|NRG ENERGY, INC. filed this Form 10-K on 02/29/2016|
The intangible value to NRG Texas for synergies it provides to NRG’s retail businesses was determined by capitalizing estimated annual collateral cost savings of approximately $45 million per year and annual supply cost savings of approximately $18 million, tax affected at the appropriate tax rate and assuming this value decreases over the useful lives of the underlying plants. The estimates of annual collateral cost savings resulting from utilizing the Company's wholesale generation assets to provide supply to retail represent the cost of collateral that would otherwise need to be held in reserve to support potential postings to third parties in the case of a significant price move. This is calculated from a combination of the volume the Company would otherwise need to buy from these third parties, based on historical volumes, and historical price movements calibrated to an appropriate probability. The estimates of annual supply cost savings are based on historical volumes of retail purchases from NRG Texas, an average bid-ask spread based on broker quotes and the assumption that NRG Texas will realize half of the benefits associated with this savings.
Under step one, if the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. Under the income approach described above, the Company estimated the fair value of NRG Texas' invested capital was 76% below its carrying value as of December 31, 2015 and concluded that step two was required. Step two requires an allocation of fair value to the individual asset and liabilities using a hypothetical purchase price allocation in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded. Under the step two analysis it was determined the carrying amount of the goodwill exceeded its fair value by approximately $1.4 billion and an impairment loss of this amount was recorded.
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. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the NRG Texas reporting unit may include such items as follows:
Falling or depressed long-term natural gas prices which may result in lower power prices in the markets in which the Texas reporting unit operates;
A significant change to power plants' new-build/retirement economics and reserve margins resulting primarily from unexpected environmental or regulatory changes;
Decrease in natural gas prices or significant changes to power plants’ economics and expected generation could result in decreased realized synergies associated with estimated collateral and cost supply savings related to the combination of the NRG Texas and Texas retail businesses; and/or
Macroeconomic factors that significantly differ from the Company's assumptions in timing or degree.
The Company noted that during 2015, the Company observed a significant decrease in its stock price, which was driven in part by depressed commodity prices and resulted in a decline in industry-wide stock prices during 2015. The Company's view on long-term commodity prices is reflected in the inputs utilized to test its goodwill and long-lived assets for impairment and reflects the current depressed commodity environment. If long-term natural gas prices remain depressed for an extended period of time, the Company's remaining goodwill associated with NRG Texas may be further impaired.