Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that in the normal course of business we may experience a loss in value because of changes in market conditions that affect economic factors such as commodity prices, interest rates and counterparty credit. Our exposure to market risk is affected by several factors, including the size, duration and composition of our energy and financial portfolio, as well as the volatility and liquidity of markets. Instruments used to manage this exposure include interest rate swaps to hedge debt costs, as well as exchange-traded, over-the-counter contracts and other contractual arrangements to hedge commodity prices.
Risk Oversight
We manage the commodity price, counterparty credit and commodity-related operational risk related to the competitive energy business within limitations established by senior management and in accordance with overall risk management policies. Interest rate risk is managed centrally by our treasury function. Market risks are monitored by risk management groups that operate independently of the wholesale commercial operations, utilizing defined practices and analytical methodologies. These techniques measure the risk of change in value of the portfolio of contracts and the hypothetical effect on this value from changes in market conditions and include, but are not limited to, position reporting and review, Value at Risk (VaR) methodologies and stress test scenarios. Key risk control activities include, but are not limited to, transaction review and approval (including credit review), operational and market risk measurement, transaction authority oversight, validation of transaction capture, market price validation and reporting, and portfolio valuation and reporting, including mark-to-market, VaR and other risk measurement metrics.
Vistra has a risk management organization that enforces applicable risk limits, including the respective policies and procedures to ensure compliance with such limits, and evaluates the risks inherent in our businesses.
Commodity Price Risk
Our business is subject to the inherent risks of market fluctuations in the price of electricity, natural gas and other energy-related products it markets or purchases. We actively manage the portfolio of generation assets, fuel supply and retail sales load to mitigate the near-term impacts of these risks on results of operations. Similar to other participants in the market, we cannot fully manage the long-term value impact of structural declines or increases in natural gas and power prices.
In managing energy price risk, we enter into a variety of market transactions including, but not limited to, short- and long-term contracts for physical delivery, exchange-traded and over-the-counter financial contracts and bilateral contracts with customers. Activities include hedging, the structuring of long-term contractual arrangements and proprietary trading. We continuously monitor the valuation of identified risks and adjust positions based on current market conditions. We strive to use consistent assumptions regarding forward market price curves in evaluating and recording the effects of commodity price risk.
VaR Methodology
A VaR methodology is used to measure the amount of market risk that exists within the portfolio under a variety of market conditions. The resultant VaR produces an estimate of a portfolio's potential for loss given a specified confidence level and considers, among other things, market movements utilizing standard statistical techniques given historical and projected market prices and volatilities.
Parametric processes are used to calculate VaR and are considered by management to be the most effective way to estimate changes in a portfolio's value based on assumed market conditions for liquid markets. The use of this method requires a number of key assumptions, such as use of (i) an assumed confidence level, (ii) an assumed holding period ( i.e. , the time necessary for management action, such as to liquidate positions) and (iii) historical estimates of volatility and correlation data. The table below details a VaR measure related to various portfolios of contracts.
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VaR for Underlying Generation Assets and Energy-Related Contracts
This measurement estimates the potential loss in value, due to changes in market conditions, of all underlying generation assets and contracts, based on a 95% confidence level and an assumed holding period of 60 days. The forward period covered by this calculation includes the current and subsequent calendar year at the time of calculation.
Year Ended December 31,
2023 2022
Month-end average VaR $ 190 $ 489
Month-end high VaR $ 423 $ 686
Month-end low VaR $ 115 $ 283
The month-end high VaR risk measure in 2023 is currently lower than the prior year due to lower prices and higher hedge levels.
Price Sensitivities
The following sensitivity table provides approximate estimates of the potential impact of movements in power prices and spark spreads (the difference between the power revenue and fuel expense of natural gas-fired generation as calculated using an assumed Heat Rate of 7.2 MMBtu/MWh) on realized pre-tax earnings (in millions) taking into account the hedge positions noted above for the periods presented. The residual natural gas position is calculated based on two steps: first, calculating the difference between actual Heat Rates of our natural gas generation units and the assumed 7.2 Heat Rate used to calculate the sensitivity to spark spreads; and second, calculating the residual natural gas exposure that is not already included in the natural gas generation spark spread sensitivity shown in the table below. The estimates related to price sensitivity are based on our expected generation, related hedges and forward prices as of December 31, 2023.
2024 2025
Texas:
Nuclear/Renewable/Coal Generation: $2.50/MWh increase in power price $ 5 $ 9
Nuclear/Renewable/Coal Generation: $2.50/MWh decrease in power price $ (4) $ (8)
Natural Gas Generation: $1.00/MWh increase in spark spread $ 7 $ 10
Natural Gas Generation: $1.00/MWh decrease in spark spread $ (6) $ (9)
Residual Natural Gas Position: $0.25/MMBtu increase in natural gas price $ (9) $ 8
Residual Natural Gas Position: $0.25/MMBtu decrease in natural gas price $ 3 $ (11)
East:
Natural Gas Generation: $1.00/MWh increase in spark spread $ 2 $ 11
Natural Gas Generation: $1.00/MWh decrease in spark spread $ — $ (10)
Residual Natural Gas Position: $0.25/MMBtu increase in natural gas price $ (7) $ (25)
Residual Natural Gas Position: $0.25/MMBtu decrease in natural gas price $ 7 $ 25
West:
Natural Gas Generation: $1.00/MWh increase in spark spread $ — $ 1
Natural Gas Generation: $1.00/MWh decrease in spark spread $ — $ (1)
Residual Natural Gas Position: $0.25/MMBtu increase in natural gas price $ 1 $ 2
Residual Natural Gas Position: $0.25/MMBtu decrease in natural gas price $ (1) $ (2)
Sunset:
Coal Generation: $2.50/MWh increase in power price $ 3 $ 27
Coal Generation: $2.50/MWh decrease in power price $ (2) $ (27)
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Interest Rate Risk
We manage our interest rate risk to limit the impact of interest rate changes on our results of operations and cash flows and to lower our overall borrowing costs. To achieve these objectives, a majority of our borrowings have fixed interest rates. The inflationary environment continues to drive elevated interest rates, resulting in increased expected refinancing or borrowing costs. See Item 7. Management's Discussion and Analysis of Financial Condition, and Results of Operations – Significant Activities and Events, and Items Influencing Future Performance – Macroeconomic Conditions.
