NRG ENERGY, INC. (NRG) FY 2021 MD&A

Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below has been organized as follows:

•Executive Summary, including the business environment in which the Company operates, a discussion of regulation, weather, competition and other factors that affect the business, and other significant events that are important to understanding the results of operations and financial condition;

•Results of operations for the years ended December 31, 2021 and December 31, 2020, including an explanation of significant differences between the periods in the specific line items of NRG's Consolidated Statements of Operations;

•Financial condition addressing credit ratings, liquidity position, sources and uses of cash, capital resources and requirements, contractual obligations and market commitments, and off-balance sheet arrangements; and

•Critical accounting estimates that are most important to both the portrayal of the Company's financial condition and results of operations, and require management's most difficult, subjective, or complex judgments.

As you read this discussion and analysis, refer to NRG's Consolidated Statements of Operations in this Form 10-K, which present the results of the Company's operations for the years ended December 31, 2021 and 2020, and also refer to Item 1 to this Form 10-K for more detail discussion about the Company's business. A discussion and analysis of fiscal year 2019 may be found in Part II, Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

As further described in Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Consolidated Financial Statements, the Company determined in prior years that the following businesses were discontinued operations and recast to present their results in the corporate segment:

•South Central Portfolio

•NRG Yield, Inc. and its Renewables Platform

•Carlsbad

Executive Summary

NRG Energy, Inc., or NRG or the Company, is a consumer services company built on dynamic retail brands. NRG brings the power of energy to customers by producing and selling energy and related products and services, nation-wide in the U.S. and Canada in a manner that delivers value to all of NRG's stakeholders. NRG sells power, natural gas, home and power services, and develops innovative, sustainable solutions, predominately under the brand names NRG, Reliant, Direct Energy, Green Mountain Energy, Stream, and XOOM Energy. The Company has a customer base that includes approximately 6 million Home customers as well as commercial, industrial, and wholesale customers, supported by approximately 18,000 MW of generation as of December 31, 2021.

Business Environment

The industry dynamics and external influences affecting the Company, its businesses, and the retail energy and power generation industry in 2021 and for the future medium term include:

Market Dynamics — The price of natural gas plays an important role in setting the price of electricity in many of the regions where NRG operates. Natural gas prices are driven by variables including demand from the industrial, residential, and electric sectors, productivity across natural gas supply basins, costs of natural gas production, changes in pipeline infrastructure, and the financial and hedging profile of natural gas customers and producers. In 2021, the average natural gas price at Henry Hub was 85% higher than in 2020.

NRG may experience impacts to gross margins due to significant, rapid changes in current natural gas prices and the lag in our ability to make a corresponding adjustment to the retail rates we charge customers on term and month to month contracts. The Company hedges its load commitments in order to mitigate the impact of changes in commodity prices, and as a result, these gross margin impacts would be realized in future periods until we are able to make the corresponding adjustments to the retail customer rates.

Natural gas prices are a primary driver of coal demand. Coal commodity prices increased significantly in 2021, which is partly due to supply chain disruptions, as further discussed below in Global Supply Chain Disruptions, as well as stressed coal equities, which has led coal suppliers to file for bankruptcy protection, launch debt exchanges, rationalize assets, and cut production.

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Electricity Prices — The price of electricity is a key determinant of the profitability of the Company. Many variables such as the price of different fuels, weather, load growth and unit availability all coalesce to impact the final price for electricity and the Company's profitability. An increase in supply cost volatility in the competitive retail markets may result in smaller companies choosing to exit the market, which may result in further consolidation in the competitive retail space. The following table summarizes average on-peak power prices for each of the major markets in which NRG operates for the years ended December 31, 2021 and 2020. The average on-peak power prices increased significantly in Texas due to the impact from Winter Storm Uri. The average on-peak power prices increased in East and West/Services/Other due to higher natural gas prices.

(a) Average on-peak power prices based on real time settlement prices as published by the respective ISOs

(b) Average on-peak power prices based on day-ahead settlement prices as published by the respective ISOs

The following table summarizes average realized power prices for NRG, including the impact of settled hedges, for the years ended December 31, 2021 and 2020:

(a) Average Realized Power Price reflects energy sales from the generation fleet, including sales to the retail component of the East Segment. Intercompany financial transactions hedging generation with the retail operations make up ($8.03)/MWh in the year ended December 31, 2021 and $12.18/MWh in the year ended December 31, 2020

The average realized power prices increased less than average on peak power prices for the year ended December 31, 2021, as compared to the same period in 2020, due to the Company's multi-year hedging program impacting average realized power prices, while on peak power prices increased due to increased natural gas prices and warmer June temperatures in California.

Increased Awareness of, and Action to Combat, Climate Change — Diverse groups of stakeholders, including investors, asset managers, financial institutions, non-government organizations, industry coalitions, individual companies, consumer groups and academic institutions, are increasingly engaged in efforts to limit global warming in the post-industrial era to well below 2 degrees Celsius. As a result, policymakers and regulators at regional, national, sub-national and local levels of government, both in the United States and other parts of the world, are increasingly focused on actions to combat climate change.

NRG actively monitors climate change related developments that could impact its business and regularly engages with a diverse set of stakeholders on these issues. Such engagement helps the Company identify and pursue potential opportunities both to decarbonize its business and better serve its customers. NRG is committed to providing transparent disclosures of its climate risks and opportunities to stakeholders. The Company became an early supporter of the Task Force on Climate-related Financial Disclosures ("TCFD") recommendations after they were issued in 2017, published a TCFD mapping disclosure in December 2020 and issued a stand-alone TCFD report in December 2021.

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Lower Carbon Infrastructure Development — Policy mechanisms at the state and federal level, including production and investment tax credits, cash grants, loan guarantees, accelerated depreciation tax benefits, RPS, and carbon trading plans, have supported and continue to support the development of renewable generation, demand-side and smart grid, and other lower carbon infrastructure technologies. In addition, the costs associated with the development of lower carbon infrastructure, such as wind and solar generating facilities, continue to decline. These factors continue to drive increases in the development of lower carbon infrastructure in the markets where the Company participates, which may impact the ability of the Company's generating facilities to participate in those markets. According to ERCOT, 39% of 2021 energy consumption in the ERCOT market was generated from carbon emission-free resources, with wind power contributing 24%. In addition, subsidies and incentives have contributed to the increase in renewable power sources, and customer awareness and preferences are shifting toward sustainable solutions. Increased demand for sustainable energy products from both residential and commercial customers creates opportunities for diversified product offerings in competitive retail markets.

Digitization and Customization — The electric industry is experiencing major technology changes in the way power is distributed and used by end-use customers. The electric grid is shifting from a centralized analog system, where power is generated from limited sources and flows in one direction, to a decentralized multidirectional system, where power can be generated from a number of distributed resources and stored or dispatched on an as-needed basis. In addition, customers are seeking new ways to engage with their power providers. Technologies like smart thermostats, appliances and electric vehicles are giving individuals more choice and control over their electricity usage.

Weather — Weather conditions in the regions of the U.S. in which NRG conducts business influence the Company's financial results. Weather conditions can affect the supply and demand for electricity and fuels and may also impact the availability of the Company's generating assets. Changes in energy supply and demand may impact the price of these energy commodities in both the spot and forward markets, which may affect the Company's results in any given period. Typically, demand for and the price of electricity is higher in the summer and the winter seasons, when temperatures are more extreme. The demand for and price of natural gas is also generally higher in the winter. However, all regions of the U.S. typically do not experience extreme weather conditions at the same time, thus NRG's operations are typically not exposed to the effects of extreme weather in all parts of its business at once. A significant portion of the Company's business is located within Texas, and extreme weather conditions occurring in Texas may have a material impact on the Company's financial position.

