
 
December 31, 2010
 
(In millions)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,939

 
$
2,951

 
$
1,939

 
$
2,951

Funds deposited by counterparties
260

 
408

 
260

 
408

Restricted cash
145

 
8

 
145

 
8

Cash collateral paid in support of energy risk management activities
254

 
323

 
254

 
323

Investment in available-for-sale securities (classified within other non-current assets):
 
 
 
 
 
 
 
Debt securities
9

 
8

 
9

 
8

Marketable equity securities
2

 
3

 
2

 
3

Trust fund investments
435

 
414

 
435

 
414

Notes receivable
203

 
177

 
214

 
190

Derivative assets
2,335

 
2,722

 
2,335

 
2,722

Restricted cash supporting funded Letter of Credit Facility
1,301

 
1,300

 
1,301

 
1,300

Liabilities:
 
 
 
 
 
 
 
Long-term debt, including current portion
8,886

 
9,104

 
8,950

 
9,236

Funded letter of credit
1,300

 
1,300

 
1,300

 
1,295

Cash collateral received in support of energy risk management activities
260

 
408

 
260

 
408

Derivative liabilities
$
1,652

 
$
2,050

 
$
1,652

 
$
2,050


14




Recurring Fair Value Measurements

The following table presents 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:

(In millions)
Fair Value
As of June 30, 2011
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
1,939

 
$

 
$

 
$
1,939

Funds deposited by counterparties
260

 

 

 
260

Restricted cash
145

 

 

 
145

Cash collateral paid in support of energy risk management activities
254

 

 

 
254

Investment in available-for-sale securities (classified within other non-current assets):
 
 
 
 
 
 
 
Debt securities

 

 
9

 
9

Marketable equity securities
2

 

 

 
2

Trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
2

 

 

 
2

U.S. government and federal agency obligations
37

 

 

 
37

Federal agency mortgage-backed securities

 
60

 

 
60

Commercial mortgage-backed securities

 
11

 

 
11

Corporate debt securities

 
53

 

 
53

Marketable equity securities
226

 

 
41

 
267

Foreign government fixed income securities

 
5

 

 
5

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
700

 
1,548

 
87

 
2,335

Restricted cash supporting Funded Letter of Credit Facility
1,301

 

 

 
1,301

Total assets
$
4,866

 
$
1,677

 
$
137

 
$
6,680

Cash collateral received in support of energy risk management activities
$
260

 
$

 
$

 
$
260

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
707

 
758

 
113

 
1,578

Interest rate contracts

 
74

 

 
74

Total liabilities
$
967

 
$
832

 
$
113

 
$
1,912




15



(In millions)
Fair Value
As of December 31, 2010
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
2,951

 
$

 
$

 
$
2,951

Funds deposited by counterparties
408

 

 

 
408

Restricted cash
8

 

 

 
8

Cash collateral paid in support of energy risk management activities
323

 

 

 
323

Investment in available-for-sale securities (classified within other
non-current assets):
 
 
 
 
 
 
 
Debt securities

 

 
8

 
8

Marketable equity securities
3

 

 

 
3

Trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
9

 

 

 
9

U.S. government and federal agency obligations
27

 

 

 
27

Federal agency mortgage-backed securities

 
57

 

 
57

Commercial mortgage-backed securities

 
11

 

 
11

Corporate debt securities

 
56

 

 
56

Marketable equity securities
213

 

 
39

 
252

Foreign government fixed income securities

 
2

 

 
2

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
652

 
2,046

 
24

 
2,722

Restricted cash supporting Funded Letter of Credit Facility
1,300

 

 

 
1,300

Total assets
$
5,894

 
$
2,172

 
$
71

 
$
8,137

Cash collateral received in support of energy risk management activities
$
408

 
$

 
$

 
$
408

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
660

 
1,251

 
51

 
1,962

Interest rate contracts

 
88

 

 
88

Total liabilities
$
1,068

 
$
1,339

 
$
51

 
$
2,458



16




There were no transfers during the three months and six months ended June 30, 2011, and 2010, between Levels 1 and 2. The following tables reconcile, for the three months and six months ended June 30, 2011, and 2010, 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 June 30, 2011
 
Six months ended June 30, 2011
 
Debt Securities
 
Trust Fund Investments
 
 
 
 
 
Debt Securities
 
Trust Fund Investments
 
 
 
 
(In millions)
Derivatives(a)
 