The following table provides information concerning our financial instruments at December 31, 2023 and 2022 that are sensitive to changes in interest rates. Debt amounts consist of the Vistra Operations Credit Facilities. See Note 12 to the Financial Statements for further discussion of these financial instruments.
Expected Maturity Date 2023
Total Carrying
Amount 2023
Total Fair
Value 2022
Total Carrying
Amount 2022
Total Fair
Value
2024 2025 2026 2027 2028 There-after
Long-term debt, including current maturities (a):
Variable rate debt amount $ 25 $ 25 $ 25 $ 25 $ 25 $ 2,375 $ 2,500 $ 2,500 $ 2,514 $ 2,486
Average interest rate (b) 7.36 % 7.36 % 7.36 % 7.36 % 7.36 % 7.36 % 7.36 % 6.12 %
Debt swapped to fixed (c):
Notional amount $ — $ — $ 2,300 $ — $ — $ 1,625 $ 3,925 $ 4,600
Average pay rate 5.42 % 5.41 % 5.37 % 5.28 % 5.28 % 5.28 %
Average receive rate 7.36 % 7.36 % 7.36 % 7.36 % 7.36 % 7.36 %
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(a) Unamortized premiums, discounts and debt issuance costs are excluded from the table.
(b) The weighted average interest rate presented is based on the rates in effect at December 31, 2023.
(c) Interest rate swaps have maturity dates through December 2030, of which $1.625 billion become effective in July 2026. Maturities are presented net of $600 million and $700 million of debt swapped to variable maturing in 2024 and 2026, respectively, that is matched against the terms of the equivalent amounts of debt swapped to fixed that effectively fix the out-of-the-money position of such swaps (see Note 12 to the Financial Statements).
As of December 31, 2023, the potential reduction of annual pretax earnings over the next twelve months due to a one percentage-point (100 basis points) increase in floating interest rates on long-term debt totaled approximately $2 million taking into account the interest rate swaps discussed in Note 12 to Financial Statements.
Credit Risk
Credit risk relates to the risk of loss associated with nonperformance by counterparties. We minimize credit risk by evaluating potential counterparties, monitoring ongoing counterparty risk and assessing overall portfolio risk. This includes review of counterparty financial condition, current and potential credit exposures, credit rating and other quantitative and qualitative credit criteria. We also employ certain risk mitigation practices, including utilization of standardized master agreements that provide for netting and setoff rights, as well as credit enhancements such as margin deposits and customer deposits, letters of credit, parental guarantees and surety bonds. See Note 17 to the Financial Statements for further discussion of this exposure.
Credit Exposure
Our gross credit exposure (excluding collateral impacts) associated with retail and wholesale trade accounts receivable and net derivative assets arising from commodity contracts and hedging and trading activities totaled $1.976 billion at December 31, 2023.
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As of December 31, 2023, Retail segment credit exposure totaled approximately $1.302 billion, including $1.241 billion of trade accounts receivable and $61 million related to derivatives. Cash deposits and letters of credit held as collateral for these receivables totaled $54 million, resulting in a net exposure of $1.248 billion. Allowances for uncollectible accounts receivable are established for the expected loss from nonpayment by these customers based on historical experience, market or operational conditions and changes in the financial condition of large business customers.
As of December 31, 2023, aggregate Texas, East, Sunset and Asset Closure segments credit exposure totaled $674 million including $545 million related to derivative assets and $129 million of trade accounts receivable, after taking into account master netting agreement provisions but excluding collateral impacts.
Including collateral posted to us by counterparties, our net Texas, East, Sunset and Asset Closure segments exposure was $551 million, as seen in the following table that presents the distribution of credit exposure by counterparty credit quality as of December 31, 2023. Credit collateral includes cash and letters of credit but excludes other credit enhancements such as guarantees or liens on assets.
Exposure
Before Credit
Collateral Credit
Collateral Net
Exposure
Investment grade $ 539 $ 26 $ 513
Below investment grade or no rating 135 97 38
Totals
$ 674 $ 123 $ 551
Significant ( i.e. , 10% or greater) concentration of credit exposure exists with two counterparties, which represented an aggregate $293 million, or 53%, of our total net exposure as of December 31, 2023. We view exposure to these counterparties to be within an acceptable level of risk tolerance due to the counterparties' credit ratings, the counterparties' market role and deemed creditworthiness and the importance of our business relationship with the counterparty. An event of default by one or more counterparties could subsequently result in termination-related settlement payments that reduce available liquidity if amounts such as margin deposits are owed to the counterparties or delays in receipts of expected settlements owed to us.
Contracts classified as "normal" purchase or sale and non-derivative contractual commitments are not marked-to-market in the financial statements and are excluded from the detail above. Such contractual commitments may contain pricing that is favorable considering current market conditions and therefore represent economic risk if the counterparties do not perform.
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