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Acquisitions and Dispositions | 9 Months Ended
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Sep. 30, 2021
Business Combination and Asset Acquisition [Abstract] |
Acquisitions and Dispositions | Acquisitions and Dispositions Acquisitions Direct Energy Acquisition On January 5, 2021 (the "Acquisition Closing Date"), the Company acquired all of the issued and outstanding common shares of Direct Energy, 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 strengthens its integrated model. It also broadens 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. The Company paid an aggregate purchase price of $3.625 billion in cash and an initial 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 purchase price adjustment resulted in a reduction of $3 million, which is in negotiation with Centrica. The Company expects to receive this payment from Centrica in 2021. The Company also increased its collective liquidity and collateral facilities by $3.4 billion as of the Acquisition Closing Date to meet the additional liquidity requirements related to the acquisition, as detailed in the following table:
| (In millions)
Available on Acquisition Closing Date |
Revolving Credit Facility commitment increase | $ | 802 |
Revolving Credit Facility new tranche | 273 |
Facility agreement in connection with the sale of pre-capitalized trust securities | 874 |
Available as of December 31, 2020 |
Credit default swap facility | 150 |
Revolving accounts receivable financing facility | 750 |
Repurchase facility | 75 |
Bilateral letter of credit facilities | 475 |
Total Increases to Liquidity and Collateral Facilities | $ | 3,399 |
For further discussion see Note 9, Long-term Debt and Finance Leases, and also Note 13, Receivables Securitization and Repurchase Facility, to the Company's 2020 Form 10-K. Acquisition costs were $1 million and $24 million for the three and nine months ended September 30, 2021, respectively, and are included in acquisition-related transaction and integration costs in the Company's consolidated statement of operations. The acquisition has been recorded as a business combination under ASC 805 with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair values on the acquisition date. The initial accounting for the business combination is not complete because the evaluation necessary to assess the fair value of certain net assets acquired and the amount of goodwill to be recognized is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the Acquisition Closing Date. The purchase price is provisionally allocated as follows:
| (In millions)
Current Assets |
Cash and cash equivalents | $ | 152 |
Funds deposited by counterparties | 21 |
Restricted cash | 9 |
Accounts receivable, net | 1,802 |
Inventory | 106 |
Derivative instruments | 1,014 |
Cash collateral paid in support of energy risk management activities | 233 |
Prepayments and other current assets | 183 |
Total current assets | 3,520 |
Property, plant and equipment, net | 151 |
Other Assets |
Goodwill(a) | 1,257 |
Intangible assets, net: |
Customer relationships(b) | 1,277 |
Customer and supply contracts(b) | 610 |
Trade names(b) | 310 |
Renewable energy credits | 124 |
Total intangible assets, net | 2,321 |
Derivative instruments | 531 |
Other non-current assets | 31 |
Total other assets | 4,140 |
Total Assets | $ | 7,811 |
Current Liabilities |
Accounts payable | $ | 1,120 |
Derivative instruments | 1,266 |
Cash collateral received in support of energy risk management activities | 21 |
Accrued expenses and other current liabilities | 690 |
Total current liabilities | 3,097 |
Other Liabilities |
Derivative instruments | 562 |
Deferred income taxes | 338 |
Other non-current liabilities | 115 |
Total other liabilities | 1,015 |
Total Liabilities | $ | 4,112 |
Direct Energy Purchase Price | $ | 3,699 |
(a) Goodwill arising from the acquisition is attributed to the value of the platform acquired and the synergies expected from combining the operations of Direct Energy with NRG's existing businesses. Goodwill was provisionally allocated to the Texas, East, and West/Services/Other segments of $424 million, $663 million and $170 million, respectively. Goodwill expected to be deductible for tax purposes is $337 million (b) The weighted average amortization period for total amortizable intangible assets is 12 years Measurement Period Adjustments The following measurement period adjustments were recognized during the quarter ended September 30, 2021:
(In millions) | Increase/(Decrease)
Assets |
Goodwill | $ | 11 |
Intangible assets, net | (32) |
Total decrease in assets | $ | (21) |
Liabilities |
Accounts payable | $ | (270) |
Accrued expenses and other current liabilities | 248 |
Deferred income taxes | (1) |
Other non-current liabilities | 2 |
Total decrease in liabilities | $ | (21) |
The measurement period adjustments to the provisional amounts are attributable primarily to refinement of the underlying assumptions used to estimate the fair value of assets acquired and liabilities assumed as more information is obtained about facts and circumstances that existed as of the Acquisition Closing Date. Fair Value Measurement of Intangible Assets The provisional fair values of intangible assets as of the Acquisition Closing Date were measured primarily based on significant inputs that are observable and unobservable in the market and thus represent Level 2 and Level 3 measurements, respectively. Significant inputs were as follows: Customer relationships — Customer relationships, reflective of Direct Energy’s customer base, were valued using an excess earning method of the income approach. Under this approach, the Company estimated the present value of expected future cash flows resulting from existing customer relationships, considering attrition and charges for contributory assets (such as net working capital, fixed assets, workforce and trade names) utilized in the business, discounted at an independent power producer peer group’s weighted average cost of capital. The customer relationships are amortized to depreciation and amortization, ratably based on discounted future cash flows. The weighted average amortization period is 12 years. Customer and supply contracts — The fair value of in-market and out-of-market customer and supply contracts were estimated based on contractual terms compared to market prices as of the Acquisition Closing Date. The majority of the contracts were valued using prices provided by external sources, primarily price quotations available through broker or over-the-counter and online exchanges. For contracts for which external sources or observable market quotes were not available, these values were based on valuation techniques including, but not limited to, internal models based on fundamental analysis of the market and extrapolation of the observable market data with similar characteristics. In