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Income Taxes
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The income tax provision from continuing operations consisted of the following amounts:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In millions, except percentages)
Current
 
 
 
 
 
U.S. Federal
$

 
$
(538
)
 
$
211

State
20

 
10

 
35

Foreign
13

 
16

 
23

 
33

 
(512
)
 
269

Deferred
 
 
 
 
 
U.S. Federal
(326
)
 
(317
)
 
23

State
(24
)
 
(5
)
 
(9
)
Foreign
(10
)
 
(9
)
 
(6
)
 
(360
)
 
(331
)
 
8

Total income tax (benefit)/expense
$
(327
)
 
$
(843
)
 
$
277

Effective tax rate
(129.8
)%
 
130.5
%
 
36.8
%

The following represents the domestic and foreign components of income/(loss) before income tax (benefit)/expense:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In millions)
U.S. 
$
223

 
$
(680
)
 
$
691

Foreign
29

 
34

 
62

Total
$
252

 
$
(646
)
 
$
753


A reconciliation of the U.S. federal statutory rate of 35% to NRG's effective rate is as follows:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In millions, except percentages)
Income/(Loss) Before Income Taxes
$
252

 
$
(646
)
 
$
753

Tax at 35%
88

 
(226
)
 
264

State taxes, net of federal benefit
13

 
15

 
18

Foreign operations
(24
)
 
(3
)
 
(3
)
Federal and state tax credits
(158
)
 
(1
)
 
(7
)
Valuation allowance
5

 
(63
)
 
(34
)
Expiration/utilization of capital losses

 
45

 

Reversal of valuation allowance on expired/utilized capital losses

 
(45
)
 

Impact of non-taxable equity earnings
(7
)
 

 

Bargain purchase gain related to GenOn acquisition
(196
)
 

 

Change in state effective tax rate
(12
)
 

 

Foreign earnings

 
4

 
17

Non-deductible interest

 

 
4

Interest accrued on uncertain tax positions
2

 
2

 
25

Production tax credit
(14
)
 
(14
)
 
(11
)
Reversal of uncertain tax position reserves
(13
)
 
(561
)
 

Other
(11
)
 
4

 
4

Income tax (benefit)/expense
$
(327
)
 
$
(843
)
 
$
277

Effective income tax rate
(129.8
)%
 
130.5
%
 
36.8
%

The effective tax rate for the year ended December 31, 2012, differs from the statutory rate of 35% primarily due to a benefit of $196 million resulting from the gain on bargain purchase from the GenOn acquisition and the generation of ITCs from the Company's Agua Caliente solar project in Arizona of $158 million and production, tax credits, or PTCs, generated from Texas wind facilities of $14 million.
The effective tax rate for the year ended December 31, 2011, differs from the statutory rate of 35% primarily due to a benefit of $633 million resulting from the resolution of the federal tax audit. The benefit is predominantly due to the recognition of previously uncertain tax benefits that were settled upon audit in 2011 and that were mainly composed of net operating losses of $536 million which had been classified as capital loss carryforwards for financial statement purposes.
The effective income tax rate for the year ended December 31, 2010, differs from the statutory rate of 35% primarily due to the impact of state and local income taxes and interest on uncertain tax positions, which were partially offset by the reduction in the valuation allowance resulting from realized capital gains as well as federal and state tax credits generated during the current year.
 The temporary differences, which gave rise to the Company's deferred tax assets and liabilities consisted of the following:
 
As of December 31,
 
2012
 
2011
 
(In millions)
Deferred tax liabilities:
 
 
 
Discount/premium on notes
$

 
$
7

Emissions allowances
15

 
33

Difference between book and tax basis of property
123

 
1,604

Derivatives, net
323

 
244

Goodwill
165

 
139

Cumulative translation adjustments
19

 
27

Intangibles amortization (excluding goodwill)
85

 
229

Investment in projects
52

 

Other

 
8

Total deferred tax liabilities
782

 
2,291

Deferred tax assets:
 
 
 
Deferred compensation, pension, accrued vacation and other reserves
232

 
80

Discount / premium on notes
156

 

Investment in projects

 
72

Differences between book and tax basis of contracts
343

 
225

Pension and other postretirement benefits
274

 
137

Equity compensation
57

 
36

Bad debt reserve
14

 
15

U.S. capital loss carryforwards
1

 
1

U.S. Federal net operating loss carryforwards
605

 
84

Foreign net operating loss carryforwards
89

 
70

State net operating loss carryforwards
149

 
53

Foreign capital loss carryforwards
1

 
1

Deferred financing costs
33

 

Federal and state tax credits
258

 
64

Federal benefit on state uncertain tax positions
18

 
20

Other
5

 

Total deferred tax assets
2,235

 
858

Valuation allowance
(191
)
 
