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Item 1A. Risk Factors

2025-02-26 compared with 2024-02-28 · 212 added, 194 removed, 261 unchanged (61% of the section changed)

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NRG's risk factors are grouped into the following categories:

(i) Risks Related to the Acquisition of Vivint Smart Home;

(ii) Risks Related to the Operation of NRG's Business;

(iii) Risks Related to Governmental Regulation and Laws;

and (iv) Risks Related to Economic and Financial Market Conditions, and the Company's Indebtedness.

Risks Related to the Acquisition of Vivint Smart Home

The acquisition of Vivint Smart Home may not achieve its intended results and its integration may disrupt or have a negative impact on the Company’s business.

Achieving the anticipated cost savings and operating efficiencies from the acquisition of Vivint Smart Home is subject to risks, including whether the businesses of NRG and Vivint Smart Home are integrated in an efficient and effective manner.

These risks include, but are not limited to:

• the difficulty of managing and integrating Vivint Smart Home and its operations;

• difficulties in implementing and maintaining uniform processes, systems, standards, controls, procedures, practices, policies and compensation standards;

• unanticipated issues in integrating information technology, communications, and other systems;

• the possibility of faulty assumptions underlying expectations regarding the integration process;

• the potential difficulty in managing an increased number of locations and employees;

• difficulty addressing any possible differences in corporate cultures and management philosophies;

• the effect of any government regulations which relate to the business acquired.

Many of these factors are outside of the Company’s control.

Failure to address these risks effectively could result in increased costs, lower-than-expected revenues or income generated by the combined company and diversion of management's time and energy and could have an adverse effect on the Company's business, financial results and prospects.

(i) Risks Related to the Operation of NRG's Business;

(ii) Risks Related to Governmental Regulation and Laws;

and (iii) Risks Related to Economic and Financial Market Conditions and the Company's Indebtedness.

Risks Related to the Operation of NRG's Business

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• weather conditions, including extreme weather conditions and seasonal fluctuations, including the effects of climate change;

• a public health crisis, epidemic or pandemic;

• changes in commodity prices and the supply of commodities, including but not limited to natural gas, coal and oil;

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• development of new fuels, new technologies and new forms of competition for the production of power;

• economic and political conditions;

• economic and political conditions, including the impact of changing U.S.

trade policies and potential additional tariffs that may be imposed;

• changes in law, including judicial decisions, environmental regulations and environmental legislation;

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Additionally, increases in wholesale costs to retail customers may cause additional customer defaults or increased customer attrition, or may be impacted by regulatory rules.

Further, in low natural gas price environments, natural gas can be the more cost-competitive fuel compared to coal for generating electricity.

The Company enters into guaranteed supply contracts to provide for the amount of coal needed to operate its base load coal-fired generating facilities.

The Company may experience periods where it holds excess amounts of coal if fuel

pricing results in the Company reducing or idling coal-fired generating facilities.

In addition, the Company may incur costs to terminate supply contracts for coal in excess of its generating requirements.

Conversely, should natural gas prices rise to consistently exceed coal prices, NRG’s demand for coal generation may exceed the near-term ability of coal suppliers or rail transporters to meet it, causing the Company to lose generation sales opportunities and/or realize higher retail energy supply costs.

Such factors and the associated fluctuations in power prices have affected the Company's wholesale and retail profitability in the past and are expected to continue to do so in the future.

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The Company's earnings and cash flows could also be adversely affected in any period in which its customers' actual usage of electricity or gas significantly varies from the forecasted usage, which could occur due to, among other factors, weather events, changes in usage patterns, competition and economic conditions.

NRG's trading operations and use of hedging agreements could result in financial losses that negatively impact its results of operations , and NRG's hedging activities may increase the volatility in the Company's quarterly and annual financial results.

The Company typically enters into hedging agreements, including contracts to purchase or sell commodities at future dates and at fixed prices, to manage the commodity price risks inherent in its business.

