UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____ 

RRI Energy, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0655566 (I.R.S. Employer Identification No.)

1000 Main Street
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)

(832) 357-3000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 27, 2009, the latest practicable date for determination, RRI Energy, Inc. had 352,778,305 shares of common stock outstanding and no shares of treasury stock.

 

 

TABLE OF CONTENTS

Forward-Looking Information		ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			1
Consolidated Statements of Operations (unaudited) Three and Nine Months Ended September 30, 2009 and 2008			1
Consolidated Balance Sheets (unaudited) September 30, 2009 and December 31, 2008			2
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2009 and 2008			3
Notes to Unaudited Consolidated Interim Financial Statements			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
Business Overview			31
Consolidated Results of Operations			34
Liquidity and Capital Resources			45
Off-Balance Sheet Arrangements			47
New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates			48
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			49
Market Risks and Risk Management			49
Non-Trading Market Risks			49
Trading Market Risks			50
Fair Value Measurements			51
ITEM 4. CONTROLS AND PROCEDURES			52
Evaluation of Disclosure Controls and Procedures			52
Changes in Internal Control Over Financial Reporting			52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			52
ITEM 6. EXHIBITS			52
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING INFORMATION

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that contain projections, assumptions or estimates about our revenues, income, capital structure and other financial items, our plans and objectives for future operations or about our future economic performance, possible transactions, dispositions, financings or offerings, and our view of economic and market conditions. In many cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and other similar words. However, the absence of these words does not mean that the statements are not forward-looking.

Actual results may differ materially from those expressed or implied by the forward-looking statements as a result of many factors or events, including, but not limited to, the following:

•

Demand and market prices for electricity, purchased power and fuel and emission allowances;

•

Limitations on our ability to set rates at market prices;

•

Legislative, regulatory and/or market developments;

•

Our ability to obtain adequate fuel supply and/or transmission and distribution services;

•

Interruption or breakdown of our generating equipment and processes;

•

Failure of third parties to perform contractual obligations;

•

Changes in environmental regulations that constrain our operations or increase our compliance costs;

•

Failure by transmission system operators to communicate operating and system information properly and timely;

•

Failure to meet our debt service, restrictive covenants or collateral postings;

•

Ineffective hedging and other risk management activities;

•

Changes in the wholesale energy market or in our evaluation of our generation assets;

•

The outcome of pending or threatened lawsuits, regulatory proceedings, tax proceedings and investigations;

•

Weather-related events or other events beyond our control;

•

The timing and extent of changes in commodity prices or interest rates; and

•

Financial and economic market conditions and our access to capital.

Other factors that could cause our actual results to differ from our projected results are discussed or referred to in the “Risk Factors” section of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Each forward-looking statement speaks only as of the date of the particular statement and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Our filings and other important information are also available on our investor page at www.rrienergy.com.

PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RRI ENERGY, INC. AND SUBSIDIARIES

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(thousands of dollars, except per share amounts)
Revenues:
Revenues (including $25,095, $6,169, $51,255 and $12,906 unrealized losses) (including $0, $0, $0 and $253,001 from affiliates)		$	507,179			$	959,865			$	1,363,140			$	2,853,227
Expenses:
Cost of sales (including $31,826, $(34,247), $20,857 and $70,806 unrealized gains (losses)) (including $0, $1,234, $0 and $71,540 from affiliates)			267,632				513,801				872,373				1,591,516
Operation and maintenance			114,457				134,586				428,567				455,764
General and administrative			23,686				23,070				80,345				84,911
Western states litigation and similar settlements			—				3,467				—				37,467
Gains on sales of assets and emission and exchange allowances, net			(1,013	)			(16,561	)			(21,184	)			(39,484	)
Depreciation and amortization			67,724				78,353				203,228				244,059
Total operating expense			472,486				736,716				1,563,329				2,374,233
Operating Income (Loss)			34,693				223,149				(200,189	)			478,994
Other Income (Expense):
Income of equity investment, net			1,297				1,405				1,148				2,600
Debt extinguishments gains (losses)			(103	)			(904	)			741				(2,257	)
Other, net			(417	)			4,593				(206	)			4,619
Interest expense			(44,614	)			(49,293	)			(136,600	)			(151,803	)
Interest income			407				4,495				1,376				19,146
Total other expense			(43,430	)			(39,704	)			(133,541	)			(127,695	)
Income (Loss) from Continuing Operations Before Income Taxes			(8,737	)			183,445				(333,730	)			351,299
Income tax expense (benefit)			9,532				89,868				(105,988	)			162,808
Income (Loss) from Continuing Operations			(18,269	)			93,577				(227,742	)			188,491
Income (loss) from discontinued operations			2,841				(1,131,497	)			864,467				(490,511	)
Net Income (Loss)		$	(15,428	)		$	(1,037,920	)		$	636,725			$	(302,020	)
Basic Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(0.05	)		$	0.27			$	(0.65	)		$	0.54
Income (loss) from discontinued operations			0.01				(3.24	)			2.46				(1.41	)
Net income (loss)		$	(0.04	)		$	(2.97	)		$	1.81			$	(0.87	)
Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(0.05	)		$	0.26			$	(0.65	)		$	0.53
Income (loss) from discontinued operations			0.01				(3.19	)			2.46				(1.38	)
Net income (loss)		$	(0.04	)		$	(2.93	)		$	1.81			$	(0.85	)

