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, 2008

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

For the transition period from                      to                     

Reliant Energy, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(713) 497-3000
(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 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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 24, 2008, the latest practicable date for determination, Reliant Energy, Inc. had 349,807,872 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, 2008 and 2007			1
Consolidated Balance Sheets (unaudited) September 30, 2008 and December 31, 2007			2
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2008 and 2007			3
Notes to Unaudited Consolidated Interim Financial Statements			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
Business Overview			25
Liquidity and Capital Resources			26
Recent Events			27
Consolidated Results of Operations			28
Credit Risk			47
Off-Balance Sheet Arrangements			48
Historical Cash Flows			48
New Accounting Pronouncements, Significant Accounting Policies and Critical Accounting Estimates			49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			50
Market Risks and Risk Management			50
Non-Trading Market Risks			50
Trading Market Risks			51
Fair Value Measurements			53
ITEM 4. CONTROLS AND PROCEDURES			54
Evaluation of Disclosure Controls and Procedures			54
Changes in Internal Control Over Financial Reporting			54
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			54
ITEM 1A. RISK FACTORS			54
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			54
ITEM 6. EXHIBITS			54
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

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, transactions and dispositions and financings and approvals related thereto. 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, collateral postings or obligations related to our credit-enhanced retail structure;
	•		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;
	•		Our ability to attract and retain retail customers or to adequately forecast their energy needs and usage;
	•		Our ability to complete ongoing negotiations for an orderly unwind of our credit-enhanced retail structure or failure of such structure;
	•		Our ability to complete ongoing negotiations with respect to the term loan component of our $1.0 billion of new capital arrangements;
	•		Financial market conditions and our access to capital; and
	•		The outcome of our strategic alternatives review.

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 this report and of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our filings and other important information are also available on our website at www.reliant.com.

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.

PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RELIANT ENERGY, INC. AND SUBSIDIARIES

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(thousands of dollars, except per share amounts)
Revenues:
Revenues (including $(6,173), $7,205, $(13,130) and $10,927 unrealized gains (losses)) (including $0, $39,805, $253,001 and $39,805 from affiliates)		$	3,738,106			$	3,543,192			$	9,977,065			$	8,555,708
Expenses:
Cost of sales (including $(1,688,016), $(34,719), $(552,571) and $157,443 unrealized gains (losses)) (including $1,234, $37,782, $201,364 and $37,782 from affiliates)			4,899,393				2,838,950				9,059,914				6,758,157
Operation and maintenance			201,987				209,374				643,888				674,081
Selling, general and administrative			114,870				99,796				275,934				290,477
Western states litigation and similar settlements			3,467				—				37,467				22,000
Gains on sales of assets and emission and exchange allowances, net			(16,561	)			(16,769	)			(39,484	)			(18,496	)
Depreciation and amortization			84,228				121,449				261,597				324,021
Total operating expense			5,287,384				3,252,800				10,239,316				8,050,240
Operating Income (Loss)			(1,549,278	)			290,392				(262,251	)			505,468
Other Income (Expense):
Income of equity investment, net			1,405				1,549				2,600				4,075
Debt extinguishments			(594	)			(1,320	)			(1,017	)			(72,589	)
Other, net			4,593				1,590				4,619				2,084
Interest expense			(62,484	)			(74,235	)			(188,815	)			(283,280	)
Interest income			6,259				5,777				26,510				24,473
Total other expense			(50,821	)			(66,639	)			(156,103	)			(325,237	)
Income (Loss) from Continuing Operations Before Income Taxes			(1,600,099	)			223,753				(418,354	)			180,231
Income tax expense (benefit)			(562,208	)			63,850				(110,299	)			41,028
Income (Loss) from Continuing Operations			(1,037,891	)			159,903				(308,055	)			139,203
Income (loss) from discontinued operations			(29	)			2,479				6,035				(1,062	)
Net Income (Loss)		$	(1,037,920	)		$	162,382			$	(302,020	)		$	138,141
Basic Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(2.97	)		$	0.47			$	(0.89	)		$	0.41
Income (loss) from discontinued operations			—				—				0.02				(0.01	)
Net income (loss)		$	(2.97	)		$	0.47			$	(0.87	)		$	0.40
Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations		$	(2.97	)		$	0.45			$	(0.89	)		$	0.40
Income (loss) from discontinued operations			—				0.01				0.02				(0.01	)
Net income (loss)		$	(2.97	)		$	0.46			$	(0.87	)		$	0.39

