NRG ENERGY, INC. 10-K

Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis below has been organized as follows: • Executive Summary, including the business environment in which the Company operates, a discussion of regulation, weather, competition and other factors that affect the business, a Transformation Plan update, and other significant events that are important to understanding the results of operations and financial condition; • Results of operations for the years ended December 31, 2020 and December 31, 2019, including an explanation of significant differences between the periods in the specific line items of NRG's Consolidated Statements of Operations; • Financial condition addressing credit ratings, liquidity position, sources and uses of cash, capital resources and requirements, commitments, and off-balance sheet arrangements; and • Critical accounting policies that are most important to both the portrayal of the Company's financial condition and results of operations, and require management's most difficult, subjective or complex judgments. As you read this discussion and analysis, refer to NRG's Consolidated Statements of Operations in this Form 10-K, which present the results of the Company's operations for the years ended December 31, 2020 and 2019, and also refer to Item 1 to this Form 10-K for more detail discussion about the Company's business. A discussion and analysis of fiscal year 2018 may be found in Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations of Exhibit 99.1 to the Current Report on Form 8-K, filed on May 7, 2020, which provides retrospectively revised historical financial information to correspond with the Company's current segment structure. As further described in Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions , to the Consolidated Financial Statements, the Company determined in prior years that the following businesses were discontinued operations and recast to present their results in the corporate segment: • South Central Portfolio • NRG Yield, Inc. and its Renewables Platform • Carlsbad • GenOn Energy, Inc. Executive Summary NRG is an integrated power company built on dynamic retail brands with diverse generation assets. NRG brings the power of energy to customers by producing and selling energy and related products and services in major competitive power and gas markets in the U.S. and Canada in a manner that delivers value to all of NRG's stakeholders. As of December 31, 2020, the Company sold energy, services, and innovative, sustainable products and services directly to retail customers under the brand names NRG, Reliant, Green Mountain Energy, Stream, and XOOM Energy, as well as other brand names owned by NRG, supported by approximately 23,000 MW of generation. For discussion of COVID-19 related considerations refer to Item 1 — Business. Business Environment The industry dynamics and external influences affecting the Company, its businesses, and the retail energy and power generation industry in 2020 and for the future medium term include: Commodities Markets — The price of natural gas plays an important role in setting the price of electricity in many of the regions where NRG operates. Natural gas prices are driven by variables including demand from the industrial, residential, and electric sectors, productivity across natural gas supply basins, costs of natural gas production, changes in pipeline infrastructure, and the financial and hedging profile of natural gas customers and producers. In 2020, the average natural gas prices at Henry Hub was 21% lower than in 2019. If long-term gas prices increase, the Company is likely to encounter higher realized energy prices, leading to higher energy revenues as lower priced hedge contracts mature and are replaced by contracts with higher gas and power prices. This impact is partially offset by the retail operations, as NRG's retail gross margins have historically decreased as natural gas prices increase. NRG's retail gross margins have historically improved as natural gas prices decline. This would be partially offset by lower realized energy prices, leading to lower energy revenues as higher priced hedge contracts mature and are replaced by contracts with lower gas and power prices. To further mitigate this impact, NRG may increase its percentage of coal and nuclear capacity sold forward using a variety of hedging instruments, as described under the heading "Energy-Related Commodities" in Item 15 — Note 6, Accounting for Derivative Instruments and Hedging Activities, to the Consolidated Financial Statements. 46 Natural gas prices are a primary driver of coal demand. The low-priced commodity environment has stressed coal equities, leading coal suppliers to file for bankruptcy protection, launch debt exchanges, rationalize assets, and cut production. If multiple parties withdraw from the market, liquidity could be challenged in the short term. Inventory overhang will be utilized to offset production losses. Coal prices are typically affected by the price of natural gas. Electricity Prices — The price of electricity is a key determinant of the profitability of the Company. Many variables such as the price of different fuels, weather, load growth and unit availability all coalesce to impact the final price for electricity and the Company's profitability. An increase in supply cost volatility in the competitive retail markets may result in smaller companies choosing to exit the market, which may result in further consolidation in the competitive retail space. The following table summarizes average on-peak power prices for each of the major markets in which NRG operates for the years ended December 31, 2020 and 2019. ERCOT power prices decreased for the year ended December 31, 2020 as compared to 2019 primarily due to the lower power prices in summer and lower gas prices in the first half of the year. Power prices in the East and West/Other decreased for the year ended December 31, 2020 as compared to 2019 due to lower prices associated with lower demand due to COVID-19. Average On-Peak Power Price ($/MWh) Year Ended December 31 2020 vs 2019 Region 2020 2019 Change % Texas (a) ERCOT - Houston (a) $ 27.65 $ 51.44 (46) % ERCOT - North (a) 25.85 50.80 (49) % East NY J/NYC (b) 24.55 33.73 (27) % NEPOOL (b) 26.52 34.89 (24) % COMED (PJM) (b) 22.48 28.28 (21) % PJM West Hub (b) 24.49 30.85 (21) % West/Other CAISO - SP15 (b) 38.15 38.15 — % MISO - Louisiana Hub (b) 24.43 30.58 (20) % (a) Average on-peak power prices based on real time settlement prices as published by the respective ISOs (b) Average on-peak power prices based on day-ahead settlement prices as published by the respective ISOs The following table summarizes average realized power prices for each region in which NRG operates, including the impact of settled hedges, for the years ended December 31, 2020 and 2019: Average Realized Power Price ($/MWh) Year Ended December 31 2020 vs 2019 Region 2020 2019 Change % East $ 34.92 $ 34.37 2 % West/Other 34.80 32.41 7 % (a) Average Realized Power Price reflects energy sales from the generation fleet, omitting sales to the retail component of the East Segment. Intercompany financial transactions hedging generation with the retail operations make up $12.18/MWh in the year ended December 31, 2020 and $5.40/MWh in the year ended December 31, 2019. The average realized power prices were relatively stable year over year due to the Company's hedging program. Increased Awareness of, and Action to Combat, Climate Change — Diverse groups of stakeholders, including investors, asset managers, financial institutions, non-government organizations, industry coalitions, individual companies, consumer groups and academic institutions, are increasingly engaged in efforts to limit global warming in the post-industrial era to well below 2 degrees Celsius. As a result, policymakers and regulators at regional, national, sub-national and local levels of government, both in the United States and other parts of the world, are increasingly focused on actions to combat climate change. In the United States, the current Administration has stated that limiting climate change is one of its top priorities. In its early days, the Administration issued an Executive Order on "Tackling the Climate Crisis at Home and Abroad." This included commitments to reset the United States' greenhouse gas emission reduction targets under the Paris Climate Agreement, integrate environmental justice considerations into all aspects of its climate and environmental policy, consider climate change and conservation in federal permitting decisions and align government procurement strategy and standards with climate goals. 47 To enable climate policy development and implementation, the Administration has pledged to adopt a "whole-of-government" approach and is establishing various new climate-oriented positions and working groups. For example, it created the White House Office of Domestic Climate Policy, led by the first-ever National Climate Advisor and Deputy National Climate Advisor, which will create a central office in the White House that is charged with coordinating and implementing the President's domestic climate agenda. The newly established National Climate Task Force will assemble representatives from across 21 federal agencies and departments. The Federal Reserve is creating a committee to deepen its understanding of the risks that climate change poses to the financial system. The SEC has created the new role of Senior Policy Advisor for Climate and Environmental, Social and Governance ("ESG") to oversee and coordinate the agency's efforts related to climate risk and other ESG developments, and to examine how these issues intersect with the regulatory framework across its offices and divisions. An interagency working group on Coal and Power Plant Communities and Revitalization will identify and deliver federal resources to revitalize the economics of coal, oil, gas and power plant dependent communities. Outside the United States, a foreign climate agenda will be advanced through the Special Presidential Envoy for Climate in concert with departments including State and Treasury. NRG actively monitors climate change related developments that could impact its business and regularly engages with a diverse set of stakeholders on these issues. Such engagement helps the Company identify and pursue potential opportunities both to decarbonize its business and better serve its customers. NRG is committed to providing transparent disclosures of its climate risks and opportunities to stakeholders. The Company became an early supporter of the Task Force on Climate-related Financial Disclosures ("TCFD") recommendations after they were issued in 2017, published a TCFD mapping disclosure in December 2020 and will issue a stand-alone TCFD report in 2021. Lower Carbon Infrastructure Development — Policy mechanisms at the state and federal level, including production and investment tax credits, cash grants, loan guarantees, accelerated depreciation tax benefits, RPS, and carbon trading plans, have supported and continue to support the development of renewable generation, demand-side and smart grid, and other lower carbon infrastructure technologies. In addition, the costs associated with the development of lower carbon infrastructure, such as wind and solar generating facilities, continue to decline. These factors continue to drive increases in the development of lower carbon infrastructure in the markets where the Company participates, which may impact the ability of the Company's generating facilities to participate in those markets. According to ERCOT, Inc., 36% of 2020 energy consumption in the ERCOT market was generated from carbon emission-free resources, with wind power contributing 23%. In addition, subsidies and incentives have contributed to the increase in renewable power sources, and customer awareness and preferences are shifting toward sustainable solutions. Increased demand for sustainable energy products from both residential and commercial customers creates opportunities for diversified product offerings in competitive retail markets. Digitization and Customization — The electric industry is experiencing major technology changes in the way power is distributed and used by end-use customers. The electric grid is shifting from a centralized analog system, where power is generated from limited sources and flows in one direction, to a decentralized multidirectional system, where power can be generated from a number of distributed resources and stored or dispatched on an as-needed basis. In addition, customers are seeking new ways to engage with their power providers. Technologies like smart thermostats, appliances and electric vehicles are giving individuals more choice and control over their electricity usage. Weather — Weather conditions in the regions of the U.S. in which NRG does business influence the Company's financial results. Weather conditions can affect the supply and demand for electricity and fuels and may also impact the availability of the Company's generating assets. Changes in energy supply and demand may impact the price of these energy commodities in both the spot and forward markets, which may affect the Company's results in any given period. Typically, demand for and the price of electricity is higher in the summer and the winter seasons, when temperatures are more extreme. The demand for and price of natural gas is also generally higher in the winter. However, all regions of the U.S. typically do not experience extreme weather conditions at the same time, thus NRG's operations are typically not exposed to the effects of extreme weather in all parts of its business at once. A significant portion of the Company's business is located within Texas, and extreme weather conditions occurring in Texas may have a material impact on the Company's financial position. For discussion of the recent weather event in Texas, see Other Significant Events - Extreme Weather Event in Texas During February 2021 below. 