NRG Amendment No. 2 to 2013 10-K
                    

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 2)
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2013.
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from                      to                       .
Commission file No. 001-15891
     NRG Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
41-1724239
(I.R.S. Employer Identification No.)
 
 
 
211 Carnegie Center Princeton, New Jersey
(Address of principal executive offices)
 
08540
(Zip Code)
(609) 524-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $0.01
 
New York Stock Exchange
     Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes o    No x
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes o    No x
As of the last business day of the most recently completed second fiscal quarter, the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $9,508,294,816 based on the closing sale price of $37.20 as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date.
Class
 
Outstanding at August 30, 2014
Common Stock, par value $0.01 per share
 
337,890,742
Documents Incorporated by Reference:
None
 
 
 
 
 


                    

EXPLANATORY NOTE
We are filing this Amendment No. 2 (the “Amendment No. 2”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission (the “Commission”) on February 28, 2014 (the “Original Filing”) and as amended and filed with the Commission on April 4, 2014 (the “Amendment No. 1”). The Amendment No. 1 was filed to include the attestation report of our independent registered public accounting firm as required by Item 308(b) of Regulation S-K, which was inadvertently omitted from the Original Filing. This Amendment No. 2 is being filed to include the complete text of Item 15 of Part IV of Form 10-K.
In accordance with Rule 12b-15 of the Securities Exchange Act of 1934, as amended, we have included new certifications of our principal executive, financial and accounting officers.
This Amendment No. 2 does not affect the original financial statements or footnotes as originally filed in the Original Filing. In addition, this Amendment No. 2 does not reflect events occurring after the Original Filing date, and does not modify or update the disclosures therein in any way other than as required to reflect the Amendment No. 2 as described above and set forth below. Accordingly, this Amendment No. 2 should be read in conjunction with the Original Filing, the Amendment No. 1, and our other filings made with the Commission subsequent to the date of the Original Filing, including any amendments to those filings.

TABLE OF CONTENTS
 
 

2

                    


PART IV
Item 15 — Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The following consolidated financial statements of NRG Energy, Inc. and related notes thereto, together with the reports thereon of KPMG LLP, are included herein:
Consolidated Statements of Operations — Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income/(Loss) — Years ended December 31, 2013, 2012, and 2011
Consolidated Balance Sheets — December 31, 2013 and 2012
Consolidated Statements of Cash Flows — Years ended December 31, 2013, 2012, and 2011
Consolidated Statement of Stockholders' Equity — Years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
The following Consolidated Financial Statement Schedule of NRG Energy, Inc. is filed as part of Item 15(d) of this report and should be read in conjunction with the Consolidated Financial Statements.
Schedule II — Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(a)(3) Exhibits: See Exhibit Index submitted as a separate section of this report.
(b) Exhibits
See Exhibit Index submitted as a separate section of this report.
(c) Not applicable

3

                    

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NRG Energy Inc.'s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including its principal executive officer, principal financial officer and principal accounting officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework in Internal Control — Integrated Framework (1992), the Company's management concluded that its internal control over financial reporting was effective as of December 31, 2013.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2013, has been audited by KPMG LLP, the Company's independent registered public accounting firm, as stated in its report which is included in this Form 10‑K.

4

                    

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

NRG Energy, Inc.:
We have audited NRG Energy, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NRG Energy, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, NRG Energy, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NRG Energy, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income/(loss), cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 2013, and our report dated February 28, 2014 expressed an unqualified opinion on those consolidated financial statements.


 
/s/ KPMG LLP
 
KPMG LLP
Philadelphia, Pennsylvania
 
February 28, 2014
 





5

                    

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

NRG Energy, Inc.:

We have audited the accompanying consolidated balance sheets of NRG Energy, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income/(loss), cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule “Schedule II. Valuation and Qualifying Accounts.” These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NRG Energy, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of NRG Energy, Inc. and subsidiaries internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2014 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.



 
/s/ KPMG LLP
 
KPMG LLP
Philadelphia, Pennsylvania
 
February 28, 2014
 



6

                    


NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Year Ended December 31,
(In millions, except per share amounts)
2013
 
2012
 
2011
Operating Revenues
 
 
 
 
 
Total operating revenues
$
11,295

 
$
8,422

 
$
9,079

Operating Costs and Expenses

 

 
 
Cost of operations
8,121

 
6,140

 
6,745

Depreciation and amortization
1,256

 
950

 
896

Impairment losses
459

 

 
160

Selling, general and administrative
904

 
807

 
586

Acquisition-related transaction and integration costs
128

 
107

 

Development activity expenses
84

 
68

 
57

Total operating costs and expenses
10,952

 
8,072

 
8,444

Operating Income
343

 
350

 
635

Other Income/(Expense)

 

 
 
Equity in earnings of unconsolidated affiliates
7

 
37

 
35

Bargain purchase gain related to GenOn acquisition

 
296

 

Impairment losses on investments
(99
)
 
(2
)
 
(495
)
Other income, net
13

 
19

 
19

Loss on debt extinguishment
(50
)
 
(51
)
 
(175
)
Interest expense
(848
)
 
(661
)
 
(665
)
Total other expense
(977
)
 
(362
)
 
(1,281
)
Loss Before Income Taxes
(634
)
 
(12
)
 
(646
)
Income tax benefit
(282
)
 
(327
)
 
(843
)
Net (Loss)/Income
(352
)
 
315

 
197

Less: Net income attributable to noncontrolling interest
34

 
20

 

Net (Loss)/Income Attributable to NRG Energy, Inc.
(386
)
 
295

 
197

Dividends for preferred shares
9

 
9

 
9

(Loss)/Income Available for Common Stockholders
$
(395
)
 
$
286

 
$
188

(Loss)/Earnings Per Share Attributable to NRG Energy, Inc. Common Stockholders
 
 
 
 
 
Weighted average number of common shares outstanding — basic
323

 
232

 
240

Net (Loss)/Income per Weighted Average Common Share — Basic
$
(1.22
)
 
$
1.23

 
$
0.78

Weighted average number of common shares outstanding — diluted
323

 
234

 
241

Net (Loss)/Income per Weighted Average Common Share — Diluted
$
(1.22
)
 
$
1.22

 
$
0.78

Dividends Per Common Share
$
0.45

 
$
0.18

 
$

See notes to Consolidated Financial Statements.

7

                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In millions)
Net (Loss)/Income
$
(352
)
 
$
315

 
$
197

Other Comprehensive Income/(Loss), net of tax
 
 
 
 
 
Unrealized gain/(loss) on derivatives, net of income tax benefit of $6, $94, and $181
8

 
(163
)
 
(309
)
Foreign currency translation adjustments, net of income tax benefit of $14, $1, and $1
(24
)
 
(1
)
 
(2
)
Reclassification adjustment for translation gain realized upon sale of Schkopau, net of income tax benefit of $0, $6, and $0

 
(11
)
 

Available-for-sale securities, net of income tax expense of $2, $1, and $0
3

 
3

 
(1
)
Defined benefit plan, net of income tax (expense)/benefit of $(100), $21, and $27
168

 
(52
)
 
(46
)
Other comprehensive income/(loss)
155

 
(224
)
 
(358
)
Comprehensive (Loss)/Income
(197
)
 
91

 
(161
)
Less: Comprehensive income attributable to noncontrolling interest
34

 
20

 

Comprehensive (Loss)/Income Attributable to NRG Energy, Inc.
(231
)
 
71

 
(161
)
Dividends for preferred shares
9

 
9

 
9

Comprehensive (Loss)/Income Available for Common Stockholders
$
(240
)
 
$
62

 
$
(170
)
See notes to Consolidated Financial Statements.

8

                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
As of December 31,
 
2013
 
2012
 
(In millions)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
2,254

 
$
2,087

Funds deposited by counterparties
63

 
271

Restricted cash
268

 
217

Accounts receivable — trade, less allowance for doubtful accounts of $40 and $32
1,214

 
1,061

Inventory
898

 
903

Derivative instruments
1,328

 
2,644

Cash collateral paid in support of energy risk management activities
276

 
229

Deferred income taxes
258

 
56

Renewable energy grant receivable
539

 
58

Prepayments and other current assets
498

 
446

Total current assets
7,596

 
7,972

Property, Plant and Equipment
 
 
 
In service
23,649

 
21,133

Under construction
2,775

 
4,428

Total property, plant and equipment
26,424

 
25,561

Less accumulated depreciation
(6,573
)
 
(5,408
)
Net property, plant and equipment
19,851

 
20,153

Other Assets
 
 
 
Equity investments in affiliates
453

 
676

Notes receivable, less current portion
73

 
79

Goodwill
1,985

 
1,956

Intangible assets, net of accumulated amortization of $1,977 and $1,706
1,140

 
1,210

Nuclear decommissioning trust fund
551

 
473

Derivative instruments
311

 
662

Deferred income taxes
1,202

 
1,203

Other non-current assets
740

 
599

Total other assets
6,455

 
6,858

Total Assets
$
33,902

 
$
34,983

See notes to Consolidated Financial Statements.