See Notes to our Unaudited Consolidated Interim Financial Statements

RELIANT ENERGY, INC. AND SUBSIDIARIES

		September 30, 2008				December 31, 2007
		(thousands of dollars, except per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	793,857			$	754,962
Restricted cash			5,956				3,251
Accounts and notes receivable, principally customer, net of allowance of $42,780 and $36,724			1,257,036				1,082,746
Inventory			325,620				285,408
Derivative assets			804,184				663,049
Margin deposits			135,308				139,834
Accumulated deferred income taxes			189,559				114,559
Investment in and receivables from Channelview, net			61,442				83,253
Prepayments and other current assets			132,378				104,314
Assets held for sale			446,458				—
Current assets of discontinued operations			—				2,133
Total current assets			4,151,798				3,233,509
Property, plant and equipment, gross			6,604,285				6,852,170
Accumulated depreciation			(1,756,344	)			(1,629,953	)
Property, Plant and Equipment, net			4,847,941				5,222,217
Other Assets:
Goodwill, net			357,490				379,644
Other intangibles, net			389,381				405,338
Derivative assets			340,423				376,535
Prepaid lease			288,132				270,133
Accumulated deferred income taxes			175,395				70,410
Other ($36,991 and $29,016 accounted for at fair value)			204,824				234,014
Total other assets			1,755,645				1,736,074
Total Assets		$	10,755,384			$	10,191,800
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt and short-term borrowings		$	12,193			$	52,546
Accounts payable, principally trade			820,319				687,046
Derivative liabilities			1,279,446				885,346
Margin deposits			7,100				250
Other			513,253				426,839
Liabilities held for sale			62,483				—
Current liabilities of discontinued operations			2,952				—
Total current liabilities			2,697,746				2,052,027
Other Liabilities:
Derivative liabilities			695,063				473,516
Other			244,897				278,641
Long-term liabilities of discontinued operations			3,542				3,542
Total other liabilities			943,502				755,699
Long-term Debt			2,874,785				2,902,346
Commitments and Contingencies
Temporary Equity Stock-based Compensation			7,121				4,694
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; 349,770,636 and 344,579,508 issued)			111				106
Additional paid-in capital			6,237,692				6,215,512
Accumulated deficit			(1,937,546	)			(1,635,526	)
Accumulated other comprehensive loss			(68,027	)			(103,058	)
Total stockholders’ equity			4,232,230				4,477,034
Total Liabilities and Equity		$	10,755,384			$	10,191,800

See Notes to our Unaudited Consolidated Interim Financial Statements

RELIANT ENERGY, INC. AND SUBSIDIARIES

		Nine Months Ended September 30,
		2008				2007
		(thousands of dollars)
Cash Flows from Operating Activities:
Net income (loss)		$	(302,020	)		$	138,141
(Income) loss from discontinued operations			(6,035	)			1,062
Net income (loss) from continuing operations			(308,055	)			139,203
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			261,597				324,021
Deferred income taxes			(140,798	)			25,246
Net changes in energy derivatives			589,054				(126,819	)
Amortization of deferred financing costs			6,446				47,817
Gains on sales of assets and emission and exchange allowances, net			(39,484	)			(18,496	)
Debt extinguishments			1,017				72,589
Income of equity investment, net			(2,600	)			(4,075	)
Western states litigation and similar settlements			37,467				—
Other, net			(361	)			8,909
Changes in other assets and liabilities:
Accounts and notes receivable, net			(187,077	)			(368,989	)
Changes in notes, receivables and payables with affiliate, net			4,183				(4,225	)
Inventory			(42,484	)			(6,117	)
Margin deposits, net			11,376				200,928
Net derivative assets and liabilities			(37,845	)			(30,949	)
Western states litigation and similar settlements payments			—				(35,000	)
Accounts payable			107,675				172,789
Other current assets			(16,384	)			(14,586	)
Other assets			(2,902	)			(35,155	)
Taxes payable/receivable			11,852				(12,334	)
Other current liabilities			16,648				6,352
Other liabilities			(8,683	)			(9,168	)
Net cash provided by continuing operations from operating activities			260,642				331,941
Net cash provided by (used in) discontinued operations from operating activities			7,459				(3,754	)
Net cash provided by operating activities			268,101				328,187
Cash Flows from Investing Activities:
Capital expenditures			(215,695	)			(135,473	)
Proceeds from sales of assets, net			18,429				30,380
Proceeds from sales of emission and exchange allowances			38,685				6,794
Purchases of emission allowances			(26,053	)			(52,160	)
Restricted cash			(2,705	)			4,716
Other, net			3,312				5,295
Net cash used in continuing operations from investing activities			(184,027	)			(140,448	)
Net cash provided by discontinued operations from investing activities			—				520
Net cash used in investing activities			(184,027	)			(139,928	)
Cash Flows from Financing Activities:
Payments of long-term debt			(57,704	)			(1,497,887	)
Proceeds from long-term debt			—				1,300,000
Increase in short-term borrowings and revolving credit facilities, net			—				6,554
Payments of financing costs			—				(31,245	)
Payments of debt extinguishments			(1,017	)			(72,589	)
Proceeds from issuances of stock			13,542				39,401
Net cash used in financing activities			(45,179	)			(255,766	)
Net Change in Cash and Cash Equivalents			38,895				(67,507	)
Cash and Cash Equivalents at Beginning of Period			754,962				463,909
Cash and Cash Equivalents at End of Period		$	793,857			$	396,402
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations		$	134,988			$	218,592
Income taxes paid (net of income tax refunds) for continuing operations			18,000				28,115