(83
)
Net deferred tax assets
2,044

 
775

Net deferred tax asset (liability)
$
1,262

 
$
(1,516
)

The following table summarizes NRG's net deferred tax position:
 
As of December 31,
 
2012
 
2011
 
(In millions)
Current deferred tax asset (liability)
$
56

 
$
(127
)
Non-current net deferred tax asset (liability)
1,206

 
(1,389
)
Net deferred tax asset (liability)
$
1,262

 
$
(1,516
)

Tax Receivable and Payable
        As of December 31, 2012, NRG recorded a current tax payable of $31 million that represents a tax liability due for Federal taxes of $6 million, domestic state taxes of $17 million, as well as foreign taxes payable of $8 million. NRG has a domestic tax receivable of $174 million, of which $96 million relates to an IRS refund for prior years, $58 million relates to federal cash grants applied for eligible solar energy projects under development in California, New Jersey and Maryland, $20 million is related to property tax refunds due to the New York State Empire Zone program. In addition, a $56 million non-current asset for Empire Zone credits generated in 2010 through 2012, that are being deferred pursuant to New York State law, has been recorded.
Deferred tax assets and valuation allowance
        Net deferred tax balance — As of December 31, 2012, and 2011, NRG recorded a net deferred tax asset (liability) of $1.4 billion and ($1.4 billion), respectively. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income which includes the future reversal of existing taxable temporary differences to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion to utilize projections of future profit before tax in our estimate of future taxable income, we considered the profit before tax generated in recent years. Based on our assessment of positive and negative evidence, including available tax planning strategies, NRG believes that it is more likely than not that a benefit will not be realized on $191 million and $83 million of tax assets as of December 31, 2012 and 2011, respectively, thus a valuation allowance has been recorded. The Company estimates it will need to generate future taxable income of approximately $3.5 billion, to fully realize the net federal and state unitary deferred tax asset before expiration.
In connection with the accounting for the GenOn acquisition, the Company recorded the realizable deferred tax assets and liabilities acquired, primarily consisting of net operating losses and other temporary differences. In addition, the excess of GenOn's historical tax basis of assets and liabilities over the amount assigned to the fair value of the assets acquired and liabilities assumed generated deferred tax assets and liabilities that were recorded on the acquisition date.         
NOL carryforwards — At December 31, 2012, the Company had domestic NOLs consisting of carryforwards for federal income tax purposes of $605 million and cumulative state NOLs of $149 million. In addition, NRG has cumulative foreign NOL carryforwards of $89 million of which $17 million will expire starting 2013 through 2020 and of which $72 million do not have an expiration date.
        Valuation allowance — As of December 31, 2012, the Company's tax effected valuation allowance was $191 million, consisting of $102 million for state deferred tax assets, primarily operating loss carryovers, and $89 million for foreign deferred tax assets, primarily operating loss carryovers for which there is insufficient earnings to support future realization.
Uncertain tax benefits
NRG has identified uncertain tax benefits whose after-tax value was $193 million that if recognized, would impact the Company's income tax expense.
As of December 31, 2012, and 2011, NRG has recorded a non-current tax liability of $72 million and $58 million, respectively. As of December 31, 2012 and 2011, the balance primarily related to positions taken on various state returns, including accrued interest.
The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. During the year ended December 31, 2012, the Company accrued interest of $3 million. For the year ended December 31, 2011, the Company recognized a benefit of $32 million in interest and penalties and accrued interest of $2 million. As of December 31, 2012, and 2011, NRG had accrued interest and penalties related to these uncertain tax benefits of $15 million and $12 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. Prior to the GenOn acquisition, the Company was not subject to U.S. federal income tax examinations for years prior to 2007. As a result of the acquisition, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2002. With few exceptions, state and local income tax examinations are no longer open for years before 2003. The Company's primary foreign operations are also no longer subject to examination by local jurisdictions for years prior to 2004.
During 2011, the Company settled the Internal Revenue Service's audit examination for the years 2004 through 2006 and recognized a benefit of $633 million. The benefit is predominantly due to the recognition of previously uncertain tax benefits mainly composed of net operating losses of $536 million which had been classified as capital loss carryforwards for financial statement purposes. The Company continues to be under examination for various state jurisdictions for multiple years.
The following table reconciles the total amounts of uncertain tax benefits:
 
As of December 31,
 
2012
 
2011
 
(In millions)
Balance as of January 1
$
178

 
$
663

Increase due to current year positions
21

 
12

Decrease due to current year positions
(3
)
 
(6
)
Increase due to prior year positions
13

 
6

Decrease due to prior year positions
(21
)
 
(2
)
Increase due to acquisitions
5

 

Decrease due to settlements and payments

 
(495
)
Uncertain tax benefits as of December 31
$
193

 
$
178


Included in the balance at December 31, 2012, are $36 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductions. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash or use of net operating loss carryforwards to an earlier period.