For discussion of the recent weather event in Texas, see Significant Events - Extreme Weather Event in Texas During February 2021 and expected Uplift Securitization Proceeds below.

Global Supply Chain Disruptions — There are currently global supply chain disruptions impacting natural gas, coal and other fuels and materials necessary for the production and sale of electricity to our retail customers. These supply chain disruptions are due in part to increased demand driven by a number of factors outside the Company's control including the COVID-19 pandemic, labor shortages and extreme weather events in the U.S. These factors are impacting the dispatch of generation facilities, as well as the costs to serve our retail customers. The Company expects supply chain disruptions will continue throughout the remainder of 2022. We are working closely with our suppliers and customers to minimize any potential adverse impacts of these events. We will continue to actively monitor all direct and indirect potential impacts of the supply chain disruptions, and will seek to mitigate and minimize their impact on our business.

Other Factors — A number of other factors significantly influence the level and volatility of prices for energy commodities and related derivative products for NRG's business. These factors include:

•seasonal, daily and hourly changes in demand;

•extreme peak demands;

•available supply resources;

•transportation and transmission availability and reliability within and between regions;

•location of NRG's generating facilities relative to the location of its load-serving opportunities;

•procedures used to maintain the integrity of the physical electricity system during extreme conditions; and

•changes in the nature and extent of federal and state regulations.

These factors can affect energy commodity and derivative prices in different ways and to different degrees. These effects may vary throughout the country as a result of regional differences in:

•weather conditions;

•market liquidity;

•capability and reliability of the physical electricity and gas systems;

•local transportation systems; and

•the nature and extent of electricity deregulation.

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Environmental Matters, Regulatory Matters and Legal Proceedings — Details of environmental matters are presented in Item 15 — Note 25, Environmental Matters, to the Consolidated Financial Statements and Item 1 — Business, Environmental Matters. Details of regulatory matters are presented in Item 15 — Note 24, Regulatory Matters, to the Consolidated Financial Statements and Item 1 — Business, Regulatory Matters. Details of legal proceedings are presented in Item 15 — Note 23, Commitments and Contingencies, to the Consolidated Financial Statements. Some of this information relates to costs that may be material to the Company's financial results.

Significant Events

The following significant events occurred during 2021 and through the filing date, as further described within this Management's Discussion and Analysis and the consolidated financial statements:

Financing Activities

On August 23, 2021, the Company issued $1.1 billion of aggregate principal amount at par of 3.875% senior notes due 2032 (the "2032 Senior Notes"). The 2032 Senior Notes are senior unsecured obligations of NRG and are guaranteed by certain of its subsidiaries. The 2032 Senior Notes were issued under NRG's Sustainability-Linked Bond Framework, which sets out certain sustainability targets, including reducing greenhouse gas emissions. Failure to meet such sustainability targets will result in a 25 basis point increase to the interest rate payable on the 2032 Senior Notes from and including August 15, 2026.

During the year ended December 31, 2021, the Company redeemed $1.9 billion in aggregate principal of its Senior Notes for $1.9 billion using the proceeds of the 2032 Senior Notes and cash on hand.

Extreme Weather Event in Texas During February 2021 and expected Uplift Securitization proceeds

During February 2021, Texas experienced unprecedented cold temperatures for a prolonged duration as a result of Winter Storm Uri, resulting in a power emergency, blackouts, and an estimated all-time peak demand of 77 GW (without load shed). Ahead of the event, NRG launched residential customer communications calling for conservation across all of its brands, and initiated residential and commercial and industrial demand response programs to curtail customer load. The Company maximized available generating capacity and brought in additional resources to supplement in-state staff with technical and operating experts from the rest of its U.S. fleet.

The Texas Legislature passed House Bill 4492, which among other things, authorized ERCOT to obtain $2.1 billion of financing to distribute to LSEs that were charged and paid to ERCOT exceptionally highly priced ORDPA and ancillary service costs during Winter Storm Uri. Based on LSE-level detail published by the PUCT on December 7, 2021, NRG will receive $689 million from ERCOT.

During the year ended December 31, 2021, Winter Storm Uri's pre-tax financial impact to the Company was a loss of $380 million, which reflects the recovery of $689 million of cost of operations as a result of the proceeds we will receive from the Uplift Securitization discussed above, with receipt expected to occur during the second quarter of 2022. The Company continues to pursue additional mitigants including, but not limited to, customer bad debt mitigation, counterparty default recovery, and additional ERCOT default recovery.

Direct Energy Acquisition

On January 5, 2021, the Company acquired Direct Energy, which had been a North American subsidiary of Centrica. Direct Energy is a leading retail provider of electricity, natural gas, and home and business energy related products and services in North America, with operations in all 50 U.S. states and 8 Canadian provinces. The acquisition increased NRG's retail portfolio by over 3 million customers and complements its integrated model. It also broadened the Company's presence in the Northeast and into states and locales where it did not previously operate, supporting NRG's objective to diversify its business. See Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Consolidated Financial Statements for further discussion.

Limestone Extended Outage

In early July 2021, Limestone Unit 1 came offline as a result of damage to the duct work associated with the flue gas desulfurization system. Based on management's current assessment of necessary remediation efforts, Limestone Unit 1 is expected to remain on an outage until the second quarter of 2022.

PJM Base Residual Auction results and Planned Retirement of 1,600 MWs of PJM Coal Capacity

During the second quarter of 2021, the results of the PJM Base Residual Auction for the 2022/2023 delivery year were released, leading the Company to announce the near-term retirement of a significant portion of its PJM coal generating assets in June 2022. On July 30, 2021, PJM identified reliability impacts resulting from the proposed deactivation of one of those assets, Indian River Unit 4. On August 27, 2021 the Company notified PJM that it would continue operations at Indian River Unit 4 until the reliability upgrades identified by PJM were completed, provided that the unit receives a satisfactory and compensatory 'reliability must run' arrangement.

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The Company recorded impairment losses of $271 million and $35 million on the PJM generating assets and Midwest Generation goodwill, respectively, in connection with the decline in PJM capacity prices and the near-term retirement dates of certain assets. See Item 15 — Note 11, Asset Impairments to the Consolidated Financial Statements for further discussion. The Company is continuing to evaluate the viability of the remaining PJM generating assets.

Sale of 4.8 GW of Fossil Generation Assets

On December 1, 2021, the Company sold approximately 4,850 MWs of fossil generating assets from its East and West regions of operations to Generation Bridge, an affiliate of ArcLight Capital Partners. As part of the transaction, NRG entered into a tolling agreement for the 866 MW Arthur Kill plant in New York City through April 2025. See Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Consolidated Financial Statements for further discussion.

Sale of Agua Caliente

On February 3, 2021, the Company completed the sale of its 35% ownership in Agua Caliente to Clearway Energy, Inc. for $202 million. NRG recognized a gain on the sale of $17 million, including cash disposed of $7 million.

Share Repurchases

In December 2021, the Company's board of directors authorized the Company to repurchase $1.0 billion of its common stock. Through December 31, 2021, the Company completed $53 million of share repurchases at an average price of $40.22 per share, including $9 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuances. Through February 24, 2022, an additional $82 million of share repurchases were executed at an average price of $40.26 per share, including $6 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuances. See Item 15 - Note 16, Capital Structure, to the Consolidated Financial Statements for additional discussion.

Renewable Power Purchase Agreements

The Company's strategy is to procure mid to long-term generation through power purchase agreements. As of December 31, 2021, NRG has entered into PPAs totaling approximately 2.6 GW with third-party project developers and other counterparties. The average tenor of these agreements is twelve years. The Company expects to continue evaluating and executing similar agreements that support the needs of the business. The total GW entered into through PPAs may be impacted by contract terminations when they occur.

