GenOn Energy, Inc.

Income Taxes (GenOn, GenOn Americas Generation and GenOn Mid-Atlantic)

Income Taxes

GenOn

GenOn’s income tax expense/(benefit) consisted of the following:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In millions, except percentages)
Current
U.S. Federal	$	—		$	—		$	—
State	(1		)	11			(3		)
Total — current	(1		)	11			(3		)
Deferred
U.S. Federal	1			—			—
State	7			—			—
Total — deferred	8			—			—
Total income tax expense/(benefit)	$	7		$	11		$	(3	)
Effective tax rate	(2.4		)%	12.0		%	2.5		%

A reconciliation of GenOn's federal statutory income tax provision to the effective income tax expense/(benefit) adjusted for permanent and other items during 2017, 2016, and 2015, is as follows:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In millions)
(Loss)/income before income taxes	$	(288	)	$	92		$	(118	)
Provision for income taxes based on U.S. federal statutory income tax rate	(101		)	32			(42		)
State and local income tax provision, net of federal income taxes	6			11			(3		)
Change in deferred tax asset valuation allowance - current period activities	124			(92		)	16
Tax Act - corporate income tax rate change	766			—			—
Valuation allowance due to corporate income tax rate change	(766		)	—			—
State rate change	(17		)	60			26
Other, net	(5		)	—			—
Income tax expense/(benefit)	$	7		$	11		$	(3	)

For the year ended December 31, 2017, GenOn's overall effective tax rate was different than the statutory rate of 35% primarily due to the change in valuation allowance and state income taxes. GenOn incurred tax expense of $7 million primarily due to state income taxes. The tax expense recorded for revaluation of the net deferred tax asset was required to reflect the reduction in the corporate income tax rate from 35% to 21% in accordance with the Tax Cuts and Jobs Act of 2017, or the Tax Act. The impact of the reduction to the deferred tax asset is fully offset by a valuation allowance for a corresponding amount, resulting in no net impact to the tax expense for 2017. While GenOn has not yet completed its assessment of the effects of the Tax Act, a reasonable estimate for the impact of the key item specified above was able to be determined.

During the year ended December 31, 2016, GenOn incurred tax expense of $11 million due to state income taxes as a result of the gain on the sale of certain generating stations during the year.

During the year ended December 31, 2015, GenOn had a tax benefit of $3 million related to the recognition of previously uncertain tax benefits.

The tax effects of temporary differences between the carrying amounts of assets and liabilities in GenOn's financial statements and their respective tax bases which give rise to deferred tax assets and liabilities are as follows:



	As of December 31,
	2017			2016
	(In millions)
Deferred Tax Assets:
Pension and other postretirement benefits	$	39		$	61
Deferred compensation, accrued vacation and other reserves	31			61
U.S. Federal net operating loss carryforwards	348			442
State net operating loss carryforwards	165			116
Difference between book and tax basis of property	701			1,080
Inventory	8			32
Intangible amortization	68			—
Investment in projects	1			1
Derivatives, net	4			—
Out-of-market contracts fair value adjustment	153			242
Debt premium, net	3			49
Other	—			9
Subtotal	1,521			2,093
Valuation allowance	(1,521		)	(2,087		)
Net deferred tax assets	—			6
Deferred Tax Liabilities:
Derivative contracts	—			6
Net deferred tax liabilities	—			6
Net deferred taxes	$	—		$	—

Deferred tax assets and valuation allowance

Net deferred tax balance — As of December 31, 2017 and 2016, GenOn recorded a net deferred tax asset of $1.5 billion and $2.1 billion, respectively. Based on its assessment of positive and negative evidence, including available tax planning strategies, GenOn believes that it is more likely than not that a benefit will not be realized on $1.5 billion and $2.1 billion of tax assets as of December 31, 2017 and 2016, respectively, thus a valuation allowance has been recorded.

NOL carryforwards — At December 31, 2017, GenOn had tax effected cumulative domestic NOLs consisting of carryforwards for federal income tax purposes of $348 million and state of $165 million. GenOn's pre-merger federal NOLs are limited to tax effected $13 million annually. GenOn estimates it will need to generate future taxable income to fully realize the net federal deferred tax asset before expiration commencing in 2032.

Valuation allowance — As of December 31, 2017, GenOn's tax effected valuation allowance was $1.5 billion, relating primarily to federal and state loss carryforwards, out-of-market contracts and differences between book and tax basis of property, plant and equipment.

Taxes Receivable and Payable

As of December 31, 2017, GenOn recorded a tax receivable of $3 million, comprised of refunds due from state income tax estimated payments and return filings for 2017 and 2016, respectively.