9

                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
 
As of December 31,
 
2013
 
2012
 
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt and capital leases
$
1,050

 
$
147

Accounts payable 
1,038

 
1,172

Derivative instruments
1,055

 
1,981

Cash collateral received in support of energy risk management activities
63

 
271

Accrued interest expense
185

 
191

Other accrued expenses
480

 
539

Other current liabilities
333

 
369

Total current liabilities
4,204

 
4,670

Other Liabilities
 
 
 
Long-term debt and capital leases
15,767

 
15,736

Nuclear decommissioning reserve
294

 
354

Nuclear decommissioning trust liability
324

 
273

Postretirement and other benefit obligations
506

 
803

Deferred income taxes
22

 
55

Derivative instruments
195

 
500

Out-of-market contracts
1,177

 
1,278

Other non-current liabilities
695

 
796

Total non-current liabilities
18,980

 
19,795

Total Liabilities
23,184

 
24,465

3.625% convertible perpetual preferred stock; $0.01 par value; 250,000 shares issued and outstanding (at liquidation value of $250, net of issuance costs)
249

 
249

Commitments and Contingencies

 

Stockholders' Equity
 
 
 
Common stock; $0.01 par value; 500,000,000 shares authorized; 401,126,780 and 399,112,616 shares issued and 323,779,252 and 322,606,898 shares outstanding at December 31, 2013 and 2012
4

 
4

Additional paid-in capital
7,840

 
7,587

Retained earnings
3,695

 
4,230

Less treasury stock, at cost; 77,347,528 and 76,505,718 shares at December 31, 2013 and 2012
(1,942
)
 
(1,920
)
Accumulated other comprehensive income/(loss)
5

 
(150
)
Noncontrolling interest
867

 
518

Total Stockholders' Equity
10,469

 
10,269

Total Liabilities and Stockholders' Equity
$
33,902

 
$
34,983

See notes to Consolidated Financial Statements.


10

                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In millions)
Cash Flows from Operating Activities
 
 
 
 
 
Net (loss)/income
$
(352
)
 
$
315

 
$
197

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
 
 
 
 
 
Distributions and equity in earnings of unconsolidated affiliates
84

 
2

 
9

Bargain purchase gain related to GenOn acquisition

 
(296
)
 

Depreciation and amortization
1,256

 
950

 
896

Provision for bad debts
67

 
45

 
59

Amortization of nuclear fuel
36

 
39

 
39

Amortization of financing costs and debt discount/premiums
(33
)
 
31

 
32

Adjustment to loss on debt extinguishment
(15
)
 
9

 
58

Amortization of intangibles and out-of-market contracts
49

 
146

 
167

Amortization of unearned equity compensation
38

 
41

 
28

(Gain)/Loss on disposals and sales of assets, net
(3
)
 
11

 
14

Impairment losses
558

 

 
657

Changes in derivative instruments
164

 
124

 
(138
)
Changes in deferred income taxes and liability for uncertain tax benefits
(67
)
 
(353
)
 
(859
)
Changes in nuclear decommissioning trust liability
15

 
37

 
20

Cash (used)/provided by changes in other working capital, net of acquisition and disposition effects:
 
 
 
 
 
Accounts receivable - trade
(224
)
 
(131
)
 
(119
)
Inventory
11

 
(172
)
 
145

Prepayments and other current assets
(22
)
 
(26
)
 
59

Accounts payable
275

 
(132
)
 
9

Accrued expenses and other current liabilities
(114
)
 
231

 
(111
)
Other assets and liabilities
(453
)
 
278

 
4

Net Cash Provided by Operating Activities
1,270

 
1,149

 
1,166

Cash Flows from Investing Activities
 
 
 
 
 
Acquisition of businesses, net of cash acquired
(494
)
 
(81
)
 
(377
)
Cash acquired in GenOn acquisition

 
983

 

Capital expenditures
(1,987
)
 
(3,396
)
 
(2,310
)
Increase in restricted cash, net
(22
)
 
(66
)
 
(35
)
(Increase)/decrease in restricted cash to support equity requirements for U.S. DOE funded projects
(26
)
 
164

 
(215
)
(Increase)/decrease in notes receivable
(11
)
 
(24
)
 
12

Proceeds from renewable energy grants
55

 
62

 

Purchases of emission allowances, net of proceeds
5

 
(1
)
 
(19
)
Investments in nuclear decommissioning trust fund securities
(514
)
 
(436
)
 
(406
)
Proceeds from sales of nuclear decommissioning trust fund securities
488

 
399

 
385

Proceeds from sale of assets, net
13

 
137

 
7

Investments in unconsolidated affiliates

 
(25
)
 
(66
)
Other
(35
)
 
22

 
(23
)
Net Cash Used by Investing Activities
(2,528
)
 
(2,262
)
 
(3,047
)
Cash Flows from Financing Activities
 
 
 
 
 
Payment of dividends to preferred and common stockholders
(154
)
 
(50
)
 
(9
)
Net receipts/(payments for) from settlement of acquired derivatives that include financing elements
267

 
(68
)
 
(83
)
Payment for treasury stock
(25
)
 

 
(430
)
Sales proceeds and other contributions from noncontrolling interests in subsidiaries
531

 
347

 
29

Proceeds from issuance of common stock
16

 

 
2

Proceeds from issuance of long-term debt
1,777

 
3,165

 
6,224

Payments for term loan for funded letter of credit facility

 

 
(1,300
)
Decrease in restricted cash supporting funded letter of credit facility

 

 
1,300

Payment of debt issuance and hedging costs
(50
)
 
(35
)
 
(207
)
Payments for short and long-term debt
(935
)
 
(1,260
)
 
(5,493
)
Net Cash Provided by Financing Activities
1,427

 
2,099

 
33

Effect of exchange rate changes on cash and cash equivalents
(2
)
 
(4
)
 
2

Net Increase/(Decrease) in Cash and Cash Equivalents
167

 
982

 
(1,846
)
Cash and Cash Equivalents at Beginning of Period
2,087

 
1,105

 
2,951

Cash and Cash Equivalents at End of Period
$
2,254

 
$
2,087

 
$
1,105

See notes to Consolidated Financial Statements.

11

                    

NRG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Noncon- trolling
Interest
 
Total
Stockholders'
Equity
 
(In millions)
Balances at December 31, 2010
$

 
$
3

 
$
5,323

 
$
3,800

 
$
(1,503
)
 
$
432

 
$
17

 
$
8,072

Net income
 

 
 

 
 

 
197

 
 

 
 

 

 
197

Other comprehensive income


 


 


 


 


 
(358
)
 


 
(358
)
Equity-based compensation


 


 
28

 


 


 


 


 
28

Purchase of treasury stock


 


 


 


 
(430
)
 


 


 
(430
)
Preferred stock dividends


 


 


 
(9
)
 


 


 


 
(9
)
ESPP share purchases


 


 
(5
)
 
(1
)
 
9

 


 


 
3

NINA deconsolidation


 


 


 


 


 


 
(17
)
 
(17
)
Ivanpah contribution


 


 


 


 


 


 
183

 
183

Balances at December 31, 2011
$

 
$
3

 
$
5,346

 
$
3,987

 
$
(1,924
)
 
$
74

 
$
183

 
$
7,669

Net income


 


 


 
295

 


 


 
20

 
315

Other comprehensive loss


 


 


 


 


 
(224
)
 


 
(224
)
Issuance of shares for acquisition of GenOn


 
1

 
2,176

 


 


 


 


 
2,177

Equity-based compensation


 


 
34

 


 


 


 


 
34

Preferred stock dividends


 


 


 
(9
)
 


 


 


 
(9
)
Common stock dividends


 


 


 
(41
)
 


 


 


 
(41
)
ESPP share purchases


 


 
(1
)
 
(2
)
 
4

 


 


 
1

Sales proceeds and other contributions from noncontrolling interests


 


 
32

 


 


 


 
315

 
347

Balances at December 31, 2012
$

 
$
4

 
$
7,587

 
$
4,230

 
$
(1,920
)
 
$
(150
)
 
$
518

 
$
10,269

Net loss


 


 


 
(386
)
 


 


 
34

 
(352
)
Other comprehensive income


 


 


 


 


 
155

 


 
155

Equity-based compensation


 


 
36

 


 


 


 


 
36

Purchase of treasury stock


 


 


 


 
(25
)
 


 


 
(25
)
Preferred stock dividends


 


 


 
(9
)
 


 


 


 
(9
)
Common stock dividends


 


 


 
(145
)
 


 


 


 
(145
)
ESPP share purchases


 


 


 
5

 
3

 


 


 
8

NRG Yield IPO


 


 
217

 


 


 


 
240

 
457

Sales proceeds and other contributions from noncontrolling interests


 


 


 


 


 


 
75

 
75

Balances at December 31, 2013
$

 
$
4

 
$
7,840

 
$
3,695

 
$
(1,942
)
 
$
5

 
$
867

 
$
10,469

See notes to Consolidated Financial Statements.

