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Market risk is the potential loss that may result from market changes associated with the Company's retail operations, merchant power generation, or with an existing or forecasted financial or commodity transactions.
−Removed: The types of market risks the Company is exposed to are commodity price risk, interest rate risk, liquidity risk, credit risk and currency exchange risk.
+Added: The types of market risks the Company is exposed to are commodity price risk, credit risk, liquidity risk, interest rate risk and currency exchange risk.
In order to manage these risks, the Company uses various fixed-price forward purchase and sales contracts, futures and option contracts traded on NYMEX and other exchanges, and swaps and options traded in the over-the-counter financial markets to:
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For the year ended December 31,
−Removed: (a) Calculation is based on NRG generation assets and load obligations excluding the acquisition of Direct Energy assets and load obligations in the first quarter of 2021
−Removed: The increase in the range of the daily VaR results was primarily due to increased commodity prices and market volatility during 2022 as compared to 2021.
−Removed: In order to provide additional information, the Company also uses VaR to estimate the potential loss of derivative financial instruments that are subject to mark-to-market accounting.
+Added: Average $ 62 $ 51
+Added: Maximum 82 86
+Added: Minimum 41 26
+Added: The Company also uses VaR to estimate the potential loss of derivative financial instruments that are subject to mark-to-market accounting.
These derivative instruments include transactions that were entered into for both asset management and trading purposes.
−Removed: The VaR for the derivative
−Removed: financial instruments calculated using the diversified VaR model for the entire term of these instruments entered into for both asset management and trading was $413 million as of December 31, 2022, primarily driven by asset-backed transactions.
−Removed: Retail Customer Credit Risk
−Removed: NRG is exposed to retail credit risk related to its Business and Home customers.
−Removed: Retail credit risk results in losses when a customer fails to pay for services rendered.
−Removed: The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value.
−Removed: NRG manages retail credit risk through the use of established credit policies that include monitoring of the portfolio and the use of credit mitigation measures, such as deposits or prepayment arrangements.
−Removed: As of December 31, 2022, the Company's retail customer credit exposure to Home and Business customers was diversified across many customers and various industries, as well as government entities.
−Removed: Current economic conditions may affect the Company's customers' ability to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in credit losses.
−Removed: The Company's provision for credit losses resulting from credit risk was $11 million, $698 million and $108 million for the years ending December 31, 2022, 2021 and 2020, respectively.
−Removed: During the year ended December 31, 2022, the provision for credit losses included the Company's loss mitigation efforts recognized as income of $126 million related to Winter Storm Uri.
−Removed: During the year ended December 31, 2021, the provision for credit losses included $596 million of expenses due to the impacts of Winter Storm Uri.
−Removed: Liquidity Risk
−Removed: Liquidity risk arises from the general funding needs of the Company's activities and the management of the Company's assets and liabilities.
−Removed: The Company is currently exposed to additional collateral posting if natural gas prices decline, primarily due to the long natural gas equivalent position at various exchanges used to hedge NRG's retail supply load obligations.
−Removed: Based on a sensitivity analysis for power and gas positions under marginable contracts as of December 31, 2022, a $0.50 per MMBtu decrease in natural gas prices across the term of the marginable contracts would cause an increase in margin collateral posted of approximately $811 million and a 1.00 MMBtu/MWh decrease in heat rates for heat rate positions would result in an increase in margin collateral posted of approximately $380 million.
−Removed: This analysis uses simplified assumptions and is calculated based on portfolio composition and margin-related contract provisions as of December 31, 2022.
+Added: The VaR for the derivative financial instruments calculated using the diversified VaR model for the entire term of these instruments entered into for both asset management and trading was $185 million as of December 31, 2023, primarily driven by asset-backed transactions.
+Added: Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations.
+Added: NRG is exposed to counterparty credit risk through various activities including wholesale sales, fuel purchases and retail supply arrangements, and retail customer credit risk through its retail load activities.
+Added: Counterparty credit risk and retail customer credit risk are discussed below.
+Added: See Note 6, Accounting for Derivative Instruments and Hedging Activities , to this Form 10-K for discussion regarding credit risk contingent features.
Counterparty Credit Risk
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Cash margin is collected and held at the Company to cover the credit risk of the counterparty until positions settle.