Uncertain tax benefits

GenOn does not have any uncertain tax benefits for the years ended December 31, 2017 and December 31, 2016.

GenOn recognizes interest and penalties related to uncertain tax benefits in income tax expense. During the year ended December 31, 2017 and 2016, GenOn did not accrue interest. As of December 31, 2017 GenOn had no cumulative interest and penalties.

Tax jurisdictions — GenOn is no longer subject to U.S. federal income tax examinations for years prior to 2015. With few exceptions, state and local income tax examinations are no longer open for years before 2010.

GenOn Americas Generation

GenOn America's Generation is a wholly owned limited liability company, a disregarded entity, for federal and state income tax purposes. Therefore federal and state taxes are assessed at the parent level. Accordingly, no provision has been made for federal or state income taxes in the accompanying financial statements.

A reconciliation of GenOn Americas Generation's expected federal statutory income tax provision to the effective income tax provision adjusted for permanent and other items during 2017, 2016, and 2015, is as follows:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In millions)
(Loss)/income before income taxes	$	(187	)	$	121		$	116
Provision for income taxes based on U.S. federal statutory income tax rate	(65		)	42			41
State and local income tax provision, net of federal income taxes	(11		)	(5		)	10
LLC income not subject to taxation	78			(77		)	(51		)
State rate change	(14		)	40			—
Other, net (including provision to return)	12			—			—
Income tax provision	$	—		$	—		$	—

Uncertain tax benefits

GenOn Americas Generation does not have any uncertain tax benefits for the years ended December 31, 2017 and December 31, 2016.

Pro Forma Income Tax Disclosures

GenOn Americas Generation

GenOn Americas Generation is not subject to income taxes except for those subsidiaries of GenOn Americas Generation that are separate taxpayers. NRG Americas, GenOn and NRG are otherwise directly responsible for income taxes related to GenOn Americas Generation's operations.

GenOn Americas Generation was not allocated income taxes attributable to its operations on a pro forma income tax provision basis for the years ended December 31, 2017, 2016, and 2015.

The following table presents the pro forma reconciliation of GenOn Americas Generation's federal statutory income tax provision for continuing operations adjusted for reorganization items to the pro forma effective tax provision:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In millions)
(Loss)/income before income taxes	$	(187	)	$	121		$	116
Provision for income taxes based on U.S. federal statutory income tax rate	(65		)	42			41
State and local income tax provision, net of federal income taxes	(11		)	(5		)	10
Change in deferred tax asset valuation allowance - current period activities	78			(77		)	(51		)
Tax Act - corporate income tax rate change	314			—			—
Valuation allowance due to corporate income tax rate change	(314		)	—			—
State rate change	(14		)	40			—
Other, net (including provision to return)	12			—			—
Income tax provision	$	—		$	—		$	—

The tax expense recorded for revaluation of the net deferred tax asset was required to reflect the reduction in the corporate income tax rate from 35% to 21% in accordance with the Tax Cuts and Jobs Act of 2017, or the Tax Act. The impact of the reduction to the deferred tax asset is fully offset by a valuation allowance for a corresponding amount, resulting in no net impact to the tax expense for 2017. While GenOn Americas Generation has not yet completed its assessment of the effects of the Tax Act, a reasonable estimate for the impact of the key item specified above was able to be determined.

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheets and their respective tax bases which give rise to the pro forma deferred tax assets and liabilities would be as follows:



	As of December 31,
	2017			2016
	(In millions)
Deferred Tax Assets:
Pension and other postretirement benefits	$	1		$	1
Other reserves	12			27
U.S. Federal net operating loss carryforwards	25			—
State net operating loss carryforwards	6			—
Difference between book and tax basis of property	431			566
Inventory	4			—
Intangible amortization	2			—
Out-of-market contracts fair value adjustment	121			188
Derivatives, net	1			4
Debt premium, net	1			20
Other, net	—			16
Subtotal	604			822
Valuation allowance	(604		)	(822		)
Net deferred taxes	$	—		$	—

Deferred tax assets and valuation allowance

Net deferred tax balance — As of December 31, 2017 and 2016, GenOn Americas Generation recorded a net deferred tax asset of $604 million and $822 million, respectively. Based on its assessment of positive and negative evidence, including available tax planning strategies, GenOn Americas believes that it is more likely than not that a benefit will not be realized on $604 million and $822 million of tax assets as of December 31, 2017 and 2016, respectively, thus a valuation allowance has been recorded.