Dividend Increase

In the first quarter of 2021, NRG increased the annual dividend to $1.30 from $1.20 per share. In 2022, NRG further increased the annual dividend to $1.40 per share, representing an 8% increase from 2021. The Company expects to target an annual dividend growth rate of 7-9% per share in subsequent years.

COVID-19

While the pandemic presented risks, as further described in Part II, Item 1A — Risk Factors of this Form 10-K, to the Company’s business, there was not a material adverse impact on the Company’s results of operations for the years ended December 31, 2021 and 2020.

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Consolidated Results of Operations for the years ended December 31, 2021 and 2020

The following table provides selected financial information for the Company:

(a)Includes realized gains and losses from financially settled transactions

(b)Includes trading gains and losses and ancillary revenues

(c)Includes amortization of SO2 and NOx credits and excludes amortization of RGGI credits

Gross Margin

The Company calculates gross margin in order to evaluate operating performance as operating revenues less cost of fuel, purchased energy and other costs of sales, mark-to-market for economic hedging activities, contract and emission credit amortization and depreciation and amortization.

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Economic Gross Margin

In addition to gross margin, the Company evaluates its operating performance using the measure of economic gross margin, which is not a GAAP measure and may not be comparable to other companies’ presentations or deemed more useful than the GAAP information provided elsewhere in this report. Economic gross margin should be viewed as a supplement to and not a substitute for the Company's presentation of gross margin, which is the most directly comparable GAAP measure. Economic gross margin is not intended to represent gross margin. The Company believes that economic gross margin is useful to investors as it is a key operational measure reviewed by the Company's chief operating decision maker. Economic gross margin is defined as the sum of retail revenue, energy revenue, capacity revenue and other revenue, less cost of fuels, purchased energy and other cost of sales. Economic gross margin does not include mark-to-market gains or losses on economic hedging activities, contract amortization, emission credit amortization, depreciation and amortization, operations and maintenance, or other costs of operations.

The tables below present the composition and reconciliation of gross margin and economic gross margin for the years ended December 31, 2021 and 2020:

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The table below represents the weather metrics for 2021 and 2020:

(a) The West/Services/Other weather metrics are comprised of the average of the CDD and HDD regional results for the West - California and West - South Central regions

(b) National Oceanic and Atmospheric Administration-Climate Prediction Center - A Cooling Degree Day, or CDD, represents the number of degrees that the mean temperature for a particular day is above 65 degrees Fahrenheit in each region. A Heating Degree Day, or HDD, represents the number of degrees that the mean temperature for a particular day is below 65 degrees Fahrenheit in each region. The CDDs/HDDs for a period of time are calculated by adding the CDDs/HDDs for each day during the period

Winter Storm Uri

During the year ended December 31, 2021, Winter Storm Uri's pre-tax financial impact to the Company was a loss of $380 million, which reflects the recovery of $689 million of cost of operations as a result of the expected proceeds from the Uplift Securitization. The following impacts are further discussed in the related sections below:

The Company continues to pursue additional mitigants including, but not limited to, customer bad debt mitigation, counterparty default recovery, and additional ERCOT default recovery.

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Gross margin and economic gross margin

Gross margin increased $3.9 billion and economic gross margin increased $1.5 billion, both of which include intercompany sales, during the year ended December 31, 2021, compared to the same period in 2020. The detail by segment is as follows:

Texas

East

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West/Services/Other

Mark-to-market for Economic Hedging Activities

Mark-to-market for economic hedging activities includes asset-backed hedges that have not been designated as cash flow hedges. Total net mark-to-market results increased by $2.8 billion during the year ended December 31, 2021, compared to the same period in 2020.

The breakdown of gains and losses included in operating revenues and operating costs and expenses by segment was as follows:

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Mark-to-market results consist of unrealized gains and losses on contracts that are yet to be settled. The settlement of these transactions is reflected in the same revenue or cost caption as the items being hedged.

The reversals of acquired gain or loss positions were valued based upon the forward prices on the acquisition date.

For the year ended December 31, 2021 the $164 million loss in operating revenues from economic hedge positions was driven primarily by a decrease in the value of open positions as a result of increases in East and West/Services/Other power prices, as well as the reversal of previously recognized unrealized gains on contracts that settled during the period. The $2.9 billion gain in operating costs and expenses from economic hedge positions was driven primarily by an increase in the value of open positions as a result of increases in natural gas and power prices across all segments as well as the reversal of acquired contracts that settled during the year.

For the year ended December 31, 2020 the $95 million gain in operating revenues from economic hedge positions was driven primarily by an increase in the value of open positions as a result of decreases in New York capacity prices, as well as the reversal of previously recognized unrealized losses on contracts that settled during the period. The $214 million loss in operating costs and expenses from economic hedge positions was driven primarily by a decrease in the value of open positions as a result of decreases in ERCOT power prices and heat rate contraction, as well as the reversal of previously recognized unrealized gains on contracts that settled during the period.

In accordance with ASC 815, the following table represents the results of the Company's financial and physical trading of energy commodities for the years ended December 31, 2021 and 2020. The realized and unrealized financial and physical trading results are included in operating revenue. The Company's trading activities are subject to limits within the Company's Risk Management Policy.

Operations and Maintenance Expenses

Operations and maintenance expenses are comprised of the following:

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Operations and maintenance expenses increased by $241 million for the year ended December 31, 2021 compared to the same period in 2020, due to the following:

Other Cost of Operations

Other Cost of operations are comprised of the following:

Other cost of operations increased by $67 million for the year ended December 31, 2021 compared to the same period in 2020, due to the following:

Depreciation and Amortization

Depreciation and amortization expenses are comprised of the following:

Depreciation and amortization expense increased by $350 million for the year ended December 31, 2021 compared to the same period in 2020, primarily due to amortization of acquired intangibles in connection with the acquisition of Direct Energy in January 2021.

Impairment Losses

During the year ended December 31, 2021, the Company recorded impairment losses of $544 million, of which $306 million was recorded in the second quarter related to the decline in capacity prices and the planned retirement of a significant portion of the PJM coal fleet, $213 million in the fourth quarter as a result of changes in the long-term outlook of the Joliet facility prompted by market conditions and an assessment of various alternatives for the long-term operational landscape of the facility including the impact of the CEJA in Illinois, and $25 million related to various other power plants. During the year ended December 31, 2020, the Company recorded impairment losses of $75 million primarily related to the Cottonwood facility and the Home Solar business. Refer to Item 15 — Note 11, Asset Impairments, to the Consolidated Financial Statements for further discussion.

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Selling, General and Administrative Costs

Selling, general and administrative costs are comprised of the following:

Selling, general and administrative costs increased by $483 million for the year ended December 31, 2021 compared to the same period in 2020, due to the following:

Provision for Credit Losses

Provision for credit losses are comprised of the following:

Provision for credit losses increased by $590 million for the year ended December 31, 2021, compared to the same period in 2020, due to the following:

Acquisition-Related Transaction and Integration Costs

Acquisition-related transaction and integration costs increased by $70 million when compared to the same period in 2020. Acquisition-related transaction costs increased by $8 million, primarily related to the Direct Energy acquisition. Integration costs increased by $62 million, primarily related to employee costs, software costs and consulting services for the Direct Energy acquisition.

Gain on Sale of Assets

The gain on sale of assets of $247 million was recorded for the year ended December 31, 2021 includes a $210 million gain on the sale of 4,850 MW of fossil generating assets in December 2021, a $20 million gain on the sale of a deactivated site in November 2021, and a $17 million due to the sale of Agua Caliente in February 2021. The gain on the sale of assets of $3 million for the year ended December 31, 2020 was related to the sale of land and investments in January 2020, partially offset by the disposition of the Home Solar business.