Total
 
 
Derivatives(a)
 
Total
Beginning Balance
$
9

 
$
40

 
$
(11
)
 
$
38

 
$
8

 
$
39

 
$
(27
)
 
$
20

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

 

 
10

 
10

 

 

 
19

 
19

Included in OCI

 

 

 

 
1

 

 

 
1

Included in nuclear decommissioning obligations

 

 

 

 

 
1

 

 
1

Purchases

 
1

 
5

 
6

 

 
1

 
8

 
9

Transfers into Level 3 (b)

 

 
(12
)
 
(12
)
 

 

 
(30
)
 
(30
)
Transfers out of Level 3 (b)

 

 
(18
)
 
(18
)
 

 

 
4

 
4

Ending balance as of June 30, 2011
$
9

 
$
41

 
$
(26
)
 
$
24

 
$
9

 
$
41

 
$
(26
)
 
$
24

The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of June 30, 2011
$

 
$

 
$
5

 
$
5

 
$

 
$

 
$
7

 
$
7


 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Three months ended June 30, 2010
 
Six months ended June 30, 2010
 
Debt Securities
 
Trust Fund Investments
 
 
 
 
 
Debt Securities
 
Trust Fund Investments
 
 
 
 
(In millions)
Derivatives(a)
 
Total
 
 
Derivatives(a)
 
Total
Beginning Balance
$
9

 
$
37

 
$
(25
)
 
$
21

 
$
9

 
$
37

 
$
(13
)
 
$
33

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

 

 
(63
)
 
(63
)
 

 

 
(31
)
 
(31
)
Included in OCI
1

 

 

 
1

 
1

 

 

 
1

Included in nuclear decommissioning obligations

 
(5
)
 

 
(5
)
 

 
(5
)
 

 
(5
)
Purchases

 

 
8

 
8

 

 

 
9

 
9

Transfers into Level 3 (b)

 

 
15

 
15

 

 

 
(47
)
 
(47
)
Transfers out of Level 3 (b)

 

 
(11
)
 
(11
)
 

 

 
6

 
6

Ending balance as of June 30, 2010
$
10

 
$
32

 
$
(76
)
 
$
(34
)
 
$
10

 
$
32

 
$
(76
)
 
$
(34
)
The amount of the total gains for the period included in earnings attributable to the change in unrealized gains relating to assets still held as of June 30, 2010
$

 
$

 
$
(61
)
 
$
(61
)
 
$

 
$

 
$
(36
)
 
$
(36
)
(a)
Consists of derivative assets and liabilities, net.
(b)
Transfers into/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period. All transfers into/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.

In determining the fair value of NRG's Level 2 and 3 derivative contracts, NRG applies a credit reserve to reflect credit risk which is calculated based on credit default swaps. As of June 30, 2011, the credit reserve resulted in a $2 million decrease in fair value which is composed of a $2 million loss in operating revenue and cost of operations. As of June 30, 2010, the credit reserve resulted in an $11 million decrease in fair value which is composed of a $6 million loss in OCI and a $5 million loss in operating revenue and cost of operations.

17




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 2010 Form 10-K, the following item 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.

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 June 30, 2011, counterparty credit exposure to a significant portion of the Company's counterparties was $1.3 billion and NRG held collateral (cash and letters of credit) against those positions of $250 million, resulting in a net exposure of $1.1 billion. Counterparty credit exposure is discounted at the risk free rate. The following tables highlight the counterparty credit quality and the net counterparty credit exposure by industry sector. 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
53
%
Utilities, energy merchants, marketers and other
38

Coal and emissions
4

ISOs
5

Total as of June 30, 2011
100
%

 
Net Exposure (a)
Category
(% of Total)
Investment grade
73
%
Non-Investment grade
3

Non-rated (b)
24

Total as of June 30, 2011
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 was $251 million. Approximately 77% of NRG's positions relating to this credit risk roll-off by the end of 2012. 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.

18




Counterparty credit exposure described above excludes credit risk exposure under certain long term agreements, including California tolling agreements, South Central load obligations and a coal supply agreement. 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 June 30, 2011, credit risk exposure to these counterparties is approximately $700 million for the next five years. This amount excludes potential credit exposure 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. In the case of the coal supply agreement, NRG holds a lien against the underlying asset. These factors significantly reduce the risk of loss.