48 Other Factors — A number of other factors significantly influence the level and volatility of prices for energy commodities and related derivative products for NRG's business. These factors include: • seasonal, daily and hourly changes in demand; • extreme peak demands; • available supply resources; • transportation and transmission availability and reliability within and between regions; • location of NRG's generating facilities relative to the location of its load-serving opportunities; • procedures used to maintain the integrity of the physical electricity system during extreme conditions; and • changes in the nature and extent of federal and state regulations. These factors can affect energy commodity and derivative prices in different ways and to different degrees. These effects may vary throughout the country as a result of regional differences in: • weather conditions; • market liquidity; • capability and reliability of the physical electricity and gas systems; • local transportation systems; and • the nature and extent of electricity deregulation. Environmental Matters, Regulatory Matters and Legal Proceedings — Details of environmental matters are presented in Item 15 — Note 26, Environmental Matters , to the Consolidated Financial Statements and Item 1 — Business, Environmental Matters . Details of regulatory matters are presented in Item 15 — Note 25, Regulatory Matters , to the Consolidated Financial Statements and Item 1 — Business, Regulatory Matters . Details of legal proceedings are presented in Item 15 — Note 24, Commitments and Contingencies , to the Consolidated Financial Statements. Some of this information relates to costs that may be material to the Company's financial results. Transformation Plan NRG completed its three-year Transformation Plan as of December 31, 2020. The Transformation Plan targets were achieved as follows: • Achieved recurring cost savings and margin enhancement of $1,065 million, including $590 million of cumulative cost savings, a $215 million net margin enhancement program, $50 million annual reduction in maintenance capital expenditures, and $210 million in permanent selling, general and administrative expense reduction associated with asset sales • Fully realized $370 million of non-recurring working capital improvements and $295 million of one-time costs to achieve • Completed asset sales of $3.0 billion, accomplishing the planned portfolio optimization • Initially targeted credit ratio of 3.0x net debt / adjusted EBITDA (a) was achieved. The credit metrics target was subsequently revised and successfully completed, to further strengthen its balance sheet and improve credit ratings by reducing leverage (a) adjusted EBITDA as defined per the Senior Credit Facility 49 Other Significant Events The following additional significant events occurred during 2020 and through the filing date: Extreme Weather Event in Texas During February 2021 During February 2021, Texas experienced unprecedented cold temperatures for a prolonged duration, resulting in a power emergency, blackouts, and an estimated all-time peak demand of 77 GWs (without load shed). Ahead of the event, NRG launched residential customer communications calling for conservation across all of its brands, and initiated residential and commercial and industrial demand response programs to curtail customer load. The Company maximized available generating capacity and brought in additional resources to supplement in-state staff with technical and operating experts from the rest of its U.S. fleet. NRG is committed to working with all necessary stakeholders on a comprehensive, objective, and exhaustive root cause analysis of the entirety of the energy system. The estimated financial impact is still preliminary, due to customer meter and settlement data not being finalized, as well as potential customer and counterparty risk and expected ERCOT default allocations. Based on a preliminary analysis, Winter Storm Uri's financial impact is not expected to be adverse to NRG's financial results. The Company separately stress-tested assumptions and although at a lower probability, this stress-test analysis indicated a potential plus or minus $100 million to income from continuing operations in 2021. NRG's integrated platform continues to deliver stable results through unprecedented events. Direct Energy Acquisition On January 5, 2021, the Company acquired Direct Energy, a North American subsidiary of Centrica plc. Direct Energy is a leading retail provider of electricity, natural gas, and home and business energy related products and services in North America, with operations in all 50 U.S. states and 8 Canadian provinces. The acquisition increases NRG's retail portfolio by over 3 million customers and complements its integrated model. It also broadens the Company's presence in the Northeast and into states and locales where it does not currently operate, supporting NRG's objective to diversify its business. The Company paid an aggregate purchase price of $3.625 billion in cash, subject to a purchase price adjustment of $77 million. The Company funded the purchase price using a combination of $715 million of cash on hand, $166 million from a draw on its Revolving Credit Facility (of which $107 million was used to fund acquisition costs and financing fees that are not included in the aggregate purchase price above) as well as approximately $2.9 billion in secured and unsecured corporate debt issued in December 2020. The Company also increased its collective collateral facilities by $3.4 billion through a combination of amending its Revolving Credit Facility, amending its credit default swap facility, entering into a revolving accounts receivable financing facility, entering into an uncommitted repurchase facility and entering into multiple agreements to issue letters of credit. For further discussion on the increase of collateral facilities, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, Item 15 — Note 13, Receivables Securitization and Repurchase Facility, and Item 15 — Note 14, Long-term Debt and Finance Leases. Issuance of 2029 Senior Unsecured Notes and 2031 Senior Unsecured Notes On December 2, 2020, NRG issued $500 million aggregate principal amount of 3.375% senior notes due 2029 (the "2029 Unsecured Notes") and $1.0 billion aggregate principal amount of 3.625% senior notes due 2031 (the "2031 Unsecured Notes, together with the 2029 Unsecured Notes, the "Unsecured Notes"). Issuance of 2025 and 2027 Senior Secured First Lien Notes On December 2, 2020, NRG issued $1.4 billion of aggregate principal amount of senior secured first lien notes, consisting of $500 million 2.000% senior secured first lien notes due 2025 (the "2025 Secured Notes") and $900 million 2.450% senior secured first lien notes due 2027 (the "2027 Secured Notes"), at a discount. The 2027 Secured Notes were issued under NRG’s Sustainability-Linked Bond Framework, which links attractive financing terms with the realization of certain sustainability targets, including reducing greenhouse gas emissions. Receivables Securitization and Repurchase Facility On September 22, 2020, NRG Receivables LLC, a bankruptcy remote, special purpose, indirect wholly owned subsidiary, entered into a revolving accounts receivable financing facility (the "Receivables Facility") for an amount up to $750 million, subject to adjustments on a seasonal basis, with issuers of asset-backed commercial paper and commercial banks (the "Lenders".) As of December 31, 2020, there were no outstanding borrowings and there were $198 million in letters of credit issued under the Receivables Facility. 50 On September 22, 2020, the Company entered into an uncommitted repurchase facility (the “Repurchase Facility”) related to the Receivables Facility. Under the Repurchase Facility, the Company can borrow up to $75 million, collateralized by a subordinated note issued by NRG Receivables LLC to NRG Retail LLC in favor of the originating entities representing a portion of the balance of receivables sold to NRG Receivables LLC under the Receivables Facility. As of December 31, 2020, there were no outstanding borrowings under the Repurchase Facility. For further discussion on the Receivables Facility and Repurchase Facility, see Note 9, Receivables Securitization and Repurchase Facility. Midwest Generation Lease Purchase On September 29, 2020, Midwest Generation acquired all of the ownership interests in the Powerton facility and Units 7 and 8 of the Joliet facility, which were being leased through 2034 and 2030, respectively, for approximately $260 million. The purchase was funded with cash-on-hand. Upon closing, lease expense related to these facilities, which totaled approximately $14 million in 2019, and the operating lease liability of $148 million were eliminated. Home Solar Disposition In the third quarter of 2020, the Company concluded its Home Solar business was held for sale and recorded an impairment loss of $29 million. On November 13, 2020, the Company completed the sale of the Home Solar business for cash proceeds of $66 million, resulting in a $2 million loss on the sale. In connection with the sale, the Company extinguished debt of $27 million and recognized a $5 million loss on the extinguishment. Sale of Agua Caliente On November 19, 2020, the Company entered an agreement to sell its 35% ownership in Agua Caliente to Clearway Energy, Inc. for $202 million. The sale of the 290 MW solar project closed on February 3, 2021. On October 21, 2019, the Company had repaid the Agua Caliente Borrower 1 notes associated with the project of $83 million. Sale of 4.8 GW of Fossil Generation Assets On February 28, 2021, the Company entered into a definitive purchase agreement with Generation Bridge, an affiliate of ArcLight Capital Partners, to sell approximately 4,850 MWs of fossil generating assets from its East and West regions of operations for total proceeds of $760 million, subject to standard purchase price adjustments and certain other indemnifications. As part of the transaction, NRG is entering into a tolling agreement for its 866 MW Arthur Kill plant in New York City through April 2025. The transaction is expected to close in the fourth quarter of 2021, and is subject to various closing conditions, approvals and consents, including FERC, NYSPSC, and antitrust review under Hart-Scott-Rodino. Share Repurchases In 2020, the Company completed $224 million of share repurchases at an average price of $33.05 per share, including $27 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuance. Renewable Power Purchase Agreements NRG began execution of its strategy to procure mid to long-term generation through power purchase agreements in 2019. As of December 31, 2020, NRG has entered into PPAs totaling approximately 1,800 MWs with third-party project developers and other counterparties. The tenor of these agreements is an average between eleven and twelve years. The Company expects to continue evaluating and executing similar agreements that support the needs of the business. Due to COVID-19, certain of these PPA contracts have been amended to allow for the delay of project completion dates from mid-2021 into 2022. These amendments include improved terms for NRG. Dividend Increase In the first quarter of 2020, NRG increased the annual dividend to $1.20 from $0.12 per share, as part of a long-term capital allocation policy adopted in the fourth quarter of 2019 that targets allocating 50% of cash available for allocation generated each year to growth investments and 50% to be returned to shareholders. The return of capital to shareholders is expected to be completed through the increased dividend supplemented by share repurchases. The long-term capital allocation policy targets an annual dividend growth rate of 7-9% per share in years subsequent to 2020. In 2021, NRG further increased the annual dividend to $1.30 per share, representing an 8% increase from 2020. 51 Consolidated Results of Operations for the years ended December 31, 2020 and 2019 The following table provides selected financial information for the Company: Year Ended December 31, (In millions, except otherwise noted) 2020 2019 Change Operating Revenues Retail revenue $ 7,460 $ 7,533 $ (73) Energy revenue (a) 539 1,169 (630) Capacity revenue (a) 680 700 (20) Mark-to-market for economic hedging activities 95 33 62 Other revenues (a)(b) 319 386 (67) Total operating revenues 9,093 9,821 (728) Operating Costs and Expenses Cost of sales (c) 4,920 5,878 958 Mark-to-market for economic hedging activities 214 53 (161) Contract and emissions credit amortization (c) 5 19 14 Operations and maintenance 1,129 1,082 (47) Other cost of operations 272 271 (1) Total cost of operations 6,540 7,303 763 Depreciation and amortization 435 373 (62) Impairment losses 75 5 (70) Selling, general and administrative costs 933 827 (106) Reorganization costs — 23 23 Development costs 8 7 (1) Total operating costs and expenses 7,991 8,538 547 Gain on sale of assets 3 7 (4) Operating Income 1,105 1,290 (185) Other Income/(Expense) Equity in earnings of unconsolidated affiliates 17 2 15 Impairment losses on investments (18) (108) 90 Other income, net 67 66 1 Net loss on debt extinguishment (9) (51) 42 Interest expense (401) (413) 12 Total other expenses (344) (504) 160 Income from Continuing Operations Before Income Taxes 761 786 (25) Income tax expense/(benefit) 251 (3,334) 3,585 Income from Continuing Operations 510 4,120 (3,610) Income from discontinued operations, net of income tax — 321 (321) Net Income 510 4,441 (3,931) Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests — 3 (3) Net Income Attributable to NRG Energy, Inc. $ 510 $ 4,438 $ (3,928) Business Metrics Average natural gas price — Henry Hub ($/MMBtu) $ 2.08 $ 2.63 (21) % (a) Includes realized gains and losses from financially settled transactions (b) Includes realized and unrealized trading gains and losses (c) Includes amortization of SO 2 and NO x credits and excludes amortization of RGGI credits 52 Economic Gross Margin In addition to gross margin, the Company evaluates its operating performance using the measure of economic gross margin, which is not a GAAP measure and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report. Economic gross margin should be viewed as a supplement to and not a substitute for the Company's presentation of gross margin, which is the most directly comparable GAAP measure. Economic gross margin is not intended to represent gross margin. The Company believes that economic gross margin is useful to investors as it is a key operational measure reviewed by the Company's chief operating decision maker. Economic gross margin is defined as the sum of energy revenue, capacity revenue and other revenue, less cost of fuels and other cost of sales. Economic gross margin does not include mark-to-market gains or losses on economic hedging activities, contract amortization, emission credit amortization, or other operating costs. The tables below present the composition and reconciliation of gross margin and economic gross margin for the years ended December 31, 2020 and 2019 based on the Company's reportable segments: Year Ended December 31, 2020 ($ in millions, except otherwise noted) Texas East West/Other Corporate/Eliminations Total Retail revenue $ 6,061 $ 1,401 $ — $ (2) $ 7,460 Energy revenue 24 183 333 (1) 539 Capacity revenue — 620 61 (1) 680 Mark-to-market for economic hedging activities 2 88 (3) 8 95 Other revenue 222 62 43 (8) 319 Operating revenue 6,309 2,354 434 (4) 9,093 Cost of fuel (546) (151) (154) — (851) Purchased power (945) (507) (24) 6 (1,470) Other costs of sales (a)(b) (2,165) (422) (12) — (2,599) Mark-to-market for economic hedging activities (211) 5 — (8) (214) Contract and emission credit amortization (5) — — — (5) Gross margin $ 2,437 $ 1,279 $ 244 $ (6) $ 3,954 Less: Mark-to-market for economic hedging activities, net (209) 93 (3) — (119) Less: Contract and emission credit amortization (5) — — — (5) Economic gross margin $ 2,651 $ 1,186 $ 247 $ (6) $ 4,078 (a) Includes capacity and emissions credits (b) Includes $1,967 million and $10 million of TDSP expense in Texas and East, respectively Business Metrics Texas East West/Other Total Mass Market electricity sales volume (GWh) 38,473 10,221 48,694 C&I electricity sales volume (GWh) 17,928 1,596 19,524 Natural gas retail sales volumes (MDth) — 23,509 23,509 Average retail Mass Market customer count (in thousands) (a) 2,449 1,175 3,624 Ending retail Mass Market customer count (in thousands) (a) 2,451 1,136 3,587 GWh sold 31,385 8,136 9,569 49,090 GWh generated (b) 31,385 4,102 9,171 44,658 (a) East represents combined electricity and natural gas customers (b) Includes owned generation and excludes equity investments 53 Year Ended December 31, 2019 ($ in millions, except otherwise noted) Texas East West/Other (a) Corporate/Eliminations Total Retail revenue $ 6,232 $ 1,304 $ — $ (3) $ 7,533 Energy revenue 529 322 318 — 1,169 Capacity revenue — 664 36 — 700 Mark-to-market for economic hedging activities 47 (29) 16 (1) 33 Other revenue 261 58 70 (3) 386 Operating revenue 7,069 2,319 440 (7) 9,821 Cost of fuel (694) (208) (178) — (1,080) Purchased power (1,557) (612) (13) 1 (2,181) Other costs of sales (a)(b) (2,233) (342) (42) — (2,617) Mark-to-market for economic hedging activities (57) 4 (1) 1 (53) Contract and emission credit amortization (19) — — — (19) Gross margin $ 2,509 $ 1,161 $ 206 $ (5) $ 3,871 Less: Mark-to-market for economic hedging activities, net (10) (25) 15 — (20) Less: Contract and emission credit amortization (19) — — — (19) Economic gross margin $ 2,538 $ 1,186 $ 191 $ (5) $ 3,910 (a) Includes capacity and emissions credits (b) Includes $1,944 million and $9 million of electric TDSP charges for Texas and East, respectively Business Metrics Texas East West/Other Total Mass Market electricity sales volume (GWh) 38,958 9,918 — 48,876 C&I electricity sales volume (GWh) 18,976 1,214 — 20,190 Natural gas retail sales volumes (MDth) — 23,359 — 23,359 Average retail Mass Market customer count (in thousands) (a) 2,358 1,112 — 3,470 Ending retail Mass Market customer count (in thousands) (a) 2,450 1,228 — 3,678 GWh sold 42,662 11,113 9,811 63,586 GWh generated (b) 37,995 6,913 9,462 54,370 (a) East represents combined electricity and natural gas customers (b) Includes owned generation and excludes equity investments The table below represents the weather metrics for 2020 and 2019: Years ended December 31, Quarters ended December 31, Quarters ended September 30, Quarters ended June 30, Quarters ended March 31, Weather Metrics Texas East West/Other (a) Texas East West/Other (a) Texas East West/Other (a) Texas East West/Other (a) Texas East West/Other (a) 2020 CDDs (b) 3,102 1,362 1,971 280 79 181 1,640 874 1,152 1,012 353 562 170 56 76 HDDs (b) 1,501 4,268 1,939 634 1,517 763 6 72 4 70 634 178 791 2,045 994 2019 CDDs 3,115 1,349 1,899 266 98 136 1,840 869 1,219 934 348 513 75 34 31 HDDs 1,868 4,615 2,199 757 1,664 806 — 29 9 70 465 192 1,041 2,457 1,192 10-year average CDDs 3,076 1,297 1,900 277 83 153 1,693 818 1,149 1,002 361 552 104 35 46 HDDs 1,756 4,629 2,108 696 1,616 779 5 54 13 60 501 206 995 2,458 1,110 (a) The West/Other weather metrics are comprised of the average of the CDD and HDD regional results for the West - California and West - South Central regions (b) National Oceanic and Atmospheric Administration-Climate Prediction Center - A Cooling Degree Day, or CDD, represents the number of degrees that the mean temperature for a particular day is above 65 degrees Fahrenheit in each region. A Heating Degree Day, or HDD, represents the number of degrees that the mean temperature for a particular day is below 65 degrees Fahrenheit in each region. The CDDs/HDDs for a period of time are calculated by adding the CDDs/HDDs for each day during the period. 54 Gross margin and economic gross margin Gross margin increased $83 million and economic gross margin increased $168 million for the year ended December 31, 2020, compared to the same period in 2019. The detail by segment is as follows: Texas (In millions) Lower fuel and supply costs primarily due to $18 per MWh lower average power purchases in 2020 to serve the retail load, driven by purchasing incremental supply in 2019 at escalated prices above $1,000/MWh during periods of extreme weather during the third quarter; partially offset by a reduction in sell back of excess supply in 2020 $ 540 Lower gross margin due to a decrease in net sales of generation to third parties, as the supply was utilized to serve the Company's retail load following the integration of the wholesale generation and retail operations with a geographical focus in 2020 (269) Lower net revenue due to: • lower volumes from attrition, customer mix, and reduced sales from direct and alternative sales channels due to the impact of COVID-19 of $212 million, • lower net revenue rates driven by customer term, product, mix and the impact of COVID-19 of $0.76 per MWh or $43 million, • decreased load of 1.1 TWhs from unfavorable weather of $89 million; • partially offset by higher retail net revenue due to increased volumes from the acquisition of Stream in August 2019 of $231 million (113) Lower gross margin from market optimization activities (27) Lower gross margin due to the sale of emissions in 2019 (13) Other (5) Increase in economic gross margin $ 113 Decrease in mark-to-market for economic hedging primarily due to net unrealized gains/losses on open positions related to economic hedges (199) Increase in contract and emission credit amortization 14 Decrease in gross margin $ (72) East (In millions) Higher gross margin driven by a 43% increase in New York realized capacity prices $ 47 Higher gross margin due to increased volumes from the acquisition of Stream Energy in August 2019 33 Higher gross margin due to increased sales of portable solar and power products 24 Higher gross margin due to lower supply costs on contracted load 23 Higher gross margin due to lower supply costs of approximately $2.50 per MWh, or $21 million, driven by lower electricity and natural gas prices, partially offset by $19 million from lower volumes due to attrition and customer mix, and the impact of COVID-19 2 Lower gross margin due to a 6% decrease in PJM capacity volumes and a 4% decrease in PJM capacity prices (41) Lower gross margin due to a 25% decrease in New England realized capacity prices (36) Lower gross margin due to a lower of cost or market adjustment on oil inventory in 2020 (29) Lower gross margin primarily due to a 41% decrease in economic generation volumes, primarily due to dark spread contractions and planned outages in 2020 (16) Lower gross margin due to insurance proceeds from outages in 2019 (8) Other 1 Economic gross margin $ — Increase in mark-to-market for economic hedging primarily due to net unrealized gains/losses on open positions related to economic hedges 118 Increase in gross margin $ 118 55 West/Other (In millions) Higher gross margin primarily due to MISO uplift payments resulting from out-of-market dispatch during Hurricane Laura, spark spread expansion in MISO and increased California resource adequacy pricing; partially offset by lower realized pricing in the West $ 55 Higher gross margin from generation outage insurance proceeds received in 2020 for forced outages in 2019 30 Higher gross margin due to the extended forced outage at the Sunrise facility in 2019, partially offset by 2020 forced outages at Cottonwood 2 Lower gross margin from market optimization activities (17) Lower gross margin due to the Canal 3 substantial completion payment earned in 2019 (9) Lower gross margin due to the sale of emissions in 2019 (4) Other (1) Increase in economic gross margin $ 56 Decrease in mark-to-market for economic hedging primarily due to net unrealized gains/losses on open positions related to economic hedges (18) Increase in gross margin $ 38 Mark-to-market for Economic Hedging Activities Mark-to-market for economic hedging activities includes asset-backed hedges that have not been designated as cash flow hedges. Total net mark-to-market results decreased by $99 million during the year ended December 31, 2020, compared to the same period in 2019. The breakdown of gains and losses included in operating revenues and operating costs and expenses by segment was as follows: Year Ended December 31, 2020 (In millions) Texas East West/Other Eliminations Total Mark-to-market results in operating revenues Reversal of previously recognized unrealized losses/(gains) on settled positions related to economic hedges $ 1 $ 33 $ (7) $ 4 $ 31 Net unrealized gains on open positions related to economic hedges 1 55 4 4 64 Total mark-to-market gains/(losses) in operating revenues $ 2 $ 88 $ (3) $ 8 $ 95 Mark-to-market results in operating costs and expenses Reversal of previously recognized unrealized (gains)/losses on settled positions related to economic hedges $ (87) $ 5 $ — $ (4) $ (86) Reversal of acquired loss positions related to economic hedges 2 2 — — 4 Net unrealized (losses) on open positions related to economic hedges (126) (2) — (4) (132) Total mark-to-market (losses)/gains in operating costs and expenses $ (211) $ 5 $ — $ (8) $ (214) 56 Year Ended December 31, 2019 (In millions) Texas East West/Other Eliminations Total Mark-to-market results in operating revenues Reversal of previously recognized unrealized losses on settled positions related to economic hedges $ 21 $ 14 $ 12 $ — $ 47 Net unrealized gains/(losses) on open positions related to economic hedges 26 (43) 4 (1) (14) Total mark-to-market gains/(losses) in operating revenues $ 47 $ (29) $ 16 $ (1) $ 33 Mark-to-market results in operating costs and expenses Reversal of previously recognized unrealized (gains)/losses on settled positions related to economic hedges $ (117) $ 3 $ (1) $ — $ (115) Reversal of acquired loss positions related to economic hedges. 1 5 — — 6 Net unrealized gains/(losses) on open positions related to economic hedges 59 (4) — 1 56 Total mark-to-market (losses)/gains in operating costs and expenses $ (57) $ 4 $ (1) $ 1 $ (53) Mark-to-market results consist of unrealized gains and losses on contracts that are yet to be settled. The settlement of these transactions is reflected in the same revenue or cost caption as the items being hedged. The reversals of acquired gain or loss positions were valued based upon the forward prices on the acquisition date. For the year ended December 31, 2020 the $95 million gain in operating revenues from economic hedge positions was driven primarily by an increase in the value of open positions as a result of decreases in New York capacity prices, as well as the reversal of previously recognized unrealized losses on contracts that settled during the period. The $214 million loss in operating costs and expenses from economic hedge positions was driven primarily by a decrease in the value of open positions as a result of decreases in ERCOT power prices and heat rate contraction, as well as the reversal of previously recognized unrealized gains on contracts that settled during the period. For the year ended December 31, 2019 the $33 million gain in operating revenues from economic hedge positions was driven primarily by the reversal of previously recognized unrealized losses on contracts that settled during the period. The $53 million loss in operating costs and expenses from economic hedge positions was driven primarily by the reversal of previously recognized unrealized gains, partially offset by an increase in the value of open positions as a result of gains on ERCOT heat rate positions due to heat rate expansion. In accordance with ASC 815, the following table represents the results of the Company's financial and physical trading of energy commodities for the years ended December 31, 2020 and 2019. The realized and unrealized financial and physical trading results are included in operating revenue. The Company's trading activities are subject to limits within the Company's Risk Management Policy. Year ended December 31, (In millions) 2020 2019 Trading gains/(losses) Realized $ 41 $ 57 Unrealized (5) 20 Total trading gains $ 36 $ 77 Operations and Maintenance Expenses Operations and maintenance expenses are comprised of the following: (In millions) Texas East West/Other Corporate Eliminations Total Year Ended December 31, 2020 $ 651 $ 374 $ 101 $ 9 $ (6) $ 1,129 Year Ended December 31, 2019 605 368 105 9 (5) 1,082 57 Operations and maintenance expenses increased by $47 million for the year ended December 31, 2020 compared to the same period in 2019, due to the following: (In millions) Increase due to the final settlement of the asbestos liability related to Midwest Generation and the resulting reduction of the accrual in 2019 $ 27 Increase due to higher customer operations spend including digital capabilities, data analytics and customer retention 19 Increase due to a suspended plant project and reserves for obsolete inventory 13 Increase due to Stream Energy acquisition in August 2019 11 Increase primarily due to planned outages at Midwest Generation in 2020 8 Increase due to incremental safety measures resulting from COVID-19 8 Decrease in variable chemical costs due to a reduction in East generation volumes (14) Decrease in plant deactivation costs due to projects at Midwest Generation and Encina in 2019 (12) Decrease due to return to service costs incurred at Gregory facility in 2019 (7) Other (6) Increase in operations and maintenance expense $ 47 Other Cost of Operations Other Cost of operations are comprised of the following: (In millions) Texas East West/Other Total Year Ended December 31, 2020 $ 163 $ 91 $ 18 $ 272 Year Ended December 31, 2019 166 78 27 271 Other cost of operations increased by $1 million for the year ended December 31, 2020 compared to the same period in 2019, due to the following: (In millions) Increase in gross receipts tax due to the Stream Energy acquisition in August 2019 and higher revenue from increased rates and customer counts $ 6 Decrease in ARO expense due to Encina decommissioning and Jewett Mine remediation in 2019, partially offset by an increase in costs due to changes in regulatory requirements at the Joliet facility (5) Increase in other cost of operations $ 1 Depreciation and Amortization Depreciation and amortization expenses are comprised of the following: (In millions) Texas East West/Other Corporate Total Year Ended December 31, 2020 $ 227 $ 142 $ 32 $ 34 $ 435 Year Ended December 31, 2019 188 121 33 31 373 Depreciation and amortization expense increased by $62 million for the year ended December 31, 2020 compared to the same period in 2019, primarily due to the acquisition of Stream Energy in August 2019, retail customer book acquisitions in 2020 and the Midwest Generation lease purchase in 2020. Impairment Losses During the year ended December 31, 2020, the Company recorded impairment losses of $75 million primarily related to the Cottonwood facility and the Home Solar business, compared to impairment losses of $5 million recorded on intangible assets during the same period in 2019, as further described in Item 15 — Note 11, Asset Impairments , to the Consolidated Financial Statements . 