Impairment Losses on Investments

During the year ended December 31, 2020, the Company recorded other-than-temporary impairment losses on the Company's investment in Petra Nova Parish Holdings of $18 million, as further described in Item 15 — Note 11, Asset Impairments, to the Consolidated Financial Statements.

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Loss on Debt Extinguishment

A loss on debt extinguishment of $77 million was recorded for the year ended December 31, 2021, driven by the redemption of senior notes as further discussed in Item 15 — Note 13, Long-term Debt and Finance Leases, to the Consolidated Financial Statements. A loss on debt extinguishment of $9 million was recorded for the year ended December 31, 2020, driven by the debt extinguished in connection with the sale of Home Solar and the redemptions of the Indian River and Dunkirk bonds.

Interest Expense

Interest expense increased by $84 million for the year ended December 31, 2021 compared to the same period in 2020, primarily due to financings entered into in connection with the Direct Energy acquisition.

Income Tax Expense

For the year ended December 31, 2021, NRG recorded income tax expense of $672 million on pre-tax income of $2.9 billion. For the same period in 2020, NRG recorded an income tax expense of $251 million on pre-tax income of $761 million. The effective tax rate was 23.5% and 33.0% for the years ended December 31, 2021 and 2020, respectively.

For the year ended December 31, 2021, NRG's overall effective tax rate was higher than the federal statutory tax rate of 21% primarily due to state tax expense partially offset by tax benefits from the revaluation of state deferred tax assets, valuation allowance, and settlements of uncertain tax positions.

The effective income tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses and changes in valuation allowances in accordance with ASC 740, Income Taxes, or ASC 740. These factors and others, including the Company's history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets.

Liquidity and Capital Resources

Liquidity Position

As of December 31, 2021 and 2020, NRG's liquidity, excluding collateral funds deposited by counterparties, was approximately $2.7 billion and $7.0 billion, respectively, comprised of the following:

(a)Includes reserves primarily for debt service, performance obligations and capital expenditures

(b)Total capacity of Revolving Credit Facility and collective collateral facilities was $5.9 billion and $4.0 billion as of December 31, 2021 and December 31, 2020, respectively

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As of December 31, 2021, total liquidity, excluding collateral funds deposited by counterparties, decreased by $4.4 billion. The decrease was primarily driven by the closing of the Direct Energy acquisition and the impact of Winter Storm Uri. Changes in cash and cash equivalent balances are further discussed under the heading Cash Flow Discussion. Cash and cash equivalents at December 31, 2021 were predominantly held in money market funds invested in treasury securities, treasury repurchase agreements or government agency debt.

Management believes that the Company's liquidity position and cash flows from operations will be adequate to finance operating and maintenance capital expenditures, to fund dividends to NRG's common stockholders, and to fund other liquidity commitments. Management continues to regularly monitor the Company's ability to finance the needs of its operating, financing and investing activity within the dictates of prudent balance sheet management.

Credit Ratings

On March 17, 2021, following Winter Storm Uri, Standard & Poor's placed NRG's issuer credit rating of BB+ on CreditWatch with negative implications. On May 12, 2021, Standard & Poor's affirmed NRG's issuer credit rating of BB+ with a stable outlook. On March 19, 2021, Moody's changed NRG's rating outlook from positive to stable. At the same time, Moody's affirmed NRG's corporate family rating of Ba1.

The following table summarizes the Company's current credit ratings:

Liquidity

The principal sources of liquidity for NRG's operating and capital expenditures are expected to be derived from cash on hand, cash flows from operations and financing arrangements. As described in Item 15 — Note 13, Long-term Debt and Finance Leases, to the Consolidated Financial Statements, the Company's financing arrangements consist mainly of the Senior Notes, Convertible Senior Notes, Senior Secured First Lien Notes, Revolving Credit Facility, and tax-exempt bonds.

The Company's requirements for liquidity and capital resources, other than for operating its facilities, can generally be categorized by the following: (i) market operations activities; (ii) debt service obligations, as described more fully in Item 15 — Note 13, Long-term Debt and Finance Leases, to the Consolidated Financial Statements; (iii) capital expenditures, including maintenance, repowering, development, and environmental; and (iv) allocations in connection with acquisition opportunities, debt repayments, share repurchases and dividend payments to stockholders, as described in Item 15 — Note 16, Capital Structure, to the Consolidated Financial Statements.

Direct Energy Acquisition

On January 5, 2021, the Company acquired Direct Energy, which had been a North American subsidiary of Centrica. Direct Energy is a leading retail provider of electricity, natural gas, and home and business energy related products and services in North America, with operations in all 50 U.S. states and 8 Canadian provinces.

The Company paid an aggregate purchase price of $3.625 billion in cash, subject to a purchase price adjustment of $77 million. The Company funded the purchase price using a combination of $715 million of cash on hand, $166 million from a draw on its Revolving Credit Facility (of which $107 million was used to fund acquisition costs and financing fees that are not included in the aggregate purchase price above) as well as approximately $2.9 billion in secured and unsecured corporate debt issued in December 2020. The final purchase price adjustment resulted in additional payment of $22 million, which was paid to Centrica in December 2021.

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Collateral Facility Increases

The following table presents increases to the Company's liquidity and collateral facilities in connection with the Direct Energy acquisition:

Planned Debt Reduction

In light of the impact of Winter Storm Uri, the Company's deleveraging program will extend to 2023. The Company remains committed to maintaining a strong balance sheet and continues to work to achieve investment grade credit metrics.

Issuance of 2032 Senior Notes

On August 23, 2021, the Company issued $1.1 billion of aggregate principal amount at par of 3.875% senior notes due 2032 (the "2032 Senior Notes"). The 2032 Senior Notes are senior unsecured obligations of NRG and are guaranteed by certain of its subsidiaries. The 2032 Senior Notes were issued under NRG's Sustainability-Linked Bond Framework, which sets out certain sustainability targets, including reducing greenhouse gas emissions. Failure to meet such sustainability targets will result in a 25 basis point increase to the interest rate payable on the 2032 Senior Notes from and including August 15, 2026.

Senior Note Redemptions

During the year ended December 31, 2021, the Company redeemed $1.9 billion in aggregate principal of its Senior Notes for $1.9 billion using the proceeds of the 2032 Senior Notes and cash on hand. In connection with the redemptions, a $77 million loss on debt extinguishment was recorded.

Receivables Facility

On July 26, 2021, NRG Receivables LLC, a wholly-owned indirect subsidiary of the Company, renewed its existing accounts receivable securitized borrowings facility (the "Receivables Facility") to, among others, (i) increase the facility size to $800 million, (ii) extend the maturity date until July 26, 2022, (iii) make certain adjustments to the pool of receivables through the Receivables Facility and certain related covenants, and (iv) provide for revised language relating to interest determination based on SOFR in case of a LIBOR cessation or the occurrence of certain other trigger events. As of December 31, 2021, there were no outstanding borrowings and there were $400 million in letters of credit issued under the Receivables Facility.

Repurchase Facility

On July 26, 2021, the Company renewed its existing uncommitted repurchase facility ("Repurchase Facility") to, among other things, (i) extend the maturity date to July 26, 2022 and (ii) provide for revised language relating to interest determination based on SOFR in case of a LIBOR cessation or the occurrence of certain other trigger events. On February 9, 2022, the Company entered into amendments to its existing Repurchase Facility to, among other things, (i) increase the size of the facility from $75 million to $150 million and (ii) replace LIBOR with term SOFR as the benchmark for the pricing rate. The Repurchase Facility has no commitment fee and borrowings will be drawn at SOFR + 1.30%. As of December 31, 2021, there were no outstanding borrowings under the Repurchase Facility.