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

		September 30, 2009				December 31, 2008
		(thousands of dollars, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,254,070			$	1,004,367
Restricted cash			3,473				2,721
Accounts and notes receivable, principally customer			145,266				249,871
Inventory			317,993				314,999
Derivative assets			150,302				161,340
Margin deposits			184,117				32,676
Investment in and receivables from Channelview, net			24,271				58,703
Prepayments and other current assets			94,688				124,449
Current assets of discontinued operations ($87,990 and $295,477 of margin deposits)			161,925				2,506,340
Total current assets			2,336,105				4,455,466
Property, plant and equipment, gross			6,544,219				6,417,268
Accumulated depreciation			(1,773,491	)			(1,597,479	)
Property, Plant and Equipment, net			4,770,728				4,819,789
Other Assets:
Other intangibles, net			370,014				380,554
Derivative assets			62,926				78,879
Prepaid lease			292,127				273,374
Other ($33,264 and $29,012 accounted for at fair value)			238,028				219,552
Long-term assets of discontinued operations			10,343				494,781
Total other assets			973,438				1,447,140
Total Assets		$	8,080,271			$	10,722,395
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings		$	568,420			$	12,517
Accounts payable, principally trade			134,583				156,604
Derivative liabilities			215,727				202,206
Margin deposits			4,538				93,000
Other			240,367				199,026
Current liabilities of discontinued operations ($8,750 and $0 of margin deposits)			71,659				2,375,895
Total current liabilities			1,235,294				3,039,248
Other Liabilities:
Derivative liabilities			87,637				140,493
Other			296,612				272,079
Long-term liabilities of discontinued operations			19,483				873,190
Total other liabilities			403,732				1,285,762
Long-term Debt			1,984,792				2,610,737
Commitments and Contingencies
Temporary Equity Stock-based Compensation			5,765				9,004
Stockholders’ Equity:
Preferred stock; par value $0.001 per share (125,000,000 shares authorized; none outstanding)			—				—
Common stock; par value $0.001 per share (2,000,000,000 shares authorized; 352,757,922 and 349,812,537 issued)			114				111
Additional paid-in capital			6,257,995				6,238,639
Accumulated deficit			(1,738,476	)			(2,375,201	)
Accumulated other comprehensive loss			(68,945	)			(85,905	)
Total stockholders’ equity			4,450,688				3,777,644
Total Liabilities and Equity		$	8,080,271			$	10,722,395

