NRG(NRG) - 2023 Q3 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Information Overview of Forward-Looking Statements and Risks Identifies forward-looking statements in the 10-Q report and lists risks that could cause actual results to differ from projections - Forward-looking statements are identified by words such as "believes," "projects," "anticipates," "plans," "expects," "intends," "estimates," "should," and "forecasts"[10] - Key risks include business uncertainties related to integrating Vivint Smart Home, maintaining retail market share, general economic conditions, changes in wholesale power/gas markets, fuel cost fluctuations, regulatory changes, and cybersecurity risks[11] - NRG undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws[12] Glossary of Terms Definitions of Key Terms and Abbreviations Provides definitions for technical terms and abbreviations, ensuring consistent understanding of industry and company-specific language - The glossary defines critical terms such as Adjusted EBITDA, ERCOT, GAAP, ISO, MWh, PJM, and various debt instruments, which are essential for understanding the financial and operational context of the report[14][15][16] Part I — Financial Information Item 1 — Condensed Consolidated Financial Statements and Notes Presents unaudited condensed consolidated financial statements and notes, detailing business, accounting policies, revenue, acquisitions, and disclosures Condensed Consolidated Statements of Operations Q3 2023 net income rose to $343 million despite lower revenue; nine months saw a $684 million net loss due to increased costs Three Months Ended September 30 (in millions) | Metric | 2023 | 2022 | Change | | :----------------------------------- | :----- | :----- | :----- | | Revenue | $7,946 | $8,510 | $(564) | | Total operating costs and expenses | $7,385 | $8,376 | $(991) | | Operating Income/(Loss) | $561 | $156 | $405 | | Income/(Loss) Before Income Taxes | $408 | $83 | $325 | | Net Income/(Loss) | $343 | $67 | $276 | | Income/(Loss) per Weighted Average Common Share — Basic | $1.42 | $0.29 | $1.13 | Nine Months Ended September 30 (in millions) | Metric | 2023 | 2022 | Change | | :----------------------------------- | :----- | :----- | :----- | | Revenue | $22,016 | $23,688 | $(1,672) | | Total operating costs and expenses | $22,671 | $20,404 | $2,267 | | Operating Income/(Loss) | $(453) | $3,335 | $(3,788) | | Income/(Loss) Before Income Taxes | $(866) | $3,055 | $(3,921) | | Net Income/(Loss) | $(684) | $2,316 | $(3,000) | | Income/(Loss) per Weighted Average Common Share — Basic | $(3.14) | $9.73 | $(12.87) | Condensed Consolidated Statements of Comprehensive Income/(Loss) Q3 2023 comprehensive income increased to $336 million; nine months reported a $684 million comprehensive loss Comprehensive Income/(Loss) (in millions) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income/(Loss) | $343 | $67 | $(684) | $2,316 | | Other Comprehensive (Loss)/Income | $(7) | $(34) | $0 | $(28) | | Comprehensive Income/(Loss) | $336 | $33 | $(684) | $2,288 | Condensed Consolidated Balance Sheets Total assets decreased to $27,910 million by September 30, 2023, primarily from reduced current assets; liabilities also declined Condensed Consolidated Balance Sheets (in millions) | Metric | September 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :----------------- | :------------------ | :----- | | Total current assets | $9,468 | $16,231 | $(6,763) | | Goodwill | $5,143 | $1,650 | $3,493 | | Customer relationships, net | $2,299 | $943 | $1,356 | | Total Assets | $27,910 | $29,146 | $(1,236) | | Total current liabilities | $8,930 | $12,982 | $(4,052) | | Long-term debt and finance leases | $10,741 | $7,976 | $2,765 | | Total Liabilities | $24,392 | $25,318 | $(926) | | Total Stockholders' Equity | $3,518 | $3,828 | $(310) | - The significant increase in Goodwill and Customer relationships, net, is primarily due to the acquisition of Vivint Smart Home[23][49][66] Condensed Consolidated Statements of Cash Flows Operating cash flow shifted to a $462 million net use for nine months 2023; investing activities increased cash used for acquisitions Cash Flows (in millions) | Metric | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :----- | | Cash Flows from Operating Activities | $(462) | $1,758 | $(2,220) | | Cash Flows from Investing Activities | $(2,631) | $(205) | $(2,426) | | Cash Flows from Financing Activities | $1,590 | $855 | $735 | | Net (Decrease)/Increase in Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash | $(1,503) | $2,403 | $(3,906) | | Cash and Cash Equivalents, Funds Deposited by Counterparties and Restricted Cash at End of Period | $675 | $3,513 | $(2,838) | - The significant increase in cash used for investing activities is primarily due to the $2,502 million payment for acquisitions of businesses and assets, net of cash acquired, in 2023[27] Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased to $3,518 million by September 30, 2023, due to net loss and dividends, offset by preferred stock Stockholders' Equity (in millions) | Metric | Balance at Dec 31, 2022 | Balance at Sep 30, 2023 | Change | | :----------------------------------- | :---------------------- | :---------------------- | :----- | | Preferred Stock | $0 | $650 | $650 | | Additional Paid-In Capital | $8,457 | $8,527 | $70 | | Retained Earnings | $1,408 | $425 | $(983) | | Treasury Stock | $(5,864) | $(5,911) | $(47) | | Total Stockholders' Equity | $3,828 | $3,518 | $(310) | - The issuance of Series A Preferred Stock contributed $650 million to preferred stock, while net loss and common stock dividends reduced retained earnings[29] Note 1 — Nature of Business and Basis of Presentation NRG is a leading energy, smart home, and services company across the U.S. and Canada, with financial statements prepared under GAAP - NRG is a leading energy, smart home, and services company with approximately 7.5 million residential consumers and 15 GW of generation as of September 30, 2023[34] - The company's business is segmented into Texas, East, West/Services/Other, Vivint Smart Home, and Corporate activities[40] Note 2 — Summary of Significant Accounting Policies Details accounting policies for Vivint Smart Home's Flex Pay plan, capitalized contract costs, credit loss provisions, and goodwill - Vivint Smart Home's Flex Pay plan treats product and service sales as a single performance obligation, recognizing revenue on a straight-line basis over the contract term, typically five years[39][40] - Capitalized contract costs, including installed products and commissions, are amortized over an expected benefit period of approximately five years[42] Allowance for Credit Losses Activity (in millions) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance | $120 | $627 | $133 | $683 | | Provision for credit losses | $85 | $52 | $165 | $103 | | Ending balance | $158 | $638 | $158 | $638 | Goodwill by Segment (in millions) | Segment | Balance as of Dec 31, 2022 | Goodwill from Vivint Smart Home Acquisition | Balance as of Sep 30, 2023 | | :-------------------- | :------------------------- | :--------------------------------- | :------------------------- | | Texas | $710 | $0 | $710 | | East | $723 | $0 | $721 | | West/Services/Other | $217 | $0 | $218 | | Vivint Smart Home | $0 | $3,494 | $3,494 | | Total | $1,650 | $3,494 | $5,143 | Note 3 — Revenue Recognition Outlines revenue recognition, especially for Vivint Smart Home's integrated products/services, and provides disaggregated revenue data - Vivint Smart Home's integrated smart home products and services are recognized as a single performance obligation over the subscriber's contract term, typically five years[52] Total Revenue by Segment (in millions) | Segment | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Texas | $3,686 | $3,145 | $8,235 | $7,857 | | East | $2,809 | $4,178 | $9,488 | $12,407 | | West/Services/Other | $978 | $1,175 | $3,244 | $3,395 | | Vivint Smart Home | $478 | $0 | $1,070 | $0 | | Total Revenue | $7,946 | $8,510 | $22,016 | $23,688 | Deferred Revenues (in millions) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :------------------ | | Deferred revenues from contracts with customers | $1,720 | $175 | - The increase in deferred revenues is primarily due to the acquisition of Vivint Smart Home[58] Note 4 — Acquisitions and Dispositions Details the $2.6 billion Vivint Smart Home acquisition, purchase price allocation, and recent dispositions of STP and Gregory facilities - NRG completed the acquisition of Vivint Smart Home on March 10, 2023, for $2.6 billion in cash, adding approximately two million subscribers and accelerating its consumer-focused growth strategy[60][61] - The acquisition was funded by $740 million in newly issued Senior Secured First Lien Notes, $635 million from newly issued Series A Preferred Stock, approximately $900 million drawn from its Revolving Credit Facility and Receivables Securitization Facilities, and cash on hand[61][65] Provisional Purchase Price Allocation for Vivint Smart Home (in millions) | Asset/Liability | Amount | | :-------------------------- | :----- | | Total Assets | $7,074 | | Goodwill | $3,494 | | Intangible assets, net | $2,770 | | Total Liabilities | $4,451 | | Vivint Smart Home Purchase Price | $2,623 | - Post-quarter-end, NRG closed the sale of its 44% equity interest in STP for $1.654 billion net proceeds (November 1, 2023) and the Gregory natural gas facility for $102 million (October 2, 2023)[76][77] Note 5 — Fair Value of Financial Instruments Provides fair value measurements for financial instruments, including debt and derivatives, detailing hierarchy and Level 3 unobservable inputs Fair Value of Long-term Debt (in millions) | Metric | September 30, 2023 (Carrying Amount) | September 30, 2023 (Fair Value) | December 31, 2022 (Carrying Amount) | December 31, 2022 (Fair Value) | | :----------------------------------- | :----------------------------------- | :------------------------------ | :----------------------------------- | :------------------------------ | | Convertible Senior Notes | $575 | $612 | $575 | $576 | | Other long-term debt | $11,137 | $10,028 | $7,523 | $6,432 | | Total long-term debt | $11,712 | $10,640 | $8,098 | $7,008 | Fair Value of Derivative Assets and Liabilities (in millions) as of September 30, 2023 | Category | Total Assets | Level 1 Assets | Level 2 Assets | Level 3 Assets | Total Liabilities | Level 1 Liabilities | Level 2 Liabilities | Level 3 Liabilities | | :----------------------------------- | :----------- | :------------- | :------------- | :------------- | :---------------- | :------------------ | :------------------ | :------------------ | | Investments in securities | $19 | $0 | $19 | $0 | N/A | N/A | N/A | N/A | | Nuclear trust fund investments | $834 | $550 | $144 | $0 | N/A | N/A | N/A | N/A | | Derivative instruments | $6,240 | $1,123 | $4,308 | $809 | $4,680 | $910 | $3,254 | $516 | - Level 3 positions, including physical and financial natural gas and power contracts in illiquid markets, FTRs, and Consumer Financing Program derivatives, are valued using discounted cash flow models with unobservable inputs like forward market prices, auction prices, collateral default rates, and credit loss rates[88][89] - As of September 30, 2023, counterparty credit exposure (excluding RTOs/ISOs/exchanges) was $1.7 billion, with $494 million held as collateral, resulting in a net exposure of $1.2 billion[92] Note 6 — Nuclear Decommissioning Trust Fund Details NRG's Nuclear Decommissioning Trust Fund assets for STP, classified as available-for-sale securities with gains/losses to liability - The Nuclear Decommissioning Trust Fund assets are for the decommissioning of NRG's 44% interest in STP and are classified as available-for-sale securities[100] - All realized and unrealized gains or losses related to the trust fund are recorded to the Nuclear Decommissioning Trust liability, not net income, consistent with regulatory treatment[100] Nuclear Decommissioning Trust Fund Securities (in millions) | Metric | Fair Value (Sep 30, 2023) | Unrealized Gains (Sep 30, 2023) | Unrealized Losses (Sep 30, 2023) | Fair Value (Dec 31, 2022) | Unrealized Gains (Dec 31, 2022) | Unrealized Losses (Dec 31, 2022) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total | $893 | $390 | $37 | $838 | $346 | $36 | Note 7 — Accounting for Derivative Instruments and Hedging Activities Describes accounting for derivative instruments, including energy, interest rate, and foreign exchange contracts, and their operational impact - NRG uses energy-related derivative instruments (extending through 2036), interest rate swaps (to hedge variable rate debt), and foreign exchange contracts (for Canadian business natural gas purchases) to manage market risks[104][105][106] - The Consumer Financing Program involves derivative liabilities for contractual future payment obligations to financing providers, adjusted to fair value through other income, net[107] Volumetric Underlying Derivative Transactions (in millions) | Category | Units | September 30, 2023 | December 31, 2022 | | :-------------------------- | :------ | :----------------- | :------------------ | | Natural Gas | MMBtu | 841 | 422 | | Power | MWh | 201 | 192 | | Consumer Financing Program | Dollars | 1,142 | 0 | | Interest | Dollars | 1,300 | 0 | Total Unrealized Mark-to-Market (Losses)/Gains - Commodities and Foreign Exchange (in millions) | Period | 2023 | 2022 | | :----------------------------------- | :----- | :----- | | Three months ended September 30 | $(54) | $(80) | | Nine months ended September 30 | $(1,909) | $2,900 | - For the nine months ended September 30, 2023, a $1.9 billion unrealized loss from open economic hedge positions was primarily due to decreases in natural gas and power prices in the East and West[116] Note 8 — Impairments Details 2022 impairment losses for Astoria redevelopment and PJM generating assets; no impairments recorded in nine months 2023 Impairment Losses (in millions) | Period | 2023 | 2022 | | :----------------------------------- | :----- | :----- | | Three months ended September 30 | $0 | $43 | | Nine months ended September 30 | $0 | $198 | - In 2022, $43 million was impaired for the Astoria redevelopment project, and $150 million was impaired for PJM generating assets and Midwest Generation goodwill due to revised market views and declining capacity prices[119][120] Note 9 — Long-term Debt and Finance Leases Details NRG's long-term debt and finance leases, significantly increased by the Vivint Smart Home acquisition and new issuances Long-term Debt and Finance Leases (in millions) | Metric | September 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :----------------- | :------------------ | :----- | | Subtotal long-term debt (including current maturities) | $11,863 | $8,100 | $3,763 | | Total long-term debt and finance leases | $10,741 | $7,976 | $2,765 | - On March 9, 2023, NRG issued $740 million of 7.000% Senior Secured First Lien Notes due 2033 to partially fund the Vivint Smart Home acquisition[123] - The Revolving Credit Facility was amended in February and March 2023, increasing commitments by $645 million and extending maturity for a portion to February 2028[125][126] - The Receivables Facility was amended in June 2023, extending its