The Company’s risk management policies and hedging procedures may not mitigate risk as planned, and the Company may fail to fully or effectively hedge its commodity supply and price risk.

In addition, these activities, although intended to mitigate price volatility, expose the Company to other risks.

When the Company sells or buys power or gas forward, it gives up the opportunity to buy or sell at the future price, which not only may result in lost opportunity costs but also may require the Company to post significant amounts of cash collateral or other credit support to its counterparties.

The Company also relies on counterparty performance under its hedging agreements and is exposed to the credit quality of its counterparties under those agreements.

Further, if the values of the financial contracts change in a manner that the Company does not anticipate, or if a counterparty fails to perform under a contract, it could harm the Company's business, operating results or financial position.

NRG does not typically hedge the entire exposure of its operations against commodity price volatility.

To the extent it does not hedge against commodity price volatility, the Company's results of operations and financial position may be improved or diminished based upon movement in commodity prices.

NRG may engage in trading activities, including the trading of power, natural gas, fuel, emissions allowances, environmental attributes and credits, weather, and other physical and financial commodity related products that are not directly related to the operation of the Company's generation facilities or the management of related risks.

These trading activities take place in volatile markets and some of these trades could be characterized as speculative.

This trading activity may expose the Company to the risk of significant financial losses which could have a material adverse effect on its business and financial condition.

NRG generally attempts to balance its fixed-price physical and financial purchases and sales commitments in terms of contract volumes and the timing of performance and delivery obligations through the use of financial and physical derivative contracts.

These derivatives are accounted for in accordance with the FASB ASC 815, Derivatives and Hedging ("ASC 815"), which requires the Company to record all derivatives on the balance sheet at fair value with changes in the fair value resulting from fluctuations in the underlying commodity prices immediately recognized in earnings, unless the derivative qualifies for cash flow hedge accounting treatment or a scope exception.

As a result, the Company's quarterly and annual results are subject to significant fluctuations caused by changes in market prices.

Competition may have a material adverse effect on NRG's results of operations, cash flows and the market value of its assets.

The Company's retail operations face competition for customers.

Competitors may offer different products, lower prices, and other incentives which may attract customers away from the Company.

In some retail electricity markets, the principal competitor may be the incumbent utility.

The incumbent utility often has the advantage of long-standing relationships with its customers and strong brand recognition.

Furthermore, NRG may face competition from other energy service providers, other

energy industry participants, or nationally branded providers of consumer products and services, who have, and may in the future, develop businesses and offerings that compete with NRG.

The Company's smart home services market faces competition from residential security companies as well as other companies that are able to bundle their existing offerings, such as cable, telecommunications and internet service, with automation and monitored security services, and from do-it-yourself smart home systems, which customers are able to install without subscription services.

The Company’s plant operations face competition from newer or more efficient plants owned by competitors, which may put some of the Company's plants at a disadvantage to the extent these competitors are able to consume the same or less fuel as the Company's plant.

Over time, the Company's plants may be unable to compete with these more efficient plants, which could result in asset retirements.

NRG’s competitors may have greater liquidity, greater access to credit and other financial resources, lower cost structures, more effective risk management policies and procedures, greater ability to incur losses, longer-standing relationships with customers, greater brand awareness, greater potential for profitability from retail sales or greater flexibility in the timing of their sale of generation capacity and ancillary services than NRG does.

Competitors may also have better access to subsidies or other out-of-market payments that put NRG at a competitive disadvantage.

NRG's competitors may be able to respond more quickly to new laws or regulations or emerging technologies, or devote greater resources to marketing of retail energy and home services than NRG can.

In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties.

Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share.

There can be no assurance that NRG will be able to compete successfully against current and future competitors, and any failure to do so would have a material adverse effect on the Company's business, financial condition, results of operations and cash flow.

NRG’s strategy relies, in part, on its ability to cross-serve and optimize its network of retail and Smart Home services customers, and if it is unable to retain existing customers and expand their use of the Company’s products and services, its expected growth and operating results could be adversely affected.