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

		Nine Months Ended September 30,
		2009				2008
		(thousands of dollars)
Cash Flows from Operating Activities:
Net income (loss)		$	636,725			$	(302,020	)
(Income) loss from discontinued operations			(864,467	)			490,511
Net income (loss) from continuing operations			(227,742	)			188,491
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			203,228				244,059
Deferred income taxes			(106,923	)			136,909
Net changes in energy derivatives			30,748				(57,900	)
Amortization of deferred financing costs			6,459				4,949
Gains on sales of assets and emission and exchange allowances, net			(21,184	)			(39,484	)
Western states litigation and similar settlements			—				37,467
Other, net			(2,446	)			(2,158	)
Changes in other assets and liabilities:
Accounts and notes receivable, net			117,255				17,133
Changes in notes, receivables and payables with affiliate, net			68				4,183
Inventory			(1,399	)			(42,484	)
Margin deposits, net			(239,903	)			28,944
Net derivative assets and liabilities			(26,816	)			(5,550	)
Western states litigation and similar settlements payments			(3,449	)			—
Accounts payable			(9,111	)			(53,185	)
Other current assets			7,749				(800	)
Other assets			(19,858	)			(4,774	)
Taxes payable/receivable			(3,479	)			24,034
Other current liabilities			36,779				33,905
Other liabilities			(15,719	)			(8,246	)
Net cash provided by (used in) continuing operations from operating activities			(275,743	)			505,493
Net cash provided by (used in) discontinued operations from operating activities			534,275				(237,392	)
Net cash provided by operating activities			258,532				268,101
Cash Flows from Investing Activities:
Capital expenditures			(157,750	)			(191,059	)
Proceeds from sales of assets, net			35,931				18,429
Proceeds from sales of emission and exchange allowances			19,180				38,685
Purchases of emission allowances			(7,624	)			(26,053	)
Restricted cash			(752	)			(2,705	)
Other, net			3,750				3,312
Net cash used in continuing operations from investing activities			(107,265	)			(159,391	)
Net cash provided by (used in) discontinued operations from investing activities			313,775				(24,636	)
Net cash provided by (used in) investing activities			206,510				(184,027	)
Cash Flows from Financing Activities:
Payments of long-term debt			(59,413	)			(57,704	)
Payments of debt extinguishments expenses			—				(1,017	)
Proceeds from issuances of stock			4,584				13,542
Net cash used in continuing operations from financing activities			(54,829	)			(45,179	)
Net cash used in discontinued operations from financing activities			(260,707	)			—
Net cash used in financing activities			(315,536	)			(45,179	)
Net Change in Cash and Cash Equivalents, Total Operations			149,506				38,895
Less: Net Change in Cash and Cash Equivalents, Discontinued Operations			(100,197	)			(90,596	)
Cash and Cash Equivalents at Beginning of Period, Continuing Operations			1,004,367				524,070
Cash and Cash Equivalents at End of Period, Continuing Operations		$	1,254,070			$	653,561
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations		$	89,127			$	103,459
Income taxes paid (net of income tax refunds) for continuing operations			4,582				1,864

See Notes to our Unaudited Consolidated Interim Financial Statements

RRI ENERGY, INC. AND SUBSIDIARIES

(1) Background and Basis of Presentation

(a) Background.

“RRI Energy” refers to RRI Energy, Inc. and “we,” “us” and “our” refer to RRI Energy, Inc. and its consolidated subsidiaries. We provide electricity, capacity, ancillary and other energy services to wholesale customers in competitive power generation energy markets in the United States through our ownership and operation of and contracting for power generation capacity. Our business consists of four reportable segments. See note 15. Our consolidated interim financial statements and notes (interim financial statements) are unaudited, omit certain disclosures and should be read in conjunction with our audited consolidated financial statements and notes in our Form 10-K.

On May 1, 2009, we sold our interests in the affiliates that operated our Texas retail business; we began reporting this business as discontinued operations in the first quarter of 2009. In connection with this sale, we changed our name to RRI Energy, Inc. from Reliant Energy, Inc. effective May 2, 2009. See note 17.

(b) Basis of Presentation.

Estimates. Management makes estimates and assumptions to prepare financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) that affect:

•

the reported amounts of assets, liabilities and equity;

•

the reported amounts of revenues and expenses; and

•

our disclosure of contingent assets and liabilities at the date of the financial statements.

Actual results could differ from those estimates.

We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. We have evaluated subsequent events for recording and disclosure to November 5, 2009, the date the interim financial statements were issued.