Sale of 4.8 GW of Fossil Generation Assets

On December 1, 2021, the Company closed the previously announced sale of approximately 4,850 MWs of fossil generating assets from its East and West regions to Generation Bridge, an affiliate of ArcLight Capital Partners. At Closing, NRG received $623 million of net proceeds, after working capital and other adjustments, including a deduction for cash flows generated of approximately $11 million per month from the beginning of the year until the closing of the transaction, in lieu of

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cash flows generated during the year. As part of the transaction, NRG entered into a tolling agreement for the 866 MW Arthur Kill plant in New York City through April 2025.

Sale of Agua Caliente

On February 3, 2021, the Company closed on the sale of its 35% ownership in the Agua Caliente solar project to Clearway Energy, Inc. for $202 million. NRG recognized a gain on the sale of $17 million, including cash disposed of $7 million.

CARES Act

On March 27, 2020, the U.S. government enacted the CARES Act, which provides, among other things: (i) the option to defer payments of certain 2019 employer payroll taxes incurred after the date of enactment; and (ii) allows NOLs from tax years 2018, 2019, and 2020 to be carried back five years. The total benefit to the Company due to the CARES Act was $35 million. Of this amount, $13 million was paid to social security in 2021 and $13 million will be payable in 2022.

Pension Plan Contribution

The American Rescue Plan Act ("ARPA") was enacted on March 11, 2021 to provide economic relief related to the COVID-19 pandemic. ARPA provided pension funding relief for single employer plans, among other provisions. As a result, NRG reduced its 2021 planned cash contribution by approximately $23 million.

Pension and Other postretirement benefits minimum funding requirements

As of December 31, 2021, the Company does not have estimated minimum pension contributions required under the Pension Protection Act of 2006 for the next 5 years. As of December 31, 2021, the Company’s estimated Other postretirement benefits minimum funding requirements for the next 5 years were $33 million, of which $7 million are required to be made within the next 12 months. These amounts represent estimates based on assumptions that are subject to change. For further discussion, see Item 15 — Note 15, Benefit Plans and Other Postretirement Benefits, to the Consolidated Financial Statements.

Debt Service Obligations

Principal payments on debt and finance leases as of December 31, 2021 are due in the following periods:

For further discussion, see Item 15 — Note 13, Long-term Debt and Finance Leases.

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Market Operations

The Company's market operations activities require a significant amount of liquidity and capital resources. These liquidity requirements are primarily driven by: (i) margin and collateral posted with counterparties; (ii) margin and collateral required to participate in physical markets and commodity exchanges; (iii) timing of disbursements and receipts (e.g. buying fuel before receiving energy revenues); and (iv) initial collateral for large structured transactions. As of December 31, 2021, market operations had total cash collateral outstanding of $291 million and $3.5 billion outstanding in letters of credit to third parties primarily to support its market activities. As of December 31, 2021, total funds deposited by counterparties were $845 million in cash and $429 million of letters of credit.

The Company has entered into long-term contractual arrangements to procure certain fuel and transportation services for the Company's generation assets. As of December 31, 2021, the Company had minimum payment obligations under such outstanding agreements of $378 million, with $122 million payable within the next 12 months. Additionally, the Company has long-term contractual commitments related to electricity and natural gas products, including power purchases, gas transportation and storage of various quantities and durations, and renewable purchased power agreements under PPAs with third-party project developers, which are accounted for as NPNS. As of December 31, 2021, the Company had minimum purchased energy commitments of $5.0 billion, with $1.6 billion payable within the next 12 months. For further discussion, see Item 15 — Note 23, Commitments and Contingencies.

Future liquidity requirements may change based on the Company's hedging activities and structures, fuel purchases, and future market conditions, including forward prices for energy and fuel and market volatility. In addition, liquidity requirements are dependent on the Company's credit ratings and general perception of its creditworthiness.

First Lien Structure

NRG has granted first liens to certain counterparties on a substantial portion of the Company's assets, subject to various exclusions including NRG's assets that have project-level financing and the assets of certain non-guarantor subsidiaries, to reduce the amount of cash collateral and letters of credit that it would otherwise be required to post from time to time to support its obligations under out-of-the-money hedge agreements for forward sales of power or MWh equivalents. The first lien program does not limit the volume that can be hedged or the value of underlying out-of-the-money positions. The first lien program also does not require NRG to post collateral above any threshold amount of exposure. The first lien structure is not subject to unwind or termination upon a ratings downgrade of a counterparty and has no stated maturity date.

The Company's first lien counterparties may have a claim on its assets to the extent market prices exceed the hedged prices. As of December 31, 2021, all hedges under the first liens were out-of-the-money on a counterparty aggregate basis.

The following table summarizes the amount of MW hedged against the Company's coal and nuclear assets and as a percentage relative to the Company's coal and nuclear capacity under the first lien structure as of December 31, 2021:

(a)Equivalent Net Sales include natural gas swaps converted using a weighted average heat rate by region

(b)Net coal and nuclear capacity represents 80% of the Company's total coal and nuclear assets eligible under the first lien, which excludes coal assets acquired in the Midwest Generation acquisition

Capital Expenditures

The following table summarizes the Company's capital expenditures for maintenance, environmental, and growth investments for the year ended December 31, 2021:

(a)Includes other investments, acquisitions, digital NRG and integration projects

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Growth investments in East for the year ended December 31, 2021 include the Astoria generating facility, for which the Company has proposed to replace existing units with a single, new state-of-the-art Simple Cycle Combustion Turbine having a total generating capacity of 437 MW. On October 27, 2021, the NYSDEC Staff denied the Company's application for an air permit. On November 26, 2021, Astoria Gas Turbine Power LLC filed a Request for Adjudicatory Hearing on the NYSDEC's denial. To date, the Company has spent approximately $42 million on the Astoria project. Additionally, included in Investments are expenditures for Encina site improvements classified as ARO payments. Demolition of Encina is underway and is expected to be completed in the first half of 2022. The Company expects to begin marketing the site in 2022.

Environmental Capital Expenditures Estimate

NRG estimates that environmental capital expenditures from 2022 through 2026 required to comply with environmental laws will be approximately $56 million. The largest component is the cost of complying with ELG at our coal units in Texas.

The table below summarizes the status of NRG's coal fleet with respect to air quality controls. NRG uses an integrated approach to fuels, controls and emissions markets to meet environmental requirements.

The following table summarizes the estimated environmental capital expenditures by year:

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Share Repurchases

In December 2021, the Company's board of directors authorized the Company to repurchase $1.0 billion of its common stock. Through December 31, 2021, the Company completed $53 million of share repurchases at an average price of $40.22 per share, including $9 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuances. Through February 24, 2022, an additional $82 million of share repurchases were executed at an average price of $40.26 per share, including $6 million of equivalent shares purchased in lieu of tax withholdings on equity compensation issuances. See Item 15 - Note 16, Capital Structure, to the Consolidated Financial Statements for additional discussion.

Dividend Increase

In the first quarter of 2021, NRG increased the annual dividend to $1.30 from $1.20 per share. The Company returned $320 million of capital to shareholders in the year ended 2021 through a $1.30 dividend per common share. In 2022, NRG further increased the annual dividend to $1.40 per share, representing an 8% increase from 2021. The Company expects to target an annual dividend growth rate of 7-9% per share in subsequent years.

On January 21, 2022, NRG declared a quarterly dividend on the Company's common stock of $0.35 per share, or $1.40 per share on an annualized basis, payable on February 15, 2022, to stockholders of record as of February 1, 2022. The Company's common stock dividends are subject to available capital, market conditions, and compliance with associated laws and regulations.