As part of NRG’s growth strategy, it is important for the Company to cross-sell energy sales and services to smart home services subscribers and smart home services to residential retail customers.

As the Company continues pursuing cross-selling opportunities between these customers, there can be no assurances that its efforts in this regard will be successful.

Additionally, for the Company to be successful in such cross-selling opportunities, it must retain its existing customers.

The length of the terms for which NRG’s retail customers are contracted can be for multi-year periods, but many customers are contracted for a period of one year or less.

Smart home services customers historically have entered into subscriptions that range from three to five years.

These customers are not obligated to, and may not, renew their contracts or subscriptions after the expiration of their original commitments.

If customers terminate their contracts, do not renew their contracts or do not expand their use of NRG’s products and services, the Company’s growth strategy may not be successful and its expected results of operations may be adversely affected.

The Company’s expectations regarding load growth may not materialize.

The electricity industry is expected to experience a surge in demand driven primarily by new manufacturing, industrial and data center facilities (inclusive of generative AI (“GenAI”)).

Energy Information Administration's 2023 Annual Energy Outlook, combined with external forecasts, shows the potential for 500 TWh of incremental load across the U.S.

through 2030, as compared to 2023.

ERCOT's current long term load forecast shows peak demand increasing from 86 GW in 2024 to 137 GW in 2028.

However, there is no assurance that these forecasts will be accurate or that the anticipated load growth will occur as projected.

Factors such as evolving technology, improvements in energy efficiency, changes in economic conditions, shifts in government policy or regulation, and project delays or cancellations by the Company’s commercial and industrial consumers (including data center facilities) could reduce or slow demand for electricity relative to current expectations.

The Company’s capital expenditures and other investments are influenced by projected demand;

if the anticipated load growth fails to materialize, the Company could incur additional expenses to terminate or redeploy any underutilized assets or infrastructure, or it may be unable to fully recover its capital expenditures or realize the expected returns on its investments.

Operation of power generation facilities involves significant risks and hazards customary to the power industry that could have a material adverse effect on NRG's revenues and results of operations, and NRG may not have adequate insurance to cover these risks and hazards.

The ongoing operation of NRG's facilities involves risks that include the breakdown or failure of equipment or processes, performance below expected levels of output or efficiency and the inability to transport the Company's products to its customers in an efficient manner due to a lack of transmission capacity.

Unplanned outages of generating units, including extensions of scheduled outages due to mechanical failures or other problems occur from time to time and are an inherent risk of the Company's business.

Unplanned outages typically increase the Company's operation and maintenance expenses and may reduce the Company's revenues as a result of selling fewer MWh or incurring non-performance penalties and/or require NRG to incur significant costs as a result of obtaining replacement power from third parties in the open market or running one of its higher cost units to satisfy the Company's forward power sales obligations.

NRG's inability to operate the Company's plants efficiently, manage capital expenditures and costs, and generate earnings and cash flow from the Company's asset-based businesses could have a material adverse effect on the Company's results of operations, financial condition or cash flows.

In addition, NRG provides plant operations and commercial services to a variety of third parties.

There is a risk that mistakes, mis-operations or actions taken by these third parties could be attributed to NRG, including the risk of investigation or penalties being assessed to NRG in connection with the services it offers, or that regulators could question whether NRG had the appropriate safeguards in place.

Power generation involves hazardous activities, including acquiring, transporting and unloading fuel, operating large pieces of rotating equipment and delivering electricity to transmission and distribution systems.

In addition to natural risks such as earthquake, flood, lightning, wildfires, hurricane and wind, other hazards, such as fire, explosion, structural collapse and machinery failure are inherent risks in the Company's operations.

These and other hazards can cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment, contamination of, or damage to, the environment and suspension of operations.

The occurrence of any one of these events may result in NRG being named as a defendant in lawsuits asserting claims for substantial damages, including for environmental cleanup costs, personal injury and property damage and fines and/or penalties.