See Notes to our Unaudited Consolidated Interim Financial Statements

RELIANT ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(1) Background and Basis of Presentation

(a) Background.

“Reliant Energy” refers to Reliant Energy, Inc. and “we,” “us” and “our” refer to Reliant Energy, Inc. and its consolidated subsidiaries. Our business consists primarily of two business segments, retail energy and wholesale energy. See note 13. 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.

(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 amount 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.

Retail Energy Segment Estimates due to Hurricane Ike. In September 2008, Hurricane Ike struck the upper Texas coast causing substantial damage to the electric transmission and distribution system serving the Houston-Galveston area. Due to the diversion of meter reading personnel to assist with the restoration, the Public Utility Commission of Texas (PUCT) is allowing the transmission and distribution companies, as necessary, to estimate a customer’s electricity consumption for three consecutive meter read cycles. A true up to the customer’s actual consumption will take place when the meter is read in the subsequent months. As of September 30, 2008, we have $153 million and $225 million in billed and unbilled revenues, respectively, based on estimated meter reads. These amounts represent 5% and 4% of our retail energy segment’s revenues and consolidated revenues, respectively, for the nine months ended September 30, 2008.

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, changes in our retail revenue rates and changes in regulations, timing of maintenance and other expenditures, dispositions, changes in interest expense and other factors. We have changed the presentation of our December 31, 2007 consolidated balance sheet due to the adoption of FSP FIN 39-1, Amendment of FASB Interpretation No. 39 (FIN 39-1). See below.

Deconsolidation of Channelview. On August 20, 2007, four of our wholly-owned subsidiaries, Reliant Energy Channelview LP (Channelview LP), Reliant Energy Channelview (Texas) LLC, Reliant Energy Channelview (Delaware) LLC and Reliant Energy Services Channelview LLC (collectively, Channelview), filed for reorganization under Chapter 11 of the Bankruptcy Code. As Channelview is currently 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. See note 14 for further discussion of Channelview.

Gross Receipts Taxes. We record gross receipts taxes for our retail energy segment on a gross basis in revenues and operations and maintenance in our consolidated statements of operations. During the three months ended September 30, 2008 and 2007, our retail energy segment’s revenues and operation and maintenance include gross receipts taxes of $32 million and $31 million, respectively, and during the nine months ended September 30, 2008 and 2007, $80 million and $76 million, respectively.

New Accounting Pronouncement Adopted — Offsetting of Amounts. FIN 39-1 was applicable for us beginning January 1, 2008. This interpretation allows either (a) offsetting assets and liabilities for derivative instruments under a master netting arrangement only if the fair value amounts recognized for any related cash collateral are also offset or (b) presenting these amounts gross.

Effective January 1, 2008, we discontinued netting our derivative assets and liabilities (with the same counterparty pursuant to a master netting arrangement) and present them on a gross basis. Cash collateral amounts remain presented on a gross basis. This change has significantly increased our derivative assets and liabilities retrospectively for all financial statements presented and is accounted for as a change in accounting principle.

The effect to our December 31, 2007 consolidated balance sheet was as follows: (Note — only line items impacted are shown.)

		December 31, 2007
		As Previously
		Reported in the				Upon Adoption
		Form 10-K				of FIN 39-1
		(in millions)
Current derivative assets		$	214			$	663
Total current assets			2,784				3,233
Long-term derivative assets			90				376
Total other assets			1,450				1,736
Total assets			9,457				10,192
Current derivative liabilities			437				885
Total current liabilities			1,602				2,050
Long-term derivative liabilities			187				474
Total other liabilities			470				757
Total liabilities and stockholders’ equity			9,457				10,192

New Accounting Pronouncement Not Yet Adopted — Disclosures about Derivatives and Hedging Activities. Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161) is an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and is intended to enhance the related qualitative and quantitative disclosures by providing for additional information about objectives, strategies, accounting treatment, volume by commodity type and credit-risk-related contingent features. SFAS No. 161 must be adopted by January 1, 2009.