12

                    

NRG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Business
General
NRG Energy, Inc., or NRG or the Company, is a competitive power and energy company that aspires to be a leader in the way residential, industrial and commercial consumers think about, use, produce and deliver energy and energy services in major competitive power markets in the United States. NRG engages in the ownership and operation of power generation facilities; the trading of energy, capacity and related products; the transacting in and trading of fuel and transportation services and the direct sale of energy, services, and innovative, sustainable products to retail customers. The Company sells retail electric products and services under the name “NRG” and various brands owned by NRG. Finally, NRG aspires to be a clean energy leader and is focused on the deployment and commercialization of potentially transformative technologies, like electric vehicles, Distributed Solar and smart meter/home automation technology that collectively have the potential to fundamentally change the nature of the power industry, including a substantial change in the role of the national electric transmission grid and distribution system.
NRG's domestic generation facilities consist of intermittent, baseload, intermediate, and peaking power generation facilities. The following table summarizes NRG's global generation portfolio by operating segment, which includes 88 fossil fuel and nuclear plants, eleven Utility Scale Solar facilities and four wind farms, as well as Distributed Solar facilities. Also included is one Utility Scale Solar facility and additional Distributed Solar facilities currently under construction. All Utility Scale Solar and Distributed Solar facilities are described in megawatts on an alternating current basis. MW figures provided represent nominal summer net megawatt capacity of power generated as adjusted for the Company's owned or leased interest excluding capacity from inactive/mothballed units:
 
 
Fossil Fuel, Nuclear, and Renewable
 
 
(In MW)
Generation Type
 
Texas
 
East
 
South Central
 
West
 
Alternative Energy
 
NRG Yield
 
Total Domestic
 
Other (Inter-national)
 
Total Global
Natural gas
 
5,917

 
7,651

 
3,817

 
6,779

 

 
843

 
25,007

 

 
25,007

Coal
 
4,193

 
6,879

 
1,496

 

 

 

 
12,568

 
605

 
13,173

Oil(a)
 

 
5,531

 

 

 

 
190

 
5,721

 

 
5,721

Nuclear
 
1,176

 

 

 

 

 

 
1,176

 

 
1,176

Wind
 

 

 

 

 
347

 
101

 
448

 

 
448

Utility Scale Solar
 

 

 

 

 
836

 
303

 
1,139

 

 
1,139

Distributed Solar
 

 

 

 

 
37

 
10

 
47

 

 
47

Total generation capacity
 
11,286

 
20,061

 
5,313

 
6,779

 
1,220

 
1,447

 
46,106

 
605

 
46,711

Capacity attributable to noncontrolling interest
 

 

 

 

 
(331
)
 
(499
)
 
(830
)
 

 
(830
)
Total net generation capacity
 
11,286

 
20,061

 
5,313

 
6,779

 
889

 
948

 
45,276

 
605

 
45,881

Under Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility Scale Solar
 

 

 

 

 
26

 

 
26

 

 
26

Distributed Solar
 

 

 

 

 
6

 

 
6

 

 
6

Total under construction
 

 

 

 

 
32

 

 
32

 

 
32

(a) The NRG Yield operating segment consists of two dual-fuel (natural gas and oil) simple-cycle generation facilities.
In addition, the Company's thermal assets provide steam and chilled water capacity of approximately 1,374 MWt through its district energy business, 28 MWt of which is available under the right-to-use provision of the Chilled Water Service Agreement at NRG Energy Center Phoenix, AZ.
NRG sells power from its generation portfolio, offers capacity or similar products to retail electric providers and others, and provides ancillary services to support system reliability.
The Retail Business provides energy and related services to residential, commercial and institutional customers primarily located in Texas and selected Northeast markets. Products and services range from system power to home services, to bundled products which combine system power with protection products, energy efficiency and renewable energy solutions. Based on metered locations, as of December 31, 2013, NRG's Retail Business served approximately 2.3 million residential, small business, commercial and industrial customers.

13

                    

NRG was incorporated as a Delaware corporation on May 29, 1992. NRG's common stock is listed on the New York Stock Exchange under the symbol "NRG". The Company's principal executive offices are located at 211 Carnegie Center, Princeton, New Jersey 08540. NRG is dual headquartered, with financial and commercial headquarters in Princeton, New Jersey and operational headquarters in Houston, Texas. NRG's telephone number is (609) 524-4500. The address of the Company's website is www.nrgenergy.com. NRG's recent annual reports, quarterly reports, current reports, and other periodic filings are available free of charge through the Company's website.
Initial Public Offering of NRG Yield, Inc.
The Company formed NRG Yield, Inc. to own and operate a portfolio of contracted generation assets and thermal infrastructure assets that have historically been owned and/or operated by NRG and its subsidiaries. On July 22, 2013, NRG Yield, Inc. closed its initial public offering of 22,511,250 shares of Class A common stock at a price of $22 per share. Net proceeds to NRG Yield, Inc. from the sale of the Class A common stock were approximately $468 million, net of underwriting discounts and commissions of $27 million. The Company retained 42,738,250 shares of Class B common stock of NRG Yield, Inc. As a result, the Company owns a controlling interest in NRG Yield, Inc. and will consolidate this entity for financial reporting purposes. In addition, the Company retained a 65.5% interest in NRG Yield LLC. The initial public offering represented the sale of a 34.5% interest in NRG Yield LLC. NRG Yield LLC's initial assets consisted of three natural gas or dual-fired facilities, eight utility-scale solar and wind generation facilities, two portfolios of distributed solar facilities that collectively represent 1,324 net MW, and thermal infrastructure assets with an aggregate steam and chilled water capacity of 1,098 net MWt and electric generation capacity of 123 net MW. On December 31, 2013, NRG Yield LLC acquired Energy Systems, as described in Note 3, Business Acquisitions and Dispositions. The following table represents the structure of NRG Yield, Inc. after the initial public offering:

14

                    

Note 2 — Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company's consolidated financial statements have been prepared in accordance with U.S. GAAP. The ASC, established by the FASB, is the source of authoritative U.S. GAAP to be applied by nongovernmental entities. In addition, the rules and interpretative releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
The consolidated financial statements include NRG's accounts and operations and those of its subsidiaries in which the Company has a controlling interest. All significant intercompany transactions and balances have been eliminated in consolidation. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist through arrangements that do not involve controlling voting interests. As such, NRG applies the guidance of ASC 810, Consolidations, or ASC 810, to determine when an entity that is insufficiently capitalized or not controlled through its voting interests, referred to as a VIE should be consolidated.
Segment Reporting
Effective June 2013, the Company's segment structure and its allocation of corporate expenses were updated to reflect how management currently makes financial decisions and allocates resources. The Company has recast data from prior periods to reflect this change in reportable segments to conform to the current year presentation. The Company's businesses are primarily segregated based on the Retail Business, conventional power generation, alternative energy businesses, NRG Yield, and corporate activities.  Within NRG's conventional power generation, there are distinct components with separate operating results and management structures for the following geographical regions: Texas, East, South Central, West and Other, which includes international businesses and maintenance services.  The Company's alternative energy segment includes solar and wind assets, excluding those in the NRG Yield segment, electric vehicle services and the carbon capture business.  NRG Yield includes certain of the Company's contracted generation assets including three natural gas or dual-fired facilities, eight utility-scale solar and wind generation facilities, two portfolios of distributed solar facilities and thermal infrastructure assets. 
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an original maturity of three months or less at the time of purchase.
Funds Deposited by Counterparties
Funds deposited by counterparties consist of cash held by the Company as a result of collateral posting obligations from its counterparties. Some amounts are segregated into separate accounts that are not contractually restricted but, based on the Company's intention, are not available for the payment of general corporate obligations. Depending on market fluctuations and the settlement of the underlying contracts, the Company will refund this collateral to the hedge counterparties pursuant to the terms and conditions of the underlying trades. Since collateral requirements fluctuate daily and the Company cannot predict if any collateral will be held for more than twelve months, the funds deposited by counterparties are classified as a current asset on the Company's balance sheet, with an offsetting liability for this cash collateral received within current liabilities. Changes in funds deposited by counterparties are closely associated with the Company's operating activities, and are classified as an operating activity in the Company's consolidated statements of cash flows.
Restricted Cash
Restricted cash consists primarily of funds held to satisfy the requirements of certain debt agreements and funds held within the Company's projects that are restricted in their use. These funds are used to pay for current operating expenses and current debt service payments as well as to fund required equity contributions, per the restrictions of the debt agreements.
Trade Receivables and Allowance for Doubtful Accounts
Trade receivables are reported in the balance sheet at outstanding principal adjusted for any write-offs and the allowance for doubtful accounts. For its Retail Business, the Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing counterparty credit ratings (for commercial and industrial customers), historical collections, accounts receivable aging and other factors. The Retail Business writes-off accounts receivable balances against the allowance for doubtful accounts when it determines a receivable is uncollectible.