Additional Material Cash Requirements Not Discussed Above

Operating leases — The Company leases generating facilities, land, office and equipment, railcars, fleet vehicles and storefront space at retail stores. As of December 31, 2021, the Company had lease payment obligations of $372 million, of which $96 million is payable within the next 12 months. For further discussion, see Item 15 — Note 10, Leases.

Other liabilities — Other liabilities includes water right agreements, service and maintenance agreements, stadium naming rights, stadium sponsorships, LTSA commitments and other contractual obligations. As of December 31, 2021, the Company had total of $210 million under such commitments, of which $41 million are payable within the next 12 months.

Contingent obligations for guarantees — NRG and its subsidiaries enter into various contracts that include indemnifications and guarantee provisions as a routine part of the Company’s business activities. For further discussion, see Item 15 —Note 27, Guarantees.

Obligations Arising Out of a Variable Interest in an Unconsolidated Entity

Variable interest in Equity investments — As of December 31, 2021, NRG has several investments with an ownership interest percentage of 50% or less in energy and energy-related entities that are accounted for under the equity method of accounting. Ivanpah is considered a variable interest entity for which NRG is not the primary beneficiary.

NRG's pro-rata share of non-recourse debt held by unconsolidated affiliates was approximately $535 million as of December 31, 2021. This indebtedness may restrict the ability of these subsidiaries to issue dividends or distributions to NRG. See also Item 15 — Note 17, Investments Accounted for by the Equity Method and Variable Interest Entities, to the Consolidated Financial Statements for additional discussion.

Cash Flow Discussion

2021 compared to 2020

The following table reflects the changes in cash flows for the comparative years:

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Net Cash (Used)/Provided By Operating Activities

Changes to net cash (used)/provided by operating activities were driven by:

Net Cash (Used)/Provided By Investing Activities

Changes to net cash (used)/provided by investing activities were driven by:

Net Cash (Used)/Provided By Financing Activities

Changes in net cash (used)/provided by financing activities were driven by:

NOLs, Deferred Tax Assets and Uncertain Tax Position Implications

For the year ended December 31, 2021, the Company had domestic pre-tax book income of $2.8 billion and foreign pre-tax book income of $100 million. For the year ended December 31, 2021, the Company utilized U.S. federal NOLs of $1.6 billion due to current year taxable income. As of December 31, 2021, the Company has cumulative U.S. federal NOL carryforwards of $8.4 billion, of which $11 million were generated prior to Tax Cuts and Jobs Act and will begin expiring in 2031 and cumulative state NOL carryforwards of $5.2 billion for financial statement purposes. NRG also has cumulative foreign NOL carryforwards of $383 million, which do not have an expiration date. In addition to the above NOLs, NRG has a $20 million indefinite carryforward for interest deductions, as well as $384 million of tax credits to be utilized in future years. As a result of the Company's tax position, including the utilization of federal and state NOLs, and based on current forecasts, the Company anticipates income tax payments, due to federal, state and foreign jurisdictions, of up to $58 million in 2022.

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The Company has $13 million of tax effected uncertain federal and state tax benefits for which the Company has recorded a non-current tax liability of $14 million (including accrued interest) until such final resolution with the related taxing authority.

The Company is no longer subject to U.S. federal income tax examinations for years prior to 2018. With few exceptions, state and Canadian income tax examinations are no longer open for years before 2013.

Guarantor Financial Information

As of December 31, 2021, the Company's outstanding registered senior notes consisted of $375 million of the 2027 Senior Notes and $821 million of the 2028 Senior Notes, as shown in Note 13, Long-term Debt and Finance Leases. These Senior Notes are guaranteed by certain of NRG's current and future 100% owned domestic subsidiaries, or guarantor subsidiaries (the “Guarantors”). See Exhibit 22.1 for a listing of the Guarantors. These guarantees are both joint and several.

NRG conducts much of its business through and derives much of its income from its subsidiaries. Therefore, the Company's ability to make required payments with respect to its indebtedness and other obligations depends on the financial results and condition of its subsidiaries and NRG's ability to receive funds from its subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to NRG. Other subsidiaries of the Company do not guarantee the registered debt securities of either NRG Energy, Inc. or the Guarantors (such subsidiaries are referred to as the “Non-Guarantors”). The Non-Guarantors include all of NRG's foreign subsidiaries and certain domestic subsidiaries.

The tables below present summarized financial information of NRG Energy, Inc. and the Guarantors in accordance with Rule 3-10 under the SEC's Regulation S-X. The financial information may not necessarily be indicative of results of operations or financial position of NRG Energy, Inc. and the Guarantors in accordance with U.S. GAAP.

The following table presents the summarized statement of operations:

(a)Intercompany transactions with Non-Guarantors include operating revenue of $42 million, cost of operations of $(235) million and selling, general and administrative of $108 million

The following table presents the summarized balance sheet information:

(a)Includes intercompany receivables of $86 million and intercompany payables of $50 million due from Non-Guarantors

Fair Value of Derivative Instruments

NRG may enter into power purchase and sales contracts, fuel purchase contracts and other energy-related financial instruments to mitigate variability in earnings due to fluctuations in spot market prices and to hedge fuel requirements at power plants or retail load obligations. In addition, in order to mitigate foreign exchange rate risk primarily associated with the purchase of USD denominated natural gas for the Company's Canadian business, NRG enters into foreign exchange contract agreements.

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.

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The tables below disclose the activities that include both exchange and non-exchange traded contracts accounted for at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures, or ASC 820. Specifically, these tables disaggregate realized and unrealized changes in fair value; disaggregate estimated fair values at December 31, 2021, based on their level within the fair value hierarchy defined in ASC 820; and indicate the maturities of contracts at December 31, 2021. For a full discussion of the Company's valuation methodology of its contracts, see Derivative Fair Value Measurements in Item 15 — Note 5, Fair Value of Financial Instruments, to the Consolidated Financial Statements.

The Company has elected to disclose derivative assets and liabilities on a trade-by-trade basis and does not offset amounts at the counterparty master agreement level. Also, collateral received or posted on the Company's derivative assets or liabilities are recorded on a separate line item on the balance sheet. Consequently, the magnitude of the changes in individual current and non-current derivative assets or liabilities is higher than the underlying credit and market risk of the Company's portfolio. As discussed in Item 7A — Quantitative and Qualitative Disclosures About Market Risk, Commodity Price Risk, NRG measures the sensitivity of the Company's portfolio to potential changes in market prices using VaR, a statistical model which attempts to predict risk of loss based on market price and volatility. NRG's risk management policy places a limit on one-day holding period VaR, which limits the Company's net open position. As the Company's trade-by-trade derivative accounting results in a gross-up of the Company's derivative assets and liabilities, the net derivative assets and liability position is a better indicator of NRG's hedging activity. As of December 31, 2021, NRG's net derivative asset was $2.3 billion, an increase to total fair value of $2.4 billion as compared to December 31, 2020. This increase was primarily driven by roll-off trades that settled during the period, as well as gains in fair value.

Based on a sensitivity analysis using simplified assumptions, the impact of a $0.50 per MMBtu increase in natural gas prices across the term of the derivative contracts would result in an increase of approximately $1.3 billion in the net value of derivatives as of December 31, 2021.

The impact of a $0.50 per MMBtu decrease in natural gas prices across the term of the derivative contracts would result in a decrease of approximately $1.4 billion in the net value of derivatives as of December 31, 2021.

Critical Accounting Estimates

The Company's discussion and analysis of the financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance as well as the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The application of appropriate technical accounting rules and guidance involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges, and the fair value of certain assets and liabilities. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the accounting guidance has not changed.

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NRG evaluates these estimates, on an ongoing basis, utilizing historic experience, consultation with experts and other methods the Company considers reasonable. In any event, actual results may differ substantially from the Company's estimates. Any effects on the Company's business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the information that gives rise to the revision becomes known.