58 Selling, General and Administrative Costs Selling, general and administrative costs are comprised of the following: (In millions) Texas East West/Other Corporate Total Year Ended December 31, 2020 $ 559 $ 288 $ 37 $ 49 $ 933 Year Ended December 31, 2019 481 291 31 24 827 Selling, general and administrative costs increased by $106 million for the year ended December 31, 2020 compared to the same period in 2019, due to the following: (In millions) Increase due to the acquisitions of Stream Energy in August 2019 $ 27 Increase due to income from transition services agreements ending in 2019 and an increase in personnel costs in 2020 24 Increase due to higher amortization of commissions 18 Increase in acquisition costs related to the Direct Energy acquisition 17 Increase in selling and marketing expenses primarily due to higher advertising expenses and marketing campaigns to increase customer count, partially offset by reduced spend in direct and alternative sales channels due to COVID-19 11 Increase in bad debt expense primarily due to the impact of COVID-19 5 Other 4 Increase in selling, general and administrative costs $ 106 Reorganization Costs For the year ended December 31, 2019, reorganization costs of $23 million primarily related to severance and contract modifications for the Transformation Plan. The Company significantly achieved the operations and cost excellent portion of the Transformation Plan during 2019. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates increased by $15 million for the year ended December 31, 2020 compared to the same period in 2019 primarily due to higher revenues at Ivanpah driven by operational efficiencies and favorable weather. Impairment Losses on Investments During the year ended December 31, 2020, the Company recorded other-than-temporary impairment losses on the Company's investment in Petra Nova Parish Holdings of $18 million, compared to $108 million recorded in the same period in 2019, as further described in Item 15 — Note 11, Asset Impairments , to the Consolidated Financial Statements. Other Income, Net Other income increased by $1 million for the year ended December 31, 2020 compared to the same period in 2019, primarily due to income from insurance proceeds received, partially offset by decreases in interest income and dividends received from cost method investments in 2020. Loss on Debt Extinguishment A loss on debt extinguishment of $9 million was recorded for the year ended December 31, 2020, driven by the debt extinguished in connection with the sale of Home Solar and the redemptions of the Indian River and Dunkirk bonds. A loss on debt extinguishment of $51 million was recorded for the year ended December 31, 2019, driven by the redemption of Senior Notes, due 2024, and the repayment of the 2023 Term Loan Facility. 59 Interest Expense Interest expense decreased by $12 million for the year ended December 31, 2020 compared to the same period in 2019, due to the following: (In millions) Decrease due to the repayment of the Term Loan and 2024 Senior Notes $ (16) Decrease in derivative interest expense due to the termination of interest rate swaps in 2019, partially offset by settlement of in-the-money interest rate swaps in 2019 (14) Decrease due to repayment of Agua Caliente debt in the fourth quarter of 2019 (7) Decrease due to lower interest on the Revolving Credit Facility in 2020 (3) Decrease due to the early settlement of an interest rate swap in 2020, partially offset by interest expense related to financings entered into in connection with the Direct Energy acquisition (2) Increase due to full year of interest incurred in 2020 on bonds issued in the second quarter of 2019 33 Other (3) Decrease in interest expense $ (12) Income Tax Expense/(Benefit) For the year ended December 31, 2020, NRG recorded income tax expense of $251 million on pre-tax income of $761 million. For the same period in 2019, NRG recorded an income tax benefit of $3.3 billion on pre-tax income of $786 million. The effective tax rate was 33.0% and (424.2)% for the years ended December 31, 2020 and 2019, respectively. The large benefit for the year ended December 31, 2019 was due to a $3.5 billion release of the Company’s valuation allowance. Refer to Item 15 – Note 21, Income Taxes, to the Consolidated Financial Statements for further discussion of the release in valuation allowance. For the year ended December 31, 2020, NRG's overall effective tax rate was different than the federal statutory tax rate of 21% primarily due to state tax expense, recognition of state valuation allowance on NOLs, and return to provision adjustments. Year Ended December 31, (In millions, except effective income tax rate) 2020 2019 Income from continuing operations before income taxes $ 761 $ 786 Tax at federal statutory tax rate 160 165 State taxes 18 13 Deferred impact of state tax rate changes 2 12 Changes in valuation allowance 24 (3,492) Permanent differences 8 (9) Return to provision adjustments 36 — Recognition of uncertain tax benefits 3 (10) Other — (13) Income tax expense/(benefit) $ 251 $ (3,334) Effective income tax rate 33.0 % (424.2) % The effective income tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses and changes in valuation allowances in accordance with ASC 740, Income Taxes, or ASC 740. These factors and others, including the Company's history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets. Income from Discontinued Operations, Net of Income Tax Year ended December 31, (In millions) 2019 South Central $ 28 Yield Renewables Platform & Carlsbad 296 GenOn (3) Income from discontinued operations, net of income tax $ 321 Refer to Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Consolidated Financial Statements for further discussion. 60 Liquidity and Capital Resources Liquidity Position As of December 31, 2020 and 2019, NRG's liquidity, excluding collateral funds deposited by counterparties, was approximately $7.0 billion and $2.1 billion, respectively, comprised of the following: As of February 26, As of December 31, (In millions) 2021 2020 2019 Cash and cash equivalents: $ 1,923 $ 3,905 $ 345 Restricted cash - operating 10 3 4 Restricted cash - reserves (a) 2 3 4 Total 1,935 3,911 353 Total availability under Revolving Credit Facility and collective collateral facilities 1,865 3,129 1,794 Total liquidity, excluding collateral funds deposited by counterparties $ 3,800 $ 7,040 $ 2,147 (a) Includes reserves primarily for debt service, performance obligations and capital expenditures As of December 31, 2020, total liquidity, excluding collateral funds deposited by counterparties, increased by $4.9 billion. The increase was primarily driven by $2.9 billion of newly-issued secured and unsecured corporate debt and a $1.5 billion increase in collateral facilities to fund the Direct Energy acquisition. As of February 26, 2021, NRG had $3.8 billion of liquidity available to continue to support its operations. Changes in cash and cash equivalent balances are further discussed under the heading Cash Flow Discussion . Cash and cash equivalents at December 31, 2020 were predominantly held in money market funds invested in treasury securities, treasury repurchase agreements or government agency debt. Management believes that the Company's liquidity position and cash flows from operations will be adequate to finance operating and maintenance capital expenditures, to fund dividends to NRG's common stockholders, and to fund other liquidity commitments. Management continues to regularly monitor the Company's ability to finance the needs of its operating, financing and investing activity within the dictates of prudent balance sheet management. Credit Ratings On July 24, 2020, Moody's affirmed NRG's corporate family rating of Ba1, with positive outlook. The agency also affirmed the ratings on all NRG's outstanding debt, including the Ba2 rating on senior unsecured bonds, Baa3 rating on senior secured bonds with fall-away security provisions and Baa2 rating on senior secured bonds without the fall-away feature. On July 27, 2020, S&P upgraded the NRG corporate family rating to BB+ with a stable outlook and senior unsecured rating to BB+. The following table summarizes the Company's current credit ratings: S&P Moody's NRG Energy, Inc. BB+ Stable Ba1 Positive 3.75% Senior Secured Notes, due 2024 BBB- Baa3 2.00% Senior Secured Notes, due 2025 BBB- Baa3 7.25% Senior Notes, due 2026 BB+ Ba2 2.45% Senior Secured Notes, due 2027 BBB- Baa3 6.625% Senior Notes, due 2027 BB+ Ba2 5.75% Senior Notes, due 2028 BB+ Ba2 3.375% Senior Notes, due 2029 BB+ Ba2 4.45% Senior Secured Notes, due 2029 BBB- Baa3 5.25% Senior Notes, due 2029 BB+ Ba2 3.625% Senior Notes, due 2031 BB+ Ba2 Revolving Credit Facility, due 2024 BBB- Baa3 61 Liquidity The principal sources of liquidity for NRG's operating and capital expenditures are expected to be derived from cash on hand, cash flows from operations and financing arrangements. As described in Item 15 — Note 14, Long-term Debt and Finance Leases, to the Consolidated Financial Statements, the Company's financing arrangements consist mainly of the Senior Credit Facility, the Senior Notes and the Senior Secured Notes. The Company's requirements for liquidity and capital resources, other than for operating its facilities, can generally be categorized by the following: (i) market operations activities; (ii) debt service obligations, as described more fully in Item 15 — Note 14, Long-term Debt and Finance Leases , to the Consolidated Financial Statements; (iii) capital expenditures, including environmental; and (iv) allocations in connection with return of capital and dividend payments to shareholders as described in Item 15 — Note 17, Capital Structure , to the Consolidated Financial Statements, acquisition opportunities, and debt repayments. Direct Energy Acquisition On July 24, 2020, the Company entered into the Purchase Agreement with Centrica plc to acquire Direct Energy, a North American subsidiary of Centrica plc. Direct Energy is a leading retail provider of electricity, natural gas, and home and business energy related products and services in North America, with operations in all 50 U.S. states and 8 Canadian provinces. The acquisition increased NRG's retail portfolio by over 3 million customers and strengthens its integrated model. It also broadens the Company's presence in the Northeast and into states and locales where it did not previously operate, supporting NRG's objective to diversify its business. The Company paid an aggregate purchase price of $3.625 billion in cash, subject to a purchase price adjustment of $77 million. The Company funded the purchase price using a combination of $715 million of cash on hand, $166 million from a draw on its Revolving Credit Facility (of which $107 million was used to fund acquisition costs and financing fees that are not included in the aggregate purchase price above) as well as approximately $2.9 billion in secured and unsecured corporate debt issued in December 2020. The Company also increased its liquidity and collateral facilities by $3.4 billion through a combination of new letter of credit facilities and increases to its existing Revolving Credit Facility, as further discussed below. Liquidity and Collateral Facility Increases The following table presents increases to the Company's liquidity and collateral facilities in connection with the Direct Energy acquisition: (In millions) December 31, 2020 Revolving Credit Facility commitment increase (a) $ 802 Revolving Credit Facility new tranche (a) 273 Credit default swap facility 150 Revolving accounts receivable financing facility 750 Repurchase facility 75 Facility agreement in connection with the sale of pre-capitalized trust securities (a) 874 Bilateral letter of credit facilities 475 Total Increases to Liquidity and Collateral Facilities $ 3,399 (a) Available upon the Acquisition Closing Date In connection with the close of the Direct Energy acquisition, the Company is working to replace the collateral posted by Centrica plc utilizing the availability under the above and existing facilities. Issuance of 2029 Senior Unsecured Notes and 2031 Senior Unsecured Notes On December 2, 2020, NRG issued $500 million aggregate principal amount of 3.375% senior notes due 2029 (the “2029 Unsecured Notes”) and $1.0 billion aggregate principal amount of 3.625% senior notes due 2031 (the “2031 Unsecured Notes” and, together with the 2029 Unsecured Notes, the “Unsecured Notes”). Interest is payable on the Unsecured Notes on February 15 and August 15 of each year beginning on August 15, 2021 until the maturity date of February 15, 2029 for the 2029 Unsecured Notes and February 15, 2031 for the 2031 Unsecured Notes. 