15

                    

Inventory
Inventory is valued at the lower of weighted average cost or market, and consists principally of fuel oil, coal and raw materials used to generate electricity or steam. The Company removes these inventories as they are used in the production of electricity or steam. Spare parts inventory is valued at a weighted average cost, since the Company expects to recover these costs in the ordinary course of business. The Company removes these inventories when they are used for repairs, maintenance or capital projects. Sales of inventory are classified as an operating activity in the consolidated statements of cash flows.
Property, Plant and Equipment
Property, plant and equipment are stated at cost; however impairment adjustments are recorded whenever events or changes in circumstances indicate that their carrying values may not be recoverable. NRG also classifies nuclear fuel related to the Company's 44% ownership interest in STP as part of the Company's property, plant, and equipment. Significant additions or improvements extending asset lives are capitalized as incurred, while repairs and maintenance that do not improve or extend the life of the respective asset are charged to expense as incurred. Depreciation other than nuclear fuel is computed using the straight-line method, while nuclear fuel is amortized based on units of production over the estimated useful lives. Certain assets and their related accumulated depreciation amounts are adjusted for asset retirements and disposals with the resulting gain or loss included in cost of operations in the consolidated statements of operations.
Asset Impairments
Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. Such reviews are performed in accordance with ASC 360. An impairment loss is recognized if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference recorded in operating costs and expenses in the statements of operations. Fair values are determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets and present value techniques.
Investments accounted for by the equity method are reviewed for impairment in accordance with ASC 323, Investments-Equity Method and Joint Ventures, or ASC 323, which requires that a loss in value of an investment that is other than a temporary decline should be recognized. The Company identifies and measures losses in the value of equity method investments based upon a comparison of fair value to carrying value.
For further discussion of these matters, refer to Note 10, Asset Impairments.
Development Activity Expenses and Capitalized Interest
Project development costs are expensed in the preliminary stages of a project and capitalized when the project is deemed to be commercially viable. Commercial viability is determined by one or a series of actions including among others, Board of Director approval pursuant to a formal project plan that subjects the Company to significant future obligations that can only be discharged by the use of a Company asset.
Development activity expenses include project development costs, which are expensed in the preliminary stages of a project and capitalized when the project is deemed to be commercially viable. Commercial viability is determined by one or a series of actions including, among others, Board of Director approval pursuant to a formal project plan that subjects the Company to significant future obligations that can only be discharged by the use of a Company asset. When a project is available for operations, capitalized project development costs are reclassified to property, plant and equipment and amortized on a straight-line basis over the estimated useful life of the project's related assets. Capitalized costs are charged to expense if a project is abandoned or management otherwise determines the costs to be unrecoverable.
Development activity expenses also include selling, general, and administrative expenses associated with the current operations of certain developing businesses including residential solar, electric vehicles, waste-to-energy, carbon capture and other emerging technologies. The revenue associated with these businesses was immaterial for the years ended December 31, 2013, 2012, and 2011. When it is determined that a business will remain an ongoing part of the Company's operations or when operating revenues become material relative to the operating costs of the underlying business, the Company no longer classifies a business as a development activity.
Interest incurred on funds borrowed to finance capital projects is capitalized until the project under construction is ready for its intended use. The amount of interest capitalized for the years ended December 31, 2013, 2012, and 2011, was $64 million, $104 million, and $80 million, respectively.

16

                    

When a project is available for operations, capitalized interest and project development costs are reclassified to property, plant and equipment and amortized on a straight-line basis over the estimated useful life of the project's related assets. Capitalized costs are charged to expense if a project is abandoned or management otherwise determines the costs to be unrecoverable.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized as interest expense on a basis which approximates the effective interest method over the term of the related debt.
Intangible Assets
Intangible assets represent contractual rights held by NRG. The Company recognizes specifically identifiable intangible assets including customer contracts, customer relationships, energy supply contracts, marketing partnerships, development rights, trade names, emission allowances, and fuel contracts when specific rights and contracts are acquired. In addition, NRG also established values for emission allowances and power contracts upon adoption of Fresh Start reporting. These intangible assets are amortized based on expected volumes, expected delivery, expected discounted future net cash flows, straight line or units of production basis.
Intangible assets determined to have indefinite lives are not amortized, but rather are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that such acquired intangible assets have been determined to have finite lives and should now be amortized over their useful lives. NRG had no intangible assets with indefinite lives recorded as of December 31, 2013.
Emission allowances held-for-sale, which are included in other non-current assets on the Company's consolidated balance sheet, are not amortized; they are carried at the lower of cost or fair value and reviewed for impairment in accordance with ASC 360.
Goodwill
In accordance with ASC 350, the Company recognizes goodwill for the excess cost of an acquired entity over the net value assigned to assets acquired and liabilities assumed. NRG performs goodwill impairment tests annually, during the fourth quarter, and when events or changes in circumstances indicate that the carrying value may not be recoverable.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for Impairment, or ASU No. 2011-08. The objective of ASU 2011-08 is to simplify how entities test goodwill for impairment. The amendments in ASU No. 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company adopted the provisions of ASU No. 2011-08, effective January 1, 2011, with no impact on its results of operations, financial position or cash flows.
In the absence of sufficient qualitative factors, goodwill impairment is determined using a two step process:
 
Step one —
Identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value exceeds book value, goodwill of the reporting unit is not considered impaired. If the book value exceeds fair value, proceed to step two.
 
Step two —
Compare the implied fair value of the reporting unit's goodwill to the book value of the reporting unit goodwill. If the book value of goodwill exceeds fair value, an impairment charge is recognized for the sum of such excess.
Income Taxes
NRG accounts for income taxes using the liability method in accordance with ASC 740, which requires that the Company use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant temporary differences.
NRG has two categories of income tax expense or benefit — current and deferred, as follows:
Current income tax expense or benefit consists solely of current taxes payable less applicable tax credits, and
Deferred income tax expense or benefit is the change in the net deferred income tax asset or liability, excluding amounts charged or credited to accumulated other comprehensive income.

17

                    

NRG reports some of the Company's revenues and expenses differently for financial statement purposes than for income tax return purposes, resulting in temporary and permanent differences between the Company's financial statements and income tax returns. The tax effects of such temporary differences are recorded as either deferred income tax assets or deferred income tax liabilities in the Company's consolidated balance sheets. NRG measures the Company's deferred income tax assets and deferred income tax liabilities using income tax rates that are currently in effect. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income which includes the future reversal of existing taxable temporary differences to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion to utilize projections of future profit before tax in our estimate of future taxable income, the Company considered the profit before tax generated in recent years. A valuation allowance is recorded to reduce the Company's net deferred tax assets to an amount that is more-likely-than-not to be realized.
NRG reduces its current income tax expense in the consolidated statement of operations for any investment tax credits, or ITCs, that are not convertible into cash grants, as well as other tax credits, in the period the tax credit is generated. ITCs that are convertible into cash grants, as well as the deferred income tax benefit generated by the difference in the financial statement and tax basis of the related assets, are recorded as a reduction to the carrying value of the underlying property and subsequently amortized to earnings on a straight-line basis over the useful life of each underlying property.
The Company accounts for uncertain tax positions in accordance with ASC 740, which applies to all tax positions related to income taxes. Under ASC 740, tax benefits are recognized when it is more-likely-than-not that a tax position will be sustained upon examination by the authorities. The benefit recognized from a position that has surpassed the more-likely-than-not threshold is the largest amount of benefit that is more than 50% likely to be realized upon settlement. The Company recognizes interest and penalties accrued related to uncertain tax benefits as a component of income tax expense.
In accordance with ASC 805 and as discussed further in Note 19, Income Taxes, changes to existing net deferred tax assets or valuation allowances or changes to uncertain tax benefits, are recorded to income tax expense.
Revenue Recognition
Energy — Both physical and financial transactions are entered into to optimize the financial performance of NRG's generating facilities. Electric energy revenue is recognized upon transmission to the customer. Physical transactions, or the sale of generated electricity to meet supply and demand, are recorded on a gross basis in the Company's consolidated statements of operations. Financial transactions, or the buying and selling of energy for trading purposes, are recorded net within operating revenues in the consolidated statements of operations in accordance with ASC 815.
Capacity — Capacity revenues are recognized when contractually earned, and consist of revenues billed to a third party at either the market or a negotiated contract price for making installed generation capacity available in order to satisfy system integrity and reliability requirements.
Sale of Emission Allowances — NRG records the Company's bank of emission allowances as part of the Company's intangible assets. From time to time, management may authorize the transfer of emission allowances in excess of usage from the Company's emission bank to intangible assets held-for-sale for trading purposes. NRG records the sale of emission allowances on a net basis within operating revenue in the Company's consolidated statements of operations.
Contract Amortization — Assets and liabilities recognized from power sales agreements assumed at Fresh Start and through acquisitions related to the sale of electric capacity and energy in future periods for which the fair value has been determined to be significantly less (more) than market are amortized to revenue over the term of each underlying contract based on actual generation and/or contracted volumes.
Retail revenues — Gross revenues for energy sales and services to retail customers are recognized upon delivery under the accrual method. Energy sales and services that have been delivered but not billed by period end are estimated. Gross revenues also includes energy revenues from resales of purchased power, which were $166 million, $151 million and $186 million for the years ended December 31, 2013, 2012, and 2011, respectively. These revenues represent the sale of excess supply to third parties in the market.
Accrued unbilled revenues are based on estimates of customer usage since the date of the last meter reading provided by the independent system operators or electric distribution companies. Volume estimates are based on daily forecasted volumes and estimated customer usage by class. Unbilled revenues are calculated by multiplying these volume estimates by the applicable rate by customer class. Estimated amounts are adjusted when actual usage is known and billed. NRG recorded receivables for unbilled revenues of $356 million, $338 million and $318 million as of December 31, 2013, 2012, and 2011, respectively, for retail energy sales and services.