(2) Stock-based Compensation

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in millions)
Stock-based incentive plans compensation expense (income) (pre-tax)		$	(1	)(1)		$	3			$	7	(1)		$	23

During February 2008, the compensation committee of our board of directors granted stock-based compensation awards to 47 of our officers under the Reliant Energy, Inc. 2002 Long-Term Incentive Plan. The committee granted 461,824 time-based stock options (exercise price of $23.38 per share, which vest in three equal installments during February 2009, 2010 and 2011), 215,527 time-based restricted stock units (which vest during February 2011) and 371,586 market-based cash units (each payable into a cash amount equal to the market value of one share of our common stock if our common stock closes at $32 or higher for 20 consecutive trading days before February 19, 2011). In addition, during February 2008, the committee granted 95,574 time-based restricted stock units and 95,574 time-based cash units to other employees under the Reliant Energy, Inc. 2002 Stock Plan. These awards will vest during February 2011.

No tax benefits related to stock-based compensation were realized during the nine months ended September 30, 2008 and 2007 due to our net operating loss carryforwards.

(3) Fair Value Measurements

Summary. Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) on a prospective basis for our financial assets and liabilities. In connection with the adoption, no cumulative effect of an accounting change was recognized. For non-financial assets and liabilities, the adoption of SFAS No. 157 has been deferred until January 1, 2009.

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.
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 and forwards.
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 market heat rates, 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 structured power supply contracts, coal contracts, longer term natural gas contracts and options.

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. 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.

		September 30, 2008
																		Total
		Level 1				Level 2				Level 3				Reclassifications				Fair Value
		(in millions)
Total derivative assets		$	383			$	592			$	183			$	(14	)(1)		$	1,144
Total derivative liabilities			382				1,451				154				(14	)(1)			1,973
Other assets(2)			37				—				—				—				37

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

		Three Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2008
		Net Derivatives				Net Derivatives
		(in millions)				(in millions)
Balance, beginning of period		$	482			$	121
Total gains (losses) realized/unrealized:
Included in earnings			(286	)(1)			252	(1)
Purchases, issuances and settlements (net)			(181	)			(362	)
Transfers in and/or out of Level 3 (net)			14	(2)			18	(3)
Balance, September 30, 2008		$	29			$	29
Changes in unrealized gains/losses relating to derivative assets and liabilities still held at September 30, 2008			(197	)(4)			36	(5)

See notes 2(d) and 5 to our consolidated financial statements in our Form 10-K for additional information about our derivatives.

(4) Comprehensive Income (Loss)

The components of total comprehensive income (loss) are:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in millions)
Net income (loss)		$	(1,038	)		$	162			$	(302	)		$	138
Other comprehensive income (loss), net of tax:
Deferred income from cash flow hedges			—				1				—				4
Reclassification of net deferred loss from cash flow hedges realized in net income/loss			9				24				25				69
Amortization of prior service costs			1				1				1				1
Unrealized gain on available-for-sale securities			9				—				9				—
Comprehensive income (loss)		$	(1,019	)		$	188			$	(267	)		$	212

(5) Goodwill

2008 Annual Goodwill Impairment Assessments. We completed our annual goodwill impairment assessments for our wholesale energy and retail energy reporting units effective April 1, 2008. No impairments occurred.

Estimation of Our Wholesale Energy Reporting Unit’s Fair Value. We updated a number of subjective factors and significant assumptions to estimate fair value in our April 2008 test as compared to our April 2007 test, including (a) appropriate weighting of valuation approaches (income approach, market approach and comparable public company approach); (b) projections about future power generation margins; (c) estimates of our future cost structure; (d) environmental assumptions; (e) discount rates for estimated cash flows, which changed from 9.5% to 10.0% primarily due to changes in the required rate on debt capital of peer companies and (f) required level of working capital. See note 4(a) to our consolidated financial statements in our Form 10-K.

Goodwill Impairment Assessments Update. Given recent changes in the business climate and the credit markets and our review of strategic alternatives to enhance stockholder value, we updated the key inputs and assumptions used to estimate the fair values of our wholesale energy and retail energy reporting units and concluded that no goodwill impairments have occurred as of September 30, 2008. We use a combination of an income approach and a market approach to estimate the fair value of our wholesale energy reporting unit. Key fair value inputs for the wholesale energy reporting unit that we changed include the weighting of the valuation approaches, projections about future power generation margins and the discount rate, which is based on the cost of capital. We primarily use an income approach to estimate the fair value of our retail energy reporting unit. Key fair value inputs for the retail energy reporting unit that we changed include projections about future margins, required levels of working capital and the discount rate, which is based on the cost of capital. See note 17(a).