Adjustments and Reclassifications. The interim financial statements reflect all normal recurring adjustments necessary, in management’s opinion, to present fairly our financial position and results of operations for the reported periods. Amounts reported for interim periods, however, may not be indicative of a full year period due to seasonal fluctuations in demand for electricity and energy services, changes in commodity prices, and changes in regulations, timing of maintenance and other expenditures, dispositions, changes in interest expense and other factors. We have reclassified certain amounts reported in these interim financial statements from prior periods to conform to the 2009 presentation. These reclassifications had no impact on reported earnings/losses.

Deconsolidation of Channelview. On August 20, 2007, four of our wholly-owned subsidiaries, RRI Energy Channelview LP, RRI Energy Channelview (Texas) LLC, RRI Energy Channelview (Delaware) LLC and RRI Energy Services Channelview LLC (collectively, Channelview), filed for reorganization under Chapter 11 of the Bankruptcy Code. As Channelview was subject to the supervision of the bankruptcy court, we deconsolidated Channelview’s financial results beginning August 20, 2007 and began reporting our investment in Channelview using the cost method. The Channelview plant was sold on July 1, 2008. Channelview emerged from bankruptcy in October 2009. See note 16 for further discussion of Channelview.

Inventory. We value fuel inventories at the lower of average cost or market. We reduce these inventories as they are used in the production of electricity or sold. We recorded $23 million and $14 million during the three months ended September 30, 2009 and 2008, respectively, for lower of average cost or market adjustments in cost of sales and recorded $82 million and $15 million during the nine months ended September 30, 2009 and 2008, respectively.

Review for Asset Impairments. In connection with the decline in current market conditions, we evaluated each of our plants and related intangible assets for potential impairments as of September 30, 2009. The impairment evaluations considered a variety of scenarios and were performed to assess whether the carrying values of these assets were recoverable. Although near-term energy market conditions have deteriorated since mid-2008, in part reflecting lower commodity prices, decreased demand and a compression of dark spreads, our evaluations indicated that the estimated undiscounted future cash flows exceeded the carrying values of the plants and related intangible assets and impairments did not exist as of September 30, 2009 under the held and used model. However, compared to historical levels, the amount of excess plant-level undiscounted cash flows has been significantly reduced.

FASB Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification became effective for us in the third quarter of 2009. The Codification brings together in one place all authoritative GAAP except for rules, regulations and interpretative releases of the Securities and Exchange Commission which are also authoritative GAAP for us. This change did not materially affect our consolidated financial statements.

New Accounting Pronouncement Not Yet Adopted — Disclosures about Plan Assets. Effective for our 2009 Annual Report on Form 10-K, we will provide (a) enhanced disclosures regarding investment policies and strategies for our benefit plan assets and (b) information about fair value measurements of plan assets similar to the required disclosures about other fair value measurements as disclosed in note 3.

(2) Stock-based Compensation

Our compensation expense for our stock-based incentive plans was:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(in millions)
Stock-based incentive plans compensation expense (income) (pre-tax)(1)		$	3			$	(1	)		$	7			$	7

During June 2009, the compensation committee of our board of directors granted 817,030 time-based restricted stock units and 817,030 time-based cash units to employees under our stock and incentive plans. The awards will vest in June 2012. No tax benefits related to stock-based compensation were realized during the three and nine months ended September 30, 2009 and 2008 due to our net operating loss carryforwards.

(3) Fair Value Measurements

Fair Value Hierarchy and Valuation Techniques. We apply recurring fair value measurements to our financial assets and liabilities. In determining fair value, we generally use the market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable internally-developed inputs. Based on the observability of the inputs used in our valuation techniques, our financial assets and liabilities are classified as follows:

Level 1:		Level 1 represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our energy derivative instruments that are exchange-traded or that are cleared and settled through the exchange. It also includes our available-for-sale and trading securities.
Level 2:		Level 2 represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category includes emission allowances futures that are exchange-traded and over-the-counter (OTC) derivative instruments such as generic swaps, forwards and options.
Level 3:		This category includes our energy derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from objective sources (such as implied volatilities and correlations). Our OTC, complex or structured derivative instruments that are transacted in less liquid markets with limited pricing information are included in Level 3. Examples are coal contracts, longer term natural gas contracts and options valued using implied or internally-developed inputs.