18

                    

PPAs Certain of the Company's revenues are currently obtained through PPAs or other contractual arrangements. All of these PPAs are recorded as operating leases in accordance with ASC 840, Leases, or ASC 840. ASC 840 requires minimum lease payments received to be amortized over the term of the lease and contingent rentals are recorded when the achievement of the contingency becomes probable. These leases have no minimum lease payments and all the rent is recorded as contingent rent on an actual basis when the electricity is delivered. The contingent rental income recognized in the years ended December 31, 2013, 2012, and 2011 was $400 million, $130 million, and $27 million, respectively.
Gross Receipts and Sales Taxes
In connection with its Retail Business, the Company records gross receipts taxes on a gross basis in revenues and cost of operations in its consolidated statements of operations. During the years ended December 31, 2013, 2012, and 2011, NRG's revenues and cost of operations included gross receipts taxes of $88 million, $79 million, and $78 million respectively. Additionally, the Retail Business records sales taxes collected from its taxable customers and remitted to the various governmental entities on a net basis, thus, there is no impact on the Company's consolidated statement of operations.
Cost of Energy for Retail Operations
The cost of energy for electricity sales and services to retail customers is based on estimated supply volumes for the applicable reporting period. A portion of the cost of energy ($90 million, $97 million and $87 million as of December 31, 2013, 2012, and 2011, respectively) was accrued and consisted of estimated transmission and distribution charges not yet billed by the transmission and distribution utilities. In estimating supply volumes, the Company considers the effects of historical customer volumes, weather factors and usage by customer class. Transmission and distribution delivery fees are estimated using the same method used for electricity sales and services to retail customers. In addition, ISO fees are estimated based on historical trends, estimated supply volumes and initial ERCOT ISO settlements. Volume estimates are then multiplied by the supply rate and recorded as cost of operations in the applicable reporting period.
Derivative Financial Instruments
NRG accounts for derivative financial instruments under ASC 815, which requires the Company to record all derivatives on the balance sheet at fair value unless they qualify for a NPNS exception. Changes in the fair value of non-hedge derivatives are immediately recognized in earnings. Changes in the fair value of derivatives accounted for as hedges, if elected for hedge accounting, are either:
Recognized in earnings as an offset to the changes in the fair value of the related hedged assets, liabilities and firm commitments; or
Deferred and recorded as a component of accumulated OCI until the hedged transactions occur and are recognized in earnings.
NRG's primary derivative instruments are power sales contracts, fuels purchase contracts, other energy related commodities, and interest rate instruments used to mitigate variability in earnings due to fluctuations in market prices and interest rates. On an ongoing basis, NRG assesses the effectiveness of all derivatives that are designated as hedges for accounting purposes in order to determine that each derivative continues to be highly effective in offsetting changes in fair values or cash flows of hedged items. Internal analyses that measure the statistical correlation between the derivative and the associated hedged item determine the effectiveness of such an energy contract designated as a hedge. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting will be discontinued prospectively. Hedge accounting will also be discontinued on contracts related to commodity price risk previously accounted for as cash flow hedges when it is probable that delivery will not be made against these contracts. In this case, the gain or loss previously deferred in accumulated OCI would be immediately reclassified into earnings. If the derivative instrument is terminated, the effective portion of this derivative deferred in accumulated OCI will be frozen until the underlying hedged item is delivered.
Revenues and expenses on contracts that qualify for the NPNS exception are recognized when the underlying physical transaction is delivered. While these contracts are considered derivative financial instruments under ASC 815, they are not recorded at fair value, but on an accrual basis of accounting. If it is determined that a transaction designated as NPNS no longer meets the scope exception, the fair value of the related contract is recorded on the balance sheet and immediately recognized through earnings.
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.

19

                    

Foreign Currency Translation and Transaction Gains and Losses
The local currencies are generally the functional currency of NRG's foreign operations. Foreign currency denominated assets and liabilities are translated at end-of-period rates of exchange. Revenues, expenses, and cash flows are translated at the weighted-average rates of exchange for the period. The resulting currency translation adjustments are not included in the Company's statements of operations for the period, but are accumulated and reported as a separate component of stockholders' equity until sale or complete or substantially complete liquidation of the net investment in the foreign entity takes place. Foreign currency transaction gains or losses are reported within other income/(expense) in the Company's statements of operations. For the years ended December 31, 2013, 2012, and 2011, amounts recognized as foreign currency transaction gains (losses) were immaterial. The Company's cumulative translation adjustment balances as of December 31, 2013, 2012, and 2011 were $15 million, $53 million and $72 million, respectively.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trust funds, accounts receivable, notes receivable, derivatives, and investments in debt securities. Trust funds are held in accounts managed by experienced investment advisors. Certain accounts receivable, notes receivable, and derivative instruments are concentrated within entities engaged in the energy industry. These industry concentrations may impact the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic, industry or other conditions. Receivables and other contractual arrangements are subject to collateral requirements under the terms of enabling agreements. However, the Company believes that the credit risk posed by industry concentration is offset by the diversification and creditworthiness of its customer base. See Note 4, Fair Value of Financial Instruments, for a further discussion of derivative concentrations.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, funds deposited by counterparties, receivables, accounts payables, and accrued liabilities approximate fair value because of the short-term maturity of these instruments. See Note 4, Fair Value of Financial Instruments for a further discussion of fair value of financial instruments.
Asset Retirement Obligations
NRG accounts for its AROs in accordance with ASC 410-20, Asset Retirement Obligations, or ASC 410-20. Retirement obligations associated with long-lived assets included within the scope of ASC 410-20 are those for which a legal obligation exists under enacted laws, statutes, and written or oral contracts, including obligations arising under the doctrine of promissory estoppel, and for which the timing and/or method of settlement may be conditional on a future event. ASC 410-20 requires an entity to recognize the fair value of a liability for an ARO in the period in which it is incurred and a reasonable estimate of fair value can be made.
Upon initial recognition of a liability for an ARO, NRG capitalizes the asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount. Over time, the liability is accreted to its future value, while the capitalized cost is depreciated over the useful life of the related asset. See Note 13, Asset Retirement Obligations, for a further discussion of AROs.
Pensions and Other Postretirement Benefits
NRG offers pension benefits through a defined benefit pension plan. In addition, the Company provides postretirement health and welfare benefits for certain groups of employees. NRG accounts for pension and other postretirement benefits in accordance with ASC 715, Compensation — Retirement Benefits. NRG recognizes the funded status of the Company's defined benefit plans in the statement of financial position and records an offset for gains and losses as well as all prior service costs that have not been included as part of the Company's net periodic benefit cost to other comprehensive income. The determination of NRG's obligation and expenses for pension benefits is dependent on the selection of certain assumptions. These assumptions determined by management include the discount rate, the expected rate of return on plan assets and the rate of future compensation increases. NRG's actuarial consultants determine assumptions for such items as retirement age. The assumptions used may differ materially from actual results, which may result in a significant impact to the amount of pension obligation or expense recorded by the Company.
NRG measures the fair value of its pension assets in accordance with ASC 820, Fair Value Measurements and Disclosures, or ASC 820.

20

                    

Stock-Based Compensation
NRG accounts for its stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation, or ASC 718. The fair value of the Company's non-qualified stock options and performance units are estimated on the date of grant using the Black-Scholes option-pricing model and the Monte Carlo valuation model, respectively. NRG uses the Company's common stock price on the date of grant as the fair value of the Company's restricted stock units and deferred stock units. Forfeiture rates are estimated based on an analysis of NRG's historical forfeitures, employment turnover, and expected future behavior. The Company recognizes compensation expense for both graded and cliff vesting awards on a straight-line basis over the requisite service period for the entire award.
Investments Accounted for by the Equity Method
NRG has investments in various domestic energy projects, as well as one Australian project. The equity method of accounting is applied to such investments in affiliates, which include joint ventures and partnerships, because the ownership structure prevents NRG from exercising a controlling influence over the operating and financial policies of the projects. Under this method, equity in pre-tax income or losses of domestic partnerships and, generally, in the net income or losses of its Australian project, are reflected as equity in earnings of unconsolidated affiliates.
Marketing and Advertising Costs
The Company expenses its advertising and marketing costs as incurred. The costs of tangible assets used in advertising campaigns are recorded as fixed assets or deferred advertising costs and amortized as advertising costs over the shorter of the useful life of the asset or the advertising campaign. The Company has several long-term sponsorship arrangements. Payments related to these arrangements are deferred and expensed over the term of the arrangement. Marketing and advertising expenses included within selling, general and administrative expense for the years ended December 31, 2013, 2012, and 2011 were $195 million, $197 million, and $127 million respectively.
Business Combinations
The Company accounts for its business combinations in accordance with ASC 805, Business Combinations, or ASC 805. ASC 805 requires an acquirer to recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at fair value at the acquisition date. It also recognizes and measures the goodwill acquired or a gain from a bargain purchase in the business combination and determines what information to disclose to enable users of an entity's financial statements to evaluate the nature and financial effects of the business combination. In addition, transaction costs are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
In recording transactions and balances resulting from business operations, NRG uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, tax provisions, uncollectible accounts, actuarially determined benefit costs, and the valuation of energy commodity contracts, environmental liabilities, legal costs incurred in connection with recorded loss contingencies, and assets acquired and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment and to determine the fair value of impaired assets. As better information becomes available or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Reclassifications
Certain prior-year amounts have been reclassified for comparative purposes.