(6) Derivative Instruments

For discussion of our derivative activities, see notes 2(d) and 5 to our consolidated financial statements in our Form 10-K. The income (loss) of our energy and interest rate derivative instruments is:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in millions)
Energy derivatives:
Hedge ineffectiveness gains		$	—	(1)		$	9	(1)		$	—	(1)		$	11	(1)
Other net unrealized gains (losses)			(1,694	)			(37	)			(566	)			157
Interest rate derivatives:
Other net unrealized gains (losses)			—				1				—				(4	)
Total(2)(3)		$	(1,694	)		$	(27	)		$	(566	)		$	164

Amounts included in accumulated other comprehensive loss:

		September 30, 2008
						Expected to be
						Reclassified into
						Results of Operations
		At the End of the Period				in Next 12 Months
		(in millions)
De-designated cash flow hedges		$	55			$	19

Although we discontinued our proprietary trading business in March 2003, we have legacy trading and non-core asset management positions. The income (loss) associated with these transactions is:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in millions)
Revenues		$	1			$	—			$	1			$	—
Cost of sales			30				8				13				8
Total		$	31			$	8			$	14			$	8

(7) Debt

Our outstanding debt:

		September 30, 2008												December 31, 2007
		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:
Reliant Energy:
Senior secured revolver due 2012			5.80	%		$	—			$	—				6.45	%		$	—			$	—
Senior secured notes due 2014(2)			6.75				667				—				6.75				671				41
Senior unsecured notes due 2013(3)			9.50				—				—				9.50				13				—
Senior unsecured notes due 2014			7.625				575				—				7.625				575				—
Senior unsecured notes due 2017			7.875				725				—				7.875				725				—
Convertible senior subordinated notes due 2010 (unsecured)(4)			5.00				—				—				5.00				2				—
Subsidiary Obligations:
Orion Power Holdings, Inc. senior notes due 2010 (unsecured)			12.00				400				—				12.00				400				—
Reliant Energy Seward, LLC PEDFA(5) fixed-rate bonds due 2036			6.75				500				—				6.75				500				—
Reliant Energy Power Supply, LLC working capital facility due 2012(6)			4.15				—				—				5.30				—				—
Total facilities, bonds and notes							2,867				—								2,886				41
Other:
Adjustment to fair value of debt(7)							8				12								17				11
Total other debt							8				12								17				11
Total debt(8)						$	2,875			$	12							$	2,903			$	52

Amounts borrowed and available for borrowing under our revolving credit agreements as of September 30, 2008:

		Total Committed				Drawn				Letters				Unused
		Credit				Amount				of Credit				Amount
		(in millions)
Reliant Energy senior secured revolver due 2012		$	500			$	—			$	55			$	445
Reliant Energy letter of credit facility due 2014			250				—				234				16
		$	750			$	—			$	289			$	461

See note 17 for discussion of events occurring subsequent to September 30, 2008 regarding our capital and debt structure.

(8) Earnings (Loss) Per Share

Reconciliations of the amounts used in the basic and diluted earnings (loss) per common share computations are:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(in millions)
Income (loss) from continuing operations (basic)		$	(1,038	)		$	160			$	(308	)		$	139
Plus: Interest expense on 5.00% convertible senior subordinated notes, net of tax			—	(1)			—	(2)			—	(1)			—	(2)
Income (loss) from continuing operations (diluted)		$	(1,038	)		$	160			$	(308	)		$	139

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(shares in thousands)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding (basic)			349,200				343,835				347,086				341,768
Plus: Incremental shares from assumed conversions:
Stock options			—	(1)			4,957				—	(1)			4,950
Restricted stock			—	(1)			521				—	(1)			492
Employee stock purchase plan			—	(1)			—				—	(1)			60
5.00% convertible senior subordinated notes			—	(1)			212				—	(1)			214
Warrants			—	(1)			4,679				—	(1)			4,841
Weighted average shares outstanding assuming conversion (diluted)			349,200				354,204				347,086				352,325

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,
		2008				2007				2008				2007
		(shares in thousands, dollars in millions)
Shares excluded from the calculation of diluted earnings (loss) per share			4,494	(1)			N/A	(2)			6,872	(1)			N/A	(2)
Shares excluded from the calculation of diluted earnings (loss) per share because the exercise price exceeded the average market price			2,314	(3)			1,943	(3)			2,300	(3)			2,047	(3)
Interest expense that would be added to income if 5.00% convertible senior subordinated notes were dilutive			—	(4)			N/A	(2)			—	(4)			N/A	(2)

(9) Income Taxes

(a) Tax Rate Reconciliation.