We value some of our OTC, complex or structured derivative instruments using valuation models, which utilize inputs that may not be corroborated by market data, such as market prices for power and fuel, price shapes, volatilities and correlations as well as other relevant factors. When such inputs are significant to the fair value measurement, the derivative assets or liabilities are classified as Level 3 when we do not have corroborating market evidence to support significant valuation model inputs and cannot verify the model to market transactions. We believe the transaction price is the best estimate of fair value at inception under the exit price methodology. Accordingly, when a pricing model is used to value such an instrument, the resulting value is adjusted so the model value at inception equals the transaction price. Valuation models are typically impacted by Level 1 or Level 2 inputs that can be observed in the market, as well as unobservable Level 3 inputs. Subsequent to initial recognition, we update Level 1 and Level 2 inputs to reflect observable market changes. Level 3 inputs are updated when corroborated by available market evidence. In the absence of such evidence, management’s best estimate is used.

Fair Value of Derivative Instruments and Certain Other Assets. We apply recurring fair value measurements to our financial assets and liabilities. Fair value measurements of our financial assets and liabilities are as follows:

		September 30, 2009
																		Total
		Level 1				Level 2				Level 3				Reclassifications(1)				Fair Value
		(in millions)
Total derivative assets		$	150			$	59			$	5			$	(1	)		$	213
Total derivative liabilities			60				162				82				(1	)			303
Other assets(2)			33				—				—				—				33

		December 31, 2008
																		Total
		Level 1				Level 2				Level 3				Reclassifications(1)				Fair Value
		(in millions)
Total derivative assets		$	125			$	111			$	7			$	(3	)		$	240
Total derivative liabilities			17				208				121				(3	)			343
Other assets(2)			29				—				—				—				29

The following is a reconciliation of changes in fair value of net derivative assets and liabilities classified as Level 3:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		Net Derivatives (Level 3)								Net Derivatives (Level 3)
		(in millions)
Balance, beginning of period		$	(117	)		$	176			$	(114	)		$	21
Total gains (losses) realized/unrealized:
Included in earnings(1)			(7	)			(37	)			(78	)			141
Purchases, issuances and settlements (net)			47				(58	)			115				(81	)
Transfers in and/or out of Level 3 (net)			—				—				—				—
Balance, end of period		$	(77	)		$	81			$	(77	)		$	81
Changes in unrealized gains (losses) relating to derivative assets and liabilities still held at September 30, 2009 and 2008:
Revenues		$	—			$	2			$	(1	)		$	2
Cost of sales			(6	)			(43	)			(41	)			43
Total		$	(6	)		$	(41	)		$	(42	)		$	45

Fair Value of Other Financial Instruments. The fair values of cash and cash equivalents, accounts receivable and payable, margin deposits, available-for-sale securities, trading securities and derivative assets and liabilities approximate their carrying amounts. Values of our debt for continuing operations (see note 7) are:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value(1)				Value				Value(1)
		(in millions)
Fixed rate debt		$	2,553			$	2,555			$	2,623			$	2,168
Total debt		$	2,553			$	2,555			$	2,623			$	2,168

See note 2(e) to our consolidated financial statements in our Form 10-K for additional information about fair value measurements.

(4) Derivative Instruments and Hedging Activities

Changes in commodity prices prior to the energy delivery period are inherent in our business. Accordingly, we may enter selective hedges, including originated transactions, based on our assessment of (a) operational and market limitations requiring us to enter into power, fuel, capacity and emissions transactions to manage our generation assets, (b) the near term economic environment and volatile commodity markets and the benefits of hedging some of the downside risk to our earnings and cash flows and (c) market fundamentals and the opportunity to increase the return from our generation assets. For our risk management activities, we use derivative and non-derivative contracts that provide for settlement in cash or by delivery of a commodity. We use derivative instruments such as futures, forwards, swaps and options to execute our hedge strategy. We may also enter into derivatives to manage our exposure to changes in prices of emission and exchange allowances.