62 Issuance of 2025 and 2027 Senior Secured First Lien Notes On December 2, 2020, NRG issued $1.4 billion of aggregate principal amount of senior secured first lien notes, consisting of $500 million 2.000% senior secured first lien notes due 2025 (the “2025 Secured Notes”) and $900 million 2.450% senior secured first lien notes due 2027 (the “2027 Secured Notes” and, together with the 2025 Secured Notes, the “2025 and 2027 Senior Secured First Lien Notes”), at a discount. The 2027 Secured Notes were issued under NRG’s Sustainability-Linked Bond Framework, which sets out certain sustainability targets, including reducing greenhouse gas emissions. Failure to meet such sustainability targets will result in a 25 basis point increase to the interest rate payable on the 2027 Secured Notes from and including the interest period ending on June 2, 2026. The 2025 and 2027 Senior Secured First Lien Notes are guaranteed on a first-priority basis by each of NRG’s current and future subsidiaries that guarantee indebtedness under its credit agreement. The 2025 and 2027 Senior Secured First Lien Notes will be secured by a first priority security interest in the same collateral that is pledged for the benefit of the lenders under NRG’s credit agreement, which consists of a substantial portion of the property and assets owned by NRG and the guarantors. The collateral securing the 2025 and 2027 Senior Secured First Lien Notes will be released if the Company obtains an investment grade rating from two out of the three rating agencies, subject to an obligation to reinstate the collateral if such rating agencies withdraw the Company's investment grade rating or downgrade its rating below investment grade Interest is payable on the 2025 and 2027 Senior Secured First Lien Notes on June 2 and December 2 of each year beginning on June 2, 2021 until the maturity date of December 2, 2025 for the 2025 Secured Notes and until the maturity date of December 2, 2027 for the 2027 Secured Notes. Dunkirk Bonds On March 11, 2020, NRG issued $59 million in aggregate principal amount of NRG Dunkirk 2020 1.30% tax-exempt refinancing bonds due 2042 (the "Dunkirk Bonds"). The Dunkirk Bonds are guaranteed on a first-priority basis by each of NRG’s current and future subsidiaries that guarantee indebtedness under its credit agreement. The Dunkirk Bonds are secured by a first priority security interest in the same collateral that is pledged for the benefit of the lenders under NRG’s credit agreement, which consists of a substantial portion of the property and assets owned by NRG and the guarantors. The collateral securing the Dunkirk Bonds will, at the request of NRG, be released if NRG satisfies certain conditions, including receipt of an investment grade rating on its senior, unsecured debt securities from two out of the three rating agencies, subject to reversion if those rating agencies withdraw their investment grade rating of the Bonds or any of NRG’s senior, unsecured debt securities or downgrade such rating below investment grade. The Dunkirk Bonds are subject to mandatory tender and purchase on April 3, 2023 and have a final maturity date of April 1, 2042. NRG used the net proceeds from the offering to redeem in 2020 the existing principal amount of outstanding Dunkirk Power LLC 5.875% tax exempt bonds due 2042. Indian River Bonds On December 17, 2020, NRG issued $57 million in aggregate principal amount of NRG Indian River 2020 1.25% tax-exempt refinancing bonds due 2040 (the "IR 2040 Bonds") and $190 million aggregate principal amount of NRG Indian River Power 2020 1.25% tax-exempt refinancing bonds due 2045 (the "IR 2045 Bonds") (together the "IR Bonds"). The IR Bonds are guaranteed on a first-priority basis by each of NRG’s current and future subsidiaries that guarantee indebtedness under its credit agreement. The Bonds are secured by a first priority security interest in the same collateral that is pledged for the benefit of the lenders under NRG’s credit agreement, which consists of a substantial portion of the property and assets owned by NRG and the guarantors. The collateral securing the IR Bonds will, at the request of NRG, be released if NRG satisfies certain conditions, including receipt of an investment grade rating on its senior, unsecured debt securities from two out of the three rating agencies, subject to reversion if those rating agencies withdraw their investment grade rating of the IR Bonds or any of NRG’s senior, unsecured debt securities or downgrade such rating below investment grade. The IR Bonds are subject to mandatory tender and purchase on October 1, 2025 and have final maturity dates of October 1, 2040 for the IR 2040 Bonds and October 1, 2045 for the IR 2045 Bonds. NRG used the net proceeds from the offering to redeem in 2020 the existing principal amounts of outstanding Indian River Power 6.000% tax exempt bonds due 2040 and Indian River Power LLC 5.375% tax exempt bonds due 2045. Revolving Credit Facility The Company had $83 million outstanding under its Revolving Credit Facility as of December 31, 2019, which was used to repay the outstanding indebtedness on the Agua Caliente Borrower 1 notes on a leverage-neutral basis during the fourth quarter of 2019. There were no borrowings outstanding as of December 31, 2020. 63 On August 20, 2020, the Company amended its existing credit agreement to, among other things, (i) increase the existing revolving commitments in an aggregate amount of $802 million, (ii) provide for a new tranche of revolving commitments in an aggregate amount of $273 million with a maturity date that is 30 months after the date of closing of the Direct Energy acquisition (the "Acquisition Closing Date"), The maturity date of the new revolving tranche of commitments may, upon request by the Company, at the option of each applicable lender under the new tranche be extended by 12 months, but not beyond May 28, 2024, which is the maturity date of the existing and increased commitments. Other than with respect to the maturity date, the terms of all revolving commitments and loan made pursuant thereto are identical. The increase in the existing commitments and the commitments with respect to the new tranche are effective on August 20, 2020 but only became available on the Acquisition Closing Date. For further discussion on the acquisition of Direct Energy see Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions , to the Consolidated Financial Statements. Upon the Acquisition Closing Date, total revolving commitments available, subject to usage, under this amendment will be $3.7 billion. In addition, the amendment includes changes to, among other things, (i) permit the borrowing of up to the full amount of the revolving commitments in Canadian dollars, (ii) increase the swingline facility from $50 million to $100 million and provide a $10 million swingline facility in Canadian dollars, (iii) increase the credit facilities lien basket from the greater of $6 billion and 30% of total assets to the greater of $10 billion and 30% of total assets, (iv) increase the credit facilities debt basket from $6 billion to $10 billion, (v) increase the basket for securitization indebtedness from $750 million to $1.7 billion, (vi) provide an additional indebtedness basket equal to $600 million for certain liquidity facilities, and (vii) make certain other changes to the existing covenants and other provisions. Put Option Agreement for Senior Debt Issuance During the fourth quarter of 2020, the Company entered into a 3-year put option agreement with a Delaware trust formed by the Company upon completion of the sale of $900 million pre-capitalized trust securities redeemable November 15, 2023 (the “P-Caps”). The Trust invested the proceeds from the sale of the P-Caps in a portfolio of principal and interest strips of U.S. Treasury securities (the “Eligible Treasury Assets”). Under the put option agreement, NRG has the right, from time to time, to issue to the Trust and to require the Trust to purchase from NRG, on one or more occasions (the “Issuance Right”), up to $900 million aggregate principal amount of NRG’s 1.841% Senior Secured First Lien Notes due 2023 (the “P-Caps Secured Notes”) in exchange for all or a portion of the Eligible Treasury Assets corresponding to the portion of the Issuance Right. NRG will pay a semi-annual premium to the Trust at a rate of 1.65%. In connection with the issuance of the P-Caps, on December 2, 2020, NRG entered into a facility agreement for the issuance of letters of credit (the “LC Agreement”) and Deutsche Bank Trust Company Americas as collateral agent (the “Collateral Agent”) and administrative agent pursuant to which certain financial institutions (the “LC Issuers”) are permitted to join with commitments to provide letters of credit in an aggregate amount not to exceed $874 million to support the operations of NRG and its subsidiaries and minority investments, including to replace certain currently outstanding letters of credit and other credit support issued for the account of entities being acquired pursuant to the Acquisition. In addition, on December 2, 2020, the Trust entered into a pledge and control agreement (the “Pledge Agreement”), among NRG, the Trust and the Collateral Agent for the LC Issuers, under which the Trust agreed to grant a pledge over the Eligible Treasury Assets in favor of the Collateral Agent for the benefit of the LC Issuers. Pursuant to the LC Agreement and the Pledge Agreement, the Collateral Agent is entitled to withdraw Eligible Treasury Assets from the Trust’s pledged account, following notice to NRG, in the event NRG has failed to reimburse amounts drawn under any letter of credit issued pursuant to the LC Agreement, and the LC Issuers have the right to instruct the Collateral Agent to enforce the pledge over the Eligible Treasury Assets upon the occurrence of any event of default under the LC Agreement (a “Collateral Enforcement Event”). As of December 31, 2020 no letters of credit were issued under this agreement . See Note 14, Long-term Debt and Finance Leases for further discussion. Credit Default Swap Facility On January 4, 2019, the Company entered into an $80 million credit agreement to issue letters of credit, which is currently supporting the Cottonwood facility lease. Annual fees of 1.33% on the facility were paid quarterly in advance. On August 13, 2020, the agreement was amended permitting the Company to increase the size of the facility and fees on the facility were adjusted to reflect the costs of the credit default swaps that serve as collateral for the facility. In order to increase the Company’s collective collateral facilities in connection with the Direct Energy acquisition. NRG expanded the facility allowing for the issuance of an additional $150 million of letters of credit as of December 31, 2020. As of December 31, 2020, $229 million was issued under this facility. Bilateral Letter of Credit Facilities In December 2020, the Company entered into a series of bilateral letter of credit facilities to allow for the issuance of up to $475 million of letters of credit. These facilities are uncommitted. As of December 31, 2020, $5 million was issued under these facilities. 64 Receivables Securitization On September 22, 2020, NRG Receivables LLC, a bankruptcy remote, special purpose, indirect wholly owned subsidiary, entered into the Receivables Facility for an amount up to $750 million, subject to adjustments on a seasonal basis, with issuers of asset-backed commercial paper and commercial banks (the "Lenders".) The assets of NRG Receivables LLC are first available to satisfy the claims of the Lenders before making payments on the subordinated note and equity issued by NRG Receivables LLC. The assets of NRG Receivables LLC are not available to the Company and its subsidiaries and creditors unless and until distributed by NRG Receivables LLC. Under the Receivables Facility, certain indirect subsidiaries of the Company sell their accounts receivables to NRG Receivables LLC, subject to certain terms and conditions. In turn, NRG Receivables LLC has granted a security interest in the purchased receivables to the Lenders as collateral for borrowings of cash and issuances of letters of credit. Receivables remain on the Company's consolidated balance sheet and amounts funded by the Lenders to NRG Receivables LLC are reflected as short-term borrowings. Cash flows from the Receivables Facility are reflected as financing activities in the Company's Consolidated Statements of Cash Flows. The Company will continue to service the receivables sold in exchange for a servicing fee. The Receivables Facility is scheduled to expire on September 21, 2021, unless renewed by the mutual consent of the parties in accordance with its terms. Borrowings by NRG Receivables LLC under the Receivables Facility bear interest as defined under the Receivables Financing Agreement. The weighted average interest rate related to usage under the Receivables Facility as of December 31, 2020 was 0.537%. As of December 31, 2020, there were no outstanding borrowings and there were $198 million in letters of credit issued under the Receivables Facility. Repurchase Facility On September 22, 2020, the Company entered into an uncommitted repurchase facility (“Repurchase Facility”) related to the Receivables Facility. Under the Repurchase Facility the Company can borrow up to $75 million, collateralized by a subordinated note issued by NRG Receivables LLC to NRG Retail LLC in favor of the originating entities representing a portion of the balance of receivables sold to NRG Receivables LLC under the Receivables Facility. The Repurchase Facility is scheduled to expire on September 22, 2021, unless renewed by the mutual consent of the parties in accordance with its terms. The Repurchase Facility has no commitment fee and borrowings will be drawn at LIBOR +1.25%. As of December 31, 2020, there were no outstanding borrowings under the Repurchase Facility. Midwest Generation Lease Purchase On September 29, 2020, Midwest Generation acquired all of the ownership interests in the Powerton facility and Units 7 and 8 of the Joliet facility, which were being leased through 2034 and 2030, respectively, for approximately $260 million. The Company funded the purchase with cash-on-hand. Upon closing, lease expense related to these facilities, which totaled approximately $14 million in 2019, and the operating lease liability of $148 million were eliminated. Sale of Agua Caliente On November 19, 2020, the Company entered into an agreement to sell its 35% ownership in Agua Caliente to Clearway Energy for $202 million. The sale of the solar project closed on February 3, 2021. On October 21, 2019, the Company had repaid the Agua Caliente Borrower 1 notes associated with the project of $83 million. Sale of 4.8 GW of Fossil Generation Assets On February 28, 2021, the Company entered into a definitive purchase agreement with Generation Bridge, an affiliate of ArcLight Capital Partners, to sell approximately 4,850 MWs of fossil generating assets from its East and West regions of operations for total proceeds of $760 million, subject to standard purchase price adjustments and certain other indemnifications. As part of the transaction, NRG is entering into a tolling agreement for its 866 MW Arthur Kill plant in New York City through April 2025. The transaction is expected to close in the fourth quarter of 2021, and is subject to various closing conditions, approvals and consents, including FERC, NYSPSC, and antitrust review under Hart-Scott-Rodino. CARES Act On March 27, 2020, the U.S. government enacted the CARES Act, which provides, among other things, the option to defer payments of certain 2019 employer payroll taxes incurred after the date of enactment and pension contributions due in 2020, as well as claim a refund now for AMT credits from the IRS that were previously refundable over several years. As a result, the Company (i) deferred the payment of $17 million for the employer share of social security taxes that would otherwise have been due in 2020, with 50% due by December 31, 2021 and the remaining 50% due by December 31, 2022 and (ii) received $34 million of refundable AMT credits on August 4, 2020, inclusive of $17 million that was originally scheduled to be received in 2021. Of the amount received, $22 million was paid to GenOn for its share of the AMT credits received during the year of 2020. 