−Removed: As of December 31, 2022, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, and registered commodity exchanges and certain long-term agreements, was $2.7 billion, of which the Company held collateral (cash and letters of credit) against those positions of $1.0 billion resulting in a net exposure of $1.7 billion.
+Added: As of December 31, 2023, counterparty credit exposure, excluding credit exposure from RTOs, ISOs, registered commodity exchanges and certain long-term agreements, was $1.6 billion, of which the Company held collateral (cash and letters of credit) against those positions of $426 million resulting in a net exposure of $1.2 billion.
NRG periodically receives collateral from counterparties in excess of their exposure.
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Non-Investment grade/Non-Rated 56
−Removed: (a) Counterparty credit exposure excludes uranium and coal transportation contracts because of the unavailability of market prices
+Added: (a) Counterparty credit exposure excludes coal transportation contracts because of the unavailability of market prices
(b) The figures in the tables above exclude potential counterparty credit exposure related to RTOs, ISOs, registered commodity exchanges and certain long-term contracts
−Removed: The Company has no exposure to wholesale counterparties in excess of 10% of the total net exposure discussed above as of December 31, 2022.
+Added: The Company has exposure to one wholesale counterparty in excess of 10% of the total net exposure discussed above as of December 31, 2023.
Changes in hedge positions and market prices will affect credit exposure and counterparty concentration.
−Removed: During Winter Storm Uri, in February 2021, the Company experienced nonperformance by a counterparty in one of its bilateral financial hedging transactions, resulting in exposure of $403 million.
−Removed: During December 2022, the Company received $70 million as part of the Company's loss mitigation efforts related to this exposure.
RTOs and ISOs
−Removed: The Company participates in the organized markets of CAISO, ERCOT, ISO-NE, MISO, NYISO and PJM, known as RTOs or ISOs.
−Removed: Trading in these markets is approved by FERC, or in the case of ERCOT, approved by the PUCT and include credit policies that, under certain circumstances, require that losses arising from the default of one member on spot market transactions be shared by the remaining participants.
−Removed: As a result, the counterparty credit risk to these markets is limited to NRG’s applicable share of the overall market and are excluded from the above exposures.
+Added: The Company participates in the organized markets of CAISO, ERCOT, AESO, IESO, ISO-NE, MISO, NYISO and PJM, known as RTOs or ISOs.
+Added: Trading in the majority of these markets is approved by FERC, whereas in the case of ERCOT, it is approved by the PUCT, and whereas in the case of AESO and IESO, both exist provincially with AESO primarily subject to Alberta Utilities Commission and the IESO subject to the Ontario Energy Board.
+Added: These ISOs may include credit policies that, under certain circumstances, require that losses arising from the default of one member on spot market transactions be shared by the remaining participants.
+Added: As a result, the counterparty credit risk to these markets is limited to NRG’s share of the overall market and are excluded from the above exposures.
Exchange Traded Transactions
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As external sources or observable market quotes are not available to estimate such exposure, the Company values these contracts based on various techniques including, but not limited to, internal models based on a fundamental analysis of the market and extrapolation of observable market data with similar characteristics.
−Removed: Based on these valuation techniques, as of December 31, 2022, aggregate credit risk exposure managed by NRG to these counterparties was approximately $1.1 billion for the next five years.
+Added: Based on these valuation techniques, as of December 31, 2023, aggregate credit risk exposure managed by NRG to these counterparties was approximately $882 million for the next five years.
+Added: Retail Customer Credit Risk
+Added: NRG is exposed to retail credit risk through the Company's retail electricity and gas providers as well as through Vivint Smart Home.
+Added: Retail credit risk results in losses when a customer fails to pay for services rendered.
+Added: The losses may result from both nonpayment of customer accounts receivable and the loss of in-the-money forward value.
+Added: The Company manages retail credit risk through the use of established credit policies, which include monitoring of the portfolio and the use of credit mitigation measures such as deposits or prepayment arrangements.
+Added: As of December 31, 2023, the Company's retail customer credit exposure to Home and Business customers was diversified across many customers and various industries, as well as government entities.
+Added: Current economic conditions may affect the Company's customers' ability to pay bills in a timely manner, which could increase customer delinquencies and may lead to an increase in credit losses.