We account for our derivatives under one of three accounting methods (mark-to-market, accrual (under the normal purchase/normal sale exception to fair value accounting) or cash flow hedge accounting) based on facts and circumstances. The fair values of our derivative activities are determined by (a) prices actively quoted, (b) prices provided by other external sources or (c) prices based on models and other valuation methods. See note 3 for discussion on fair value measurements.

A derivative is recognized at fair value in the balance sheet whether or not it is designated as an accounting hedge, except for derivative contracts designated as normal purchase/normal sale exceptions, which are not in our consolidated balance sheet or results of operations prior to settlement resulting in accrual accounting treatment.

Realized gains and losses on derivative contracts used for risk management purposes and not held for trading purposes are reported either on a net or gross basis based on the relevant facts and circumstances. Hedging transactions that do not physically flow are included in the same caption as the items being hedged.

A summary of our derivative activities and classification in our results of operations is:

		Primary
		Risk		Purpose for Holding or		Transactions that		Transactions that
Instrument		Exposure		Issuing Instrument(1)		Physically Flow/Settle(2)		Financially Settle(3)
Power futures, forward, swap and option contracts		Price risk		Power sales to customers		Revenues		Revenues
				Power purchases related to operations		Cost of sales		Revenues
				Power purchases/sales related to legacy trading and non-core asset management positions(4)		Revenues		Revenues
Natural gas and fuel futures, forward, swap and option contracts		Price risk		Natural gas and fuel sales related to operations		Revenues/Cost of sales		Cost of sales
				Natural gas sales related to power generation(5)		N/A(6)		Revenues
				Natural gas and fuel purchases related to operations		Cost of sales		Cost of sales
				Natural gas and fuel purchases/sales related to legacy trading and non-core asset management positions(4)		Cost of sales		Cost of sales
Emission and exchange allowances futures(7)		Price risk		Purchases/sales of emission and exchange allowances		N/A(6)		Revenues/Cost of sales

In addition to price risk, we are exposed to credit and operational risk. We have a risk control framework to manage these risks, which include: (a) measuring and monitoring these risks, (b) review and approval of new transactions relative to these risks, (c) transaction validation and (d) portfolio valuation and reporting. We use mark-to-market valuation, value-at-risk and other metrics in monitoring and measuring risk. Our risk control framework includes a variety of separate but complementary processes, which involve commercial and senior management and our Board of Directors. See note 5 for further discussion of our credit policy.

Earnings Volatility from Derivative Instruments. We procure natural gas, coal, oil, natural gas transportation and storage capacity and other energy-related commodities to support our business. We may experience volatility in our earnings resulting from some contracts receiving accrual accounting treatment while related derivative instruments are marked to market through earnings. As discussed in note 1(b), our financial statements include estimates and assumptions made by management throughout the reporting periods and as of the balance sheet dates. It is reasonable that subsequent to the balance sheet date of September 30, 2009, changes, some of which could be significant, have occurred in the inputs to our various fair value measures, particularly relating to commodity price movements.

Unrealized gains and losses on energy derivatives consist of both gains and losses on energy derivatives during the current reporting period for derivative assets or liabilities that have not settled as of the balance sheet date and the reversal of unrealized gains and losses from prior periods for derivative assets or liabilities that settled prior to the balance sheet date but during the current reporting period.

Cash Flow Hedges. During the first quarter of 2007, we de-designated our remaining cash flow hedges; therefore, as of September 30, 2009 and December 31, 2008, we do not have any designated cash flow hedges. The fair value of our de-designated cash flow hedges are deferred in accumulated other comprehensive loss, net of tax, to the extent the contracts have been effective as hedges, until the forecasted transactions affect earnings. At the time the forecasted transactions affect earnings, we reclassify the amounts in accumulated other comprehensive income/loss into earnings.

Amounts included in accumulated other comprehensive loss are:

		September 30, 2009
						Expected to be
						Reclassified into
						Results of
		At the End of the				Operations
		Period				in Next 12 Months
		(in millions)
De-designated cash flow hedges, net of tax(1)(2)		$	36			$	15

Presentation of Derivative Assets and Liabilities. We present our derivative assets and liabilities on a gross basis (regardless of master netting arrangements with the same counterparty). Cash collateral amounts are also presented on a gross basis.