A reconciliation of the federal statutory income tax rate to the effective income tax rate is:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Federal statutory rate			35	%			35	%			35	%			35	%
Additions (reductions) resulting from:
Federal tax uncertainties			—				—				—				(3	)
Federal valuation allowance			—				(13	)			—				(13	)
State income taxes, net of federal income taxes			—				3				(7	)			2
Other, net			—				4				(2	)			2
Effective rate			35	%			29	%			26	%			23	%

(b) Valuation Allowances.

We assess our future ability to use federal, state and foreign net operating loss carryforwards, capital loss carryforwards and other deferred tax assets using the more-likely-than-not criteria. These assessments include an evaluation of our recent history of earnings and losses, future reversals of temporary differences and identification of other sources of future taxable income, including the identification of tax planning strategies in certain situations.

Our valuation allowances for deferred tax assets are:

										Capital, Foreign
		Federal				State				and Other, Net
		(in millions)
As of December 31, 2007		$	14			$	67			$	22
Changes in valuation allowances			—				5				(1	)
As of March 31, 2008			14				72				21
Changes in valuation allowances			—				2				—
As of June 30, 2008			14				74				21
Changes in valuation allowances			—				(2	)			(1	)
As of September 30, 2008		$	14			$	72			$	20

(c) FIN 48 and Income Tax Uncertainties.

Effective January 1, 2007, we adopted FIN 48, “Accounting for Uncertainty in Income Taxes”. This interpretation addresses whether (and when) tax benefits claimed in our tax returns should be recorded in our financial statements. Pursuant to FIN 48, we may only recognize the tax benefit for financial reporting purposes from an uncertain tax position when it is more-likely-than-not that, based on the technical merits, the position will be sustained by taxing authorities or the courts. The recognized tax benefits are measured as the largest benefit having a greater than fifty percent likelihood of being realized upon settlement with a taxing authority. FIN 48 also provides guidance for derecognition, classification, interest and penalties, disclosures, transition rules and related matters. We classify accrued interest and penalties related to uncertain income tax positions in income tax expense/benefit.

We expect to continue discussions with taxing authorities regarding tax positions related to the following, and believe it is reasonably possible some of these matters could be resolved in the next 12 months; however, we cannot estimate the range of changes that might occur:

	•		$177 million payment to CenterPoint during 2004 related to our residential customers;
	•		$351 million charge during 2005 to settle certain civil litigation and claims relating to the Western states energy crisis (see note 14(a) to our consolidated financial statements in our Form 10-K); and
	•		the timing of tax deductions as a result of negotiations with respect to California-related revenue, depreciation, emission allowances and certain employee benefits.

(10) Guarantees and Indemnifications

We have guaranteed some non-qualified benefits of CenterPoint’s existing retirees at September 20, 2002. The estimated maximum potential amount of future payments under the guarantee was approximately $54 million as of September 30, 2008 and no liability is recorded in our consolidated balance sheets for this item.

We also guarantee the $500 million PEDFA bonds, which are included in our consolidated balance sheet as outstanding debt. Our guarantees are secured by guarantees from some of our subsidiaries. The guarantees require us to comply with covenants substantially identical to those in the 6.75% senior secured notes indenture. The PEDFA bonds will become secured by certain assets of our Seward power plant if the collateral supporting both the 6.75% senior secured notes and our guarantees are released. Our maximum potential obligation under the guarantees is for payment of the principal of $500 million and related interest charges at a fixed rate of 6.75%.

We have guaranteed payments to a third party relating to energy sales from El Dorado Energy, LLC, a former investment. The estimated maximum potential amount of future payments under this guarantee was approximately $21 million as of September 30, 2008 and no liability is recorded in our consolidated balance sheets for this item.

We enter into contracts that include indemnification and guarantee provisions. In general, we enter into contracts with indemnities for matters such as breaches of representations and warranties and covenants contained in the contract and/or against certain specified liabilities. Examples of these contracts include asset sales agreements, retail supply agreements, service agreements and procurement agreements.

In our debt agreements, we typically indemnify against liabilities that arise from the preparation, entry into, administration or enforcement of the agreement.

Except as otherwise noted, we are unable to estimate our maximum potential exposure under these agreements until an event triggering payment occurs. We do not expect to make any material payments under these agreements.

(11) Contingencies

We are party to many legal proceedings, some of which may involve substantial amounts. Unless otherwise noted, we cannot predict the outcome of the matters described below.

(a) Pending Natural Gas Litigation.

The following proceedings relate to alleged conduct in the natural gas markets. In 2005 and 2006, we settled a number of proceedings that were pending in California and other Western states; however, a number of other proceedings remain pending.