The Company identifies its most critical accounting estimates as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and require the most difficult, subjective, and/or complex judgments by management about matters that are inherently uncertain.

Such accounting estimates include:

Derivative Instruments

The Company follows the guidance of ASC 815, Derivatives and Hedging, or ASC 815, to account for derivative instruments. ASC 815 requires the Company to mark-to-market all derivative instruments on the balance sheet and recognize fair value change in earnings, unless they qualify for the NPNS exception. ASC 815 applies to NRG's energy related commodity contracts, interest rate swaps and foreign exchange contracts.

For purposes of measuring the fair value of derivative instruments, the Company uses quoted exchange prices and broker quotes. When external prices are not available, NRG uses internal models to determine the fair value. These internal models include assumptions of the future prices of energy commodities based on the specific market in which the energy commodity is being purchased or sold, using externally available forward market pricing curves for all periods possible under the pricing model. These estimations are considered to be critical accounting estimates.

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During the fourth quarter of 2020, the Company entered into $1.6 billion of interest rate hedges associated with anticipated certain financing needs. As of December 31, 2020, the interest rate hedges were settled in connection with the issuance of fixed rate debt, resulting in a gain of $11 million that was recorded as a reduction to interest expense. In order to qualify the derivative instruments for hedged transactions prior to termination, NRG estimated the forecasted borrowings for interest rate swaps occurring within a specified time period.

In order to mitigate foreign exchange risk primarily associated with the purchase of USD denominated natural gas for the Company's Canadian business, the Company enters into foreign exchange contract agreements.

Certain derivative instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered to be NPNS. The availability of this exception is based upon the assumption that the Company has the ability and it is probable to deliver or take delivery of the underlying item. These assumptions are based on expected load requirements, internal forecasts of sales and generation and historical physical delivery on contracts. Derivatives that are considered to be NPNS are exempt from derivative accounting treatment and are accounted for under accrual accounting. If it is determined that a transaction designated as NPNS no longer meets the scope exception due to changes in estimates, the related contract would be recorded on the balance sheet at fair value combined with the immediate recognition through earnings.

Income Taxes and Valuation Allowance for Deferred Tax Assets

As of December 31, 2021, NRG’s deferred tax assets were primarily the result of U.S. federal and state NOLs, the difference between book and tax basis in property, plant, and equipment, and tax credit carryforwards. The realization of deferred tax assets is dependent upon the Company's ability to generate sufficient future taxable income during the periods in which those temporary differences become deductible, prior to the expiration of the tax attributes. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and forecasting future profitability by tax jurisdiction.

The Company evaluates its deferred tax assets quarterly on a jurisdictional basis to determine whether adjustments to the valuation allowance are appropriate considering changes in facts or circumstances. As of each reporting date, management considers new evidence, both positive and negative, when determining the future realization of the Company’s deferred tax assets. Given the Company’s current level of pre-tax earnings and forecasted future pre-tax earnings, the Company expects to generate income before taxes in the U.S. in future periods at a level that would fully utilize its U.S. federal NOL carryforwards and the majority of its state NOL carryforwards prior to their expiration.

The Company continues to maintain a valuation allowance of approximately $248 million as of December 31, 2021 against deferred tax assets consisting of state net operating losses and foreign NOL carryforwards in jurisdictions where the Company does not currently believe that the realization of deferred tax assets is more likely than not. As of December 31, 2020 the Company's valuation allowance balance was $266 million.

Considerable judgment is required to determine the tax treatment of a particular item that involves interpretations of complex tax laws. The Company is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions, including operations located in Australia and Canada. The Company continues to be under audit for multiple years by taxing authorities in various jurisdictions.

The Company is no longer subject to U.S. federal income tax examinations for years prior to 2018. With few exceptions, state and and Canadian income tax examinations are no longer open for years before 2013.

NRG does not intend, nor currently foresee a need, to repatriate funds held at our international operations into the U.S. These funds are deemed to be indefinitely reinvested in our foreign operations and the Company has not changed its assertion with respect to distributions of funds that would require the accrual of U.S. income tax.

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Evaluation of Assets for Impairment and Other-Than-Temporary Decline in Value

In accordance with ASC 360, Property, Plant, and Equipment, or ASC 360, the Company evaluates property, plant and equipment and certain intangible assets for impairment whenever indicators of impairment exist. Examples of such indicators or events include:

•Significant decrease in the market price of a long-lived asset;

•Significant adverse change in the manner an asset is being used or its physical condition;

•Adverse business climate;

•Accumulation of costs significantly in excess of the amounts originally expected for the construction or acquisition of an asset;

•Current period loss combined with a history of losses or the projection of future losses; and

•Change in the Company's intent about an asset from an intent to hold to a greater than 50% likelihood that an asset will be sold, or disposed of before the end of its previously estimated useful life.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset, through considering project specific assumptions for long-term power and natural gas prices, escalated future project operating costs and expected plant operations. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets by factoring in the different courses of action available to the Company. Generally, fair value will be determined using valuation techniques, such as the present value of expected future cash flows. NRG uses its best estimates in making these evaluations and considers various factors, including forward price curves for energy, fuel and operating costs. However, actual future market prices and project costs could vary from the assumptions used in the Company's estimates and the impact of such variations could be material.

For assets to be held and used, if the Company determines that the undiscounted cash flows from the asset are less than the carrying amount of the asset, NRG must estimate fair value to determine the amount of any impairment loss. Assets held-for-sale are reported at the lower of the carrying amount or fair value less the cost to sell. The estimation of fair value, whether in conjunction with an asset to be held and used or with an asset held-for-sale, and the evaluation of asset impairment are, by their nature, subjective. The Company considers quoted market prices in active markets to the extent they are available. In the absence of such information, NRG may consider prices of similar assets, consult with brokers, or employ other valuation techniques. The Company will also discount the estimated future cash flows associated with the asset using a single interest rate representative of the risk involved with such an investment or asset. The use of these methods involves the same inherent uncertainty of future cash flows as previously discussed with respect to undiscounted cash flows. Actual future market prices and project costs could vary from those used in NRG's estimates and the impact of such variations could be material.

During the second quarter of 2021, the results of the PJM Base Residual Auction for the 2022/2023 delivery year were released leading the Company to announce the near-term retirement of a significant portion of its PJM coal generating assets in June 2022. The Company considered the decline in PJM capacity prices and the near-term retirement dates of certain assets to be a trigger for impairment and performed impairment tests on the PJM generating assets and the goodwill associated with Midwest Generation. The Company measured the impairment losses on the PJM generation assets and Midwest Generation goodwill as the difference between the carrying amount and the fair value of the PJM generating assets and Midwest Generation reporting unit, respectively. Fair values were determined primarily using an income approach in which the Company applied a discounted cash flow methodology to the long-term budgets for the plants and reporting unit. Significant inputs impacting the income approach include the Company's long-term view of capacity and fuel prices, projected generation, the physical and economic characteristics of each plant, and the discount rate applied to the after-tax cash flow projections. Impairment losses of $271 million and $35 million were recorded in the East segment on the PJM generating assets and Midwest Generation goodwill, respectively.

Annually, during the fourth quarter, the Company revises its views of power and fuel prices including the Company's fundamental view for long-term prices, forecasted generation and operating and capital expenditures, in connection with the preparation of its annual budget. Changes to the Company's views of long-term power and fuel prices impact the Company’s projections of profitability, based on management's estimate of supply and demand within the sub-markets for its operations and the physical and economic characteristics of each of its businesses.