21

                    

Recent Accounting Developments
ASU 2011-11 - Effective January 1, 2013, the Company adopted the provisions of ASU No. 2011-11, Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities, or ASU No. 2011-11, and began providing enhanced disclosures regarding the effect or potential effect of netting arrangements on an entity's financial position by improving information about financial instruments and derivative instruments that either (1) offset in accordance with either ASC 210-20-45 or ASC 810-20-45 or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Reporting entities are required to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The disclosures required by ASU No. 2011-11 are required to be adopted retroactively. As this guidance provides only disclosure requirements, the adoption of this standard did not impact the Company's results of operations, cash flows or financial position.
ASU 2013-02 - Effective January 1, 2013, the Company adopted the provisions of ASU No. 2013-02, Other Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, or ASU No. 2013-02, and began reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income within the notes to the financial statements if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts not required by U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures which provide additional information about the amounts.  The provisions of ASU No. 2013-02 are required to be adopted prospectively.  As this guidance provides only presentation requirements, the adoption of this standard did not impact the Company's results of operations, cash flows or financial position.
Other - The following accounting standard was issued in 2013 and was adopted January 1, 2014:
ASU 2013-11 - In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU No. 2013-11.  The amendments of ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction of a deferred tax asset for a net operating loss, or NOL, a similar tax loss or tax credit carryforwards rather than a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and the entity intends to use the deferred tax asset for that purpose.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The Company adopted this standard effective December 31, 2013. The adoption of this standard did not impact the Company's results of operations or cash flows as the unrecognized tax benefits relate to state issues and the Company either has no NOL's or the NOL's are limited for that particular jurisdiction.
Note 3 — Business Acquisitions and Dispositions
2013 Acquisitions
Pending Acquisition On October 18, 2013, the Company entered into an agreement to acquire substantially all of the assets of Edison Mission Energy, or EME.  EME, through its subsidiaries and affiliates, owns, operates, and leases a portfolio of 8,000 MW consisting of wind energy facilities and coal- and gas-fired generating facilities. On December 17, 2012, EME and certain of its direct and indirect subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code, or the Bankruptcy Code.  EME was deconsolidated from its parent company, Edison International, for financial statement purposes but not for tax purposes on December 17, 2012.  On May 2, 2013, certain other subsidiaries of EME filed voluntary petitions for relief under the Bankruptcy Code. 
The Company expects to pay an aggregate purchase price of $2.6 billion (subject to adjustment), which will consist of 12,671,977 shares of NRG common stock (valued at $350 million based upon the volume-weighted average trading price over the 20 trading days prior to October 18, 2013) with the balance to be paid in cash. The Company expects to fund the net cash portion of the purchase price using a combination of cash on hand, including acquired cash on hand of $1.1 billion, and approximately $700 million in newly-issued corporate debt. The Company also expects to assume debt related to acquired project assets of approximately $1.5 billion, which will be non-recourse to NRG. 
In connection with the transaction, NRG has agreed to certain conditions with the parties to the Powerton and Joliet, or POJO, sale-leaseback transaction subject to which an NRG subsidiary will assume the POJO leveraged leases and NRG will guarantee the remaining payments under each lease. In connection with this agreement, NRG has committed to fund up to $350 million in capital expenditures for plant modifications at Powerton and Joliet to install controls to comply with MATS.

22

                    

The acquisition is subject to customary conditions, including approval of the U.S. Bankruptcy Court for the Northern District of Illinois and required regulatory approvals, and is expected to close by the end of the first quarter of 2014.  Under certain circumstances, including if EME enters into an alternative transaction, NRG will receive a cash fee of $65 million plus expense reimbursement.  There are no assurances that the conditions to the acquisition of EME will be satisfied, that EME will not enter into an alternative transaction, or that the acquisition of EME will be consummated on the terms agreed to, if at all.
Energy Systems On December 31, 2013, NRG Energy Center Omaha Holdings, LLC, an indirect wholly owned subsidiary of NRG Yield LLC, acquired 100% of Energy Systems Company, or Energy Systems, for approximately $120 million. The acquisition was financed from cash on hand. Energy Systems is an operator of steam and chilled thermal facilities that provides heating and cooling services to nonresidential customers in Omaha, Nebraska. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was primarily allocated to property, plant and equipment of $60 million, customer relationships of $59 million, and working capital of $1 million. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair values of certain net assets acquired and the amount of goodwill to be recognized are still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date.
The provisional fair values of the intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. Significant inputs were as follows:
Customer relationships - The customer relationships were valued using a variation of the income approach. Under this approach, the present value of the expected future cash flows resulting from existing customer relationships, considering attrition and charges for contributory assets (such as working capital, fixed assets, and workforce) utilized in the business were estimated and then discounted back at an integrated utility peer group's weighted average cost of capital adjusted to be consistent with the risk inherent in the cash flows. The customer relationships are amortized to depreciation and amortization expense, on a straight-line basis, over 33 years.
Significant considerations in determining fair value measurements as defined in ASC 820 of the assets acquired and liabilities assumed are as follows:
Property, plant & equipment - The fair value of property, plant and equipment acquired were valued utilizing the cost approach. Under this approach, the fair value approximates the current cost of replacing an asset with another of equivalent economic utility adjusted for functional obsolescence and physical depreciation.
Gregory On August 7, 2013, NRG Texas Gregory, LLC, a wholly owned subsidiary of NRG, acquired Gregory Power Partners, L.P. for approximately $245 million in cash, net of $32 million cash acquired. Gregory is a cogeneration plant located in Corpus Christi, Texas, which has generation capacity of 388 MW and steam capacity of 160 MWt. The Gregory cogeneration plant provides steam, processed water and a small percentage of its electrical generation to the Corpus Christi Sherwin Alumina plant. The majority of the plant's generation is available for sale in the ERCOT market. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was provisionally allocated to property, plant, and equipment of $248 million, current assets of $13 million, and other liabilities of $16 million. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair value of certain net assets acquired are still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date.
Significant considerations in determining fair value measurements as defined in ASC 820 of the assets acquired and liabilities assumed are as follows:
Property, plant & equipment - The fair value of property, plant and equipment acquired were valued utilizing the cost approach. Under this approach, the fair value approximates the current cost of replacing an asset with another of equivalent economic utility adjusted for functional obsolescence and physical depreciation.

23

                    

2012 Acquisitions
GenOn Energy, Inc. On December 14, 2012, NRG acquired GenOn Energy, Inc., or GenOn.  GenOn, a generator of wholesale electricity, has baseload, intermediate and peaking power generation facilities using coal, natural gas and oil, totaling approximately 21,440 MW.  The Company issued, as consideration for the acquisition, 0.1216 shares of NRG common stock for each outstanding share of GenOn, including restricted stock units outstanding, on the acquisition date, except for fractional shares which were paid in cash.  The Company issued approximately 93.9 million shares of NRG common stock, or 29% of total common shares outstanding following the closing of the transaction. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The accounting for the GenOn acquisition was completed on December 13, 2013 at which point the fair values became final. The provisional amounts were subject to revision until the evaluations were completed to the extent that additional information was obtained about the facts and circumstances that existed as of the acquisition date. Any changes made to the fair value assessments affected the gain on bargain purchase.
The following table summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date as well as adjustments made through December 13, 2013 to the amounts initially recorded in 2012 due to the ongoing evaluation of initial estimates. The measurement period adjustments were recorded as an adjustment to the gain on bargain purchase and did not have a significant impact on the Company's consolidated cash flows or financial position in any period. The purchase price of $2.2 billion was allocated as follows:
(In millions)
Amounts Recognized
as of Acquisition Date
(as previously reported)
 
Measurement Period Adjustments
 
Amounts Recognized
as of Acquisition Date
(as adjusted)
Assets
 
 
 
 
 
Cash
$
983

 
$

 
$
983

Current and non-current assets
1,385

 
28

 
1,413

Property, plant and equipment
3,936

 
(115
)
 
3,821

Derivative assets
1,157

 

 
1,157

Deferred income taxes
2,265

 
(58
)
 
2,207

Total assets acquired
$
9,726

 
$
(145
)
 
$
9,581

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Current and non-current liabilities
$
1,312

 
$
54

 
$
1,366

Out-of-market contracts and leases
1,064

 
62

 
1,126

Derivative liabilities
399

 

 
399

Long-term debt and capital leases
4,203

 
3

 
4,206

Total liabilities assumed
6,978

 
119

 
7,097

Net assets acquired
2,748

 
(264
)
 
2,484

Consideration paid
2,188

 
 
 
2,188

Gain on bargain purchase
$
560

 
$
(264
)
 
$
296

The measurement period adjustments for property, plant and equipment and out-of market liabilities primarily reflect revisions of various estimates based on additional information available. In addition, measurement period adjustments were recorded for additional environmental reserves resulting from further review and revisions to various estimates. The difference between the historical tax basis of the assets and liabilities over the net amount assigned to the assets and liabilities in acquisition accounting was recorded as a net deferred tax asset. In addition, the deferred tax assets associated with net operating losses and other deferred tax benefits were adjusted to reflect the amount expected to be realized in the post-acquisition period.
2012 Dispositions
Agua Caliente On January 18, 2012, the Company completed the sale of a 49% interest in NRG Solar AC Holdings LLC, the indirect owner of the Agua Caliente project, to MidAmerican Energy Holdings Company, or MidAmerican. A majority of the $122 million of cash consideration received at closing represented 49% of construction costs funded by NRG's equity contributions. The excess of the consideration over the carrying value of the divested interest was recorded to additional paid-in capital. MidAmerican will fund its proportionate share of future equity contributions and other credit support for the project. NRG continues to hold a majority interest in and consolidate the project.