Retail Customer Credit Risk

NRG is exposed to credit risk through the Company's competitive electricity supply business, which serves retail customers. Retail credit risk results when a customer fails to pay for 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 June 30, 2011, the Company's retail customer credit exposure to C&I customers was diversified across many customers and various industries, with a significant portion of the exposure residing at government entities.

NRG is also exposed to retail customer credit risk relating to its Mass customers, which may result in a write-off of bad debt. During 2011, the Company continued to experience improved customer payment behavior, but current economic conditions may affect the ability of the Company's customers to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in bad debt expense.

This footnote should be read in conjunction with the complete description under Note 5, Fair Value of Financial Instruments, to the Company's 2010 Form 10-K.



19



Note 7Nuclear Decommissioning Trust Fund

NRG's nuclear decommissioning trust fund assets, which are for its portion of the decommissioning of the South Texas Project, or STP 1 & 2 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. Since the Company is in compliance with PUCT rules and regulations regarding decommissioning trusts and the cost of decommissioning is the responsibility of the Texas ratepayers, not NRG, all realized and unrealized gains or losses (including other-than-temporary impairments) related to the Nuclear Decommissioning Trust Fund are recorded to the Nuclear Decommissioning Trust Liability to the ratepayers 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. The cost of securities sold is determined on the specific identification method.
 
As of June 30, 2011
 
As of December 31, 2010
(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

 
$

 
$

 

 
$
9

 
$

 
$

 

U.S. government and federal agency obligations
35

 
1

 

 
10

 
25

 
1

 

 
9

Federal agency mortgage-backed securities
60

 
3

 

 
23

 
57

 
2

 

 
24

Commercial mortgage-backed securities
11

 

 

 
29

 
11

 

 

 
29

Corporate debt securities
53

 
2

 
1

 
11

 
56

 
3

 
1

 
10

Marketable equity securities
267

 
130

 
1

 

 
252

 
117

 
1

 

Foreign government fixed income securities
5

 

 

 
6

 
2

 

 

 
8

Total
$
433

 
$
136

 
$
2

 
 
 
$
412

 
$
123

 
$
2

 
 

The following tables summarize 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.
 
Six months ended June 30,
(In millions)
2011
 
2010
Realized gains
$
3

 
$
2

Realized losses
3

 
2

Proceeds from sale of securities
152

 
67




20




Note 8Accounting for Derivative Instruments and Hedging Activities

This footnote should be read in conjunction with the complete description under Note 6, Accounting for Derivative Instruments and Hedging Activities, to the Company's 2010 Form 10-K.

Energy-Related Commodities

As of June 30, 2011, NRG had energy-related derivative financial instruments extending through December 2013, 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 June 30, 2011, NRG had interest rate derivative instruments on recourse debt extending through 2013 and on non-recourse debt extending through 2029, 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 June 30, 2011 and December 31, 2010. 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
 
 
June 30, 2011
December 31, 2010
Commodity
Units
(In millions)
Emissions
Short Ton
(2
)

Coal
Short Ton
35

34

Natural Gas
MMBtu
(64
)
(175
)
Oil
Barrel

1

Power
MWh
10

5

Capacity
MW/Day

(1
)
Interest
Dollars
$
1,266

$
2,782


21




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
(In millions)
June 30, 2011
 
December 31, 2010
 
June 30, 2011
 
December 31,
2010
Derivatives Designated as Cash Flow or Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate contracts current
$

 
$

 
$

 
$
17

Interest rate contracts long-term

 

 
74

 
71

Commodity contracts current
329

 
392

 
2

 
2

Commodity contracts long-term
116

 
217

 

 

Total Derivatives Designated as Cash Flow or Fair Value Hedges
445

 
609

 
76

 
90

Derivatives Not Designated as Cash Flow or Fair Value Hedges:
 
 
 
 
 
 
 
Commodity contracts current
1,420

 
1,572

 
1,317

 
1,666

Commodity contracts long-term
470

 
541

 
259

 
294

Total Derivatives Not Designated as Cash Flow or
Fair Value Hedges
1,890

 
2,113

 
1,576

 
1,960

Total Derivatives
$
2,335

 
$
2,722

 
$
1,652

 
$
2,050


Accumulated Other Comprehensive Income

The following table summarizes the effects of ASC 815 on NRG’s accumulated OCI balance attributable to cash flow hedge derivatives, net of tax:

