Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our financial position is routinely subject to a variety of risks, including market risks associated with (i) changes in commodity prices, (ii) interest rate movements on outstanding debt, and (iii) credit risk, which is the risk of financial loss if a customer, counterparty, or financial institution is unable to perform or pay amounts due to us.
Market risks are monitored by our risk management group which operates independently of the wholesale commercial operations, utilizing defined practices and analytical methodologies. These practices and methodologies measure the risk of change in value of the portfolio of contracts and the hypothetical effect on this value from changes in market conditions. Measurement techniques include, but are not limited to, position reporting and review, Value at Risk (VaR) methodologies and stress test scenarios. Risk management regularly reports their analysis to the Company's Risk Committee and Executive Committee, and to the Sustainability and Risk Committee of the Board of Directors.
Commodity Price Risk and Oversight
Our business is subject to the inherent risks of market fluctuations in the price of commodities for energy-related products we market or purchase in futures markets including electricity, natural gas, uranium, coal, environmental credits and other energy commodities in competitive wholesale markets. Factors that influence these market fluctuations are dependent upon many factors outside of our control including seasonal changes in supply and demand, weather conditions, market liquidity, governmental, regulatory, and environmental policies.
We manage the commodity price 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. In managing commodity 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. 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. Beginning in 2024, our nuclear fleet is eligible for the nuclear PTC provided by the IRA which provides increasing levels of support as unit revenues decline below levels established in the IRA and is further adjusted annually for inflation over the duration of the program.
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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. This measurement estimates the potential loss in value, due to changes in market conditions, of all underlying generation assets and contracts. 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 following table summarizes the VaR for Vistra's commodity portfolio based on a 95% confidence level and an assumed holding period of 60 days. Average VaRs as of December 31 are the average of each month-end average for the years ended December 31, 2024 and 2023, respectively:
Year Ended December 31,
2024 2023
Average VaR
$ 236 $ 190
High VaR
$ 371 $ 423
Low VaR
$ 86 $ 115
The month-end average VaR risk measure increased in 2024 due to higher volumes following the Energy Harbor Merger.
Interest Rate Risk
We are exposed to fluctuations in interest rates through our issuance of variable rate debt. We mitigate our exposure to fluctuations in interest rates through entering interest rate swaps. These interest rate swaps limit the impact of interest rate changes on our results of operations and cash flows and to lower our overall borrowing costs. Interest rate risk is managed centrally by our treasury function.
As of December 31, 2024, we have approximately $3.5 billion principal amount of variable rate debt consisting of the Vistra Operations Credit Facilities Term Loan B-3 Facility, the BCOP Credit Facilities and the Vistra Zero Term Loan B Facility (see Note 9 to the Financial Statements). We have entered into net notional interest rate swaps that will hedge $2.3 billion of our exposure to variable rate debt through December 2030 (see Note 11 to Financial Statements). As of December 31, 2024, 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 $12 million after taking into account the interest rate swaps.
Credit Risk
Our primary concentration of credit risk is associated with the collection of receivables resulting from sales to retail customers and the risk of a counterparty's failure to meet its obligations under derivative contracts. We minimize our exposure to 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 11 to the Financial Statements for additional information.
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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 $2.360 billion at December 31, 2024. Including collateral posted to us by counterparties, our net exposure was $2.166 billion, as seen in the following table that presents the distribution of credit exposure by counterparty credit quality as of December 31, 2024. Credit collateral includes cash and letters of credit but excludes other credit enhancements such as guarantees or liens on assets.
Exposure Before Credit Collateral
Trade Accounts Receivable
Derivatives
Gross
Exposure
Credit
Collateral Net
Exposure
(in millions)
Retail segment
$ 1,545 $ — $ 1,545 $ 51 $ 1,494
Texas, East and Asset Closure segments:
Investment grade $ 99 $ 451 $ 550 $ 49 $ 501
Below investment grade or no rating 69 196 265 94 171
Texas, East and Asset Closure segments
$ 168 $ 647 $ 815 $ 143 $ 672
Totals
$ 1,713 $ 647 $ 2,360 $ 194 $ 2,166
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.
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. Significant ( i.e. , 10% or greater) concentration of credit exposure exists with one counterparty, which represented an aggregate $262 million, or 39%, of our total net exposure as of December 31, 2024. We view exposure to this counterparty to be within an acceptable level of risk tolerance due to the counterparty's credit ratings, the counterparty's market role and deemed creditworthiness and the importance of our business relationship with the counterparty.
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