We are party to approximately 30 lawsuits, several of which are class action lawsuits, in state and federal courts in California, Colorado, Kansas, Missouri, Nevada, Tennessee and Wisconsin. These lawsuits relate to alleged conduct to increase natural gas prices in violation of antitrust and similar laws. The lawsuits seek treble or punitive damages, restitution and/or expenses. The lawsuits also name a number of unaffiliated energy companies as parties.

One of the natural gas cases is a case filed by the Los Angeles Department of Water and Power (LADWP) in the California Superior Court in 2004. The lawsuit alleges that we conspired to manipulate natural gas prices in breach of our supply contract with LADWP and in violation of California’s antitrust laws and the California False Claims Act. The lawsuit seeks treble damages for the alleged overcharges (estimated to be $218 million) for gas purchased by LADWP, interest and legal costs. The lawsuit also seeks (a) a determination that an extension of the contract with LADWP was invalid in that the required municipal approvals for the extension were allegedly not obtained and (b) a return of all money paid by LADWP during that period (estimated to be $681 million).

Recent developments in these cases include:

	•		In October 2008, we reached an agreement in principle to settle the five cases pending in federal court in Nevada. The settlement is subject to the completion of definitive documentation. The charges anticipated to be incurred in connection with the settlement were expensed in the third quarter of 2008. This settlement and the settlement described below will resolve all of the remaining California gas cases.
	•		In May 2008, we signed a memorandum of understanding to settle the 16 cases comprising the California-based gas index litigation, including the case filed by LADWP. The settlement is subject to the completion of definitive documentation. The charges anticipated to be incurred in connection with the settlement were expensed during the first quarter of 2008.
	•		In September 2007, the Ninth Circuit Court of Appeals issued decisions in a number of the other gas cases in which we are a defendant. The Ninth Circuit Court of Appeals reversed a series of lower court decisions holding that the filed rate doctrine barred the plaintiffs’ claims in those cases. As a result of the Ninth Circuit Court of Appeals rulings, these cases have been remanded for further proceedings at the trial court level. The cases in which we are a defendant are covered by the October 2008 settlement described above.

(b) Environmental Matters.

New Source Review Matters. The United States Environmental Protection Agency (EPA) and various states are investigating compliance of coal-fueled electric generating stations with the pre-construction permitting requirements of the Clean Air Act known as “New Source Review.” In 2000 and 2001, we responded to the EPA’s information requests related to five of our stations, and in December 2007, we received supplemental requests for two of those stations. In September 2008, we received an EPA request for information related to two additional stations. The EPA has agreed to share information relating to its investigations with state environmental agencies.

In December 2007, the New Jersey Department of Environmental Protection (NJDEP) filed suit against us in the United States District Court in Pennsylvania, alleging that New Source Review violations occurred at one of our power plants located in Pennsylvania. The suit seeks installation of “best available” control technologies for each pollutant, to enjoin us from operating the plant if it is not in compliance with the Clean Air Act and civil penalties. The suit also names three past owners of the plant as defendants. We believe we are indemnified by or have the right to seek indemnification from the prior owners for losses and expenses that we may incur from activities occurring prior to our ownership.

We are unable to predict the ultimate outcome of the EPA’s investigation or the NJDEP’s suit, but a final finding that we violated the New Source Review requirements could result in significant capital expenditures associated with the implementation of emissions reductions on an accelerated basis and possible penalties.

Ash Disposal Landfill Closures. We are responsible for environmental costs related to the future closures of seven ash disposal landfills. We recorded the estimated discounted costs associated with these environmental liabilities as part of our asset retirement obligations. See note 2(o) to our consolidated financial statements in our Form 10-K.

Remediation Obligations. We are responsible for environmental costs related to site contamination investigations and remediation requirements at four power plants in New Jersey. We recorded the estimated long-term liability for the remediation costs of $8 million as of September 30, 2008 and December 31, 2007.

Conemaugh Actions. In April 2007, PennEnvironment and the Sierra Club filed a citizens’ suit against us in the United States District Court, Western District of Pennsylvania. The suit alleges that the Conemaugh plant, in which we have a 16.45% interest, is in violation of its water discharge permit and related state and federal laws and seeks civil penalties, remediation and to enjoin violations. The Conemaugh plant is governed by a consent order agreement with the Pennsylvania Department of Environmental Protection (PADEP). We are confident that the Conemaugh plant has operated and will continue to operate in material compliance with the consent order agreement, its water discharge permit and related state and federal laws. However, if PennEnvironment and the Sierra Club are successful, we could incur significant capital expenditures associated with the implementation of discharge reductions on an accelerated basis and possible penalties. In October 2008, the PADEP filed to dismiss its related suit against us filed in April 2007 in the Court of Common Pleas of Indiana County, Pennsylvania.