termination date to June 21, 2024, and increasing aggregate commitments from $1.0 billion to $1.4 billion[128] - The Vivint Smart Home acquisition included the retention of $2.7 billion in non-recourse debt, comprising senior secured notes, senior notes, and a senior secured term loan[141][142][143][144] Note 10 — Investments Accounted for Using the Equity Method and Variable Interest Entities, or VIEs Discusses equity method investments like Ivanpah and identifies NRG Receivables LLC as a consolidated Variable Interest Entity (VIE) - Equity method accounting for Ivanpah was suspended in 2022 due to project losses, including debt service and depreciation[148] - NRG Receivables LLC is a consolidated Variable Interest Entity (VIE) where NRG holds a controlling financial interest[149] Summarized Financial Information for Consolidated VIE (in millions) | Metric | September 30, 2023 | December 31, 2022 | | :----------------------------------- | :----------------- | :------------------ | | Accounts receivable and Other current assets | $1,796 | $2,108 | | Current liabilities | $153 | $152 | | Net assets | $1,643 | $1,956 | Note 11 — Changes in Capital Structure Details changes in NRG's capital structure, including preferred stock issuance, increased share repurchase, and dividend increase Changes in Preferred and Common Stock (Shares) | Metric | Balance as of Dec 31, 2022 | Shares Issued/Repurchased | Balance as of Sep 30, 2023 | | :----------------------------------- | :------------------------- | :------------------------ | :------------------------- | | Preferred Stock Issued and Outstanding | 0 | 650,000 | 650,000 | | Common Stock Issued | 423,897,001 | 1,011,448 | 424,908,449 | | Treasury Stock | (194,335,971) | (1,322,141) | (195,571,596) | | Common Stock Outstanding | 229,561,030 | (224,177) | 229,336,853 | - In March 2023, NRG issued 650,000 shares of 10.25% Series A Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Stock, generating $635 million net proceeds for the Vivint Smart Home acquisition[156] - The share repurchase authorization was increased to $2.7 billion through 2025, with $50 million executed in Q3 2023 and an additional $150 million through October 31, 2023; a $950 million accelerated share repurchase program is planned post-STP sale[152][240] - The annual common stock dividend was increased to $1.51 per share in Q1 2023 and will further increase by 8% to $1.63 per share in Q1 2024, targeting 7-9% annual growth[154][241] Note 12 — Income/(Loss) Per Share Presents basic and diluted income/(loss) per common share, showing a significant decline to a loss for nine months 2023 Income/(Loss) per Share | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income/(loss) available for common stockholders (in millions) | $326 | $67 | $(722) | $2,316 | | Weighted average number of common shares outstanding — basic (in millions) | 230 | 235 | 230 | 238 | | Income/(loss) per weighted average common share — basic | $1.42 | $0.29 | $(3.14) | $9.73 | | Income/(loss) per weighted average common share — diluted | $1.41 | $0.29 | $(3.14) | $9.73 | - For the nine months ended September 30, 2023, 6 million outstanding equity instruments were anti-dilutive and excluded from diluted loss per share computation[161] Note 13 — Segment Reporting Outlines NRG's segment structure (Texas, East, West/Services/Other, Vivint Smart Home, Corporate) and performance evaluation - NRG manages operations based on combined retail and wholesale generation businesses with a geographical focus, including Texas, East, West/Services/Other, Vivint Smart Home, and Corporate segments[162] - Segment performance is evaluated by the CEO using Adjusted EBITDA, free cash flow, capital allocation, and net income/(loss)[163] Net Income/(Loss) by Segment (in millions) | Segment | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Texas | $463 | $(481) | $1,532 | $1,052 | | East | $316 | $557 | $(1,187) | $2,083 | | West/Services/Other | $(168) | $92 | $(601) | $246 | | Vivint Smart Home | $(4) | $0 | $(66) | $0 | | Corporate | $(264) | $(101) | $(362) | $(1065) | | Total Net Income/(Loss) | $343 | $67 | $(684) | $2,316 | Note 14 — Income Taxes Details NRG's income tax provision and effective tax rates, including a $182 million benefit on a pre-tax loss for nine months 2023 Income Tax Expense/(Benefit) and Effective Tax Rate (in millions, except rates) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income/(Loss) before income taxes | $408 | $83 | $(866) | $3,055 | | Income tax expense/(benefit) | $65 | $16 | $(182) | $739 | | Effective income tax rate | 15.9% | 19.3% | 21.0% | 24.2% | - The effective tax rate for the nine months ended September 30, 2023, approximated the statutory rate of 21%, including state and foreign taxes[165] - As of September 30, 2023, NRG had a non-current tax liability of $48 million for uncertain tax benefits[167] Note 15 — Related Party Transactions Summarizes NRG's material related party transactions, primarily services provided to equity method investments under O&M agreements Revenues from Related Parties (in millions) | Related Party | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Gladstone | $1 | $1 | $2 | $2 | | Ivanpah | $15 | $10 | $70 | $32 | | Midway-Sunset | $0 | $2 | $2 | $5 | | Total | $16 | $13 | $74 | $39 | Note 16 — Commitments and Contingencies Outlines NRG's commitments, including first liens, and various contingencies such as environmental, consumer, patent, and contract lawsuits - NRG grants first liens on substantial property and assets to certain counterparties to reduce cash collateral and letters of credit required for out-of-the-money hedges[172] - The company is involved in environmental lawsuits (Sierra Club v. Midwest Generation LLC), consumer lawsuits (XOOM Energy, Direct Energy, Vivint Smart Home sales practices), patent infringement (Skybell v. Vivint Smart Home), and contract disputes (Alarm.com, STP sale)[175][177][181][183][184][185][186] - Vivint Smart Home faces a $190 million jury verdict for deceptive sales practices in the CPI Security Systems lawsuit and a $45 million jury verdict for patent infringement in the Skybell lawsuit, both of which the company intends to appeal[183][184] - NRG is also named in property damage and wrongful death claims related to Winter Storm Uri[188] Note 17 — Regulatory Matters Highlights NRG's operations in a highly regulated industry, subject to federal, state, and provincial agencies, and ISO/RTO market rules - NRG operates in a highly regulated industry, subject to various federal, state, and provincial agencies (CFTC, FERC, NRC, PUCT) and market rules of ISO/RTOs[191] - The company has accrued a liability for California Station Power due to unfavorable litigation regarding consumption at its Encina power plant[193] Note 18 — Environmental Matters Details NRG's exposure to environmental laws (air, water, waste), noting compliance may require significant capital expenditures - NRG is subject to stringent environmental laws regarding air quality (GHG emissions, NAAQS, CSAPR, Regional Haze), water use (ELG), and waste management (coal combustion byproducts)[194][196][197][198] - The EPA's proposed revisions to GHG emissions regulations for EGUs (May 2023) and CSAPR (March 2023) could lead to more stringent requirements and legal challenges[196] - NRG intends to comply with Effluent Limitations Guidelines by ceasing coal combustion by end of 2028 at most domestic units and installing controls by end of 2025 at Texas coal units[197] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on NRG's financial condition, operations, strategy, regulatory updates, and segment performance Executive Summary NRG is a leading energy, smart home, and services company focused on maximizing stockholder value through reliable energy and solutions - NRG is a leading energy, smart home, and services company serving approximately 7.5 million customers with 15 GW of generation[200] - The company's strategy focuses on maximizing stockholder value by providing reliable energy and innovative home solutions, aiming for stable cash flow, strengthened earnings, and reduced risk[201] - Key strategic pillars include serving diverse customer needs, offering differentiated products (including smart home and renewable solutions), operational excellence, optimal portfolio hedging, and disciplined capital allocation[202] Energy Regulatory Matters NRG operates in a highly regulated environment, with recent PUCT actions in Texas and PJM capacity market rule revisions impacting operations - NRG is subject to regulation by CFTC, FERC, NRC, PUCT, other public utility commissions, and ISO/RTO market rules[204] - In Texas, the PUCT is implementing the Performance Credit Mechanism (PCM) and Dispatchable Reliability Reserve Service (DRRS) to improve wholesale market reliability, along with the Texas Energy Fund to incentivize dispatchable generation[207] - An appeal to the Supreme Court of Texas could potentially require repricing of ERCOT market prices during Winter Storm Uri[209] - PJM has delayed Base Residual Auctions for 2025/2026 to 2028/2029 delivery years and is proposing market reforms to capacity accreditation and Market Seller Offer Cap rules[215] - The EPA's proposed revisions to GHG emissions regulations and CSAPR could lead to more stringent requirements and legal challenges[222] Significant Events Highlights key 2023 events: Vivint Smart Home acquisition, STP/Gregory sales, Joliet retirement, financing activities, and dividend increase - NRG completed the acquisition of Vivint Smart Home on March 10, 2023, for $2.6 billion[233] - Post-quarter-end, NRG closed the sale of its 44% equity interest in STP for $1.654 billion net proceeds (November 1, 2023) and the Gregory natural gas facility for $102 million (October 2, 2023)[232][235] - The Joliet generating facility fully retired on September 1, 2023[234] - W.A. Parish Unit 8 returned to service in September 2023 after an extended forced outage since May 2022[239] - Share repurchase authorization increased to $2.7 billion, with a $950 million accelerated share repurchase program planned post-STP sale[240] - The annual common stock dividend was increased to $1.51 per share in Q1 2023 and