24

                    

Saale Energie GmbH On July 17, 2012, the Company completed the sale of its 100% interest in Saale Energie GmbH, or SEG, which holds a 41.9% interest in Kraftwerke Schkopau GbR and a 44.4% interest in Kraftwerke Schkopau Betriebsgesllschaft mbH, collectively, Schkopau. Schkopau holds a fixed 400 MW participation in the 900 MW Schkopau Power Station located in Germany. In connection with the sale of Schkopau, NRG entered into a foreign currency swap contract to hedge the impact of exchange rate fluctuations on the sale proceeds of €141 million. The Company received cash consideration, net of selling expenses, of $174 million, which included $4 million related to the settlement of the swap contract that was recorded as a gain within Other income, net in the quarter ended September 30, 2012. The cash consideration approximated the book value of the net assets, including cash of $38 million, on the date of the sale.
2011 Acquisitions
Energy Plus On September 30, 2011, NRG acquired Energy Plus for $194 million in cash, net of $5 million cash acquired, funded from cash on hand. Energy Plus is a retail electricity provider with 188,000 customers as of December 31, 2011, concentrated in the Northeast markets, and a unique sales channel involving exclusive loyalty and affinity program partnerships. The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The purchase price was primarily allocated to customer relationships of $63 million, marketing partnerships of $88 million, trade names of $10 million and goodwill of $29 million. The factors that resulted in goodwill arising from the acquisition include the revenues associated with expanding the Energy Plus retail business and its unique sales channel in new regions, expanding its loyalty and affinity program partnerships and the synergies associated with combining the business with NRG's generation assets. The accounting for the Energy Plus acquisition was completed as of March 31, 2012, at which point the provisional fair values became final with no material changes.
Solar Acquisitions During the year ended December 31, 2011, NRG acquired stakes in three Utility Scale Solar facilities for approximately $165 million in cash consideration, as part of the Company's initiative to capture opportunities for future growth in renewables. Subsequent to the acquisition dates in 2011, NRG made capital contributions into these projects of $868 million. In addition, NRG has a commitment to contribute additional amounts into the projects, comprised of $66 million in letters of credit as of December 31, 2013. The Company may increase its letters of credit to replace the restricted cash at its discretion. NRG's minority partners had contributed approximately $413 million of equity subsequent to the acquisition through December 31, 2013 and had additional equity commitments of $64 million as of December 31, 2013. These acquisitions were recorded as business combinations under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date.
The acquisitions of these three solar facilities are further described below:
California Valley Solar Ranch On September 30, 2011, NRG Solar LLC, a wholly-owned subsidiary of NRG, acquired 100% of the 250 MW California Valley Solar Ranch project, or CVSR, in eastern San Luis Obispo County, California. During the second quarter of 2012, the Company met the conditions necessary to permit loan disbursements under the CVSR Financing Agreement, as discussed in Note 12, Debt and Capital Leases. Operations commenced on the first 22 MW phase in September 2012 and 105 MWs for Phases 2 and 4 in December 2012. For the completion of the final phase, 21 MWs commenced operation in the third quarter of 2013 and 102 MWs commenced operation in October 2013. Power generated from CVSR is sold to PG&E under a 25 year PPA.
Agua Caliente On August 5, 2011, NRG, through its wholly-owned subsidiary, NRG Solar PV LLC, acquired 100% of the 290 MW Agua Caliente solar project in Yuma, AZ. On January 18, 2012, the Company completed the sale of a 49% interest to MidAmerican Energy Holdings Company as discussed above. Power generated from Agua Caliente is sold to PG&E under a 25 year PPA. Full commercial operations of the entire 290 MW project was achieved as of September 30, 2013.
Ivanpah On April 5, 2011, NRG acquired a 50.1% stake in the 378 MW Ivanpah Solar Electric Generation System, or Ivanpah, from BrightSource Energy, Inc., or BSE. BSE maintained a 21.8% interest in Ivanpah and the remaining 28.1% was acquired by a wholly-owned subsidiary of Google. Ivanpah is composed of three separate facilities - Ivanpah 1 (126 MW), Ivanpah 2 (133 MW), and Ivanpah 3 (133 MW). Ivanpah achieved operations as of December 31, 2013. Power generated from Ivanpah is sold to Southern California Edison and Pacific Gas and Electric, under multiple 20 to 25 year PPAs.
The purchase price for these acquisitions, considered business combinations, was primarily allocated to $767 million of property, plant and equipment, $489 million of accrued expenses, $60 million of other assets, including restricted cash, and $19 million of other liabilities. The accounting for these acquisitions was completed as of March 31, 2012, at which point the provisional fair values became final with no material changes.

25

                    

Note 4 — Fair Value of Financial Instruments
For cash and cash equivalents, funds deposited by counterparties, accounts and other receivables, accounts payable, restricted cash, and cash collateral paid and received in support of energy risk management activities, the carrying amount approximates fair value because of the short-term maturity of those instruments and are classified as Level 1 within the fair value hierarchy.
The estimated carrying values and fair values of NRG's recorded financial instruments not carried at fair market value are as follows:
 
As of December 31,
 
2013
 
2012
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(In millions)
Assets
 
 
 
 
 
 
 
Notes receivable (a)
$
99

 
$
99

 
$
88

 
$
88

Liabilities
 
 
 
 
 
 
 
Long-term debt, including current portion
16,804

 
17,222

 
15,866

 
16,492

(a) Includes the current portion of notes receivable which is recorded in prepayments and other current assets on the Company's consolidated balance sheets.
The fair value of the Company's publicly-traded long-term debt is based on quoted market prices and is classified as Level 2 within the fair value hierarchy. The fair value of debt securities, non publicly-traded long-term debt, and certain notes receivable of the Company are based on expected future cash flows discounted at market interest rates, or current interest rates for similar instruments with equivalent credit quality and are classified as Level 3 within the fair value hierarchy.
Fair Value Accounting under ASC 820
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. NRG's financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities, energy derivatives, and trust fund investments.
Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. NRG's financial assets and liabilities utilizing Level 2 inputs include fixed income securities, exchange-based derivatives, and over the counter derivatives such as swaps, options and forward contracts.
Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. NRG's financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.
In accordance with ASC 820, the Company determines the level in the fair value hierarchy within which each fair value measurement in its entirety falls, based on the lowest level input that is significant to the fair value measurement in its entirety.

26

                    

Recurring Fair Value Measurements
Debt securities, equity securities, and trust fund investments, which are comprised of various U.S. debt and equity securities, and derivative assets and liabilities, are carried at fair market value.
The following tables present assets and liabilities measured and recorded at fair value on the Company's consolidated balance sheets on a recurring basis and their level within the fair value hierarchy:
 
As of December 31, 2013
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In millions)
Investment in available-for-sale securities (classified within other non-current assets):
 
 
 
 
 
 
 
Debt securities
$

 
$

 
$
16

 
$
16

Available-for-sale securities
2

 

 

 
2

Other (a)
37

 

 
10

 
47

Nuclear trust fund investments:
 
 
 
 
 
 
 
Cash and cash equivalents
26

 

 

 
26

U.S. government and federal agency obligations
40

 
5

 

 
45

Federal agency mortgage-backed securities

 
62

 

 
62

Commercial mortgage-backed securities

 
14

 

 
14

Corporate debt securities

 
70

 

 
70

Equity securities
276

 

 
56

 
332

Foreign government fixed income securities

 
2

 

 
2

Other trust fund investments:
 
 
 
 
 
 
 
U.S. government and federal agency obligations
1

 

 

 
1

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
346

 
1,126

 
147

 
1,619

Interest rate contracts

 
20

 

 
20

Total assets
$
728

 
$
1,299

 
$
229

 
$
2,256

Derivative liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
216

 
$
831

 
$
134

 
$
1,181

Interest rate contracts

 
69

 

 
69

Total liabilities
$
216

 
$
900

 
$
134

 
$
1,250

(a)
Consists primarily of mutual funds held in a Rabbi Trust for non-qualified deferred compensation plans for some key and highly compensated employees and a total return swap that does not meet the definition of a derivative.