Global Warming. In February 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the United States District Court for the Northern District of California against us and 23 other electric generating and oil and gas companies. The lawsuit seeks damages of up to $400 million for the cost of relocating the village allegedly because of global warming caused by the greenhouse gas emissions of the defendants.

(c) Other.

PUCT Cases. There are various proceedings pending before the state district court in Travis County, Texas, seeking reviews of the PUCT orders relating to the fuel factor component used in our “price-to-beat” tariff. In an earlier proceeding, a review of the PUCT’s approval of our requested fuel factor change was decided in our favor by the district court and was later affirmed by the court of appeals in Travis County. The remaining cases involve the same issues already addressed and decided in our favor by those courts.

CenterPoint Indemnity. We have agreed to indemnify CenterPoint against certain losses relating to the lawsuits described in note 11(a) under “Pending Natural Gas Litigation.”

Texas Franchise Audit. The state of Texas has issued assessment orders indicating an estimated tax liability of approximately $55 million (including interest and penalties of $18 million) relating primarily to the sourcing of receipts for 2000 through 2005. We are contesting the audit assessments related to this issue.

Sales Tax Contingencies. Some of our sales tax computations are subject to challenge under audit. As of September 30, 2008 and December 31, 2007, we have $20 million and $19 million, respectively, accrued in current and long-term liabilities relating to these contingencies.

(12) Supplemental Guarantor Information

Our wholly-owned subsidiaries are either (a) full and unconditional guarantors, jointly and severally, or (b) non-guarantors of the senior secured notes.

Condensed Consolidating Statements of Operations.

		Three Months Ended September 30, 2008
		Reliant Energy				Guarantors				Non-Guarantors				Adjustments(1)				Consolidated
		(in millions)
Revenues		$	—			$	1,003			$	3,199			$	(464	)		$	3,738
Cost of sales			—				796				4,565				(462	)			4,899
Operation and maintenance			—				40				163				(1	)			202
Selling, general and administrative			—				2				114				(1	)			115
Western states litigation and similar settlements			—				3				—				—				3
Gains on sales of assets and emission and exchange allowances, net			—				(17	)			—				—				(17	)
Depreciation and amortization			—				32				53				—				85
Total			—				856				4,895				(464	)			5,287
Operating income (loss)			—				147				(1,696	)			—				(1,549	)
Income of equity investment, net			—				2				—				—				2
Income (loss) of equity investments of consolidated subsidiaries			(1,042	)			40				—				1,002				—
Debt extinguishments			(1	)			—				—				—				(1	)
Other, net			—				—				4				—				4
Interest expense			(41	)			(9	)			(13	)			—				(63	)
Interest income			4				1				2				—				7
Interest income (expense) — affiliated companies, net			44				(27	)			(17	)			—				—
Total other income (expense)			(1,036	)			7				(24	)			1,002				(51	)
Income (loss) from continuing operations before income taxes			(1,036	)			154				(1,720	)			1,002				(1,600	)
Income tax expense (benefit)			2				38				(613	)			11				(562	)
Income (loss) from continuing operations			(1,038	)			116				(1,107	)			991				(1,038	)
Net income (loss)		$	(1,038	)		$	116			$	(1,107	)		$	991			$	(1,038	)

		Three Months Ended September 30, 2007
		Reliant Energy				Guarantors				Non-Guarantors				Adjustments(1)				Consolidated
		(in millions)
Revenues		$	—			$	1,152			$	3,103			$	(711	)		$	3,544
Cost of sales			—				1,006				2,542				(709	)			2,839
Operation and maintenance			—				49				163				(1	)			211
Selling, general and administrative			—				4				96				(1	)			99
(Gains) losses on sales of assets and emission and exchange allowances, net			—				(18	)			1				—				(17	)
Depreciation and amortization			—				36				86				—				122
Total			—				1,077				2,888				(711	)			3,254
Operating income			—				75				215				—				290
Income of equity investment, net			—				1				—				—				1
Income of equity investments of consolidated subsidiaries			120				30				—				(150	)			—
Debt extinguishments			(1	)			—				—				—				(1	)
Other, net			—				2				—				—				2
Interest expense			(43	)			(9	)			(22	)			—				(74	)
Interest income			1				2				3				—				6
Interest income (expense) — affiliated companies, net			81				(59	)			(22	)			—				—
Total other income (expense)			158				(33	)			(41	)			(150	)			(66	)
Income from continuing operations before income taxes			158				42				174				(150	)			224
Income tax expense (benefit)			(4	)			5				72				(9	)			64
Income from continuing operations			162				37				102				(141	)			160
Income from discontinued operations			—				—				2				—				2
Net income		$	162			$	37			$	104			$	(141	)		$	162