NRG maintains an amount of insurance protection that it considers adequate, obtains warranties from vendors and obligates contractors to meet certain performance levels, but the Company cannot provide any assurance that these measures will be sufficient or effective under all circumstances and against all hazards or liabilities to which it may be subject.

A successful claim for which the Company is not adequately insured or protected could hurt its financial results and materially harm NRG's financial condition.

NRG cannot provide any assurance that its insurance coverage will continue to be available at all or at rates or on terms similar to those presently available.

Any losses not covered by insurance could have a material adverse effect on the Company's financial condition, results of operations or cash flows.

NRG's costs, results of operations, financial condition and cash flows could be adversely impacted by disruption of its fuel supplies.

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In order to hedge these obligations, the Company may enter into long-term and short-term contracts for the purchase and delivery of fuel.

Many of the forward power sales contracts do not allow the Company to pass through changes in fuel costs or discharge the power sale obligations in the case of a disruption in fuel supply due to force majeure events or the default of a fuel supplier or transporter.

forward power sales contracts do not allow the Company to pass through changes in fuel costs or discharge the power sale obligations in the case of a disruption in fuel supply due to force majeure events or the default of a fuel supplier or transporter.

Disruptions in the Company's fuel supplies or power supply arrangements may therefore require it to supply replacement power either by running its other, higher cost power plants or by obtaining power from third-party sources at market prices that could substantially exceed the contract price, or to pay damages to counterparties for failure to deliver power or sell electricity or natural gas as contracted.

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Prices sometimes rise or fall significantly over a relatively short period of time.

The price NRG can obtain for the sale of energy may not rise at the same rate, or may not rise at

all, to match a rise in fuel or delivery costs.

The price NRG can obtain for the sale of energy may not rise at the same rate, or may not rise at all, to match a rise in fuel or delivery costs.

Retail rates may also not rise at the same rate or may not rise at all.

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This could have a material adverse impact on the financial results of specific plants and on the Company's results of operations.

There may be periods when NRG will not be able to meet its commitments under forward sale or purchase obligations at a reasonable cost or at all.

The Company may sell fixed price gas as a proxy for power.

Because the obligations under most of the Company's forward sale agreements are not contingent on a unit being available to generate power, NRG is generally required to deliver power to the buyer, even in the event of a plant outage, fuel supply disruption or a reduction in the available capacity of the unit.

To the extent that the Company does not have sufficient lower-cost capacity to meet its commitments under its forward sale obligations, the Company would be required to supply replacement power either by running its other, higher cost power plants or by obtaining power from third-party sources at market prices that could substantially exceed the contract price.

If NRG fails to deliver the contracted power, it would be required to pay the difference between the market price at the delivery point and the contract price, and the amount of such payments could be substantial.

NRG relies on storage, transportation assets and suppliers, which it does not own or control, to deliver natural gas.

The Company depends on natural gas pipelines and other transportation and storage facilities owned and operated by third parties to deliver natural gas to wholesale and retail markets and to provide retail energy services to customers.

The Company's ability to provide natural gas for its present and projected customers will depend upon its suppliers' ability to obtain and deliver supplies of natural gas, as well as NRG's ability to acquire supplies.

Factors beyond the control of the Company and its suppliers may affect the Company's ability to deliver such supplies.

These factors include other parties' control over the drilling of new wells and the facilities to transport natural gas to the Company's receipt points, development of additional interstate pipeline infrastructure, availability of supply sources competition for the acquisition of natural gas, priority allocations, impact of severe weather disruptions to natural gas supplies and the regulatory and pricing policies of federal and state regulatory agencies, as well as the availability of Canadian reserves for export to the U.S.

Energy deregulation legislation may increase competition among natural gas utilities and impact the quantities of natural gas requirements needed for sales service.

If supply, transportation or storage is disrupted, including for reasons of force majeure, the ability of the Company to sell and deliver its products and services may be hindered.

As a result, the Company may be responsible for damages incurred by its customers, such as the additional cost of acquiring alternative supply at then-current market rates.