+Added: The Company's provision for credit losses resulting from credit risk was $251 million, $11 million and $698 million for the years ended December 31, 2023, 2022 and 2021, respectively.
+Added: During the year ended December 31, 2022, the provision for credit losses included the Company's loss mitigation efforts recognized as income of $126 million related to Winter Storm Uri.
+Added: During the year ended December 31, 2021, the provision for credit losses included $596 million of expenses due to the impacts of Winter Storm Uri.
+Added: Liquidity Risk
+Added: Liquidity risk arises from the general funding needs of the Company's activities and the management of the Company's assets and liabilities.
+Added: The Company is currently exposed to additional collateral posting if natural gas prices decline, primarily due to the long natural gas equivalent position at various exchanges used to hedge NRG's retail supply load obligations.
+Added: Based on a sensitivity analysis for power and gas positions under marginable contracts as of December 31, 2023, a $0.50 per MMBtu decrease in natural gas prices across the term of the marginable contracts would cause an increase in margin collateral posted of approximately $1.5 billion and a 1.00 MMBtu/MWh decrease in heat rates for heat rate positions would result in an increase in margin collateral posted of approximately $350 million.
+Added: This analysis uses simplified assumptions and is calculated based on portfolio composition and margin-related contract provisions as of December 31, 2023.
Interest Rate Risk
+Added: NRG is exposed to fluctuations in interest rates through its issuance of variable rate debt.
+Added: Exposures to interest rate fluctuations may be mitigated by entering into derivative instruments known as interest rate swaps, caps, collars and put or call options.
+Added: These contracts reduce exposure to interest rate volatility and result in primarily fixed rate debt obligations when taking into account the combinations of the variable rate debt and the interest rate derivative instrument.
+Added: NRG's risk management policies allow the Company to reduce interest rate exposure from variable rate debt obligations.
+Added: In the first quarter of 2023, the Company entered into $1.0 billion of interest rate swaps through 2027 to hedge the floating rate on the Term Loan acquired with the Vivint Smart Home acquisition.
+Added: Additionally, in the first quarter of 2023, the Company had entered into interest rate swaps to hedge the floating rate on the Revolving Credit Facility extending through 2024, which was fully terminated in conjunction with the pay down of the Revolving Credit Facility.
As of December 31, 2023, the Company's debt fair value was $10.6 billion and carrying value was $10.8 billion.
NRG estimates that a 1% decrease in market interest rates would have increased the fair value of the Company's long-term debt by $602 million.
−Removed: Credit Risk Related Contingent Features
−Removed: Certain of the Company's hedging and trading agreements contain provisions that entitle the counterparty to demand that the Company post additional collateral if the counterparty determines that there has been deterioration in the Company's credit quality, generally termed “adequate assurance” under the agreements, or require the Company to post additional collateral if there were a downgrade in the Company's credit rating.
−Removed: The collateral potentially required for contracts with adequate assurance clauses that are in a net liability position as of December 31, 2022, was $1.5 billion.
−Removed: The Company is also a party to certain marginable agreements under which it has a net liability position, but the counterparty has not called for the collateral due, which was approximately $195 million as of December 31, 2022.
−Removed: In the event of a downgrade in the Company's credit rating and if called for by the counterparty, $30 million of additional collateral would be required for all contracts with credit rating contingent features as of December 31, 2022.
Currency Exchange Risk
3 unchanged sentences
As of December 31, 2023, NRG is exposed to changes in foreign currency primarily associated with the purchase of U.S.
−Removed: dollar denominated natural gas for its Canadian business and entered into foreign exchange contracts with notional amount of $569 million.
+Added: dollar denominated natural gas for its Canadian business and entered into foreign exchange contracts with a notional amount of $548 million.
The Company is subject to translation exchange rate risk related to the translation of the financial statements of its foreign operations into U.S.
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A hypothetical 10% appreciation in major currencies relative to the U.S.
−Removed: dollar as of December 31, 2022, would have resulted in an increase of $17 million to net income within the Consolidated Statement of Operations.
+Added: dollar as of December 31, 2023, would have resulted in a decrease of $36 million to net income within the Consolidated Statement of Operations.
Item 8 — Financial Statements and Supplementary Data
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.