will further increase to $1.63 per share in Q1 2024[241] Trends Affecting Results of Operations and Future Business Performance Refers to the 2022 Form 10-K for trends affecting operations and future business performance, with no new material trends in this report - Trends affecting results of operations and future business performance are consistent with those described in the Company's 2022 Form 10-K[243] Changes in Accounting Standards Refers to Note 2 for recent accounting developments, with no new material changes in accounting standards in this interim report - Recent accounting developments are discussed in Note 2, Summary of Significant Accounting Policies[244] Consolidated Results of Operations Q3 2023 revenue decreased, but net income increased; nine months saw revenue decline and a $684 million net loss due to increased costs Consolidated Results of Operations (in millions) | Metric | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Change | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | Change | | :----------------------------------- | :------------------------------ | :------------------------------ | :----- | :----------------------------- | :----------------------------- | :------- | | Total revenue | $7,946 | $8,510 | $(564) | $22,016 | $23,688 | $(1,672) | | Total operating costs and expenses | $7,385 | $8,376 | $(991) | $22,671 | $20,404 | $2,267 | | Operating Income/(Loss) | $561 | $156 | $405 | $(453) | $3,335 | $(3,788) | | Net Income/(Loss) | $343 | $67 | $276 | $(684) | $2,316 | $(3,000) | - The nine-month period saw a $5,184 million negative swing in mark-to-market for economic hedging activities within operating costs, contributing significantly to the net loss[246] Management's Discussion of Results of Operations (Three Months) Q3 2023 economic gross margin increased by $775 million, driven by Texas and Vivint Smart Home, despite lower overall revenue Average On-Peak Power Price ($/MWh) | Region | 2023 | 2022 | Change % | | :-------------------- | :----- | :----- | :------- | | ERCOT - Houston | $183.49 | $128.61 | 43% | | ERCOT - North | $181.72 | $131.62 | 38% | | NY J/NYC | $40.86 | $109.43 | (63)% | | NEPOOL | $40.41 | $99.14 | (59)% | | COMED (PJM) | $39.38 | $101.00 | (61)% | | PJM West Hub | $43.27 | $110.99 | (61)% | Average Henry Hub Natural Gas Price ($/MMBtu) | Period | 2023 | 2022 | Change % | | :-------------------- | :----- | :----- | :------- | | Three months ended Sep 30 | $2.55 | $8.20 | (69)% | Economic Gross Margin by Segment (in millions) | Segment | 2023 | 2022 | Change | | :-------------------- | :----- | :----- | :----- | | Texas | $1,027 | $640 | $387 | | East | $426 | $407 | $19 | | West/Services/Other | $143 | $200 | $(57) | | Vivint Smart Home | $428 | $0 | $428 | | Total Economic Gross Margin | $2,022 | $1,247 | $775 | - Texas economic gross margin increased by $387 million due to higher net revenue rates ($4.15/MWh) and a $225 million decrease in cost to serve retail load, driven by lower supply costs and improved plant performance[255] - Selling, general and administrative costs increased by $260 million, with $172 million attributed to the Vivint Smart Home acquisition[269] Management's Discussion of Results of Operations (Nine Months) Nine months 2023 economic gross margin increased by $1.7 billion, driven by Vivint Smart Home and Texas, despite mark-to-market losses Average On-Peak Power Price ($/MWh) | Region | 2023 | 2022 | Change % | | :-------------------- | :----- | :----- | :------- | | ERCOT - Houston | $89.00 | $101.20 | (12)% | | ERCOT - North | $87.49 | $85.68 | 2% | | NY J/NYC | $39.43 | $98.34 | (60)% | | NEPOOL | $41.87 | $96.30 | (57)% | | COMED (PJM) | $33.05 | $76.82 | (57)% | | PJM West Hub | $38.39 | $87.44 | (56)% | Average Henry Hub Natural Gas Price ($/MMBtu) | Period | 2023 | 2022 | Change % | | :-------------------- | :----- | :----- | :------- | | Nine months ended Sep 30 | $2.69 | $6.77 | (60)% | Economic Gross Margin by Segment (in millions) | Segment | 2023 | 2022 | Change | | :-------------------- | :----- | :----- | :----- | | Texas | $2,622 | $1,859 | $763 | | East | $1,292 | $1,286 | $6 | | West/Services/Other | $393 | $461 | $(68) | | Vivint Smart Home | $968 | $0 | $968 | | Total Economic Gross Margin | $5,271 | $3,604 | $1,667 | - Texas economic gross margin increased by $763 million due to higher net revenue rates ($6.00/MWh) and a $418 million decrease in retail load cost, driven by lower supply costs and improved plant performance[287] - Mark-to-market for economic hedging activities resulted in a $2.0 billion loss in operating costs and expenses for the nine months ended September 30, 2023, a significant negative swing from a $3.2 billion gain in the prior year[291][292] - Selling, general and administrative costs increased by $510 million, with $375 million attributed to the Vivint Smart Home acquisition[301] Liquidity and Capital Resources Total liquidity increased by $1.3 billion to $4.1 billion by September 30, 2023, with debt reduction plans and Vivint financing Total Liquidity (in millions) | Metric | September 30, 2023 | December 31, 2022 | Change | | :----------------------------------- | :----------------- | :------------------ | :----- | | Cash and cash equivalents | $401 | $430 | $(29) | | Total availability under Revolving Credit Facility and collective collateral facilities | $3,723 | $2,324 | $1,399 | | Total liquidity, excluding funds deposited by counterparties | $4,135 | $2,794 | $1,341 | - NRG plans to reduce debt by $900 million during 2023, with $600 million already executed by September 30, 2023, and an additional $500 million planned after the STP sale[318] - The Vivint Smart Home acquisition was funded by $740 million in new secured debt, $650 million in preferred stock, $900 million from credit facilities, and cash on hand[319] - As of September 30, 2023, NRG had $2 million in cash collateral outstanding and $3.8 billion in letters of credit to third parties primarily to support its market activities[331] Cash Flows (in millions) | Metric | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | | Cash (used)/provided by operating activities | $(462) | $1,758 | $(2,220) | | Cash used by investing activities | $(2,631) | $(205) | $(2,426) | | Cash provided by financing activities | $1,590 | $855 | $735 | NOLs, Deferred Tax Assets and Uncertain Tax Position Implications, under ASC 740 NRG has significant NOL carryforwards, increased by Vivint Smart Home, and anticipates up to $70 million in 2023 net income tax payments - As of December 31, 2022, NRG had $8.2 billion in U.S. Federal NOL carryforwards and $5.3 billion in state NOL carryforwards, with an additional $2.1 billion federal and $1.8 billion state NOLs from the Vivint Smart Home acquisition[348] - The company anticipates net income tax payments of up to $70 million in 2023[348] - A tax-effected valuation allowance of $228 million was recorded as of September 30, 2023, for state and foreign NOL carryforwards deemed not realizable[352] Guarantor Financial Information Provides summarized financial information for NRG Energy, Inc. and its guarantor subsidiaries, which jointly guarantee certain senior notes - NRG's outstanding registered senior notes are guaranteed by certain 100% owned domestic subsidiaries (Guarantors) on a joint and several basis[353] - There are no restrictions on the ability of Guarantors to transfer funds to NRG[354] Summarized Statement of Operations (in millions) for NRG Energy, Inc. and Guarantors | Metric | Nine months ended Sep 30, 2023 | | :-------------------- | :----------------------------- | | Revenue | $18,590 | | Operating loss | $(288) | | Net Loss | $(511) | Summarized Balance Sheet Information (in millions) for NRG Energy, Inc. and Guarantors | Metric | September 30, 2023 | | :-------------------- | :----------------- | | Current assets | $6,780 | | Non-current assets | $14,323 | | Current liabilities | $7,471 | | Non-current liabilities | $11,385 | Fair Value of Derivative Instruments NRG uses derivatives to mitigate market risks, with a net derivative asset decrease of $2.0 billion by September 30, 2023, due to settled trades - NRG uses derivative instruments to mitigate commodity price risk, interest rate risk, and currency exchange risk[356] - The net derivative asset was $1.6 billion as of September 30, 2023, a $2.0 billion decrease from December 31, 2022, driven by settled trades, fair value losses, and Vivint Smart Home contracts[361] - A $0.50 per MMBtu increase or decrease in natural gas prices would result in an approximate $1.8 billion change in the net value of derivatives[362] Critical Accounting Estimates NRG's critical accounting estimates remain consistent with the 2022 Form 10-K, involving subjective judgments about uncertain matters - Critical accounting estimates involve difficult, subjective, and complex judgments about inherently uncertain matters, such as project success, legal challenges, and fair value of assets/liabilities[363][365] - There have been no material changes to the company's critical accounting estimates since the 2022 Form 10-K[366] Item 3 — Quantitative and Qualitative Disclosures About Market Risk Details NRG's exposure to commodity price, credit, liquidity, interest rate, and currency exchange risks, and their management Commodity Price Risk NRG manages commodity price risks using derivatives and a VaR model to estimate potential losses in its energy portfolio - NRG manages commodity price risk using derivative and non-derivative instruments to hedge variability in future cash flows from energy and fuel sales/purchases[369] - The company uses a Monte Carlo simulation-based VaR model to estimate potential losses in its energy portfolio, with a one-day holding period at a 95% confidence interval for the forward 36 months[369] VaR for NRG's Commodity Portfolio (in millions) | Metric | 2023 | 2022 | | :-------------------- | :----- | :----- | | VaR as of Sep 30 | $63 | $58 | | Three months ended Sep 30 (Average) | $64 | $44 | | Nine months ended Sep 30 (Average) | $66 | $45 | Credit Risk NRG is exposed to counterparty and retail customer credit risk, with $1.2 billion net counterparty exposure as of September 30, 2023 - NRG's counterparty credit exposure (excluding RTOs/ISOs/exchanges and certain long-term agreements) was $1.7 billion, with $494 million in collateral, resulting in a net exposure of $1.2 billion as of September 30, 2023[372] Net Counterparty Credit Exposure by Credit Quality (as of Sep 30, 2023) | Category | % of Total | | :-------------------- | :--------- | | Investment grade | 56% | | Non-investment grade/non-rated | 44% | - Aggregate credit risk exposure for certain long-term contracts, primarily Renewable PPAs, was approximately $1.0 billion for the next five years as of September 30, 2023[377] - Retail customer credit risk is managed through established credit policies, portfolio monitoring, and credit mitigation measures like deposits or prepayment arrangements[378] Liquidity Risk NRG faces liquidity risk from funding needs and asset/liability management, with potential for increased collateral if natural gas prices decline - Liquidity risk arises from funding needs and asset/liability management, with exposure to increased collateral posting if natural gas prices decline[380] - A $0.50 per MMBtu decrease in natural gas prices could increase margin collateral posted by approximately $1.2 billion[381] Interest Rate Risk NRG mitigates interest rate risk from variable rate debt through interest rate swap agreements, including $1.0 billion for Vivint Term Loan - NRG mitigates interest rate risk from variable rate debt through interest rate swap agreements[382] - In Q1 2023, NRG entered into $1.0 billion of interest rate swaps for the Vivint Smart Home Term Loan and has $300 million outstanding for the Revolving Credit Facility[382] - A 1% decrease in market interest rates would have increased the fair value of the company's long-term debt by $848 million as of September 30, 2023[383] Currency Exchange Risk NRG is exposed to transactional and translation exchange rate risks, hedging Canadian natural gas purchases with forward contracts - NRG is exposed to transactional exchange rate risk, primarily from Canadian business natural gas purchases, and hedges a portion with foreign exchange forward contracts ($566 million notional as of Sep 30, 2023)[384] - A hypothetical 10% appreciation in major currencies relative to the U.S. dollar would have decreased net income by $23 million as of September 30, 2023[385] Item 4 — Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes - Disclosure controls and procedures were effective as of September 30, 2023[386] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[387] Part II — Other Information Item 1 — Legal Proceedings Refers to Note 16, Commitments and Contingencies, for a discussion of material legal proceedings in which NRG was involved - Material legal proceedings are discussed in Note 16, Commitments and Contingencies[389] Item 1A — Risk Factors No material changes to Risk Factors were reported compared to the previous quarterly report for the quarter ended March 31, 2023 - No material changes to Risk Factors were reported during the three months ended September 30, 2023, compared to the previous quarterly report[390] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds Provides information on purchases of NRG's common stock during Q3 2023 under the publicly announced share repurchase authorization Common Stock Purchases (for the three months ended Sep 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | | :----------------------------------- | :----------------------------- | :--------------------------- | :----------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | Month 1 (July 1 - July 31, 2023) | 1,322,141 | $37.82 | 1,322,141 | $2,650 | | Month 2 (Aug 1 - Aug 31, 2023) | 0 | $0 | 0 | $2,650 | | Month 3 (Sep 1 - Sep 30, 2023) | 0 | $0 | 0 | $2,650 | | Total at Sep 30, 2023 | 1,322,141 | $37.82 | 1,322,141 | N/A | - The company executed 1,322,141 share repurchases at an average price of $37.82 per share in July 2023, under the $2.7 billion authorization[392] Item 3 — Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred[393] Item 4 — Mine Safety Disclosures No events requiring mine safety disclosures were reported - No events requiring mine safety disclosures were reported[394] Item 5 — Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during Q3 2023 - No Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the quarter[395] Item 6 — Exhibits Lists all exhibits filed as part of the Form 10-Q, including facility agreements, indentures, and certifications - The exhibits include various legal agreements related to financing, such as the Facility Agreement, Letter of Credit Facility Agreement, and Indenture, all dated August 29, 2023[397][398] - Certifications from the Chief Executive Officer, Chief Financial Officer, and Corporate Controller are included[397][401] Signatures Report Signatures Contains the signatures of NRG Energy, Inc.'s principal executive, financial, and accounting officers, certifying the report - The report is signed by Mauricio Gutierrez (Chief Executive Officer), Woo-Sung Chung (Chief Financial Officer), and Emily Picarello (Corporate Controller)[403]