These conditions could have a material impact on the Company's financial condition, results of operations and cash flows.

NRG relies on power transmission and distribution facilities that it does not own or control and that are subject to transmission constraints within a number of the Company's core regions.

NRG depends on transmission and distribution facilities owned and operated by others to deliver power to its customers.

If transmission or distribution is disrupted, including by force majeure events, or if the transmission or distribution infrastructure is inadequate, NRG's ability to deliver power may be adversely impacted.

The Company also cannot predict whether transmission or distribution facilities will be expanded in specific markets to accommodate competitive access to those markets.

In addition, in certain of the markets in which NRG operates, energy transmission congestion may occur and the Company may be deemed responsible for congestion costs associated with power sales or purchases, or retail sales, particularly where the Company’s load is not co-located with its retail sales obligations.

If NRG were liable for such congestion costs, the Company's financial results could be adversely affected.

Maintenance, expansion and refurbishment of power generation facilities involve significant risks that could result in unplanned power outages or reduced output and could have a material adverse effect on NRG's results of operations, cash flows and financial condition.

NRG's facilities require periodic maintenance and repair.

Any unexpected failure, including failure associated with breakdowns, forced outages or any unanticipated capital expenditures could result in reduced profitability.

NRG cannot be certain of the level of capital expenditures that will be required due to changing environmental and safety laws (including changes in the interpretation or enforcement thereof), needed facility repairs and unexpected events (such as natural disasters or terrorist attacks).

The unexpected requirement of large capital expenditures could have a material adverse effect on the Company's liquidity and financial condition.

The Company may incur additional costs or delays in the development and construction of new generation projects and may not be able to recover its investments or complete the projects.

NRG’s development and construction of new generation facilities involve many risks, including:

• inability to receive governmental or other third-party funding;

• delays or inability in obtaining necessary permits and licenses;

• supply interruptions;

• work stoppages and labor disputes;

• weather interferences;

• unforeseen engineering, environmental and geological problems;

• unanticipated cost overruns;

• failure of various third parties to perform under contracts.

Any of these risks could cause NRG's financial returns on such new investments to be lower than expected, or could cause the Company to operate below expected capacity or availability levels, which could result in loss of revenues, increase in expenses, higher maintenance costs and penalties.

To protect against these risks, insurance is maintained, warranties are generally obtained for limited periods relating to the construction of each project and its equipment in varying degrees, and contractors and equipment suppliers are obligated to meet certain performance levels.

The insurance, warranties or performance guarantees, however, may not be adequate to cover increased expenses.

As a result, a project may cost more than projected and the Company may be unable to fund principal and interest payments under construction financing obligations, if any.

Furthermore, where the Company has partnering relationships with a third party, the Company is subject to the viability and performance of the third party.

The Company's inability to find a replacement contracting party where the original contracting party has failed to perform, could result in the abandonment of the development and/or construction of such project, while the Company could remain obligated on other agreements associated with the project.

If the Company is unable to complete the development or construction of a facility, or decides to delay, downsize, or cancel such project, it may not be able to recover its investment in that facility.

Furthermore, if construction projects are not completed according to specification, the Company may incur liabilities and suffer reduced plant efficiency, higher operating costs and reduced net income.

Because NRG owns less than a majority of the ownership interests of some of its project investments, the Company cannot exercise complete control over their operations.

NRG has limited control over the operation of some project investments and joint ventures because the Company's investments are in projects where it beneficially owns less than a majority of the ownership interests.

NRG seeks to exert a degree of influence with respect to the management and operation of projects in which it owns less than a majority of the ownership interests by negotiating to obtain positions on management committees or to receive certain limited governance rights, such as rights to veto significant actions.

However, the Company may not always succeed in such negotiations.

NRG may be dependent on its co-venturers to operate such projects.

The Company's co-venturers may not have the level of experience, technical expertise, human resources management or other attributes necessary to operate these projects optimally.

The approval of co-venturers also may be required for NRG to receive distributions of funds from projects or to transfer the Company's interest in projects.