addition, the Company applied a credit reserve to reflect credit risk, which is calculated based on published default probabilities. The customer and supply contracts are amortized to revenue and cost of operations, respectively, based upon the fair market value, as of the acquisition date, for each delivery month. The weighted average amortization period is 14 years. Trade names — Trade names were valued using a "relief from royalty" method of the income approach. Under this approach, the fair value is estimated to be the present value of royalties saved because NRG owns the intangible asset and therefore does not have to pay a royalty for its use. The trade names are amortized to depreciation and amortization, on a straight line basis, over a weighted average amortization period of 15 years. Renewable energy credits — Renewable energy credits were valued based on the market prices as of the Acquisition Closing Date. Renewable energy credits are retired, as required, for the applicable compliance period. They are expensed to cost of operations based on customer usage. Fair Value Measurement of Derivative Assets and Liabilities The fair values of derivatives assets and liabilities as of the Acquisition Closing Date were as follows:
| Fair Value
(In millions) | Total |  | Level 1 |  | Level 2 |  | Level 3
Derivatives assets | $ | 1,545 |  |  | $ | 155 |  |  | $ | 1,272 |  |  | $ | 118 |
Derivatives liabilities | $ | 1,828 |  |  | $ | 207 |  |  | $ | 1,489 |  |  | $ | 132 |
Refer to Note 5, Fair Value of Financial Instruments to this Form 10-Q and Note 5, Fair Value of Financial Instruments to the Company's 2020 Form 10-K for discussion on derivative fair value measurements. Supplemental Information For the three and nine months ended September 30, 2021 Direct Energy contributed revenue and income before income taxes as follows:
(In millions) | Three months ended September 30, 2021 |  | Nine months ended September 30, 2021
Revenue | $ | 3,599 |  |  | $ | 10,718 |
Income before income taxes | 2,010 |  |  | 3,457 |
Supplemental Pro Forma Financial Information for the nine months ended September 30, 2021 and 2020(a) The following table provides pro forma combined financial information of NRG and Direct Energy, after giving effect to the Direct Energy acquisition and related financing transactions as if they had occurred on January 1, 2020. The pro forma financial information has been prepared for illustrative and informational purposes only, and is not intended to project future operating results or indicative of what our financial performance would have been had the transactions occurred on the date assumed. No effect has been given to operating synergies.
(In millions) | Nine months ended September 30, 2021 |  | Nine months ended September 30, 2020
Total operating revenues | $ | 19,932 |  |  | $ | 16,039 |
Net Income | 2,585 |  |  | 832 |
(a) Pro forma comparative financial information for the three months ended September 30, 2021 and 2020 has not been included as computation of such information is impracticable as Direct Energy's pre-acquisition financial statements for the three months ended September 30, 2020 were not prepared in accordance with GAAP Amounts above reflect certain pro forma adjustments that were directly attributable to the Direct Energy acquisition. These adjustments include the following: (i) Income statement effects of fair value adjustments based on the preliminary purchase price allocation including amortization of intangible assets, depreciation of property, plant and equipment and lease expense. (ii) Interest expense assumes the financing transactions directly attributable to the Direct Energy acquisition occurred on January 1, 2020. (iii) Removal of Direct Energy historical interest expense associated with related party notes receivable/payable between Direct Energy and Centrica and its subsidiaries, as those notes are assumed to be repaid as of January 1, 2020. (iv) Elimination of transactions between NRG and Direct Energy. (v) Adjustments to reflect all acquisition costs occurring during the nine months ended September 30, 2020. (vi) Tax effects of pro forma adjustments on both periods and shifting the recognition of one time tax benefits resulting from the acquisition from the nine months ended September 30, 2021 to the period ended September 30, 2020. Midwest Generation Lease Purchase On September 29, 2020, Midwest Generation acquired all of the ownership interests in the Powerton facility and Units 7 and 8 of the Joliet facility, which were being leased through 2034 and 2030, respectively, for approximately $260 million. The purchase was funded with cash-on-hand. Upon closing the operating lease liability of $148 million was eliminated. Dispositions On February 28, 2021, the Company entered into a definitive purchase agreement with Generation Bridge, an affiliate of ArcLight Capital Partners, to sell approximately 4,850 MW of fossil generating assets from its East and West regions of operations for total proceeds of $760 million, subject to standard purchase price adjustments and certain other indemnifications. The purchase price adjustments will include a working capital 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 cash flows generated during the year. As part of the transaction, NRG is entering into a tolling agreement for its 866 MW Arthur Kill plant in New York City through April 2025. The transaction is expected to close by the end of 2021 and is subject to various closing conditions, approvals and consents, including approval from the NYPSC. The transaction has received FERC approval and approval under the Hart-Scott-Rodino Act. As of September 30, 2021, the following is classified as held for sale in the Consolidated Balance Sheet:
| (In millions)(a)
Current assets(b) | $ | 51 |
Property, plant and equipment, net | 391 |
Other non-current assets | 3 |
Total non-current assets(c) | 394 |
Total assets held for sale | $ | 445 |
Current liabilities(d) | 14 |
Non-current liabilities(e) | 61 |
Total liabilities held for sale | $ | 75 |
(a) Property, plant and equipment, net for the East and West/Services/Other segments was $242 million and $149 million, respectively. The remaining assets and liabilities were primarily in the East segment (b) Included in prepayments and other current assets in the Consolidated Balance Sheet (c) Included in other non-current assets in the Consolidated Balance Sheet (d) Included in accrued expenses and other current liabilities in the Consolidated Balance Sheet (e) Included in other non-current liabilities in the Consolidated Balance Sheet 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. The Company completed other asset sales for cash proceeds of $3 million and $15 million during the nine months ended September 30, 2021 and 2020, respectively.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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