In the fourth quarter of 2021, the Company recognized an impairment loss of $213 million in the East segment as a result of changes in the long-term outlook of the Joliet facility prompted by market conditions and an assessment of various alternatives for the long-term operational landscape of the facility including the impact of the CEJA in Illinois, which concluded with the annual budget process. The Company recorded additional impairment losses of $16 million and $9 million related to various power plants in the East and West/Services/Other segments, respectively.

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In the third quarter of 2020, the Company concluded its Home Solar business was held for sale as a result of advanced negotiations to sell the business and recorded an impairment loss of $29 million in the West/Services/Other segment to adjust the carrying amount of the assets and liabilities to fair market value based on indicative sale prices. On November 13, 2020, the Company completed the sale of the Home Solar business for $66 million.

In the fourth quarter of 2020, the Company recognized an impairment loss of $32 million in the West/Services/Other segment related to the Cottonwood facility. The impairment was attributable to the Company's long-term services agreement and related lease payments, as the carrying amounts of the assets from the contract were higher than the estimated operating cash flow though the remaining lease period. Additionally, in the fourth quarter of 2020, the Company recorded $14 million of impairment losses related to intangible assets in the Texas segment.

Equity Method Investments

The Company is also required to evaluate for impairment its equity method investments in accordance with ASC 323, Investments - Equity Method and Joint Ventures, or ASC 323. The standard for determining whether an impairment must be recorded under ASC 323 is whether an observed decline in the value of an equity method investment is considered other-than-temporary. The evaluation and measurement of impairments under ASC 323 involves the same uncertainties as described for long-lived assets that the Company owns directly and accounts for in accordance with ASC 360. Similarly, the estimates that the Company makes with respect to its equity method investments are subjective, and the impact of variations in these estimates could be material. Additionally, if the projects in which the Company holds these investments recognize an impairment under the provisions of ASC 360, the Company would record its proportionate share of that impairment loss and would evaluate its investment for an other-than-temporary decline in value under ASC 323. During the first quarter of 2020, NRG recorded an impairment loss of $18 million in the Texas segment, attributable to its equity method investment in Petra Nova Parish Holdings, which included the anticipated drawdown of the $12 million letter of credit posted in September 2019 to cover certain project debt reserve requirements.

Goodwill and Other Intangible Assets

At December 31, 2021, the Company reported goodwill of $1.8 billion, consisting of $1.3 billion from the acquisition of Direct Energy in 2021, $130 million associated with the acquisition of Midwest Generation and $414 million for retail operations acquisitions, including Stream Energy, which was acquired in 2019.

The Company applies ASC 805, Business Combinations, or ASC 805, and ASC 350, Intangibles-Goodwill and Other, or ASC 350 to account for its goodwill and intangible assets. Under these standards, the Company amortizes all finite-lived intangible assets over their respective estimated weighted-average useful lives, while goodwill has an indefinite life and is not amortized. Goodwill is tested for impairment at least annually, or more frequently whenever an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company tests goodwill for impairment at the reporting unit level, which is identified by assessing whether the components of the Company's operating segments constitute businesses for which discrete financial information is available and whether segment management regularly reviews the operating results of those components. The Company performs the annual goodwill impairment assessment as of December 31 or when events or changes in circumstances indicate that the fair value of the reporting unit may be below the carrying amount. The Company first assesses qualitative factors to determine whether it is more likely than not that an impairment has occurred. In the absence of sufficient qualitative factors, the Company performs a quantitative assessment by determining the fair value of the reporting unit and comparing to its book value. If it is determined that the fair value of a reporting unit is below its carrying amount, the Company's goodwill will be impaired at that time.

During the second quarter of 2021, the results of the PJM Base Residual Auction for the 2022/2023 delivery year were released leading the Company to announce the near-term retirement of a significant portion of its PJM coal generating assets in June 2022. The Company considered the decline in PJM capacity prices and the near-term retirement dates of certain assets to be a trigger for impairment and performed impairment tests on the PJM generating assets and the goodwill associated with Midwest Generation. An impairment of $35 million was recorded in Midwest Generation goodwill. For further discussion, see Evaluation of Assets for Impairment and Other-Than-Temporary Decline in Value caption above.

During the fourth quarter of 2021, the Company performed its qualitative assessment of macroeconomic, industry and market events and circumstances, and the overall financial performance of the Texas (Texas segment) and East Retail (East segment) reporting units. The Company determined it was more-likely-than not that the fair value of the goodwill attributed to these reporting units were more than their carrying amount and accordingly, no impairment existed for the year ended December 31, 2021.

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During the fourth quarter of 2021, the Company also performed a quantitative assessment for the Midwest Generation (East segment) and West/Services/Other reporting units. The Company determined the fair value of the reporting units using an income approach. Based on the income approach, the Company estimated the fair value of each reporting units' cash flows exceeded its carrying value and, as such, NRG concluded that the goodwill associated with each reporting unit was not impaired as of December 31, 2021.

The Company believes the methodology and assumptions used in its quantitative assessments were consistent with the views of market participants. Significant inputs to the determinations of fair value of the Midwest Generation reporting unit were as follows:

•The Company applied a discounted cash flow methodology to the long-term budgets for the Midwest Generation plants, resulting in fair value over the carrying value of the reporting unit of 117%. The significant assumptions used to derive the long-term budgets used in the income approach are affected by the following key inputs:

◦The Company's views of power, capacity and fuel prices consider market prices for the next five years and the Company's fundamental view for the longer term, driven by the Company's long-term view of the price of natural gas. The Company's fundamental view for the longer term reflects the implied prices and heat rate that would support new build of a combined cycle gas plant. The price of natural gas plays an important role in setting the price of electricity in many of the regions where NRG operates power plants. Hedging is included to the extent of contracts already in place;

◦The Company's estimate of generation, fuel costs, capital expenditure requirements and the existing and anticipated impact of environmental regulations;

◦The Company's fundamental view for the longer term, cash flows for the plants in the region were included in the fair value calculation through the end of each plants' estimated useful life; and

◦Projected generation and resulting energy gross margin in the long-term budgets is based on an hourly dispatch that simulates dispatch of each unit into the power market. The dispatch simulation is based on power prices, fuel prices, and the physical and economic characteristics of each plant.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future.

Business Combinations

We account for business acquisitions using the acquisition method of accounting prescribed under ASC 805. Under this method, we are required to record on our Consolidated Balance Sheets the estimated fair values of the acquired company’s assets and liabilities assumed at the acquisition date. The excess of the consideration transferred over the fair value of the net identifiable assets acquired and liabilities assumed is recorded as goodwill. Determining fair values of assets acquired and liabilities assumed requires significant estimates and judgments. We determine fair value based on the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The acquired assets and assumed liabilities that involved the most subjectivity in determining fair value consisted of the trade names, customer relationships and derivative contracts.

The fair value of trade names and customer relationships was measured using income-based valuation methodologies, which include certain assumptions such as forecasted future cash flows, customer attrition rates, royalty rates and discount rates. The trade names are amortized to depreciation and amortization, on a straight line basis. The customer relationships are amortized to depreciation and amortization, ratably based on discounted future cash flows.

In measuring the fair value of derivative contracts, a significant portion of the fair value of the derivative portfolio was 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 were 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. The fair value of each contract was discounted using a risk free interest rate. In addition, the Company applied a credit reserve to reflect credit risk. NRG describes in detail its acquisitions in Item 15 — Note 4, Acquisitions, Discontinued Operations and Dispositions, to the Consolidated Financial Statements

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Contingencies

NRG records reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or does become a reality. Such determinations are subject to interpretations of current facts and circumstances, forecasts of future events, and estimates of the financial impacts of such events. NRG describes in detail its contingencies in Item 15 — Note 23, Commitments and Contingencies, to the Consolidated Financial Statements.

Recent Accounting Developments

See Item 15 — Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements for a discussion of recent accounting developments.