65 Pension Plan Contribution In the Company's 2019 Form 10-K, NRG had anticipated making contributions of $63 million to its pension plans, including STP, in 2020. Cash contributions of $18 million were made during 2020, of which $7 million was related to STP. The remaining planned contributions for 2020 were satisfied by available pre-funded pension balances (previous contributions in excess of required pension contributions). Debt Service Obligations Principal payments on debt and finance leases as of December 31, 2020 are due in the following periods: (In millions) Description 2021 2022 2023 2024 2025 Thereafter Total Recourse Debt: Senior notes, due 2026 $ — $ — $ — $ — $ — $ 1,000 $ 1,000 Senior notes, due 2027 — — — — — 1,230 1,230 Senior notes, due 2028 — — — — — 821 821 Senior notes, due 2029 — — — — — 733 733 Senior notes, due 2029 — — — — — 500 500 Senior notes, due 2031 — — — — — 1,030 1,030 Convertible Senior Notes, due 2048 — — — — — 575 575 Senior Secured First Lien Notes, due 2024 — — — 600 — — 600 Senior Secured First Lien Notes, due 2025 — — — — 500 — 500 Senior Secured First Lien Notes, due 2027 — — — — — 900 900 Senior Secured First Lien Notes, due 2029 — — — — — 500 500 Tax-exempt bonds — — — — — 466 466 Subtotal Recourse Debt — — — 600 500 7,755 8,855 Finance Leases: Finance leases 1 2 1 — — — 4 Subtotal Finance Leases 1 2 1 — — — 4 Total Debt and Finance Leases $ 1 $ 2 $ 1 $ 600 $ 500 $ 7,755 $ 8,859 The Company plans to reduce debt by nearly $1.2 billion during 2021 to maintain its targeted investment grade credit metrics. The Company intends to fund the repurchase from cash from operations. NRG continues to look at optimizing its debt structure and seeking out lower interest rates. Market Operations The Company's market operations activities require a significant amount of liquidity and capital resources. These liquidity requirements are primarily driven by: (i) margin and collateral posted with counterparties; (ii) margin and collateral required to participate in physical markets and commodity exchanges; (iii) timing of disbursements and receipts (e.g. buying fuel before receiving energy revenues); (iv) initial collateral for large structured transactions; and (v) collateral for project development. As of December 31, 2020, market operations had total cash collateral outstanding of $50 million and $768 million outstanding in letters of credit to third parties primarily to support its market activities for both wholesale and retail transactions. As of December 31, 2020, total funds deposited by counterparties was $19 million in cash and $75 million of letters of credit. Future liquidity requirements, including those related to the acquisition of Direct Energy, may change based on the Company's hedging activities and structures, power purchases and sales, fuel purchases, and future market conditions, including forward prices for energy and fuel and market volatility. In addition, liquidity requirements are dependent on the Company's credit ratings and general perception of its creditworthiness. 66 First Lien Structure NRG has granted first liens to certain counterparties on a substantial portion of property and assets owned by NRG and the guarantors of its senior debt. NRG uses the first lien structure to reduce the amount of cash collateral and letters of credit that it would otherwise be required to post from time to time to support its obligations under out-of-the-money hedge agreements for forward sales of power or gas used as a proxy for power. To the extent that the underlying hedge positions for a counterparty are out-of-the-money to NRG, the counterparty would have a claim under the first lien program. The first lien program limits the volume that can be hedged, not the value of underlying out-of-the-money positions. The first lien program does not require NRG to post collateral above any threshold amount of exposure. Within the first lien structure, the Company can hedge up to 80% of its coal and nuclear capacity and 10% of its other assets with these counterparties for the first 60 months and then declining thereafter. Net exposure to a counterparty on all trades must be positively correlated to the price of the relevant commodity for the first lien to be available to that counterparty. The first lien structure is not subject to unwind or termination upon a ratings downgrade of a counterparty and has no stated maturity date. The Company's first lien counterparties may have a claim on its assets to the extent market prices exceed the hedged prices. As of December 31, 2020, all hedges under the first liens were in-the-money on a counterparty aggregate basis. The following table summarizes the amount of MW hedged against the Company's coal and nuclear assets and as a percentage relative to the Company's coal and nuclear capacity under the first lien structure as of December 31, 2020: Equivalent Net Sales Secured by First Lien Structure (a) 2021 2022 2023 2024 In MW 692 803 801 0 As a percentage of total net coal and nuclear capacity (b) 15% 18% 18% —% (a) Equivalent Net Sales include natural gas swaps converted using a weighted average heat rate by region (b) Net coal and nuclear capacity represents 80% of the Company's total coal and nuclear assets eligible under the first lien, which excludes coal assets acquired in the Midwest Generation acquisition Small Book Acquisitions During 2020, the Company acquired multiple books of customers totaling approximately 56,000 customers for $22 million. Capital Expenditures The following table summarizes the Company's capital expenditures for maintenance, environmental, and growth investments for the year ended December 31, 2020: (In millions) Maintenance Environmental Growth Investments (a) Total Texas $ (99) $ (1) $ (30) $ (130) East (20) (2) (23) (45) West/Other (30) — — (30) Corporate (7) — (18) (25) Total capital expenditures (156) (3) (71) (230) Other investments — — (32) (32) Total capital expenditures and investments $ (156) $ (3) $ (103) $ (262) (a) Includes other investments, acquisitions, digital NRG and costs to achieve. Excludes Midwest Generation lease buyout Growth investments in East for the year ended December 31, 2020 include the Astoria generating facility, for which the Company has proposed to replace existing units with a single, new state-of-the-art Simple Cycle Combustion Turbine having a total generating capacity of 437 MW. The Company is working to obtain the permits and regulatory approvals necessary to commence construction of the project. NRG is targeting 2023 for commercial operation. Additionally, included in other investments are expenditures for Encina site improvements classified as ARO payments. Demolition at the Encina site is underway and is expected to be completed in the first half of 2022. The Company expects to initiate the planning and marketing process of the Encina site in 2021. Environmental Capital Expenditures Estimate NRG estimates that environmental capital expenditures from 2021 through 2025 required to comply with environmental laws will be approximately $61 million. These costs are primarily associated with the cost of complying with the federal CCR rule and ash storage projects. 67 The table below summarizes the status of NRG's coal fleet with respect to air quality controls. NRG uses an integrated approach to fuels, controls and emissions markets to meet environmental requirements. SO 2 NO x Mercury Particulate Units State Control Equipment Install Date Control Equipment Install Date Control Equipment Install Date Control Equipment Install Date Indian River 4 DE CDS 2011 LNBOFA/SCR 1999/2011 ACI/CDS/FF 2008/2011 ESP/FF 1980/2011 Limestone 1-2 TX FGD 1985-86 LNBOFA 2002/2003 ACI 2015 ESP 1985-1986 Powerton 5 IL DSI 2016 OFA/SNCR 2003/2012 ACI 2009 ESP/upgrade 1973/2016 Powerton 6 IL DSI 2014 OFA/SNCR 2002/2012 ACI 2009 ESP/upgrade 1976/2014 W.A. Parish 5, 6, 7 TX FF co-benefit 1988 SCR 2004 ACI 2015 FF 1988 W.A. Parish 8 TX FGD 1982 SCR 2004 ACI 2015 FF 1988 Waukegan 7 IL DSI 2014 LNBOFA 2002 ACI 2008 ESP/upgrade 1958/2002, 2014 Waukegan 8 IL DSI 2015 LNBOFA 1999 ACI 2008 ESP/upgrade 1962/1999, 2015 Will County 4 IL DSI 2017 LNBOFA 1999,2000 ACI 2009 ESP/upgrade 1963,72/ 2000 ACI - Activated Carbon Injection CDS - Circulating Dry Scrubber DSI - Dry Sorbent Injection with Trona ESP - Electrostatic Precipitator FGD - Flue Gas Desulfurization (wet) FF- Fabric Filter LNBOFA - Low NO x Burner with Overfire Air OFA - Overfire Air SCR - Selective Catalytic Reduction SNCR - Selective Non-Catalytic Reduction The following table summarizes the estimated environmental capital expenditures by region: (In millions) Texas East Total 2021 $ 2 $ 7 $ 9 2022 10 17 27 2023 4 14 18 2024 4 1 5 2025 2 — 2 Total $ 22 $ 39 $ 61 Share Repurchases In 2020, the Company completed $224 million of share repurchases at an average price of $33.05 per share, including $27 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuance. Common Stock Dividends NRG increased the annual dividend to $1.20 per share from $0.12 per share in the first quarter of 2020, and to $1.30 per share beginning in the first quarter of 2021. NRG expects to target an annual dividend growth rate of 7-9% per share in subsequent years. The Company returned $294 million of capital to shareholders in the year ended 2020 through a $1.20 dividend per common share. On January 21, 2021, NRG declared a quarterly dividend on the Company's common stock of $0.325 per share, or $1.30 per share on an annualized basis, payable on February 16, 2021, to stockholders of record as of February 1, 2021. The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws and regulations. 68 Cash Flow Discussion 2020 compared to 2019 The following table reflects the changes in cash flows for the comparative years: Year ended December 31, (In millions) 2020 2019 Change Net cash provided by operating activities $ 1,837 $ 1,413 $ 424 Net cash (used)/provided by investing activities (494) 556 (1,050) Net cash provided/(used) by financing activities 2,204 (2,148) 4,352 Net Cash Provided/(Used) By Operating Activities Changes to net cash provided/(used) by operating activities were driven by: (In millions) Increase in operating income adjusted for other non-cash items $ 212 Increase in working capital primarily attributed to lower fuel payables in 2020 driven by lower volumes of gas and fewer coal shipments received. 121 Increase in other working capital due to the final settlement of the asbestos liability with ComEd and the resulting reduction of the accrual in 2019 53 Increase primarily due to decreased pension contributions in 2020 due to the utilization of pre-funded pension balances 50 Decrease due to receipt of refundable AMT credits (34) Changes in cash collateral in support of risk management activities due to change in commodity prices 22 Change in cash provided by discontinued operations (8) Other changes in working capital 8 $ 424 Net Cash (Used)/Provided By Investing Activities Changes to net cash (used)/provided by investing activities were driven by: (In millions) Decrease in proceeds from sales of assets and discontinued operations primarily due to sales of South Central and Carlsbad in 2019 $ (1,213) Change in investments in unconsolidated affiliates 93 Decrease in cash paid for acquisitions of assets, businesses and leases 71 Decrease in contributions to discontinued operations 44 Decrease in net sales of emissions allowances (21) Increase in purchases of investments in nuclear decommissioning trust fund securities, net of proceeds from sales (18) Other (6) $ (1,050) 69 Net Cash Provided/(Used) By Financing Activities Changes in net cash provided/(used) by financing activities were driven by: (In millions) Decrease in payments of long-term debt $ 2,236 Increase in proceeds from issuance of long-term debt 1,401 Decrease in payments for share repurchase activity 1,211 Increase in payments of dividends to common stockholders (263) Changes in the Revolving Credit Facility (166) Change in cash provided by discontinued operations (43) Increase in payments of debt extinguishment costs and deferred issuance costs (19) Other (5) $ 4,352 NOLs, Deferred Tax Assets and Uncertain Tax Position Implications As of December 31, 2020, the Company had domestic pre-tax book income of $749 million and foreign pre-tax book income of $12 million. For the year ended December 31, 2020, the Company utilized U.S. federal NOLs of $134 million due to current year taxable income. As of December 31, 2020, the Company has cumulative U.S. federal NOL carryforwards of $10.1 billion, which will begin expiring in 2031 and cumulative state NOL carryforwards of $5.4 billion. NRG also has cumulative foreign NOL carryforwards of $347 million, which do not have an expiration date. In addition to the above NOLs, NRG has a $14 million indefinite carryforward for interest deductions, as well as $384 million of tax credits to be utilized in future years. As a result of the Company's tax position, including the utilization of federal and state NOLs, and based on current forecasts, the Company anticipates income tax payments, primarily due to state and local jurisdictions, of up to $26 million in 2021. The Company has $15 million of tax effected uncertain state tax benefits for which the Company has recorded a non-current tax liability of $18 million (including accrued interest) until such final resolution with the related taxing authority. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2017. With few exceptions, state and local income tax examinations are no longer open for years before 2012. Off-Balance Sheet Arrangements Obligations under Certain Guarantee Contracts NRG and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate market transactions with third parties. These arrangements include financial and performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. See also Item 15 — Note 28, Guarantees, to the Consolidated Financial Statements for additional discussion. Retained or Contingent Interests NRG does not have any material retained or contingent interests in assets transferred to an unconsolidated entity. Obligations Arising Out of a Variable Interest in an Unconsolidated Entity Variable interest in Equity investments — As of December 31, 2020, NRG has several investments with an ownership interest percentage of 50% or less in energy and energy-related entities that are accounted for under the equity method of accounting. Ivanpah is considered a variable interest entity for which NRG is not the primary beneficiary. NRG's pro-rata share of non-recourse debt held by unconsolidated affiliates was approximately $829 million as of December 31, 2020. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to NRG. See also Item 15 — Note 18, Investments Accounted for by the Equity Method and Variable Interest Entities, to the Consolidated Financial Statements for additional discussion. 70 Contractual Obligations and Market Commitments NRG has a variety of contractual obligations and other market commitments that represent prospective cash requirements in addition to the Company's capital expenditure programs. The following tables summarize NRG's contractual obligations and contingent obligations for guarantees. See also Item 15 — Note 14, Long-term Debt and Finance Leases , Note 24, Commitments and Contingencies , and Note 28, Guarantees , to the Consolidated Financial Statements for additional discussion. By Remaining Maturity at December 31, (In millions) 2020 Contractual Cash Obligations Under 1 Year 1-3 Years 3-5 Years Over 5 Years Total (a) Long-term debt (including estimated interest) $ 431 $ 901 $ 1,883 $ 9,098 $ 12,313 Finance lease obligations (including estimated interest) 1 3 — — 4 Operating leases 86 163 118 34 401 Fuel purchase and transportation obligations 146 167 132 80 525 Purchased power commitments (b) 48 112 99 316 575 Pension minimum funding requirement (c) 27 30 25 43 125 Other postretirement benefits minimum funding requirement (d) 6 11 10 19 46 Other liabilities (e) 34 46 34 108 222 Cash consideration for the acquisition of Direct Energy (f) 3,702 — — — 3,702 Total $ 4,481 $ 1,433 $ 2,301 $ 9,698 $ 17,913 (a) Excludes $15 million non-current payable relating to NRG's uncertain tax benefits under ASC 740 as the period of payment cannot be reasonably estimated. Also excludes $760 million of asset retirement obligations that are discussed in Item 15 — Note 15, Asset Retirement Obligations , to the Consolidated Financial Statements (b) Includes purchase power commitments and renewable minimum purchase power commitments under PPAs (c) These amounts represent the Company's estimated minimum pension contributions required under the Pension Protection Act of 2006. These amounts represent estimates based on assumptions that are subject to change. (d) These amounts represent estimates based on assumptions that are subject to change (e) Includes water right agreements, service and maintenance agreements, stadium naming rights, stadium sponsorships, LTSA commitments and other contractual obligations (f) On January 5, 2021 the Company acquired all of the issued and outstanding common shares of Direct Energy and paid an aggregate purchase price of $3.625 billion in cash, subject to a purchase price adjustment of $77 million. For more information see Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions . By Remaining Maturity at December 31, (In millions) 2020 Guarantees Under 1 Year 1-3 Years 3-5 Years Over 5 Years Total Letters of credit and surety bonds $ 1,049 $ 73 $ 31 $ — $ 1,153 Asset sales guarantee obligations 86 282 26 112 506 Other guarantees — — — 87 87 Total guarantees $ 1,135 $ 355 $ 57 $ 199 $ 1,746 Guarantor Financial Information As of December 31, 2020, the Company had outstanding $5.9 billion of Senior Notes and Convertible Senior Notes due 2026 to 2048 and outstanding $2.5 billion of Senior Secured First Lien Notes due from 2024 to 2029, as shown in Note 14, Long-term Debt and Finance Leases . These Senior Notes and Senior Secured First Lien Notes are guaranteed by certain of NRG's current and future 100% owned domestic subsidiaries, or guarantor subsidiaries (the “Guarantors”). See Exhibit 22.1 for a listing of the Guarantors. These guarantees are both joint and several. NRG conducts much of its business through and derives much of its income from its subsidiaries. Therefore, the Company's ability to make required payments with respect to its indebtedness and other obligations depends on the financial results and condition of its subsidiaries and NRG's ability to receive funds from its subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to NRG. Other subsidiaries of the Company do not guarantee the registered debt securities of either NRG Energy, Inc or the Guarantors (such subsidiaries are referred to as the “Non-Guarantors”). The Non-Guarantors include all of NRG's foreign subsidiaries and certain domestic subsidiaries. In March 2020, the SEC adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantees of registered debt securities under Rule 3-10 of Regulation S-X, permitting registrants to disclose summarized financial information for each subsidiary issuer and guarantor. These final rules were codified in Rule 13-01 of Regulation S-X. 71 In compliance thereof, the Company is including summarized financial information for NRG Energy, Inc. and the Guarantors on a combined basis after transactions and balances within the combined entities have been eliminated. The tables below present summarized financial information of NRG Energy, Inc. and the Guarantors in accordance with Rule 3-10 under the SEC's Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position of NRG Energy, Inc. and the Guarantors in accordance with U.S. GAAP. The following table presents the summarized statement of operations: (In millions) For the Year Ended December 31, 2020 (a) Operating revenues $ 8,146 Operating income 1,011 Total other expense (348) Income from Continuing Operations 663 Net Income 431 (a) Intercompany transactions with Non-Guarantors include operating revenue of $10 million, cost of operations of $(169) million and selling, general and administrative of $18 million The following table presents the summarized balance sheet information: (In millions) December 31, 2020 Current assets (a) $ 5,389 Property, plant and equipment, net 1,303 Non-current assets 7,599 Current liabilities (a) 1,846 Non-current liabilities 10,976 (a) Includes intercompany receivables of $55 million and intercompany payables of $52 million due from Non-Guarantors Fair Value of Derivative Instruments NRG may enter into power purchase and sales contracts, fuel purchase contracts and other energy-related financial instruments to mitigate variability in earnings due to fluctuations in spot market prices and to hedge fuel requirements at power plants or retail load obligations. NRG's trading activities are subject to limits in accordance with the Company's Risk Management Policy. These contracts are recognized on the balance sheet at fair value and changes in the fair value of these derivative financial instruments are recognized in earnings. The tables below disclose the activities that include both exchange and non-exchange traded contracts accounted for at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures , or ASC 820. Specifically, these tables disaggregate realized and unrealized changes in fair value; disaggregate estimated fair values at December 31, 2020, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at December 31, 2020. For a full discussion of the Company's valuation methodology of its contracts, see Derivative Fair Value Measurements in Item 15 — Note 5, Fair Value of Financial Instruments , to the Consolidated Financial Statements. Derivative Activity Gains/(Losses) (In millions) Fair value of contracts as of December 31, 2019 $ 67 Contracts realized or otherwise settled during the period (77) Changes in fair value (53) Fair value of contracts as of December 31, 2020 $ (63) 72 Fair Value of Contracts as of December 31, 2020 (In millions) Maturity Fair value hierarchy (Losses)/Gains 1 Year or Less Greater Than 1 Year to 3 Years Greater Than 3 Years to 5 Years Greater Than 5 Years Total Fair Value Level 1 $ (22) $ (6) $ — $ 1 $ (27) Level 2 79 (60) (32) (7) (20) Level 3 4 (9) (5) (6) (16) Total $ 61 $ (75) $ (37) $ (12) $ (63) The Company has elected to disclose derivative assets and liabilities on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. Also, collateral received or posted on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. Consequently, the magnitude of the changes in individual current and non-current derivative assets or liabilities is higher than the underlying credit and market risk of the Company's portfolio. As discussed in Item 7A — Quantitative and Qualitative Disclosures About Market Risk, Commodity Price Risk , NRG measures the sensitivity of the Company's portfolio to potential changes in market prices using VaR, a statistical model which attempts to predict risk of loss based on market price and volatility. NRG's risk management policy places a limit on one-day holding period VaR, which limits the Company's net open position. As the Company's trade-by-trade derivative accounting results in a gross-up of the Company's derivative assets and liabilities, the net derivative assets and liability position is a better indicator of NRG's hedging activity. As of December 31, 2020, NRG's net derivative liability was $63 million, a decrease to total fair value of $130 million as compared to December 31, 2019. This decrease was primarily driven by roll-off trades that settled during the period, as well as losses in fair value. Based on a sensitivity analysis using simplified assumptions, the impact of a $0.50 per MMBtu increase in natural gas prices across the term of the derivative contracts would result in an increase of approximately $102 million in the net value of derivatives as of December 31, 2020. The impact of a $0.50 per MMBtu decrease in natural gas prices across the term of the derivative contracts would result in a decrease of approximately $105 million in the net value of derivatives as of December 31, 2020. Critical Accounting Policies and Estimates NRG's discussion and analysis of the financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of these policies involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges, and the fair value of certain assets and liabilities. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies have not changed. On an ongoing basis, NRG evaluates these estimates, utilizing historic experience, consultation with experts and other methods the Company considers reasonable. In any event, actual results may differ substantially from the Company's estimates. Any effects on the Company's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the information that gives rise to the revision becomes known. NRG's significant accounting policies are summarized in Item 15 — Note 2, Summary of Significant Accounting Policies , to the Consolidated Financial Statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. 73 Accounting Policy Judgments/Uncertainties Affecting Application Derivative Instruments Assumptions used in valuation techniques Assumptions used in forecasting generation Assumptions used in forecasting borrowings Market maturity and economic conditions Contract interpretation Market conditions in the energy industry, especially the effects of price volatility on contractual commitments Income Taxes and Valuation Allowance for Deferred Tax Assets Ability to be sustained upon audit examination of taxing authorities Interpret existing tax statute and regulations upon application to transactions Ability to utilize tax benefits through carry backs to prior periods and carry forwards to future periods Impairment of Long-Lived Assets and Investments Recoverability of investment through future operations Regulatory and political environments and requirements Estimated useful lives of assets Environmental obligations and operational limitations Estimates of future cash flows Estimates of fair value Judgment about impairment triggering events Goodwill and Other Intangible Assets Estimated useful lives for finite-lived intangible assets Judgment about impairment triggering events Estimates of reporting unit's fair value Fair value estimate of intangible assets acquired in business combinations Contingencies Estimated financial impact of event(s) Judgment about likelihood of event(s) occurring Regulatory and political environments and requirements Derivative Instruments The Company follows the guidance of ASC 815 to account for derivative instruments. ASC 815 requires the Company to mark-to-market all derivative instruments on the balance sheet and recognize changes in the fair value of non-hedge derivative instruments immediately in earnings. In certain cases, NRG may apply hedge accounting to the Company's derivative instruments. The criteria used to determine if hedge accounting treatment is appropriate are: (i) the designation of the hedge to an underlying exposure; (ii) whether the overall risk is being reduced; and (iii) if there is a correlation between the changes in fair value of the derivative instrument and the underlying hedged item. Changes in the fair value of derivatives instruments accounted for as hedges are deferred and recorded as a component of OCI and subsequently recognized in earnings when the hedged transactions occur. For purposes of measuring the fair value of derivative instruments, NRG uses quoted exchange prices and broker quotes. When external prices are not available, NRG uses internal models to determine the fair value. These internal models include assumptions of the future prices of energy commodities based on the specific market in which the energy commodity is being purchased or sold, using externally available forward market pricing curves for all periods possible under the pricing model. These estimations are considered to be critical accounting estimates. Upon repayment of the Term Loan in 2019, all of the Company's interest rate swaps were terminated. During the fourth quarter of 2020, NRG entered into $1.6 billion of interest rate hedges associated with anticipated certain financing needs. As of December 31, 2020, the interest rate hedges were settled in connection with the issuance of fixed rate debt, resulting in a gain of $11 million that was recorded as a reduction to interest expense. In order to qualify the derivative instruments for hedged transactions prior to termination, NRG estimated the forecasted borrowings for interest rate swaps occurring within a specified time period. Judgments related to the probability of forecasted borrowings were based on the estimated timing of project construction, which can vary based on various factors. The probability that forecasted borrowings will occur by the end of a specified time period could change the results of operations by requiring amounts classified in OCI to be reclassified into earnings, creating increased variability in the Company's earnings. Certain derivative instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered to be NPNS. The availability of this exception is based upon the assumption 74 that NRG has the ability and it is probable to deliver or take delivery of the underlying item. These assumptions are based on expected load requirements, available baseload capacity, internal forecasts of sales and generation and historical physical delivery on contracts. Derivatives that are considered to be NPNS are exempt from derivative accounting treatment and are accounted for under accrual accounting. If it is determined that a transaction designated as NPNS no longer meets the scope exception due to changes in estimates, the related contract would be recorded on the balance sheet at fair value combined with the immediate recognition through earnings. Income Taxes and Valuation Allowance for Deferred Tax Assets As of December 31, 2020, NRG’s deferred tax assets were primarily the result of U.S. federal and state NOLs, the difference between book and tax basis in property, plant, and equipment, and tax credit carryforwards. The realization of deferred tax assets is dependent upon the Company's ability to generate sufficient future taxable income during the periods in which those temporary differences become deductible, prior to the expiration of the tax attributes. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and forecasting future profitability by tax jurisdiction. A valuation allowance of $266 million and $242 million was recorded against NRG’s gross deferred tax asset balance as of December 31, 2020, and December 31, 2019, respectively. During the year ended December 31, 2019, NRG released the majority of its valuation allowance against its U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expense of approximately $3.5 billion. The Company evaluates its deferred tax assets quarterly on a jurisdictional basis to determine whether adjustments to the valuation allowance are appropriate considering changes in facts or circumstances. As of each reporting date, management considers new evidence, both positive and negative, when determining the future realization of the Company’s deferred tax assets. In making the determination to release the majority of the valuation allowance as of December 31, 2019, the Company evaluated a number of factors, including its recent history of pre-tax earnings, utilization of $593 million of NOLs in 2019, as well as its forecasted future pre-tax earnings. Based on this evaluation, the Company determined that its future U.S. federal tax benefits are more-likely-than-not to be realized. Given the Company’s current level of pre-tax earnings and forecasted future pre-tax earnings, the Company expects to generate income before taxes in the U.S. in future periods at a level that would fully utilize its U.S. federal NOL carryforwards and the majority of its state NOL carryforwards prior to their expiration. NRG continues to maintain a valuation allowance of approximately $266 million as of December 31, 2020 against net deferred tax assets consisting of state net operating losses and foreign NOL carryforwards in jurisdictions where the Company does not currently believe that the realization of its deferred tax assets is more likely than not. Considerable judgment is required to determine the tax treatment of a particular item that involves interpretations of complex tax laws, including the impact of the Tax Act effective December 22, 2017. NRG is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions, including operations located in Australia and Canada. NRG continues to be under audit for multiple years by taxing authorities in various jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2017. With few exceptions, state and local income tax examinations are no longer open for years before 2012. Evaluation of Assets for Impairment and Other-Than-Temporary Decline in Value In accordance with ASC 360, Property, Plant, and Equipment , or ASC 360, NRG evaluates property, plant and equipment and certain intangible assets for impairment whenever indicators of impairment exist. Examples of such indicators or events are: • Significant decrease in the market price of a long-lived asset; • Significant adverse change in the manner an asset is being used or its physical condition; • Adverse business climate; • Accumulation of costs significantly in excess of the amount originally expected for the construction or acquisition of an asset; • Current period loss combined with a history of losses or the projection of future losses; and • Change in the Company's intent about an asset from an intent to hold to a greater than 50% likelihood that an asset will be sold, or disposed of before the end of its previously estimated useful life. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset, through considering project specific assumptions for long-term power prices, escalated future project operating costs and expected plant operations. If such assets are considered to be impaired, the 75 impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets by factoring in the different courses of action available to the Company. Generally, fair value will be determined using valuation techniques, such as the present value of expected future cash flows. NRG uses its best estimates in making these evaluations and considers various factors, including forward price curves for energy, fuel and operating costs. However, actual future market prices and project costs could vary from the assumptions used in the Company's estimates and the impact of such variations could be material. For assets to be held and used, if the Company determines that the undiscounted cash flows from the asset are less than the carrying amount of the asset, NRG must estimate fair value to determine the amount of any impairment loss. Assets held-for-sale are reported at the lower of the carrying amount or fair value less the cost to sell. The estimation of fair value, whether in conjunction with an asset to be held and used or with an asset held-for-sale, and the evaluation of asset impairment are, by their nature, subjective. NRG considers quoted market prices in active markets to the extent they are available. In the absence of such information, the Company may consider prices of similar assets, consult with brokers, or employ other valuation techniques. NRG will also discount the estimated future cash flows associated with the asset using a single interest rate representative of the risk involved with such an investment or asset. The use of these methods involves the same inherent uncertainty of future cash flows as previously discussed with respect to undiscounted cash flows. Actual future market prices and project costs could vary from those used in the Company's estimates and the impact of such variations could be material. In the third quarter of 2020, the Company concluded its Home Solar business was held for sale as a result of advanced negotiations to sell the business and recorded an impairment loss of $29 million in the West/Other segment to adjust the carrying amount of the assets and liabilities to fair market value based on indicative sale prices. On November 13, 2020, the Company completed the sale of the Home Solar business for $66 million. Annually, during the fourth quarter, the Company revises its views of power and fuel prices including the Company's fundamental view for long-term prices, forecasted generation and operating and capital expenditures, in connection with the preparation of its annual budget. Changes to the Company's views of long-term power and fuel prices impact the Company’s projections of profitability, based on management's estimate of supply and demand within the sub-markets for its operations and the physical and economic characteristics of each of its businesses. During 2020, the Company identified a long-lived asset impairment related to the Cottonwood facility, as further described in Item 15 — Note 11 , Asset Impairments . The Company recognized an impairment loss of $32 million in 2020 in the West/Other segment associated with the Company's long-term services agreement and related lease payments, as the carrying amounts of the assets from the contract were higher than the estimated operating cash flow though the remaining lease period. Equity Method Investments NRG is also required to evaluate its equity method investments to determine whether or not they are impaired in accordance with ASC 323, Investments - Equity Method and Joint Ventures , or ASC 323. The standard for determining whether an impairment must be recorded under ASC 323 is whether a decline in the value is considered an other-than-temporary decline in value. The evaluation and measurement of impairments under ASC 323 involves the same uncertainties as described for long-lived assets that the Company owns directly and accounts for in accordance with ASC 360. Similarly, the estimates that NRG makes with respect to its equity method investments are subjective, and the impact of variations in these estimates could be material. Additionally, if the projects in which the Company holds these investments recognize an impairment under the provisions of ASC 360, NRG would record its proportionate share of that impairment loss and would evaluate its investment for an other-than-temporary decline in value under ASC 323. During the year ended December 31, 2020, the Company recorded an impairment loss of $18 million in the Texas segment, which included the anticipated drawdown of the $12 million letter of credit posted in September 2019 to cover certain project debt reserve requirements. Other Impairments For the year ended December 31, 2020, the Company recorded $14 million of impairment losses related to intangible assets in the Texas segment. Goodwill and Other Intangible Assets At December 31, 2020, NRG reported goodwill of $579 million, consisting of $165 million associated with the acquisition of Midwest Generation and $414 million for retail operations acquisitions, including Stream Energy and XOOM, which were acquired in 2019 and 2018, respectively. The Company applies ASC 805, Business Combinations , or ASC 805, and ASC 350, to account for its goodwill and intangible assets. Under these standards, the Company amortizes all finite-lived intangible assets over their respective estimated weighted-average useful lives, while goodwill has an indefinite life and is not amortized. Goodwill is tested for impairment at least annually, or more frequently whenever an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company tests goodwill for impairment at the reporting unit 76 level, which is identified by assessing whether the components of the Company's operating segments constitute businesses for which discrete financial information is available and whether segment management regularly reviews the operating results of those components. The Company performs the annual goodwill impairment assessment as of December 31 or when events or changes in circumstances indicate that the fair value of the reporting unit may be below the carrying amount. The Company first assesses qualitative factors to determine whether it is more likely than not that an impairment has occurred. In the absence of sufficient qualitative factors, the Company performs a quantitative assessment by determining the fair value of the reporting unit and comparing to its book value. If it is determined that the fair value of a reporting unit is below its carrying amount, where necessary, the Company's goodwill will be impaired at that time. The Company performed its qualitative assessment of macroeconomic, industry and market events and circumstances, and the overall financial performance of the Texas (Texas segment) and East Retail (East segment) reporting units. The Company determined it was more-likely-than not that the fair value of the goodwill attributed to these reporting units were more than their carrying amount and accordingly, no impairment existed for the year ended December 31, 2020. The Company performed a quantitative assessment for the Midwest Generation (East segment) reporting unit. The Company determined the fair value of the reporting unit using an income approach. Under the income approach, the Company estimated the fair value of the reporting unit's cash flow exceeded its carrying value and, as such, the Company concluded that goodwill associated with the reporting unit was not impaired as of December 31, 2020. The Company believes the methodology and assumptions used in its quantitative assessments were consistent with the views of market participants. Significant inputs to the determinations of fair value were as follows: • The Company applied a discounted cash flow methodology to the long-term budgets for the Midwest Generation plants, resulting in fair value over the carrying value of the reporting unit of 115%. The significant assumptions used to derive the long-term budgets used in the income approach are affected by the following key inputs: ◦ The Company's views of power, capacity and fuel prices consider market prices for the next five years and the Company's fundamental view for the longer term, driven by the Company's long-term view of the price of natural gas. The Company's fundamental view for the longer term reflects the implied prices and heat rate that would support new build of a combined cycle gas plant. The price of natural gas plays an important role in setting the price of electricity in many of the regions where NRG operates power plants. Hedging is included to the extent of contracts already in place; ◦ The Company's estimate of generation, fuel costs, capital expenditure requirements and the existing and anticipated impact of environmental regulations; ◦ The Company's fundamental view for the longer term, cash flows for the plants in the region were included in the fair value calculation through the end of each plants' estimated useful life; and ◦ Projected generation and resulting energy gross margin in the long-term budgets is based on an hourly dispatch that simulates dispatch of each unit into the power market. The dispatch simulation is based on power prices, fuel prices, and the physical and economic characteristics of each plant Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. Contingencies NRG records reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or does become a reality. Such determinations are subject to interpretations of current facts and circumstances, forecasts of future events, and estimates of the financial impacts of such events. NRG describes in detail its contingencies in Item 15 — Note 24, Commitments and Contingencies, to the Consolidated Financial Statements. Recent Accounting Developments See Item 15 — Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements for a discussion of recent accounting developments. 77