As of September 30, 2009, our commodity derivative assets and liabilities include amounts for non-trading and trading activities as follows:

		Derivative Assets								Derivative Liabilities								Net Derivative
		Current				Long-Term				Current				Long-Term				Assets (Liabilities)
		(in millions)
Non-trading		$	74			$	57			$	164			$	83			$	(116	)
Trading			76				6				52				4				26
Total derivatives		$	150			$	63			$	216			$	87			$	(90	)

We have the following derivative commodity contracts outstanding as of September 30, 2009:

				Notional Volumes(2)
Commodity		Unit(1)		Current				Long-term
				(in millions)
Power		MWh			(4	)			(5	)
Capacity energy		MWh			(1	)			(1	)
Natural gas		MMBTU			(2	)			25
Natural gas basis		MMBTU			(4	)			—
Coal		MMBTU			128				210

The income (loss) associated with our energy derivatives is:

		Three Months Ended								Nine Months Ended
		September 30, 2009								September 30, 2009
Derivatives Not Designated as Hedging Instruments(1)		Revenues				Cost of Sales				Revenues				Cost of Sales
		(in millions)
Non-Trading Commodity Contracts:
Unrealized(2)		$	(25	)		$	34			$	(51	)		$	25
Realized(3)(4)(5)			105				(62	)			292				(136	)
Total non-trading		$	80			$	(28	)		$	241			$	(111	)
Trading Commodity Contracts:
Unrealized		$	—			$	(2	)		$	—			$	(4	)
Realized(3)			—				—				—				20
Total trading		$	—			$	(2	)		$	—			$	16

Trading Activities. Prior to March 2003, we engaged in proprietary trading activities. Trading positions entered into prior to our decision to exit this business are being closed on economical terms or are being retained and settled over the contract terms. In addition, we have current transactions relating to non-core asset management, such as gas storage and transportation contracts not tied to generation assets, which are classified as trading activities. The income (loss) associated with these transactions is:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(in millions)
Revenues		$	—			$	1			$	—			$	1
Cost of sales			5				30				21				13
Total(1)		$	5			$	31			$	21			$	14

(5) Credit Risk

We have a credit policy that governs the management of credit risk, including the establishment of counterparty credit limits and specific transaction approvals. Credit risk is monitored daily and the financial condition of our counterparties is reviewed periodically. We try to mitigate credit risk by entering into contracts that permit netting and allow us to terminate upon the occurrence of certain events of default. We measure credit risk as the replacement cost for our derivative positions plus amounts owed for settled transactions.

Our credit exposure is based on our derivative assets and accounts receivable from our counterparties, after taking into consideration netting within each contract and any master netting contracts with counterparties. We believe this represents the maximum potential loss we would incur if our counterparties failed to perform according to their contract terms.

As of September 30, 2009, our derivative assets and accounts receivable, after taking into consideration netting within each contract and any master netting contracts with counterparties, are:

		Exposure				Credit								Number of				Net Exposure of
		Before				Collateral				Exposure				Counterparties				Counterparties
Credit Rating Equivalent		Collateral(1) (2)				Held(3)				Net of Collateral				>10%				>10%
		(dollars in millions)
Investment grade		$	170			$	13			$	157				2	(4)		$	135
Non-investment grade			—				—				—				—				—
No external ratings:
Internally rated — Investment grade			55				—				55				1	(5)			45
Internally rated — Non-investment grade			2				2				—				—				—
Total		$	227			$	15			$	212				3			$	180

As of December 31, 2008, three investment grade counterparties (a financial institution and two power grid operators) represented 63% ($156 million) of our credit exposure.

Based on our current credit ratings, any additional collateral postings that would be required from us due to a credit downgrade would be immaterial. As of September 30, 2009 and December 31, 2008, we have posted cash margin deposits of $169 million and $70 million, respectively, as collateral for our derivative liabilities receiving mark-to-market accounting treatment and our accounts payable (classified either as continuing or discontinued operations). Additionally, as of September 30, 2009 and December 31, 2008, we have $26 million and $103 million, respectively, in letters of credit issued as collateral for our derivative liabilities receiving mark-to-market accounting treatment and our accounts payable (classified either as continuing or discontinued operations). See note 7.