 
Three months ended June 30, 2011
 
Six months ended June 30, 2011
(In millions)
Energy Commodities
 
Interest Rate
 
Total
 
Energy Commodities
 
Interest Rate
 
Total
Accumulated OCI beginning balance
$
392

 
$
(33
)
 
$
359

 
$
488

 
$
(47
)
 
$
441

Reclassified from accumulated OCI to income:
 
 
 
 
 
 
 
 
 
 
 
- Due to realization of previously deferred amounts
(92
)
 

 
(92
)
 
(190
)
 
11

 
(179
)
Mark-to-market of cash flow hedge accounting contracts
32

 
(7
)
 
25

 
34

 
(4
)
 
30

Accumulated OCI ending balance, net of $181 tax
$
332

 
$
(40
)
 
$
292

 
$
332

 
$
(40
)
 
$
292

Gains/(losses) expected to be realized from OCI during the next 12 months, net of $134 tax
$
230

 
$
(2
)
 
$
228

 
$
230

 
$
(2
)
 
$
228

Gains/(losses) recognized in income from the ineffective portion of cash flow hedges
$
(4
)
 
$
4

 
$

 
$
(1
)
 
$
3

 
$
2



22



 
Three months ended June 30, 2010
 
Six months ended June 30, 2010
(In millions)
Energy Commodities
 
Interest Rate
 
Total
 
Energy Commodities
 
Interest Rate
 
Total
Accumulated OCI beginning balance
$
719

 
$
(56
)
 
$
663

 
$
461

 
$
(55
)
 
$
406

Reclassified from accumulated OCI to income:
 
 
 
 
 
 
 
 
 
 
 
- Due to realization of previously deferred amounts
(128
)
 
(2
)
 
(130
)
 
(234
)
 

 
(234
)
Mark-to-market of cash flow hedge accounting contracts
(16
)
 
(8
)
 
(24
)
 
348

 
(11
)
 
337

Accumulated OCI balance ending balance, net of $308 tax
$
575

 
$
(66
)
 
$
509

 
$
575

 
$
(66
)
 
$
509

Gains/(losses) expected to be realized from OCI during the next 12 months, net of $186 tax
$
348

 
$
(32
)
 
$
316

 
$
348

 
$
(32
)
 
$
316

(Losses)/gains recognized in income from the ineffective portion of cash flow hedges
$
(12
)
 
$
2

 
$
(10
)
 
$
(14
)
 
$
2

 
$
(12
)

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.

The following table summarizes the amount of gain/(loss) resulting from fair value hedges reflected in interest income/(expense) for interest rate contracts:

 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
2011
 
2010
 
2011
 
2010
Derivative
$

 
$

 
$

 
$
3

Senior Notes (hedged item)

 

 

 
(3
)

23




Impact of Derivative Instruments on the Statement of Operations

In accordance with ASC 815, unrealized gains and losses associated with changes in the fair value of derivative instruments not accounted for as cash flow hedge derivatives and ineffectiveness of hedge derivatives are reflected in current period earnings.

The following table summarizes the pre-tax effects of economic hedges that did not qualify for cash flow hedge accounting, ineffectiveness on cash flow hedges, and trading activity on NRG's statement of operations. These gains are included within operating revenues and cost of operations.
 
Three months ended June 30,
 
Six months ended June 30,
(In millions)
2011
 
2010
 
2011
 
2010
Unrealized mark-to-market results
 
 
 
 
 
 
 
Reversal of previously recognized unrealized losses/(gains) on settled positions related to economic hedges
$
24

 
$
(51
)
 
22

 
$
(91
)
Reversal of loss positions acquired as part of the Reliant Energy acquisition as of May 1, 2009
19

 
60

 
47

 
150

Reversal of loss positions acquired as part of the Green Mountain Energy acquisition as of November 5, 2010
11

 

 
24

 

Net unrealized (losses)/gains on open positions related to economic hedges
(7
)
 
48

 
84

 
(70
)
Loss on ineffectiveness associated with open positions treated as
cash flow hedges
(4
)
 
(12
)
 
(1
)
 
(14
)
Total unrealized mark-to-market gains/(losses) for economic
hedging activities
43

 
45

 
176

 
(25
)
Reversal of previously recognized unrealized losses on settled positions related to trading activity

 
8

 
14

 
26

Net unrealized gains on open positions related to trading activity
22

 
9

 
22

 
23

Total unrealized mark-to-market for trading activity
22

 
17

 
36

 
49