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Income Taxes

12 Months Ended

Dec. 31, 2020

The income tax provision from continuing operations consisted of the following amounts:


	Year Ended December 31,
(In millions, except effective income tax rate)	2020			2019			2018
Current

State	$	22		$	2		$	6
Foreign	4			4			—
Total — current	26			6			6
Deferred
U.S. Federal	168			(3,000)			(16)
State	60			(340)			16
Foreign	(3)			—			1
Total — deferred	225			(3,340)			1
Total income tax expense/(benefit)	$	251		$	(3,334)		$	7
Effective income tax rate	33.0		%	(424.2)		%	1.5		%

During the year ended December 31, 2019, NRG released the majority of its valuation allowance against its U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expense of approximately $3.5 billion. In making the determination to release the majority of the valuation allowance as of December 31, 2019, the Company evaluated a number of factors, including its recent history of pre-tax earnings, utilization of $593 million of NOLs in 2019, as well as its forecasted future pre-tax earnings. Based on this evaluation, the Company determined that the majority of its future tax benefits are more-likely-than-not to be realized. 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.

On March 27, 2020, the Senate passed the CARES Act to provide emergency relief related to the COVID-19 pandemic. The CARES Act contains federal income tax provisions which, among other things: (i) increases the amount of interest expense that businesses are allowed to deduct by increasing the adjusted taxable income limitation from 30% to 50% for tax years that begin in 2019 and 2020; (ii) permits businesses to carry back to each of the five tax years NOLs arising from tax years beginning after December 31, 2017 and before January 1, 2020; and (iii) temporarily removes the 80% limitation on NOLs until tax years beginning after 2020. The CARES Act provisions did not have a material impact on the tax positions of the Company.

The following represented the domestic and foreign components of income from continuing operations before income taxes:


	Year Ended December 31,
(In millions)	2020		2019		2018
U.S.	$	749	$	771	$	468
Foreign	12		15		(1)
Total	$	761	$	786	$	467

Reconciliations of the U.S. federal statutory tax rate to NRG's effective tax rate were as follows:


	Year Ended December 31,
(In millions, except effective income tax rate)	2020			2019			2018
Income from continuing operations before income taxes	$	761		$	786		$	467
Tax at federal statutory tax rate	160			165			98
State taxes	18			13			18

Permanent differences	8			(9)			7
Changes in valuation allowance	24			(3,492)			(106)


Deferred impact of state tax rate changes	2			12			—
Production tax credits ("PTC")	—			—			(7)
Recognition of uncertain tax benefits	3			(10)			1
Return to provision adjustments	36			—			—

Alternative minimum tax ("AMT") refundable credit	—			—			(4)


Other	—			(13)			—
Income tax expense/(benefit)	$	251		$	(3,334)		$	7
Effective income tax rate	33.0		%	(424.2)		%	1.5		%

For the year ended December 31, 2020, NRG's effective income tax rate was higher than the federal statutory tax rate of 21% primarily due to state tax expense, the recognition of state valuation allowance on NOLs, and return to provision adjustments.

For the year ended December 31, 2019, NRG's effective income tax rate was lower than the federal statutory tax rate of 21% primarily due to the tax benefit from the release of the valuation allowance.

For the year ended December 31, 2018, NRG's effective income tax rate was lower than the federal statutory tax rate of 21% primarily due to a tax benefit for the change in valuation allowance, the generation of PTCs from various wind facilities and establishment of the previously sequestered AMT credit receivable, partially offset by current state tax expense.

The temporary differences, which gave rise to the Company's deferred tax assets and liabilities consisted of the following:


	As of December 31,
(In millions)	2020		2019
Deferred tax assets:
Deferred compensation, accrued vacation and other reserves	$	79	$	81
Difference between book and tax basis of property	357		548


Pension and other postretirement benefits	86		86
Equity compensation	10		11
Bad debt reserve	16		13
Derivatives, net	11		—
U.S. Federal net operating loss carryforwards	2,117		2,116
Foreign net operating loss carryforwards	102		105
State net operating loss carryforwards	351		360

Federal and state tax credit carryforwards	384		384
Federal benefit on state uncertain tax positions	4		4

Interest disallowance carryforward per §163(j) of the Tax Act	4		82
Inventory obsolescence	6		7
Other	10		3

Total deferred tax assets	3,537		3,800
Deferred tax liabilities:
Emissions allowances	21		19

Derivatives, net	—		27
Goodwill	29		8
Intangibles amortization (excluding goodwill)	2		15
Equity method investments	156		201

Convertible Debt	16		19


Total deferred tax liabilities	224		289
Total deferred tax assets less deferred tax liabilities	3,313		3,511
Valuation allowance	(266)		(242)

Total net deferred tax assets, net of valuation allowance	$	3,047	$	3,269

The following table summarizes NRG's net deferred tax position as presented in the consolidated balance sheets:


	As of December 31,
(In millions)	2020		2019
Deferred tax asset	$	3,066	$	3,286

Deferred tax liability	(19)		(17)
Net deferred tax asset	$	3,047	$	3,269

The primary drivers for the decrease in the net deferred tax asset from $3.3 billion as of December 31, 2019 to $3.0 billion as of December 31, 2020 are a decrease in the tax basis of property and the utilization of previously disallowed interest, partially offset by a change in equity method investments.

Deferred tax assets and valuation allowance

Net deferred tax balance — As of December 31, 2020 and 2019, NRG recorded a net deferred tax asset, excluding valuation allowance, of $3.3 billion and $3.5 billion, respectively. The Company believes certain state net operating losses may not be realizable under the more-likely-than-not measurement and as such, a valuation allowance was recorded as of December 31, 2020 as discussed below.

NOL carryforwards — As of December 31, 2020, the Company had tax-effected cumulative U.S. NOLs consisting of carryforwards for federal and state income tax purposes of $2.1 billion and $351 million, respectively. The Company estimates it will need to generate future taxable income to fully realize the net federal deferred tax asset before the expiration of certain carryforwards commences in 2031. In addition, NRG has tax-effected cumulative foreign NOL carryforwards of $102 million with no expiration date.

Valuation allowance — As of December 31, 2020, the Company's tax-effected valuation allowance was $266 million, consisting of state NOL carryforwards and foreign NOL carryforwards. The valuation allowance was recorded based on the assessment of cumulative and forecasted pre-tax book earnings and the future reversal of existing taxable temporary differences.

Taxes Receivable and Payable

As of December 31, 2020, NRG recorded a current tax payable of $12 million that represents a tax liability due for state income taxes that is primarily comprised of Texas margin tax. NRG has a tax receivable of $1 million, comprised of refunds due from state income tax estimated payments and return filings.

Uncertain tax benefits

NRG has identified uncertain tax benefits with after-tax value of $15 million as of December 31, 2020 and 2019, for which NRG has recorded a non-current tax liability of $18 million and $17 million, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company recognized expense of $1 million related to interest in each of the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020 and 2019, NRG had cumulative interest and penalties related to these uncertain tax benefits of $3 million and $2 million, respectively.

Tax jurisdictions — NRG 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 is no longer subject to U.S. federal income tax examinations for years prior to 2017. With few exceptions, state and local income tax examinations are no longer open for years before 2012.

The following table summarizes uncertain tax benefits activity:


	As of December 31,
(In millions)	2020		2019
Balance as of January 1	$	15	$	26
Increase due to current year positions	3		2

Settlements, payments and statute closure	(3)		(13)
Uncertain tax benefits as of December 31	$	15	$	15

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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