NOL carryforwards — At December 31, 2017, GenOn Americas Generation had tax effected cumulative domestic NOLs consisting of carryforwards for federal income tax purposes of $25 million and state of $6 million.

Valuation allowance — As of December 31, 2017, GenOn Americas Generation's tax effected valuation allowance was $604 million, relating primarily to differences between book and tax basis of property, plant and equipment and out-of-market contracts.

Uncertain tax benefits

As of December 31, 2017, GenOn Americas Generation does not have any uncertain tax benefits for the years ended December 31, 2017 and December 31, 2016.

GenOn Mid-Atlantic

GenOn Mid-Atlantic is not subject to income taxes except for those subsidiaries of GenOn Mid-Atlantic that are separate taxpayers. NRG Americas, GenOn and NRG are otherwise directly responsible for income taxes related to GenOn Mid-Atlantic's operations.

GenOn Mid-Atlantic was not allocated income taxes attributable to its operations on a pro forma income tax provision basis for the year ended December 31, 2017, 2016, and 2015.

The following reflects a pro forma disclosure of the income tax provision that would be reported if GenOn Mid-Atlantic was to be allocated income taxes attributable to its operations. Pro forma income tax provision attributable to income before tax would consist of the following:



	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	(In millions)
Current provision:
Federal	$	—		$	51		$	36
State	—			9			6
Deferred provision/(benefit):
Federal	169			(42		)	—
State	(31		)	42			—
Valuation allowance	(138		)	648			—
Total provision for income taxes	$	—		$	708		$	42

The following table presents the pro forma reconciliation of GenOn Mid-Atlantic's federal statutory income tax provision for continuing operations adjusted for reorganization items to the pro forma effective tax provision:



	Year Ended December 31, 2017			Year Ended December 31, 2016		Year Ended December 31, 2015
	(In millions)
(Loss)/income before income taxes	$	(269	)	$	52	$	104
Provision for income taxes based on U.S. federal statutory income tax rate	(94		)	18		36
State and local income tax provision, net of federal income taxes	(15		)	2		6
Change in deferred tax asset valuation allowance - current period activities	114			—		—
Tax Act - corporate income tax rate change	266			—		—
Valuation allowance due to corporate income tax rate change	(266		)	—		—
State rate change	(11		)	31		—
Valuation allowance	—			648		—
Other, net	6			9		—
Income tax provision	$	—		$	708	$	42

The tax expense recorded for revaluation of the net deferred tax asset was required to reflect the reduction in the corporate income tax rate from 35% to 21% in accordance with the Tax Cuts and Jobs Act of 2017, or the Tax Act. The impact of the reduction to the deferred tax asset is fully offset by a valuation allowance for a corresponding amount, resulting in no net impact to the tax expense for 2017. While GenOn Mid-Atlantic has not yet completed its assessment of the effects of the Tax Act, a reasonable estimate for the impact of the key item specified above was able to be determined.



	As of December 31,
	2017			2016
	(In millions)
Deferred Tax Assets:
Pension and other postretirement benefits	$	1		$	1
Other reserves	10			24
U.S. Federal net operating loss carryforwards	27			—
State net operating loss carryforwards	8			—
Difference between book and tax basis of property	339			424
Inventory	3			8
Derivatives, net	1			2
Out-of-market contracts fair value adjustment	121			189
Other	—			—
Total deferred tax assets	510			648
Valuation allowance	(510		)	(648		)
Net deferred taxes	$	—		$	—

Deferred tax assets and valuation allowance

Net deferred tax balance — As of December 31, 2017 and 2016, GenOn Mid-Atlantic recorded a net deferred tax asset of $510 million and $648 million, respectively. Based on the assessment of cumulative and forecasted pretax book earnings and the future reversal of existing taxable temporary differences, GenOn Mid-Atlantic believes that it is more likely than not that a benefit will not be realized on $510 million and $648 million of tax assets as of December 31, 2017 and 2016, respectively, thus a valuation allowance has been recorded.

NOL carryforwards — At December 31, 2017, GenOn Mid-Atlantic had tax effected cumulative domestic NOLs consisting of carryforwards for federal income tax purposes of $27 million and state of $8 million.

Valuation allowance — As of December 31, 2017, GenOn Mid-Atlantic's tax effected valuation allowance was $510 million, primarily relating to federal and state loss carryforwards, out-of-market contracts and differences between book and tax basis of property, plant and equipment.

Uncertain tax benefits

GenOn Mid-Atlantic does not have any uncertain tax benefits for the years ended December 31, 2017 and 2016.