(6) Comprehensive Income (Loss)

The components of total comprehensive income (loss) are:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(in millions)
Net income (loss)		$	(15	)		$	(1,038	)		$	637			$	(302	)
Other comprehensive income, net of tax:
Reclassification of net deferred loss from cash flow hedges realized into net income/loss (net of tax)			5				9				13				25
Unrealized gain on available-for-sale securities (net of tax)(1)			—				9				3				9
Reclassification of benefits actuarial net loss into net income/loss (net of tax)			—				—				1				—
Reclassification of benefits, net prior service costs into net income/loss (net of tax)			—				1				—				1
Comprehensive income (loss)		$	(10	)		$	(1,019	)		$	654			$	(267	)

(7) Debt

		September 30, 2009												December 31, 2008
		Weighted												Weighted
		Average												Average
		Stated												Stated
		Interest												Interest
		Rate(1)				Long-term				Current				Rate(1)				Long-term				Current
		(in millions, except interest rates)
Facilities, Bonds and Notes:
RRI Energy:
Senior secured revolver due 2012			2.04	%		$	—			$	—				3.18	%		$	—			$	—
Senior secured notes due 2014(2)(3)(4)			6.75				279				158				6.75				498	(5)			—
Senior unsecured notes due 2014			7.625				575				—				7.625				575				—
Senior unsecured notes due 2017			7.875				725				—				7.875				725				—
Subsidiary Obligations:
Orion Power Holdings, Inc. senior notes due 2010 (unsecured)			12.00				—				400				12.00				400				—
PEDFA(6) fixed-rate bonds due 2036(7)			6.75				406				2				6.75				408	(8)			—
Total facilities, bonds and notes							1,985				560								2,606				—
Other:
Adjustment to fair value of debt(9)							—				8								4				13
Total other debt							—				8								4				13
Total debt						$	1,985			$	568							$	2,610	(10)		$	13

Amounts borrowed and available for borrowing under our revolving credit agreements as of September 30, 2009 are:

		Total Committed				Drawn				Letters				Unused
		Credit				Amount				of Credit				Amount
		(in millions)
RRI Energy senior secured revolver due 2012		$	500			$	—			$	—			$	500
RRI Energy letter of credit facility due 2014			250				—				144				106
Total		$	750			$	—			$	144			$	606

(8) Earnings (Loss) Per Share

The amounts used in the basic and diluted earnings (loss) per common share computations are the same.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(in millions)
Income (loss) from continuing operations (basic and diluted)		$	(19	)		$	93			$	(228	)		$	188

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(shares in thousands)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding (basic)			351,561				349,200				350,908				347,086
Plus: Incremental shares from assumed conversions:
Stock options			—	(1)			3,390				—	(1)			3,986
Restricted stock			—	(1)			428				—	(1)			516
Employee stock purchase plan			—	(1)			—				—	(1)			16
5.00% convertible senior subordinated notes			N/A	(2)			2				N/A	(2)			77
Warrants			N/A	(3)			674				N/A	(3)			2,277
Weighted average shares outstanding assuming conversion (diluted)			351,561				353,694				350,908				353,958

We excluded the following items from diluted earnings (loss) per common share due to the anti-dilutive effect:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(shares in thousands, dollars in millions)
Shares excluded from the calculation of diluted earnings (loss) per share			619	(1)			N/A	(2)			501	(1)			N/A	(2)
Shares excluded from the calculation of diluted earnings (loss) per share because the exercise price exceeded the average market price			4,970	(3)			2,314	(3)			4,970	(3)			2,300	(3)

(9) Income Taxes

(a) Tax Rate Reconciliation.

A reconciliation of the federal statutory income tax rate to the effective income tax rate for our continuing operations is:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Federal statutory rate			(35	)%			35	%			(35	)%			35	%
Additions (reductions) resulting from:
Federal valuation allowance(1)			134				—				4				—
State income taxes, net of federal income taxes			(20	) (2)			14	(3)			(2	) (4)			10	(5)
Other			30	(6)(7)			—				1	(6)(7)			1
Effective rate			109	%			49	%			(32	)%			46	%