27

                    

 
As of December 31, 2012
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In millions)
Investment in available-for-sale securities (classified within other non-current assets):
 
 
 
 
 
 

Debt securities
$

 
$

 
$
12

 
$
12

Other (a)
22

 

 

 
22

Nuclear trust fund investments:


 


 


 


Cash and cash equivalents
10

 

 

 
10

 U.S. government and federal agency obligations
33

 

 

 
33

Federal agency mortgage-backed securities

 
59

 

 
59

Commercial mortgage-backed securities

 
9

 

 
9

 Corporate debt securities

 
80

 

 
80

Equity securities
233

 

 
47

 
280

Foreign government fixed income securities

 
2

 

 
2

Other trust fund investments:
 
 
 
 
 
 
 
U.S. government and federal agency obligations
1

 

 

 
1

Derivative assets:
 
 
 
 
 
 
 
Commodity contracts
1,457

 
1,711

 
135

 
3,303

Interest rate contracts

 
3

 

 
3

Total assets
$
1,756

 
$
1,864

 
$
194

 
$
3,814

Derivative liabilities:


 
 
 


 


Commodity contracts
$
1,144

 
$
1,047

 
$
147

 
$
2,338

Interest rate contracts

 
143

 

 
143

Total liabilities
$
1,144

 
$
1,190

 
$
147

 
$
2,481

(a)
Consists primarily of mutual funds held in a Rabbi Trust for non-qualified deferred compensation plans for some key and highly compensated employees.
There have been no transfers during the year ended December 31, 2013, between Levels 1 and 2. The following tables reconcile, for the years ended December 31, 2013, and 2012, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements at least annually using significant unobservable inputs:
 
For the Year Ended December 31, 2013
 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Debt
Securities
 
Other
 
Trust Fund
Investments
 
Derivatives (a)
 
Total
 
(In millions)
Beginning balance as of January 1, 2013
$
12

 
$

 
$
47

 
$
(12
)
 
$
47

Total gains and losses (realized/unrealized):
 
 
 
 
 
 
 
 
 
Included in OCI
4

 

 

 

 
4

Included in earnings

 

 

 
(12
)
 
(12
)
Included in nuclear decommissioning obligations

 

 
10

 

 
10

Purchases

 
10

 
2

 
4

 
16

Sales

 

 
(3
)
 

 
(3
)
Transfers into Level 3 (b)

 

 

 
6

 
6

Transfers out of Level 3 (b)

 

 

 
27

 
27

Ending balance as of December 31, 2013
$
16

 
$
10

 
$
56

 
$
13

 
$
95

Gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of December 31, 2013
$

 
$

 
$

 
$
1

 
$
1

(a)
Consists of derivatives assets and liabilities, net.
(b)
Transfers in/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period. All transfers in/out are with Level 2.

28

                    

 
For the Year Ended December 31, 2012
 
Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
 
Debt
Securities
 
Trust Fund
Investments
 
Derivatives (a)
 
Total
 
(In millions)
Beginning balance as of January 1, 2012
$
7

 
$
42

 
$
8

 
$
57

Total gains and losses (realized/unrealized):

 

 

 
 
Included in OCI
5

 

 

 
5

Included in earnings

 

 
(13
)
 
(13
)
Included in nuclear decommissioning obligations

 
5

 

 
5

Purchases

 

 
8

 
8

Contracts acquired in GenOn acquisition

 

 
18

 
18

Transfers into Level 3 (b)

 

 
(33
)
 
(33
)
 Transfer out of Level 3 (b)

 

 

 

Ending balance as of December 31, 2012
$
12

 
$
47

 
$
(12
)
 
$
47

Losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held as of December 31, 2012
$

 
$

 
$
(3
)
 
$
(3
)
(a)
Consists of derivatives assets and liabilities, net.
(b)
Transfers in/out of Level 3 are related to the availability of external broker quotes, and are valued as of the end of the reporting period. All transfers in/out are with Level 2.
Realized and unrealized gains and losses included in earnings that are related to the energy derivatives are recorded in operating revenues and cost of operations.
Non-derivative fair value measurements
NRG's investments in debt securities are classified as Level 3 and consist of non-traded debt instruments that are valued based on third-party market value assessments.
The trust fund investments are held primarily to satisfy NRG's nuclear decommissioning obligations. These trust fund investments hold debt and equity securities directly and equity securities indirectly through commingled funds. The fair values of equity securities held directly by the trust funds are based on quoted prices in active markets and are categorized in Level 1. In addition, U.S. government and federal agency obligations are categorized as Level 1 because they trade in a highly liquid and transparent market. The fair values of corporate debt securities are based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences and are categorized in Level 2. Certain equity securities, classified as commingled funds, are analogous to mutual funds, are maintained by investment companies, and hold certain investments in accordance with a stated set of fund objectives. The fair value of the equity securities classified as commingled funds are based on net asset values per fund share (the unit of account), derived from the quoted prices in active markets of the underlying equity securities. However, because the shares in the commingled funds are not publicly quoted, not traded in an active market and are subject to certain restrictions regarding their purchase and sale, the commingled funds are categorized in Level 3. See also Note 6, Nuclear Decommissioning Trust Fund.

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Derivative fair value measurements
A portion of NRG's contracts are exchange-traded contracts with readily available quoted market prices. A majority of NRG's contracts are non-exchange-traded contracts valued using prices provided by external sources, primarily price quotations available through brokers or over-the-counter and on-line exchanges. For the majority of NRG markets, the Company receives quotes from multiple sources. To the extent that NRG receives multiple quotes, the Company's prices reflect the average of the bid-ask mid-point prices obtained from all sources that NRG believes provide the most liquid market for the commodity. If the Company receives one quote, then the mid-point of the bid-ask spread for that quote is used. The terms for which such price information is available vary by commodity, region and product. A significant portion of the fair value of the Company's derivative portfolio is based on price quotes from brokers in active markets who regularly facilitate those transactions and the Company believes such price quotes are executable. The Company does not use third party sources that derive price based on proprietary models or market surveys. The remainder of the assets and liabilities represents contracts for which external sources or observable market quotes are not available. These contracts are valued based on various valuation 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. Contracts valued with prices provided by models and other valuation techniques make up 9% of derivative assets and 11% of derivative liabilities. The fair value of each contract is discounted using a risk free interest rate. In addition, the Company applies a credit reserve to reflect credit risk which is calculated based on published default probabilities. To the extent that NRG's net exposure under a specific master agreement is an asset, the Company uses the counterparty's default swap rate. If the exposure under a specific master agreement is a liability, the Company uses NRG's default swap rate. The credit reserve is added to the discounted fair value to reflect the exit price that a market participant would be willing to receive to assume NRG's liabilities or that a market participant would be willing to pay for NRG's assets. As of December 31, 2013, the credit reserve resulted in a $1 million decrease in fair value which is reflected as a $1 million loss in operating revenue and cost of operations.
The fair values in each category reflect the level of forward prices and volatility factors as of December 31, 2013, and may change as a result of changes in these factors. Management uses its best estimates to determine the fair value of commodity and derivative contracts NRG holds and sells. These estimates consider various factors including closing exchange and over-the-counter price quotations, time value, volatility factors and credit exposure. It is possible, however, that future market prices could vary from those used in recording assets and liabilities from energy marketing and trading activities and such variations could be material.
Under the guidance of ASC 815, entities may choose to offset cash collateral paid or received against the fair value of derivative positions executed with the same counterparties under the same master netting agreements. The Company has chosen not to offset positions as defined in ASC 815. As of December 31, 2013, the Company recorded $276 million of cash collateral paid and $63 million of cash collateral received on its balance sheet.
Concentration of Credit Risk
In addition to the credit risk discussion as disclosed in Note 2, Summary of Significant Accounting Policies, the following item is a discussion of the concentration of credit risk for the Company's financial instruments. 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. The Company monitors and manages credit risk through credit policies that include: (i) an established credit approval process; (ii) a daily monitoring of counterparties' credit limits; (iii) the use of credit mitigation measures such as margin, collateral, prepayment arrangements, or volumetric limits; (iv) the use of payment netting agreements; and (v) the use of master netting agreements that allow for the netting of positive and negative exposures of various contracts associated with a single counterparty. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. The Company seeks to mitigate counterparty risk by having a diversified portfolio of counterparties. The Company also has credit protection within various agreements to call on additional collateral support if and when necessary. Cash margin is collected and held at NRG to cover the credit risk of the counterparty until positions settle.

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As of December 31, 2013, counterparty credit exposure, excluding credit risk exposure under certain long term agreements, was $813 million and NRG held collateral (cash and letters of credit) against those positions of $5 million, resulting in a net exposure of $808 million. Approximately 87% of the Company's exposure before collateral is expected to roll off by the end of 2015. Counterparty credit exposure is valued through observable market quotes and discounted at a risk free interest rate. The following tables highlight net counterparty credit exposure by industry sector and by counterparty credit quality. Net counterparty credit exposure is defined as the aggregate net asset position for NRG with counterparties where netting is permitted under the enabling agreement and includes all cash flow, mark-to-market and NPNS, and non-derivative transactions. The exposure is shown net of collateral held, and includes amounts net of receivables or payables.
Category
Net Exposure (a)
(% of Total)
Financial institutions
52
%
Utilities, energy merchants, marketers and other
29

Coal and emissions
1

ISOs
18

Total
100